I was invited by our county's District Attorney, Ed Jagels, to be a guest on the Jaz McKay show (1560 KNZR) this afternoon. The topic was illegal immigration, and the Arizona law which allows/mandates local law enforcement to detain/arrest Mexicans (let's face it, they're not going after illegal Canadians) when police are "reasonably suspicious" that they are here illegally. Ed Jagels was the guest host. As you can imagine, I had a lot of fun. Among the points I made/questions I asked were:
* Jesus didn't speak English and wandered around with no papers.
* What would Jesus do if he was confronted with our immigrant dilemma?
* Does the Equal Protection Clause and the 4th Amendment mean anything anymore? (a tough question for any D.A.).
* What does an illegal alien look like?
* What's the difference between Arizona's "reasonable suspicion" clause and law enforcement's "probable cause"? (our D.A. made it clear that it lowers the bar).
* Because police must rely on communities across the country for information and leads, crime would spike as the illegal community clammed up instead of coming forward with information.
* Legal thugs and criminals would extort and abuse illegals for money, knowing they couldn't go to the police for fear of being deported.
* We need a NAFTA Visa program.
There was more (I was on for an hour), but the point is this: What Arizona did with their illegal immigration bill is both counterproductive and poorly thought out.
The NY Times had an interesting editorial yesterday on the casino that Wall Street created. The editorial contains the (by now) standard observation that Wall Street's gambling does little more than extract wealth as opposed to creating it. How they do it is particularly noteworthy.
Unlike the farmer who plants wheat in case the corn crop doesn't come in - a practice that focuses on enhancing the production of real goods - many of today's market players are simply making bets on paper contracts (derivatives), knowing that others (pensions, foreign banks, etc.) will be forced to take the financial hit if their bets pay off. To stack the game in their favor, firms like Goldman Sachs are accused of rigging the game so their bets will pay off.
As insightful as the NY Times editorial is, huffing and puffing about market players gambling does little in the way of offering insight into what needs to be done. If we want to get things right we need to look to history - both short term and long term - to better understand what we're facing. This is what makes this contribution from Bethany McLean so insightful.
McLean tells us that Congress is as much at fault for our current economic mess as are the financial players they're now pointing fingers at. I agree. Make no mistake about it, the "Cash-for-Deregulation" game is as insiduous as it is incestuous. And it's not just one party. As I've made clear on air and here, there's enough bi-partisan stupidity to go around on this one.
The primary reason for this is that while most members of Congress understand the power of money, they can't distinguish between markets and the illegitimate market activities they can spawn.
Herein lies the problem. Congress, and most of America, simply don't understand the difference between legitimate investment and hedging activities (which are generally positive sum) in a market economy and gambling activities in a casino (a zero-sum proposition). This, unfortunately, has been a problem that's plagued markets for centuries.
GAMBLING ON TULIPS
Congress is as much to blame for this mess as the market idiots on Wall Street. But because Congress makes the laws of the land they have the power - and the requisite lack of shame - that allows them to point fingers away from themselves. And they are doing quite well in the process.
What Congress should be doing, however, is looking to history for insight and answers. If it's reckless gambling, a casino mentality, and sheer stupidity on Wall Street that they're worried about, history has plenty of examples to draw from. The following is drawn from Chapter 4 in my book.
In A Short History of Financial Euphoria, John Kenneth Galbraith discusses the famous case of “Tulipomania” in Amsterdam at the beginning of the seventeenth century. What started as simple prestige for those who possessed novel tulip bulbs turned into wild speculation over successive price increases throughout 1636.
Specifically, competition over tulips turned into mania, with single bulbs trading for new carriages and homes, or fetching as much as $25-50,000 each. Demand reached such heights the Amsterdam Stock Exchange developed a futures market for the bulb. This market, as well as the dreams of many speculators, would collapse under the weight of its own nonsense and spectacular avarice.
As sellers demanded their tulip contracts be enforced, they were disappointed when their petitions fell on the deaf ears of the courts. Because the market had little to do with the production of actual goods and services, the courts viewed Tulipomania as little more than a gambling operation. As is the case throughout these histories, panic, default, and bankruptcy followed. Galbraith wrote “no one knows for what reason” the speculation and mania ended, but there’s little doubt common sense finally prevailed in a market spun out of control by deluded buyers and sellers.
Think about what this story tells us today ...
The Dutch courts ruled in the 17th century that the purchasers of tulips were not investing — they were gambling. Wild speculation, in what was essentially a gambling den environment, did not justify supporting contracts built on out of control betting.
With this in mind, you would think that Wall Street's market players (they're not investors) in the modern era shouldn't be allowed to reward themselves for making bets on crap and s*%t that they knowingly sell as crap and s*%t (Goldman Sachs). But they've been doing stuff like this on a grand scale for the past three decades, as the following illustrates.
GAMBLING ON "ANOMALIES"
When you consider that Goldman Sachs' employees sat in front of Congress and brazenly dodged questions as to whether it's their responsibility to "act in the best interest of their clients" (FF to 25:30 in the clip), there's no doubt in my mind that making money — even if it deliberately burns clients, or could lead to a market meltdown — was the dominating mind-set of Goldman's market players. Their focus is on wealth extraction, not wealth creation.
