"End of Wall Street Boom" - Must-read history

[JackRiddler]

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New page!

Adding accumulated news articles of interest, no endorsements implied.

Check the last page, I added some stuff at the end.


http://www.nytimes.com/2010/06/20/busin ... nted=print
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China Signals a Gradual Rise in Value of Its Currency

June 19, 2010

By KEITH BRADSHER

HONG KONG — China announced on Saturday evening that it would allow greater flexibility in the value of its currency, a move that could deflect growing international criticism of its economic policies and defuse one of the greatest sources of tension between Beijing and Washington.

The statement, by China’s central bank, was the clearest sign yet that the country would allow its currency to appreciate gradually against the dollar. World leaders are due to meet next week in Canada for economic talks, and China’s currency policies had appeared a certain source of conflict.

The United States has been leading a chorus of countries urging China to let its currency fluctuate. Many members of Congress believe China’s exchange rate policy gives it an unfair trade advantage, and a movement has been growing to take retaliatory trade action if China did not make an adjustment.

President Obama and the Treasury secretary, Timothy F. Geithner, immediately praised China’s action. “China’s decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy,” Mr. Obama said in a statement. The European Commission also said it supported the move.

But it remains to be seen whether the move will significantly rebalance the global trade picture. The People’s Bank of China was cautious in its statement about how far its currency, the renminbi, might fluctuate, warning explicitly that “the basis for large-scale appreciation of the RMB exchange rate does not exist.” Chinese officials said the renminbi would move in relation to an unspecified basket of currencies, not just the dollar. Experts said that depending on how the system was designed, China could avoid rapid fluctuations.

Mr. Geithner alluded to this in a statement, saying, “This is an important step, but the test will be how far and how fast they let the currency appreciate.”

The first sign of how much currency appreciation will be tolerated is likely to come Monday morning, when the Chinese government will set the initial trading band for the value of the renminbi in Shanghai trading.

China has kept its currency value low since mid-2008 by pegging it to that of the dollar and not letting it fluctuate. Any trend in the renminbi’s value would have been higher without the peg, making China’s goods more expensive to foreign consumers and possibly slowing the country’s export-based economy.

In its statement Saturday, the central bank said that the Chinese economy was strengthening after the crisis and that it was “desirable to proceed further with reform” of the currency. Tellingly, the announcement was made almost simultaneously in Chinese and in English, a rare occurrence, and Chinese officials advised foreign governments beforehand that they were about to take a new stance on currency policy, according to an American official.

Though China said its action was based on the interests of its own economy, it has been under rising pressure from the United States, the European Union, Brazil and India. Mr. Obama had held repeated conversations with President Hu Jintao over the last year or so, the most recent of which was two weeks ago, and Mr. Geithner traveled to China for meetings last month.

China has handled currency policy gingerly, fearing that its people might see appreciation as a step taken in response to foreign pressure that might not be in the national interest.

For Mr. Obama, China’s currency has been a particularly sticky problem. He also has been leaning on Beijing to help contain the nuclear programs of Iran and North Korea, to act as one of the main engines for the world economy, and to moderate its efforts to gain exclusive access to raw materials around the world needed to fuel China’s huge growth.

But Mr. Obama’s leverage has been minimal, and in the end it may have been the threat of a Congressional bill’s protectionist actions against Chinese products that convinced Beijing that it had to begin to free its currency.

That threat had been gaining ground in Congress among lawmakers convinced that China was keeping its currency value artificially low to the detriment of the American economy.

“China’s currency practice has cost American jobs and hurt American ranchers, farmers and small businesses,” Max Baucus, Democrat of Montana and the chairman of the Senate Finance Committee, said in a statement Saturday. “Today’s announcement is a welcome first step to help keep American businesses competitive and create more American jobs.”

Senator Charles E. Schumer, Democrat of New York, however, cautioned that unless China gave further detail to its plan, “we will have no choice but to move forward with our legislation.”

If the renminbi were to rise significantly, goods from the United States and other countries could eventually start displacing Chinese exports. That could help fuel economic growth in many of China’s trading partners, while braking growth in China, which has been expanding so fast that inflation is now accelerating.

Rising wages after recent labor unrest, combined with a stronger currency, may also make China a more attractive consumer market for international companies. But this could help Europe more than America, whose exports to China have been weak and concentrated in a few categories like aircraft, turbines and soybeans, while European companies have been more successful in selling high-end consumer goods there.

For China, a stronger renminbi will increase the buying power of its consumers and could make gasoline and other imported commodities seem less expensive. Faced with spreading labor unrest, particularly in the auto industry, the government has started to make an energetic effort to improve the standard of living of industrial workers.

But many economists inside and outside China have argued that currency appreciation is in China’s interest most of all. The country has been spending nearly one-tenth of its annual economic output to buy Treasury notes and bonds and other foreign securities while printing and selling renminbi, all in an effort to prevent the renminbi from rising against the dollar.

The renminbi has already risen with the dollar by 15 percent against the euro in the last two months. That has made Chinese officials nervous about the future competitiveness of Chinese sales to Europe, the biggest market for Chinese exports.

Cui Tiankai, a vice foreign minister, said on Friday that the value of the renminbi was not a subject for global discussion, the latest in a series of remarks by Chinese officials indicating strong nationalistic sensitivities about currency policy.

But people familiar with Chinese currency policy making have been saying for two months that the Chinese leadership agreed in early April to a change of direction. A devastating earthquake in western China in mid-April followed by worries about economic turmoil in Europe delayed action on the decision.


David E. Sanger and Sewell Chan contributed reporting from Washington.

http://www.nytimes.com/2010/06/20/busin ... nted=print
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Cost of Seizing Fannie and Freddie Surges for Taxpayers
June 19, 2010

By BINYAMIN APPELBAUM

CASA GRANDE, Ariz. — Fannie Mae and Freddie Mac took over a foreclosed home roughly every 90 seconds during the first three months of the year. They owned 163,828 houses at the end of March, a virtual city with more houses than Seattle. The mortgage finance companies, created by Congress to help Americans buy homes, have become two of the nation’s largest landlords.

Bill Bridwell, a real estate agent in the desert south of Phoenix, is among the thousands of agents hired nationwide by the companies to sell those foreclosures, recouping some of the money that borrowers failed to repay. In a good week, he sells 20 homes and Fannie sends another 20 listings his way.

“We’re all working for the government now,” said Mr. Bridwell on a recent sun-baked morning, steering a Hummer through subdivisions laid out like circuit boards on the desert floor.

For all the focus on the historic federal rescue of the banking industry, it is the government’s decision to seize Fannie Mae and Freddie Mac in September 2008 that is likely to cost taxpayers the most money. So far the tab stands at $145.9 billion, and it grows with every foreclosure of a three-bedroom home with a two-car garage one hour from Phoenix. The Congressional Budget Office predicts that the final bill could reach $389 billion.

Fannie and Freddie increased American home ownership over the last half-century by persuading investors to provide money for mortgage loans. The sales pitch amounted to a money-back guarantee: If borrowers defaulted, the companies promised to repay the investors.

Rather than actually making loans, the two companies — Fannie older and larger, Freddie created to provide competition — bought loans from banks and other originators, providing money for more lending and helping to hold down interest rates.

“Our business is the American dream of home ownership,” Fannie Mae declared in its mission statement, and in 2001 the company set a target of helping to create six million new homeowners by 2014. Here in Arizona, during a housing boom fueled by cheap land, cheap money and population growth, Fannie Mae executives trumpeted that the company would invest $15 billion to help families buy homes.

As it turns out, Fannie and Freddie increasingly were channeling money into loans that borrowers could not afford. As defaults mounted, the companies quickly ran low on money to honor their guarantees. The federal government, fearing that investors would stop providing money for new loans, placed the companies in conservatorship and took a 79.9 percent ownership stake, adding its own guarantee that investors would be repaid.

The huge and continually rising cost of that decision has spurred national debate about federal subsidies for mortgage lending. Republicans want to sever ties with Fannie and Freddie once the crisis abates. The Obama administration and Congressional Democrats have insisted on postponing the argument until after the midterm elections.

In the meantime, Fannie and Freddie are editing the results of the housing boom at public expense, removing owners who cannot afford their homes, reselling the houses at much lower prices and financing mortgage loans for the new owners.

The two companies together accounted for 17 percent of real estate sales in Arizona during the first four months of the year, almost three times their share of the market during the same period last year, according to an analysis by MDA DataQuick.

Valarie Ross, who lives in the Phoenix suburb of Avondale, has watched six of the nine homes visible from her lawn chair emptied by moving trucks during the last year. Four have been resold by the government. “One by one,” she said. “Just amazing.”

The population of Pinal County, where Mr. Bridwell lives and works, roughly doubled to 340,000 over the last decade. Developers built an entirely new city called Maricopa on land assembled from farmers. Buyers camped outside new developments, waiting to purchase homes. One builder laid out a 300-lot subdivision at the end of a three-mile dirt road and still managed to sell 30 of the homes.

Mr. Bridwell sold plenty of those houses during the boom, then cut workers as prices crashed. Now his firm, Golden Touch Realty, again employs as many people as at the height of the boom, all working exclusively for Fannie Mae. The payroll now includes a locksmith to secure foreclosed homes and two clerks devoted to federal paperwork.

Golden Touch gets more listings from Fannie Mae than any other firm in Pinal County. Mr. Bridwell said he was ready to jump because he remembered the last time the government ended up owning thousands of Arizona houses, after the late-1980s collapse of the savings and loan industry.

“The way I see it,” said Mr. Bridwell, whose glass-top desk displays membership cards from the Republican National Committee, “is that we’re getting these homes back into private hands.”

Selling a house generally costs the government about $10,000. The outsides are weeded and the insides are scrubbed. Stolen appliances are replaced, brackish pools are refilled. And until the properties are sold, they must be maintained. Fannie asks contractors to mow lawns twice a month during the summer, and pays them $80 each time. That’s a monthly grass bill of more than $10 million.

All told, the companies spent more than $1 billion on upkeep last year.

“We may be behind many loans on the same street, so we believe that it’s in everyone’s best interest to aggressively do property maintenance,” said Chris Bowden, the Freddie Mac executive in charge of foreclosure sales.

Prices have plunged. So by the time a home is resold, Fannie and Freddie on average recoup less than 60 percent of the money the borrower failed to repay, according to the companies’ financial filings. In Phoenix and other areas where prices have fallen sharply, the losses often are larger.

Foreclosures punch holes in neighborhoods, so residents, community groups and public officials are eager to see properties reoccupied. But there also is concern that investors are buying many foreclosures as rental properties, making it harder for neighborhoods to recover.

Real estate agents tend to favor investors because the sales close surely and quickly and there is the prospect of repeat business. But community advocates say that Fannie and Freddie have an obligation to sell houses to homeowners.

David Adame worked for Fannie Mae’s local office during the boom, on programs to make ownership more affordable. Now with prices down sharply, Mr. Adame sees a second chance to put people into homes they can afford.

“Yes, move inventory,” said Mr. Adame, now an executive focused on housing issues at Chicanos por la Causa, a Phoenix nonprofit group, “but if we just move inventory to investors, then what are we doing?”

Executives at both Fannie and Freddie say they have an overriding obligation to limit losses, but that they are taking steps to sell more homes to families.

Fannie Mae last summer announced that it would give people seeking homes a “first look” by not accepting offers from investors in the first 15 days that a property is on the market. It also offers to help buyers with closing costs, and prohibits buyers from reselling properties at a profit for 90 days, to discourage speculation. Fannie Mae said that 68.4 percent of buyers this year had certified that they would use the house as a primary residence.

Freddie Mac has adopted fewer programs, but it said it had sold about the same share of foreclosures to owner-occupants.

The companies also have agreed to sell foreclosed homes to nonprofits using grants from the federal Neighborhood Stabilization Program. Chicanos por la Causa, which won $137 million under the program in partnership with nonprofits in eight other states, plans to buy more than 200 homes in Phoenix in the next two years. It plans to renovate them to sell to local families.

The scale of such efforts is small. The home ownership rate in Phoenix continues to fall as foreclosures pile up and renters replace owners.

But John R. Smith, chief of Housing Our Communities, another Phoenix-area group using federal money to buy foreclosures, says he tries to focus on salvaging one property at a time.

“I tell them, ‘O.K., you want to unload 10 houses to that guy, fine,’ ” he said. “ ‘Now give me this one. And this one. And one over here.’ ”

[JackRiddler]

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And now for some heavier analysis.

Vijay Prashad and Michael Hudson with previews of G-20 and the new financial austerity wave the EU, UK and US. Darwin Bond-Graham's excellent article detailing the machinations behind the Peterson and related campaigns and the Kill Social Security Commission follows logically.

Nice capsule history of the G from Prashad.


http://counterpunch.org/prashad06212010.html
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Global Bonapartism

G-Spots and the Planet

June 21, 2010


By VIJAY PRASHAD

We are left with the politicians who think poorly of us, and who stand back with chaos in their pale old eyes whimpering, “That is not what we wanted. No, it was not to have gone that way.” They are old, but we have been very ill, and cannot yet send them away. - Bertram Warr (1917-1943).



When the Finance Ministers of the Advanced States set up the G7 in 1974-75, their tongues quivered with the taste of centuries of power. The Soviet Union had begun its plummet into obsolescence. Its collapse was held off by a decade through the rise of oil prices and the cannibalization of the remarkable achievements of an earlier generation. The Third World had threatened the established order with its vdemand for a New International Economic Order (1973), but that would quickly be dispatched through financial trickery, one that led directly to the massive debt crisis of the 1980s and the inflation of the power of Wall Street, the City of London and the Frankfurt Finanzplatz. No rivals stood in the way of the G7. The European and Japanese Ministers happily bound their economies into dollar seigniorage, with the euro and the yen now secondary currencies in the world of international settlements. The United States was the leading edge. Its wingmen stood around: Canada, France, Germany, Italy, Japan and the United Kingdom. Everyone beamed. The future was theirs.

Like Achilles, the G7 not only killed its Hector, the hopes of the rest of the planet, but it now tied the countries of Africa, Asia and Latin America behind its chariot and dragged it across the battlefield. Structural adjustment conditionalities, aerial bombardment: this was the loot and pillage of the era that opened up in 1975.

In late June, the G7 (with Russia, the G8) will meet in Toronto, Canada. This is its 33rd official gathering; it might be its final one. Alongside the G8, Canada will also host the G20. The G20 was formed in 1999 at the initiative of the “locomotives of the South,” the BRIC countries (Brazil, Russia, India and China), South Africa (who joins them in another iteration, the IBSA -- India, Brazil and South Africa) and Mexico. A smart fellow at Goldman Sachs coined the acronym BRIC, but it has stuck, and it means more than that quaint sounding term from the 1990s, “emerging economies.” The G20 began as a “mechanism for informal dialogue.” Circumstances favored a greater role: the global financial crisis from 2008 onward opened the door. The “advanced” economies turned for consideration to their creditors among the BRIC states. This moment of crisis pushed the G20 to ask for more than an informal status. At the 2009 G20 Summit in Pittsburg, the eminences pledged, “Today, we designated the G20 as the premier forum for our international economic cooperation.”

Canada, Japan and the United Kingdom are the least pleased with the demise of the G8, since this has been their major platform to assert their otherwise declined global presence (this applies in particular to Japan, which has seen its influence decline relative to the rise of China’s authority). Because of these powers, the G8 might continue to meet, but it will not be able to act as the executive committee of the G20. The others might not allow that. They can see the benefit of having China in the room, and India and Brazil. Keep your friends close, is the theory, but your enemies closer.

The Road to the High Table

Since the 1950s, it has been the effort of the Atlantic states to squash the march of political progress in Africa, Asia, and Latin America. Independent political action was frowned upon. The Dulles brothers felt that all this talk of “non-alignment” was simply a Trojan Horse for Bolshevism. John Foster Dulles shared bugbears with Winston Churchill. Both were obsessed with Communism, what Dulles called “godless terrorism.” One can imagine John Foster chuckling as Churchill says, “The failure to strangle Bolshevism at its birth and to bring Russia, then prostrate, by one means or another, into the general democratic system, lies heavy upon us today” (1949). If Russia finally entered the G7, and, despite its occasional bouts of independent thinking, went along with the Atlantic powers, the countries of the Third World project were less pliable. Even when they give themselves over to the broad outlines of the Atlantic project, they still do things that are unacceptable: as when Turkey and Brazil cut the deal with Iran on nuclear fuel.

Unwilling to be fully servile, the “locomotives of the South” have tried to make the most of differences among the G7 to edge their way onto the table. The weak link was France’s Sarkozy. In 2003, the French had already invited the Plus Five countries (Brazil, China, India, Mexico and South Africa) to the Evain Summit of the G7. At the next two summits (Gleneagles, 2005, and Heilingendamm, 2007) the G7 leaders spoke timidly of trying to “institutionalize the dialogue.” The Plus Five saw this as insufficient. Shortly after his installation as France’s President in 2007, Sarkozy put the case for the Plus Five. It was his Gaullist moment, to create some daylight between the Anglo-Saxon attack on Iraq and France’s “benign” colonial history.

In January 2008, at a meeting in Delhi, Sarkozy told business leaders, “At the G8 summit, eight countries meet for two and a half days and on the third day invite five developing nations – Brazil, China, India, Mexico and, South Africa– for discussions over lunch. This is injustice to 2.5 billion inhabitants of these nations. Why this third grade treatment to them? I want that the next G8 summit be converted into a G13 summit.” Sarko’s indignation stops at his borders. The third-grade treatment is acceptable to the racaille in the banlieues, but not to the leadership of their homelands.

The Plus Five states wanted a formal role in the G8, but that was not all. There is an old, unaddressed demand from them to bring democracy to the UN Security Council, where only five powers have a permanent seat and a veto (China, France, Russia, United Kingdom, and the United States). India, Brazil and South Africa, in particular, have called for regional representation – another Asian state, a South American one and an African one. The call has fallen on deaf years.

