Minimal Work To Indict For Securities Fraud In Real Estate Mortgage-Backed Securities
By: masaccio
Saturday March 5, 2011
http://firedoglake.com/2011/03/05/minimal-work-to-indict-for-securities-fraud-in-rmbs
One of the excuses given by the media for the repulsive failure to charge anyone with crimes arising from the Great Crash is that the FBI is too busy fighting terrorism. That’s nonsense. As Yves Smith points out in her explanation of criminal violations of Sarbanes-Oxley, investigators are not starting from scratch. A lot of the work has already been done.
For example, as the Final Report of the FCIC says, the underwriting firms knew in detail the statistical make-up of the sour loans they bought to put into real estate mortgage-backed securities. Most hired outside firms to examine a random selection of the loans proposed for the RMBS, and received reports showing, among other things, compliance with underwriting guidelines of the originators of the mortgages.
That means that all the work necessary for a solid criminal case like this one is sitting at the offices of the firms that did the due diligence, including Clayton Holdings, the firm that cooperated with the Financial Crisis Inquiry Commission, and figures prominently in its Final Report. Suppose you have a prosecutor and a couple of investigators and lawyers from the SEC. Here’s the work flow.
1. Get a report from one of the firms that follows real estate mortgage-backed securities (RMBS), showing the worst performers by name. All three of the rating services, Fitch, Moody’s and Standard and Poor produce these reports, and so does Clayton Holdings. Clayton Holding’s report is free, though a bit delayed.
2. Pick out the 20 worst performers, the Dogs, for which the statute of limitations hasn’t run. You don’t need an FBI agent, get your paralegal to do it.
3. Subpoena Clayton Holdings and the other due diligence firms to appear and bring with them their reports and all their files on the Dogs. The Final Report says that one or two underwriters did their own limited due diligence on the loan files. If they underwrote Dogs, subpoena all of their files, including their due diligence files. As with all subpoenas, demand production in searchable electronic form.
4. Get the SEC filings on the Dogs. These are available on-line, so you can easily search them for the disclosure or non-disclosure of the critical information.
5. Subpoena all documents related to the Dogs from the underwriters who used due diligence firms.
6. Compare the offering materials with the documents you now have. A quick review will tell you if there are issues beyond those in my simple criminal case.
7. Convene a grand jury in SDNY. As you can tell, we are now in imaginary land, because Preet Bhahara, the US Attorney there, thinks that the only kind of securities fraud worth prosecuting is insider trading. After all, that reduces income other Wall Streeters want to grab for themselves.
8. Subpoena people from the firms that underwrote the Dogs to the Grand Jury. You want the people who signed off on the SEC documents first. Question each of them in the following areas:
a) did you see the due diligence report?
b) why isn’t it in the offering materials?
c) which lawyers inside and outside the firm passed on the disclosure documents?
d) who is your supervisor, and did that person see the due diligence report, and up the chain
e) how much did you get paid the year of issuance?
f) other questions you can think up if you spend more than the 5 minutes I took to write this.
9. Subpoena the people whose names you got in response to 8, especially the lawyers. You know that one defense is going to be reliance on the advice of counsel. If the lawyers knew about the due diligence report and didn’t insist on disclosure, you may want to indict them for something like conspiracy, wire fraud, mail fraud, or securities fraud, or you may want to take other appropriate action. If they didn’t know about the due diligence report, then the defense will fail.
10. Write up indictments.
11. Tell the target they have one week to discuss plea bargains, because the statute of limitations is running quickly. You want higher-ups. Continue this until you aren’t getting anyone.
12. Indict the higher-ups. Don’t plead out. Go to trial. Bring in the investors to testify about their losses. Surely there are some pension plans or mutual funds. Get them to talk about the losses they incurred for workers and small investors. Ask them if they can point to some damaged individual. These witnesses put blood on the floor for the jury to contemplate as they deliberate.
It doesn’t take an army. It just takes courage. Or am I back in imaginary land?
Showing posts with label SEC. Show all posts
Showing posts with label SEC. Show all posts
Saturday, March 12, 2011
Friday, May 7, 2010
7 questions Eliot Spitzer would have asked Goldman
http://www.financialpost.com/news-sectors/financials/story.html?id=2962262
7 questions Eliot Spitzer would have asked Goldman
Eliot Spitzer, Slate.com
Wednesday, April 28, 2010
Eliot Spitzer, the former 'Sheriff of Wall Street' says it's time to start figuring out whether investment banks have any real social value.
In ordinary times, the SEC's fraud case against Goldman Sachs would have been settled before it was even filed. There would have been a consent decree in which Goldman neither admitted nor denied any wrongdoing, paid a fine, and agreed to make more fulsome disclosures in the future. But these are not ordinary times, and the SEC's very public announcement that it's charging Goldman with misrepresentation and fraud in its marketing of a subprime debt product has become one of the biggest stories in the entire Wall Street scandal.
The filing of the Goldman case has crystallized the public support for more vigorous regulation of Wall Street. The Republican effort to oppose financial regulatory reform is now fading into an effort to forge a compromise that will give them some sort of defensible exit strategy. Under any bill that is likely to pass, derivatives trading will become reasonably transparent; a consumer protection agency will be created with a significant degree of independence; some chairs will be rearranged on the organizational deck of the regulatory ship of state; capital requirements and leverage ratios will be adjusted in ways that will be designed to reduce overall risk; and a systemic risk overseer will be created. This is all good stuff, but none of it is really adequate to address the "too big to fail" structure of the financial industry in a fundamental way. And it won't repair the underlying asymmetry of our having "socialized risk" and "privatized gain" for those entities that have an explicit federal guarantee behind them.
The furor around the Goldman case offers an opportunity to consider Wall Street's most profound, and entirely ignored, crisis. Now that we are seeing the inner workings of the products that Goldman is marketing, we must ask whether what Goldman and others investment banks do deserves the huge public subsidies they have received. Do they do anything that has any real social value?
In the traditional model, investment banks are thought to serve two critical functions. First, they are financial intermediaries: They are the conduits for transferring savings to those sectors of the economy that need capital. They fulfill the essential function, the economists tell us, of efficient allocation of capital. That is where their initial public offering and other capital-raising functions come into play. They enable productive companies to access the capital markets so they can grow their businesses.
Second, they are supposed to be market makers that provide liquidity and stability in the markets to permit the free flow of capital on an ongoing basis.
The question that must now be asked is: Are investment banks doing that? Are they doing the things that merit public support at all? Or are they just running a casino with products that have no great social utility? The regulators, legislators and investigators have not focused on the fact that the fundamental business of banking has changed from capital allocation to, essentially, gambling.
It's time to start figuring out whether and how investments banks perform economically useful functions. To do that, we need to know how big banks deploy their capital and how they make their money.
So here are a few questions that I believe are structurally more important than the ones that reporters and senators have been asking about Goldman:
• What percentage of Goldman's capital is dedicated to proprietary trading as opposed to capital formation for client companies?
• What percentage of Goldman's profits derives from proprietary trading, asset management and prime brokerage activities; and what percentage comes from capital formation for client companies?
• What percentage of Goldman's profits derives from marketing and trading derivatives, specifically the synthetic CDOs that are at the heart of the SEC investigation?
• What percentage of Goldman's capital has been invested in U.S. government securities over the last year, essentially taking advantage of an interest arbitrage between Goldman's cost of capital and the rate being paid on Treasury bills?
• How much income did Goldman derive from bets against products it marketed?
• How much capital - debt and equity - have Goldman and the other major investment houses raised for their clients over each of the past five years?
• How much capital have they invested overseas in foreign-based companies-especially through private equity funds?
This is just a starting list. The point is that we need to get a real measure of the social value of investment banking activity and to determine whether they are fulfilling the essential capital formation and liquidity needs of the markets. We taxpayers have given them billions upon billions upon billions based on the theory that they perform economically useful activities. They need to prove that they do.
7 questions Eliot Spitzer would have asked Goldman
Eliot Spitzer, Slate.com
Wednesday, April 28, 2010
Eliot Spitzer, the former 'Sheriff of Wall Street' says it's time to start figuring out whether investment banks have any real social value.
In ordinary times, the SEC's fraud case against Goldman Sachs would have been settled before it was even filed. There would have been a consent decree in which Goldman neither admitted nor denied any wrongdoing, paid a fine, and agreed to make more fulsome disclosures in the future. But these are not ordinary times, and the SEC's very public announcement that it's charging Goldman with misrepresentation and fraud in its marketing of a subprime debt product has become one of the biggest stories in the entire Wall Street scandal.
The filing of the Goldman case has crystallized the public support for more vigorous regulation of Wall Street. The Republican effort to oppose financial regulatory reform is now fading into an effort to forge a compromise that will give them some sort of defensible exit strategy. Under any bill that is likely to pass, derivatives trading will become reasonably transparent; a consumer protection agency will be created with a significant degree of independence; some chairs will be rearranged on the organizational deck of the regulatory ship of state; capital requirements and leverage ratios will be adjusted in ways that will be designed to reduce overall risk; and a systemic risk overseer will be created. This is all good stuff, but none of it is really adequate to address the "too big to fail" structure of the financial industry in a fundamental way. And it won't repair the underlying asymmetry of our having "socialized risk" and "privatized gain" for those entities that have an explicit federal guarantee behind them.
The furor around the Goldman case offers an opportunity to consider Wall Street's most profound, and entirely ignored, crisis. Now that we are seeing the inner workings of the products that Goldman is marketing, we must ask whether what Goldman and others investment banks do deserves the huge public subsidies they have received. Do they do anything that has any real social value?
In the traditional model, investment banks are thought to serve two critical functions. First, they are financial intermediaries: They are the conduits for transferring savings to those sectors of the economy that need capital. They fulfill the essential function, the economists tell us, of efficient allocation of capital. That is where their initial public offering and other capital-raising functions come into play. They enable productive companies to access the capital markets so they can grow their businesses.
Second, they are supposed to be market makers that provide liquidity and stability in the markets to permit the free flow of capital on an ongoing basis.