This mind-set has been widespread for some time now. The following example from Chapter 10 of my book makes this very clear:
Founded by a group of Wall Street hotshots and leading academics with Nobel prizes on their resumés, Long-Term Capital Management (LTCM) was created in the 1990s to search markets for price anomalies in goods that had shown historical relationships. It didn’t matter, for example, why the price of toothpaste was diverging from the price of tooth brushes; the fact that a price divergence existed was all that traders needed to make a move.
But LTCM was not trading in tooth brushes and toothpaste. They were trading in complex financial instruments that, according to their formulas, had price relationships that rarely diverged. Because the price anomaly in each “product” that they tracked was small, LTCM had to spend big to make money.
After securing hundreds of millions from investors, no doubt impressed with their pedigreed analysts, LTCM still had to borrow big to make their wagers pay off. At its height, LTCM was highly leveraged and owed investors and banks billions of dollars ...
In many ways, LTCM had fallen into the same trap as the purchasers of Tulipstulips. The company was comprised of speculators who wanted to make a quick buck. As Martin Mayer put it: "The work done at LTCM, while not illegal or sinful, was totally without redeeming social value. This is not 'investing'; it enables the production of no goods or useful services. It is betting."
LTCM came crashing down in 1998 after Russia defaulted on loans, an event that neither LTCM’s computer models nor it's Nobel laureates in economics anticipated ... The company owed so much money to the banks that the Federal Reserve of New York stepped in and brought the banks to LTCM. The Federal Reserve wanted to make sure that LTCM didn’t suddenly dump their its assets to pay the banks.
The Federal Reserve feared that if LTCM was forced to sell its assets they would depress markets by forcing losses on others. The Federal Reserve’s then new chairman, Alan Greenspan, even went so far as to testify that an LTCM “fire sale” could have ended prosperity in our time. The Federal Reserve had to intervene to — in what has become by now a standard refrain — “save the system.”
At the end of the day, if you're betting on the price direction of tulips (the Dutch), market anomalies (LTCM), or securities (Goldman Sachs), one thing is clear: You're not investing. You're trying to extract wealth for yourself, rather than create it. Worse, you're making claims on money that hasn't been created (literally) as a result of legitimate business investments. You shouldn't be on Wall Street. You should be on the Vegas strip ... far away from taxpayer funded bailouts.
WHY OUR GAMBLING PROBLEM PERSISTS
Hiding behind spiffy thousand dollar business suits, high rise buildings, and a team of lawyer-lobbyists, many of Wall Street's market players have, unfortunately, managed to create the illusion that they are legitimate capitalists. They're not. They're high-priced street hustlers.
Until we recognize that there's a difference between hedging in real markets (planting wheat in case the corn crop doesn't come in) and gambling in a casino environment (trying to get rich quick at the expense of others) the current pieces of legislation making their way through the halls of Congress won't be sufficient to curb the excesses of Wall Street. They simply paper over the cracks.
Worse, they can always be watered down, or chipped away at, by industry lobbyists in the future.
With the biggest recipients of taxpayer bailout money controlling over 90 percent of the $135 to $592 Trillion derivative market (yes, that $592 Trillion) we need to do more than just paper over the cracks. This is especially the case when you consider the global derivatives market - which took it's cue from the United States - has grown to about $1.14 quadrillion (that's 15 zeroes).
With the total U.S economy producing about $14 trillion worth of goods and services in 2010, all of this should be cause for concern.
While the previous post makes it clear that Goldman Sachs was knowingly selling crap to clients, the complete Q&A with Goldman executives makes it clear that Goldman executives arrived prepared to do little more than stonewall, fein ignorance, and get people to forget how they refined theft.
I know it's not exciting, but if you have the time watch as much of the C-Span video as you can.
In 1919 the Chicago White Sox lost the World Series to the Cincinnati Reds. All would have been left to the record books except for one thing. Eight of the White Sox ball players conspired to throw the series for money. Driven by poor pay and a genuine hatred for a tightwad and less than pleasant owner, Charles Comiskey, the eight players colluded with shady gambling elements to fix the 1919 World Series.
While the eight players were eventually cleared in court (of conspiring to defraud the public) the "Black Sox" scandal ended the careers, and destroyed the reputations, of the players involved.
I bring this story up because every day we learn more about Goldman Sachs and their efforts to fix the market game by selling goods they knew were toxic. Like the money men who paid the White Sox players to rig the 1919 World Series, Goldman Sachs made big bets on the outcome of markets that they helped rig.
The similarities between Goldman Sachs and the gamblers who funded the Black Sox scandal are striking.
* THE CON: The gamblers of 1919 bet against a team that was supposed to win ... Goldman bet against AAA instruments that they had put together and sold to investors as solid, or winning, investments.
* HIDING TOXIC CRAP: The gamblers of 1919 bought off a group of players whose compromised status was hidden by public trust, and the fact that they played on baseball's top rated team ... Goldman purchased and bundled toxic mortgages into complex financial instruments, and then paid credit rating agencies to label them as AAA securities, which they would then sell to trusting investors (pensions, foreign banks, etc.).
* THE HEAD FAKE: The gamblers of 1919 made it appear as if their bets were legitimate and all in a day's work. But the size of the bets and the number of people involved in funding the buyoff insured that others would find out and make more bets ... Goldman's 2009 annual report suggested that their bets were all in a day's work, stating that the firm "did not generate enormous net revenues by betting against residential related products". But recently released e-mails show that Goldman knew they would make a lot of money from the bets they made against the mortgage market.