The other important demand has been for democracy in the IMF and the World Bank, two institutions that are dominated by the Europeans and the United States. As the country with vast surpluses, China has made the loudest noises, in the most genial way, for greater voting power in the IMF. At the Pittsburg meeting of the G20 in 2009, the powers gave the nod to open up the vote share in the IMF (the United States has the largest block of votes, 17 per cent, while China now has the sixth largest, with 3.7 per cent). “The voices of those countries is underrepresented, and their economies are developing very rapidly. If those facts are not adequately reflected, the IMF will not be able to maintain its credibility and legitimacy,” said Sadakazu Tanigaki the Japanese Finance Minister in 2006 (he is now the leader of the opposition Liberal Democratic Party, and likely Prime Minister if the LDP comes back to power).

Entry into the Executive Committee of the IMF, which is what has been gained, is of little value. It barely takes any decisions. It is a sleepy sinecure for Central Bank officials who are near retirement. The IMF’s Independent Evaluation Office report from 2008 acknowledges this. In 2007, the German Minister of Finance, Peter Steinbruck, told the International Monetary and Financial Committee that Germany would advocate for “fair representation” based on “relative weight in the global economy.” The problem is how one calculates that. The Indian Finance Minister P. Chidambaram felt that if GDP is the gold standard, then it must be converted using purchasing power parities. To quote Aerosmith, dream on.

The Lehman collapse provided the spur to bring the Plus Five to the high table. But the push for institutional reform predates the financial crisis. It comes from an earlier tradition, one articulated in the 1990 South Commission Report, The Challenge of the South, to push the locomotives to the front and hope that they will not ignore the challenges of the rest of the African, Asian and Latin American states, as well as the needs of the working peoples of the North. That was the game plan. The seats are now occupied, but it is unlikely that those who occupy them have either the subjective or objective pressures to champion the disposable peoples of the planet.

Capitalist Revisionism

The G20 met in Pittsburg when it appeared possible that global capitalism might implode. Talk of global Keynesianism was in the air, and it looked like neo-liberalism was on its knees. The final communiqué from Pittsburg did not disguise its true intentions, which was to use the stimulus to get over the slump and then return to business as usual. “We will avoid any premature withdrawal of surplus,” the eminences wrote, “at the same time, we will prepare our exit strategies and, when the time is right, withdraw our extraordinary policy support in a cooperative and coordinated way, maintaining our commitment to fiscal responsibility.” There is nothing here to indicate a fundamental course correction.

A real alternative was proposed in the UN Conference at the Highest Level on the World Financial and Economic Crisis and Its Impact on Development (June 1-3, 2009). It was a gasp from the UN Left – pushed by the General Assembly’s President Miguel d’Escoto Brockmann and organized by former World Bank lead economist Joseph Stiglitz. They drew their judgment from an October 2008 panel that included India’s Prabhat Patnaik, Japan’s Sakiko Fukuda-Parr and Kenya’s Calestous Juma. In April 2009, the Commission of Experts put out a set of recommendations. The text is 18 pages long. It called for the discussion to return to the G-192 (the UN), and conduct a colonoscopy of the financial system. It is now available from the New Press as The Stiglitz Report (Spring 2010).

The finance ministers of the G20, called the sherpas, met in Busan, South Korea earlier this month to create the agenda and draft documents for the G20 summit. The ministers met in the lush Paradise Hotel. They told the press that it was time for austerity. Yoon Jeung-Hyun, South Korea’s Minister for Strategy and Finance, led the charge. In 1992, he had pushed South Korea’s capital market liberalization. Yoon is a veteran not only of crisis creation, but also of crisis management (when South Korea begged the IMF and its creditors for leeway in the J. P. Morgan building in 1997). The Pusan text was interpreted by Yoon, “The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability, differentiated for and tailored to national circumstances. Those countries with serious fiscal challenges need to accelerate the pace of consolidation.” The keyword here is “consolidation,” which in the argot of the financiers means the reduction of government deficits and debt accumulation. Or, in almost popular language, the Pusan sherpas called for austerity.

The Greek financial meltdown provided the lesson. That Goldman Sachs had colluded with the Greek ruling elite to enable and mask its debt was not the issue. The lesson from the Greek debacle was that European countries had to hastily bring down their deficits. These deficits had to now be paid for not by higher taxes on the rich (or even more effective tax collection on extant rates), but by cuts in government social spending and on effective taxations of all kinds on the working-class. The consumption of the elite could not be touched, but the consumption of the poor, low as it is, is going to be curtailed. The newly elected Conservatives in the UK hastened to slash government spending, with the Conservative leader, David Cameron, telling his fellows to change their “whole way of life.”

Angela Merkel’s German conservatives were not far behind with their cuts; this after Merkel forced the Greeks to wield their own hatchet. An 80 billion euro cut will start the process, with more in the wings. “The direction is the right one,” said an editorial in Bild, “The government is saving money on items it no longer wants to afford and that can only be financed through debt. Every private individual would do the same with his finances. The program isn’t heartless.” Actually, the program is brutal.

During the Pusan meeting, the IMF’s Dominique Strauss-Kahn went to Spain to validate the austerity program of Prime Minister Zapatero. Both are socialists. Strauss-Kahn is the presumptive Socialist candidate for the 2012 election. He was the architect of the privatization program that doomed the last socialist government (led by Lionel Jospin). Zapatero is going to cut 15 billion euros from his budget. Spain is “moving in absolutely the right direction,” anointed Strauss-Kahn. The new polices are a “shot in the arm.” Even Merkel expressed her “full confidence in Spain.” Not so the workers, who mimic their Greek comrades on the Spanish streets.

Obama sent his encyclical to the G20. He worried that Europe was too hasty in the turn to austerity. Obama cannot afford to follow them. He has neither the political capital nor the political will. In the past, he wrote, the “stimulus was too quickly withdrawn and resulted in renewed hardships and recession.” Obama wants “credible plans,” which means another route. He cannot afford to be outside, what David Cameron called, “the international mainstream” of debt management. It would look awkward.

Less awkward for Obama is to blame China. That is now an established art in Washington. The current theme is to demand that China devalue its currency, and thereby administer a reduction of its surplus dollars. There is a demand that the Chinese government needs to push polices that increase domestic consumption and reduce its domestic saving rate. The Chinese need to be made into consumers. They are too thrifty. Currently the personal consumption of the vast Chinese population is only 16 per cent of that of the U. S. population. If the Chinese were to become America, imagine the ecological stress. The champion of “green capitalism” has not thought that through.

Hu Jintao is a crafty politician. To forestall U. S. criticism, the Chinese have loosed the yuan’s peg to the dollar. It will not do what Washington wants, but it will allow Hu to claim he has done what he can and yet do little. Beijing promised as much in April, before Hu’s visit to Washington. Little came of it. The Chinese are equally unprepared to slow down on the stimulus – at $585 billion, it allowed the Chinese economy to grow by 8.7 per cent last year. To manage the unrest in the country, the leadership has looked the other way during strike action against some of the export-processing firms. Hu has his own problems. He won’t be Obama’s sherpa.

At Toronto, the main card will be Obama v. Merkel. What the newly enfranchised G20 will do is unclear. It has a place at the table, but it has none of the vision of the Bolivarians (Venezuela wants to close down the IMF, and Ecuador has defaulted on the Odious Debts). Neither do the “locomotives of the South” have an agenda in common. Will they be spectators, watching Obama and Merkel circle each other, or will they offer a third way, perhaps putting forward a few of the proposals from the Stiglitz Report? I put my money on them being spectators, but I’d love to be wrong.

Vijay Prashad is the George and Martha Kellner Chair of South Asian History and Director of International Studies at Trinity College, Hartford, CT His most recent book, The Darker Nations: A People's History of the Third World, won the Muzaffar Ahmad Book Prize for 2009. The Swedish and French editions are just out. He can be reached at: vijay.prashad@trincoll.edu

http://counterpunch.org/hudson06252010.html
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EU Today, US Tomorrow
Europe's Fiscal Dystopia: the "New Austerity" Road

June 25 - 27, 2010


By MICHAEL HUDSON

Europe is committing fiscal suicide – and will have little trouble finding allies at this weekend’s G-20 meetings in Toronto. Despite the deepening Great Recession threatening to bring on outright depression, European Central Bank (ECB) president Jean-Claude Trichet and prime ministers from Britain’s David Cameron to Greece’s George Papandreou (president of the Socialist International) and Canada’s host, Conservative Premier Stephen Harper, are calling for cutbacks in public spending.

The United States is playing an ambiguous role. The Obama Administration is all for slashing Social Security and pensions, euphemized as “balancing the budget.” Wall Street is demanding “realistic” write-downs of state and local pensions in keeping with the “ability to pay” (that is, to pay without taxing real estate, finance or the upper income brackets). These local pensions have been left unfunded so that communities can cut real estate taxes, enabling site-rental values to be pledged to the banks of interest. Without a debt write-down (by mortgage bankers or bondholders), there is no way that any mathematical model can come up with a means of paying these pensions. To enable workers to live “freely” after their working days are over would require either (1) that bondholders not be paid (“unthinkable”) or (2) that property taxes be raised, forcing even more homes into negative equity and leading to even more walkaways and bank losses on their junk mortgages. Given the fact that the banks are writing national economic policy these days, it doesn’t look good for people expecting a leisure society to materialize any time soon.

The problem for U.S. officials is that Europe’s sudden passion for slashing public pensions and other social spending will shrink European economies, slowing U.S. export growth. U.S. officials are urging Europe not to wage its fiscal war against labor quite yet. Best to coordinate with the United States after a modicum of recovery.

Saturday and Sunday will see the six-month mark in a carefully orchestrated financial war against the “real” economy. The buildup began here in the United States. On February 18, President Obama stacked his White House Deficit Commission (formally the National Commission on Fiscal Responsibility and Reform) with the same brand of neoliberal ideologues who comprised the notorious 1982 Greenspan Commission on Social Security “reform.”

The pro-financial, anti-labor and anti-government restructurings since 1980 have given the word “reform” a bad name. The commission is headed by former Republican Wyoming Senator Alan Simpson (who explained derisively that Social Security is for the “lesser people”) and Clinton neoliberal Erskine Bowles, who led the fight for the Balanced Budget Act of 1997. Also on the committee are bluedog Democrat Max Baucus of Montana (the pro-Wall Street Finance Committee chairman). The result is an Obama anti-change dream: bipartisan advocacy for balanced budgets, which means in practice to stop running budget deficits – the deficits that Keynes explained were necessary to fuel economic recovery by providing liquidity and purchasing power.

A balanced budget in an economic downturn means shrinkage for the private sector. Coming as the Western economies move into a debt deflation, the policy means shrinking markets for goods and services – all to support banking claims on the “real” economy.

The exercise in managing public perceptions to imagine that all this is a good thing was escalated in April with the manufactured Greek crisis. Newspapers throughout the world breathlessly discovered that Greece was not taxing the wealthy classes. They joined in a chorus to demand that workers be taxed more to make up for the tax shift off wealth. It was their version of the Obama Plan (that is, old-time Rubinomics).

On June 3, the World Bank reiterated the New Austerity doctrine, as if it were a new discovery: The way to prosperity is via austerity. “Rich counties can help developing economies grow faster by rapidly cutting government spending or raising taxes.” The New Fiscal Conservatism aims to corral all countries to scale back social spending in order to “stabilize” economies by a balanced budget. This is to be achieved by impoverishing labor, slashing wages, reducing social spending and rolling back the clock to the good old class war as it flourished before the Progressive Era.

The rationale is the discredited “crowding out” theory:

Budget deficits mean more borrowing, which bids up interest rates. Lower interest rates are supposed to help countries – or would, if borrowing was for productive capital formation. But this is not how financial markets operate in today’s world. Lower interest rates simply make it cheaper and easier for corporate raiders or speculators to capitalize a given flow of earnings at a higher multiple, loading the economy down with even more debt!

Alan Greenspan parroted the World Bank announcement almost word for word in a June 18 Wall Street Journal op-ed. Running deficits is supposed to increase interest rates. It looks like the stage is being set for a big interest-rate jump – and corresponding stock and bond market crash as the “suckers’ rally” comes to an abrupt end in months to come.

The idea is to create an artificial financial crisis, to come in and “save” it by imposing on Europe and North America a “Greek-style” cutbacks in social security and pensions. For the United States, state and local pensions in particular are to be cut back by “emergency” measures to “free” government budgets.

All this is an inversion of the social philosophy that most voters hold. This is the political problem inherent in the neoliberal worldview. It is diametrically opposed to the original liberalism of Adam Smith and his successors. The idea of a free market in the 19th century was one free from predatory rentier financial and property claims. Today, an Ayn-Rand-style “free market” is a market free for predators. The world is being treated to a travesty of liberalism and free markets.

This shows the usual ignorance of how interest rates are really set – a blind spot which is a precondition for being approved for the post of central banker these days. Ignored is the fact that central banks determine interest rates by creating credit. Under the ECB rules, central banks cannot do this. Yet that is precisely what central banks were created to do. European governments are obliged to borrow from commercial banks.

This financial stranglehold threatens either to break up Europe or to plunge it into the same kind of poverty that the EU is imposing on the Baltics. Latvia is the prime example. Despite a plunge of over 20 per cent in its GDP, its central bankers are running a budget surplus, in the hope of lowering wage rates. Public-sector wages have been driven down by over 30 per cent, and the government expresses the hope for yet further cuts – spreading to the private sector. Spending on hospitals, ambulance care and schooling has been drastically cut back.

What is missing from this argument? The cost of labor can be lowered by a classical restoration of progressive taxes and a tax shift back onto property – land and rentier income. Instead, the cost of living is to be raised, by shifting the tax burden further onto labor and off real estate and finance. The idea is for the economic surplus to be pledged for debt service.

In England, Ambrose Evans-Pritchard has described a “euro mutiny” against regressive fiscal policy. But it is more than that. Beyond merely shrinking the economy, the neoliberal aim is to change the shape of the trajectory along which Western civilization has been moving for the past two centuries. It is nothing less than to roll back Social Security and pensions for labor, health care, education and other public spending, to dismantle the social welfare state, the Progressive Era and even classical liberalism.

So we are witnessing a policy long in the planning, now being unleashed in a full-court press. The rentier interests, the vested interests that a century of Progressive Era, New Deal and kindred reforms sought to subordinate to the economy at large, are fighting back. And they are in control, with their own representatives in power – ironically, as Social Democrats and Labor party leaders, from President Obama here to President Papandreou in Greece and President Jose Luis Rodriguez Zapatero in Spain.

Having bided their time for the past few years the global predatory class is now making its move to “free” economies from the social philosophy long thought to have been irreversibly built into the economic system: Social Security and old-age pensions so that labor didn’t have to be paid higher wages to save for its own retirement; public education and health care to raise labor productivity; basic infrastructure spending to lower the costs of doing business; anti-monopoly price regulation to prevent prices from rising above the necessary costs of production; and central banking to stabilize economies by monetizing government deficits rather than forcing the economy to rely on commercial bank credit under conditions where property and income are collateralized to pay the interest-bearing debts, culminating in forfeitures as the logical culmination of the Miracle of Compound Interest.

This is the Junk Economics that financial lobbyists are trying to sell to voters: “Prosperity requires austerity.” “An independent central bank is the hallmark of democracy.” “Governments are just like families: they have to balance the budget.” “It is all the result of aging populations, not debt overload.” These are the oxymorons to which the world will be treated during the coming week in Toronto.

It is the rhetoric of fiscal and financial class war. The problem is that there is not enough economic surplus available to pay the financial sector on its bad loans while also paying pensions and social security. Something has to give. The commission is to provide a cover story for a revived Rubinomics, this time aimed not at the former Soviet Union but here at home. Its aim is to scale back Social Security while reviving George Bush’s aborted privatization plan to send FICA paycheck withholding into the stock market – that is, into the hands of money managers to stick into an array of junk financial packages designed to skim off labor’s savings.

So Obama is hypocritical in warning Europe not to go too far too fast to shrink its economy and squeeze out a rising army of the unemployed. His idea at home is to do the same thing. The strategy is to panic voters about the federal debt – panic them enough to oppose spending on the social programs designed to help them. The fiscal crisis is being blamed on demographic mathematics of an aging population – not on the exponentially soaring debt overhead, junk loans and massive financial fraud that the government is bailing out.

What really is causing the financial and fiscal squeeze, of course, is the fact that that government funding is now needed to compensate the financial sector for what promises to be year after year of losses as loans go bad in economies that are all loaned up and sinking into negative equity.

When politicians let the financial sector run the show, their natural preference is to turn the economy into a grab bag. And they usually come out ahead. That’s what the words “foreclosure,” “forfeiture” and “liquidate” mean – along with “sound money,” “business confidence” and the usual consequences, “debt deflation” and “debt peonage.”

Somebody must take a loss on the economy’s bad loans – and bankers want the economy to take the loss, to “save the financial system.” From the financial sector’s vantage point, the economy is to be managed to preserve bank liquidity, rather than the financial system run to serve the economy. Government social spending (on everything apart from bank bailouts and financial subsidies), disposable personal income are to be cut back to keep the debt overhead from being written down. Corporate cash flow is to be used to pay creditors, not employ more labor and make long-term capital investment.

The economy is to be sacrificed to subsidize the fantasy that debts can be paid, if only banks can be “made whole” to begin lending again – that is, to resume loading the economy down with even more debt, causing yet more intrusive debt deflation.

This is not the familiar old 19th-century class war of industrial employers against labor, although that is part of what is happening. It is above all a war of the financial sector against the “real” economy: industry as well as labor.

The underlying reality is indeed that pensions cannot be paid – at least, not paid out of financial gains. For the past fifty years the Western economies have indulged the fantasy of paying retirees out of purely financial gains (M-M’ as Marxists would put it), not out of an expanding economy (M-C-M’, employing labor to produce more output). The myth was that finance would take the form of productive loans to increase capital formation and hiring. The reality is that finance takes the form of debt – and gambling. Its gains were therefore made from the economy at large. They were extractive, not productive. Wealth at the rentier top of the economic pyramid shrank the base below. So something has to give. The question is, what form will the “give” take? And who will do the giving – and be the recipients?

