Sunday, February 28, 2010


Here's some good reading.

First up, another Congressional Budget Office report says that President Obama's recovery program has saved or created between 1 million and 2.1 million jobs.

Next, if you ever wondered whether U.S. bankers are sociopaths, wonder no more. From we find that U.S. bankers rejected the suggestion from U.K. bankers to rein in executive pay and bonuses after the market crash.

Is the American middle class under assault? This piece suggests it is. This is a must read for anyone who believes that market players do the right thing.

Finally, this Frank Rich article does a good job of explaining why the Tea Party movement is stocked with delusional nut jobs who don't have a firm grasp on reality.

- Mark

Friday, February 26, 2010


This Money Morning article is by far the best piece I have read about the "brokered deposits" and "hot money" pheonomenon that's challenging our banking and economic system. Simply put, the need to find higher yields with FDIC guaranteed deposits (which bank brokers do), coupled with the need of our biggest bank's to pad their books, helps to explain why bank loans to Main Street have collapsed (in spite of trillions in taxpayer dollars being thrown at the banks).

Students who have been in my American Politics class (and paid attention), and those who have followed this blog, will understand immediately the importance of our current brokered deposits situation. Brokered deposits help to explain why I believe we're gearing up for Round Two of our Economic Meltdown.

If you don't read anything else today read this article. And if you're inspired, you should read this piece from Zero Hedge, which explains how Bank of America is covering their losses with U.S. government guarantees.

- Mark


Via nakedcapitalism we get this article supplied by Science Daily. It cites a study that seeks to explain the political divisions that we see around us. According the London School of Economics study, liberals are smarter than conservatives because - from an evolutionary perspective - liberals (which includes atheists) have a firmer grasp on the world around them. The study argues that ...

More intelligent people are statistically significantly more likely to exhibit social values and religious and political preferences that are novel to the human species in evolutionary history ...

What this means is that in the past we used to only cling to each other in family, tribal or small communal units. We did so because it was necessary (protection), comforting (reassuring) and the only world we could know. Over time we've been genetically programmed to put family, friends, and community first. This makes communal traditions, like marriage rituals, important because they perpetuate and enforce clan patterns. Both liberals and conservatives are genetically wired this way.

But then there's a split. And this is where the chaos begins.

As our civilizations have gotten bigger and evolved over time our "tribal" units have had to adapt to others, especially as technology has enhanced our capacity to communicate (starting with the printing press) and travel (starting with wind sails and navigation equipment). Throughout time people have either retrenched, and embraced what is familiar and comforting, or they have tried to understand novelty and other developments that require constant reassessment. The former become conservative, and pursue comforting patterns. The latter pursue activities outside of their comfort zone, like caring for "genetically unrelated strangers."

While conservatives might mock the "it takes a village" mentality, the goal of liberals is to take the tribal and communal mind-set to the next level. The whole must be cared for and made better if we are all to do better. This concept is "evolutionary novel" and liberal. Or as the study suggests ...

What this means is that as your world and your perspective opens up you tend to adapt to things you don't necessarily understand.
The study even taps into the whole fear-mongering side of conservatives. The authors start with the premise that humans "are evolutionarily designed to be paranoid, and they believe in God because they are paranoid" (as this study shows, both conservatives and liberals who consider themselves religious are driven by this premise). Then the authors suggest that God, or religion, is a defense mechanism designed to help us understand what we don't know. Over time, as science has unwrapped mysteries that once befuddled us liberals have learned to deal with a world that may not be driven by "original sin" or the constant threat of God's punishment.

For example, as we have learned more about tectonic plates and weather patterns it has become easier to abandon the notion that devastating earthquakes, or every catastrophic hurricane, are a product of "God's wrath". While this may be entirely too glib, simply put, liberals embrace the science, while conservatives struggle with it.

It really should come as no surprise then that Pat Robertson and other conservatives invoke their version of God (the Creation Museum in Kentucky is a must see) whenever they want to explain natural disasters, human folly, and other events.

Depending on your take, this study can go a long way in explaining the uni-color tone of the conservative Tea Party movement. The study suggests the group is only comfortable with people who live in a world only they know (seriously, they think they're the only ones who understand America). The study might also help us understand the fear- and hate-mongering that comes with the Republican Party's terror drenched, immigrant- and gay-bashing, approach to politics. There is an innate need for conservatives to fear "outsiders".

In all cases, both groups sense history is passing them by, and it scares the hell out of them. For them it's better to fight novelty and invoke God, rather than understand the complexity. Simply put, if they're not just emerging from the medieval castle walls, conservatives may be blinded by the light of intellectual enlightenment. Clinging to the good 'ol days helps conservatives cope with change.

This is an interesting study. I encourage you to check it out. I'll leave it at that for now.

- Mark

Thursday, February 25, 2010


OK, maybe I'm being cynical, but after watching Rep. John Boehner (R-Ohio) and Sen. Mitch McConnell (R-Kentucky), it appears that the Republican leadership is going to walk away from the spirit of this Health Care Summit. They will probably say something to the effect that "The President doesn't want work with us because he doesn't want to start over. He just lectured us."

During the Summit both Boehner and McConnell called on President Obama to scrap the health bill that's on the table. In spite of many areas of agreement - and there are many - the Republicans are looking to trash everything that's on the table. In my view, they're doing this primarily because they want to drag everything out into November. Why? Because they want to point to President Obama and the Democrats and say, "See, they can't get anything done. We wanted to start over, but ..."

Well, some times you don't need to start over as much as you need to make a few adjustments, as this comic makes clear.

Again, maybe I'm being cynical. But I'm not expecting anything positive from the Republicans tonight (not that I was expecting much to begin with). That's too bad. When the Republicans weren't trying to get in some campaign sound bytes (see Boehner's, McConnell's, and Rep. Paul Ryan's comments), they actually had some good ideas.

From what I heard, I actually think that the "team work" reference above is where Republicans and Democrats are at. Seriously, the ideas and challenges that both parties referenced aren't that far apart. Trying to score political points by making President Obama look like a failure in November is not good policy.

People are going bankrupt, dying, or not getting care that they should, every day. If the Republicans come out swinging tonight I hope the President presses for reconciliation.

- Mark

UPDATE, I: And it begins. Here's Senator John Thune (R-SD) saying that the GOP won't "fundamentally" be part of the health care process because of how it drives up costs. He essentially declares the summit a failure before it even ended.