* THE "THEY CAN'T BLAME ME" HALO: One of the most prominent gambler-sportsmen in America, Arnold "Big Bankroll" Rothstein, got involved in the scheme, even after learning about the number of people who knew the fix was in, commenting: "If nine guys go to bed with a girl, she'll have a tough time proving the tenth is the father!" (pre-DNA testing, mind you) ... Showing there's a difference between a lifetime of working on the street 1919, and a lifetime of working for Wall Street in the 21st century, Lloyd Blankfein, CEO of Goldman, claimed: "I'm doing God's work."
At the end of the day what we're looking at is simple fraud. You shouldn't be able to fix a game, or the market, and then make bets on the outcomes. Hiding behind "It was legal" (Blankfein/Goldman Sachs), "Everyone else was doing it" (Arnold Rothestein), or "No one caught me in the act" (Al Capone, or Charlie Manson; you pick) is no way to run a society.
Currently, Goldman Sachs is facing a shareholder lawsuit, which accuses Blankfein and his board of directors of "systematic failure." The eight White Sox players won their case, but lost their livelihood (and reputations). Rothestein was never convicted of anything in his lifetime. He eventually gave up gambling and went into other (more reputable?) business endeavors, like drug dealing, bootlegging, and labor racketeering.
Given Washington's penchant for embracing Wall Street, it's difficult to imagine Blankfein, or Goldman Sachs, having to give up their chosen professions. Indeed, with the Republicans, once again, voting down financial reform legislation today, you can expect the gambling that Goldman Sachs did to continue long into the future.
On many levels, it would appear that the only crime committed by the White Sox 8 was that they didn't work for Wall Street in the 21st century.
With nearly two thirds of Americans clamoring for greater controls over America's financial institutions, Republicans have decided America doesn't need to talk about it. So what do they do? Instead of being responsible participants in governing the Republicans have chosen to send Wall Street kisses, and then gum up the works by playing procedural games that are the functional equivalent of making prank phone calls.
I'll be the first to admit that the financial reforms proposed in congress won't fix what ails our nation's financial system. But we should at least begin talking about what needs to be done. Instead of dialing up some reform the Republicans would rather keep Americans angry and pissed off by tying up the lines with their filibuster games. If you don't understand what's happening, you'll get an idea from this ...
It's really that simple. I don't think I need to explain who the Republicans are represented by ...
Bill Maher takes it to the Tea Baggers in this clip ...
The War Crazies, many in the Gun Fetish crowd, and those with a limited understanding of international relations won't like these comments, but here's where he brings it home:
Next question, so what government spending do you want to see cut? Answer: nothing. Not a thing.
America is like a family that spends way more than they bring in. But Mom won't give up her shopping sprees and Dad won't give up that big stupid boat he bought. Even now when we utterly can't afford a big stupid boat.
And you know what America's stupid boat is? It's our empire. We have an empire. We have half a million of our troops in other peoples' countries all over the world. That is our boat. And maintaining that empire and everything that goes into defense costs us about $1 trillion dollars a year. Most of which goes to fighting the Russians in 1978.
What defense spending really is. Is a giant welfare program. A jobs program for defense workers to build crap we don't need. So... scream about handouts. This is what they should be protesting.
We spend more on weapons than the next top 15 military powers combined. Let's cut it in half so we only spend as much as the next 8 countries behind us and see if anyone invades us.
Teabaggers, If you'll look into that, I will believe you really are 'we the people,' 'what about our grandchildren' patriots. But if you're unwilling to cut defense and give up the empire, you don't really care about the debt. And you have to admit: you're just a racist sore loser.
Because, at the end of the day, all it does is remind people of this ...
And this, "Your papers, please ..."
There's a pattern here. But let's not delude ourselves. As The Atlantic's Mark Ambinder put it, this is what you end up with when ignorant entertainers, who shout little more than bumper sticker slogans, are promoted and embraced as serious political actors. Bread and circus should not drive policy, nor govern our political world's narrative.
Yesterday I wrote about President Obama's Wall Street speech. In his talk he tried to make it look like he's confronting Wall Street when, in fact, he's doing little more than trying to make them feel better about "the mob" on Main Street. At a time when the nation is looking toward their government to do something about Wall Street's gambling, their social indifference, and their undeserved rewards, President Obama pretty much told Wall Street's speculators and profiteers, "Go ahead and keep the loot ... but be warned, we're turning our home alarms on this time."
That ought to scare them.
Compare that with what Franklin D. Roosevelt did in 1936. As the Huffington Post pointed out, back then Franklin D. Roosevelt raised the ire of Wall Street's biggest financiers when he told America, "We know now that government by organized money is just as dangerous as government by organized mob." Telling Wall Street that their actions before 1929 were akin to unruly mob rule set the tone for this classic from FDR:
"Never before in all our history have these forces been so united against one candidate as they've been today. They are unanimous in their hatred for me and I welcome their hatred."
President Obama, for his part, asked "organized money" on Wall Street to join him in supporting reform because it's not only "in the best interest of our country, but in the best interest of the financial sector.”
Woh. Slow down there Mr. President. We all know how much Wall Street's sociopaths like being lectured to, and how they respect the common good. If he continue along these lines President Obama might even get Wall Street to voluntarily give up their hard earned bonuses (not). Count me as unimpressed.