The question that must now be asked is: Are investment banks doing that? Are they doing the things that merit public support at all? Or are they just running a casino with products that have no great social utility? The regulators, legislators and investigators have not focused on the fact that the fundamental business of banking has changed from capital allocation to, essentially, gambling.
It's time to start figuring out whether and how investments banks perform economically useful functions. To do that, we need to know how big banks deploy their capital and how they make their money.
So here are a few questions that I believe are structurally more important than the ones that reporters and senators have been asking about Goldman:
• What percentage of Goldman's capital is dedicated to proprietary trading as opposed to capital formation for client companies?
• What percentage of Goldman's profits derives from proprietary trading, asset management and prime brokerage activities; and what percentage comes from capital formation for client companies?
• What percentage of Goldman's profits derives from marketing and trading derivatives, specifically the synthetic CDOs that are at the heart of the SEC investigation?
• What percentage of Goldman's capital has been invested in U.S. government securities over the last year, essentially taking advantage of an interest arbitrage between Goldman's cost of capital and the rate being paid on Treasury bills?
• How much income did Goldman derive from bets against products it marketed?
• How much capital - debt and equity - have Goldman and the other major investment houses raised for their clients over each of the past five years?
• How much capital have they invested overseas in foreign-based companies-especially through private equity funds?
This is just a starting list. The point is that we need to get a real measure of the social value of investment banking activity and to determine whether they are fulfilling the essential capital formation and liquidity needs of the markets. We taxpayers have given them billions upon billions upon billions based on the theory that they perform economically useful activities. They need to prove that they do.
Thursday, April 29, 2010
Report: SEC staffers watched porn as economy crashed
Robalini's Note - Quick quiz, guys. You work for the SEC. Do you:
A. Try everything possible to stop the worst economic disaster since The Great Depression from happening
B. Search the Internet for lesbian videos starring Savanna Samson or Teanna Kai
Thought so. So I must defend the SEC on this one...
http://www.cnn.com/2010/POLITICS/04/23/sec.porn/
Report: SEC staffers watched porn as economy crashed
April 23, 2010
SEC employees spent hours looking at porn sites on their work computers, according to an internal report.
STORY HIGHLIGHTS
SEC investigation: Dozens of employees, contractors surfed porn sites on work computers
Staffers violated government-wide ethics rules, report finds
Report: Incidents occurred while country was teetering on verge of financial collapse
(CNN) -- As the country was sinking into its worst financial crisis in more than 70 years, Security and Exchange Commission employees and contractors cruised porn sites and viewed sexually explicit pictures using government computers, according to an agency report obtained by CNN.
"During the past five years, the SEC OIG (Office of Inspector General) substantiated that 33 SEC employees and or contractors violated Commission rules and policies, as well as the government-wide Standards of Ethical Conduct, by viewing pornographic, sexually explicit or sexually suggestive images using government computer resources and official time," said a summary of the investigation by the inspector general's office.
More than half of the workers made between $99,000 and $223,000. All the cases took place over the past five years.
"It is nothing short of disturbing that high-ranking officials within the SEC were spending more time looking at pornography than taking action to help stave off the events that brought our nation's economy to the brink of collapse," said Rep. Darrell Issa. The Republican is the ranking member of the House Committee on Oversight and Government Reform.
"This stunning report should make everyone question the wisdom of moving forward with plans to give regulators like the SEC even more widespread authority," he said. "Inexplicably, rather than exercise its existing regulatory enforcement authority, SEC officials were preoccupied with other distractions."
SEC spokesman John Nester said the employees involved have been disciplined or are being disciplined. Some have been suspended or dismissed, he said, adding that the SEC has further increased penalties for misusing government resources in recent months.
"We will not tolerate the transgressions of the very few who bring discredit to their thousands of hardworking colleagues," he said.
The investigation came to light on the same day President Obama gave a speech in lower Manhattan, calling for reform in the finance industry.
On Capitol Hill, the Senate is working on a financial reform bill that would set up regulatory oversight of the financial industry's practices with the goal of preventing another Wall Street meltdown like the one in 2008 that launched the U.S. recession.
The bill includes an "early warning" system intended to spot signs of crisis, as well as a $50 billion liquidation fund created with money from banks and other finance industry corporations to ensure an orderly transition in closing down failing entities. It was recently approved by the Senate's Banking and Agricultural committees. The House passed its version of the bill in December.
The inspector general's report includes specific examples of misuse by employees.
A regional office staff accountant tried to access pornographic websites nearly 1,800 times, using her SEC laptop during a two-week period. She also had about 600 pornographic images saved on her laptop hard drive.
Separately, a senior attorney at SEC headquarters admitted to downloading pornography up to eight hours a day, according to the investigation.
"In fact, this attorney downloaded so much pornography to his government computer that he exhausted the available space on the computer hard drive and downloaded pornography to CDs or DVDs that he accumulated in boxes in his office," the inspector general's report said.
A. Try everything possible to stop the worst economic disaster since The Great Depression from happening
B. Search the Internet for lesbian videos starring Savanna Samson or Teanna Kai
Thought so. So I must defend the SEC on this one...
http://www.cnn.com/2010/POLITICS/04/23/sec.porn/
Report: SEC staffers watched porn as economy crashed
April 23, 2010
SEC employees spent hours looking at porn sites on their work computers, according to an internal report.
STORY HIGHLIGHTS
SEC investigation: Dozens of employees, contractors surfed porn sites on work computers
Staffers violated government-wide ethics rules, report finds
Report: Incidents occurred while country was teetering on verge of financial collapse
(CNN) -- As the country was sinking into its worst financial crisis in more than 70 years, Security and Exchange Commission employees and contractors cruised porn sites and viewed sexually explicit pictures using government computers, according to an agency report obtained by CNN.
"During the past five years, the SEC OIG (Office of Inspector General) substantiated that 33 SEC employees and or contractors violated Commission rules and policies, as well as the government-wide Standards of Ethical Conduct, by viewing pornographic, sexually explicit or sexually suggestive images using government computer resources and official time," said a summary of the investigation by the inspector general's office.
More than half of the workers made between $99,000 and $223,000. All the cases took place over the past five years.
"It is nothing short of disturbing that high-ranking officials within the SEC were spending more time looking at pornography than taking action to help stave off the events that brought our nation's economy to the brink of collapse," said Rep. Darrell Issa. The Republican is the ranking member of the House Committee on Oversight and Government Reform.
"This stunning report should make everyone question the wisdom of moving forward with plans to give regulators like the SEC even more widespread authority," he said. "Inexplicably, rather than exercise its existing regulatory enforcement authority, SEC officials were preoccupied with other distractions."
SEC spokesman John Nester said the employees involved have been disciplined or are being disciplined. Some have been suspended or dismissed, he said, adding that the SEC has further increased penalties for misusing government resources in recent months.
"We will not tolerate the transgressions of the very few who bring discredit to their thousands of hardworking colleagues," he said.
The investigation came to light on the same day President Obama gave a speech in lower Manhattan, calling for reform in the finance industry.
On Capitol Hill, the Senate is working on a financial reform bill that would set up regulatory oversight of the financial industry's practices with the goal of preventing another Wall Street meltdown like the one in 2008 that launched the U.S. recession.
The bill includes an "early warning" system intended to spot signs of crisis, as well as a $50 billion liquidation fund created with money from banks and other finance industry corporations to ensure an orderly transition in closing down failing entities. It was recently approved by the Senate's Banking and Agricultural committees. The House passed its version of the bill in December.
The inspector general's report includes specific examples of misuse by employees.
A regional office staff accountant tried to access pornographic websites nearly 1,800 times, using her SEC laptop during a two-week period. She also had about 600 pornographic images saved on her laptop hard drive.
Separately, a senior attorney at SEC headquarters admitted to downloading pornography up to eight hours a day, according to the investigation.
"In fact, this attorney downloaded so much pornography to his government computer that he exhausted the available space on the computer hard drive and downloaded pornography to CDs or DVDs that he accumulated in boxes in his office," the inspector general's report said.
Sunday, April 25, 2010
SEC says Goldman defrauded investors of $1 billion
Robalini's Note: This sounds like what the Carlyle Group did as well. Here's what I wrote in 2008: "Though Carlyle Capital has indeed gone belly up, its parent Carlyle Group - the private equity group whose partners have included George H. W. Bush and the bin Laden family, and whose founder, perhaps not-so-symbolically, bought the original copy of the Magna Carta for $20 million - has only been marginally damaged by the liquidation, as Carlyle Capital was an spin-off of mortgage securities. Did Carlyle suspect the mortgage market was doomed to sink over toxic subprime loans and thus create the spin-off, the first in its history, to dump a loser on sucker investors?"
http://rawstory.com/rs/2010/0416/charges-goldman-sachs-fraud/
SEC says Goldman defrauded investors of $1 billion
By John Byrne
Friday, April 16th, 2010
The Securities and Exchange Commission has charged investment banking titan Goldman Sachs with civil fraud over a pre-packaged mortgage instrument they say was designed to fail.
Goldman Sachs created the derivative -- called Abacus 2007-AC1 -- in response to a request from a hedge fund manager who predicted that the housing market would collapse and wanted to bet against it. The trader, John Paulson, later earned $3.7 billion for his wager. Goldman's practices cost investors $1 billion, according to the filing.
According to the New York Times, which first revealed details of the Abacus case, the instrument was among 25 Goldman created so that clients could bet against the housing market:
As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.
Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against — the ones he believed were most likely to lose value — and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.
But the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson as likely to default. Goldman told investors in Abacus marketing materials reviewed by The Times that the bonds would be chosen by an independent manager.
Apparently, they weren't.
Fabrice Tourre, a vice president at Goldman who helped design and market Abacus, was also named in the SEC suit.
84 percent of Abacus' mortgage bonds would be downgraded within five months of their sale. By the end of 2007, Paulson's credit hedge fund soared 590 percent, and Goldman's clients lost billions.
Goldman reportedly targeted specific mortgage bonds at Paulson's request that Paulson felt were most likely to lose their golden credit ratings, which would trigger a payout for his firm.
Goldman did not immediately comment on the suit. The company's shares fell more than 10 percent on the news.
