Posts Tagged ‘depression’

Context Re: Wall Street Propaganda And Mind-Boggling Beltway Spin

Apr 3rd, 11 / 0 Comments

Evans Liberal Politics
April 3, 2011

Context Re: Wall Street Propaganda
And Mind-Boggling Beltway Spin

Context Re: Wall Street Propaganda And Mind-Boggling Beltway Spin, Daily Kos, March 3, 2011, by Bob Swern, used with permission, quoted verbatim:

The next time you see a story, online or in the MSM, about the “great” job that’s being done by those managing our economy and/or the “genius” of Treasury Secretary Tim Geithner and Federal Reserve Board Chair Ben Bernanke, perhaps you should consider the following inconvenient realities.

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IMHO, here’s the latest on the ongoing story that gets the “award” for being the most egregious violation of the public’s trust, at least when it comes to illustrating the true state of regulatory enforcement on Wall Street, today (Tim Geithner and Bernanke, among others, have been running the show for a lot longer than President Obama’s been in office): “Wachovia Paid Trivial Fine for Nearly $400 Billion of Drug Related Money Laundering.”

(Diarist’s Note: Naked Capitalism Publisher Yves Smith has provided written authorization to diarist to reproduce her blog’s posts in their entirety for the benefit of the DKos community.)

Wachovia Paid Trivial Fine for Nearly $400 Billion of Drug Related Money Laundering
Yves Smith
Naked Capitalism
April 3, 2011If this news story does not prove that banks are effectively above the law, I don’t know what does. The Guardian, in an account yet to be picked up anywhere in the US media (per Google News as of this posting, hat tip readers May S and Swedish Lex) reports that Wachovia was at the heart of one of the world’s biggest money laundering operations, moving $378.4 billion into dollar-based accounts from Mexican casas de cambio, which are currency exchange firms. While these transfers took place over a period of years, the article notes that it equals 1/3 of Mexican GDP. And the resolution?
Criminal proceedings were brought against Wachovia, though not against any individual, but the case never came to court. In March 2010, Wachovia settled the biggest action brought under the US bank secrecy act, through the US district court in Miami. Now that the year’s “deferred prosecution” has expired, the bank is in effect in the clear. It paid federal authorities $110m in forfeiture, for allowing transactions later proved to be connected to drug smuggling, and incurred a $50m fine for failing to monitor cash used to ship 22 tons of cocaine.
The operation may have started sooner, but Wachovia admitted in the settlement that as of 2004 it had reason to address the procedures used for these transfers and chose not to. Martin Woods, a London-based employee and former member of the Metropolitan drug squad, had been hired as a senior anti-money laundering officer and started tightening up the activities within his reach. In 2006, he identified a number of obviously problematic transactions coming out of the cases:
Woods discussed the matter with Wachovia’s global head of anti-money laundering for correspondent banking….He then undertook what banks call a “look back” at previous transactions and saw fit to submit a series of SARs, or suspicious activity reports, to the authorities in the UK and his superiors in Charlotte, urging the blocking of named parties and large series of sequentially numbered traveller’s cheques from Mexico. He issued a number of SARs in 2006, of which 50 related to the casas de cambio in Mexico. To his amazement, the response from Wachovia’s Miami office, the centre for Latin American business, was anything but supportive – he felt it was quite the reverse.As it turned out, however, Woods was on the right track. Wachovia’s business in Mexico was coming under closer and closer scrutiny by US federal law enforcement. Wachovia was issued with a number of subpoenas for information on its Mexican operation. Woods has subsequently been informed that Wachovia had six or seven thousand subpoenas. He says this was “An absurd number. So at what point does someone at the highest level not get the feeling that something is very, very wrong?”
In April and May 2007, Wachovia – as a result of increasing interest and pressure from the US attorney’s office – began to close its relationship with some of the casas de cambio. But rather than launch an internal investigation into Woods’s alerts over Mexico, Woods claims Wachovia hung its own money-laundering expert out to dry….
Later in 2007, after the investigation of Wachovia was reported in the US financial media, the bank decided to end its remaining relationships with the Mexican casas de cambio globally. By this time, Woods says, he found his personal situation within the bank untenable…
On 16 June Woods was told by Wachovia’s head of compliance that his latest SAR need not have been filed, that he had no legal requirement to investigate an overseas case and no right of access to documents held overseas from Britain, even if they were held by Wachovia…
Late in 2007, Woods attended a function at Scotland Yard where colleagues from the US were being entertained. There, he sought out a representative of the Drug Enforcement Administration and told him about the casas de cambio, the SARs and his employer’s reaction. The Federal Reserve and officials of the office of comptroller of currency in Washington DC then “spent a lot of time examining the SARs” that had been sent by Woods to Charlotte from London.
The article recounts how the DEA, the criminal division of the Internal Revenue Service and the US attorney’s office in southern Florida were taking a hard look at wire transfers out of Mexico and found that they wound up at the correspondent bank account of the casas at Wachovia which were supervised by its Miami branch. From the Guardian:
“On numerous occasions,” say the court papers, “monies were deposited into a CDC by a drug-trafficking organisation. Using false identities, the CDC then wired that money through its Wachovia correspondent bank accounts for the purchase of airplanes for drug-trafficking organisations.” The court settlement of 2010 would detail that “nearly $13m went through correspondent bank accounts at Wachovia for the purchase of aircraft to be used in the illegal narcotics trade. From these aircraft, more than 20,000kg of cocaine were seized.”
The story provides a great deal more detail about the money laundering operations and the investigation. It is an excellent job of reporting and I urge you to read it in full. It is very clear the US put a lot of resources into the investigation. So why did Wachovia get off so easy?
At the height of the 2008 banking crisis, Antonio Maria Costa, then head of the United Nations office on drugs and crime, said he had evidence to suggest the proceeds from drugs and crime were “the only liquid investment capital” available to banks on the brink of collapse. “Inter-bank loans were funded by money that originated from the drugs trade,” he said. “There were signs that some banks were rescued that way.”…[Paul] Mazur [lead infiltrator of the Medellin drug operation] said that “a lot of the law enforcement people were disappointed to see a settlement” between the adlture ration and Wachovia. “But I know there were external circumstances that worked to Wachovia’s benefit, not least that the US banking system was on the edge of collapse.”
I suspect you never imagined “too big to fail” and “too big to jail” were this intimately connected.

So, given this culture of Wall Street being above the law, and of our government looking the other way, it should come as no surprise that there are people in the MSM and in some parts of the blogosphere, including right here on Daily Kos, that continue to tell us via their rec’d diaries: “There’s nothing to see here. Move along,” when it comes to the latest public disclosure of corporate kleptocracy. Specifically, I’m referencing the Federal Reserve’s public disclosure of its actions at its discount window during “the height” of nation’s financial crisis in late 2008.