REAL-TIME RESPONSES (to talking points)

When I can, I'm trying to watch the Health Care Summit. Guess what I find? The live feed at the White House's site (which is about 1 second slower than YouTube) has a companion area that's putting up responses to various talking points within minutes of the points being made. Check this out.

In a few words, the White House is providing a Real-Time Viewers Guide that outlines areas where the President's proposals incorporate, for example, what the Republicans are calling for in health care.

This information may have been posted elsewhere before, but putting it up during the health care discussion is a smart move.

- Mark


I was watching the beginning of President Obama's health care summit this morning. The usual courtesies and talking points were made in the opening remarks. Still, it's clear that the problems that exist are as much political as they are ideological. MSNBC's Rachel Maddow, from The Rachel Maddow Show, points out a few of these issues.

First, Democrats in Congress have become increasingly frustrated with the Republican's "just say no" position on health care. Congressman Anthony Weiner's (D-NY) comments on why he believes they're saying no illustrates this frustration. In this RMS segment he tells Republicans on the House floor that they've become little more than a "wholly owned subsidiary of the insurance industry ...". The follow-up exchange is a classic.

While the Republicans might not be wholly owned by the insurance industry in a legal sense, when you do their bidding like they've been doing it's hard to tell the difference.

Then Rachel Maddow takes a look at one of the outright lies of the Republican party when it comes to "reconciliation" and the public option (the effort to get a simple 51 majority vote) ...

This should be embarrassing for those who seek to confuse the reconciliation issue, but it's not. The fact that it isn't says much about where the Republican Party is politically on the health care debate. Simply put, they're not serious (keep in mind they had almost the entire Bush administration to do something on this issue). For transcripts and more, click here.

Either way you cut it, there's a wide gap between ideas and tactics that won't be resolved today.

Today's health care summit will probably end with Republicans saying the Democrats and/or the President don't listen, or that President Obama lectured them. If this happens I think it's time for the President to embrace and push for using reconciliation (used, as Barbara Boxer pointed out, 16 times by Republicans since 1980) to get the public option and/or health care reform.

The policy reasons policy reasons why I support reform can be found here and here. These are the issues you bring into the office if you want to win the debate on points. The political reasons why I support the reforms proposed by the Democrats can be found here. These are the issues you discuss if you want to drag out debate and torture your friends (and still win).

- Mark

Addendum: You can watch the Health Care Summit here and here. Interestingly, the White House feed is about 1 second behind the Youtube feed.

Wednesday, February 24, 2010


Have you ever wondered why Wall Street's financial institutions have been making record profits, but none of it has "trickled down" to Main Street? Wonder no more. It has a lot to do with what Wall Street claims to have "earned" over the past 40 years (empty profits), and what it actually does (extract wealth).

As a reminder, it was Ronald Reagan who ushered in the era of "trickle down" or "supply-side" economics. The central argument is that if we put more money into the hands of those who already have money they will increase their investments. This, in turn, will lead to more industry jobs. With more jobs more people will have money to consume (I know, I know ... "Whatever happened to demand driving supply?" ... it's their playbook, so play along here).

The follow-up budget deficits that were supposed to materialize from massive tax cuts would then - according to the trickle down theory - be offset by new consumer spending. This would generate new tax revenue. And just like that, everyone lives happily ever after. See the genius in the theory?

To make the theory work Republicans called for tax cuts for the rich and deregulation for "the market" (to help inspire the rich invest their money).

We've enacted these trickle down & deregulation policies for the better part of 30 years. What do we have to show for it? Lower taxes on the rich, and a slew of favorable legislation for people who have become increasingly reckless. The result has been a continuous transfer of money to America's wealthiest class so that income growth, which was relatively equal between 1943 and 1979 (light blue columns in chart), has become disproportionately skewed to America's already wealthy, as we saw between 1973 and 2005 (darker "greyish" column).

Here's another chart demonstrating the same negative effect of deregulation and tax cuts for the rich on middle America.

If you're having trouble digesting all of this, let's make this simpler. Since what we now call supply-side, or trickle down, economic policies were introduced (keep in mind that pursuing tax cuts for the rich started long before Reagan), those at the top of America's income escalator are living something like this ...

With wages, and purchasing power, effectively stagnating because of these policies (and rising prices) what all of this suggests is that a large proportion of the economy’s growth, and it's productivity gains, over the past 30 years are not being enjoyed by workers and consumers. The real gains have been going to America's CEOs and other economic elite ...

Because America's middle class is not seeing relatively lower prices or higher wages, the share of America's income and overall wealth has been growing faster for America's already wealthy than it has for the rest of us.

Things don't get much better if we just look at America's top 1% of income earners (those making about $376,000 or more per year). Comparatively speaking, they are raking in about 60% of all income. Compared to other industrialized nations, this puts America at the top of the heap in terms of growing income inequality.

Why is this increased concentration of wealth occuring, in spite of almost thirty years of supply-side, trickle down economic policies? If you listen to conservatives this is happening because those in the bottom 90% (those making about $103,000 or less per year) aren't working hard enough, or because they're simply losers.

Demonstrating their complete ignorance of the impact that favorable legislation, legal protections, subsidies, tax breaks, write-offs, inheritance, etc. have on wealth, those on the far right will even say it's survival of the fittest at work ... only the those at the top deserve what they get because they're smarter and more talented. It has nothing to do with favorable legislation, or other factors.

Those of us who walk upright disagree.

For example, the National Bureau of Economic Research's Robert Gordon and Ian Drew-Becker point to a decline in unionization, increased trade, increased immigration, a decline in real minimum wages, and the impact falling income tax rates (for the rich) have had on growing income gaps. In fact, tax cuts have had a demonstrably positive effect on the income and wealth of America's top 1% of income earners (again, about $376,000 and above).

With America's middle class making comparatively less - which has made it difficult for Main Street, especially with rising consumer prices (play with the graph, it's fun) - and with taxes going down on America's wealthiest groups, it should come as no surprise that our federal debt skyrocketed from about $975 billion in 1980, when Ronald Reagan entered office, to around $12.5 trillion today.

Worse, the deregulation policies that Wall Street asked for throughout the 1980s and 1990s contributed to the greatest market collapse since the Great Depression and, by far, the greatest bailout of market stupidity in human history. 