The primary problem I have with President Obama's approach yesterday is that, as Paul Krugman put it, "Mr. Obama should be trying to do what’s right for the country — full stop. If doing so hurts the bankers, that’s O.K. ... More than that, reform actually should hurt the bankers."
I agree. But what's worse is what the proposed legislation isn't going to do.
Les Leopold, author of The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity—and What We Can Do About It, offers some insight. In this Huffington Post piece, he lists six things we need to watch out for.
1. TOO BIG TO FAIL CONTINUES: Too Big to Fail (or is that Too Big to Care?) financial institutions will not be broken up.
2. BETTING WITH YOUR MONEY CONTINUES: Speculating with bank - and FDIC backed - money will not stop as long as there is no separation between commercial and investment banks.
3. TOOTH FAIRY BETTING CONTINUES: Fantasy finance products, like CDOs & CDSs, will continue to be traded with few, or very weak, oversights.
4.CEO / EXECUTIVE'S BONUSES CONTINUE: Obscene executive compensation will continue because there are no provisions for reining in or taxing unearned bonuses, especially in the trade and "capital gains" area. So guess which kind of economic transactions will continue?
5. CONSUMER PROTECTIONS BURIED: The idea that the Federal Reserve is supposed to become the new protector of consumers is ridiculous. The Fed didn't say a peep about banks ripping off each other and state pension funds with fantasy bets. What makes anyone think they're going to watch out for consumers now? This kind of thinking is akin to a church placing Charlie Manson in charge of Bible & Family Values Night. This one's still being discussed.
6. THE JOBS MIRAGE: The notion that creating wealth (for a few) will eventually lead to jobs should have died when Ronald Reagan left office. It should have had a stake put through it's black heart when George W. Bush left. Still, people in Washington want to believe that if we let Wall Street steal and manke money as their "free marketeers" see fit that jobs will miraculously appear. What a bunch of idiots.
There's more. But you get the picture. It's not good.
President Obama gave a speech in Manhattan on financial reform (text here) this morning. It was disappointing. In a few words, I got the sense that President Obama didn't want to piss off Wall Street.
To be sure, President Obama explained that we shouldn't have any more taxpayer bailouts (a no brainer after 2008), why we need greater transparency in markets (who's going to say no to this?), how proposed legislation brings us the strongest consumer financial protections ever (which isn't saying much given the size of the financial loopholes), and the need for a larger voice for shareholders (which, I'm sure, America's CEOs laughed at).
President Obama told us what we already know.
It appeared that President Obama is so confident that the lukewarm pieces of financial legislation currently making their way through Congress will pass that he didn't want to upset the "progress" being made. It was as if President Obama didn't want the Wall Street banksters to collectively get their feelings hurt, and then stand up and say, "We're going to take our ball and go home ... again."
And this is the crux of the problem.
There was absolutely nothing of substance said about banks being too big to fail ...
Look, any time a company - or a group of companies in an industry - get so big that their collapse can threaten the stability of our nation, the claim that there will be no more taxpayer bailouts is simply nonsense (the $50 billion, bank funded, bailout fund in the legislation is for show, while the Volcker Rule reference is a sideshow). If the stability of the system is threatened it would be irresponsible for any government - Democrat or Republican - to allow the country to collapse because of simple stupidity and greed (though there are, no doubt, gun toting Tea Baggers who like sleeping in camouflage pajamas who might disagree).
But what really got me about President Obama's presentation today was how the tone of the speech suggested that, if we just keep playing along, the financial reform bills now making their ways through Congress will do do the job. They won't.
MAIN STREET'S FRUSTRATIONS ...
Then we have the even bigger issue of what's happened to Main Street. Main Street is pissed off and wants, and needs, things fixed on our side. If you're like me, you're pissed. And you probably want a pound of flesh too.
So, why didn't President Obama mention Wall Street's role in:
* Damaging state and municipal pensions?
* Contributing to state mandated furlough programs?
* Massive layoffs?
* Prolonging unemployment?
* The number of houses that are underwater?
* Working against homeowner mortgage negotiations?
* Pissing off middle America by giving undeserved bonuses?
There was absolutely nothing said about any of this. Nor was there anything said about Wall Street's responsibility in helping to fix any of this.
How can you tame Wall Street when there's no consequences for bad behavior? How can you tame Wall Street when they don't fear you? How can you tame Wall Street when their size dictates your actions? Watch out. With the exception of the Brown-Kaufman SAFE Banking Act, the reform bills making their way through Congress are palliatives. The next market collapse is around the corner. The only question is when.
I regularly get updates from a variety of sources that point out the lies and distortions from Fox News, Rush Limbaugh, Glenn Beck, etc. From time to time I will post on some of these, with commentary. Today I'm just going to post what I received from Media Matters for today. Click on the links for more.
Dubious Doocy: Poll found "majority" of tea partiers are Dems or independents. Fox & Friends co-host Steve Doocy claimed that a "majority" of tea-party supporters in a recent poll identified themselves as Democrats or independents. Although Doocy did not specify which poll he was discussing, recent polling by the Winston Group found that 57 percent of tea-party supporters identified themselves as Republicans.
FoxPAC: Gingrich attacks cap and trade on Fox while his political committee takes fossil fuel money. In the first quarter of 2010, Newt Gingrich's political committee received $350,000 in donations from a major coal producing company and a major oil and gas drilling company. During the same period, Gingrich repeatedly used his Fox News platform to attack Democratic proposals to implement a cap-and trade system or otherwise price carbon without disclosing those donations.
