Nel's New Day

September 12, 2013

‘Too Big to Fail’ Will Bring Us Down

This week sees an important anniversary that destroyed millions of people. Some of you may be thinking about the 3,000 people who died when two planes struck the World Trade towers. But the financial disintegration had greater effects on a hugely devastating range of people than what the four airplanes caused on 9/11. In one weekend, Bear Stearns sold to JPMorgan Chase, Washington Mutual and Wachovia and Merrill Lynch were sold, and mortgage giants Fannie Mae and Freddie Mac went into conservatorship. Lehman Brothers was allowed to go bankrupt on September 13, 2007, five years ago on Saturday.

Five years later there is 7.3 percent unemployment, the lowest labor force participation rate since 1978, 49 million people on food stamps, and one in six mortgage holders underwater because they owe more on their houses than they’re worth. The government spent trillions to bail out Wall Street, but ordinary Americans received only token support. And the people responsible for this disaster emerged largely unharmed. Yet nothing has changed; nothing has improved in the financial district.

A group of self-styled innovators caused this crisis when they believed their financial instruments would yield only big returns and never any losses. Their mathematical analysts, known as “quants,” developed a system in which thousands of mortgages of any quality were packaged into a bond and then sold throughout the world. In the structure of the bond (called a collateralized debt obligation, or CDO) attributed losses initially to junior investors.

Quants said that complete safety came from spreading risk across thousands of mortgages. Banks even thought that the riskier lower tranches of the CDO would be completely safe by batching them up and creating new “CDO-squared” products from them. Then credit rating agencies tasked with quality control swallowed the banks’ lies hook, line, and sinker because the agencies were paid to believe these lies. Their income came from banks who issued the financial products, giving them incentives to stamp the product with a triple-A rating.

Incentives also went to mortgage originators who followed Wall Street’s demand for more loans and handed them out to anyone with a pulse. Investment banks wanted to sell loans because they got higher returns than the low interest rates on government bonds. Banks, hedge funds, and investors borrowed more and more to finance these new products and even made bets on top of bets, buying anything that could yield a higher return. This “leverage” got out of control before the crisis; banks were borrowing up to $40 for every dollar they held in assets.

Thus the enormous risk bubble was based almost completely on fraud. Originators faked appraisals to make bigger loans and fudged borrowers’ income statements. Banks sold bonds backed by these mortgages to investors without revealing the loans’ shoddy quality of the loans. They knew the shoddy quality: they hired third parties to examine mortgages. But any negative information was used to get discounts from the originators rather than warning investors. As investments went bad, banks used fraudulent accounting by taking large segments of their toxic assets off the books, pretending risky assets were safe, and hiding the truth from shareholders and regulators. Far beyond unethical, these practices are illegal; petty thieves are indicted and jailed for the same conduct every day of the week.

The quants used the excuse that mortgage markets are regional and cannot fall at the same time to promise that this house of cards would stay standing. But bubbles pop. Extra layers of credit derivatives changed a more manageable crisis like the house crash of the 1980s into a total collapse. People made bets with others, “shadow banking,” invisible to regulators, and then more people bought insurance on the bets. Insurers like AIG had no money in reserve. When Lehman went bankrupt, nobody wanted to lend to anyone else because of the risk of default. Banks relied on short-term lending, and this lending freeze meant that even non-financial companies had no funds to make their payrolls.

The financial industry decided to fund economic growth despite stagnant wages by piling on mountains of debt. But when it all went bad, they didn’t solve the problem by rebalancing the economy through getting money into the hands of workers and preference wages over assets. Instead the money went to the people who caused the problem by inflating their assets to preserve the status quo. The Federal Reserve’s emergency lending and then quantitative easing rescued bank balance sheets. The five biggest U.S. banks are now 30 percent bigger than they were at the height of the crisis, nursed back to health by the government. Banks used the TARP program for foreclosure mitigation as a predatory lending system to trap borrowers, and lending for businesses did not increase.