Seriously. Building up and leveraging debt contracts, and then gambling on whether they would pay out was not a bright idea. Yet, Wall Street did it because they could. Deregulation and favorable legislation let them do it. And this is the point I'm getting at.

Since we embarked on policies that gave tax breaks to America's richest groups, rather than getting the promised "trickle down" effect of more jobs and reduced budget deficits we have seen wage and wealth gaps increase, while Wall Street has done what it's wanted to do. Our national debt has soared too.

Money claims on income "earned" from shady, unregulated insurance bets (Credit Default Swaps on Collateralized Debt Obligations, among others), have shot through the roof for Wall Street's biggest players (represented by M-3). What you and I have to work with (checking and savings accounts, represented by M-1) has not kept pace.

(Note: M-3 data was suspended as a "cost saving" measure by the Bush administration in 2006. I discuss the real reasons in my book)

U.S. Money Supply (selected years)
Year       M-1                M-2                 M-3 
1964          $160 billion              $425 billion               $442 billion
1972          $249 billion              $802 billion               $886 billion
1974          $274 billion              $902 billion               $1.070 trillion
1975          $287 billion              $1.017 trillion            $1.170 trillion
1984          $551 billion              $2.312 trillion            $2.991 trillion
1994          $1,150 trillion           $3.498 trillion           $4.370 trillion
2002          $1,219 trillion           $5.801 trillion           $8.568 trillion
2003          $1.306 trillion           $6.062 trillion           $8.872 trillion
2004          $1.376 trillion           $6.422 trillion            $9.433 trillion
2005          $1.375 trillion           $6.692 trillion           $10.154 trillion
2006          $1.367 trillion           $7.036 trillion           $10.299 trillion
2007          $1.367 trillion           $7.447 trillion                  N/A
2008          $1.600 trillion           $8.108 trillion                  N/A
2009          $1.546 trillion           $8.110 trillion                  N/A

What does this mean for you and me? Very simple. The earnings and income gains of Wall Street and America's biggest market players was based on a number of factors that were not tied to the invisible hand of the market. From favorable legislation, tax breaks, tax write-offs, deregulation, globalization, attacks on unions, immigration, declines in minimum wages, etc. the "earnings" and recent wealth increases that have accrued to America's wealthiest over the past 30 years has come off the backs of America's middle class.

Don't believe me? Check out personal debt loads in America. In fact, take a look at what has happened to personal obligations and government debt loads over the past 30 years.

Because the focus over the past 30 years has been to extract wealth, rather than build it up through innovative investments that would create jobs (as the trickle down model was sold), it should really come as no surprise that what happened in 2008 occurred. The goal of Ronald Reagan was simply to get more money into the hands of the rich, and to keep it away from America's middle class. Favorable legislation, subsidies, corporate write-offs, tax breaks, and other favors for America's upper crust were  the tactics used to achieve the goal.

Put another way, trickle down and supply-side economics was always a farce. Or as George H.W. Bush once noted, it was little more than Voodo economics from the very beginning.

So can we finally dispense with the trickle down notion that tax cuts for the rich (on their own) is a viable economic plan?

- Mark

Tuesday, February 23, 2010


The next time you hear some Fox News talking head, or one of their many citizen drones, lament how Republicans have been cut out of the health care debate remind them of these two facts. In the spirit of bi-partisanship ...

Fact #1: Democrats threw out the public option with little or no fight.

Fact #2: Out of 210 Republican amendments submitted and considered by Sen. Christopher Dodd's Health, Education, Labor and Pensions committee, only 49 were rejected.

That means 161, or more than 75% of, Republican health care amendments were accepted by the Democratic Party. Yet not a single Republican voted to support the legislation. And now all they do is cry and whine about being excluded from the process.

Sounds to me like we can cut 161 sections/amendments out of Sen. Dodd's committee bill on health care (and then send the GOP to bed without supper).

There's more on what the Democrats have compromised on gutlessly caved in to here.

- Mark


This is great. The Daily Reckoning (one of the investment newsletters that I regularly receive) has posted it's (un)official Financial Darwin Awards. Like the original Darwin Awards, the goal is to highlight collosal stupidity and other activities that lead people to improve our gene pool by accidentally removing themselves from it.

Only in this case, since we're talking about the idiots who helped run Wall Street and our economy into the ground, The Daily Reckoning is focused on honoring those who have "removed themselves from the greater financial gene pool (despite the fed's best efforts to revive their rotting corpse)."

I especially like their award to Fed Chair, Ben Bernanke, who is "thriving ... like a cockroach in the fallout of a nuclear blast" because in "Financial Darwinian terms, he is adapting to the Big Government Era, toxic as it is, as well, if not better, than just about anyone in the ecosystem."

The late focus on GM is a bit misplaced when you consider the trillion dollar bailouts for Wall Street, and other worthy candidates (Alan Greenspan, President Bush, Hank Paulson, etc.), but the slide show is still entertaining.

- Mark

Friday, February 19, 2010


I think one of the great frustrations for most Americans today is that we understand that we're getting screwed. The people who gave corporate America the favorable legislation they needed to wreck our economy, and the idiots on Wall Street who are stealing and looting from the U.S. Treasury, are still singing and dancing on the deck of the Titanic. They're acting as if the financial iceberg we just hit is no longer a concern because Captain Bernanke and his crew at the Federal Reserve think they see land on the horizon.

So Congress continues to play games with regulations that need to be created, or reinstated, while Wall Street continues to extract wealth from the American taxpayer.

Worse, as Tim Iacano at Iacano Reserch points out, we just gave Ben Bernanke another term at the Federal Reserve. We did this in spite of the fact that he clearly demonstrated that he had no idea that the financial icebergs floating in our economic waters before the market meltdown only represented a small portion of what was out there (what we see of icebergs generally represents about 10% of it's total mass).

If anyone needs reminding, this is what Captain Bernanke saw as he was asked about all the financial icebergs before the 2008 market collapse.

Well, hang on to your hats because it looks like we're taking on water again. Only this time it's just you and me, the American taxpayer, who's sitting in the sinking ship. But rather than floating us a life boat - or a yacht, like they gave Wall Street - the Federal Reserve is throwing the American taxpayer an anchor. And it's coming in the form more debt that we're going to have to pay for as we pick up the tab for the stupid decisions made on Wall Street. Here's how it's happening.