The Greek government has been unwilling to tax the rich. So labor must make up the fiscal gap, by permitting its socialist government to cut back pensions, health care, education and other social spending – all to bail out the financial sector from an exponential growth that is impossible to realize in practice. The economy is being sacrificed to an impossible dream. Yet instead of blaming the problem on the exponential growth in bank claims that cannot be paid, bank lobbyists – and the G-20 politicians dependent on their campaign funding – are promoting the myth that the problem is demographic: an aging population expecting Social Security and employer pensions. Instead of paying these, governments are being told to use their taxing and credit-creating power to bail out the financial sector’s claims for payment.

Latvia has been held out as the poster child for what the EU is recommending for Greece and the other southern EU countries in trouble: Slashing public spending on education and health has reduced public-sector wages by 30 per cent, and they are still falling. Property prices have fallen by 70 percent – and homeowners and their extended family of co-signers are liable for the negative equity, plunging them into a life of debt peonage if they do not take the hint and emigrate.

The bizarre pretense for government budget cutbacks in the face of a post-bubble economic downturn is that the supposed aim is to rebuild “confidence.” It is as if fiscal self-destruction can instill confidence rather than prompting investors to flee the euro. The logic seems to be the familiar old class war, rolling back the clock to the hard-line tax philosophy of a bygone era – rolling back Social Security and public pensions, rolling back public spending on education and other basic needs, and above all, increasing unemployment to drive down wage levels. This was made explicit by Latvia’s central bank – which EU central bankers hold up as a “model” of economic shrinkage for other countries to follow.

It is a self-destructive logic. Exacerbating the economic downturn will reduce tax revenues, making budget deficits even worse in a declining spiral. Latvia’s experience shows that the response to economic shrinkage is emigration of skilled labor and capital flight. Europe’s policy of planned economic shrinkage in fact controverts the prime assumption of political and economic textbooks: the axiom that voters act in their self-interest, and that economies choose to grow, not to destroy themselves. Today, European democracies – and even the Social Democratic, Socialist and labour Parties – are running for office on a fiscal and financial policy platform that opposes the interests of most voters, and even industry.

The explanation, of course, is that today’s economic planning is not being done by elected representatives. Planning authority has been relinquished to the hands of “independent” central banks, which in turn act as the lobbyists for commercial banks selling their product – debt. From the central bank’s vantage point, the “economic problem” is how to keep commercial banks and other financial institutions solvent in a post-bubble economy. How can they get paid for debts that are beyond the ability of many people to pay, in an environment of rising defaults?

The answer is that creditors can get paid only at the economy’s expense. The remaining economic surplus must go to them, not to capital investment, employment or social spending.

This is the problem with the financial view. It is short-term – and predatory. Given a choice between operating the banks to promote the economy, or running the economy to benefit the banks, bankers always will choose the latter alternative. And so will the politicians they support.

Governments need huge sums to bail out the banks from their bad loans. But they cannot borrow more, because of the debt squeeze. So the bad-debt loss must be passed onto labor and industry. The cover story is that government bailouts will permit the banks to start lending again, to reflate the Bubble Economy’s Ponzi-borrowing. But there is already too much negative equity and there is no leeway left to restart the bubble. Economies are all “loaned up.” Real estate rents, corporate cash flow and public taxing power cannot support further borrowing – no matter how wealth the government gives to banks. Asset prices have plunged into negative equity territory. Debt deflation is shrinking markets, corporate profits and cash flow. The Miracle of Compound Interest dynamic has culminated in defaults, reflecting the inability of debtors to sustain the exponential rise in carrying charges that “financial solvency” requires.

If the financial sector can be rescued only by cutting back social spending on Social Security, health care and education, bolstered by more privatization sell-offs, is it worth the price? To sacrifice the economy in this way would violate most peoples’ social values of equity and fairness rooted deep in Enlightenment philosophy.

That is the political problem: How can bankers persuade voters to approve this under a democratic system? It is necessary to orchestrate and manage their perceptions. Their poverty must be portrayed as desirable – as a step toward future prosperity.

A half-century of failed IMF austerity plans imposed on hapless Third World debtors should have dispelled forever the idea that the way to prosperity is via austerity. The ground has been paved for this attitude by a generation of purging the academic curriculum of knowledge that there ever was an alternative economic philosophy to that sponsored by the rentier Counter-Enlightenment. Classical value and price theory reflected John Locke’s labor theory of property: A person’s wealth should be what he or she creates with their own labor and enterprise, not by insider dealing or special privilege.

This is why I say that Europe is dying. If its trajectory is not changed, the EU must succumb to a financial coup d’êtat rolling back the past three centuries of Enlightenment social philosophy. The question is whether a break-up is now the only way to recover its social democratic ideals from the banks that have taken over its central planning organs.

Michael Hudson is a former Wall Street economist and now a Distinguished Research Professor at University of Missouri, Kansas City (UMKC), and president of the Institute for the Study of Long-Term Economic Trends (ISLET). He is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. He can be reached via his website, mh@michael-hudson.com

http://counterpunch.org/graham06252010.html
(Article reproduced here under fair-use provisions, with original link given, solely for non-commercial purposes of archiving, education and discussion.)

How Big Foundations and Wall Street Elites are Legitimating Their Plans to Balance the Budget
Capital Speaks

Weekend Edition
June 25 - 27, 2010



By DARWIN BOND-GRAHAM

This Saturday tens of thousands of Americans, from all walks of life, men and women of all races, immigrants and citizens, young and old, from all regions of the country, will gather in hundreds of town hall meetings. There they will "weigh in on strategies for a sustainable fiscal future." This series of coordinated gatherings is called America Speaks, and its goals are to "educate the American public about the challenges facing our nation, provide Americans with a neutral space to explore the issues and weigh the trade offs, and deliver to political leaders in Washington a clear message about the shared priorities of a large, demographically representative group of Americans."

At least this is how the foundation funders and political operatives organizing America Speaks describe their well-funded exercise in hegemony. A more honest appraisal it deserves though. Following up a highly exclusive budget summit in Washington D.C. last month that featured the likes of Alan Greenspan and Robert Rubin, America Speaks is more for those of us who BP Chairman Carl-Henric Svanberg recently identified as the "small people." The town hall meetings being organized by America Speaks are in fact the latest and one of the largest and most sophisticated operations in securing consent to rule that the U.S. elite has ever attempted. Like the D.C. budget summit organized by Peter G. Peterson, the town hall meetings are intended to make an impression on President Obama's official commission which has been tasked with putting all options on the table in order to reduce the federal deficit.

Bankrolled by a strange cast of institutional and individual characters, the guiding force behind America Speaks' town hall meetings on the national budget is Peter G. Peterson, the billionaire founder of the Blackstone Group. In the 1970s Peterson left his post as CEO of Bell and Howell Corporation to begin his forays into public policy through official appointments and foundation initiatives. He served as President Nixon's Secretary of Commerce in 1972, and then naturally was appointed Chairman of Lehmen Brothers. It was at Lehmen where Peterson spent the majority of his business career making fistfuls of cash. In 1985 he set out with other captains of the financial industry to create the Blackstone Group which became the world's largest private equity firm.

Two years later Gordon Gekko, the fictive embodiment of Peterson's cohort, would tell America;

"The richest one percent of this country owns half our country's wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons, and what I do, stock and real estate speculation. It's bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you're not naive enough to think we're living in a democracy, are you buddy? It's the free market."

On Wall Street Peterson became known for his fiscal conservatism and free market faith which initially translated into strong support for the Republican Party. But Peterson has been more than a partisan. Democrats have also solicited his energies to rationalize cuts in welfare spending alongside federal policies to grease the wheels of wealth accumulation to the benefit of the elite. Throughout his career as a philanthropist Peterson has seemed equally displeased with both Republican and Democratic Party failures to structurally adjust the U.S. economy by balancing the budget on the backs of the poor. His lament is shared by many financial elites.

While one function of the U.S. government (perhaps the main function in recent decades) is to facilitate capitalist accumulation on ever-greater scales, another function, more a necessity growing out of the pain and dislocation that wealth accumulation creates, is to legitimate rule, oftentimes by stabilizing an otherwise brutal socioeconomic structure. This means placating the working poor with minimum wages, food stamps, and public housing, while rewarding the more politically powerful, if complacent, middle class with huge social welfare programs like Social Security or federally backed mortgages. Congress and the White House have essentially lost all sense of balance in this act, due in no small part to the nation's imperial overstretch as well as the power of corporations and the wealthy to insulate their fortunes from the grasp of the tax man.

During George H.W. Bush's term in office Peterson was moved to found the Concord Coalition which sounded alarms over the U.S. deficit, focusing a lot of attention on health care spending, social security, and other entitlements that stood in the way of greater sums of speculative profit and private wealth accumulation. A close observer and panderer to the needs of the financial elite, President Clinton appointed Peterson to the Bi-Partisan Commission on Entitlement and Tax Reform which built support for the "end to welfare as we know it." Clinton and the Republican controlled Congress brought some of the Commission's findings down like a bludgeon on tens of millions of low-income Americans with the 1996 Personal Responsibility and Work Opportunity Reconciliation Act.

With Peterson as its prime backer you can see where the America Speaks budget town halls are likely to be steered. Up for discussion: cutting welfare spending, health care, education. Not up for discussion? The backers of America Speaks have so far kept military spending off the table. They've also been conspicuously silent about one of the simplest solutions to the fiscal crisis, taxing corporate wealth and private equity.

Peterson is by no means alone in funding the America Speaks budget town hall meetings. Other powerful financial elites are bankrolling this exercise in legitimation. There's South Carolinian Roger Milliken, heir to an enormous private textile fortune. Milliken's contempt for social welfare programs is well-known, as is his support for ever greater levels of militarism. Milliken helped bankroll the Peace Through Strength PAC, and Freedom's Defense Fund. The former helped Cold War era politicians win elections and funnel the national treasury into pie-in-the-sky weapons systems. The latter has carried on this work while condemning welfare in most forms. According to their web site, Freedom's Defense Fund is "dedicated to the principles of limited government, as the Founders understood them," and works to liberate America from "the shackles of the nanny state."

Other anti-"nanny state" parties behind America Speaks include a cluster of Wyoming-based groups with roots in the oil, gas, and coal industries. This is due no doubt to Alan Simpson's influence. The former Senator from Wyoming is co-chair of President Obama's budget commission. The Wyoming Business Alliance, Casper Area Economic Development Alliance, Casper Community Foundation, Casper Events Center, City of Casper, Casper Rotary Foundation, along with two oil and gas businesses, Goolsby-Finley and Associates, and Gene George and Associates, are providing funding and in-kind support for the budget town halls.

Rounding out America Speaks are a few of the Democratic Party's Daddy Warbucks, including real estate investor Robert Monks, Rockefeller Brothers Fund trustee Richard G. Rockefeller, and hedge fund manager S. Donald Sussman.

What this seemingly bi-partisan caste holds in common is their fear over the U.S. deficit, but also their fear that the budget will be balanced to the detriment of the top 5 percent's ability to further accumulate wealth. And so on Saturday these AstroTurf town hall meetings, occurring in 19 major cities and dozens of other locations, will provide cover for what is otherwise a foregone set of conclusions that include recommendations that the Congress and White House cut and privatize many social programs.

There is an illustrative precedent to this exercise in fiscal hegemony. After Hurricane Katrina the Rockefeller Foundation financed an initiative called the Unified New Orleans Plan, or UNOP. UNOP's supposed function was to create a democratic process for the planning of the disaster-stricken city's future. In practice UNOP was an exercise in legitimating plans already in the works. UNOP town hall meetings, called "charrettes," a buzzword in planning and architecture circles, were filled with middle class white residents of the city. Displaced citizens had no voice, but still the campaign's organizers, ever-sensitive to creating the appearance of sensitivity and democracy, claimed to hold planning sessions in distant cities where black and working class residents were struggling to survive.

UNOP was mostly a failure. Multiple and competing plans were hatched by the Mayor, City Council, and foundations like Rockefeller, and disorganization consumed most everyone. Even so, parts of the foundation funded plan have purportedly been used as a base for the new city master plan (still in the works). Furthermore, the main goal from the start wasn't to actually plan the city's future. It was instead to create the appearance of inclusion and participation, and to give New Orleanians a sense that the future of their city, economy, and public sector was being democratically determined. All the while it was not.

Decisions to demolish tens of thousands of housing units were made behind closed doors, in concert with developers seeking to privatize them. Health care facilities like Charity Hospital were shuttered in the name of building newer and more profitable facilities, and also to create a base for the newest economic development scheme of the city's elite: a biomedical district. Public schools were closed down and replaced with a virtually all charter system. Public transport was drastically scaled back. All of these cuts were made possible by foundations and NGOs which provided a mask of pluralism and inclusion. Resistance to austerity measures was undermined with faux democracy and inclusion.

While "greed is good" may be the most quoted line from Wall Street, it's a different Gekkoism that provides deep insight into the dynamics of capitalism and the strategic thinking of its agents whose base of operations is the world of large foundations. At one point Gekko explains, "it's a zero sum game. Somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one person to another. Like magic." Transferred. Money is transferred.

In some respects the national budget question is a zero sum game. It's a pie that can split various ways. Military spending is currently the biggest "discretionary" slice. Welfare programs and tax rebates that aid the poorest citizens of the United States —such as TANF or EITC— are but a mere fraction of what is spent every year supplying the Pentagon and waging its wars. Who will win and who will lose if the pie shrinks? As it shrinks, and it has been shrinking, how will it be redistributed? So far it has been redistributed increasingly into the hands of the upper 5 percent of wealth holders. And how will the loss and sacrifice imposed upon the nation's most vulnerable be legitimated and explained? America Speaks is one answer to that question.

In another respect the federal budget isn't a zero sum game. The budget can grow if the vast deposits of wealth held by the top 5 percent are taxed more progressively. But America Speaks is being set up to keep this off the table too.

Darwin Bond-Graham is a sociologist who splits his time between New Orleans, Albuquerque, and Navarro, CA. He can be reached at: darwin@riseup.net

[JackRiddler]

A Community Currency Proposal

Not bad for my birthday: A proposal by which Greeks could try out the Woergl system known from Austria during the Depression. The interesting thing is that it would allow currency issue and control on a local level without needing to force the country out of the euro (which Greece should do, but would set off the broader burning of Europe that the mother-fucking grandma-murdering bond markets are hoping to perpetrate).

(Now I only have to tell a few of my relatives about this idea by phone and within days the whole country will be adopting it.)

(Jeez, there was a typo in the headline, which I've corrected. Either Counterpunch needs an editor, or Cockburn needs new glasses.)

http://counterpunch.org/andresen06252010.html
(Article reproduced here under fair-use provisions, with original link given, solely for non-commercial purposes of archiving, education and discussion.)

Local Exchange Trading Systems

Weekend Edition
June 25 - 27, 2010

What If the Greeks Did This?

By TROND ANDRESEN

Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally”

-- John Maynard Keynes

This is an attempt to think outside the box, because any sorts of thinking inside the box on Greece and countries in similar situations hasn't led to anything and will not either. But if the reader knows about some unconventional proposal that I may have overlooked, point me to it!
Here follows my proposal - comments are welcome:

An alliance of large grass roots organisation (typically: unions) sets up a cooperative bank-like operation ("BLO"). Probably it should formally be an association requiring membership to participate (more on this below). This BLO issues "value points" (an arbitrarily chosen term, from now on abbreviated "VP's" -- it could be called "units", "work units", "credits", "coupons", whatever -- but should for legal reasons not be called "money" or "Drachmas"). Technically, the BLO is just a national office with computer capacity and a few employees. There are no branches. A member gets a VP "account" with the BLO. To use the account the member needs a mobile phone subscription. When opening an account, (s)he is automatically offered credit up to a standard amount of VP's from the BLO. Such a "start loan" has the purpose of enabling the person to start transacting with others. It is primarily meant as a medium of exchange, and not as a store of value. It is interest-free, but there is a very small membership fee per account, which is only to cover the expenses of the BLO office and computer/network costs. This fee must be paid in Euros/regular money. The VP loan has limited duration, a few months. When the loan expires, the borrower has the right to an automatically renewed loan, but the maximum amount allowed may have been adjusted somewhat up or down in relation to the last loan received. More on this below.

Technological progress makes this possible

What is to be proposed here is a national and extremely efficient version of a LETS (Local Exchange Trading System), or a local currency system. These are basically barter schemes but strongly improved by using a local medium of exchange. Members gain points by supplying goods or services to other members. Such points gained are in the next round used to buy goods or services from other participants. The big advantage is that this enables economic activities locally which would else not have taken place due to lack of a regular medium of exchange (i.e. money). A LETS system has traditionally been managed by some trusted person(s) keeping tally of everyones' points account on a computer. This is done when reports of exchanges are received. Such a system is only manageable when it is confined to some local community. Another factor limiting the geographical and population scope of such schemes is that participants need to know which other agents (persons, firms) are also in the scheme, and what sort of services or goods they offer.

A local currency system does a similar job as a LETS scheme. In that case one may have circulating paper currency resembling regular money, something that eliminates the need for account updates with each transaction, but which may be legally difficult to uphold due to the state's monopoly on money issuance.

A LETS-like scheme must do the following:

* account for transactions (or run a local monetary system)

* give participants an easy and fast way to find other agents in the system and what they offer (or demand).

Today, with most people having mobile phones, and also access to the Internet (whether at home, work or elsewhere), both challenges may be elegantly and cheaply met, and "the local community" may be expanded to encompass a country. Reporting of transactions is done via mobile phone/SMS and automatically received and accounted for on a server. And a web site data base (possibly on the same server), updated by participants and having a Google-like search system, will enable participants to advertise themselves or to easily find sellers and and buyers anywhere of the relevant goods or services.