Fund completely wrong about "$50 billion fund for future bailouts". John Fund falsely claimed that financial regulatory reform "sets up a $50 billion fund for future bailouts." In fact, a provision currently in the legislation would create a $50 billion fund paid for by the financial services industry to provide for the orderly liquidation of failing firms and would in no way bail them out.
QUICK FACT: Yes, Hannity, Bush did play golf during war. On his radio show, Sean Hannity again falsely claimed that President Bush did not play golf after the war started. In fact, Bush did play golf during the wars in Afghanistan and Iraq and later took up biking instead of golf.
Breitbart again falsely suggests WH directed alleged violence at health care town halls. On Fox News' Glenn Beck, Andrew Breitbart falsely claimed that a White House official told "organized labor" that "if they punch you, punch back twice as hard." In fact, the official was reportedly speaking to Senate Democrats -- not to any union groups -- and there is no evidence it was anything other than a metaphorical explanation of how the White House planned to respond politically to attacks against Senate Democrats.
What's clear is that conservative media sources have absolutely no problem with distorting the facts, and simply lying to their viewers. Worse is having to acknowledge that there are millions of Americans who don't care that they are being presented distortions, or being flat out lied to on a regular basis.
In "The State of Financial Engineering" market consultant Sylvain Raynes takes a strong swipe at business schools in general, and the professors of finance in specific. He follows this up with "The Hollow Men of Financial Engineering", where he offers no apologies for the egos he offended in the first article. Both are good reads and if you like sardonic wit, like I do, you will no doubt agree that both articles offer insights that we can all learn from.
For example, here's what Raynes has to say about the "sleazily transparent, anti-intellectual" techniques taught at universities that offer Masters degree programs in quantitative finance, or financial engineering (FE):
What is obvious and regrettable is that no effort is ever made to teach numerical analysis as a proper and rigorous discipline. Instead, students literally learn numerical recipes and are no more equipped to handle reality than someone equipped with a driver’s license when their car breaks down.
One might think that Raynes - who was a founding principal of R&R Consulting, a structured credit consultancy firm founded in 2000 - would stop after criticizing the techniques used to teach FE. One would be mistaken. Looking at the major universities that churn out the uncreative number crunchers, Raynes tells us that:
... the Chicago School of Economics recently held a well-attended conference with the stated objective of investigating whether its thinking bore either blame or responsibility for the occurrence of the sub-prime crisis, and if so how much. As expected, the usual suspects reached the foregone conclusion that Chicago School thinking was totally blameless and that, in point of fact, the fault lay entirely with those who had “misunderstood” its groundless theories.
In many ways Raynes is simply stating what others have been pointing out for some time now. If no one is at fault, no one can be blamed for the mess of 2008. This means we will never develop long-term solutions for what ails our markets, and society. Logically, another market collapse is only a matter of time.
I bring up Silvain Raynes because of this piece from Huffington Post. In it we see that academics in the field of finance who were offended by Raynes can rest (a bit) because Raynes shows that he's an equal opportunity critic (FF to 3 minutes; watch the clip here).
No doubt cognizant of the fact that CNBC's Erin Burnett and Jim Cramer both worked for Goldman Sachs, Raynes criticizes Burnett for essentially being a Wall Street lacky because of her tendency to put Goldman Sachs cheerleaders on her show, Street Signs. He then goes after CNBC's Jim Cramer for being a Wall Street shill, and dumming down markets to a level that only an idiot would appreciate.
Whether you like his personal attacks on Cramer or not, one thing is clear. Mr. Raynes knows what he's talking about. Perhaps more importantly, with his attacks on both Wall Street shills Burnett & Cramer and our nation's business schools, Raynes seems to understand the Big Picture, which doesn't come through in the Burnett clip.
With Burnett & Cramer's Goldman Sachs backgrounds, and their recent Wall Street mistakes and boot-licking history, CNBC needs to invite more people like Raynes to the set. Whether you agree with Raynes's tone or his methods (I like it), there's no doubt that he is both insightful and irreverant (in a healthy way).
Just what the doctor ordered in our troubled financial times.
- Mark
ADDENDUM: Speaking of Goldman Sachs, check out this Daily Show clip ...
Mortgage broker Michael David White has updated several of his many useful charts. The one on negative home equity (i.e. you owe more than the home is worth) stands out. As you can see from the chart below, the number of people who can make money by walking away from their homes runs into the millions ... regardless which bank numbers you want to use.
White has a few suggestions for getting out of the current real estate mess. Fortunately it doesn't involve any of the stupidity or wishful thinking proposed through President Obama's Making Home Affordable Programs (and their equally worthless spin-off and/or affiliates). Seriously, President Obama's housing programs hould be renamed Making Banks Look Solvent, or Pissing Off the American Mortgage Holder, because of how they string homeowners along and keep homes (and CDO-like securities) from being marked down on the books.
Among the ideas from White that I like include "blowing up" the fake debts accumulated during the bubble days so that we can realistically match the price of housing to income. More specifically, this means we need to "massacre mortgage debt." One of his regular readers pitches in with this suggestion: Eliminate all interest on home loans.