Quelle Surprise! Fed Lent Over $110 Billion Against Junk Collateral During Crisis
Yves Smith
Naked Capitalism
April 1, 2011Former central banker Willem Buiter once remarked that the Federal Reserve’s “unusual and exigent circumstances” clause, which enables it to lend to “any individual, partnership or corporation” if it can’t get the dough from other banks, allows the Fed to lend against a dead dog if it so chooses.
It looks like the US central bank did precisely that.
Readers no doubt know that Bloomberg entered into a hard-fought battle over its Freedom of Information Act request to compel the Fed to release the details of its various lending programs during the crisis to the public. The banking regulator used the patently bogus excuse that revealing that information could damage the competitive positions of firms that had received the loans. That was patently bogus since all the major recipients are in the market on an ongoing basis and rejiggering their exposures based on market opportunities.
The only party at risk at this juncture was the Fed, since it would have its decisions scrutinized. And in a democracy, it is of vital public interest that an organization as influential as the Fed, which committed large amounts of funding outside Constitutionally-mandated budget processes, be held accountable for its actions.
The information was released yesterday and Bloomberg has provided a first cut on a small but juicy portion of it, the Primary Dealer Credit Facility. From a risk standpoint, the loans mace under this program violated the central bank guideline known as the Bagehot rule: “Lend freely, against good collateral, at penalty rates”. That is the prescription if the borrower is facing a bank run, meaning a liquidity crisis. The fact that 72% of the Fed’s loans on September 29 from the Primary Dealer Credit Facility were junk or equivalent (defaulted and unrated securities or equity) is further proof that many financial firms were facing a solvency, not a liquidity, crisis. The breakdown:
Equities comprised $71.7 billion, or 43.6 percent of the total. High-yield debt, including the defaulted issues, accounted for $18.4 billion, or 11.2 percent. Collateral of unknown rating was $28 billion, or 17 percent…..The U.S. central bank allowed borrowers to use $929 million in market-valued debt that had gone into default, rated D, as collateral on that day, 2008, more than the $905.5 million in Treasuries that were pledged…
And the haircuts were so low that the ideas that these were collateralized loans is a joke. The “collateralization” was a necessary legal fiction for throwing cash at anyone who thought they needed it:
The Fed loans on Sept. 29, 2008, represented a 5.49 percent “collateral cushion,” the amount by which the pledged assets exceeded the loan value….To put things in perspective, the market haircut on most debt securities during the period of the crisis starting in September 2008 was above 40 percent,” [Craig] Pirrong [a finance professor at the University of Houston} said....The cushion “was far too small for the risk of the underlying collateral,” Pirrong said. “Collateral that’s junk or defaulted debt and equities at a time when market volatility was huge is pretty eye opening.”
It wasn't just "most debt securities" that had tanked in value. Consider the fate of AAA rated ABS CDOs, which were one of the most serious black holes at virtually all of the dealer banks. We reproduced this chart on repo haircuts in ECONNED:
(Diarist's Note: CHART: International Monetary Fund illustration from Yves Smith's, "Econned," where the Fed was providing Wall Street "Primary Dealers" with loans at almost face value on assets where the banks should have taken: "...a 95% haircut on AAA rated ABS CDOs," post-Lehman.)
Note these prices were as of August; things were clearly even worse post Lehman. A 95% haircut on AAA rated ABS CDOs means the paper was effectively worthless.
This first cut by Bloomberg also shows that Morgan Stanley was the biggest user of the facility, receiving $61.3 billion of funds for securities "worth" $66.5 billion, 71.6% of which was junk or unrated. As eye-popping as those numbers are, the funds received are less than half the fall in Morgan Stanley's liquidity pool in the two weeks after the Lehman failure, per Economics of Contempt. Merrill Lynch was second, getting $36.3 billion in funding for $39.1 billion of collateral, 83.4% of which was junk or unrated.
A separate Bloomberg story on the discount window operations found that 70% of the credit extended, including four of the five biggest users during the peak usage week, in October 2008, were foreign. More high (or more accurately, low) points:
U.S. Federal Reserve Chairman Ben S. Bernanke’s two-year fight to shield crisis-squeezed banks from the stigma of revealing their public loans protected a lender to local governments in Belgium, a Japanese fishing-cooperative financier and a company part-owned by the Central Bank of Libya.Dexia SA, based in Brussels and Paris, borrowed as much as $33.5 billion through its New York branch from the Fed’s “discount window” lending program, according to Fed documents released yesterday in response to a Freedom of Information Act request. Dublin-based Depfa Bank Plc, taken over in 2007 by a German real-estate lender later seized by the German government, drew $24.5 billion...
“What in the world are we doing thinking we can pass out tens of billions of dollars to banks that are overseas?” said [Ron] Paul, who has advocated abolishing the Fed. “We have problems here at home with people not being able to pay their mortgages, and they’re losing their homes.”
Expect some fun Congressional hearings in the not-too-distant future.
A further remark: the fact that Bloomberg can say anything intelligent at this juncture is a testament to the cleverness of its reporters. The central bank quite deliberately responded to the request by providing the information in the most disaggregated, difficult to work with form imaginable. The central bank did a version of the same trick with its data on Maiden Lane II. The holdings of that asset management vehicle were various real estate exposures, some of which were hedged. The hedges were reported separately from the bonds and loans. Clearly, Blackrock, the asset manager, had far more useful and understandable reports that they used internally and provided to the New York Fed, but those were withheld. This data will presumably be as enticing as the Wikileaks cables, so enough eyeballs on it will eventually overcome the Fed’s efforts to hinder analysis.
Given the voluminous amount of information provided, future FOIA requests may need to explicitly include that the relevant government body provide information in the form in which it is used internally, including any higher level aggregations, to prevent future “fuck yous” in the form of technically permissible but nevertheless obstructionist compliance.

While Federal Reserve documents just provided to the public last Thursday are voluminous, above and beyond what Yves covers above, we’ve already learned, via Gretchen Morgenson in today’s NY Times, that the Fed also made an autonomous decision to backstop to the world (or, at least just about everywhere else other than Main Street):

The Bank Run We Knew So Little About
Gretchen Morgenson
New York Times
April 3, 2011…“The striking thing was the large amount of borrowing that the New York Fed accepted during the crisis from European banks that had only a minimal presence in the U.S. and arguably posed no threat to the U.S. payment system,” said Walker F. Todd, a research fellow at the American Institute for Economic Research and a former assistant general counsel and research officer at the Federal Reserve Bank of Cleveland. Such a thing would never have occurred 20 years ago, he added.

As Morgenson also notes, everything lent via the Fed’s discount-window during the crisis was repaid.

..But the precedent was set: The Fed was the financial backstop to the world.
Since 2000 or so, the mind-set at the Fed in New York and Washington has been that the central bank must step in when there is a global crisis, Mr. Todd said, even if it appears to exceed its mandate.
Ben S. Bernanke, the Fed chairman, seemed to foreshadow this view early in the crisis. Addressing the Fed’s annual symposium at Jackson Hole, Wyo., on Aug. 17, 2007, Mr. Bernanke said: “It is not the responsibility of the Federal Reserve — nor would it be appropriate — to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.”

Note Morgenson’s closing paragraph. (I really get a kick out of how Morgenson often “buries the [real] lead.”)

Protecting global lenders and investors from the effects of their financial decisions was exactly what the Fed decided it had to do. Bankers and investors on the receiving end of this largess have long known the extent to which the Fed rescued them in their time of need. Now, thanks to these Fed documents, the rest of us can see it, too.

Bold type is diarist’s emphasis.
Yes, it truly is amazing what a great job our government (most notably, the Treasury Department) and the Federal Reserve does when it comes to protecting “…lenders and investors from the effects of THEIR financial decisions.” But, as we’ve learned of late, and as we’re constantly reminded, once again tonight on 60 Minutes, when it comes to Main Street, not so much: “Foreclosure Fraud Featured This Sunday On 60 Minutes.”

For more on the shameful, ongoing pillaging of Main Street by Wall Street–aided, abetted and obfuscated by their minions in our government with the support of even a few folks in this community and via their respective independent blogs–here are some additional links loaded with the details (and, I’m talking about just the past 72 hours):

“Matt Stoller: Comptroller of the Currency Orders National Banks to Cover Up Foreclosure Scandal”

“Gauging the Pain of the Middle Class”

“Banksters’ Counteroffer Makes A Further Mockery of Fraudclosure Settlement Negotiations”

“David Apgar: Is That a Horse’s Head Under the Sheets or Are You Just Happy to Fleece Me?”

So, while on Friday we were told that the March employment report added 216,000 jobs to the economy, the truth behind the numbers is far different than the spin. You see, as Dean Baker reminds us about the absurdity of the spin we’re witnessing in the MSM and even in the blogosphere, on a daily basis…

…[Over the past year] The drop in the unemployment rate over this period was entirely due to people leaving the labor force. Now is that good news or what?

Then again, as noted above and as it will be self-evident on 60 Minutes tonight, there are fleeting moments in the MSM, these days, where we are now starting to hear about these inconvenient truths.

Who knows? Maybe even the folks inside the Beltway will get a clue; but, I doubt it.

# # #

“ADDED DIARY BONUS” (heh…if you’ve made it this far): Speaking of inconvenient truths, if you haven’t seen this year’s Oscar-winning documentary, “Inside Job,” it’s now available online, FOR FREE!

Evans Liberal Politics would like to thank Bob Swern for permission to republish his work on an ongoing basis. Bob is our favorite progressive economics writer (along with Robert Reich). More than even Paul Krugman, Mr. Swern fleshes out his articles with lots of details and links, and so provides real grist for liberals and progressives to learn from. You are invited to email Bob Swern here.

60 Minutes, Bank of Wachovia, banking, banking crisis, Barack Obama, Ben Bernanke, corporate kleptocracy, Dean Baker, depression, economics, economy, Evans Liberal Politics, foreclosure fraud, fraud, great recession, Gretchen Morgenson, inside job, liberal, liberal economics, liberal economists, liberal news source, Main Street, money, money laundering, Naked Capitalism, neofeudalism, oligarchy, progressive, progressive economics, progressive economists, recession, the truth, Tim Geithner, truthful liberal news, truthful news, Washington spin, watch Inside Job, watch Inside Job free

Leverage For Main Street? It’s In Front Of Your Nose.

Mar 4th, 11 / 2 Comments

Evans Liberal Politics
March 4, 2011

Leverage For Main Street?
It’s In Front Of Your Nose.

Leverage For Main Street? It’s In Front Of Your Nose., Daily Kos, March 3, 2011, by Bob Swern, used with permission, quoted verbatim:

A week ago, I posted a diary about the government’s proposed $20B “Mortgage Fraud Whitewash,” wherein we learned it was being floated by the Obama administration, the soon-to-be-official Consumer Financial Protection Bureau staff, and others that Wall Street would receive a $20 billion wristslap for pillaging Main Street via the mortgage industry for the past decade, and bankers would end up in a “…get-out-of-jail-free program…” and they would “…be excused for the abundant mortgage fraud they’ve committed.”

In a lead story in the Business section of (Thursday) morning’s NY Times (SEE: “Officials Disagree on Penalties for Mortgage Mess“), we’re once again reminded that when one initiates negotiations with the status quo at such a pathetically low mark–essentially, at a point where it’s a travesty from the get-go–it’s all downhill from there.

After we review this latest status quo turd, we’ll do a slightly deeper dive on a fairly simple proposal by Yves Smith which would actually enable our government to–at the very least–put a very real threat of incarceration on the table for many of these assh*les, virtually overnight; and, if nothing else, humiliate these sociopaths in $4000 suits into ponying up a few hundred billion to cover some real mortgage relief for us poor and unwashed types on Main Street, too.