Gradual increase in transactions

Mobile phone transactions with other BLO members may be implemented through one of the technically proven schemes already in operation in some developing countries. There are no physical/paper VP's in circulation. People and firms offering goods and services will gradually - as the scheme gets more popular - decide to accept a certain share of VP's as payment, while the rest must still be in Euros. Such a share is decided freely and individually by the seller, and may also be adjusted at any time with circumstances. The same holds for wages: employers and employees may as the scheme gets widely accepted, agree on a certain share of wages being paid in VP's, a share that may be re-negotiated as things develop.

Pure fiat money

The VP's are pure fiat money. They do not have any property giving it an intrinsic value like money issued by a central bank, which has indisputable value by being the sole currency that may be used to pay taxes (as per the "modern money" or "Chartalist" view). People or firms will therefore accept VP's in payment only if they believe that a sufficient amount of other people/firms will accept them. This outcome is probable however, since today's only alternative for the Greeks (and other nations in a similar situation) of too low and further shrinking income in Euros over many years, is much worse.

Building confidence

Such a scheme has dynamics which may be unstable both ways: confidence building more confidence, or decreasing confidence leading to hyperinflation and collapse. One should ensure a basic and initial level of confidence by the BLO being launched and run by (a) large, national and well established organisation(s). Second, and most important, by controlling the amount of VP's in circulation, based on observing the average acceptance of VP's as a share of payment together with Euros, it should be possible to uphold the needed amount of confidence in the system. The amount in circulation may be limited by renewing loans with a lower amount when earlier loans expire. Then the borrower will have to accept a reduction of the amount in his/hers account. To avoid runaway inflation in VP's, one should probably start the process by issuing a restricted amount (see below), and then letting the aggregate amount grow (or in between shrink) based on the observed impact. Note that the existence of VP's only as electronic entities on a computer (no physical "currency"), combined with the fact that the initial issued loan has not in any way been "earned" by the account holder, allows the scheme to freely regulate the amount of VP's in circulation upwards or even downwards, by adjusting all accounts with the same amount. This is a new and potent macroeconomic control instrument that is not available in a regular monetary system.

Why is membership necessary?

As already mentioned, the BLO should be organised as an association requiring membership. Then the VP's are not a state-controlled medium of exchange like Euros, but a device for members to exchange goods and labour between them. Hopefully this will make it difficult for the state to ban such a system, something it will possibly or even probably want to do.

There is a further good argument for membership requirement: One should avoid giving the well-to-do a free lunch in the form of an automatic BLO loan, on top of the ample buying power they possess in Euros. They should as a rule only be allowed to open an account, but not have access to an automatically given and renewed VP loan. The BLO should be targeted towards the less well-off in society. This may be achieved by having two grades of membership. Level 1 is open to all (including firms): you get an account but no initial loan. Level 2 (call it "core" membership) additionally qualifies for the loan. Core membership should only be given to people already belonging to one or more of the organisations behind the BLO (unions and similar popular organisations, for instance farmers'), and to the unemployed. And it should be automatically given, to give the scheme a flying start.

One could modify the rules somewhat by allowing level 2 membership for persons that do not initially qualify, but who are recommended by a core member. But it is probably wise to start the process carefully by only giving automatic loans to core members, and later relax the rules in a controlled manner, based on how things develop. Account holders that default on their loans above some defined level of transgression may be excluded as members of the system, and their accounts discontinued.

Credit above the automatic amount?

In an initial period, the system should be simple and only have the purpose of enabling transactions between agents that lack a medium of exchange. If the scheme exhibits strong growth and widening acceptance, the possibility of extending larger VP loans to applicants may be considered. But this would demand a dramatic increase in the staff and organisation complexity of the BLO because loan applicants have to be vetted and collateral has to be posted.

Political resistance

On may expect that such a scheme will be opposed by the state and derided by the economic establishment, including most media pundits. But criticism in itself is not a fundamental obstacle. A bigger danger is whether the scheme may be banned based on the country's laws, like the Austrian state did in 1933 against the succesful local currency in the town of Wörgl. Hopefully, organising the scheme as an association with transactions only being available to members and no money-like paper VP's in circulation, will prevent such an outcome.

Another and perhaps more surprising source of resistance may be the leadership in some of the mass organisations whose members would benefit from such a scheme. Many such leaders are anchored in a marxist/communist/left socialist tradition. The proposal may easily be seen by some of these as a "petty bourgeouis" invention of the "green" "alternative" type, only giving the masses "illusions" and "leading them astray in the struggle against capitalism and for socialism".

Better than the only and bleak alternative

By the proposed scheme it should be possible to activate a large underused potential that Greece (and other Eurozone countries) has, unemployed or underemployed people. It will also primarily stimulate domestic production, since VP's may not be used to pay for imports. Enabling unemployed or underemployed people to work for each other and (increasingly) to exchange goods and services with the rest of society, will - with immediate effects - ameliorate the dramatic and persistent decrease in living standards for most people, which is the bleak and only future (lasting many years) that the powers that be and most pundits are able to come up with.

(Note however: possibly the best solution would have been to revert to a national currency combined with partial foreign currency debt forgiveness, as argued by some dissident voices. But this seems to be politically totally out of the question for those in power. Therefore the above "VP" proposal.)

Trond Andressen is a lecturer in the Department of Engineering Cybernetics at the Norwegian University of Science and Technology in Trondheim. He can be reached at: trond.andresen@itk.ntnu.no.

[JackRiddler]

Pretty good historic synopsis of commodity, money, labor and the crisis in Marxist terms.

http://counterpunch.org/kuhn06222010.html
(Article reproduced here under fair-use provisions, with original link given, solely for non-commercial purposes of archiving, education and discussion.)

Why Money Doesn't Make the World Go Round
June 22, 2010
You Can't Eat a Collateralized Debt Obligation


By RICK KUHN

The global financial crisis that began in 2007 was clearly about money, credit and finance. For mainstream economists and politicians, from neoliberals like John B. Taylor at Stanford, and Tony Abbott, through pragmatists like Barack Obama and Australian prime minister Kevin Rudd to Keynesians and social democrats like Paul Krugman at Princeton and John Quiggin at the University of Queensland, this was the full story.

They debate whether the nature of markets or the inadequacies of government regulation led to the hysterical speculation of the mid 2000s and then the breakdown of the global credit system. The notion that the causes of the crisis may lie in the way in which capitalist production is structured by class relations doesn’t cross their minds.

The mainstream accounts of the crisis are wrong, but they seem to make sense in three ways. First, they offer more or less plausible explanations of movements in prices, supply, demand and economic indicators. Out of these they spin happy-ever-after stories about what needs to be done to overcome the problems that led to the crisis.

They operate, secondly, in the interests of the capitalist class by justifying practical steps to sustain profit rates. This may be by preventing rapid economic collapse, through government stimulus spending. Or, on the other hand, they may urge governments to reduce their deficits, by cutting back on public spending, employment and living standards, in order to restore profits.

Although rival schools of mainstream economics don’t acknowledge it, the differences between these approaches are mainly questions of timing: when the necessary cutbacks will lead to minimum pain for bosses.

Finally, plausible, but superficial explanations of the crisis also serve ruling class interests by concealing how capitalist exploitation necessarily leads to economic breakdowns like that of 2007-2009, when the capitalist system cannot even maintain working class living standards. As the Communist Manifesto put it, the ruling class ‘is unfit to rule’ because it cannot even guarantee the survival of the wage slaves it exploits.

Profits are only restored through a crisis when large numbers of people are thrown out of work as production is ‘rationalised’, productive resources lie idle and working class living standards are slashed by employers and governments.

Commodities

Capitalism is an impressive building; its impressive outer surface is money and movements of prices on markets. But the vital structures of capitalist production make that façade possible and keep it in place. The link between them is the commodity form, the way most of the things we need, food, clothing, shelter, transport etc have a price and are bought and sold.

For millennia, money has been an aspect of economic activity. Societies which consistently make commodities need money. Commodities are things produced for sale rather than to satisfy the immediate needs of producers or those who exploit them by taking what they have made. In class societies before capitalism, the producers were generally peasants, occasionally slaves. The main exploiters were the senior officials of states which imposed taxes, feudal lords who extracted rent, or slave owners.

Money arose as the producers themselves or their exploiters traded commodities. It performed vital functions that were impossible if trade was only based on barter. Initially money took the form of a special commodity, particularly gold, that had value itself because, like other commodities it was the product of human labour. The money commodity served as a ready standard for measuring the prices of all other commodities. And, under capitalism, price ultimately derives from the amount of labour time that goes, on average, into producing commodities. It was the ‘universal equivalent’ that could also be used to buy any other commodity, that is, it was a means of exchange.

Under capitalism, most production takes the form of creating commodities and the commodity form is a feature of the production process itself. People sell their ability to work, their labour power, as a commodity to bosses. The distinction between labour power and labour is important here. Employers extract as much labour as they can out of the labour power whose control they have purchased, by making sure that workers don’t slack off by taking long breaks, going slow or otherwise wasting time that belongs to the boss.

Labour power is a commodity like all others in that its value is the amount of labour that went into making it, in the form of the effort to make the commodities necessary for the reproduction of human beings. Not only food, childcare etc but also the costs of learning specific skills used at work.

But labour power is also different from other commodities. It is human creativity for sale, capable of generating more value than it took to produce it in the first place.

When it is set to work, bosses owns the right to direct that labour power as well as the tools and raw materials it uses to produce new commodities. The new commodities, and the additional value embodied in them, created by human labour, likewise belong to the bosses. That’s where profits come from.

In class societies before capitalism, exploitation was pretty obvious: lords, state officials or slave owners simply took away things you produced or what they were worth in money. There was no exchange of equivalents; just a rip-off, ultimately backed up by the threat of violence. Under capitalism, exploitation is concealed by the sale of labour power. The exploitation happens through the exchange of commodities at their value for money rather than because exploiters get commodities or money for nothing.

The commodity form and money are capitalism’s self-camouflage. Economics seems to be all about them, but they conceal the exploitation of wage labour, that is class relations, in the production process.

The owners of wealth do not always immediately reinvest the value that they have accumulated. They may be saving up for a new project, or repetition of an old one, or holding off for better conditions before they invest again. In these circumstances, money serves as a convenient store of value. This was straightforward when there was a special, durable money commodity.

Money

States’ regulation of money was, from long ago, an aspect of managing the commodity-based economy of their territories and also of funding their own activities. Developed capitalism has progressively dispensed with the money commodity. Initially states supplemented the money commodity with symbols for it. Eventually, the coins and notes that we are used to keeping in our pockets and purses, became the only valid form of money within each state’s boundaries. When such symbolic money can no longer be converted into the monye commodity it is ‘fiat money’. The money we use today is fiat money; gold no longer plays a role in the monetary system.

When there are credit arrangements, under which commodities can change hands at a different time from the payment for them, money is a means of payment. This creates credit money, promises to pay that are distinct from cash which might only be needed when contracts are finally settled. As economic activity grew in scale and complexity, banking emerged and credit money became increasingly important. Credit money was created by those involved in trade and banks, which held otherwise idle reserves of those who were not themselves using the value they had accumulated, as deposits and lent them out.

Internationally, the money commodity facilitated trade across the boundaries of states. Just as states eventually replaced commodity money with fiat money, financial institutions and states have accepted some national currencies as the means to settle international accounts. They are known as ‘reserve currencies’. Since World War II, the most important has been the US dollar, even after the link between it and gold was severed in 1971.

But the acceptability of a reserve currency can change. The rise of the Euro as a reserve currency to rival the US dollar, for example, has recently been undermined by economic crisis in the Euro zone. The weakness of the economies of Greece and other European Union countries with very high levels of government debt have led to worries about stability of the Euro.

While money pre-dates the dominance of the capitalist mode of production, the transactions, planning and allocation of resources of capitalism are impossible without money, credit and finance (the activities of banks and similar institutions in directing funds to where they will earn the greatest return).

Although indispensable for capitalism, credit and financial activities do not create new value. Interest and financial profits derive from new value created in the productive sector of the economy. Capitalists in the productive sector who borrow have to hand over a share of their profits to lenders in the form of interest for the right to use the lender’s capital. States which borrow have to pay interest out of their revenue which ultimately comes from the productive sector. And workers have to shell out some of their wages to keep up with payments on mortgages and other loans.

With the transition away from reliance on the money commodity at home or in international transactions, the stability of currencies and consequently credit and financial arrangements more than ever relies on the confidence capitalists have in them. This trust is based on the strength of the economies with which the currency is associated and especially on the power of the state that backs it to ensure that it can be exchanged for a predictable quantity of real value embodied in commodities, even though it has no intrinsic value itself

So, even though the United States was at the centre of the global crisis of 2007-2009, during the periods of greatest uncertainty the US dollar was bought up as a ‘safe-haven’ currency. The unparalleled killing power of the armed forces of the USA guarantees the value of the dollar.

Credit and Finance

The complications of credit and financial systems mean that there can be all kinds of glitches. The failure or even worries about a single corporation can trigger a contraction of credit. Lenders may be reluctant to provide funds until they can work out whether the failure exposes potential borrowers, as creditors or customers, to problems. In a similar way, problems in one financial institution can ripple out to others. Contractions in credit can slow down or stop growth in the production of real commodities, or even lead to less being produced.

The net of businesses exposed to such problems has been spread wider by new mechanisms to spread the risk that credit and other contracts won’t be met, in the form of insurance and hedge funds. When problems are small and their dimensions easy to determine, this cushions their impact. If the failures are large and both their scale and implications are unclear, these efforts to spread risk end up spreading the crisis.

In the United States, financial institutions during the early and mid 2000s gambled that housing prices would rise for ever. They made ‘sub-prime’ loans to people who would never be able to pay them back. Then, to spread the risk, the loans were bundled together and sold off as securities. People with mortgaged houses had to pay interest and repayments to the owners of the securities who were also entitled to the revenue from sale of the home if mortgage payments weren’t made.

Such securities are a form of ‘fictitious capital’, traded as though they are real commodities with an intrinsic value. In fact they are only the right to an income stream that arises from a financial arrangement rather than from the use of the money to directly generate new value in a real production process. Not only mortgage backed securities, but also shares and government bonds are forms of fictitious capital.

Financial instruments can be even more complicated. ‘Collateralised debt obligations’ are bonds, promises to pay interest at a specified rate, issued by companies whose assets are holdings of other loans, bonds or securities. This is not to mention derivatives. They can be futures or options: contracts to buy or sell, or the rights to sell or buy at specified prices real commodities, amounts of particular currencies, shares, bonds etc at a specific point in the future. Or they can be swaps: agreements to exchange the income steams from different financial assets.

Shares were initially designed to raise money for productive investment; bonds as a form of readily tradeable loan; and more arcane instruments as, perhaps, means of spreading risk. But most of the trading in fictitious capital today is speculative: gambling in the hope of making gains at the expense of other players in the market. It does not create new value and just shuffles around existing value, held by other speculators or by productive capitalists.

The rapid growth of financial speculation has meant that the implications of problems in one geographical area or economic sector for the rest of the economy are ever harder to work out before the crisis hits.

But the healthier the real economy which underpins the tower of financial activity, the more rapidly will local and sector specific problems be sorted out. Extensive new avenues for highly profitable productive investment can offset the jitters and losses caused by the failure of expectations in credit and financial markets.

Economic Crisis

The rate of profit in the advanced capitalist economies has been trending downwards for more than four decades. The scale of speculative financial activity in the lead up to the current crisis was itself is a consequence of limited outlets for profitable productive investments.

During the first phase of the crisis, from 2007 to 2009, the problems began in the US housing market and spread throughout the global financial system, leading to recessions and the economic contractions in most countries.

Credit froze up across the planet as banks stopped lending to each other, or anyone else, out of fear that borrowers might hold toxic assets like mortgage-backed securities and therefore be unable to pay back loans. Lack of credit and worries about the future led businesses to suspend investments, individuals to put off spending that could be delayed.

Governments which could afford to spent big to keep their economies, so reliant on credit money, going. In the USA, Australia, Japan, Germany, Britain, China and other countries, governments borrowed, created more fiat money in the form of central bank funds or dipped into reserves to shore up, bail out or take over banks and other financial institutions. To promote consumption, they encouraged borrowing by cutting interest rates, gave cash handouts to citizens and spent up big themselves. The Chinese regime set lending quotas for banks.

Only poorer governments, of necessity, did not engage in stimulus spending. This was the approach extreme neoliberals recommended everywhere. That approach certainly sent less efficient businesses to the wall and put pressure on working class living standards. But it risked killing off so many firms that the remainder would not be able to drive an economy-wide recovery for many years.

If real economies are fundamentally sound, then stimulus policies should jump start robust economic growth. Both state revenues and real estate prices would rise. Governments would use their increased tax income to pay off debt. Public and private financial institutions would sell off real estate without making phenomenal losses. The Keynesians would proclaim the truth of their dogma, the pragmatists the wisdom of their policies.

Instead, a second phase of the crisis became more obvious this year. As the Greek economy crumbled under the weight of public debt, the social democratic government began to attack working class living standards by cutting wages in the public sector, pensions and spending on health, education and welfare.

Now there is a growing consensus that cutting government deficits is the key to maintaining financial stability and thus restoring prosperity.

Spain, likewise under a social democratic government, but also conservative regimes in Germany, Britain, Italy and France are inspired by this dogma.

Rudd has promised to do the same; Australian opposition leader Tony Abbott to do it harder and faster. Obama is moving in the same direction.

Financial austerity measures did not begin in 2010. In countries particularly hard hit by the crisis or with weak economies, the cuts began much earlier, for example in Iceland, Ireland and the Baltic states.

A return to financial stability won’t solve the basic problems that led to the crisis: you can’t eat a collateralised debt obligation. Its fundamental causes lie in the displacement of living labour by machinery and equipment-the key to raising productivity under capitalism-driven by competition among capitals and hence a lower average rate of profit across the economy. But efforts to cut public spending are part of a solution to the crisis in the interests of bosses and at workers’ expense.

The other elements of this solution are squeezing more profits out of workers and allowing more relatively unprofitable businesses to go bankrupt. Even as some governments engaged in stimulus spending during the early stages of the crisis, employers across the world used uncertainty about jobs and rising unemployment to hold or push down wages and increase workloads.