Eliminating interest on home mortgages would go a long way in saving taxpayers from having to subsidize homeownership (through interest rate write-offs), while depriving the "Too Big To Care" banks of the money they clearly don't deserve. Sure it might lead to several big bank collapses. But they're not doing anything to help as it is, while their survival is pretty much tied to Fed guarantees and favorable legislation. In a real market environment, the services they provide will be picked up by smaller, more efficient banks, who would also know how to use Uncle Sam's bailout cash.
Since the Securities and Exchange Commission (SEC) decided to file a civil suit against Goldman Sachs it appears that both Goldman Sacs and Wall Street may be in for a rough patch.
First up, we have former President Clinton telling ABC's Jake Tapper that he got bad advice on regulating complex financial instruments (derivatives) from his former Treasury Secretaries, Robert Rubin and Larry Summers (not to mention from Alan Greenspan). He even noted that he was wrong to take the advice of those advising him against regulating derivatives (which would include Greenspan).
While President Clinton did the Washington thing, and had his assistant call back later to say that his advisors served him and the nation well, his comments help us understand the mind-set that's emerging in Washington. It looks like a few "criminal" scapegoats may be hung out to dry before November.
MSNBC's Dylan Ratigan captures the moment with questions he raises about Goldman Sachs' explanations for the complex deals that lost billions for their customers, but helped John Paulson's firm earn $15 billion. In a few words Ratigan asks why Goldman didn't reveal that the same person (John Paulson) who created the investment vehicle Goldman's customers purchased was also the same person placing big bets that the product would fail. This is akin to buying a house that catches fire and burns to the ground, only to find out later that others who had access to your house before the sale had purchased insurance on your house.
All of this is significant because as a criminal case the SEC can become very aggressive in the "discovery phase" leading up to the trial by requesting information and issuing subpoenas that could prove quite damaging. Perhaps more importantly, as Martin Hutchinson points - and as I've suggested many times before - with the right evidence the SEC could invoke the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO). To get a RICO case going on a Wall Street firm (which has been done before) the SEC would have to show a "pattern of racketeering activity" that was committed by an "ongoing criminal organization."
While this would be a pretty big event, labeling a firm like Goldman Sachs - who the Europeans haven't been too happy with lately - as a criminal organization would give the Obama administration some red meat to throw at the American public. Perhaps more importantly, it would go a long way in creating the right environment for much needed regulatory reform.
With the majority of Americans upset over lingering economic conditions, and the Republicans poised to defend Wall Street, going after Goldman might be part of a larger strategy that could even pit middle of the road Republicans against their Tea Party brethren. While it's never a good thing to use public policy as a political tool, it would be naive to assume it doesn't happen as a matter of course.
As well, with Wall Street acting the way they have over the past 15 years - and with the damage they have caused - it would be politically irresponsible for the Obama administration not to pursue this path.
You have to wonder where the Tea Party has been over the past decade when you read stuff like this.
Talk about corporate welfare. When you have your hand out, and then turn your back financially on the nation that throws you a life line, there's something wrong.
Goldman Sachs is being sued for fraud by the Securities and Exchange Commission (SEC), which is a good thing. Wall Street in general, and firms like Goldman Sachs, have been bundling, selling, and then betting against toxic investments for years. Those of you who've read my book or follow this site regularly know the story.
Rather than get into the technical details of Goldman Sachs' deals (which you can access in this article) let's have a little fun, and try to understand what happened with another conceptual picture...
Suppose you're my next door neighbor. I tell you that I like you and decide that I want to purchase life insurance on your life. You naturally get suspicious. But I tell you not to worry. I'm purchasing insurance for everyone that I am close to in my life. You think I have money, so this helps allay your concerns. And besides, I'm only doing this because I want your family to be able to stay in the house should something happen to you.
Trust me.
Still what I'm really after is the insurance money. But I can't make it look like I want the insurance money, or that I want you dead. Instead I provide some people with cash to help you change your lifestyle.
To push things along I determine that you need to start living like there's no tomorrow. My "friends" invite you to Roman-like orgies, where you can drink and smoke to your heart's content.
I invite others, who I make sure are infected with something out of a sci-fi thriller. The goal is simple. I need you dead.
I even put on a few of these orgies at my own expense, and invite some of the hygiene-challenged guests from The Jerry Springer Show ... you know, to stack the deck in my favor.
I invite you to take up fun activities like rock climbing and para sailing. I encourage you to get creative.
Unfortunately, for me, you're in too good of shape. You simply won't expire. I start thinking the unthinkable. But instead of kidnapping you and forcing you to watch Sylvester Stallone movies until you pass out, I come up with something better. I hire the mob ... but not these guys.
Ultimately, I hire the real mob to do the job. Things go well, for me.
Comfortable with what I just did, I start doing the same thing with others and become rich in the process. I don't have to worry about the police. I own them. Others follow my trail blazing path. Death becomes us ...
This is what happened in simple terms ...
1. Life insurance policies are purchased.
2. Death is pushed along by encouraging reckless living.
3. When reckless living doesn't produce desired results I rig the game by hiring the mob. I buy off the police. End of story.
In market-speak this is what Goldman Sachs (and Wall Street) did ...
1. Goldman knows they can purchase insurance (Credit Default Swaps) policies on security instruments.
2. To push defaults on security instruments Goldman encouraged reckless lending practices (no doc loans, NINJAs, etc.). Still, no one will insure a pile of toxic mortgages, which is why good was mixed with bad into a toxic brew.