Shareholder recently sued firm for huge bonus payouts
In January, a lawsuit filed against the investment bank by a shareholder alleged that the company spent more money on corporate bonuses than it earned in 2008.
Shareholder Ken Brown's lawsuit is one of two suits filed against the company over its controversial decision to hand out billions of dollars in bonuses even after it was accused of playing a central role in the financial collapse of 2008 and receiving $10 billion in direct aid from the US government.
In his lawsuit, Brown asserted that Goldman Sachs gave out $4.82 billion in bonuses in 2008, despite earnings of only $2.32 billion that year. The lawsuit alleges that the company spent 259 percent of its income in the first quarter of 2009 on compensation.
Goldman Sachs handed out $16.7 billion in compensation in the first nine months of 2009, according to Bloomberg News, and that figure may reach $22 billion for the entire year. Brown's suit says the company typically sets aside 44 percent of its net revenue for employees.
“Payment of this exorbitant amount of compensation, which has little to do with Goldman Sachs’s performance, and was financed in large part with government bailout and taxpayer money, is a waste of the company’s assets and a breach of duty and loyalty," Brown asserts in the suit.
Goldman CEO Lloyd Blankfein earned $9 million in a non-cash bonus for 2009. In prior years, he'd earned more than $20 million.
http://rawstory.com/rs/2010/0416/charges-goldman-sachs-fraud/
SEC says Goldman defrauded investors of $1 billion
By John Byrne
Friday, April 16th, 2010
The Securities and Exchange Commission has charged investment banking titan Goldman Sachs with civil fraud over a pre-packaged mortgage instrument they say was designed to fail.
Goldman Sachs created the derivative -- called Abacus 2007-AC1 -- in response to a request from a hedge fund manager who predicted that the housing market would collapse and wanted to bet against it. The trader, John Paulson, later earned $3.7 billion for his wager. Goldman's practices cost investors $1 billion, according to the filing.
According to the New York Times, which first revealed details of the Abacus case, the instrument was among 25 Goldman created so that clients could bet against the housing market:
As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.
Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against — the ones he believed were most likely to lose value — and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.
But the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson as likely to default. Goldman told investors in Abacus marketing materials reviewed by The Times that the bonds would be chosen by an independent manager.
Apparently, they weren't.
Fabrice Tourre, a vice president at Goldman who helped design and market Abacus, was also named in the SEC suit.
84 percent of Abacus' mortgage bonds would be downgraded within five months of their sale. By the end of 2007, Paulson's credit hedge fund soared 590 percent, and Goldman's clients lost billions.
Goldman reportedly targeted specific mortgage bonds at Paulson's request that Paulson felt were most likely to lose their golden credit ratings, which would trigger a payout for his firm.
Goldman did not immediately comment on the suit. The company's shares fell more than 10 percent on the news.
Shareholder recently sued firm for huge bonus payouts
In January, a lawsuit filed against the investment bank by a shareholder alleged that the company spent more money on corporate bonuses than it earned in 2008.
Shareholder Ken Brown's lawsuit is one of two suits filed against the company over its controversial decision to hand out billions of dollars in bonuses even after it was accused of playing a central role in the financial collapse of 2008 and receiving $10 billion in direct aid from the US government.
In his lawsuit, Brown asserted that Goldman Sachs gave out $4.82 billion in bonuses in 2008, despite earnings of only $2.32 billion that year. The lawsuit alleges that the company spent 259 percent of its income in the first quarter of 2009 on compensation.
Goldman Sachs handed out $16.7 billion in compensation in the first nine months of 2009, according to Bloomberg News, and that figure may reach $22 billion for the entire year. Brown's suit says the company typically sets aside 44 percent of its net revenue for employees.
“Payment of this exorbitant amount of compensation, which has little to do with Goldman Sachs’s performance, and was financed in large part with government bailout and taxpayer money, is a waste of the company’s assets and a breach of duty and loyalty," Brown asserts in the suit.
Goldman CEO Lloyd Blankfein earned $9 million in a non-cash bonus for 2009. In prior years, he'd earned more than $20 million.
Saturday, April 24, 2010
Big Banks Mask Risk Levels
http://online.wsj.com/article/SB10001424052702304830104575172280848939898.html
APRIL 9, 2010
Big Banks Mask Risk Levels
Quarter-End Loan Figures Sit 42% Below Peak, Then Rise as New Period Progresses; SEC Review
By KATE KELLY, TOM MCGINTY and DAN FITZPATRICK
Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.
A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.
Citi Execs Deny Responsibility Excessive borrowing by banks was one of the major causes of the financial crisis, leading to catastrophic bank runs in 2008 at firms including Bear Stearns Cos. and Lehman Brothers. Since then, banks have become more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished.
That practice, while legal, can give investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time.
Major banks masked their risk levels during the most recent five quarters by lowering debt levels just before announcing quarterly earnings, according to data from the New York Federal Reserve Bank. Kate Kelly and Evan Newmark discuss.
"You want your leverage to look better at quarter-end than it actually was during the quarter, to suggest that you're taking less risk," says William Tanona, a former Goldman analyst who now heads U.S. financials research at Collins Stewart, a U.K. investment bank.
Though some banks privately confirm that they temporarily reduce their borrowings at quarter's end, representatives at Goldman, Morgan Stanley, J.P. Morgan and Citigroup declined to comment specifically on the New York Fed data. Some noted that their firm's financial filings include language saying borrowing levels can fluctuate during the quarter.
"The efforts to manage the size of our balance sheet are appropriate and our policies are consistent with all applicable accounting and legal requirements," a Bank of America spokesman said.
Masking Risk
An official at the Federal Reserve Board noted that the Fed continuously monitors asset levels at the large bank-holding companies, but the financing activities captured in the New York Fed's data fall under the purview of the Securities and Exchange Commission, which regulates brokerage firms. The New York Fed declined to comment.
The data highlight the banks' levels of short-term financing in the repurchase, or "repo," market. Financial firms use cash from the loans to buy securities, then use the purchased securities as collateral for other loans, and buy more securities. The loans boost the firms' trading power, or "leverage," allowing them to make big trades without putting up big money. This amplifies gains—and losses, which were disastrous in 2008.
According to the data, the banks' outstanding net repo borrowings at the end of each of the past five quarters were on average 42% below their peak in net borrowings in the same quarters. Though the repo market represents just a slice of banks' overall activities, it provides a window into the risks that financial institutions take to trade.
The SEC now is seeking detailed information from nearly two dozen large financial firms about repos, signaling that the agency is looking for accounting techniques that could hide a firm's risk-taking. The SEC's inquiry follows recent disclosures that Lehman used repos to mask some $50 billion in debt before it collapsed in 2008.
The practice of reducing quarter-end repo borrowings has occurred periodically for years, according to the data, which go back to 2001, but never as consistently as in 2009.
The repo market played a role in recent accusations leveled by an examiner in Lehman's bankruptcy case. But rather than reducing quarter-end debt, Lehman took steps to hide it.
Anxious to maintain favorable credit ratings, Lehman engaged in an accounting device known within the firm as "Repo 105" to essentially park about $50 billion of assets away from Lehman's balance sheet, according to the examiner. The move helped Lehman look like it had less debt on its books, the examiner said.
Other Wall Street firms, including Goldman and Morgan Stanley, have denied characterizing their short-term borrowings as sales, the way Lehman did in employing Repo 105. Both of those firms also make standard disclaimers about debt.
For instance, Goldman disclosed in its 2009 annual report that although its balance sheet can "fluctuate," asset levels at the ends of quarters are "typically not materially different" from their levels in the midst of the quarter. Total assets at the end of 2009 were 7% lower than average assets during the year, the report states.
Some banks make big trades that don't show up in quarter-end balance sheets. That is what happened recently at Bank of America involving a trade designed to mature before the end of 2009's first quarter, people familiar with the matter say.
Two Bank of America traders bought $40 billion of mortgage-backed securities from clients for one month, while at the same time agreeing to sell the securities back before quarter's end, according to people familiar with the matter. This "roll" trade provided the clients with cash and the bank with fees.
Robert Qutub, then Bank of America's chief financial officer for global markets, told Michael Nierenberg, a former Bear Stearns trader who oversaw the traders who made the roll trade, to cap the size of the short-term transaction, people familiar with the matter say.
A week later, however, the amount tied to the trade shot up to $60 billion, these people say, before dropping to $25 billion, one of these people said, appearing to some at headquarters that the group had defied the order to cap the trade.
A bank spokeswoman said "the team was aware of and worked within its risk limits."
Write to Kate Kelly at kate.kelly@wsj.com, Tom McGinty at tom.mcginty@wsj.com and Dan Fitzpatrick at dan.fitzpatrick@wsj.com
APRIL 9, 2010
Big Banks Mask Risk Levels
Quarter-End Loan Figures Sit 42% Below Peak, Then Rise as New Period Progresses; SEC Review
By KATE KELLY, TOM MCGINTY and DAN FITZPATRICK
Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.
A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.
Citi Execs Deny Responsibility Excessive borrowing by banks was one of the major causes of the financial crisis, leading to catastrophic bank runs in 2008 at firms including Bear Stearns Cos. and Lehman Brothers. Since then, banks have become more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished.
That practice, while legal, can give investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time.
Major banks masked their risk levels during the most recent five quarters by lowering debt levels just before announcing quarterly earnings, according to data from the New York Federal Reserve Bank. Kate Kelly and Evan Newmark discuss.
"You want your leverage to look better at quarter-end than it actually was during the quarter, to suggest that you're taking less risk," says William Tanona, a former Goldman analyst who now heads U.S. financials research at Collins Stewart, a U.K. investment bank.
Though some banks privately confirm that they temporarily reduce their borrowings at quarter's end, representatives at Goldman, Morgan Stanley, J.P. Morgan and Citigroup declined to comment specifically on the New York Fed data. Some noted that their firm's financial filings include language saying borrowing levels can fluctuate during the quarter.
"The efforts to manage the size of our balance sheet are appropriate and our policies are consistent with all applicable accounting and legal requirements," a Bank of America spokesman said.