If you recall, not only did the Bush and Obama administrations commit $1.5 trillion in the form of TARP and stimulus program money, but the Federal Reserve and the Treasury Department have been working in tandem to commit trillions more guaranteeing and purchasing the failed business contracts that companies like AIG, Goldman Sachs, and Merrill Lynch wrote, but don't want on their books.

So, for example market players (they're not investors) would bundle up hundreds of thousands of debt contracts - car loans, credit card debt, mortgages, etc. - and repackage them as securities. Of course, in the process they paid themselves handsome fees and bonuses for writing these contracts. When they found gullible pension funds, foreign banks, and domestic institutions willing to buy these security contracts they did this over and over again (I say "gullible" because, as Brooksley Born pointed out during the Clinton adminstration - and as the FDIC made clear in 1998 - these markets were far from stable).

Still, as you can see from the graph below, contracts for unsecured or "non-agency" (no Fannie Mae or Freddie Mac backing) mortgage backed securities (MBS) reached over $1.1 trillion in value by 2005, and then climbed to $8.2 trillion in 2006 and $9 trillion in 2008 for all housing related securities.

Along the way came companies like AIG (among others) who insured these securities. And why not? Ben Bernanke was confident that the bank regulators were doing the right thing, "market fundamentals were strong," and housing prices don't fall, right?

Insurance + the sage words of Fed Chair Ben Bernanke helped make those who bundled up debt contracts feel secure. Since housing markets don't collapse why not write more security and insurance contracts, right? As a result, Wall Street and the financial titans of America actively went out and looked for more debt to write up, bundle up, and insure.

When people stopped paying their debts and mortgages (for whatever reason) what should have happened is that those who insured the securities should have paid up. Let me be clear here. When people stopped paying the debts and mortgages that made up the security what should have happened is that those who insured the securities should have paid up.

This is what happens in a real market economy. But it didn't. Why? I'd like to say because we don't have a real market economy. While this is true, in practical terms companies like AIG didn't have the money. In essence, they had been writing insurance contracts for products they didn't have the money to pay out.

Rather than have the holders of the securities that went bad lose their money, or force them to sue companies like AIG for their insurance money, big market players cried "market collapse." Instead of taking their lumps for diving into shaky debt markets Wall Street was able to convince the federal government to purchase, guarantee, or hold their bad deals.

How did they do this?

Between Congress and the President (both Bush and Obama) an environment had been created for the government (through the Federal Reserve) to loan money to the holders of failed or failing security contracts. In return the government the American taxpayer would accept as collateral the toxic securities that companies like AIG were supposed to have insured.

How much of this market crap is the government the American taxpayer currently holding? We're now sucking on trillions of dollars of downgraded and worthless crap. Check this out (don't be fooled by the term "Asset Side"; when it comes to MBSs they're ghost assets) ...

Yes, these trillions add up to much more than the $1.5 trillion President Bush and President Obama asked for and received from Congress. If you want to know what this looks like in real terms, this is what we're looking at ...

In practical terms, unless we do something on the jobs front and with regulations on Wall Street, we're looking at a long recession, higher taxes, inflation, and/or a mix of all three. It's not pretty.

So, the financial mandarins who caused this messs - by diving into debt markets, and insuring toxic crap they couldn't afford to pay out on - are now cruising away on their bailout yachts. You and me, however, are getting stuck with what's left of our debt-ridden ship. The names (Maiden Lane, TALF, etc.) of the bailout programs really don't matter at this point (names, explanations and amounts dumped on the U.S. taxpayer can be found here, with updates here). What matters is that in addition to losing jobs, suffering through pay cuts, home foreclosures, and enduring the uncertainty that wrecks families you and I are going to have to pay the tab for Wall Street's greed and stupidity.

A bunch of arrogant fools create a debt-driven bubble that they led everyone to believe they could manage. Then they dump it all on us, and get rich in the process. Does this seem right to you? 

- Mark

Thursday, February 18, 2010


If you want a primer on what's wrong with our nation's executive compensation system, this open letter from Yves Smith at is a good place to start. It focuses on the perverse incentives that encourage the Chief Executive Officers (CEOs) of America's largest financial firms to embark on reckless "heads I win, tails you lose" business strategies. 

These reckless business models compel industry CEOs to focus on extracting rather than creating wealth. All of this is detrimental to both sound business decisions and the principles that surround market capitalism. Here's Yves' letter to Sheila Bair, Chairperson of the Federal Deposit Insurance Corporation. My synopsis and final comments are below.

Dear Chairman Bair,

America can no longer afford to have a banking system that serves the ends of its executives rather than those of taxpayers and communities who have been saddled with cost of reckless profit-seeking. The FDIC proposal to tie deposit insurance premiums to the incentives in executive compensation programs would be an important step forward towards making sure that bank managers operate in a way that reflects the value of the extensive government support and safety nets they enjoy. Bank officers should not be encouraged, as they are now, to take “heads I win, tails you lose” bets with deposits.

There is no question that the annual accounting/bonus cycle is badly out of line with the time horizon of many of the wagers that financial institutions take. Unfortunately, the belief that using stock options or restricted shares as an important part of compensation would lead to responsible behavior has proven wildly false. Both Bear Stearns and Lehman had substantial equity ownership at both the executive level and among the rank and file. By contrast, when Wall Street was dominated by private partnerships, so the management group was jointly and severally liable for losses, the sort of profligate risk-taking that took place in the run-up to the global financial crisis was virtually unheard of.

Unfortunately, all compensation arrangements at public companies are inherently, “heads I win, tails you lose.” No matter how badly a corporate team performs, its pay is immune from clawback, except in the case of fraudulent conveyance in bankruptcy, and even then, the “lookback” period is usually shortly before the failure of the firm. By contrast, it often takes years to reap the bitter harvest of bonus-flattering decisions.

It may be that the only way to cope with the agency problems inherent to risk-taking in a public firms is to make pay arrangements more symmetrical, as in to find ways to recover compensation from executives and senior business unit managers who managed and led programs and products that were ultimately destructive to their companies. The better the arrangements of the old private partnerships can be approximated (admittedly a tall order) the better.