What? Leverage for Main Street? It’s right in front of our collective nose.

In between, some background from my diary from last week; words that give us hope that at least one of President Obama’s new appointees to the Federal Reserve might just have the spine we’ve been looking for; and then coverage of this latest Wall Street bullsh*t (i.e.: the feigned indignation(s) of a financial services sector that comprehensively owns the agencies that regulate it); and, finally, Yves Smith, with an awesome, Wall-Street-ass-kicking concept.

As I noted in >my diary, (Wednesday), it is now widely-acknowledged that the U.S. mortgage/residential real estate sector is in a double-dip recession which has already reached and/or eclipsed levels set during our country’s Great Depression. When one realizes that equity in one’s home — not stock market investments, where over 95%+/- of all marketable securities are owned by the top 10% of our society — represents the largest single asset for most Americans, one may begin to achieve some factual context for the state of our economy and the housing industry’s depressing effect upon Main Street, today.Late yesterday, as Naked Capitalism’s Yves Smith and FireDogLake’s Marcy Wheeler note, below, the Obama administration proposed a $20 billion “…get-out-of-jail-free program…” so, in the words of FDL’s Wheeler, “…banks could be excused for the abundant mortgage fraud they’ve committed.”
HAMP II: The $20 Billion Get Out of Jail Free Card
By: emptywheel
FireDogLake
Wednesday February 23, 2011 6:44 pmA day after the Case-Shiller Index confirmed that the housing market is in a double dip, the Powers that Be (a subsidiary of the Masters of the Universe, currently CEOed by one Barack Obama) have floated their proposal for a mortgage fraud settlement.
The settlement terms remain fluid, people familiar with the matter cautioned, and haven’t been presented to banks. Exact dollar amounts haven’t been agreed on by U.S. regulators and state attorneys general.
For the low, low price of $20 billion, the Administration proposes, banks could be excused for the abundant mortgage fraud they’ve committed….
…$20 billion won’t even begin to compensate those victims of fraudulent appraisals for the fraud committed on them.
IMHO, in light of the fact (as I also noted in my diary, Wednesday) that it’s projected by some of our country’s most highly-respected housing finance experts that approximately half of all U.S. mortgageholders will be underwater (owing more to the bank than the value of their home) on their mortgages by mid-year, this represents the equivalent of a minor wristslap to Wall Street, as our country’s middle class faces ongoing pillaging at the hands of a status-quo-gone-wild; all thanks to the unbridled, ongoing support of our bought-and-paid-for federal government…

So, a week passes, and here we have the already-pathetic narrative becoming an even greater travesty than it was just a week ago: “Officials Disagree on Penalties for Mortgage Mess.”

Officials Disagree on Penalties for Mortgage Mess
By NELSON D. SCHWARTZ and DAVID STREITFELD
New York Times
March 3, 2011 Even as state attorneys general and regulators in Washington approach the end of their investigation into abuses by the nation’s biggest mortgage companies, deep disputes are emerging over how much to punish the banks as well as exactly who should benefit from a settlement.
The newly created Consumer Financial Protection Bureau is pushing for $20 billion or more in penalties, backed up by the attorneys general and the Federal Deposit Insurance Corporation.
But other regulators, including the Office of the Comptroller of the Currency, which oversees national banks, and the Federal Reserve, do not favor such a large fine, contending a small number of people were the victims of flawed foreclosure procedures.
As the negotiations grind on, there are signs that the banks still have not come to grips with the problems plaguing the foreclosure process….
…The nation’s largest mortgage servicer, Bank of America, is already readying what will be among the industry’s main arguments: that it is unfair to reward homeowners who are delinquent or underwater but cannot point to specific errors in their case…

(It’s definitely worth reading this whole article!)

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So, let me get this right…Bank of America, one of the biggest recipients of taxpayer bailouts and ongoing government backstops, to the tune of billions upon billions of dollars, even to this day, is saying it’s unfair to reward homeowners that have been royally screwed over–and moreso by BofA’s own Countrywide Financial subsidiary, perhaps, than any other corporate entity on the planet–but, when it comes to Main Street, f*ck ‘em?

The Times’ piece quotes a spokesman for the bank who’s “concerned” that…“Too broad a rescue package, he said, ‘could forestall the housing market recovery or even create perverse incentives.’”

And, to get a picture of how pathetically “captured” Treasury Secretary Tim Geithner’s former righthand man, Ass’t Treasury Secretary Michael Barr, truly is, we have this gem in the article…

“There has been a tension in this country during the financial crisis,” said Michael S. Barr, a former Treasury official now at the University of Michigan Law School. “People want those who are in economic trouble to get a fair shake. But they don’t want them bailed out for making their own mistakes, like buying too big a home.”

So, in Mr. Barr’s view of the universe (as long as we overlook origination fraud, appraisal fraud, investor fraud, conveyance fraud, ratings agency fraud, foreclosure fraud, and on and on…), it’s okay for the too-big-to-fail, Wall Street banks to get permanent, trillion-dollar taxpayer backstops for committing rampant fraud, but when it comes to Main Street, “…they don’t want them bailed out for making their own mistakes, like buying too big a home.”

Uh, huh.

While regulators worry about how punitive any eventual settlement should be, lawyers and other advocates for the foreclosed who were hoping for criminal charges are set to be disappointed. That sanction, everyone seems to agree, is off the table. In testimony in December about the improper foreclosures by banks, Daniel K. Tarullo, a Federal Reserve governor, floated the notion of imposing fines on individuals found responsible for violations or banning them from banking, but officials involved in the talks said this idea had not gotten much traction either.

Well, Yves Smith has come up with a GREAT idea to obtain some “traction” for our government and for Main Street as far as obtaining some leverage with Wall Street is concerned. It’s a great concept: jail the bastards! (SEE: “A Straightforward Criminal Case Against Wall Street CEOs and Senior Executives.”)

(Or, at least threaten to do so with some real teeth in that effort, for a change!)

(Diarist’s Note: Naked Capitalism Publisher Yves Smith has provided written authorization to diarist to reprint her blog’s posts in their entirety for the benefit of the DKos community.)