As governments economise on their spending they will be less able to bail-out weak capitals. This means their assets can be bought up cheap and set in motion again but risks more widespread of corporate collapses and the possibility that idle machinery, equipment and buildings will just be allowed to rust and rot alongside unemployed workers.

The alternative solution, getting rid of capitalism, is not risk free either. But it holds out the promise that we can get off the deadly, profit driven ferris wheel with its booms and slumps, and start producing to satisfy human needs.

Rick Kuhn’s Henryk Grossman and the Recovery of Marxism won the Deutscher Prize in 2007. He is a contributor to Socialist Alternative www.sa.org.au.

[JackRiddler]

NYT stories on the financial bill

The claims about what this relatively lame thing does can now stop. Federal Reserve more powerful than ever, derivatives go mostly untouched, and if Elizabeth Warren isn't chosen to run the consumer credit agency then the whole thing was really a waste of time. It's funny because the meltdown may resume (for coincidental reasons) about three minutes after this thing passes. So we should get to see how effective it is about a minute after that.


http://www.nytimes.com/2010/06/26/us/po ... nted=print
(Article reproduced here under fair-use provisions, with original link given, solely for non-commercial purposes of archiving, education and discussion.)

House and Senate in Deal on Financial Overhaul

June 25, 2010

By EDWARD WYATT

WASHINGTON — Nearly two years after the American financial system teetered on the verge of collapse, Congressional negotiators reached agreement early Friday to reconcile competing versions of legislation that would transform financial regulation.

A 20-hour marathon by members of a House-Senate conference committee to complete work on toughened financial rules culminated at 5:39 a.m. Friday in agreements on the two most contentious parts of the financial regulatory overhaul and a host of other provisions. Along party lines, the House conferees voted 20 to 11 to approve the bill; the Senate conferees voted 7 to 5 to approve.

With the agreement in place, President Obama said Friday morning that Congress was “poised to pass the toughest financial reforms” since the Great Depression, homing in on the consumer-protection measures that he said would make lending agreements easier to understand and protect small borrowers from hidden penalties and fees.

He said that the bill contained “90 percent of what I proposed when I started this fight.”

He spoke shortly before flying to a summit of the Group of 20 major economies in Toronto, where leaders are expected to discuss economic reforms and the fragile global recovery.

Members of the House-Senate committee approved proposals to restrict trading by banks for their own benefit and requiring banks and their parent companies to segregate much of their derivatives activities into a separately capitalized subsidiary.

The agreements were reached after hours of negotiations, most of it behind closed doors and outside the public forum of the conference committee discussions. The approvals cleared the way for both houses of Congress to vote on the full financial regulatory bill next week.

The bill has been the subject of furious and expensive lobbying efforts by businesses and financial trade groups in recent months. While those efforts produced some specific exceptions to new regulations, by and large the bill’s financial regulations not only remained strong but in some cases gained strength as public outrage grew at the excesses that fueled the financial meltdown of 2008.

Representative Barney Frank of Massachusetts, who shepherded the bill through the House, said the bill benefited from the increased attention that turned to the subject of financial regulation after Congress completed the health care bill.

“Last year when we were debating it in the house, health care was getting all of the attention and it was not as good a bill as I would have liked to bring out because we were not getting public attention,” Mr. Frank said. “What happened was with the passage of health care, the American public started to focus on this.”

Senator Christopher J. Dodd of Connecticut, the Democratic chairman of the Senate Banking Committee, said legislators were still uncertain how the bill will work until it is in place. “But we believe we’ve done something that has been needed for a long time,” he said.

Treasury Secretary Timothy F. Geithner also praised the conference committee for its work. “All Americans have a stake in this bill,” he said. “It will offer families the protections they deserve, help safeguard their financial security and give the businesses of America access to the credit they need to expand and innovate.”

Legislators had aimed to finish their reconciliation work before President Obama travels to a G-20 meeting this weekend in Ontario, and to approve and deliver a final bill for the president’s signature by Independence Day.

At two minutes before midnight Thursday, some 14 1/2 hours after they began work Thursday morning, members of the House-Senate conference committee approved a final revision of the measure known popularly as the Volcker Rule.

The rule, named for Paul A. Volcker, the former Federal Reserve chairman who proposed the measure this year, restricts the ability of banks whose deposits are federally insured from trading for their own benefit. That measure had been fiercely opposed by banks and large Wall Street firms, who viewed it as a major incursion on some of their most profitable activities.

“One goal of these limits is to reduce participation in high-risk activity that can cause significant losses at institutions which are central to the financial system,” Mr. Dodd said. “A second goal is to end the use of low-cost funds — to which insured depositories have access — to subsidize high-risk activity.”

Banks managed to wrangle limited exceptions to the rule that would allow them to continue some investing and trading activity. The agreement limits banks’ investments in hedge funds or private equity funds to no more than 3 percent of a fund’s capital; those investments could also total no more than 3 percent of a bank’s tangible equity.

Many Wall Street firms, including Goldman Sachs, Morgan Stanley and others, have long engaged in significant amounts of trading for their own accounts, a practice that commercial banks and their parent companies were traditionally less inclined to adopt.

The Wall Street institutions might not have been subject to the new rules except for their decisions during the 2008 financial crisis to convert themselves into bank holding companies in order to gain access to the emergency lending authority of the Federal Reserve.

Most of the first 12 hours of Thursday’s meeting by the committee was spent in recess, as senators and House members huddled with staff members, consulted with Treasury Department officials, were buttonholed by lobbyists, traveled to their respective chambers for votes and waited for proposals and counter-offers to be printed and collated.

After seven hours of additional debate, the conferees approved revisions to the derivatives legislation that would require banks and their parent companies to segregate much of the derivatives trading businesses.

The final restrictions were not as tight, however, as originally approved by Senator Blanche Lincoln, the Arkansas Democrat who is chairwoman of the Senate Agriculture Committee, which oversees the Commodity Futures Trading Commission, the chief regulator of derivatives.

Mrs. Lincoln’s proposal that banks be banned from all derivatives activity drew opposition from both sides of the aisle almost since it was introduced this spring. But the provision remained in the Senate bill in part because Mrs. Lincoln was facing a tough primary battle in her home state and portrayed herself as a tough critic of Wall Street.

Mrs. Lincoln won that primary in a runoff, a development that again made legislators somewhat reluctant to oppose her derivatives proposals with the general election looming. Only in recent days did a group of centrist House Democrats threaten to withhold their approval of the entire package unless Mrs. Lincoln loosened her derivatives restrictions.

The group, known as the New Democrat Coalition, includes several House members from New York State, who voiced opposition to provisions that they felt would threaten business and jobs on Wall Street.

Outside of the conference committee chambers, discussions took place through much of the afternoon between Mrs. Lincoln’s staff and groups that have been seeking to produce a compromise derivatives proposal, including other Senate negotiators, Treasury and White House officials, and a group of House members led by Representative Melissa Bean, an Illinois Democrat.

Representatives from the New Democrats met on Thursday with White House officials, according to a House aide, and later presented a proposal to Mrs. Lincoln. At 9:10 p.m., Mrs. Lincoln returned to the conference committee room after a long absence and huddled with Mr. Dodd, who had voiced fears that the derivatives measure would make it more difficult to retain the 60 votes needed to pass the revised bill through the Senate.

The conference committee also reached substantial agreement on a provision that would exempt auto dealers from the authority of the Consumer Financial Protection Bureau, a major victory for one of the most active lobbying groups on the financial bill in recent weeks and an equally disappointing defeat for the Obama administration.

The White House and the Pentagon had both pushed aggressively for restrictions on companies that offered and promoted auto loans, which military officials said were the cause of numerous complaints of consumer fraud by members of the military and their families.

Republican members of the committee in recent days repeatedly offered amendments that were rejected on party line votes and raised issues that Democrats were little interested in entertaining. Republicans repeatedly faulted the majority for not including an overhaul of the mortgage firms Fannie Mae and Freddy Mac in the financial bill; they also raised objections to the bill’s provisions for unwinding failing financial firms, saying that the bill would not rule out future taxpayer-financed bailouts.

Earlier Thursday, Mr. Frank pushed numerous minor provisions of the 1,500-page financial bill toward agreement.

Among the provisions approved by representatives of both the House and the Senate was one that would give the Securities and Exchange Commission the authority to require stockbrokers to protect their clients’ interest when recommending investments, potentially subjecting brokers to the same fiduciary duty as financial advisers.

Members of the committee from both houses of Congress adopted a proposal that would require the S.E.C. to complete a study within six months of the financial bill’s enactment to evaluate the effectiveness of current rules governing those who give financial advice to or sell securities to consumers.

Under current law, financial advisers are required to act in the best interests of their clients, while brokers are held to a looser standard, under which they are required only to consider whether an investment is “suitable” given the time horizon, goals and appetite for risk of a client.

The compromise calls for the S.E.C. to take the results of the study into account when making any rule, but it also gives the commission the authority to impose a fiduciary standard on stock and insurance brokers. The commission may also require brokers to disclose that they are offering only proprietary products and to reveal how much they are being paid for particular products.

By the end of its work on Friday morning, the House and Senate negotiators had substantially completed work on all of the bill’s 15 titles. Minor work remained on technical amendments that would not substantially change the bill’s provisions.

The Congressional Budget Office estimated that the financial regulatory bill would cost roughly $20 billion over 10 years. The conference committee agreed to pay for the bill by imposing an assessment on large financial institutions; the assessments would be made according to a “risk matrix” that charges higher amounts to riskier institutions.

Mr. Frank said that the assessments — which Republicans called a tax — were an acceptable solution for “the collective errors of many in the financial institutions that caused this set of problems.”

The consumer bureau - again vague enough that it will be a joke if it's not Warren running it.

http://www.nytimes.com/2010/06/26/your- ... ey.html?hp
(Article reproduced here under fair-use provisions, with original link given, solely for non-commercial purposes of archiving, education and discussion.)

From Card Fees to Mortgages, a New Day for Consumers

June 25, 2010

By RON LIEBER and TARA SIEGEL BERNARD

At last, it’s settled.

After months of haggling, the terms of financial reform are set, so long as both houses of Congress vote to accept them in the coming days.

While elected officials spent much of their time working out the details of regulating complex derivatives and grappling with whether banks ought to make big bets with their own money, they also set a number of new rules that will directly affect consumers.

Investors and those who advocate on their behalf did not get everything they wanted. Stockbrokers and annuity peddlers are still not required to act in their customers’ best interest, for instance. But mortgage shoppers stand to gain under the new rules and millions of people will now have access to a free credit score.

Here is a roundup of some of the biggest consumer issues that members of Congress addressed and where they ended up:

CONSUMER BUREAU The bill would create an independent Consumer Financial Protection Bureau, housed within the Federal Reserve. The bureau is to be headed by a single director appointed by the president and confirmed by the Senate.

The new bureau would write and enforce rules for most banks, mortgage lenders, credit-card and private student loan companies, as well as payday lenders. Smaller banks and credit unions, or those with less than $10 billion in assets, would have to obey the consumer bureau’s rules — but the smaller institutions’ enforcement and supervision would remain with their current regulators, said Travis Plunkett, legislative director for the Consumer Federation of America.

Auto dealers, meanwhile, are exempt from the bureau’s oversight.

The legislation also includes a provision that consumer advocates had been fighting against — to require the new bureau to convene a panel of small business representatives, chosen by the bureau, to make sure any new rule wouldn’t have unintended consequences, like tightening small businesses’ access to credit. But consumer groups said they worry that the bureau would be required to seek input from industries — like payday lending — that it’s supposed to oversee.

CREDIT SCORES Each year, you can get one free copy of your credit report at AnnualCreditReport.com from each of the three big credit bureaus: Equifax, Experian and TransUnion. Your credit report contains information that banks and others send in about how much you owe and whether you pay on time.

But consumers generally do not get free copies of their credit scores, which are numerical snapshots derived from your credit report data. Often lenders will evaluate your credit score without looking at the credit report that has fed data into the score. Thanks to the bill, you will soon be able to see the score if it has hurt you in some way.

Let’s say a mortgage lender, credit card issuer, insurance company or landlord quotes you a more expensive interest rate or premium price or refuses to rent you an apartment because of problems with your credit score. If that happens, the company or individual would have to provide you, free of charge, the score (probably a FICO score) that led to your troubles.

Keep in mind that nothing is stopping you from asking for the score, even if you like the rate or result of your application. You may be able to get it for free even if the lender, insurer or landlord is not legally required to give it to you.

MORTGAGES The bill offers a number of new protections, many of which are a bit like closing the barn door after all of the animals escaped. Lenders, for instance, will have to check borrowers’ income and assets. Most lenders have learned that lesson by now or have ceased to exist.

Other rules include a ban on prepayment penalties for people with adjustable rate and other more complex types of mortgages. Mortgage brokers and bank employees will no longer be able to earn bonuses based on the type of loan they put you in. That will presumably eliminate any incentive to push high-interest loans on borrowers (who might otherwise qualify for a better deal) to inflate bank profits.

Julia Gordon, senior policy counsel for the Center for Responsible Lending, said there will now be a cap limiting mortgage origination fees to 3 percent of the loan. There are exceptions for required upfront mortgage insurance premiums, say for a Federal Housing Administration loan, and for points that borrowers elect to pay to lower the mortgage interest rate.

CREDIT AND DEBIT CARDS Hate those merchants that won’t let you use your credit card unless you spend more than a certain amount? Well, now they have Congress’s blessing, as long as the minimum is not higher than $10. The Federal Reserve can increase the minimum if it chooses. As for maximums, only the federal government and colleges and universities can limit what people spend. So if you are paying tuition on a credit card and earning a couple of free plane tickets each year, that fun may soon end.

Merchants are also free to offer discounts to people who pay cash instead of using cards, or use debit instead of credit cards. They will not, however, be able to charge one price for people using American Express cards and a lower price for people using Visa and MasterCard credit cards.

Merchants will also not be allowed to give discounts based on which bank issued the debit or credit card you are using. Why would a merchant want to do that? Because the bill gives the Federal Reserve the ability to set a limit on the fees that stores must pay to accept debit cards. The catch here, though, is that only banks with more than $10 billion in assets would be subject to the cap. As a result, merchants may have to pay more to accept debit cards from smaller banks and credit unions than big banks like Bank of America and Chase. And if that were to happen, stores might be tempted to offer discounts to people with big bank debit cards.

Oddly, community bankers and credit unions don’t want to end up earning more money from merchant fees than big banks do, even though it would give them a competitive advantage. Why not? They worry that the big banks will immediately put pressure on Visa and MasterCard to lower merchant fees for all debit cards, not just the big banks’ cards. Thus, the smaller institutions had hoped that the status quo would remain, with everyone continuing to earn fat fees from the merchants forever.

It is not clear what the Fed will do or how the big banks and Visa and MasterCard will react. This could take a few years to play out, or many years if lawsuits start flying. Some merchants may try to play fast and loose with the rules too. Bill Hampel, chief economist of the Credit Union National Association, figures that small retailers might happily accept debit cards with the names of big banks that they recognize and then ask shoppers with cards from no-name institutions to use cash or some other card.

FIDUCIARY DUTY The Securities and Exchange Commission was given the authority to create a new rule for brokers that would require them to put their clients’ interests first. But that won’t happen right away. Consumer advocates wanted the so-called fiduciary standard in the new law, and it appeared in the House’s original proposal.

But ultimately, negotiators compromised and agreed to have the commission first conduct a six-month study of the brokerage industry, looking at, among other things, whether there are any regulatory gaps or overlaps in regulation of brokers and investment advisers. Advisers are already required to put their clients’ interests ahead of their own, while brokers must only recommend investments that are deemed “suitable,” based on factors like their clients’ financial goals and tolerance for risk. “It is now going to be incumbent on Chairman Shapiro to stay on top of this,” said Barbara Roper, director of investor protection at the Consumer Federation of America, “to ensure that this is an unbiased study and that any rules that are proposed are strong and really provide the full fiduciary duty that investors are entitled to.”

But there are no guarantees.

EQUITY INDEXED ANNUITIES These annuities are complex financial products that promise a minimum return on your investment. But they often require you to tie up your money for long periods of time and charge hefty surrender fees if you need to pull out your money early. Unscrupulous salesmen, who collect lucrative commissions, have used deceptive marketing techniques to sell these products to senior citizens, which is why sales of these annuities have been the subject of many lawsuits.

But a provision in the legislation will prevent the S.E.C. from regulating them, a step backward, consumer advocates and the commission have argued, from what is now the case. The S.E.C. had adopted a rule to regulate these annuities as securities, but it had not yet been enacted. Now, the annuities would be treated as insurance products, which means they would be overseen by state insurance regulators.

“That means no securities antifraud authority, no rules against excessive compensation, and no securities regulators to help police the market for these abuses,” Ms. Roper said. “And there are no guarantees that the people who sell them know any more about the securities markets these products are based on than the people who buy them.”

Consumer advocates also said the amendment language is broadly written, which could allow products similar to equity indexed annuities — or those that have characteristics of both investments and insurance — to skirt S.E.C. regulation as well.

http://www.nytimes.com/2010/06/26/busin ... nted=print
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Banks Likely to Offset Impact of New Law, Analysts Say

June 25, 2010

By CHRISTINE HAUSER

Banks are expected to find ways to offset the impact of the new financial regulations on their earnings, though they face a potentially complex process of adapting to the new requirements, analysts said on Friday.

The share prices of some of the biggest United States banks, including Citigroup, JPMorgan Chase and Bank of America, were higher in afternoon trading, hours after a House-Senate conference committee completed work on a bill that would toughen financial regulations.

Analysts pored over the specifics of the deal as they emerged on Friday and expressed a wide array of views about the impact it would have. Some saw the bill as more of a political statement than a practical measure that could prevent another financial meltdown. Others said banks’ costs would increase, but banks would pass the increased costs along to consumers.

“They have got their work cut out for them, absolutely,” said William Fitzpatrick, an equities analyst who focuses on banks for Optique Capital Management

“The terms of this regulation appear to be extremely onerous on the large banks,” he said. “It is indeed a tough bill, and you are going to see several measures that are going to weigh on the profitability of the large banks.”