In addition, I would encourage you to think hard about the perverse incentives posed by acquisitions. One of the striking developments in the US banking industry over the last 20 years is an increase in concentration, particularly among the largest players, which has played directly into our current “too big to fail” policy problem. The usual rationale given in greater efficiency, that is, that bigger banking is cheaper. Yet every academic study I am aware of has found the reverse: that once a minimum threshold is reached (there is some disagreement as to where that lies), banks in the US exhibit a slightly negative cost curve, which means the bigger the bank (measured in assets) the higher its cost ratios. Thus the dramatic expense cutting that occurs in the wake of acquisitions could have been done by each of the merged institutions, separately.

Another reason to be skeptical of bank acquisitions is the poor track record of mergers generally. Virtually every academic study ever done has found most mergers “fail” as in they deliver negative outcomes to stockholders.

So why do deals continue? First, there is a large constituency that promotes them because they are particularly lucrative, in particular, investments bankers (who collect M&A and financing fees) and management consultants. A host of other “helpers” such as lawyers and accountants also reaps fat fees from deals.

But the biggest incentive is again flawed executive compensation. Bank CEO pay is highly correlated with the size of the institution, measured by total assets. And the senior team of the acquired bank is effectively bought off via golden parachutes.

I strongly encourage the FDIC to remove the incentive for executives to bulk up their banks solely to pay themselves more. One way might be to require that executive bonuses be set in relationship to the pre-acquisition peer group for a substantial initial period (at least three years, better yet five) and be benchmarked against the new peer group of bigger banks only if the merged entity had met certain operational performance targets.

I also asked readers of my blog, Naked Capitalism, to offer their comments on the proposal that you, Vice Chairman Martin Gruenberg, and Thomas Curry are supporting. They are glad that the FDIC is serous about bank reform and are keen to see meaningful measures implemented to curb executive-serving, public-endangering compensation structures. I am attaching their remarks.


Yves Smith

For those of you who aren't used to picking through the details, this is what Yves Smith is suggesting that Sheila Bair take a look at:

1. Excessive risk taking with short-term profit time horizons, and little to no liability for the CEO.
2. Paying CEOs with stock options that allow cash-outs with no loss price incentives, no matter how poorly the firm is doing.
3. No salary/bonus clawback provisions (like a retroactive tax) for executives who made short-term dumb decisions that collapsed firms after they left.
4. Unwarranted and inefficient mergers that benefit only a select few professionals at the top.
5. Volume-based compensation schemes which insure that the bigger the institution, the bigger the CEO pay schedule (which helps to drive mergers).

As one of the commentators added in the thread, it doesn't help that we have "zombie boards" made up of CEO friends and market sycophants, who also want the CEO to vote them big salaries on the boards they oversee. There's more to the story, but all of this is a good beginner's handbook for understanding what's wrong with Wall Street, and it's executive pay packages.

- Mark


We know that we're getting some great intelligence from the Christmas Day bomber, Umar Farouk Abdul Mutallab. He's talking, in part, because his parents got him to speak because they believe in the U.S. legal system (and not because of the threat of torture). Then came the arrest of Abdul Ghani Baradar, the Taliban’s military commander and the deputy to Mullah Muhammad Omar, the movement’s founder. This capture came as a result of a joint operation by the C.I.A. and Pakistan’s military intelligence agency, ISI.

This morning the NY Times is reporting that over the past few days two senior Taliban leaders - also known as "shadow governors" in their northern Afghanistan regions - were arrested inside Pakistan. I'm just wondering how long it will take Fox News and/or the Republicans to spin this success into their now predictable Miranda warning death spiral.

Seriously. We could capture or kill every al Qaeda member, and their copycat wannabes, and Fox News would probably run with the headline, "Obama Asleep at the Wheel ... al Qaeda Masterminds Still Hiding in Hitler-like Bunkers?"

- Mark

Wednesday, February 17, 2010


It's been one year since President Obama's stimulus package was passed. Republicans are saying the stimulus has done nothing. Yet, there's little doubt that the momentum behind the job-loss tidal wave is slowing down. Check this out job loss swing from the Bush and Obama administrations.

Still, from their rhetoric, Republicans would have you believe that President Obama's economic stimulus program has done nothing for America. In fact, things on the job front could have been much worse.

How do we know this? Because the non-partisan Congressional Budget Office said so (they also added that GDP would have been reduced by 3.2% absent the stimulus). As well, independent economists have said that jobs were created or saved because of the stimulus package. And guess what? According to the Wall Street Journal, Republicans are saying so too. Indeed, at least 111 of them criticized and then asked, took credit, and posed at ceremonies for stimulus money in their district because of the benefits and jobs that it would bring or create.

As usual, as the good people at point out, Rachel Maddow does a great job of exposing the hypocrisy of the Republican Party.

You might want to call what Republicans are doing hypocritical (how do you criticize something, then take credit for it?). But I have another take on this.

Simply put, Republicans think Americans are too lazy or stupid to think for themselves. Now, this might be true, in some parts of their districts. But to pursue a media campaign that criticizes the stimulus package, which the entire party embraces, suggests another, deeper, disorder. Some might say the GOP is now acting like a cult because they choose to ignore external realities they disagree with. This is a good point. Still, I think I'll go with sociopath.

Seriously, check out the symptoms.

- Mark

UPDATE: Here's Fox News and their take on the stimulus bill. Another classic "news" day for Fox.

Tuesday, February 16, 2010


In my previous post I pointed out why I like to read Money Morning, one of the many investment newsletters that I regularly receive. In this post you'll see why I try and read as many of these newsletters as I can. In a few words, much of what comes from the "experts" is not worth the cyberspace it's floating on. Yet it passes as viable market insight, or analysis.

I encourage you to read this piece on risk aversion and wave theory, which I've also posted below. I want you to read it for one reason, and one reason only: To see how technical writing, bathed in enough market-speak, can make just about anyone sound informed. The author is explaining (or trying to explain) how "the roadmap to sustainable recovery has three waves" centered around (1) panic & market collapse, (2) stabilization, and (3) confidence & recovery. My comments on the nonsense follow below.

... Over the past months I've written extensively in my Money and Markets columns about the bubbling over of the risk trade. I also warned about the rising threats that would likely make a sustainable recovery, at this point, a low probability.
And as time passes, we're beginning to see that these threats, including a growing sovereign debt crisis, rising protectionism, and threatening asset bubbles, are becoming ripe and dangerous. 
But in a world of instant information, it's easy for our focus to be drawn away from the underlying fundamental problems in the world economy ...