A Straightforward Criminal Case Against Wall Street CEOs and Senior Executives
Yves Smith
Naked Capitalism
Wednesday, March 2, 2011 4:04 AM Various people who ought to know better, such as the New York Times’ Joe Nocera, have taken to playing up the party line of the banking industry and I am told, the SEC, that we should resign ourselves to letting senior financial services industry members get away with having looted their firms and leaving the rest of us with a very large bill.
It is one thing to point out a sorry reality, that the rich and powerful often get away with abuses while ordinary citizens seldom do. It’s quite another to present it as inevitable. It would be far more productive to isolate what are the key failings in our legal,
prosecutorial, and regulatory regime are and demand changes.
The fact that financial fraud cases are often difficult does not mean they are unwinnable. And a prosecutor does not need to prevail in all, or even most, to serve as an effective cop on the beat.
Contrary to prevailing propaganda, there is a fairly straightforward case that could be launched against the CEOs and CFOs of pretty much every US bank with major trading operations. I’ll call them “dealer banks” or “Wall Street firms” to distinguish them from very big but largely traditional commercial banks like US Bank.
Since Sarbanes Oxley became law in 2002, Sections 302, 404, and 906 of that act have required these executives to establish and maintain adequate systems of internal control within their companies. In addition, they must regularly test such controls to see that they are adequate and report their findings to shareholders (through SEC reports on Form 10-Q and 10-K) and their independent accountants. “Knowingly” making false section 906 certifications is subject to fines of up to $1 million and imprisonment of up to ten years; “willful” violators face fines of up to $5 million and jail time of up to 20 years.
The responsible officers must certify that, among other things, they:
(A) are responsible for establishing and maintaining internal controls; (B) have designed such internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared; (C) have evaluated the effectiveness of the issuer’s internal controls as of a date within 90 days prior to the report; and
(D) have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation as of that date;
These officers must also have disclosed to the issuer’s auditors and the audit committee of the board of directors (or persons fulfilling the equivalent function):
(A) all significant deficiencies in the design or operation of internal controls which could adversely affect the issuer’s ability to record, process, summarize, and report financial data and have identified for the issuer’s auditors any material weaknesses in internal controls; and (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal controls
The premise of this requirement was to give assurance to investors as to (i) the integrity of the company’s financial reports and (ii) there were no big risks that the company was taking that it had not disclosed to investors.
This section puts those signing the certifications, which is at a minimum the CEO and the CFO, on the hook for both the adequacy of internal controls around financial reporting (to be precise) and the accuracy of reporting to public investors about them. Internal controls for a bank with major trading operations would include financial reporting and risk management.
It’s almost certain that you can’t have an adequate system of internal controls if you all of a sudden drop multi-billion dollar loss bombs on investors out of nowhere. Banks are not supposed to gamble with depositors’ and investors’ money like an out-of-luck punter at a racetrack. It’s pretty clear many of the banks who went to the wall or had to be bailed out because they were too big to fail, and I’ll toss AIG in here as well, had no idea they were betting the farm every day with the risks they were taking.
Not surprisingly, it isn’t difficult to find widespread shortcomings in risk management at major dealer banks. Risk management deficiencies most relevant to Sarbanes Oxley are related to pricing. The accuracy of the accounts, meaning the valuations, is the primary focus. Risk management weaknesses that impact reportable disclosures (in the accounts or the notes) have highest relevance. However, crappy risk management that leads to poor positioning may not be germane to the Sarbanes Oxley violations issue.
We discussed the issue at some length in ECONNED. Risk management was kept weak; if push came to shove, it was subordinate to the producers. Richard Bookstaber, a former chief risk officer, discussed at some length how most chief risk officers were engaged in what amounted to busywork. While they might indeed prevent particularly egregious excesses, their form over substance exercises also provided useful cover for the top brass and the board of directors. As he noted in 2007:
If you are the Chief Risk Officer and everything blows up, don’t you bear some responsibility?…In the CRO job 99% of the days there is nothing going wrong. The only test you get of how well you are doing – short of pouring out risk reports and looking ponderous and prudent in meetings – is what happens to the firm during times of market crisis. Every few years something calamitous happens in the market; if the firm gets blown away, that suggests you did not do a very good job.
Readers may have better suggestions of where to start, but I’d target Lehman. First, it already has a smoking gun: a May 2008 letter written by former senior vice president Michael Lee to senior management, including the CFO Erin Callan. It describes numerous accounting shortcomings, none of which look to be new and many of which look to be Sarbanes Oxley violations.
Second, its derivatives books were by all accounts an utter disaster at the time of its collapse: multiple non-integrated systems, to the point where the bank did not even have a good tally of how many positions it had (bankruptcy overseers Alvarez & Marsal first said the bank had 110,000 positions; they later changed their tally to 120,000). This is important because despite all the efforts to identify why the Lehman losses were so massive, most analysts have focused on the asset side, and the numbers don’t add up. That means understatement of positions and/or gross understatement of risk on the liability side is the probable culprit.
This is an egregious accounting 101 control breakdown, It indicates that the most basic operatonal controls, reconciliation of accounts, were not effective (see here for further support). Lehman would have to take the position that its basic control weaknesses were all immaterial. At all times there’s an inventory of control weaknesses that exist. That inventory must be constantly monitored and reviewed (and attested to in the 404 internal control assessments signed by the responsible officers). Materiality determinations are decided by managers, internal and external audit and ultimately the CFO and CEO. Dick Fuld also made statements in Congressional testimony about his ignorance of his ignorance of Repo 105 and a failure to include commercial real estate in stress tests starting with the end of 2007 that also seems consistent with a lack of adequate risk controls.
At other banks, prosecutors will probably need to proceed in a bottom’s up manner. The structured credit and CDO desks are targets even now for criminal securities fraud actions (the statue of limitations has not expired). These units, as Bloomberg’s Jonathan Weil has pointed out, were also ground zero of misreporting at Citigroup. The bank’s defenders claim it has a free pass by virtue of a letter from the bank lapdog OCC that did not rise to the level that would force disclosure but its basis was that the valuations Citigroup used were with market ranges. This seems a dubious argument.
The fact that a defective speedometer happened to provide a 60 mile per hour reading when the car was going 57 miles per hour does not prove the device was reliable.
Moreover, anyone with an operating brain cell knows “market prices” were being gamed by dealer banks passing small trades between them or with friendly clients, typically hedge funds who might also like to show high valuations, to establish flattering marks. If the marks Citi was relying on were the result of collusion, and the bank was either involved in or aware of the collusion, this undermines the OCC view of the validity of the marks at Citi and other banks. If yours truly knew of this practice, it had to be widespread and well known at the firms themselves.
My understanding (and reader input is welcome here) is that the authorities could file a civil suit for Section 302 certification violations. If they prevailed in that, a criminal case under Section 902 should be an easy win. The 906 certification basically says the reports are fully compliant with all regulations, including those specifically certified in the 302.
(Note that the SEC initiated a criminal case against HealthSouth CEO Richard Scrushy which included Section 302 charges. Scrushy was acquitted in a jury trial, but having followed the proceedings a bit, and also seeing another example of a trail in Birmingham, I’d be careful of generalizing from Alabama courts to other jurisdictions. The deck, even more than in other jurisdictions, is stacked in favor of the local bigwigs).
Will any of this happen? Of course not. The decision was made at the time of the TARP, and reaffirmed early in the Obama administration when there was serious talk of resolving Citigroup and Bank of America, that no one at the helm of the senior banks would be subject to serious scrutiny, much the less actually expected to be held accountable for actions that wrecked the economy and have imposed serious costs on ordinary Americans.
The case we described above is relatively simple to explain to a jury and has the advantage of being the sort where the plaintiffs could build on their experience in one action in subsequent cases.
But that sort of truth, that most, probably all, of the major Wall Street banks were engaged in the same sort of misconduct and the violations extended to the very top of the firms, would expose numerous other parties as complicit. So we’ll permit the cancer in our society to metastasize rather than threaten the power structure. But at least we citizens can make it clear, even if we cannot change the outcome, that we are not buying the canard that nothing can be done to fight this disease.

Leverage for Main Street?

It’s more than just a concept.

In fact, it’s staring us in our face.

Please feel encouraged to visit Bob Swern’s blog on Daily Kos.

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Sunday Video: Great Depression Cooking – Depression Breakfast

Feb 27th, 11 / 1 Comment

Evans Liberal Politics
February 27, 2011

Great Depression Cooking
Depression Breakfast

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Economy loses 95,000 jobs as government cuts payrolls

Oct 8th, 10 / 6 Comments

Evans Liberal Politics
October 8, 2010

Economy loses 95,000 jobs as government cuts payrolls

Cuts in Government Led U.S. Economy to Lose 95,000 Jobs, © The New York Times, October 8, 2010, by Catherine Rampell, excerpt quoted verbatim:

The economy shed 95,000 nonfarm jobs in September, the Labor Department reported Friday, with most of the decline the result of the layoffs by local governments and of temporary decennial Census workers.

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The steep drop was far worse than economists had been predicting. Most estimates were for a loss of only a few thousand jobs.

“September’s U.S. payroll report adds to the evidence that the recovery is losing what little forward momentum it had,” said Paul Ashworth, senior United States economist at Capital Economics.

The recovery that officially began in June 2009 has slowed considerably in recent months, raising concerns about the long slog the country will have to endure to dig itself out of the deepest downturn since the Great Depression. Private payrolls have been growing throughout 2009 but at a rate too sluggish to make much of a dent in unemployment. The outlook for the rest of the year is equally discouraging, economists say.

“We’re looking for companies to get more confident in the pace of recovery and start to hire around 150,000 jobs a month, which is what we need just to keep the unemployment rate flat,” said John Ryding, chief economist at RDQ Economics. “But I just don’t see that happening between now and the end of the year.”

While total government jobs fell by 159,000, private sector companies added 64,000 jobs last month. The unemployment rate, which measures the percentage of workers who are actively looking for but unable to find jobs, stayed flat at 9.6 percent.

A broader measure of unemployment, which includes people who are working part-time because they cannot find full-time jobs, and people who have given up looking for work, rose to 17.1 percent from 16.7 percent in August. This was largely because of a jump in the number of people who are reluctantly working part-time. ….

Read the full article here.

Comment by Evans Liberal Politics owner Paul Evans: 77,000 of the newly unemployed were Census workers whose job ran out of time. Also, keep in mind that unemployment is not evenly distributed throughout the economy. For those workers making $200,000 a year or more, unemployment remains at a very acceptable rate of 3.2 percent. But for those workers making $20,000 a year or less, the official unemployment rate stands at 31 percent. That doesn’t count the underemployed, those working part time jobs who really want full time jobs, nor those workers who have given up and stopped looking for work.

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Robert Reich: Republican Economics as Social Darwinism

Sep 26th, 10 / 1 Comment

Evans Liberal Politics
September 26, 2010

Robert Reich: Republican Economics
as Social Darwinism

Republican Economics as Social Darwinism, Robert Reich.org, September 26, 2010, by Robert Reich, used with permission, quoted verbatim:

John Boehner, the Republican House leader who will become Speaker if Democrats lose control of the House in the upcoming midterms, recently offered his solution to the current economic crisis: “Liquidate labor, liquidate stocks, liquidate the farmer, liquidate real estate. It will purge the rottenness out of the system. People will work harder, lead a more moral life.”

Actually, those weren’t Boehner’s words. They were uttered by Herbert Hoover’s treasury secretary, millionaire industrialist Andrew Mellon, after the Great Crash of 1929.

But they might as well have been Boehner’s because Hoover’s and Mellon’s means of purging the rottenness was by doing exactly what Boehner and his colleagues are now calling for: shrink government, cut the federal deficit, reduce the national debt, and balance the budget.

And we all know what happened after 1929, at least until FDR reversed course.

Boehner and other Republicans would even like to roll back the New Deal and get rid of Barack Obama’s smaller deal health-care law.

The issue isn’t just economic. We’re back to tough love. The basic idea is force people to live with the consequences of whatever happens to them.

In the late 19th century it was called Social Darwinism. Only the fittest should survive, and any effort to save the less fit will undermine the moral fiber of society.