“I suspect they are going to have a hard time offsetting the increased regulations,” said Mr. Fitzpatrick.

Richard Bove, a banking analyst with Rochdale Securities, said the bill would not severely curtail banks’ operations.

“I don’t see there being a tremendous clampdown on the ability of banks to make money,” he said.

“The banks will have numerous methods of getting around the most onerous provisions in this bill to maintain their earnings growth,” he added. “But the things they will do will increase the cost of banking to everybody in this country.”

For instance, Mr. Bove pointed to last year’s credit card bill, which led banks to push up rates pre-emptively or reduce customers’ credit limits.

“You’re going to get a letter from your bank saying you now have to pay $1 to $15 a month to pay for this bill,” he said. “The banks are going to get the money back because the consumer is going to pay for the bill, and that’s the killer for the consumer.”

John McDonald, a financial services analyst at Sanford C. Bernstein in New York, said there should be relief among investors, but the implementation would usher in a new phase of uncertainty.

“There is still a long way to go in terms of getting clarity on the key issues that investors are focused on, like required capital,” Mr. McDonald said.

Just take an issue like derivatives. It is still not clear what activities the banks will need to cordon off in a separate holding tank. Nor is it clear how much capital they will need, which is a major factor affecting the profitability of the business, he said.

One part of the legislation known as the Lincoln Amendment, for example, would demand the banks hold more capital. At the same time, another part that drives derivatives trading onto clearinghouses and exchanges could lessen, in aggregate, the amount of capital that banks must hold. “There are a lot of variables in the air,” Mr. McDonald noted.

Mr. Fitzpatrick said he expected the restrictions on overdraft fees, less proprietary trading and the alteration of the banks’ swaps desks to have an impact on earnings.

“All these things, in addition to higher capital requirements, will weigh on the bottom line of the large banks,” he said.

Cornelius Hurley, a professor at the Boston University School of Law and a former counsel to the Federal Reserve Board of Governors, saw deficiencies.

“They missed the crisis,” he said. “The crisis they’re dealing with now is the November elections. This is a bill, despite its length and complexity, that’s more geared to the elections than the financial system.” He said that the bill would inevitably be revised and that “in no way does it address the too-big-to-fail issue.”

“The credit ratings agencies keep rating the too-big-to-fail banks higher than everybody else, and they say it’s because of the implicit government support,” he added.

“There will be a lot of regulatory costs,” Mr. Hurley said. “There will be a lot of motion, smoke — but not fire — as we go through the regulatory process. There’s going to be ton of activity, but at its core we’re going to be back where we were the day that Lehman failed.”

Several of the larger banks said that they were still studying the bill.

“Although there are aspects of the legislation which are different from what we would have preferred, we will be able to conduct a fuller assessment of its impact after the regulators issue new rules,” said Vikram Pandit, the chief executive officer for Citigroup.

A spokesman for Goldman Sachs said: “We are studying the bill and are mindful that it still has to go through the House and the Senate. We’re also mindful of the fact that much interpretation responsibility lies with regulators, so we think it is too early to be able to express an informed view.”

But it is apparent already that banks will have to adapt the way they currently do business with their subsidiaries.

“As they wind down and spin off these more market-oriented derivatives businesses, that is going to be a challenge for them in part because of the complexity of the business,” said Jim Eckenrode, a banking analyst at TowerGroup, a financial services consulting firm.

But some analysts noted that the overhaul served an important purpose in improving confidence and providing transparency as a response to the challenges posed to the American financial system.

“My first line of thinking is that obviously there was a lack of systemic oversight in some of the businesses that were generating a lot of profits for the industry,” said Mr. Eckenrode.

“Trying to harmonize the regulatory environment I think makes a lot of sense. I do think that generally the banks should be pleased that it was not worse than it was,” he said.

For example, creating a resolution fund addressing the financial crisis, Mr. Eckenrode said, “certainly has been reduced quite a bit.”

The chief executive of the Securities Industry and Financial Markets Association, Tim Ryan, said in a statement that the new law should bolster confidence.

“Much of this new law should help to restore and maintain confidence in U.S. financial markets, including several important provisions such as the establishment of a systemic risk regulator, resolution authority and a new federal fiduciary standard for retail investors,” he said.

“But this is a tough law that will also have profound effects on the operations and cost structure of most financial services companies and financial markets,” Mr. Ryan added.

Joshua Steiner, a managing director who covers the financial sector for Hedgeye Risk Management, said he was still examining the legislation but said the new regulations could potentially weigh on earnings.

“One of the issues is really going to be going forward trying to understand how this is actually going to affect earnings, because the banks have been very cagey on how much of their earnings generally come from proprietary trading and private equity and hedge fund investing,” he said.

“So I think net-net over time this will come to represent essentially a tax on the industry for all intents and purposes,” Mr. Steiner said. “It will be a long-term depressant on earnings.”

He added: “Constraints will force them to re-allocate their capital elsewhere.”

The approvals on Friday cleared the way for both houses of Congress to vote on the full financial regulatory bill next week.

One lawmaker was quick with criticism of the bill. Senator Judd Gregg, Republican of New Hampshire and a member of the Senate Banking Committee, said: “In an effort that should be geared toward correcting deficiencies in our regulatory structure, and during a time when we should be focused on economic recovery, this legislation is a failure on both counts. It will not encourage much-needed stability and confidence in our financial markets. It will not significantly reduce systemic risk in our financial sector.”

But Ed Mierzwinski, consumer program director for the Federation of State Public Interest Research Groups, saw some positives for consumers and described the bill as “landmark legislation.”

He noted that the idea for creating a new consumer financial protection agency was proposed just three years ago. Despite intense efforts by the banking industry to water down the agency or kill it outright, Mr. Mierzwinski said the agency survived with broad authority, a strong financing stream and an independent director.

Graham Bowley, Eric Dash, Andrew Martin, Cyrus Sanati, Louise Story and Edward Wyatt contributed reporting.

http://www.nytimes.com/interactive/2010 ... ation.html
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Highlights of the financial regulation legislation and critics’ concerns.
Published: June 25, 2010
Financial Regulation: The Hope and the Worry


Legislation Effects Concerns

Derivatives For the first time, establishes federal oversight of derivatives, complex products that bet on the future movement of underlying securities. Requires most deals to be insured by a third-party clearinghouse and traded on public exchanges. Creating an open marketplace could reduce the cost of common kinds of derivatives, allowing a wide range of companies to hedge risks more cheaply. Some parts of the market could shift overseas, beyond the scrutiny of U.S. regulators. Companies that still need customized derivatives could face higher prices.

Consumer protection Creates a federal regulator to write and enforce rules protecting consumers of financial products like checking accounts, mortgages and payday loans. Increases the authority of state regulators to enforce protections. Lenders could be required to provide plain-English disclosures, price comparisons with alternative products and clear tripwires before fees are assessed. Banks may cut back on free checking as they spread costs more evenly across the customer base, rather than relying on a minority of customers to make bad choices.

Financial regulation Creates a council of regulators to watch for systemic risks. Gives the Federal Reserve new authority over large financial companies. Consolidates banking regulators, merging the Office of Thrift Supervision into the Office of the Comptroller of the Currency. The success of these changes is meant to be judged by things that don't happen — by financial disruptions avoided or minimized. Requiring banks to provide reams of additional data will create jobs for lawyers and analysts, but will it produce better results?

Too big to fail Authorizes regulators to impose restrictions on large, troubled financial companies. Creates a process for the government to liquidate failing companies at no cost to taxpayers, which is similar to the F.D.I.C. process for liquidating failed banks. Regulators have considerable leeway to impose restrictions on the largest financial companies, which could give smaller banks competitive advantages. Large foreign banks may not face comparable restrictions, which could place American banks at a competitive disadvantage in both domestic and foreign markets.

Shareholder protections Requires companies to have executive compensation set by independent directors. Gives shareholders a nonbinding vote on those decisions. Giving shareholders a formal opportunity to register concerns about compensation could place pressure on companies to adjust pay practices. The demand for independent directors with financial experience may outstrip the supply of qualified people willing to shoulder the expanded responsibilities.

Proprietary trading Restricts banks from making speculative investments with their own money, a provision known as the Volcker Rule, but allows banks to take small stakes in investment funds including hedge funds and private equity funds The departure of sophisticated traders who often enjoyed information advantages could benefit private traders and smaller firms. Goldman Sachs has estimated that 10 percent of its revenue comes from activities that could be defined as proprietary trading; other banks have less at stake.

Investor protections Requires companies selling certain complex financial products, most notably mortgage-backed securities, to retain a portion of the risk. Allows investors to sue credit ratings agencies. The changes could help restore the willingness of investors to provide money for mortgages and other consumer loans. The new rules will reduce profit margins, raising concerns that banks and investors may choose to put their money in other places.

[JackRiddler]

So what's up in Iceland?!

http://www.nytimes.com/2010/06/26/world ... nted=print
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Icelander’s Campaign Is a Joke, Until He’s Elected
June 25, 2010

By SALLY McGRANE

REYKJAVIK, Iceland — A polar bear display for the zoo. Free towels at public swimming pools. A “drug-free Parliament by 2020.” Iceland’s Best Party, founded in December by a comedian, Jon Gnarr, to satirize his country’s political system, ran a campaign that was one big joke. Or was it?

Last month, in the depressed aftermath of the country’s financial collapse, the Best Party emerged as the biggest winner in Reykjavik’s elections, with 34.7 percent of the vote, and Mr. Gnarr — who also promised a classroom of kindergartners he would build a Disneyland at the airport — is now the fourth mayor in four years of a city that is home to more than a third of the island’s 320,000 people.

In his acceptance speech he tried to calm the fears of the other 65.3 percent. “No one has to be afraid of the Best Party,” he said, “because it is the best party. If it wasn’t, it would be called the Worst Party or the Bad Party. We would never work with a party like that.”

With his party having won 6 of the City Council’s 15 seats, Mr. Gnarr needed a coalition partner, but ruled out any party whose members had not seen all five seasons of “The Wire.”

A sandy-haired 43-year-old, Mr. Gnarr is best known here for playing a television and film character named Georg Bjarnfredarson, a nasty, bald, middle-aged, Swedish-educated Marxist whose childhood was ruined by a militant feminist mother.

While his career may have given him visibility, few here doubt what actually propelled him into office. “It’s a protest vote,” said Gunnar Helgi Kristinsson, a political science professor at the University of Iceland.

In one of the first signs of Europe’s financial troubles, Iceland’s banks crashed in 2008, plunging the country into crisis. In April, voters were further upset by a report that detailed extreme negligence, cronyism and incompetence at the highest levels of government. They were ready for someone, anyone, other than the usual suspects, Professor Kristinsson said.

“People know Jon Gnarr is a good comedian, but they don’t know anything about his politics,” he said. “And even as a comedian, you never know if he’s serious or if he’s joking.”

But as Mr. Gnarr settles into the mayor’s office, he does not seem to be kidding at all.

The Best Party, whose members include a who’s who of Iceland’s punk rock scene, formed a coalition with the center-left Social Democrats (despite Mr. Gnarr’s suspicion that party leaders had assigned an underling to watch “The Wire” and take notes). With that, Mr. Gnarr took office last week, hoping to serve out a full, four-year term, and the new government granted free admission to swimming pools for everyone under 18. Its plans include turning Reykjavik, with its plentiful supply of geothermal energy, into a hub for electric cars.

“Just because something is funny doesn’t mean it isn’t serious,” said Mr. Gnarr, whose foreign relations experience includes a radio show in which he regularly crank-called the White House, the C.I.A., the F.B.I. and police stations in the Bronx to see if they had found his lost wallet.

THE polar bear idea, for example, was not totally facetious. As a result of global warming, a handful of polar bears have swum to Iceland in recent years and been shot. Better, Mr. Gnarr said, to capture them and put them in the zoo.

The free towels? That evolved from an idea to attract more tourists by attaining spa status for the city’s public pools, which have seawater and sulfur baths. For accreditation under certain European Union rules, however, a spa has to offer free towels, so that became a campaign slogan.

Mr. Gnarr, born in Reykjavik as Jon Gunnar Kristinsson to a policeman and a kitchen worker, was not a model child. At 11, he decided school was useless to his future as a circus clown or pirate and refused to learn any more. At 13, he stopped going to class and joined Reykjavik’s punk scene. At 14, he was sent to a boarding school for troubled teenagers and stayed until he was 16, when he left school for good.

Back in Reykjavik, he worked odd jobs, rented rooms, joined activist groups like Greenpeace and considered himself an anarchist (he still does). He also wrote poetry and traveled with the Sugarcubes, Bjork’s first band. He said he hated music but was a good singer, and began his career with humorous songs punctuated by monologues.

“I didn’t have many job options,” he said. “It was a way of making a living and still having fun.” His wife, Johanna Johannsdottir, a massage therapist, is Bjork’s best friend.

Mr. Gnarr said his idea for the Best Party was born of the profound distress and moral confusion after the banking collapse, when Icelanders fiercely debated their obligation to repay ruined British and Dutch depositors.

Practically speaking, Mr. Gnarr said he had no qualms. “Why should I repay money I never spent?” he asked, a common sentiment here. But on a deeper level, he had misgivings.

“I consider myself a very moral person,” he said. “Suddenly, I felt like a character in a Beckett play, where you have moral obligations towards something you have no possibility of understanding. It was like ‘Waiting for Godot’ — I was in limbo.”

LAST winter, he opened a Best Party Web site and started writing surreal “political” articles. “I got such good reactions to it,” Mr. Gnarr said, “and I started sensing the need for this — a breath of fresh air, a new interaction.”

The campaign released a popular video set to Tina Turner’s “The Best,” in which Mr. Gnarr posed with a stuffed polar bear and petted a rock, while joining his supporters in singing about the Best Party.

“A lot of us are singers,” said Ottarr Proppe, the third-ranking member of the Best Party, who was with the cult rock band HAM and the punk band Rass. Mr. Proppe now sits on the city’s executive board, where he will be deciding matters like how much money to allocate for roads. “Making a video was very easy,” he said.

At a recent budget meeting, Mr. Proppe, who has a wild red beard, ran his hand through his bleached-blond hair as he studied the fiscal report from behind tinted, gold-rimmed glasses. His old band mate S. Bjorn Blondal quizzed the city’s comptroller. Heida Helgadottir, who ran the campaign and is now assistant to the mayor, wore a diaphanous minidress and typed notes.

Mr. Gnarr, who comes across as thoughtful and reserved, did not speak often. When he did he had the whole room, including the strait-laced Social Democrat, in stitches. Still, he is not just playing a cutup; friends describe his move to politics as a spiritual awakening. He agreed.

“Of all the projects I’ve been involved with, this one has given me the most satisfaction, the greatest sense of contentment.”

[JackRiddler]

jingofever started a new thread on Wachovia laundering drug money, adding, "There are videos at the link but I haven't watched them."

http://www.bloomberg.com/news/2010-06-2 ... -deal.html
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Banks Financing Mexico Gangs Admitted in Wells Fargo Deal
By Michael Smith - Jun 29, 2010

Just before sunset on April 10, 2006, a DC-9 jet landed at the international airport in the port city of Ciudad del Carmen, 500 miles east of Mexico City. As soldiers on the ground approached the plane, the crew tried to shoo them away, saying there was a dangerous oil leak. So the troops grew suspicious and searched the jet.

They found 128 black suitcases, packed with 5.7 tons of cocaine, valued at $100 million. The stash was supposed to have been delivered from Caracas to drug traffickers in Toluca, near Mexico City, Mexican prosecutors later found. Law enforcement officials also discovered something else.

The smugglers had bought the DC-9 with laundered funds they transferred through two of the biggest banks in the U.S.: Wachovia Corp. and Bank of America Corp., Bloomberg Markets magazine reports in its August 2010 issue.

This was no isolated incident. Wachovia, it turns out, had made a habit of helping move money for Mexican drug smugglers. Wells Fargo & Co., which bought Wachovia in 2008, has admitted in court that its unit failed to monitor and report suspected money laundering by narcotics traffickers -- including the cash used to buy four planes that shipped a total of 22 tons of cocaine.

The admission came in an agreement that Charlotte, North Carolina-based Wachovia struck with federal prosecutors in March, and it sheds light on the largely undocumented role of U.S. banks in contributing to the violent drug trade that has convulsed Mexico for the past four years.

‘Blatant Disregard’

Wachovia admitted it didn’t do enough to spot illicit funds in handling $378.4 billion for Mexican-currency-exchange houses from 2004 to 2007. That’s the largest violation of the Bank Secrecy Act, an anti-money-laundering law, in U.S. history -- a sum equal to one-third of Mexico’s current gross domestic product.

“Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations,” says Jeffrey Sloman, the federal prosecutor who handled the case.

Since 2006, more than 22,000 people have been killed in drug-related battles that have raged mostly along the 2,000-mile (3,200-kilometer) border that Mexico shares with the U.S. In the Mexican city of Ciudad Juarez, just across the border from El Paso, Texas, 700 people had been murdered this year as of mid- June. Six Juarez police officers were slaughtered by automatic weapons fire in a midday ambush in April.

Rondolfo Torre, the leading candidate for governor in the Mexican border state of Tamaulipas, was gunned down yesterday, less than a week before elections in which violence related to drug trafficking was a central issue.

45,000 Troops

Mexican President Felipe Calderon vowed to crush the drug cartels when he took office in December 2006, and he’s since deployed 45,000 troops to fight the cartels. They’ve had little success.

Among the dead are police, soldiers, journalists and ordinary citizens. The U.S. has pledged Mexico $1.1 billion in the past two years to aid in the fight against narcotics cartels.

In May, President Barack Obama said he’d send 1,200 National Guard troops, adding to the 17,400 agents on the U.S. side of the border to help stem drug traffic and illegal immigration.

Behind the carnage in Mexico is an industry that supplies hundreds of tons of cocaine, heroin, marijuana and methamphetamines to Americans. The cartels have built a network of dealers in 231 U.S. cities from coast to coast, taking in about $39 billion in sales annually, according to the Justice Department.