It can be difficult to see the forest for the trees when stock markets are rising, commodity prices are recovering and the media is touting hot burgeoning world economies.

But if you step back and examine the activities in the global economy and the global financial markets over the past 2½ years, based on history it looks like the roadmap to sustainable recovery has three waves. And we're likely only two-thirds of the way through the economic drawdown.

Wave #1: Panic

Wave number one was panic-induced, risk aversion. It was the unraveling of the credit bubble, the seizing of the financial system and the flight of capital from all corners of the world back toward the center (the United States).

Wave #2: Stabilization
The second wave was the eye of the storm. Here, risk appetite bounced back. Global central banks engaged the biggest experiment in history in an effort to stabilize a rapidly deteriorating financial system. In the process, they opened up the money spigot and flooded banks with capital, backstopped failing giants, guaranteed obligations, and printed trillions of dollars.
For many, this started looking more and more like the recovery phase. But in reality, it was nothing more than a retracement of the initial, panic-induced risk aversion trade.
Wave #3: Pain & Cleansing
The final wave is another bout with pain. This is where all of the underlying problems come home to roost. Ultimately the problems get faced and worked through, only after which a path to a sustainable economic expansion opens.

This phase is best described as the final leg of the risk aversion trade. This is where global investors, again, flee for safety as the uncertainty elevates surrounding the fallout from damaged economies and the ability of central banks to manage all of the aggressive policy responses.

Here, investors abandon the pursuit of return ON capital, in favor of return OF capital. And this is precisely what we're seeing now in response to the dominoes lining up with sovereign debt problems.
The author's comments on risk aversion and wave theory might make it appear that he has a broad, historical, understanding of markets. Just ride the waves out, is the advise. Broken down what he's really saying, and covering up, is that market panic caused by excessive greed and market stupidity is being soothed by trillion dollar bailouts and other market guarantees. This will ultimately be paid for by taxpayers and consumers in the form of higher taxes and more belt tightening (for the middle-class) ... and the game will go on. It's really that simple.

But wait, there's more ...

It's also a period that begins the healing of economies. And it's driven by austerity. This means increased taxes, higher savings and a lower standard of living. In short, it's a period of rebalancing and rebuilding.
A Technical View ...
The three-phase cycle I just described is nothing new. It follows a time-tested theory on the behavior of markets and human psychology called Elliott waves. This principle suggests that patterns in markets tend to form five-wave and three-wave structures.

The five-wave structure is the dominant trend (i.e. economic expansion), and the three-wave structure is the corrective trend (economic downturn). My analysis suggests the recent downturn carries the three-wave, corrective characteristic.

Let me simplify this for you ...

A good proxy for global risk appetite has been the U.S. stock market. This is where global risk taking, or lack thereof, is among the most easily identified.

When investors shy away from risk, the stock market tends to fall. When investors embrace risk, the stock market usually rises.

Got that? When people get scared they "panic" and don't take risks. A lack of confidence is contagious, which is why markets explode and collapse. Herd mentality, rather than market rationality rules the day. But wait. Don't worry, the author tells us. Things will smooth out at the end of the day, after the "pain and cleansing period" is "faced and worked through" by people (like you and me).

This kind of analysis is genius, I tell you, pure genius. You know, kind of like this ...

Look, it was John Maynard Keynes who pointed out what happens when markets collapse. But instead of blithely saying that markets pick up when people are no longer panicked Keynes looked at why panic subsides. He also looked at what really lies at the heart of capitalism. It wasn't things like gold, infrastructures, or human capital. It was confidence. And when confidence is missing? Time for the government to step in (there's more to this, but you get the point).

Keynes also had something else to say about making the simplistic observation that when "investors embrace risk, the stock market usually rises." Specifically, he wrote:

Economists set themselves too easy, to useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.

At the end of the day, don't be mislead by market analysis that claims things that have already been said, and are said without the proper context. "Risk Aversion: The Final Wave" is one of the most empty pieces about what's happening in the market that I have read in some time. Seriously.

Because it wasted my time, it kind of ticked me off. Which is why I decided to post on it, and pass it on to you.

- Mark

Friday, February 12, 2010


Money Morning is one of the investment newsletter sites I regularly visit. After reading the articles below you'll understand why. In a few words, we're being conned by Wall Street again ... big time.

The first piece, "Warning: This is Not Another Conspiracy Theory, These are the Facts," underscores my comments about our evolving banking cartel. Specifically, the author argues that the United States government has "allowed a cabal of financial interests to hijack America." The commentary, and the questions the article raises about AIG and Goldman Sachs, should be on the desk of every member in Congress.

In "Wall Street's Stranglehold on the Economy is Choking Americans" the author makes it clear that Wall Street's financial institutions are getting taxpayer money virtually for free from the government (U.S. taxpayer). Worse, they're then turning around and lending it back to the federal government, and you and me, at market or above market rates. The article also makes this stunning claim: "Bear [Stearns] and Lehman [Brothers] were ruthlessly crushed by their competition so there would be more business to be had by fewer players." The goal was to take over their rival's market share, and make themselves so big that the government couldn't afford to let them die.

This article, "It's Time for 'Banks' to Stop High-Risk Trading," takes a jab at Goldman Sachs, the "bank". Recall, in order to be a bank you have to accept deposits, allow customers to write checks, and make loans. Goldman does none of these. Yet Goldman was allowed to achieve bank status during the market meltdown so that it could secure FDIC guarantees, and access cheap money from the Federal Reserve. Instead of collapsing and taking all their swashbuckling and arrogant "investors" out - as is the case in a real market economy - Goldman Sachs dumped $28 billion worth of debt (backed by the FDIC) and secured a $10 billion loan from the Fed after Sept. 2008 (when they got bank status).

Worse, Goldman Sachs is now making more bets with what they claim is "their" money (this is called proprietary trading). The problem is that as a bailed out, and FDIC-backed, "banking" institution Goldman Sachs can access cheap Federal Reserve taxpayer-backed funds, with government guarantess. More simply, Goldman Sachs isn't using their money. The article makes it clear that (1) proprietary trading by taxpayer backed financial institutions makes "socializing the losses, privatizing the gains" legal, and (2) we need to rebuild the firewalls we had between banks and investment banks.