Republicans have wanted to destroy Social Security since it was invented in 1935 by my predecessor as labor secretary, the great Frances Perkins. Remember George W. Bush’s proposal to privatize it? Had America agreed with him, millions of retirees would have been impoverished in 2008 when the stock market imploded.

Of course Republicans don’t talk openly about destroying Social Security, because it’s so popular. The new Republican “pledge” promises only to put it on a “fiscally responsible footing.” Translated: we’ll privatize it.

Look, I used to be a trustee of the Social Security trust fund. Believe me when I tell you Social Security is basically okay. It may need a little fine tuning but I guarantee you’ll receive your Social Security check by the time you retire even if that’s forty years from now.

Medicare, on the other hand, is a huge problem and its projected deficits are truly scary. But that’s partly because George W. Bush created a new drug benefit that’s hugely profitable for Big Pharma (something the Republican pledge conspicuously fails to address). The underlying problem, though, is health-care costs are soaring.

Repealing the new health-care legislation would cause health-care costs to rise even faster. In extending coverage, it allows 30 million Americans to get preventive care. Take it away and they’ll end up in far more expensive emergency rooms.

The new law could help control rising health costs. It calls for medical “exchange” that will give people valuable information about health costs and benefits. The public should know certain expensive procedures only pad the paychecks of specialists while driving up the costs of insurance policies that offer them.

Republicans also hate unemployment insurance. They’ve voted against every extension because, they say, it coddles the unemployed and keeps them from taking available jobs.

That’s absurd. There are still 5 job seekers for every job opening, and unemployment insurance in most states pays only a small fraction of the full-time wage.

Social insurance is fundamental to a civil society. It’s also good economics because it puts money in peoples’ pockets who then turn around and buy the things that others produce, thereby keeping those others in jobs.

We’ve fallen into the bad habit of calling these programs “entitlements,” which sounds morally suspect – as if a more responsible public wouldn’t depend on them. If the Great Recession has taught us anything, it should be that anyone can take a fall through no fault of their own.

Finally, like Hoover and Mellon, Republicans want to cut the deficit and balance the budget at a time when a large portion of the workforce is idle.

This defies economic logic. When consumers aren’t spending, businesses aren’t investing and exports can’t possibly fill the gap, and when state governments are slashing their budgets, the federal government has to spend more. Otherwise, the Great Recession will turn into exactly what Hoover and Mellon ushered in – a seemingly endless Great Depression.

It’s also cruel. Cutting the deficit and balancing the budget any time soon will subject tens of millions of American families to unnecessary hardship and throw even more into poverty.

Herbert Hoover and Andrew Mellon thought their economic policies would purge the rottenness out of the system and lead to a more moral life. Instead, it purged morality out of the system and lead to a more rotten life for millions of Americans.

And that’s exactly what Republicans are offering yet again.

here. Reich’s newest book, Aftershock: The Next Economy and America’s Future is just out and is for sale at a 48 percent savings (hardcover) at Amazon.com. The above article is from Reich’s new blog, and can be viewed here.

Robert Reich’s commentaries are available for listening to at Publicradio.com. Thanks to Professor Reich for permission to publish his articles on an ongoing basis.

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Economic Realities: Press From Hell vs. New WH Candor

Sep 12th, 10 / 2 Comments

a dollar sign composed entirely of fire against a black background highlights this article on economic troubles and the Great Recession

Evans Liberal Politics
September 13, 2010

Economic Realities: Press From Hell
vs. New WH Candor

Economic Realities: Press From Hell vs. New WH Candor, Daily Kos, September 12, 2010, by Bob Swern, used with permission, quoted verbatim:

It couldn’t happen at a more inopportune moment, but we are starting to get bombarded with many more inconvenient, if not downright ugly, facts (for Democratic incumbents) regarding our economy. And, as of today — finally — instead of happy talk about unmet expectations that “accentuate the positive” with stories about our “Recovery Summer,” it would appear that the White House is shifting strategy and telling it like Main Street has known it to be for quite some time, too.All I can say is, better late than never: “Goolsbee: Unemployment ‘Going to Stay High.’”

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Goolsbee: Unemployment ‘Going to Stay High’
White House Adviser Says Long Road to Less Joblessness
By JOSHUA MILLER
ABC
September 12, 2010Unemployment in the United States is “going to stay high” Austan Goolsbee, Obama’s chief economic adviser, told Christiane Amanpour this morning on “This Week.”
“This recession is the deepest in our lifetimes, the deepest since 1929,” said Goolsbee, who was just appointed chair of the White House Council of Economic Advisers. “More than eight million people lost their jobs. It’s going to take a significant push on our part – and time – before that comes down,” he said. “I don’t anticipate it coming down right away…”

Meanwhile, and for the record and for quite awhile, too, I’ve been referencing previous, candid administration commentary about unemployment forecasts (which have also dropped off the radar of the MSM amidst the spin of past months), much to the chagrin of many in this community, such as this: ”Romer, Orszag, Geithner: ≥9.7% Jobless Through 2010.” Unfortunately, we’re now reading where even those projections may be understated: “Double Digit Unemployment Rate early next year?”

And, here, courtesy of Calculated Risk, are two really good reasons why the administration’s unemployment projections may still fall shy of reality: “Paper: Housing and the Business Cycle.”

Here’s an example of what I’m talking about when I use the term, “Press Advisories From Hell,” as noted in the diary’s headline: “Census Bureau to Announce Findings for Income, Earnings, Poverty and Health Insurance Coverage.” The U.S. Census Bureau’s online news conference announcing this report’s findings will be held this upcoming Thursday, September 16th, at 10AM EDT. 12 days later, “…local data for income, poverty and health insurance coverage will be available Tuesday, Sept. 28th, when the Census Bureau releases new socioeconomic, housing and demographic data from the 2009 American Community Survey.”

I posted a few diaries on this last year, around this time, when the Census Bureau’s 2008 Reports were announced, including, “New Census Data This A.M.: Income, Poverty and Health Ins.” (9/10/09), and this, “Hidden Health Ins. Realities In New Census Bureau Report (9/11/09).”

This year, the forecast is significantly worse: “Poverty Rate In U.S. Saw Record Increase In 2009: 1 In 7 Americans Are Poor.”

Poverty Rate In U.S. Saw Record Increase In 2009: 1 In 7 Americans Are Poor
Associated Press (via Huffington Post)
HOPE YEN and LIZ SIDOTI | 09/11/10 11:14 PM | APWASHINGTON — The number of people in the U.S. who are in poverty is on track for a record increase on President Barack Obama’s watch, with the ranks of working-age poor approaching 1960s levels that led to the national war on poverty.
Census figures for 2009 – the recession-ravaged first year of the Democrat’s presidency – are to be released in the coming week, and demographers expect grim findings.
It’s unfortunate timing for Obama and his party just seven weeks before important elections when control of Congress is at stake. The anticipated poverty rate increase – from 13.2 percent to about 15 percent – would be another blow to Democrats struggling to persuade voters to keep them in power.

The AP coverage included the following point:

Interviews with six demographers who closely track poverty trends found wide consensus that 2009 figures are likely to show a significant rate increase to the range of 14.7 percent to 15 percent.

As the story also noted, if those forecasts hold true, then we’re looking at approximately 45 million folks in this country–more than one in seven–being officially below the poverty line; and, that constitutes the greatest year-over-year increase since the government began tracking these statistics in 1959.

Yesterday’s NY Times informed us that: “Number of Families in Shelters Rises.”

Number of Families in Shelters Rises
By MICHAEL LUO
New York Times
Published: September 11, 2010…For millions who have lost jobs or faced eviction in the economic downturn, homelessness is perhaps the darkest fear of all. In the end, though, for all the devastation wrought by the recession, a vast majority of people who have faced the possibility have somehow managed to avoid it.
Nevertheless, from 2007 through 2009, the number of families in homeless shelters — households with at least one adult and one minor child — leapt to 170,000 from 131,000, according to the Department of Housing and Urban Development.
With long-term unemployment ballooning, those numbers could easily climb this year. Late in 2009, however, states began distributing $1.5 billion that has been made available over three years by the federal government as part of the stimulus package for the Homeless Prevention and Rapid Re-Housing Program, which provides financial assistance to keep people in their homes or get them back in one quickly if they lose them.
More than 550,000 people have received aid, including more than 1,800 in Rhode Island, with just over a quarter of the money for the program spent so far nationally, state and federal officials said.
Even so, it remains to be seen whether the program is keeping pace with the continuing economic hardship…

And, on Wednesday, we learned that: “Food Stamp Participation Climbs 10%.”

However, as I noted in THIS diary, on Thursday, ”…when you look closely at the June ’10 vs. June ’09 vs. June ’08 statistics, the reality looks more like an increase of over 22% from June ’08 to June ’09, and another increase of more than 18% from June ’09 to June ’10. (Note: If someone could explain to me how that’s not the case, I’m ready to correct this observation.) Here are the stats, direct from the government: Supplemental Nutrition Assistance Program (“SNAP,” a/k/a food stamps).”

So, while it’s long overdue, IMHO, and despite the ongoing denial of many in this community (I will not be providing links to support this sentence, but you know what I’m talking about, even without the specifics) to the contrary, STILL, I welcome this apparent shift towards more candor in the messaging coming from 1600 Pennsylvania Avenue.