Masking Risk
An official at the Federal Reserve Board noted that the Fed continuously monitors asset levels at the large bank-holding companies, but the financing activities captured in the New York Fed's data fall under the purview of the Securities and Exchange Commission, which regulates brokerage firms. The New York Fed declined to comment.
The data highlight the banks' levels of short-term financing in the repurchase, or "repo," market. Financial firms use cash from the loans to buy securities, then use the purchased securities as collateral for other loans, and buy more securities. The loans boost the firms' trading power, or "leverage," allowing them to make big trades without putting up big money. This amplifies gains—and losses, which were disastrous in 2008.
According to the data, the banks' outstanding net repo borrowings at the end of each of the past five quarters were on average 42% below their peak in net borrowings in the same quarters. Though the repo market represents just a slice of banks' overall activities, it provides a window into the risks that financial institutions take to trade.
The SEC now is seeking detailed information from nearly two dozen large financial firms about repos, signaling that the agency is looking for accounting techniques that could hide a firm's risk-taking. The SEC's inquiry follows recent disclosures that Lehman used repos to mask some $50 billion in debt before it collapsed in 2008.
The practice of reducing quarter-end repo borrowings has occurred periodically for years, according to the data, which go back to 2001, but never as consistently as in 2009.
The repo market played a role in recent accusations leveled by an examiner in Lehman's bankruptcy case. But rather than reducing quarter-end debt, Lehman took steps to hide it.
Anxious to maintain favorable credit ratings, Lehman engaged in an accounting device known within the firm as "Repo 105" to essentially park about $50 billion of assets away from Lehman's balance sheet, according to the examiner. The move helped Lehman look like it had less debt on its books, the examiner said.
Other Wall Street firms, including Goldman and Morgan Stanley, have denied characterizing their short-term borrowings as sales, the way Lehman did in employing Repo 105. Both of those firms also make standard disclaimers about debt.
For instance, Goldman disclosed in its 2009 annual report that although its balance sheet can "fluctuate," asset levels at the ends of quarters are "typically not materially different" from their levels in the midst of the quarter. Total assets at the end of 2009 were 7% lower than average assets during the year, the report states.
Some banks make big trades that don't show up in quarter-end balance sheets. That is what happened recently at Bank of America involving a trade designed to mature before the end of 2009's first quarter, people familiar with the matter say.
Two Bank of America traders bought $40 billion of mortgage-backed securities from clients for one month, while at the same time agreeing to sell the securities back before quarter's end, according to people familiar with the matter. This "roll" trade provided the clients with cash and the bank with fees.
Robert Qutub, then Bank of America's chief financial officer for global markets, told Michael Nierenberg, a former Bear Stearns trader who oversaw the traders who made the roll trade, to cap the size of the short-term transaction, people familiar with the matter say.
A week later, however, the amount tied to the trade shot up to $60 billion, these people say, before dropping to $25 billion, one of these people said, appearing to some at headquarters that the group had defied the order to cap the trade.
A bank spokeswoman said "the team was aware of and worked within its risk limits."
Write to Kate Kelly at kate.kelly@wsj.com, Tom McGinty at tom.mcginty@wsj.com and Dan Fitzpatrick at dan.fitzpatrick@wsj.com
Tuesday, March 16, 2010
Sean David Morton Sued By The S.E.C.
http://www.ufomystic.com/2010/03/05/sean-david-morton-sued-by-the-sec
Sean David Morton Sued By The S.E.C.
Friday, March 5th, 2010
Greg Bishop
The New York Times (and other news sources) reported today that Sean David Morton has been sued by the Securities and Exchange Commission for investor fraud.
For those of you who are unfamiliar with Morton, he and his Delphi Associates organization have been jumping on the latest new-age bandwagon for the last decade or more, sometimes turning a decent profit. Friends and acquaintances of mine have claimed that they were swindled out of large sums of cash by Morton and his wife. Morton has also claimed to be the “World’s Foremost UFO Researcher” and has been a regular on the lecture circuit and paranormal talk shows.
For more on Morton, see the UFO Watchdog site (now hosted by the Paracast.) Morton sued site owner/ reporter Royce Meyers for libel for $1 million 2003 based on the material Meyers wrote and published. Morton could not prove that any false statements were made and was ordered to pay $16,000 in legal fees to the defendant.
Personally, I have always had a pretty negative opinion of Morton based on some limited interactions with him over the years.
Tuesday, April 28, 2009
Freddie Mac acting CFO found dead
http://www.marketwatch.com/news/story/Freddie-Mac-acting-CFO-dead/story.aspx
Freddie Mac acting CFO found dead in apparent suicide
U.S. officials express condolences to Kellermann's family and colleagues
By Sam Mamudi & Ronald D. Orol, MarketWatch
April 22, 2009
NEW YORK (MarketWatch) -- The acting chief financial officer of Freddie Mac was found dead at his home Wednesday morning in an apparent suicide.
David Kellermann, acting chief financial officer at the government-controlled mortgage company, was found dead at his home in Fairfax County, Va.
Kellermann was named acting CFO in late September, three weeks after the government took charge of Freddie Mac. He had previously been senior vice president and corporate controller there.
His death came as staff from the Securities and Exchange Commission and Justice Department were probing the home-finance company about issues including possible accounting violations.
Freddie disclosed the investigation in a March 11 filing, and the firm said it was "cooperating fully in these matters."
According to the SEC filing, Freddie said it received a federal grand jury subpoena Sept. 26 from the U.S. attorney's office for the southern district of New York. The subpoena sought documents related to accounting, disclosure and corporate-governance matters, according to the filing.
But that subpoena was later withdrawn and the investigation was taken over by the U.S. attorney for the eastern district of Virginia.
According to the filing, on Oct. 21, Freddie said the SEC had begun its own investigation, asking Freddie for documents. Specifically, on Jan. 23, Jan. 30 and Feb. 25, the SEC issued subpoenas for documents. The agency also began its own interviews of company employees, Freddie said in the filing.
In addition to the investigation, Freddie Mac received a request from the House Committee on Oversight and Investigations on Oct. 20 seeking documents for a hearing it held on Dec. 9.
Freddie Mac has received more than $30 billion in government support as the mortgage and credit crisis intensified.
Kellermann's apparent suicide surprised some key regulators in Washington, who expressed their condolences.
"On behalf of the Treasury family, we are deeply saddened by the news this morning of David Kellermann's death," said Treasury Secretary Timothy Geithner in a statement. "Our deepest sympathies are with his family and his colleagues at Freddie Mac during this difficult time."
The Federal Housing Finance Agency issued this statement: "For many years, we have known David as a person of the utmost ethical standards who was hardworking and knowledgeable in his field. As the Acting Chief Financial Officer of Freddie Mac during particularly challenging times, David was an inspiration to his staff and many others who were privileged to work with him. We extend our condolences to his family, friends and colleagues."
Kellermann's apparent suicide would be the latest of several putatively motivated by the financial crisis. French financier Rene-Thierry Magon de la Villehuchet killed himself in December after losing roughly $1 billion of his own and clients' money to the Ponzi scheme orchestrated by Bernard Madoff.
Seventy-four-year-old German billionaire Adolf Merckle in January committed suicide after the conglomerate he controlled, with investments in pharmaceuticals, cement and other sectors, experienced problems related to the global financial crisis.
In 2002, J. Clifford Baxter, a former Enron Corp. vice chairman, was found dead in his car in Houston, in an apparent suicide, after the company collapsed in a massive corruption scandal and bankruptcy filing.
Ronald D. Orol is a MarketWatch reporter, based in Washington.
Freddie Mac acting CFO found dead in apparent suicide
U.S. officials express condolences to Kellermann's family and colleagues
By Sam Mamudi & Ronald D. Orol, MarketWatch
April 22, 2009
NEW YORK (MarketWatch) -- The acting chief financial officer of Freddie Mac was found dead at his home Wednesday morning in an apparent suicide.
David Kellermann, acting chief financial officer at the government-controlled mortgage company, was found dead at his home in Fairfax County, Va.
Kellermann was named acting CFO in late September, three weeks after the government took charge of Freddie Mac. He had previously been senior vice president and corporate controller there.
His death came as staff from the Securities and Exchange Commission and Justice Department were probing the home-finance company about issues including possible accounting violations.
Freddie disclosed the investigation in a March 11 filing, and the firm said it was "cooperating fully in these matters."
According to the SEC filing, Freddie said it received a federal grand jury subpoena Sept. 26 from the U.S. attorney's office for the southern district of New York. The subpoena sought documents related to accounting, disclosure and corporate-governance matters, according to the filing.
But that subpoena was later withdrawn and the investigation was taken over by the U.S. attorney for the eastern district of Virginia.
According to the filing, on Oct. 21, Freddie said the SEC had begun its own investigation, asking Freddie for documents. Specifically, on Jan. 23, Jan. 30 and Feb. 25, the SEC issued subpoenas for documents. The agency also began its own interviews of company employees, Freddie said in the filing.
In addition to the investigation, Freddie Mac received a request from the House Committee on Oversight and Investigations on Oct. 20 seeking documents for a hearing it held on Dec. 9.
Freddie Mac has received more than $30 billion in government support as the mortgage and credit crisis intensified.
Kellermann's apparent suicide surprised some key regulators in Washington, who expressed their condolences.
"On behalf of the Treasury family, we are deeply saddened by the news this morning of David Kellermann's death," said Treasury Secretary Timothy Geithner in a statement. "Our deepest sympathies are with his family and his colleagues at Freddie Mac during this difficult time."
The Federal Housing Finance Agency issued this statement: "For many years, we have known David as a person of the utmost ethical standards who was hardworking and knowledgeable in his field. As the Acting Chief Financial Officer of Freddie Mac during particularly challenging times, David was an inspiration to his staff and many others who were privileged to work with him. We extend our condolences to his family, friends and colleagues."
Kellermann's apparent suicide would be the latest of several putatively motivated by the financial crisis. French financier Rene-Thierry Magon de la Villehuchet killed himself in December after losing roughly $1 billion of his own and clients' money to the Ponzi scheme orchestrated by Bernard Madoff.
Seventy-four-year-old German billionaire Adolf Merckle in January committed suicide after the conglomerate he controlled, with investments in pharmaceuticals, cement and other sectors, experienced problems related to the global financial crisis.