‘You’re Missing the Point’

Twenty million people in the U.S. regularly use illegal drugs, spurring street crime and wrecking families. Narcotics cost the U.S. economy $215 billion a year -- enough to cover health care for 30.9 million Americans -- in overburdened courts, prisons and hospitals and lost productivity, the department says.

“It’s the banks laundering money for the cartels that finances the tragedy,” says Martin Woods, director of Wachovia’s anti-money-laundering unit in London from 2006 to 2009. Woods says he quit the bank in disgust after executives ignored his documentation that drug dealers were funneling money through Wachovia’s branch network.

“If you don’t see the correlation between the money laundering by banks and the 22,000 people killed in Mexico, you’re missing the point,” Woods says.

Cleansing Dirty Cash

Wachovia is just one of the U.S. and European banks that have been used for drug money laundering. For the past two decades, Latin American drug traffickers have gone to U.S. banks to cleanse their dirty cash, says Paul Campo, head of the U.S. Drug Enforcement Administration’s financial crimes unit.

Miami-based American Express Bank International paid fines in both 1994 and 2007 after admitting it had failed to spot and report drug dealers laundering money through its accounts. Drug traffickers used accounts at Bank of America in Oklahoma City to buy three planes that carried 10 tons of cocaine, according to Mexican court filings.

Federal agents caught people who work for Mexican cartels depositing illicit funds in Bank of America accounts in Atlanta, Chicago and Brownsville, Texas, from 2002 to 2009. Mexican drug dealers used shell companies to open accounts at London-based HSBC Holdings Plc, Europe’s biggest bank by assets, an investigation by the Mexican Finance Ministry found.

Following Rules

Those two banks weren’t accused of wrongdoing. Bank of America spokeswoman Shirley Norton and HSBC spokesman Roy Caple say laws bar them from discussing specific clients. They say their banks strictly follow the government rules.

“Bank of America takes its anti-money-laundering responsibilities very seriously,” Norton says.

A Mexican judge on Jan. 22 accused the owners of six centros cambiarios, or money changers, in Culiacan and Tijuana of laundering drug funds through their accounts at the Mexican units of Banco Santander SA, Citigroup Inc. and HSBC, according to court documents filed in the case.

The money changers are in jail while being tried. Citigroup, HSBC and Santander, which is the largest Spanish bank by assets, weren’t accused of any wrongdoing. The three banks say Mexican law bars them from commenting on the case, adding that they each carefully enforce anti-money-laundering programs.

HSBC has stopped accepting dollar deposits in Mexico, and Citigroup no longer allows noncustomers to change dollars there. Citigroup detected suspicious activity in the Tijuana accounts, reported it to regulators and closed the accounts, Citigroup spokesman Paulo Carreno says.

Criminal Empires

On June 15, the Mexican Finance Ministry announced it would set limits for banks on cash deposits in dollars.

Mexico’s drug cartels have become multinational criminal enterprises.

Some of the gangs have delved into other illegal activities such as gunrunning, kidnapping and smuggling people across the border, as well as into seemingly legitimate areas such as trucking, travel services and air cargo transport, according to the Justice Department’s National Drug Intelligence Center.

These criminal empires have no choice but to use the global banking system to finance their businesses, Mexican Senator Felipe Gonzalez says.

“With so much cash, the only way to move this money is through the banks,” says Gonzalez, who represents a central Mexican state and chairs the senate public safety committee.

Gonzalez, a member of Calderon’s National Action Party, carries a .38 revolver for personal protection.

“I know this won’t stop the narcos when they come through that door with machine guns,” he says, pointing to the entrance to his office. “But at least I’ll take one with me.”

Subprime Losses

No bank has been more closely connected with Mexican money laundering than Wachovia. Founded in 1879, Wachovia became the largest bank by assets in the southeastern U.S. by 1900. After the Great Depression, some people in North Carolina called the bank “Walk-Over-Ya” because it had foreclosed on farms in the region.

By 2008, Wachovia was the sixth-largest U.S. lender, and it faced $26 billion in losses from subprime mortgage loans. That cost Wachovia Chief Executive Officer Kennedy Thompson his job in June 2008.

Six months later, San Francisco-based Wells Fargo, which dates from 1852, bought Wachovia for $12.7 billion, creating the largest network of bank branches in the U.S. Thompson, who now works for private-equity firm Aquiline Capital Partners LLC in New York, declined to comment.

As Wachovia’s balance sheet was bleeding, its legal woes were mounting. In the three years leading up to Wachovia’s agreement with the Justice Department, grand juries served the bank with 6,700 subpoenas requesting information.

Not Quick Enough

The bank didn’t react quickly enough to the prosecutors’ requests and failed to hire enough investigators, the U.S. Treasury Department said in March. After a 22-month investigation, the Justice Department on March 12 charged Wachovia with violating the Bank Secrecy Act by failing to run an effective anti-money-laundering program.

Five days later, Wells Fargo promised in a Miami federal courtroom to revamp its detection systems. Wachovia’s new owner paid $160 million in fines and penalties, less than 2 percent of its $12.3 billion profit in 2009.

If Wells Fargo keeps its pledge, the U.S. government will, according to the agreement, drop all charges against the bank in March 2011.

Wells Fargo regrets that some of Wachovia’s former anti- money-laundering efforts fell short, spokeswoman Mary Eshet says. Wells Fargo has invested $42 million in the past three years to improve its anti-money-laundering program and has been working with regulators, she says.

‘Significantly Upgraded’

“We have substantially increased the caliber and number of staff in our international investigations group, and we also significantly upgraded the monitoring software,” Eshet says. The agreement bars the bank from contesting or contradicting the facts in its admission.

The bank declined to answer specific questions, including how much it made by handling $378.4 billion -- including $4 billion of cash-from Mexican exchange companies.

The 1970 Bank Secrecy Act requires banks to report all cash transactions above $10,000 to regulators and to tell the government about other suspected money-laundering activity. Big banks employ hundreds of investigators and spend millions of dollars on software programs to scour accounts.

No big U.S. bank -- Wells Fargo included -- has ever been indicted for violating the Bank Secrecy Act or any other federal law. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again.

‘No Capacity to Regulate’

Large banks are protected from indictments by a variant of the too-big-to-fail theory.

Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets, says Jack Blum, a U.S. Senate investigator for 14 years and a consultant to international banks and brokerage firms on money laundering.

The theory is like a get-out-of-jail-free card for big banks, Blum says.

“There’s no capacity to regulate or punish them because they’re too big to be threatened with failure,” Blum says. “They seem to be willing to do anything that improves their bottom line, until they’re caught.”

Wachovia’s run-in with federal prosecutors hasn’t troubled investors. Wells Fargo’s stock traded at $30.86 on March 24, up 1 percent in the week after the March 17 agreement was announced.

Moving money is central to the drug trade -- from the cash that people tape to their bodies as they cross the U.S.-Mexican border to the $100,000 wire transfers they send from Mexican exchange houses to big U.S. banks.

‘Doesn’t Stop Anyone’

In Tijuana, 15 miles south of San Diego, Gustavo Rojas has lived for a quarter of a century in a shack in the shadow of the 10-foot-high (3-meter-high) steel border fence that separates the U.S. and Mexico there. He points to holes burrowed under the barrier.

“They go across with drugs and come back with cash,” Rojas, 75, says. “This fence doesn’t stop anyone.”

Drug money moves back and forth across the border in an endless cycle. In the U.S., couriers take the cash from drug sales to Mexico -- as much as $29 billion a year, according to U.S. Immigration and Customs Enforcement. That would be about 319 tons of $100 bills.

They hide it in cars and trucks to smuggle into Mexico. There, cartels pay people to deposit some of the cash into Mexican banks and branches of international banks. The narcos launder much of what’s left through money changers.

The Money Changers

Anyone who has been to Mexico is familiar with these street-corner money changers; Mexican regulators say there are at least 3,000 of them from Tijuana to Cancun, usually displaying large signs advertising the day’s dollar-peso exchange rate.

Mexican banks are regulated by the National Banking and Securities Commission, which has an anti-money-laundering unit; the money changers are policed by Mexico’s Tax Service Administration, which has no such unit.

By law, the money changers have to demand identification from anyone exchanging more than $500. They also have to report transactions higher than $5,000 to regulators.

The cartels get around these requirements by employing legions of individuals -- including relatives, maids and gardeners -- to convert small amounts of dollars into pesos or to make deposits in local banks. After that, cartels wire the money to a multinational bank.

The Smurfs

The people making the small money exchanges are known as Smurfs, after the cartoon characters.

“They can use an army of people like Smurfs and go through $1 million before lunchtime,” says Jerry Robinette, who oversees U.S. Immigration and Customs Enforcement operations along the border in east Texas.

The U.S. Treasury has been warning banks about big Mexican- currency-exchange firms laundering drug money since 1996. By 2004, many U.S. banks had closed their accounts with these companies, which are known as casas de cambio.

Wachovia ignored warnings by regulators and police, according to the deferred-prosecution agreement.

“As early as 2004, Wachovia understood the risk,” the bank admitted in court. “Despite these warnings, Wachovia remained in the business.”

One customer that Wachovia took on in 2004 was Casa de Cambio Puebla SA, a Puebla, Mexico-based currency-exchange company. Pedro Alatorre, who ran a Puebla branch in Mexico City, had created front companies for cartels, according to a pending Mexican criminal case against him.

Federal Indictment

A federal grand jury in Miami indicted Puebla, Alatorre and three other executives in February 2008 for drug trafficking and money laundering. In May 2008, the Justice Department sought extradition of the suspects, saying they used shell firms to launder $720 million through U.S. banks.

Alatorre has been in a Mexican jail for 2 1/2 years. He denies any wrongdoing, his lawyer Mauricio Moreno says. Alatorre has made no court-filed responses in the U.S.

During the period in which Wachovia admitted to moving money out of Mexico for Puebla, couriers carrying clear plastic bags stuffed with cash went to the branch Alatorre ran at the Mexico City airport, according to surveillance reports by Mexican police.

Alatorre opened accounts at HSBC on behalf of front companies, Mexican investigators found.

Puebla executives used the stolen identities of 74 people to launder money through Wachovia accounts, Mexican prosecutors say in court-filed reports.

‘Never Reported’

“Wachovia handled all the transfers, and they never reported any as suspicious,” says Jose Luis Marmolejo, a former head of the Mexican attorney general’s financial crimes unit who is now in private practice.

In November 2005 and January 2006, Wachovia transferred a total of $300,000 from Puebla to a Bank of America account in Oklahoma City, according to information in the Alatorre cases in the U.S. and Mexico.

Drug smugglers used the funds to buy the DC-9 through Oklahoma City aircraft broker U.S. Aircraft Titles Inc., according to financial records cited in the Mexican criminal case. U.S. Aircraft Titles President Sue White declined to comment.

On April 5, 2006, a pilot flew the plane from St. Petersburg, Florida, to Caracas to pick up the cocaine, according to the DEA. Five days later, troops seized the plane in Ciudad del Carmen and burned the drugs at a nearby army base.

‘Wachovia Knew’

“I am sure Wachovia knew what was going on,” says Marmolejo, who oversaw the criminal investigation into Wachovia’s customers. “It went on too long and they made too much money not to have known.”

At Wachovia’s anti-money-laundering unit in London, Woods and his colleague Jim DeFazio, in Charlotte, say they suspected that drug dealers were using the bank to move funds.

Woods, a former Scotland Yard investigator, spotted illegible signatures and other suspicious markings on traveler’s checks from Mexican exchange companies, he said in a September 2008 letter to the U.K. Financial Services Authority. He sent copies of the letter to the DEA and Treasury Department in the U.S.

Woods, 45, says his bosses instructed him to keep quiet and tried to have him fired, according to his letter to the FSA. In one meeting, a bank official insisted Woods shouldn’t have filed suspicious activity reports to the government, as both U.S. and U.K. laws require.

‘I Was Shocked’

“I was shocked by the content and outcome of the meeting and genuinely traumatized,” Woods wrote.

In the U.S., DeFazio, who had been a Federal Bureau of Investigation agent for 21 years, says he told bank executives in 2005 that the DEA was probing the transfers through Wachovia to buy the planes.

Bank executives spurned recommendations to close suspicious accounts, DeFazio, 63, says.

“I think they looked at the money and said, ‘The hell with it. We’re going to bring it in, and look at all the money we’ll make,’” DeFazio says.

DeFazio retired in 2008.

“I didn’t want anything from them,” he says. “I just wanted to get out.”

Woods, who resigned from Wachovia in May 2009, now advises banks on how to combat money laundering. He declined to discuss details of Wachovia’s actions.

U.S. Comptroller of the Currency John Dugan told Woods in a March 19 letter his efforts had helped the U.S. build its case against Wachovia.

‘Great Courage’

“You demonstrated great courage and integrity by speaking up when you saw problems,” Dugan wrote.

It was the Puebla investigation that led U.S. authorities to the broader probe of Wachovia. On May 16, 2007, DEA agents conducted a raid of Wachovia’s international banking offices in Miami. They had a court order to seize Puebla’s accounts.

U.S. prosecutors and investigators then scrutinized the bank’s dealings with Mexican-currency-exchange firms. That led to the March deferred-prosecution agreement.

With Puebla’s Wachovia accounts seized, Alatorre and his partners shifted their laundering scheme to HSBC, according to financial documents cited in the Mexican criminal case against Alatorre.

In the three weeks after the DEA raided Wachovia, two of Alatorre’s front companies, Grupo ETPB SA and Grupo Rahero SC, made 12 cash deposits totaling $1 million at an HSBC Mexican branch, Mexican investigators found.

Another Drug Plane

The funds financed a Beechcraft King Air 200 plane that police seized on Dec. 29, 2007, in Cuernavaca, 50 miles south of Mexico City, according to information in the case against Alatorre.

For years, federal authorities watched as the wife and daughter of Oscar Oropeza, a drug smuggler working for the Matamoros-based Gulf Cartel, deposited stacks of cash at a Bank of America branch on Boca Chica Boulevard in Brownsville, Texas, less than 3 miles from the border.

Investigator Robinette sits in his pickup truck across the street from that branch. It’s a one-story, tan stucco building next to a Kentucky Fried Chicken outlet. Robinette discusses the Oropeza case with Tom Salazar, an agent who investigated the family.

“Everybody in there knew who they were -- the tellers, everyone,” Salazar says. “The bank never came to us, though.”

New Meaning

The Oropeza case gives a new, literal meaning to the term money laundering. Oropeza’s wife, Tina Marie, and daughter Paulina Marie deposited stashes of $20 bills several times a day into Bank of America accounts, Salazar says. Bank employees got to know the Oropezas by the smell of their money.

“I asked the tellers what they were talking about, and they said the money had this sweet smell like Bounce, those sheets you throw into the dryer,” Salazar says. “They told me that when they opened the vault, the smell of Bounce just poured out.”

Oropeza, 48, was arrested 820 miles from Brownsville. On May 31, 2007, police in Saraland, Alabama, stopped him on a traffic violation. Checking his record, they learned of the investigation in Texas.

They searched the van and discovered 84 kilograms (185 pounds) of cocaine hidden under a false floor. That allowed federal agents to freeze Oropeza’s bank accounts and search his marble-floored home in Brownsville, Robinette says. Inside, investigators found a supply of Bounce alongside the clothes dryer.

Guilty Pleas

All three Oropezas pleaded guilty in U.S. District Court in Brownsville to drug and money-laundering charges in March and April 2008. Oscar Oropeza was sentenced to 15 years in prison; his wife was ordered to serve 10 months and his daughter got 6 months.

Bank of America’s Norton says, “We not only fulfilled our regulatory obligation, but we proactively worked with law enforcement on these matters.”

Prosecutors have tried to halt money laundering at American Express Bank International twice. In 1994, the bank, then a subsidiary of New York-based American Express Co., pledged not to allow money laundering again after two employees were convicted in a criminal case involving drug trafficker Juan Garcia Abrego.

In 1994, the bank paid $14 million to settle. Five years later, drug money again flowed through American Express Bank. Between 1999 and 2004, the bank failed to stop clients from laundering $55 million of narcotics funds, the bank admitted in a deferred-prosecution agreement in August 2007.

Western Union

It paid $65 million to the U.S. and promised not to break the law again. The government dismissed the criminal charge a year later. American Express sold the bank to London-based Standard Chartered PLC in February 2008 for $823 million.

Banks aren’t the only financial institutions that have turned a blind eye to drug cartels in moving illicit funds. Western Union Co., the world’s largest money transfer firm, agreed to pay $94 million in February 2010 to settle civil and criminal investigations by the Arizona attorney general’s office.

Undercover state police posing as drug dealers bribed Western Union employees to illegally transfer money, says Cameron Holmes, an assistant attorney general.

“Their allegiance was to the smugglers,” Holmes says. “What they thought about during work was ‘How may I please my highest- spending customers the most?’”

Smudged Fingerprints

Workers in more than 20 Western Union offices allowed the customers to use multiple names, pass fictitious identifications and smudge their fingerprints on documents, investigators say in court records.

“In all the time we did undercover operations, we never once had a bribe turned down,” says Holmes, citing court affidavits.

Western Union has made significant improvements, it complies with anti-money-laundering laws and works closely with regulators and police, spokesman Tom Fitzgerald says.

For four years, Mexican authorities have been fighting a losing battle against the cartels. The police are often two steps behind the criminals. Near the southeastern corner of Texas, in Matamoros, more than 50 combat troops surround a police station.

Officers take two suspected drug traffickers inside for questioning. Nearby, two young men wearing white T-shirts and baggy pants watch and whisper into radios. These are los halcones (the falcons), whose job is to let the cartel bosses know what the police are doing.

‘Only Way’

While the police are outmaneuvered and outgunned, ordinary Mexicans live in fear. Rojas, the man who lives in the Tijuana slum near the border fence, recalls cowering in his home as smugglers shot it out with the police.

“The only way to survive is to stay out of the way and hope the violence, the bullets, don’t come for you,” Rojas says.