A little less use of the word, “recovery” (Krugman recently referred to it as “Delusions Of Recovery“), and a little more empathy regarding the suffering currently going down on Main Street is a good place for Democrats to turn, at least if they’re interested in putting forth any type of message that resonates with the voters before November 2nd.

Better late than never.

Evans Liberal Politics would like to thank Bob Swern for permission to republish his work on an ongoing basis. Bob is our favorite progressive economics writer. More than even Paul Krugman, Mr. Swern fleshes out his articles with lots of details and links, and so provides real grist for liberals and progressives to learn from. You are invited to email Bob Swern here.

See Income More Unequal In U.S. Than In Parts Of Latin America, NPR on Evans Liberal Politics, September 8, 2010, by J.J. Sutherland.

UPDATE: See ‘Record increase’ in number of Americans in poverty, The Associated Press on The Raw Story, September 13, 2010, by AP.

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Two Tales of “A Tale of Two Economies”

Aug 2nd, 10 / 2 Comments

Evans Liberal Politics
August 2, 2010

Two Tales of “A Tale of Two Economies”

Two Tales of “A Tale of Two Economies”, Daily Kos, August 2, 2010, by Bob Swern, used with permission, quoted verbatim:

“It’s called the American Dream because you have to be asleep to believe it.”
–George Carlin

Over the past few days, I’ve been looking at some of my earlier diaries, and it’s been a bit of an upsetting experience (then again, there are people that tell me just reading my diaries makes them upset), and I’ll explain why, down below. For the moment, however, I want to focus upon a few of the weekend’s stories of note, starting with Edward Luce’s outstanding piece in Friday’s edition of the Financial Times, entitled: “The crisis of middle-class America.”

Luce visited with four middle class American families and provides his readers with masterful corollaries between his subjects’ individual experiences and recent, transcending socio-economic trends throughout our society, as a whole. (IMHO, it’s a must read.)

The author explains how Americans had been suffering through a “personal” recession long before the effects of the Great Recession took hold of our country in late 2008. In fact, as Luce tells us, the Great Recession merely exacerbated our personal recession(s). (Again, I strongly urge you to read his entire article. But, here’s a small excerpt.)

The crisis of middle-class America
By Edward Luce
Financial Times
July 30 2010 17:04…Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973–having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the multiple is above 300.
The trend has only been getting stronger. Most economists see the Great Stagnation as a structural problem–meaning it is immune to the business cycle. In the last expansion, which started in January 2002 and ended in December 2007, the median US household income dropped by $2,000 the first ever instance where most Americans were worse off at the end of a cycle than at the start. Worse is that the long era of stagnating incomes has been accompanied by something profoundly un-American: declining income mobility.
Alexis de Tocqueville, the great French chronicler of early America, was once misquoted as having said: “America is the best country in the world to be poor.” That is no longer the case. Nowadays in America, you have a smaller chance of swapping your lower income bracket for a higher one than in almost any other developed economy–even Britain on some measures. To invert the classic Horatio Alger stories, in today’s America if you are born in rags, you are likelier to stay in rags than in almost any corner of old Europe.
Combine those two deep-seated trends with a third–steeply rising inequality–and you get the slow-burning crisis of American capitalism…

And, it was shortly after reading the Luce article that I started looking at a few of my diaries from last year. Here’s the one I wanted to share with you tonight, from almost exactly a year ago (more precisely, a little over 49 weeks ago). What’s so upsetting to me, tonight, is that this is a year old, and–aside from a few details–I could’ve just as easily written this today, and it would still be (almost) as precisely pertinent now as it was then: “A Tale of Two Economies.” Our unemployment rate is slightly higher than it was a year ago; and, some of the issues I brought up then–with some of those issues never having been discussed within the DKos community up until that point–are now considered to be widely accepted facts.

FROM AUGUST 2009…

# # #

A Tale of Two Economies
by bobswern
Daily Kos
Thu Aug 20, 2009 at 11:47:04 PM EDT

‘The Wealthy Will Save Us!’

There is much talk of an impending economic “recovery” these days. Over the past week, I’ve noticed a series of stories coming from sources as disparate as Simon Johnson over at Baseline Scenario, Tyler Durden at Zero Hedge, the LA Times and even Bloomberg that are all pretty much telling us the same thing, and it’s best summed-up by Simon Johnson’s post over at Baseline Scenario, today: “The Two-Track Economy.”

The similarities of these stories–considering their varied sources–gives me great pause. To some degree, one could say I’ve had a bit of an awakening in the course of reading these pieces, or, at the very least, on a snarkier note, I’d call it “a lightbulb moment.”
Intro
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Yes! There will be a recovery…for a few of us. And, that is “the recovery” that others on this blog are referencing these days. I believe what’s inferred in their words is: “Have no fear; the wealthy will save us!”

But, realistically, what are the odds of that really happening? (Heh. If you believe that, I’ve got a couple of bridges I’d like to sell you.)

Here’s Johnson’s clarity:

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“The Two-Track Economy”
Simon Johnson
Baseline Scenario
August 20, 2009…are we seeing the emergence of a two-track economy: one bouncing back in a relatively healthy fashion, and the other really struggling?
Think about this in terms of individuals and the households in which they live. Some people have lost their jobs and are finding reemployment very difficult; many will exhaust their unemployment benefits soon. Others find that what they owe on their mortgages far exceeds the value of their home. And many find they have been cheated by financial products, particularly home loans and credit cards — which is why we need effective consumer protection for finance, and in a hurry…
–SNIP–
…The overall numbers on outcomes by groups can get complicated (here’s a partial guide), but the simple version is: the top 10% of people are going to do fine, the middle of the income distribution have been hard hit by overborrowing, and poorer people will continue to struggle with unstable jobs and low wages.
Can the richest people spend enough to power a recovery in overall GDP? Perhaps, but is that really the kind of economy you want to live in?

Yes, Johnson talks of a recovery that will have absolutely miserable overtones for most of our society (i.e.: Main Street) for many, many years…perhaps even longer than that. But, the Wall Street folks (i.e.: the upper class) will continue to hum along.

Two days earlier, along the same lines as today’s post, Johnson wrote this on his blog: “United States Inequality In The Recovery Period.” In it, Johnson went into even greater detail on this line of thought:

United States Inequality In The Recovery Period
Simon Johnson
Baseline Scenario
August 18, 2009…There’s a general assumption that, to whatever extent historically record-high inequality is present, it will almost certainly be gone post-recession. But what if it isn’t? What if this recession, and the recovery, will cement inequality in the United States even further? From them:

Johnson then quotes a piece from the LA Times, ”The consumer isn’t overleveraged — the middle class is.‘

‘The consumer isn’t overleveraged — the middle class is’
Tom Petruno
Los Angeles Times
August 14, 2009What’s more, on the asset side, BofA Merrill says the middle-class has suffered more than the wealthy from the housing crash because middle-class families tended to rely more on their homes to build savings through rising equity. Also, the wealthy naturally had a much larger and more diverse portfolio of assets — stocks, bonds, etc. — which have mostly bounced back significantly this year.

And, more from Johnson…

There are a lot of moving parts going on with the interaction between the top percents and the middle class, inequality and collapse, but it isn’t hard to see a story where the stock market picks up, housing is in decline for a decade, and we have a jobless recovery. I’m not sure how that would effect our quantitative measures of inequality, like the gini coefficient, but we could end up with much more inequality, and inequality that stings a lot harder than it did during the boom times.

Johnson then references a piece I must’ve read three times if I’ve read it once (and that was well before I read Johnson’s piece tonight, too), from this past Saturday, by the folks over at–of all places–Zero Hedge. (NOTE: Johnson and Zero Hedge do not have a whole hell of a lot in common, politically.)

“A Detailed Look At The Stratified U.S. Consumer”
Tyler Durden
Zero Hedge
August 15, 2009…It is probable that the dramatic increase in savings as disclosed previously, is an indication that at long last the richest 10% of America may be finally feeling the sting of a collapsing economy. Yet estimates demonstrate that even though on an absolute basis the wealthy are losing overall consumption power, the relative impact has hit the lower and middle classes the strongest yet again…
The main reason for this disproportionate loss of wealth has to do with the asset portfolio of the various consumer strata. A sobering observation is that while 90% of the population holds 50% or more of its assets in residential real estate, the Upper Class only has 25% of its assets in housing, holding the bulk of its assets in financial instruments and other business equity. This leads to two conclusions: while average house prices are still dropping countrywide, with some regions like the northeast, and the NY metro area in particular, still looking at roughly 40% in home net worth losses, 90% of the population will be feeling the impact of an economy still gripped in a recession for a long time due to the bulk of its assets deflating. The other observation is that only 10% of the population has truly benefited from the 50% market rise from the market’s lows: those better known as the Upper class.
And to add insult to injury, the segment of housing that has been impacted most adversely in the current downturn, is lower and middle-priced housing: that traditionally occupied by the lower and middle classes. The double whammy joke of holding a greater proportion of net wealth in disproportionately more deflating assets is likely not lost on the lower and middle classes.