In 2002, J. Clifford Baxter, a former Enron Corp. vice chairman, was found dead in his car in Houston, in an apparent suicide, after the company collapsed in a massive corruption scandal and bankruptcy filing.
Ronald D. Orol is a MarketWatch reporter, based in Washington.
Sunday, March 1, 2009
The Language of Looting
http://www.blackagendareport.com/index.php?option=com_content&task=view&id=1039&Itemid=1
The Language of Looting
Wednesday, 25 February 2009
by Michael Hudson
In order to steal literally everything, the Lords of Finance must render language incapable of describing the crime. "Society's basic grammar of thought, the vocabulary to discuss political and economic topics, is being turned inside-out." The banksters still think they can rule from the center of confusion. "Today's policy is to ‘rescue' these giant bank conglomerates by enabling them to ‘earn' their way out of debt - by selling yet more debt to an already over-indebted U.S. economy. The hope is to re-inflate real estate and other asset prices."
"Banking shares began to plunge Friday morning after Senator Dodd, the Connecticut Democrat who is chairman of the banking committee, said in an interview with Bloomberg Television that he was concerned the government might end up nationalizing some lenders "at least for a short time." Several other prominent policy makers - including Alan Greenspan, the former chairman of the Federal Reserve, and Senator Lindsey Graham of South Carolina - have echoed that view recently." -- Eric Dash, "Growing Worry on Rescue Takes a Toll on Banks," The New York Times, February 20, 2009
How is it that Alan Greenspan, free-market lobbyist for Wall Street, recently announced that he favored nationalization of America's banks - and indeed, mainly the biggest and most powerful? Has the old disciple of Ayn Rand gone Red in the night? Surely not.
The answer is that the rhetoric of "free markets," "nationalization" and even "socialism" (as in "socializing the losses") has been turned into the language of deception to help the financial sector mobilize government power to support its own special privileges. Having undermined the economy at large, Wall Street's public relations think tanks are now dismantling the language itself.
Exactly what does "a free market" mean? Is it what the classical economists advocated - a market free from monopoly power, business fraud, political insider dealing and special privileges for vested interests - a market protected by the rise in public regulation from the Sherman Anti-Trust law of 1890 to the Glass-Steagall Act and other New Deal legislation? Or is it a market free for predators to exploit victims without public regulation or economic policemen - the kind of free-for-all market that the Federal Reserve and Security and Exchange Commission (SEC) have created over the past decade or so? It seems incredible that people should accept today's neoliberal idea of "market freedom" in the sense of neutering government watchdogs, Alan Greenspan-style, letting Angelo Mozilo at Countrywide, Hank Greenberg at AIG, Bernie Madoff, Citibank, Bear Stearns and Lehman Brothers loot without hindrance or sanction, plunge the economy into crisis and then use Treasury bailout money to pay the highest salaries and bonuses in U.S. history.
"Having undermined the economy at large, Wall Street's public relations think tanks are now dismantling the language itself."
Terms that are the antithesis of "free market" also are being turned into the opposite of what they historically have meant. Take today's discussions about nationalizing the banks. For over a century nationalization has meant public takeover of monopolies or other sectors to operate them in the public interest rather than leaving them to special interests. But when neoliberals use the word "nationalization" they mean a bailout, a government giveaway to the financial interests.
Doublethink and doubletalk with regard to "nationalizing" or "socializing" the banks and other sectors is a travesty of political and economic discussion from the 17th through mid-20th centuries. Society's basic grammar of thought, the vocabulary to discuss political and economic topics, is being turned inside-out in an effort to ward off discussion of the policy solutions posed by the classical economists and political philosophers that made Western civilization "Western."
Today's clash of civilization is not really with the Orient; it is with our own past, with the Enlightenment itself and its evolution into classical political economy and Progressive Era social reforms aimed at freeing society from the surviving trammels of European feudalism. What we are seeing is propaganda designed to deceive, to distract attention from economic reality so as to promote the property and financial interests from whose predatory grasp classical economists set out to free the world. What is being attempted is nothing less than an attempt to destroy the intellectual and moral edifice of what took Western civilization eight centuries to develop, from the 12th century Schoolmen discussing Just Price through 19th and 20th century classical economic value theory.
"What we are seeing is propaganda designed to deceive, to distract attention from economic reality."
Any idea of "socialism from above," in the sense of "socializing the risk," is old-fashioned oligarchy - kleptocratic statism from above. Real nationalization occurs when governments act in the public interest to take over private property. The 19th-century program to nationalize the land (it was the first plank of the Communist Manifesto) did not mean anything remotely like the government taking over estates, paying off their mortgages at public expense and then giving it back to the former landlords free and clear of encumbrances and taxes. It meant taking the land and its rental income into the public domain, and leasing it out at a user fee ranging from actual operating cost to a subsidized rate or even freely as in the case of streets and roads.
Nationalizing the banks along these lines would mean that the government would supply the nation's credit needs. The Treasury would become the source of new money, replacing commercial bank credit. Presumably this credit would be lent out for economically and socially productive purposes, not merely to inflate asset prices while loading down households and business with debt as has occurred under today's commercial bank lending policies.
How neoliberals falsify the West's political history
The fact that today's neoliberals claim to be the intellectual descendants of Adam Smith make it necessary to restore a more accurate historical perspective. Their concept of "free markets" is the antithesis of Smith's. It is the opposite of that of the classical political economists down through John Stuart Mill, Karl Marx and the Progressive Era reforms that sought to create markets free of extractive rentier claims by special interests whose institutional power can be traced back to medieval Europe and its age of military conquest.
Economic writers from the 16th through 20th centuries recognized that free markets required government oversight to prevent monopoly pricing and other charges levied by special privilege. By contrast, today's neoliberal ideologues are public relations advocates for vested interests to depict a "free market" is one free of government regulation, "free" of anti-trust protection, and even of protection against fraud (as evidenced by the SEC's refusal to move against Madoff, Enron, Citibank et al.). The neoliberal ideal of free markets is thus basically that of a bank robber or embezzler, wishing for a world without police so as to be sufficiently free to siphon off other peoples' money without constraint.
The Chicago Boys in Chile realized that markets free for predatory finance and insider privatization could only be imposed at gunpoint. These free-marketers closed down every economics department in Chile, every social science department outside of the Catholic University where the Chicago Boys held sway. Operation Condor arrested, exiled or murdered tens of thousands of academics, intellectuals, labor leaders and artists. Only by totalitarian control over the academic curriculum and public media backed by an active secret police and army could "free markets" neoliberal style be imposed. The resulting privatization at gunpoint became an exercise in what Marx called "primitive accumulation" - seizure of the public domain by political elites backed by force. It is a free market William-the-Conqueror or Yeltsin-kleptocrat style, with property parceled out to the companions of the political or military leader.
"The neoliberal ideal of free markets is basically that of a bank robber or embezzler, wishing for a world without police."
All this was just the opposite of the kind of free markets that Adam Smith had in mind when he warned that businessmen rarely get together but to plot ways to fix markets to their advantage. This is not a problem that troubled Mr. Greenspan or the editorial writers of the New York Times and Washington Post. There really is no kinship between their neoliberal ideals and those of the Enlightenment political philosophers. For them to promote an idea of free markets as ones "free" for political insiders to pry away the public domain for themselves is to lower an intellectual Iron Curtain on the history of economic thought.
The classical economists and American Progressives envisioned markets free of economic rent and interest - free of rentier overhead charges and monopoly price gouging, free of land-rent, interest paid to bankers and wealthy financial institutions, and free of taxes to support an oligarchy. Governments were to base their tax systems on collecting the "free lunch" of economic rent, headed by that of favorable locations supplied by nature and given market value by public investment in transportation and other infrastructure, not by the efforts of landlords themselves.
The argument between Progressive Era reformers, socialists, anarchists and individualists thus turned on the political strategy of how best to free markets from debt and rent. Where they differed was on the best political means to achieve it, above all the role of the state. There was broad agreement that the state was controlled by vested interests inherited from feudal Europe's military conquests and the world that was colonized by European military force. The political question at the turn of the 20th century was whether peaceful democratic reform could overcome the political and even military resistance wielded by the Old Regime using violence to retain its "rights." The ensuing political revolutions were grounded in the Enlightenment, in the legal philosophy of men such as John Locke, political economists such as Adam Smith, John Stuart Mill and Marx. Power was to be used to free markets from the predatory property and financial systems inherited from feudalism. Markets were to be free of privilege and free lunches, so that people would obtain income and wealth only by their own labor and enterprise. This was the essence of the labor theory of value and its complement, the concept of economic rent as the excess of market price over socially necessary cost-value.
Although we now know that markets and prices, rent and interest, contractual formalities and nearly all the elements of economic enterprise originated in the "mixed economies" of Mesopotamia in the fourth millennium BC and continued throughout the mixed public/private economies of classical antiquity, the discussion was so politically polarized that the idea of a mixed economy with checks and balances received scant attention a century ago.
"Power was to be used to free markets from the predatory property and financial systems inherited from feudalism."
Individualists believed that shrinking central governments would shrink the control mechanism by which the vested interests extracted wealth without work or enterprise of their own. Socialists saw that a strong government was needed to protect society from the attempts of property and finance to use their gains to monopolize economic and political power. Both ends of the political spectrum aimed at the same objective - to bring prices down to actual costs of production. The common aim was to maximize economic efficiency so as to pass on the fruits of the Industrial and Agricultural Revolutions to the population at large. This required blocking the rentier class of interlopers from grabbing the public domain and controlling the allocation of resources. Socialists did not believe this could be done without taking the state's political and legal power into their own hands. Marxists believed that a revolution was necessary to reclaim property rent for the public domain, and to enable governments to create their own credit rather than borrow at interest from commercial bankers and wealthy bondholders. The aim was not to create a bureaucracy but to free society from the surviving absentee ownership power of the vested property and financial interests.