3. Like mixing a drink, Goldman mixed toxic mortgages with many good mortgages. To encourage defaults more toxic contracts (e.g. mortgages) were added. Congress is bought off. The End.
While there are more details - again, you can go here to read the story - the concept is clear: Buy insurance and then work hard to make sure what you insured fails (or dies).
- Mark
ADDENDUM: For those of you wondering why the "insurers" aren't complaining about paying out on these fraudulent claims, your instincts are correct. Several are suing in court to prevent payouts. They're claiming that they were mislead. On the other end of it - and I'm not sure about the extent here - it's reported that many CDS (insurance) contracts have been paid out through the bailouts, and other practices. We don't know enough about how this has happened, and who's benefited. But to the extent that it's occurred, the U.S. taxpayer is the one who paid out on the CDS contracts (100 cents on the dollar). This explains, in part, why Treasury Secretary, Tim Geithner, and Fed Chair, Ben Bernanke, are being pressed to detail how the bailout and Fed (trillions in credits) money has been lent out and spent. They, to date, are not being very helpful.
Remember when Dorothy clicked her Ruby Red Shoes in The Wizard of Oz and repeated "There's no place like home"?
Repeating "There's no place like home" over and over again eventually put Dorothy back in a safe place, and told audiences across many generations that all we need to do is repeat pleasing thoughts during times of trouble and we could move the world. Of course, Dorothy is only an imaginary character in a wonderful film that depends on it's audience suspending reality. Repeating safe thoughts, or repeating anything for that matter, will not change your physical environment.
Still, the idea of repetition moving people to another world of the mind is real, and does have it's applications. Positive thinking can be useful. But repetition also has a brusque, darker, side. Without mincing words, it's called the "Big Lie" and is a very successful propaganda technique.
Popularized by Adolf Hitler in Mein Kampf (1925), the Big Lie centers around manipulating information so blatantly, or telling a lie so big, that no one would believe that - in Hitler's words - someone "could have the impudence to distort the truth so infamously." The Big Lie was taken up by Joseph Goebbels, who was Minister of Propaganda in Nazi Germany from 1933 to 1945, and taken to new heights.
In a psychological profile of Adolf Hitler the Office of Strategic Services (OSS, the forerunner to the CIA) put out a book titled A Psychological Analysis of Adolf Hitler. Here's what the OSS had to say about Hitler's rules, which his Nazi henchmen would follow diligently:
... never allow the public to cool off; never admit a fault or wrong; never concede that there may be some good in your enemy; never leave room for alternatives; never accept blame; concentrate on one enemy at a time and blame him for everything that goes wrong; people will believe a big lie sooner than a little one; and if you repeat it frequently enough people will sooner or later believe it.
I bring all of this up because a pattern is emerging from our political right: It doesn't matter what the truth is, as long as you tell a lie often enough people will eventually believe it.
Today it's Mitch McConnell and John Boehner criticizing financial reform. Proving that they are merely talking heads for Frank Luntz and his incessant Memo to GOP game plans, both are parroting Luntz's "Language of Financial Reform" talking point. Specifically, they are repeating Frank Luntz's "permanent bailout for Wall Street" language that he drew up months ago. MSNBC's Rachel Maddow does a great job of outlining how this came about here (watch the entire clip).
The funny thing about this is that Mitch McConnells' insincerity is so blatant that his home state's largest paper called him out on it. More specifically, Kentucky's Herald-Leader referred to McConnell's pandering to Wall Street, and how he parrots the financial reform memo written by GOP mind manager Frank Luntz. Here's a snippet:
McConnell's statements are perfectly calibrated to inflame the public. He insists the bill would "allow endless taxpayer-funded bailouts for big Wall Street banks." Their resemblance to the truth is another matter.
You can read the entire piece here, which I highly recommend.
How bad has this Big Lie script gotten? Republicans have no problem promoting lies about a "Death Tax" (the estate tax), Death Panels (end of life counseling), Armageddon (fill in blank______), Obama's a socialist, Obama's a communist, Obama's a Nazi (intellectually you can't be all 3), Obama Deficits (actually inherited from Bush's disasters), and how taxes are going up (they've actually fallen for 95% of all Americans).
Then we have the little big lies from the birthers, the "he's a Muslim" crowd, the "he's not one of us" crowd, the "he makes us less safe" crowd, etc.
Look, at the end of the day we know where all of this is coming from. Republicans, Tea Partyers, and Conservatives are upset with who's in the White House and that a women from San Francisco is Speaker of the House. Throw in the fact that the top Democratic mouthpiece on financial reform (from the House of Representatives) is a homosexual, while President Obama's Chief of Staff is Jewish ... well, you can see where this is going.
Don't believe me? Take a look at the Tea Party crowds. I don't see America there. I see a fringe mob that's pissed off their team lost. They are not democracy in action. They are a sore losing mob. If I'm wrong, someone needs to explain to me why.
You will also need to explain the need for the Big Lie(s).
People on Wall Street and in the media seem to be rather pleased that the U.S. stock market has rallied. It's hovering around 11,000, which is supposed to give us hope for the future. Forgive me for not joining in the celebration, but there are some major issues that need to be addressed. But first, a quick recap of how we got into the mess of 2008.