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Yes, the wealthy aren’t exactly going to have to worry about our “new normal,” are they? (See: “America’s bumpy journey to a new normal.“)

Then again, the wealthy don’t really have to worry too much about working or unemployment benefits vaporizing. (See “Weekly Unemployment Claims Increase, Workers Exhausting Extended Benefits.“)

The wealthy don’t have to worry about health insurance (See: 85% of the other diaries on this blog right now.)

The wealthy don’t have to worry about things like foreclosures continuing to escalate, either. (See: ”MBA Forecasts Foreclosures to Peak At End of 2010.“)

And, we all know the wealthy don’t have to worry about those weekly paychecks, either, now do they? (See: “Why The Austrian, Keynesian, Marxist, Monetarist and Neo-Liberal Economists Are All Wrong.“)

Why The Austrian, Keynesian, Marxist, Monetarist and Neo-Liberal Economists Are All Wrong
Served by Jesse of Le Café Américain
Naked Capitalism
August 20, 2009US Personal Income has taken its worst annual decline since 1950.
This is why it is an improbable fantasy to think that the consumer will be able to pull this economy out of recession using the normal ‘print and trickle down’ approach. In the 1950′s the solution was huge public works projects like the Interstate Highway System and of course the Korean War.
Until the median wage improves relative to the cost of living, there will be no recovery. And by cost of living we do not mean the chimerical US Consumer Price Index.
The classic Austrian prescription is to allow prices to decline until the median wage becomes adequate. Given the risk of a deflationary wage-price spiral, which is desired by no one except for the cash rich, the political risks of such an approach are enormous…

Boldface type is diarist’s emphasis.

So, I ask: Just who will benefit from a credit-less, revenue-less, jobless “recovery?” On what planet do these people that talk of a “recovery” in the next few months spend most of their time?

It sure doesn’t look like this is a recovery in the Progressive Democratic sense of the word.

Yes, the political risks of the so-called recovery as it’s being teed-up for us now…are enormous…

# # #

My last sentence in this diary from approximately one year ago…

Yes, the political risks of the so-called recovery as it’s being teed-up for us now…are enormous…

BACK TO AUGUST 2010…

Unfortunately, a year later, it’s not just about Wall Street’s pillaging of the taxpayer and personal financial devastation, caused by the ongoing-and-even-greater financial disparity gap between our oligarchy and the peasants. It’s about a financial services sector that has all but abandoned Main Street–and the traditional driver of recoveries past: small business, being cast as “the poor cousin” and still very much languishing in “the” ditch–with major deflationary concerns permeating the hallowed halls of our Federal Reserve, as well.

In fact, unemployment (and I’m only talking about BLS’ U-3 Index joblessness) is greater than it was last August (9.6% now versus 9.4% then), with many millions more languishing in poverty and/or on extended unemployment; and, housing prices ($1.25+ trillion later in taxpayer-funded supports) are still falling.

So, it’s 2010, and here’s the second tale of two economic tales…

“The Tale Of Two Economies”
Contrary Investor
August 2010 Letter
(contraryinvestory.com)The Tale Of Two Economies…It simply continues, and as we see it is THE key tension in investment decision making of the moment. It’s the tension of the macro versus the micro. After all, isn’t this very tension exactly what has been playing out as 2Q earnings season has unfolded? Again, the key question being, what will be more important to investor decision making ahead, the macro domestic and global economic and credit cycle backdrop or company specific earnings and forward guidance? We’ll move through this little look at life as we know it at the moment relatively quickly as basically it only continues to validate the “tale of two economies” theme we have been discussing for well more than a year now. But we do believe there are some very valid conclusions that can be drawn from one of the most noticeable economic divergences we have seen in many a cycle.
To the point, in recent weeks we have been treated to the quarterly Conference Board CEO business confidence survey as well as the NFIB (small business) survey for July (data through June). As with so many business conditions surveys, the CEO confidence survey is a diffusion index. Any reading above 50 tells us the preponderance of responses were positive, and vice versa. Quarter over quarter the CEO survey was unchanged in the recent report and remains consistent with headline economic expansion based on historical precedent. At least over the recent past, survey levels at 50 or above have been consistent with at least 3% year over year real growth in GDP. Over 70% of the CEO’s surveyed expect profit growth over the next twelve months and half of the respondents expect an increase in demand to drive profitability. Alternatively for the small business crowd, demand and poor sales is their number one concern. In terms of the US corporate sector, large and small business conditions have been and continue to remain worlds apart…
–SNIP–
Bottom line summary. The tale of two economies theme remains valid and intact for now. We are seeing a huge divergence between large and small business condition outlooks at present. A divergence we have never seen in modern historical experience. Large businesses represent the micro in terms of the positive of company specific earnings. They are the large S&P 500 companies whose earnings are more dependent on the rhythm of the global economy as opposed to the domestic US economy specifically. They are the large companies whose reported “operating” earnings are not falling apart, despite a few bumps in the road now and again. Alternatively, we see the small business community representing the domestic US macro. They are the job and ultimately personal income creators. They are largely the service sector, the largest driver of domestic US economic outcomes. The NFIB numbers are simply telling us of a deceleration in macro economic activity ahead. And herein lies the tension for investors. What will be more important in decision making immediately ahead, the tone and rhythm of the US macro economy inclusive of jobs and personal income, or the micro of reported quarterly “operating” earnings of truly large and globally centric companies whose job and personal income creation activities largely lie abroad? It’s why we need to remain focused on this “tales of two economies” theme. Is it really going to be the case that the S&P 500 companies alone (as a proxy for large corporations) experienced a headline economic recovery in the current cycle while small businesses never even left the post recessionary starting gate? It’s sure looking that way for now. In terms of “counting cards” as per a potential US double dip recession outcome, the NFIB puts a checkmark in the plus column for the double dip scenario. Just keepin’ a list.

And more inconvenient truths upon which we were enlightened, just this weekend…

Alan Greenspan Just Told Us Our Financial System Is Broke; Drop In Home Prices Could Lead To Second Recession. (Of course, that’s assuming the first recession ever “ended.”)

Alan Greenspan says our economy is broke, and if housing prices drop much more–and the consensus is that they will–then the likelihood of our economy sinking deeper into recession is quite possible. (SEE: “Alan Greenspan: A drop in home prices could lead to second recession.”

And, if you recall Simon Johnson’s commentary, from a year ago (noted above): “…we need effective consumer protection for finance, and in a hurry.”

“Knives Out for Elizabeth Warren”

But, when it comes to getting our number one choice to watch consumers’ backs on Wall Street, Yves Smith says, “Knives Out for Elizabeth Warren.”

Folks, there is an ongoing crisis in middle-class America!

And, we’re supposed to be okay with this? I don’t think so!

Today, Paul Krugman tells us, the “new normal” is high unemployment, for a long, long time.

“Defining Prosperity Down”
By Paul Krugman
NY Times Op-Ed
August 2, 2010…Not long ago, anyone predicting that one in six American workers would soon be unemployed or underemployed, and that the average unemployed worker would have been jobless for 35 weeks, would have been dismissed as outlandishly pessimistic — in part because if anything like that happened, policy makers would surely be pulling out all the stops on behalf of job creation.
But now it has happened, and what do we see?
First, we see Congress sitting on its hands, with Republicans and conservative Democrats refusing to spend anything to create jobs, and unwilling even to mitigate the suffering of the jobless…
–SNIP–
…the fearmongers are unmoved: fighting deficits, they insist, must take priority over everything else — everything else, that is, except tax cuts for the rich, which must be extended, no matter how much red ink they create.
The point is that a large part of Congress — large enough to block any action on jobs — cares a lot about taxes on the richest 1 percent of the population, but very little about the plight of Americans who can’t find work…

On The Horizon…

To which Yves Smith tells us these Bush tax cut myths, upon which Krugman’s railing this Monday morning, as well, are exactly that: “[http://www.nakedcapitalism.com/...
Debunking Bush Tax Cut Myths]”

On the immediate horizon…unemployment more likely than not moving higher as the year progresses, not lower; the disparity between the haves and the have-nots growing greater than at any time since they started measuring this metric (including just prior to the Great Depression); housing prices dropping, still; our leading (and only significant) consumer advocate being thrown under the bus (while many are still in denial of this truth); small business–the leading driver of employment on Main Street–being ignored; and tax cuts for the rich more than likely being extended? (Do you really think anything other than that will be the end result?)

(And I haven’t even mentioned the word, deflation, which is being widely bandied about in the halls of the Federal Reserve as we blog now, either.)

You want to blame the Republicans for this? (Okay. That makes sense. This “mess that Greenspan made” is the result of eight years of GOP laissez-faire mismanagement. It IS their fault, of course.)

But, wouldn’t the argument (and the voters’ perceptions on these matters) for OUR PARTY be just a slight bit more compelling and believable if we actually had Democrats running our Treasury Department as well as our Federal Reserve? And, non-Rubinist Democrats advising our President in the White House?

One more time…repeat after me…and paraphrasing Barney Frank: “Things would be a lot worse” is NOT a winning campaign slogan.

And, a languishing economy–at least as far as our economy is still being perceived on Main Street–is not exactly a result to brag about in a congressional stump speech.

Fighting the good fight for major new stimulus programs is where our Party should be focused right now, IMHO. Unfortunately, as Krugman, Johnson and many others have noted
it of late, standing up for what’s right for MAIN STREET is just not at the top our party leadership’s agenda.