Absent serious financial reforms, which are especially needed for the ratings agencies, the next market collapse and bailout is only a matter of time. A mob with pitchforks and torches may not be far behind.

- Mark


On a regular basis I get comments about what I have written or said in public forums or in the media. Some of it is good. Some times it's bad for what it reveals about America's future. Other times it just makes you laugh because of what it tells us about the crazies that are out there. I especially enjoyed this diatribe directed at me after I wrote to a Tea Party crazy conservative that the "Fairytopia market world" they believe in doesn't exist.

 Mark your vast knowledge of fairies would lead one to believe that you belong to that low life, scum sucking, bottom dwelling, dingy smelling group of nefarious would be communist Marxist who are by some twisted fate, members of that disgraceful group known as the Barney Frank, act alike, Democrats. If I were you, I would hide myself in shame and ... See Morerealize you really are not American at heart or of mind. But most definitely are an accumulation from some oderferious, decayed part of the world, like the bottom of a human waste pit. Consider yourself properly vetted and cast out of membership with any real American patriot. "WE THE PEOPLE" shall overcome the likes of detrimental ilk, such as you. I will pray for you, but not very much!

I know, pretty ugly. But you have to admit, it's kind of funny. Entertaining too.

Most of the time, though, I get genuinely good comments. Yesterday, for example, I gave a talk at the university for the 60+ Club. The group is made up mostly of retirees who support the mission of the university, and attend presentations given by faculty members because they're interested in the world around them.

One of the comments yesterday dealt with the specific definition of "mark-to-market" accounting. In a few words mark-to-market accounting in our post-meltdown world allows market players to reprice collapsed financial products upward. Apparently I didn't make it clear enough that mark-to-market accounting has been turned on it's head since the bailout, and is really just another way for market players to avoid taking responsibility for the stupid decisions they made. This is one of the reasons many accountants refer to the concept as "mark-to-make-believe" (which I should have noted yesterday).

In all cases, these comments demonstrate you've got an audience that's done their homework, and makes presentations fun. This is good.

Then I get comments from people who aren't looking for clarification. Nor are they foaming at the mouth Tea Party diatribes (like from the guy mentioned above). Instead, they're ideological rants that the writer believes are bold statements of fact, when they are really little more than emotionally-charged opinions. For example, a couple of days ago I received these comments on the blog site I have for my book, The Myth of the Free Market: The Role of the State in a Capitalist Economy.

The free market did not write a 60,000+ page tax code that punishes work, rewards sloth and buys the votes of special interest groups, the government did.

The free market did not destroy our public school system and graduate (or fail to graduate) generations of civically and financially illiterate citizens, the government did.

The free market did not drive our jobs overseas and kill our entrepreneurial spirit with over-taxation, over-regulation and frivolous lawsuits, the government did.

The free market did not ban drilling for oil, vilify coal and block the building of nuclear power plants in the United States, thereby transferring hundred of billions of dollars of American wealth and many thousands of energy-industry jobs to foreign countries, the government did.

This crisis is the result of a giant social engineering experiment and vote-buying scheme gone tragically wrong.

The free market does not try to engineer society or buy votes, the government does.

The government caused this crisis, the free market did not.

The government cannot fix the crisis, the free market can.

What's clear is that - like my Tea Partying friend noted above - this individual has a utopian view of how markets work. In a few words, the state creates the conditions under which wealth is created. I can't emphasize enough how silly it is to believe that market players in a market setting without rules suddenly become virtuous and ethical. The pursuit of profit does ugly things to people who might otherwise be decent people (then again, many of them are unhinged sociopaths).

What's interesting, though, is that I shouldn't have to write any of this.

James Madison and the Founding Fathers made it clear that what was behind the activities tearing the country apart, especially after winning our independence from Britain, were the conflicts and "factions" driven by people in the pursuit of wealth. Without going into a long history lesson here (read my book), it needs to be said that our Constitution includes Art. I, Section 8 (and other sections) precisely because the Framers understood that market players don't always do the right thing, and needed guidance. Indeed, the patron saint of captalism, Adam Smith, wrote that government action to protect consumers and citizens from market players was necessary. There's a reason why he wrote this (it's tied to collusion and favorable legislation), but this post is already long enough. Click on the labels below for more.

The point is, believing in market fairytopias is intellectually lazy and, quite frankly, reveals a penchant for embracing myths that's dangerous because they work against our understanding of reality. This is bad for the country because it prevents us from developing policies that deal with real world problems.

At the end of the day, market players in the pursuit of profit don't alway do the right thing. People in the state of nature aren't angels either. Believing otherwise is sweet. But it's also delusional.

- Mark

Thursday, February 11, 2010


One of the moments I enjoy when I prepare for a class is reaquainting myself with information that tells me how little things change over time. In this case, what I'm looking at is how we're once again catering to what Nora Lustig once called a de facto banking cartel. Here's what I'm looking at ...

Tonight I'm preparing for my Politics of Mexico class, which is tomorrow morning. We've reached the section where we're going to discuss the roots of Mexico's economic collapse in 1982, and how it contributed to Mexico's Lost Decade (the 1980s).

I'm not so much concerned about the similarities between the causes behind Mexico's collapse and what happened here in the United States. To be sure, there are parallels when it comes to U.S. bankers putting too much faith in how smart they think they are, and the subsequent mistakes they made.

Nor am I really concerned about how Mexico's poor- and middle-classes had to pay for the inept mismanagement of it's economy by bearing the financial brunt of recovery through declining wages, unemployment, high inflation, devaluations, and other lost opportunities in the 1980s. America's middle-class will eventually wake up and realize that it's going to pay, on many levels, for bailing out Wall Street's reckless financial gambles. In the process they will also learn that the collapse was made possible by a bevy of boot-licking politicians in Washington who gave Wall Street a stream of deregulation gifts over a period of 30 years, and now think bankers deserve the financial equivalent of a group hug for screwing up.

Rather, I'm smiling (grumbling?) over how, once again, Washington's biggest politicians and affiliated agencies - the Federal Reserve, the Treasury Department, and other institutions - are insulating our largest banking and investment houses from their own greed and stupidity.

As was the case during the Reagan administration, when Washington bailed out and then protected U.S. banks from the very dumb decisions they made regarding Mexico (some of whom had lent Mexico more than several individual banks had in assets), taxpayers are going to have to accept the costs and conditions imposed by our current de facto banking cartel.