Most of those criminals walked away with enough money to fund their lavish lifestyles forever. Some of them are still getting munificent bonuses for destroying the people of the United States.

The Dodd-Frank financial reform law and the international Basel III process have made marginal improvements. Banks must maintain a bit more capital to cover their own losses, and  a Consumer Financial Protection Bureau looks out for some victims of predatory behavior. The system’s structure, however, hasn’t changed. Some trouble spots during the crisis, like money market funds, have not been touched. And deregulation, both through lobbyist-led weakening of the laws and regulatory forbearance (where those enforcing the laws simply look the other way), is a proximate cause of the crisis.

When–-not if–-the next crisis hits, Wall Street will be rescued while real people won’t. Banks “too big to fail” receive massive subsidies in borrowing and take outsized risks with borrowed money that threaten an interconnected global financial system. They figure that the government will foot the bill. And conservatives protect the banks by giving them this welfare while attacking people who need food and shelter.

Whistleblowers from Bank of America testified in court that they were told to lie to borrowers and given bonuses to push them into foreclosure. Last week a federal judge dismissed the case. Judge Rya Zobel agreed that borrowers faced a “Kafkaesque bureaucracy” when trying to secure loan modifications but decided that the multiple claims were too different to be combined into a single class-action lawsuit. A class action was the best option for homeowners pursuing damages on Bank of America because none of them has the means to sustain a case on their own, but a 2011 Supreme Court ruling made it nearly impossible to sue large companies as a group.

Huffington Post tracked 63 former Lehman Brothers employees named in a report as known about how Lehman disguised the reality of the bank’s deteriorating finances. Of these, 47 still hold senior positions in the financial services industry, including Michael McGarvey, the senior member of the finance group that pushed the dodgy accounting move, known as Repo 105. Conversely, the thousands of people in the support staff are struggling, some of them unemployed for three years.

At the height of the bubble, Lehman had accumulated a huge inventory of mortgage bonds. As the housing market faltered in 2007, Lehman would temporarily sell as much as $50 billion in assets just before the end of each quarter to keep the assets from appearing in disclosures. After the quarter’s close, the bank would buy them back, paying a bit more than the selling price. In that way, the bank looked less indebted. The independent bankruptcy examiner called it “balance sheet manipulation,” but the U.S. government ended an investigation into Repo 105 without bringing any charges.

Five years later, Wall Street is flooded with cash, paying an average of $122,000 in bonuses per banker—up 9 percent from the year before—while wages for average workers are shrinking. Bankers expect a 20-percent bonus for 2013; the median worker salary is about $5,000 less than in 1999, adjusted for inflation.

Only one of the 63 people is now unemployed after being fired from Lehman. In May 2008, he wrote Lehman’s top management a letter describing Repo 105 as deceitful and dangerous. He also told investigators working for Anton Valukas, a former U.S. attorney leading the review of Lehman’s collapse, about Repo 105. Valukas indicated enough evidence for the government to sue top Lehman officers, but the SEC dropped its Lehman probe last year without bringing any charges.

Five years after Lehman’s collapse, financial reformer Eliot Spitzer lost the election for New York City comptroller. He understands Wall Street scams and could have kept public money out of the hands of financial predators. Economist and former regulator Bill Black noted in an email that “Wall Street was obsessed with defeating Eliot Spitzer in the Democratic primary election for Comptroller.” He pointed out that when Spitzer served as New York’s attorney general, “an economic study found that victims of financial frauds received a substantially greater recovery of their losses when Spitzer’s office was involved in cases compared to securities fraud cases where only the SEC brought an action.”

Treasury Secretary Hank Paulson, who helped bring on the last financial crisis five years ago under George W. Bush, has told a group of bankers and economists in Manhattan to expect the next crisis. This time the Democrats will be blamed.

September 28, 2012

More Bad News for Romney

Every few weeks, I have an acupuncture appointment and talk politics with my acupuncturist. Usually I know most of his news, but yesterday’s item was something I hadn’t read. Lo and behold, I got home to read an article from Alternet that supported what he said. So here are a few more pieces describing how Romney is losing more support.