1. Deregulation
2. A Culture of Debt.
3. Unabated Speculation and Gambling on Wall Street.
Any collapsed market that was built on favorable legislation, excessive debt, and wealth extraction needs to take a step back and reassess. When a plane crashes, we see the government, independent analysts, and private players get together to determine the cause(s) and make recommendations. This kind of diligence and cooperation hasn't happened with reference to the 2008 market collapse (at this time the Financial Crisis Inquiry Commission is stocked with market sycophants, and a waste of taxpayer dollars).
Instead, we've thrown trillions of dollars at the problem, allowed record bonuses, and now have relatively toothless pieces of legislation making their way through Congress.
In effect, we're doing the functional equivalent of the FAA sending up more planes (the bailouts) after a crash, hoping that everyone looks at the number of planes in the air (a surging stock market and a "stablizing" jobs picture), instead of focusing on the carnage that's still on the ground (homes underwater, record debt, stagnant wages, foreclosures, bankruptcies, etc.). Seriously, this is what we have today:
1. No New Regulations.
2. More Debt & Record Bonuses.
3. More Speculation & Gambling ... but now with trillion dollar guarantees from the Federal Reserve.
Throw in (1) the fact that too-big-to-fail is not seen as a serious problem in Washington, or on Wall Street, (2) growing concerns in Europe and China over finance & trade issues, (3) continued real estate problems (underwater mortgages & looming commercial real estate disasters), and that (4) Wall Street seems to think more debt and no new rules are cause for celebration, and we have reason to ask what's really happening in our markets.
No one can know exactly when the s**t will hit the fan, but make no mistake. It will.
Ben DiMiero from Media Matters has an excellent post (with links) outlining how out of touch Rupert Murdoch may be with his politically irresponsible clown show, Fox News Corporation. DiMiero does a great job of demonstrating that the network is little more than an anti-Obama, Tea Party supporting, Republican mouthpiece. Here's the opening ...
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This week was a bit of a mixed bag for the journalistic ethics of Fox News.
On the upside, we confirmed that News Corp. chairman Rupert Murdoch is familiar with the idea of journalistic standards. On the downside, Murdoch appears to be completely unaware that his news network doesn't have any.
Responding to a question from Media Matters VP Ari Rabin-Havt about whether Murdoch thinks it is appropriate for a news organization to aggressively promote the tea party movement, Murdoch stated that Fox shouldn't be "supporting the Tea Party or any other party." Murdoch added, "I'd like to investigate what you are saying before I condemn anyone."
First, a point of agreement with Murdoch: It's certainly true that a news organization shouldn't be promoting political movements. However, a question arises as to whether Murdoch has taken the opportunity to flip to Fox News at any point over the last year. If he had, odds are good that he would have stumbled across evidence of Fox's incessant promotion of the tea party movement.
Since he is apparently too busy to keep an eye on his own news network, we offered some assistance with Murdoch's "investigation." Some lowlights:
* Fox Business anchor and "business journalist" Stuart Varney on April 13, 2009: "It's now my great duty to promote the tea parties. Here we go."
* In the 10 days leading up to the Tax Day Tea Parties last year, Fox News aired more than 100 commercials promoting the protests and Fox's coverage of them.
* Glenn Beck encouraged viewers to "please go" to "FNC Tax Day Tea Parties."
* Fox Nation hosted a "virtual tea party" that was promoted on-air by news anchor Megyn Kelly, news host Bill Hemmer, and Fox & Friends co-host Gretchen Carlson.
* On April 3, 2009, Hannity directed viewers to his website to "get all the details about our special 'Tax Day Tea Party.' " He later added, "We hope you'll join us."
* And if that isn't enough to convince Murdoch, Fox News explicitly branded the protests "FNC Tax Day Tea Parties," and ran this image on multiple shows:
...
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There's more, but you get the picture.
The only thing I might add to DiMiero's piece is that FNC isn't simply a mouthpiece for the Republican Party. Rather, just like Jerry Springer gets trailer park Bubbas to fight and profess their love for their (often) toothless and multi-tattooed love interests, FNC gets Republican politicians to come on air to rant and spew misinformation about a process and people they disdain and/or disrespect.
Or, as former Bush speech writer David Frum made clear, FNC is pulling the strings to such a degree that the Republican Party is pretty much working for them now, essentiall providing rotating cast members for their talking heads and the political confrontation they need to sustain the show (these comments essentially got Frum fired from his American Enterprise Institute gig).
The American Prospect's Robert Kuttner has an interesting post that explains how India escaped the financial meltdown that affected both the U.S. and Europe. After talking with Dr. Yaga Reddy, the former Governor of the Bank of India, he explained that Dr. Reddy ignored the big guys from the International Monetary Fund, and other western bankers. Rather than accept their recommendations - to allow Wall Street-styled speculation - the Indian government did the following:
1. Banks that wanted to issue complex securities were required to hold capital reserves against them.
2. The Indian central bank regulated the financial players.
Got that? You require gamblers and speculators who trade in complex financial instruments to prove that they have the money to back their bets. Then you regulate the financial industry so they don't get out of hand and, say, lend out money at a 42: 1 ratio. Pretty simple if you ask me. Kuttner finished his discussion of Reddy by writing, "The Indian bankers who condemned him earlier in the last decade for denying them profits are now praising Reddy as a prophet."
Kuttner discusses a few other individuals that he met at the founding conference for the Institute for New Economic Thinking in his post. One thing becomes clear: We're not close to getting out of our financial woods.
- Mark
P.S. For those of you looking to read or download some of the papers from the conference, click here.