All this history of economic thought has been as thoroughly expunged from today's academic curriculum as it has from popular discussion. Few people remember the great debate at the turn of the 20th century: Would the world progress fairly quickly from Progressive Era reforms to outright socialism - public ownership of basic economic infrastructure, natural monopolies (including the banking system) and the land itself (and to Marxists, of industrial capital as well)? Or, could the liberal reformers of the day - individualists, land taxers, classical economists in the tradition of Mill, and American institutionalists such as Simon Patten - retain capitalism's basic structure and private property ownership? If they could do so, they recognized that it would have to be in the context of regulating markets and introducing progressive taxation of wealth and income. This was the alternative to outright "state" ownership. Today's extreme "free market" idea is a dumbed-down caricature of this position.
"A ‘free market' was an active political creation and required regulatory vigilance."
All sides viewed the government as society's "brain," its forward planning organ. Given the complexity of modern technology, humanity would shape its own evolution. Instead of evolution occurring by "primitive accumulation," it could be planned deliberately. Individualists countered that no human planner was sufficiently imaginative to manage the complexity of markets, but endorsed the need to strip away all forms of unearned income - economic rent and the rise in land prices that Mill called the "unearned increment." This involved government regulation to shape markets. A "free market" was an active political creation and required regulatory vigilance.
As public relations advocates for the vested interests and special rentier privilege, today's "neoliberal" advocates of "free" markets seek to maximize economic rent - the free lunch of price in excess of cost-value, not to free markets from rentier charges. So misleading a pedigree only could be achieved by outright suppression of knowledge of what Locke, Smith and Mill really wrote. Attempts to regulate "free markets" and limit monopoly pricing and privilege are conflated with "socialism," even with Soviet-style bureaucracy. The aim is to deter the analysis of what a "free market" really is: a market free of unnecessary costs: monopoly rents, property rents and financial charges for credit that governments can create freely.
Political reform to bring market prices in line with socially necessary cost-value was the great economic issue of the 19th century. The labor theory of intrinsic cost-value found its counterpart in the theory of economic rent: land rent, monopoly price gouging, interest and other returns to special privilege that increased market prices purely by institutional property claims. The discussion goes all the way back to the medieval churchmen defining Just Price. The doctrine originally was applied to the proper fees that bankers could charge, and later was extended to land rent, then to the monopolies that governments created and sold off to creditors in an attempt to extricate themselves from debt.
Reformists and more radical socialists alike sought to free capitalism of its egregious inequities, above all its legacy from Europe's Dark Age of military conquest when invading warlords seized lands and imposed an absentee landlord class to receive the rental income, which was used to finance wars of further land acquisition. As matters turned out, hopes that industrial capitalism could reform itself along progressive lines to purge itself of its legacy from feudalism have come crashing down. World War I hit the global economy like a comet, pushing it into a new trajectory and catalyzing its evolution into an unanticipated form of finance capitalism.
"Instead of industrial capitalism increasing capital formation we are seeing finance capitalism strip capital."
It was unanticipated largely because most reformers spent so much effort advocating progressive policies that they neglected what Thorstein Veblen called the vested interests. Their Counter-Enlightenment is creating a world that would have been deemed a dystopia a century ago - something so pessimistic that no futurist dared depict a world run by venal and corrupt bankers, protecting as their prime customers the monopolies, real estate speculators and hedge funds whose economic rent, financial gambling and asset-price inflation is turned into a flow of interest in today's rentier economy. Instead of industrial capitalism increasing capital formation we are seeing finance capitalism strip capital, and instead of the promised world of leisure we are being drawn into one of debt peonage.
The financial travesty of democracy
The financial sector has redefined democracy by making claims that the Federal Reserve must be "independent" from democratically elected representatives, in order to act as the bank lobbyist in Washington. This makes the financial sector exempt from the democratic political process, despite the fact that today's economic planning is now centralized in the banking system. The result is a regime of insider dealings and oligarchy - rule by the wealthy few.
The economic fallacy at work is that bank credit is a veritable factor of production, an almost Physiocratic source of fertility without which growth could not occur. The reality is that the monopoly right to create interest-bearing bank credit is a free transfer from society to a privileged elite. The moral is that when we see a "factor of production" that has no actual labor-cost of production, it is simply an institutional privilege.
So this brings us to the most recent debate about "nationalizing" or "socializing" the banks. The Troubled Asset Relief Program (TARP) so far has been used for the following uses that I think can be truly deemed anti-social, not "socialist" in any form.
By the end of last year, $20 billion was used to pay bonuses and salaries to financial mismanagers, despite the plunge of their banks into negative equity. And to protect their interests, these banks continued to pay lobbying fees to persuade legislators to give them yet more special privileges.
"Do we really want to let banks 'pay back taxpayers' by engaging in yet more predatory financial practices."
While Citibank and other major institutions threatened to bring the financial system crashing down by being "too big to fail," over $100 billion of TARP funds was used to make them even bigger. Already teetering banks bought affiliates that had grown by making irresponsible and outright fraudulent loans. Bank of America bought Angelo Mozilo's Countrywide Financial and Merrill Lynch, while JP Morgan Chase bought Bear Stearns and other big banks bought WaMu and Wachovia.
Today's policy is to "rescue" these giant bank conglomerates by enabling them to "earn" their way out of debt - by selling yet more debt to an already over-indebted U.S. economy. The hope is to re-inflate real estate and other asset prices. But do we really want to let banks "pay back taxpayers" by engaging in yet more predatory financial practices vis-à-vis the economy at large? It threatens to maximize the margin of market price over direct costs of production, by building in higher financial charges. This is just the opposite policy from trying to bring prices for housing and infrastructure in line with technologically necessary costs. It certainly is not a policy to make the U.S. economy more globally competitive.
The Treasury's plan to "socialize" the banks, insurance companies and other financial institutions is simply to step in and take bad loans off their books, shifting the loss onto the public sector. This is the antithesis of true nationalization or "socialization" of the financial system. The banks and insurance companies quickly got over their initial knee-jerk fear that a government bailout would occur on terms that would wipe out their bad management, along with the stockholders and bondholders who backed this bad management. The Treasury has assured these mismanagers that "socialism" for them is a free gift. The primacy of finance over the rest of the economy will be affirmed, leaving management in place and giving stockholders a chance to recover by earning more from the economy at large, with yet more tax favoritism. (This means yet heavier taxes shifted onto consumers, raising their living costs accordingly.)
"The Treasury has assured these mismanagers that ‘socialism' for them is a free gift."
The bulk of wealth under capitalism - as under feudalism -always has come primarily from the public domain, headed by the land and formerly public utilities, capped most recently by the Treasury's debt-creating power. In effect, the Treasury creates a new asset ($11 trillion of new Treasury bonds and guarantees, e.g. the $5.2 trillion to Fannie and Freddie). Interest on these bonds is to be paid by new levies on labor, not on property. This is what is supposed to re-inflate housing, stock and bond prices - the money freed from property and corporate taxes will be available to be capitalized into yet new loans.
So the revenue hitherto paid as business taxes will still be paid - in the form of interest - while the former taxes will still be collected, but from labor. The fiscal-financial burden thus will be doubled. This is not a program to make the economy more competitive or raise living standards for most people. It is a program to polarize the U.S. economy even further between finance, insurance and real estate (FIRE) at the top and labor at the bottom.
Neoliberal denunciations of public regulation and taxation as "socialism" is really an attack on classical political economy - the "original" liberalism whose ideal was to free society from the parasitic legacy of feudalism. A truly socialized Treasury policy would be for banks to lend for productive purposes that contribute to real economic growth, not merely to increase overhead and inflate asset prices by enough to extract interest charges. Fiscal policy would aim to minimize rather than maximizing the price of home ownership and doing business, by basing the tax system on collecting the rent that is now being paid out as interest. Shifting the tax burden off wages and profits onto rent and interest was the core of classical political economy in the 18th and 19th centuries, as well as the Progressive Era and Social Democratic reform movements in the United States and Europe prior to World War I. But this doctrine and its reform program has been buried by the rhetorical smokescreen organized by financial lobbyists seeking to muddy the ideological waters sufficiently to mute popular opposition to today's power grab by finance capital and monopoly capital. Their alternative to true nationalization and socialization of finance is debt peonage, oligarchy and neo-feudalism. They have called this program "free markets."
Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com
The Language of Looting
Wednesday, 25 February 2009
by Michael Hudson
In order to steal literally everything, the Lords of Finance must render language incapable of describing the crime. "Society's basic grammar of thought, the vocabulary to discuss political and economic topics, is being turned inside-out." The banksters still think they can rule from the center of confusion. "Today's policy is to ‘rescue' these giant bank conglomerates by enabling them to ‘earn' their way out of debt - by selling yet more debt to an already over-indebted U.S. economy. The hope is to re-inflate real estate and other asset prices."
"Banking shares began to plunge Friday morning after Senator Dodd, the Connecticut Democrat who is chairman of the banking committee, said in an interview with Bloomberg Television that he was concerned the government might end up nationalizing some lenders "at least for a short time." Several other prominent policy makers - including Alan Greenspan, the former chairman of the Federal Reserve, and Senator Lindsey Graham of South Carolina - have echoed that view recently." -- Eric Dash, "Growing Worry on Rescue Takes a Toll on Banks," The New York Times, February 20, 2009
How is it that Alan Greenspan, free-market lobbyist for Wall Street, recently announced that he favored nationalization of America's banks - and indeed, mainly the biggest and most powerful? Has the old disciple of Ayn Rand gone Red in the night? Surely not.
The answer is that the rhetoric of "free markets," "nationalization" and even "socialism" (as in "socializing the losses") has been turned into the language of deception to help the financial sector mobilize government power to support its own special privileges. Having undermined the economy at large, Wall Street's public relations think tanks are now dismantling the language itself.
Exactly what does "a free market" mean? Is it what the classical economists advocated - a market free from monopoly power, business fraud, political insider dealing and special privileges for vested interests - a market protected by the rise in public regulation from the Sherman Anti-Trust law of 1890 to the Glass-Steagall Act and other New Deal legislation? Or is it a market free for predators to exploit victims without public regulation or economic policemen - the kind of free-for-all market that the Federal Reserve and Security and Exchange Commission (SEC) have created over the past decade or so? It seems incredible that people should accept today's neoliberal idea of "market freedom" in the sense of neutering government watchdogs, Alan Greenspan-style, letting Angelo Mozilo at Countrywide, Hank Greenberg at AIG, Bernie Madoff, Citibank, Bear Stearns and Lehman Brothers loot without hindrance or sanction, plunge the economy into crisis and then use Treasury bailout money to pay the highest salaries and bonuses in U.S. history.