Wall Street may be like the canary in the mine,  that dies first when oxygen gets too low. Now Politico reports that Romney may no longer be receiving their donations.  According to a chief executive of one of the largest companies in the country, who spoke on the condition of anonymity, “It looks right now like it’s probably going to be Obama, so you have to start planning for that, even if it’s not what you would prefer.”  

John Chambers, CEO of Cisco Systems and a strong Romney supporter, said whoever wins should govern like Bill Clinton. “There’s a lot to learn from President Clinton. It kills me as a strong Republican saying it, but he was the most effective president during my lifetime.”

Whenever Romney opens his mouth, he alienates voters. The 47-percent debacle reference to “those people” is not an isolated situation. In his ad to recover from this gaffe, he said, “President Obama and I both care about poor and middle-class families. The difference is my policies will make things better for them.” Poor and middle-class families are “them”; clearly Romney draws a distinction between “them” and “us.” 

Romney is so desperate that he’s being positive about RomneyCare, the father of ObamaCare. For years Romney dodged any relationship with the Massachusetts health care act very similar to the Affordable Care Act passed for the entire country. Throughout all the primary debates, he denied the value of this program.  He just kept saying that he would repeal ObamaCare on Day One of his administration. He doesn’t say that any more.

Another serious problem that Romney has recently displayed is his complete failure in leadership. When a crowd repeatedly chanted “Ry-an,” he stopped and corrected them to shout “Romney, Ryan.” He could have just praised himself for making such a great pick, but that’s not Romney’s style. Shown a clip of this on his MSNBC show, right-wing Joe Scarborough could only say, “Oh sweet Jesus!”

Even when Romney’s ideas are shown to be horrible, he doesn’t back down from them. Although his tax plan has very few supporters and a Tax Policy Center study describes it as “not mathematically possible,” he goes full steam ahead with it. The conservative economist Martin Feldstein found that taxes would need to be raised on incomes between $100,000 and $250,000 in order to pay for his rate cuts, but Romney keeps claiming that he won’t raise taxes for this income group.

Romney has always claimed that he is such a fine businessman that he would make a superb president, frequently using the company Staples as an example of his business acumen. Now that company, purchased by Bain Capital while Romney was active with the company, is closing 60 stores, 15 of them in this country. The chain also expects another 30 store closings in fiscal 2012 with another 30 stores scaled down and others relocated. When Staples moved into my small town of about 10,000, it forced the closing of at least two stores in town, small family businesses that had been flourishing here for decades. That’s one result of Romney’s business.

Even Romney’s own campaign has started to explain why their man will likely lose the presidential candidate debate on October 3. Senior adviser Beth Myers sent a memo to GOP surrogates, warning them of this possibility. Following are the reasons that the Romney campaign thinks that President Obama will win the debate, well-laced by criticisms of the president’s policies:

“Voters already believe—by a 25-point margin—that President Obama is likely to do a better job in these debates. Given President Obama’s natural gifts and extensive seasoning under the bright lights of the debate stage, this is unsurprising. President Obama is a uniquely gifted speaker, and is widely regarded as one of the most talented political communicators in modern history. This will be the eighth one-on-one presidential debate of his political career. For Mitt Romney, it will be his first.

“Four years ago, Barack Obama faced John McCain on the debate stage. According to Gallup, voters judged him the winner of each debate by double-digit margins, and their polling showed he won one debate by an astounding 33-point margin. In the 2008 primary, he faced Hillary Clinton, another formidable opponent—debating her one-on-one numerous times and coming out ahead. The takeaway? Not only has President Obama gained valuable experience in these debates, he also won them comfortably.

“This election will not be decided by the debates, however. It will be decided by the American people.”

How low can conservatives get? Every day brings another revelation. A film made from Dinesh D’Souza’s best-selling book Obama’s America accuses President Obama’s mother, Stanley Ann Dunham, of neglecting her son so she could sleep around Indonesia and paints her as a sexual predator. The book and film shows Dunham of pretending to be amazed that she supposedly got it on so often despite being a heavy woman. Thus the libel continues.