As noted in my diary from a year ago…

Yes, the political risks of the so-called recovery as it’s being teed-up for us now…are enormous…

Now that I read it again, I think that is the one line from last year that I would change to: “Yes, the political risks of the so-called recovery as it’s being teed-up for us now…are a TRAVESTY.”

And, as far as standing up for a second major stimulus package for Main Street’s concerned, with 100 days (give or take) left until the mid-terms, it’s not too late for our President to provide strong support for that, too.

Comment by Paul Evans: Speaking of Bush Tax Cut Myths, there is an excellent article from today at Think Progress by Pat Garofalo:

See Rove Invents Fantasy World In Which The Bush Tax Cuts Led To The Most Government Revenue Ever, Think Progress, August 2, 2010, by Pat Garfalo, excerpt quoted verbatim:

Last month, a handful of prominent Republican lawmakers tried to advance the false claim that the Bush tax cuts of 2001 and 2003 — which are scheduled to expire at the end of the year — actually increased government revenue. “There’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy,” said Senate Minority Leader Mitch McConnell (R-KY).
Republicans need to invent this fantasy world in order to justify complaining about the federal deficit while simultaneously advocating an extension of tax cuts that would blow an $830 billion hole in the budget, all for the benefit of the richest two percent of Americans. Today, Bush White House adviser and GOP operative Karl Rove appeared on Fox News, where he not only claimed that the Bush tax cuts increased revenue, but that the cuts resulted in the highest amount of government revenue ever collected:
The Bush tax cuts led to a couple of things. They led to first of all, the largest amount of revenue being received by the government. They helped encourage economic growth and grew tax revenues…At the top, half of small businesses are going to pay higher taxes because they file at the personal rate, and they’re going to get hit.

See Economists Tell the Masses: “It Could Have Been Worse, Truthout OpEd, August 2, 2010, by Dean Baker, excerpt quoted verbatim:

It is amazing that angry mobs have not risen up and chased all the economists out of the country. While the greed of the Wall Street gang provided the fuel for the bubble, the economists played an essential role as enablers. This was most directly true for economists in policymaking positions, like Alan Greenspan at the Fed.
It was Greenspan’s job to stop the housing bubble. A competent and honest Fed chair would have recognized the bubble by 2002 and taken whatever steps were necessary to rein it in. And we should be 100 percent clear, in spite of all the song and dance about how the financial reform bill will prevent another bailout, the Fed absolutely had all the tools needed to stop this disaster. They just lacked either the competence or the integrity, or both.

Comment by Paul Evans: I agree with Bob Swern 100 percent that we need to dump Summers, Geithner and Bernanke and get some actually progressive economists running the show in D.C. In fact, Obama needs for once in his life to be bold here: I truly believe that if the “terrible Trio” were fired, there would be such a roar of approval in this country that everyone but die-hard Republicans would be dancing in the streets (with attendant positive consequences for the mid-term election). Continuing in this tax matter, the United States went from World War two up until the sixties or seventies with a top tax rate of 93 percent and then introduced a second tier tax rate of 75 percent. All that time — ALL that time — our economy grew at a consistent rate of 4 percent growth per annum… consistently. (Could it be that God or Fate orders society in some way so that when a government is socially responsible, then it prospers? Is there an “economic Karma” involved?)

I don’t know where these Republicans get off and we allow them to posture like they don’t know exactly what they’re doing and there is some argument over how much to tax the rich. Forget rolling the tax rate back to 1993, roll it back to 1960′s rates. Then maybe we could pay for social services. Can anyone of sound mind reading this actually debate that the rich would be hurt so badly that the economy would collapse? No, Rove and George Will and others like them are NOT living in a fantasy world. They know exactly what they are doing, and they know exactly how much of a lie the “keep taxes low to fire up the economy” myth is. It’s not just a fallacy, it’s not just a myth, it’s a Damned lie.

As to these fine Republicans’ so-called Christianity, what part of “eye of a needle” and “camel doesn’t fit” don’t they get?? It is a False, a demonstrably false and execrable two faced hypocrisy when these people are not willing to help their fellow man in need. And it isn’t Christian. They are hypocrites and false Christians, whether they know this or not. ((And Rove knows it.)) ~ Evans Liberal Politics owner Paul Evans

Bob Swern remains my personal choice for favorite progressive economics writer. This is mainly because he gets to the root of the matter and provides documentation and links to look further into the topic. Thanks to Mr. Swern for giving Evans Liberal Politics ongoing permission to republish his articles. Email Bob Swern here.

"Karl Rove: Consumate Liar," Fox News interview where Rove falsely claims that the Bush tax cuts led to the most government revenue ever. — 2:40

Advice to avoid suffering
Don’t Consider Yourself: Just Be, and Live, Try and Feel, but don’t consider yourself while you’re doing it. It is a relief not to consider yourself while you live, very easy and nice. It can open up your mind to the world around you of which you are a part. It can be part of the process by which the false distinction you make between yourself and others falls away. And you will not suffer as much. This is actually a rather Buddhist idea, yet I find that I have no problem integrating the idea into my own Christian mindset. ~ Paul Evans

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SIGTARP REPORT: Taxpayer Support Of Wall St. = $3.7 Trillion

Jul 22nd, 10 / 2 Comments

Evans Liberal Politics
July 22, 2010

SIGTARP REPORT: Taxpayer Support
Of Wall St. = $3.7 Trillion

SIGTARP REPORT: Taxpayer Support Of Wall St. = $3.7 Trillion, Daily Kos, July 21, 2010, by Bob Swern, used with permission, quoted verbatim:

The next time someone tries to sell you the Wall Street propaganda–you see it in diaries on the Rec List around here, from time to time, as well–that the banks are paying off their bailouts, and our deeply-captured (by the status quo) government is going to, somehow, miraculously make a profit on this ongoing historical fleecing of its citizens, show them this just-published chart from Special Inspector General Neil Barofsky’s office (from the SIGTARP report linked in the LA Times story, below): Incremental Financial System Support By Federal Agency Since 2007.

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In fact, just 12 days ago, when it was noted by yours truly that another diary on the Rec List was reprinting a story that falsely claimed that taxpayers were going to make a profit from the Wall Street bailout, a lot of people here were quite dismayed by this inconvenient reality.

The truth is that, as of the end of June (according to the Special Inspector General’s Office), the bailout (ex-housing) has put taxpayers on the hook for over $2 trillion. If you include housing/mortgage industry supports, the number almost doubles to $3.7 trillion.And, if anyone thinks the support of the mortgage industry is providing massive benefits to homeowners, the reality is the primary beneficiaries of those related programs are the large mortgage underwriters, taking their vig these days, and then selling through their mortgages to…us–at last check, the government was the ultimate underwriter of 96.5% of all mortgages in this country. (In another diary posted the day prior to the one linked, above, I pointed out a Federal Reserve white paper that was published in 2004 which discussed the concept of the Fed providing mortgage underwriting services directly to consumers, bypassing the traditional middlemen/banks, entirely, and saving U.S. homebuyers a significant chunk of cash, as a result of that new effort.)

Also, about that other Wall Street meme that the FDIC is supported by the banks, I would imagine that by sometime around 2030 or 2040, the banks may get around to digging themselves out of their FDIC hole; but, until then, taxpayers are holding those notes, too. (But, that’s just my opinion, right?)

Here’s the truth…and, as we all know, no matter how much some might try, ultimately, you cannot hide from that…

Report: Housing aid boosts total U.S. financial-system support to $3.7 trillion
Tom Petruno
LA Times
July 21, 2010 11:41 am – Despite the winding-down of most of the government’s aid programs for the financial system this year, total federal support for the system now is 23% greater than it was a year ago, the Treasury’s watchdog for bailout plans said in a report to Congress on Wednesday.
Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, said the government was on the hook for $3.7 trillion in support as of June 30, up from $3 trillion a year earlier.
Even as banks have been repaying the money the Treasury invested in them under one of the main TARP programs approved in 2008, U.S. aid to the housing market has ballooned, Barofsky’s report said. The increase has mainly come in the form of more capital for Fannie Mae and Freddie Mac and loan guarantees for various federal mortgage programs such as those of the Federal Housing Administration.
Barofsky “Notwithstanding [the] scaling back of TARP, an examination of the broader context demonstrates that the overall governmental efforts to stabilize the economy have not diminished,” the report said.

Thanks to Bob Swern for permission to republish his articles on an ongoing basis. You can see his blogroll at Daily Kos here. Email Bob Swern here.

See Bernanke Unleashes the Bears: No Fed Plans to Give More Support, Bernanke Says, The New York Times, July 21, 2010, by Sewell Chan:

WASHINGTON — The chairman of the Federal Reserve, in saying that it had no immediate plans to provide additional support to the economy, dashed the hopes of some economists and executives who have been pushing for action to add momentum to the sluggish recovery.

See The Wall St. Bill Doesn’t Protect Us From Banker Abuse: 5 Essential Reforms Are Still Needed, AlterNet, July 21m 2010, by Zach Carter.

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SIGTARP REPORT: Taxpayer Support Of Wall St. = $3.7 Trillion

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SIGTARP REPORT: Taxpayer Support
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