"Having undermined the economy at large, Wall Street's public relations think tanks are now dismantling the language itself."
Terms that are the antithesis of "free market" also are being turned into the opposite of what they historically have meant. Take today's discussions about nationalizing the banks. For over a century nationalization has meant public takeover of monopolies or other sectors to operate them in the public interest rather than leaving them to special interests. But when neoliberals use the word "nationalization" they mean a bailout, a government giveaway to the financial interests.
Doublethink and doubletalk with regard to "nationalizing" or "socializing" the banks and other sectors is a travesty of political and economic discussion from the 17th through mid-20th centuries. Society's basic grammar of thought, the vocabulary to discuss political and economic topics, is being turned inside-out in an effort to ward off discussion of the policy solutions posed by the classical economists and political philosophers that made Western civilization "Western."
Today's clash of civilization is not really with the Orient; it is with our own past, with the Enlightenment itself and its evolution into classical political economy and Progressive Era social reforms aimed at freeing society from the surviving trammels of European feudalism. What we are seeing is propaganda designed to deceive, to distract attention from economic reality so as to promote the property and financial interests from whose predatory grasp classical economists set out to free the world. What is being attempted is nothing less than an attempt to destroy the intellectual and moral edifice of what took Western civilization eight centuries to develop, from the 12th century Schoolmen discussing Just Price through 19th and 20th century classical economic value theory.
"What we are seeing is propaganda designed to deceive, to distract attention from economic reality."
Any idea of "socialism from above," in the sense of "socializing the risk," is old-fashioned oligarchy - kleptocratic statism from above. Real nationalization occurs when governments act in the public interest to take over private property. The 19th-century program to nationalize the land (it was the first plank of the Communist Manifesto) did not mean anything remotely like the government taking over estates, paying off their mortgages at public expense and then giving it back to the former landlords free and clear of encumbrances and taxes. It meant taking the land and its rental income into the public domain, and leasing it out at a user fee ranging from actual operating cost to a subsidized rate or even freely as in the case of streets and roads.
Nationalizing the banks along these lines would mean that the government would supply the nation's credit needs. The Treasury would become the source of new money, replacing commercial bank credit. Presumably this credit would be lent out for economically and socially productive purposes, not merely to inflate asset prices while loading down households and business with debt as has occurred under today's commercial bank lending policies.
How neoliberals falsify the West's political history
The fact that today's neoliberals claim to be the intellectual descendants of Adam Smith make it necessary to restore a more accurate historical perspective. Their concept of "free markets" is the antithesis of Smith's. It is the opposite of that of the classical political economists down through John Stuart Mill, Karl Marx and the Progressive Era reforms that sought to create markets free of extractive rentier claims by special interests whose institutional power can be traced back to medieval Europe and its age of military conquest.
Economic writers from the 16th through 20th centuries recognized that free markets required government oversight to prevent monopoly pricing and other charges levied by special privilege. By contrast, today's neoliberal ideologues are public relations advocates for vested interests to depict a "free market" is one free of government regulation, "free" of anti-trust protection, and even of protection against fraud (as evidenced by the SEC's refusal to move against Madoff, Enron, Citibank et al.). The neoliberal ideal of free markets is thus basically that of a bank robber or embezzler, wishing for a world without police so as to be sufficiently free to siphon off other peoples' money without constraint.
The Chicago Boys in Chile realized that markets free for predatory finance and insider privatization could only be imposed at gunpoint. These free-marketers closed down every economics department in Chile, every social science department outside of the Catholic University where the Chicago Boys held sway. Operation Condor arrested, exiled or murdered tens of thousands of academics, intellectuals, labor leaders and artists. Only by totalitarian control over the academic curriculum and public media backed by an active secret police and army could "free markets" neoliberal style be imposed. The resulting privatization at gunpoint became an exercise in what Marx called "primitive accumulation" - seizure of the public domain by political elites backed by force. It is a free market William-the-Conqueror or Yeltsin-kleptocrat style, with property parceled out to the companions of the political or military leader.
"The neoliberal ideal of free markets is basically that of a bank robber or embezzler, wishing for a world without police."
All this was just the opposite of the kind of free markets that Adam Smith had in mind when he warned that businessmen rarely get together but to plot ways to fix markets to their advantage. This is not a problem that troubled Mr. Greenspan or the editorial writers of the New York Times and Washington Post. There really is no kinship between their neoliberal ideals and those of the Enlightenment political philosophers. For them to promote an idea of free markets as ones "free" for political insiders to pry away the public domain for themselves is to lower an intellectual Iron Curtain on the history of economic thought.
The classical economists and American Progressives envisioned markets free of economic rent and interest - free of rentier overhead charges and monopoly price gouging, free of land-rent, interest paid to bankers and wealthy financial institutions, and free of taxes to support an oligarchy. Governments were to base their tax systems on collecting the "free lunch" of economic rent, headed by that of favorable locations supplied by nature and given market value by public investment in transportation and other infrastructure, not by the efforts of landlords themselves.
The argument between Progressive Era reformers, socialists, anarchists and individualists thus turned on the political strategy of how best to free markets from debt and rent. Where they differed was on the best political means to achieve it, above all the role of the state. There was broad agreement that the state was controlled by vested interests inherited from feudal Europe's military conquests and the world that was colonized by European military force. The political question at the turn of the 20th century was whether peaceful democratic reform could overcome the political and even military resistance wielded by the Old Regime using violence to retain its "rights." The ensuing political revolutions were grounded in the Enlightenment, in the legal philosophy of men such as John Locke, political economists such as Adam Smith, John Stuart Mill and Marx. Power was to be used to free markets from the predatory property and financial systems inherited from feudalism. Markets were to be free of privilege and free lunches, so that people would obtain income and wealth only by their own labor and enterprise. This was the essence of the labor theory of value and its complement, the concept of economic rent as the excess of market price over socially necessary cost-value.
Although we now know that markets and prices, rent and interest, contractual formalities and nearly all the elements of economic enterprise originated in the "mixed economies" of Mesopotamia in the fourth millennium BC and continued throughout the mixed public/private economies of classical antiquity, the discussion was so politically polarized that the idea of a mixed economy with checks and balances received scant attention a century ago.
"Power was to be used to free markets from the predatory property and financial systems inherited from feudalism."
Individualists believed that shrinking central governments would shrink the control mechanism by which the vested interests extracted wealth without work or enterprise of their own. Socialists saw that a strong government was needed to protect society from the attempts of property and finance to use their gains to monopolize economic and political power. Both ends of the political spectrum aimed at the same objective - to bring prices down to actual costs of production. The common aim was to maximize economic efficiency so as to pass on the fruits of the Industrial and Agricultural Revolutions to the population at large. This required blocking the rentier class of interlopers from grabbing the public domain and controlling the allocation of resources. Socialists did not believe this could be done without taking the state's political and legal power into their own hands. Marxists believed that a revolution was necessary to reclaim property rent for the public domain, and to enable governments to create their own credit rather than borrow at interest from commercial bankers and wealthy bondholders. The aim was not to create a bureaucracy but to free society from the surviving absentee ownership power of the vested property and financial interests.
All this history of economic thought has been as thoroughly expunged from today's academic curriculum as it has from popular discussion. Few people remember the great debate at the turn of the 20th century: Would the world progress fairly quickly from Progressive Era reforms to outright socialism - public ownership of basic economic infrastructure, natural monopolies (including the banking system) and the land itself (and to Marxists, of industrial capital as well)? Or, could the liberal reformers of the day - individualists, land taxers, classical economists in the tradition of Mill, and American institutionalists such as Simon Patten - retain capitalism's basic structure and private property ownership? If they could do so, they recognized that it would have to be in the context of regulating markets and introducing progressive taxation of wealth and income. This was the alternative to outright "state" ownership. Today's extreme "free market" idea is a dumbed-down caricature of this position.
"A ‘free market' was an active political creation and required regulatory vigilance."
All sides viewed the government as society's "brain," its forward planning organ. Given the complexity of modern technology, humanity would shape its own evolution. Instead of evolution occurring by "primitive accumulation," it could be planned deliberately. Individualists countered that no human planner was sufficiently imaginative to manage the complexity of markets, but endorsed the need to strip away all forms of unearned income - economic rent and the rise in land prices that Mill called the "unearned increment." This involved government regulation to shape markets. A "free market" was an active political creation and required regulatory vigilance.
As public relations advocates for the vested interests and special rentier privilege, today's "neoliberal" advocates of "free" markets seek to maximize economic rent - the free lunch of price in excess of cost-value, not to free markets from rentier charges. So misleading a pedigree only could be achieved by outright suppression of knowledge of what Locke, Smith and Mill really wrote. Attempts to regulate "free markets" and limit monopoly pricing and privilege are conflated with "socialism," even with Soviet-style bureaucracy. The aim is to deter the analysis of what a "free market" really is: a market free of unnecessary costs: monopoly rents, property rents and financial charges for credit that governments can create freely.
Political reform to bring market prices in line with socially necessary cost-value was the great economic issue of the 19th century. The labor theory of intrinsic cost-value found its counterpart in the theory of economic rent: land rent, monopoly price gouging, interest and other returns to special privilege that increased market prices purely by institutional property claims. The discussion goes all the way back to the medieval churchmen defining Just Price. The doctrine originally was applied to the proper fees that bankers could charge, and later was extended to land rent, then to the monopolies that governments created and sold off to creditors in an attempt to extricate themselves from debt.
Reformists and more radical socialists alike sought to free capitalism of its egregious inequities, above all its legacy from Europe's Dark Age of military conquest when invading warlords seized lands and imposed an absentee landlord class to receive the rental income, which was used to finance wars of further land acquisition. As matters turned out, hopes that industrial capitalism could reform itself along progressive lines to purge itself of its legacy from feudalism have come crashing down. World War I hit the global economy like a comet, pushing it into a new trajectory and catalyzing its evolution into an unanticipated form of finance capitalism.