The impact is the same too. Wealth is extracted form taxpayers and transferred to the financial sector.

We shouldn't be so surprised. As I outlined in my book, saving the banks that had foolishly lent to Mexico under the premise that countries don't go bankrupt, was followed by a series of market bailouts that surrounded Continental Illinois (1984), the Discount Window Intervention (late 1980s), market supports after the 1987 crash, the Savings & Loan debacle (1989-1992), the intervention to save the Bank of New England and Citibank, the 1994-1995 Mexico rescue (yes, again), the Asian currency rescue, the Long Term Capital Management rescue, etc.  In all of these cases (and there are others) the goal was to - in what is now a standard refrain - save the financial system from collapse.

Put another way, what we are seeing today has been going on for the better part of 30 years. It's one of the reasons I consistently argue we don't have free markets. We provide favorable legislation, deregulate when we can, and then bailout when things get tough. If we did have a real free market economy many of the players running our current banking cartel would be staving off lawsuits, going bankrupt, or in jail (or a combination thereof).

For those of you interested in a longer history of myopic banking practices and/or market bailouts you can read Benjamin Cohen's In Whose Interest? International Banking and American Foreign Policy (New Haven, CT: Yale University Press, 1986).

- Mark

Wednesday, February 10, 2010


Missouri Senator Kit Bond (Republican) makes the argument that President Obama's handling of terror suspects is making us less safe. You be the judge as to strength of Senator Bonds' argument.

What's clear is that Senator Bond needs to familiarize himself with some of the bigger Supreme Court cases surrounding the issue of prosecuting enemy combatants, and what's been happening in recent cases (he also looks a bit lost from time to time, but I'll leave that for another day).

Both Hamdi v. Rumsfeld (2004) and Hamdan v. Rumsfeld (2006) make it clear that (1) U.S. citizens classified as enemy combatants (Hamdi) can not be held indefinitely without due process protections, which include the right to counsel, (2) the executive branch can't control all aspects of a trial concerning enemy combatants (evidence gathering, prosectution, appeal, etc.) with military commissions not sanctioned by Congress, and (3) Geneva Convention protections apply to enememy combatants.

While Hamdi v. Rumsfeld has little to do with one of the cases Sen. Bond discusses - the Christmas day bomber - it is instructive for what it tells us about the rule of law in America, even when it comes to enemy combatants. Primarily, Hamdi suggests that we don't lose our heads because a group of crazies attacked us. It also tells us that we can follow the rule of law even when the going gets tough.

At the heart of Senator Bonds' remarks is his concern that the Christmas day bomber, Umar Farouk Abdulmutallab, will use civilian courts as a soapbox from which to recruit other would-be terrorists in America (because we all know how effective the Charlie Manson trial was in furthering his Helter Skelter delusion). Senator Bond seems to forget that our court forums aren't at the heart of what drives the al Qaeda nut jobs. There are a ton of books and articles written that make this clear.

Worse is Senator Bond's claim that reading Abdulmutallab his Miranda rights made him clam up. This, according to Senator Bond, makes America less safe. If we are to accept the FBI's account of things - which I'm inclined to do - Senator Bond is not telling the truth. Put another way, he's lying. According to FBI Director Robert Mueller, who testified in front of Congress, the FBI agents who interrogated Abdulmutallab did not advise him of his Miranda right until after he made it clear that he wasn't going to cooperate with any more questioning.

Just as significantly, Abdulmutallab began to testify after his relatives talked to him and convinced him to cooperate. They did this not because they feared that Abdulmutallab would be tortured. Rather, according to a senior administration official, they helped investigators because they had faith in the U.S. legal system:

One of the principal reasons why his family came back is because they had complete trust in the US system of justice and believed that Umar Farouq would be treated fairly and appropriately ...
Look, if Senator Bond is concerned about Miranda rights, interrogation techniques, and how we go about securing information, he needs to refamiliarize himself with the Shoe Bomber case of Richard Reid (among others). He was convicted and sentenced to life in prison by a civilian court on the intelligence he offered up after he was was read his Miranda rights. Reid's conviction happened during the Bush administration. Hundreds more have been prosecuted under similar circumstances in civilian courts as well (during the Bush administration).

At the end of the day, we need to remember that there are terrorists and other criminally crazy thugs who don't want to be captured in or by the United States. This happens for a reason. Drug kingpins (like Pablo Escobar) and others undertand how competent and tough our legal system is, and they make extraordinary efforts to avoid capture and extradition to the United States. Republicans don't seem to appreciate this, which is puzzling for many. But not me.

In my view the Republicans fear using our civil court system to try suspected enemy combatants not because of traffic jams and the expenses tied to a trial, as they claim. These are red herrings. Rather, they understand that the more success we have in civilian courts, the more people will understand that their militarized position and fear mongering doesn't always hold water. This makes them less relevant. The fact that they can't scare America into being afraid like they are, quite frankly, scares them.

I'll leave it at that for now.

- Mark

Tuesday, February 9, 2010


There is nothing that says you can't balance pro-management members on the National Labor Relations Board (NLRB) with pro-labor nominees, like President Obama's nominee Craig Becker. Still, even though the NLRB fills only two of it's five seats filled, the U.S. Senate refused to confirm Craig Becker's appointment to the NLRB, in spite of a 52-33 vote in favor of his appointment. The culprit? Two hold out Senate Democrats and the fact that the Republicans threatened a filibuster if Becker's nomination was pushed forward.

Here's Sen. Sherrod Brown railing against the Republican tactics.

Incredibly, one of the arguments used to oppose Craig Becker's nomination was that he actually answered all of the questions that were presented to him. According to Wyoming Senator Mike Enzi, the highest-ranking Republican on the committee that approved Becker, the fact that Becker answered hundreds of questions (which were submitted by Republicans) made him suspect because only suspect candidates get asked that many questions.


This kind of thinking is akin to when President Bush's legal team made the argument that they couldn't release people who had been tortured during interrogation because, in the process of being tortured, they learned of our torture techniques. Because our methods were considered national security secrets, the argument went, interrogated prisoners could then share this torture information with attorneys and reporters. The enemy would then have an edge. We simply couldn't - according to the Bush administration - take this chance, even if we thought the prisoners were innocent.

You can read the Craig Becker review here.

- Mark