May 20, 2012

Greed to Blame for High Gas Prices

Filed under: Uncategorized — trp2011 @ 8:26 PM
Tags: , ,

The media reports that gasoline prices are falling, but they’re still almost at their five-year high. Every penny increase at the pump takes away $1.4 billion a year, making the recovery worse. Here on the West Coast, prices are going up, not down, increasing almost $.30 in the past few weeks. Refinery problems, they say. Maintenance.

Why have the gas prices climbed over 400 percent during the past 12 years? Conservatives like to blame Democratic presidents for not encouraging drilling everywhere, destroying more and more of the environment. The fact that China and India are taking more, according to conservatives, costs the people in this country more.

The conservatives, however, want to hide the real problem behind the gas prices: it’s the way that Wall Street sets prices. Not able to swindle the people in the nation through the housing bubble, they are “financializing” the commodities markets, especially oil.

Economist Thomas I. Palley explains the way this works: “Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes…. Its principal impacts are to (1) elevate the significance of the financial sector relative to the real sector, (2) transfer income from the real sector to the financial sector, and (3) increase income inequality and contribute to wage stagnation.”

Financialization is gambling, betting on the prices of goods without owning the goods. Oil markets lock in prices for a specified length of time. The gamblers take profits out of the economy without producing anything for the economy. They get richer while the rest of the people pay higher prices and then pay taxes to bail them out when the gambling crashes.

This system has been operating for a long time, but the rules of the game have changed. For other a century, speculators comprised 30 percent of the markets, and real producers, distributors, and users were the other 70 percent. Now the proportions have flipped so that only 30 percent of the people actually participate in the production. With far more speculators, the prices need to rise.

This idea isn’t a fantasy on the part of progressives. According to the St. Louis Federal Reserve, 15 percent of the rise in gasoline prices is due to Wall Street speculation. Other investigators estimate higher percentages: 30 percent (House Committee on Government Oversight); 40 percent (Goldman Sachs); and $40 per barrel (Saudi Arabia in 2008).

Wall Street is not totally to blame, however. Exxon’s first quarter profits were $9.45 billion, almost $104 million per day. Yet their tax rate last year was 13 percent, lower than the average family in the United States. They used over $1 million for contributions to candidates, 91 percent of this money to Republicans. During the first three years of President Obama’s administration, Exxon spent $52,000,000 on lobbying, 50 percent more than in the eight years of the W. Bush administration. CEO Rex Tillerson used $52,300 of his $34.9 million salary for political contributions.

How do we compare to other countries in the cost of gasoline? Germans pay less than the United States does, $2.64 a gallon (excluding taxes) compared to this country’s $2.69. Yet this country produces 5.4 million barrels of oil each day while Germany produces only 28,000. Their population is one-fourth that of the United States, they produce 0.0005 percent of the oil that this country does, and they pay less for their gas. Producing more oil in this nation isn’t going to help.

Conservatives blame President Obama for rising gasoline prices. Yet the cost of a barrel increased from $22 in 2002 to just under $100 in 2008. George W. Bush was president for that entire time. The cost of domestic crude oil is also tied to the far more expensive Brent crude produced in the North Sea. Although U.S. crude oil production has increased for the first time since 1971, this oil just makes more profits for oil companies and Wall Street instead of permitting lower gasoline prices at the pump. President Obama has increased the amount of oil produced daily, and the price goes up.

Adjusting for inflation, gas prices show an interesting picture. In 2012 U.S. dollars, these were the prices over the past century: $3.35/gallon in 1919, $3.20/gallon in 1934, $3.44 in 1980, $2.49/gallon in 2009, $2.90/gallon in 2010, and $3.57/gallon in 2011.

In the meantime, people need to remember that gamblers on Wall Street are taking $10 to $15 from money paid for each tank. The only answer to the greed from financiers is regulation. And conservatives won’t every allow that to happen.

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