"Instead of industrial capitalism increasing capital formation we are seeing finance capitalism strip capital."
It was unanticipated largely because most reformers spent so much effort advocating progressive policies that they neglected what Thorstein Veblen called the vested interests. Their Counter-Enlightenment is creating a world that would have been deemed a dystopia a century ago - something so pessimistic that no futurist dared depict a world run by venal and corrupt bankers, protecting as their prime customers the monopolies, real estate speculators and hedge funds whose economic rent, financial gambling and asset-price inflation is turned into a flow of interest in today's rentier economy. Instead of industrial capitalism increasing capital formation we are seeing finance capitalism strip capital, and instead of the promised world of leisure we are being drawn into one of debt peonage.
The financial travesty of democracy
The financial sector has redefined democracy by making claims that the Federal Reserve must be "independent" from democratically elected representatives, in order to act as the bank lobbyist in Washington. This makes the financial sector exempt from the democratic political process, despite the fact that today's economic planning is now centralized in the banking system. The result is a regime of insider dealings and oligarchy - rule by the wealthy few.
The economic fallacy at work is that bank credit is a veritable factor of production, an almost Physiocratic source of fertility without which growth could not occur. The reality is that the monopoly right to create interest-bearing bank credit is a free transfer from society to a privileged elite. The moral is that when we see a "factor of production" that has no actual labor-cost of production, it is simply an institutional privilege.
So this brings us to the most recent debate about "nationalizing" or "socializing" the banks. The Troubled Asset Relief Program (TARP) so far has been used for the following uses that I think can be truly deemed anti-social, not "socialist" in any form.
By the end of last year, $20 billion was used to pay bonuses and salaries to financial mismanagers, despite the plunge of their banks into negative equity. And to protect their interests, these banks continued to pay lobbying fees to persuade legislators to give them yet more special privileges.
"Do we really want to let banks 'pay back taxpayers' by engaging in yet more predatory financial practices."
While Citibank and other major institutions threatened to bring the financial system crashing down by being "too big to fail," over $100 billion of TARP funds was used to make them even bigger. Already teetering banks bought affiliates that had grown by making irresponsible and outright fraudulent loans. Bank of America bought Angelo Mozilo's Countrywide Financial and Merrill Lynch, while JP Morgan Chase bought Bear Stearns and other big banks bought WaMu and Wachovia.
Today's policy is to "rescue" these giant bank conglomerates by enabling them to "earn" their way out of debt - by selling yet more debt to an already over-indebted U.S. economy. The hope is to re-inflate real estate and other asset prices. But do we really want to let banks "pay back taxpayers" by engaging in yet more predatory financial practices vis-à-vis the economy at large? It threatens to maximize the margin of market price over direct costs of production, by building in higher financial charges. This is just the opposite policy from trying to bring prices for housing and infrastructure in line with technologically necessary costs. It certainly is not a policy to make the U.S. economy more globally competitive.
The Treasury's plan to "socialize" the banks, insurance companies and other financial institutions is simply to step in and take bad loans off their books, shifting the loss onto the public sector. This is the antithesis of true nationalization or "socialization" of the financial system. The banks and insurance companies quickly got over their initial knee-jerk fear that a government bailout would occur on terms that would wipe out their bad management, along with the stockholders and bondholders who backed this bad management. The Treasury has assured these mismanagers that "socialism" for them is a free gift. The primacy of finance over the rest of the economy will be affirmed, leaving management in place and giving stockholders a chance to recover by earning more from the economy at large, with yet more tax favoritism. (This means yet heavier taxes shifted onto consumers, raising their living costs accordingly.)
"The Treasury has assured these mismanagers that ‘socialism' for them is a free gift."
The bulk of wealth under capitalism - as under feudalism -always has come primarily from the public domain, headed by the land and formerly public utilities, capped most recently by the Treasury's debt-creating power. In effect, the Treasury creates a new asset ($11 trillion of new Treasury bonds and guarantees, e.g. the $5.2 trillion to Fannie and Freddie). Interest on these bonds is to be paid by new levies on labor, not on property. This is what is supposed to re-inflate housing, stock and bond prices - the money freed from property and corporate taxes will be available to be capitalized into yet new loans.
So the revenue hitherto paid as business taxes will still be paid - in the form of interest - while the former taxes will still be collected, but from labor. The fiscal-financial burden thus will be doubled. This is not a program to make the economy more competitive or raise living standards for most people. It is a program to polarize the U.S. economy even further between finance, insurance and real estate (FIRE) at the top and labor at the bottom.
Neoliberal denunciations of public regulation and taxation as "socialism" is really an attack on classical political economy - the "original" liberalism whose ideal was to free society from the parasitic legacy of feudalism. A truly socialized Treasury policy would be for banks to lend for productive purposes that contribute to real economic growth, not merely to increase overhead and inflate asset prices by enough to extract interest charges. Fiscal policy would aim to minimize rather than maximizing the price of home ownership and doing business, by basing the tax system on collecting the rent that is now being paid out as interest. Shifting the tax burden off wages and profits onto rent and interest was the core of classical political economy in the 18th and 19th centuries, as well as the Progressive Era and Social Democratic reform movements in the United States and Europe prior to World War I. But this doctrine and its reform program has been buried by the rhetorical smokescreen organized by financial lobbyists seeking to muddy the ideological waters sufficiently to mute popular opposition to today's power grab by finance capital and monopoly capital. Their alternative to true nationalization and socialization of finance is debt peonage, oligarchy and neo-feudalism. They have called this program "free markets."
Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com
Wednesday, January 14, 2009
Two more Ponzi schemes uncovered
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5485064.ece
January 10, 2009
Two more Ponzi schemes uncovered
Tom Bawden
The US Government moved to clamp down on fraudulent Ponzi schemes in the wake of the $50 billion (£33 billion) Bernard Madoff scandal, by charging two men for allegedly operating two similar schemes.
The US Securities and Exchange Commission (SEC) charged a fund manager based in the Philadelphia area with operating a $50 million Ponzi scheme, in which he paid off early investors with money from later investors.
In a joint filing, the SEC and the Commodity Futures Trading Commission allege that Joseph Forte, 53, reported consistently strong results to as many as 80 investors even though he routinely lost money, withdrew millions of dollars in personal fees and used recent investors’ contributions to repay earlier backers.
In a separate case, the SEC and the Department of Justice charged Richard Piccoli, an 82-year-old, with running a Ponzi scheme through his companies, Gen See Capital Corp and Gen Unlimited. Mr Piccoli, of Williamsville, New York, raised most of his money from clergy, Catholic parishioners, senior citizens and cemetery funds, many of them recruited through advertisements in Catholic newspapers.
US authorities are keen to be seen to be tackling Ponzi schemes to help to restore confidence among investors, which is fragile as a result of the housing crisis and the credit crunch, in the wake of the Madoff scandal.
They are expected to follow these charges with others as the publicity surrounding the Madoff scandal combines with the increasing scrutiny of potentially similar schemes to flush out further fraudsters.
Joel Cohen, the deputy head of Clifford Chance’s litigation and dispute resolution practice in New York, said: “It’s consistent with previous times when markets are down. The rocks get exposed when the tide has washed away.”
Mr Forte, who is based in Broomall, Philadelphia, has reported annual returns of between 18.5 per cent and 38 per cent since 1995, claming that the profits came from successfully betting on the direction of the Standard & Poor’s 500 index, the complaint said.
In fact, Mr Forte consistently lost money as he racked up trading losses of $3.3 million on the portion of the money he invested, He also withdrew for himself $23.1 million he received from investors , the complaint alleges.
Mr Piccoli’s scheme, which promised to deliver annual returns of at least 7.1 per cent from investing in high-quality residential mortgages, allegedly has taken at least $17 million from investors since 2004. Records show no property transactions, the complaint said.
January 10, 2009
Two more Ponzi schemes uncovered
Tom Bawden
The US Government moved to clamp down on fraudulent Ponzi schemes in the wake of the $50 billion (£33 billion) Bernard Madoff scandal, by charging two men for allegedly operating two similar schemes.
The US Securities and Exchange Commission (SEC) charged a fund manager based in the Philadelphia area with operating a $50 million Ponzi scheme, in which he paid off early investors with money from later investors.
In a joint filing, the SEC and the Commodity Futures Trading Commission allege that Joseph Forte, 53, reported consistently strong results to as many as 80 investors even though he routinely lost money, withdrew millions of dollars in personal fees and used recent investors’ contributions to repay earlier backers.
In a separate case, the SEC and the Department of Justice charged Richard Piccoli, an 82-year-old, with running a Ponzi scheme through his companies, Gen See Capital Corp and Gen Unlimited. Mr Piccoli, of Williamsville, New York, raised most of his money from clergy, Catholic parishioners, senior citizens and cemetery funds, many of them recruited through advertisements in Catholic newspapers.
US authorities are keen to be seen to be tackling Ponzi schemes to help to restore confidence among investors, which is fragile as a result of the housing crisis and the credit crunch, in the wake of the Madoff scandal.
They are expected to follow these charges with others as the publicity surrounding the Madoff scandal combines with the increasing scrutiny of potentially similar schemes to flush out further fraudsters.
Joel Cohen, the deputy head of Clifford Chance’s litigation and dispute resolution practice in New York, said: “It’s consistent with previous times when markets are down. The rocks get exposed when the tide has washed away.”
Mr Forte, who is based in Broomall, Philadelphia, has reported annual returns of between 18.5 per cent and 38 per cent since 1995, claming that the profits came from successfully betting on the direction of the Standard & Poor’s 500 index, the complaint said.
In fact, Mr Forte consistently lost money as he racked up trading losses of $3.3 million on the portion of the money he invested, He also withdrew for himself $23.1 million he received from investors , the complaint alleges.
Mr Piccoli’s scheme, which promised to deliver annual returns of at least 7.1 per cent from investing in high-quality residential mortgages, allegedly has taken at least $17 million from investors since 2004. Records show no property transactions, the complaint said.
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