To make their criminal enterprises work, the drug cartels of Mexico need to move billions of dollars across borders. That’s how they finance the purchase of drugs, planes, weapons and safe houses, Senator Gonzalez says.

“They are multinational businesses, after all,” says Gonzalez, as he slowly loads his revolver at his desk in his Mexico City office. “And they cannot work without a bank.”

[JackRiddler]

http://counterpunch.org/baker06292010.html
(Article reproduced here under fair-use provisions, with original link given, solely for non-commercial purposes of archiving, education and discussion.)

Is Advice From the IMF Better Than Advice From a Drunk on the Street?

June 29, 2010
Trust Them? Why?


By DEAN BAKER

That is the question that people around the world should be asking as the International Monetary Fund dishes out its prescription for austerity. The IMF program calls for cutbacks in government support for health care, pensions and a wide range of other public services. It also calls for weakening labor market regulations that provide workers with job security.

These recommendations are being given in a context where the world economy is suffering from a massive shortfall of demand. In other words, tens of millions of people are unemployed right now because there is not enough spending to keep them employed. The IMF’s program is almost certain to reduce spending further leading to even larger shortfalls in demand and more unemployment.

But, the IMF says that we should trust them. The question we should all be asking is “why?”

Where was the IMF when the housing bubble in the United States and elsewhere was inflating to ever more dangerous levels? Was it frantically yelling at governments to rein in the bubbles before they burst with disastrous consequences? After all, what could possibly have been more important than warning of the dangers of these bubbles?

It was easy to both recognize the housing bubbles and that their collapse would have devastating consequences for the economy. Economies don’t adjust easily to a loss of wealth that in some cases exceeded 50 percent of GDP.

Real economists know this, but apparently the folks at the IMF did not, or if they did, they didn’t think it was worth saying anything. One will look in vain through IMF publications during the buildup of the housing bubble for serious warnings of the potential dangers. While the IMF can scream about the need for austerity today, it couldn’t be bothered to say much about the bubbles that got us here.

The IMF’s track record gives us reason not only to question the institution’s competence but also its motivations. This question comes up most clearly in the case of Argentina. At the end of 2001 Argentina defaulted on its debt, enraging the IMF. Prior to the default, Argentina had been an IMF poster child eagerly embracing the IMF's program. The IMF's growth forecasts clearly reflected its change of attitude towards Argentina. Prior to the default the IMF was consistently overly optimistic about Argentina's growth prospects, projecting much higher growth than Argentina actually experienced. After the default, the IMF was hugely over-pessimistic, projecting much lower growth rates than it subsequently experienced. It is difficult to explain this pattern of errors except by a political motivation.

It is possible to see a similar pattern in the IMF’s latest set of policy recommendations to deal with the economic crisis. The impact of most of its proposals will be to reduce the benefits received by ordinary workers. The proposed changes in labor market regulations will likely also weaken workers’ bargaining power, leading to cuts in wages. Furthermore, the reduction in demand caused by the turn to austerity will leave millions more out of work, both depriving these workers of income and further weakening the bargaining power of those who still have jobs.

There are alternatives. Central banks like the European Central Bank, the Bank of England and the Federal Reserve Board could just buy and hold large amounts of government debt. These central banks can both ensure that there are no questions of solvency by providing a ready market for government debt and that there is no build-up of interest burdens. The interest paid on the debt held by the banks is refunded to governments.

Large-scale central bank purchases of government debt will not create inflation in a context of massive unemployment and excess capacity. This is not a point we have to debate. Japan’s central bank has bought an amount of government debt roughly equal to its GDP, yet it remains far more concerned about deflation than inflation. While we could hope to do better on the stimulus front than Japan, inflation is simply not a problem it faces now or even on the distant horizon.

It is especially painful to see these calls from austerity coming from the IMF. This organization is distinguished not only by its dismal track record in pushing economic policies that don’t work; it also is known for the exorbitant benefits that it gives its economists. Under the IMF’s pension program, many staffers can retire in their early 50s with six-figure pensions. Imagine the folks who completely missed the housing bubble or who got it totally wrong on Argentina lounging around the tropics at age 51 on their $100,000 a year IMF pension. At least a street drunk giving economic advice would be honest.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This column was originally published by The Guardian.

[JackRiddler]

Recall that Russell Feingold was the 1 in the Senate vote on the USA PATRIOT Act (92-1). He objects to the banking bill because it is cosmetic. Scott Brown objects because it would put a small tax on the precious banks. Guess which option the Democratic leadership follows in its effort to get the needed 60 Senate votes? If things go true to usual form, Scott Brown will be voting against the cloture motion anyway.

So for a start, what was wrong with just restoring the Glass-Steagal provisions that were in place for almost 70 years and would have prevented so much of the crooked trading of the last 11 years?

It would actually be better for the Democrats if this timid thing goes down. With the resumption of the crash as good as inevitable by the end of the year, they get to claim their sorry half-measures would have made a difference.

http://www.reuters.com/article/idUSWEN640420100628
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(Feingold Won't Vote for Bill)

June 28 (Reuters) - Senator Russell Feingold said on Monday that he will not vote to advance the financial-reform bill, denying his fellow Democrats the 60th vote they need to clear a final hurdle in Congress.


"My test for the financial regulatory reform bill is whether it will prevent another crisis," Feingold said in a prepared statement. The bill "fails that test and for that reason I will not vote to advance it."

(Reporting by Andy Sullivan)

Feingold says won't vote to advance Wall St bill
WASHINGTON
Mon Jun 28, 2010 5:23pm EDT
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http://www.reuters.com/article/idUSTRE65L4A920100629
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Democrats dump bank tax from financial reform bill

Rachelle Younglai and Kevin Drawbaugh
WASHINGTON
Tue Jun 29, 2010 7:49pm EDT

The day ahead: June 29, 2010
Mon, Jun 28 2010

Byrd's death won't derail reform
Mon, Jun 28 2010
Byrd's death won't derail reform

(Reuters) - Democrats on Tuesday stripped out a controversial tax from their landmark financial reform bill in a scramble to win the votes needed to pass it through Congress.

Politics

Democrats hoped the change would draw enough moderate Republicans to allow them to pass the sweeping overhaul through both chambers of Congress and send it to President Barack Obama to sign into law by July 4.

Though a supposedly final version of the bill had been hammered out last week, Democrats called a fresh negotiating session after support for the bill appeared to be waning.

Heeding the concerns of moderate Senate Republicans, they axed a $17.9 billion tax on large financial institutions that was added to cover the bill's costs in the wee hours on Friday as lawmakers wrapped up an all-night bargaining session.

Their new plan would cover most of the bill's costs by shutting down the government's $700 billion bank bailout fund ahead of schedule. It also would raise the amount that banks must pay to insure their customer's deposits.

"I'm prepared to make some compromises to get this very important bill through," said Democratic Representative Barney Frank, who has overseen the process.

Democrats hope they can still meet their July 4 timetable. Leaders in the House of Representatives set the stage for a quick vote on Wednesday, while their counterparts in the Senate hoped to act by the end of the week.

But their plans may be complicated by the death of Democratic Senator Robert Byrd. His absence leaves them one vote short of the 60 needed to clear a Republican procedural hurdle in the 100-seat chamber.

Furthermore, Byrd's body was scheduled to lie in state on the Senate floor on Thursday, delaying any legislative action.

Analysts said while that timetable may slip, they were confident the bill would eventually become law.

"Not a question of if, but when," Concept Capital analyst Chris Krueger said in an e-mail.

The bill, which aims to prevent a repeat of the 2007-2009 financial crisis that shook the global economy, is a top priority for Obama and would give him and fellow Democrats a big legislative win ahead of November congressional elections.

RETIRING TARP EARLY

It would force banks to reduce, but not cease, risky trading and investing, set up a new government process for liquidating troubled financial firms and establish a new consumer-protection bureau. It would saddle financial firms with a host of new regulations and reduce their profits.

Wall Street and many Republicans have tried to delay or water down the bill, but it has grown stronger during its yearlong journey though Congress as Democrats have ridden a wave of public disgust at an industry that has awarded itself fat paydays while the rest of the country struggles with high unemployment.

A handful of moderate Republican senators, mindful of the measure's popularity, managed to win concessions in return for helping the Democrats advance it, but several threatened to withdraw their support over the bank tax.

The new funding mechanism would shut down the politically unpopular Troubled Asset Relief Program, which was set up in 2008 to buy toxic assets from banks but was instead used to bail out teetering Wall Street giants and Detroit automakers.

The program is currently scheduled to expire in October, except for companies like General Motors that still rely on it.

Shutting it down early would save $11 billion, Democrats said.

The bill would raise another $5.7 billion by raising the fees that banks pay to the Federal Deposit Insurance Corp to insure their deposits from 1.15 percent to 1.35 percent.

Republicans said the new approach was simply a budgeting trick. The repaid bailout money should be used to pay down the deficit, they said.

"This is fraud on the American taxpayer, that's clear and simple," Republican Senator Judd Gregg said.

Democrats countered that they had to drop their original funding mechanism, which would have cost financial firms at least $50 billion, because of Republican objections.

(Additional reporting by Kim Dixon, Corbett Daly, Susan Cornwell, David Morgan, Richard Cowan and Andy Sullivan in Washington and Joe Rauch in Charlotte; writing by Andy Sullivan; editing by Anthony Boadle)

[JackRiddler]

http://www.truth-out.org/goldman-admits ... deals60913
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Goldman Admits It Had Bigger Role in AIG Deals

Tuesday 29 June 2010

by: Greg Gordon | McClatchy Newspapers | Report

Reversing its oft-repeated position that it was acting only on behalf of its clients in its exotic dealings with the American International Group, Goldman Sachs now says that it also used its own money to make secret wagers against the U.S. housing market.

A senior Goldman executive disclosed the "bilateral" wagers on subprime mortgages in an interview with McClatchy, marking the first time that the Wall Street titan has conceded that its dealings with troubled insurer AIG went far beyond acting as an "intermediary" responding to its clients' demands.

The official, who Goldman made available to McClatchy on the condition he remain anonymous, declined to reveal how much money Goldman reaped from its trades with AIG.

However, the wagers were part of a package of deals that had a face value of $3 billion, and in a recent settlement, AIG agreed to pay Goldman between $1.5 billion and $2 billion. AIG's losses on those deals, for which Goldman is thought to have paid less than $10 million, were ultimately borne by taxpayers as part of the government's bailout of the insurer.

With returns of 150 to 1 on $10 million, throwing in another $50 or even $100 million in kickbacks to the AIG traders making these insane deals would have been peanuts, with the only problem (if it's a problem) being how to disguise these. I'm sure our intrepid SEC lawyers are all over that possibility. I suppose it's a good sign that Goldman feels compelled to make any admissions.

Goldman's proprietary trades with AIG in 2005 and 2006 are among those that many members of Congress sought unsuccessfully to ban during recent negotiations for tougher federal regulation of the financial industry.

A McClatchy examination, including a review of public records and interviews with present and former Wall Street executives, casts doubt on several of Goldman's claims about its dealings with AIG, which at the time was the world's largest insurer.

For example:

_ The latest disclosure undercuts Goldman's repeated insistence during the past year that it acted merely on behalf of clients when it bought $20 billion in exotic insurance from AIG.

_ Although Goldman has steadfastly maintained that it had "no material exposure" to AIG if the insurer had gone bankrupt, in fact the firm could have lost money if the government hadn't allowed the insurer to pay $92 billion of American taxpayers' money to U.S. and European financial institutions whose risky business practices helped cause the global financial collapse.

_ Goldman took several aggressive steps — including demanding billions in cash collateral — against AIG that suggest to some experts that it had inside information about AIG's shaky financial condition and therefore an edge over its competitors. While former Bush administration officials said AIG was financially sound and merely faced a cash squeeze at the time of the bailout, McClatchy has reported that the insurer was swamped with massive liabilities and was a candidate for bankruptcy.

A spokesman for Goldman, Michael DuVally, said that the firm followed its "standard approach to risk management" in its dealings with AIG.

"We had no special insight into AIG's financial condition but, as we do with all exposure, we acted prudently to protect our firm and its shareholders from the risk of a loss. Most right-thinking people would surely believe that this was an appropriate way for a bank to manage its affairs."

He said that Goldman didn't have "direct economic exposure to AIG."

Why own stock when you can write how much you make just by owning a few of Joe Cassano's traders in London?

The relationship between Goldman and AIG has drawn intense scrutiny over the past year because several Goldman alumni held senior Treasury Department jobs when the Bush administration guaranteed as much as $182 billion to bail out AIG, $12.9 billion of which AIG paid to Goldman, the most money it paid any U.S. bank.

Plus still unknown sums Goldman received from Societe Generale and others whose bets were covered by the AIG bailout.

On Wednesday and Thursday, a congressional panel investigating the causes of the financial crisis plans to question current and former senior Goldman and AIG officials, including Joseph Cassano, the former head of the London-based AIG unit that covered $72 billion in bets against risky home mortgages — wagers that cost U.S. taxpayers tens of billions of dollars when the housing bubble burst.

The proprietary trades at issue were carried out using private contracts known as credit-default swaps, essentially bets on the performance of designated securities and traded in murky, loosely regulated markets with little disclosure about who placed wagers, who won and who lost.

Documents emerging from the AIG bailout and a Senate investigation of Goldman's secret bets against the housing market while it sold off tens of billions of dollars in mortgage-backed securities — first reported by McClatchy in November — have provided a window into some of these dealings.

Until now, however, Goldman has said that the insurance-like contracts it bought from AIG from 2004 to 2006 — deals that have cost the insurer some $15 billion — were made to offset similar swaps the investment bank had written for clients who wanted to bet on a housing downturn.

The companies have revealed few details of some $6 billion in so-called synthetic deals, in which the parties bet on the performance of designated securities that neither side purchased

Let's go to the naked paper races!

A person familiar with the matter, who declined to be identified because of its sensitivity, said that additional synthetic swap contracts between AIG and Goldman with a face value of $3 billion have yet to be unwound by the teams of specialists tasked with scaling down AIG's more than $2 trillion in exotic risks.

Two trillion.

The proprietary trades occurred in the same Abacus series of synthetic securities that Goldman bundled offshore, according to the senior Goldman official. Another one of those 16 deals prompted the government to sue Goldman on civil fraud charges in April.

Goldman also has long asserted that it was holding $10 billion in collateral and "hedges" and thus had "no material exposure" in the event that the government had allowed AIG's parent to go bankrupt in the fall of 2008, rather rescuing it.

The emerging details of Goldman's offshore dealings, however, also call that into question.

Offshore dealings, offshore drillings...

AIG doled out tens of billions of dollars of the bailout money to pay off mortgage-related swaps with U.S. and European financial institutions at their full face value, a decision made by the Federal Reserve Bank of New York that triggered a public furor.

I wish. Sad what passes for a public furor. Should give us hope that a real public furor might move something, if it can correctly identify its targets.

The bailout enabled major financial institutions to honor billions of dollars in swap bets that they'd made with each other, especially in offshore deals that were pegged to the performance of loans to homebuyers with shaky credit.

DuVally declined to say how much money Goldman had at stake if the value of these securities sank further and the big banks couldn't make good on their bets amid frozen credit markets.

According to court documents and a person who's seen records of some of the offshore deals, investment banks Morgan Stanley and Merrill Lynch, as well as large European banks, wrote protection for Goldman on these deals totaling hundreds of millions of dollars.

In addition, The New York Times reported earlier this year that Goldman cut a deal with the Societe Generale in which the French bank paid Goldman a portion of the $11 billion it collected from the AIG bailout.

DuVally denied that Societe Generale and Goldman had a deal regarding the French bank's payout from AIG, but he declined to say whether Goldman collected a large sum from the French bank.

I'm sure they arranged it so that it's a seven-billion-dollar service charge tucked into some other deal on an island to be named later.

Because Goldman was holding $7.5 billion in collateral from AIG and had placed $2.5 billion in other hedges, DuVally said, it "did not have direct economic exposure to AIG" in the event that the insurer's parent had been left to bankruptcy.

"That said, we have always acknowledged that if a failure of AIG had resulted in the collapse of the financial system, we would have suffered just like every other financial institution," he said.

DuVally declined to say who selected the securities for Goldman's Abacus deals with AIG.

AIG's chief executive, Robert Benmosche, was asked at the company's recent annual meeting whether it would seek to sue any banks for loading swap deals with securities on junk mortgages likely to default.

Benmosche said that the firm is reviewing "all activities from that period" and, "to the extent we find something wrong that harmed AIG inappropriately, our legal staff will take appropriate action."

Glimmer of hope is that Benmosche isn't responsible for the old deals, so he might go for it. If TARP had involved total management decapitation of all participating institutions, I might have almost been for it.

It's unclear when Goldman first suspected that AIG was at risk of a colossal meltdown, but the storied investment bank moved more nimbly than any other financial institution to shield itself.

It's unclear when Goldman started wittingly making the moves that guaranteed a colossal meltdown of AIG, but the storied investment bank owned everyone who would have the authority to do anything about it. (Corrected)

As the home mortgage securities lost value over a 14-month period beginning in the summer of 2007, Goldman's huge swap portfolio gained value. Under the terms of the contracts, Goldman began in July 2007 to demand that AIG post billions of dollars in cash as collateral.

DuVally said that Goldman had no inside information about AIG's finances, and merely protected itself by enforcing contract language that required the insurer to post cash whenever the mortgage securities underlying the bets lost value.

"Our direct knowledge of AIG's financial condition was limited to the company's public disclosures," DuVally said.

However, some experts are skeptical of that, especially because Goldman responded to AIG's refusal to meet all its demands for $10 billion in collateral by placing $2.5 billion in hedges — most of them bets on an AIG bankruptcy.

Sylvain Raynes, an expert on structured securities of the types that AIG insured, said it's "implausible that Goldman can say 'I had no idea that AIG was in dire straits or in weak financial condition.'"

Raynes, a co-author of the newly published book "Elements of Structured Finance" and a former Goldman employee, said that a standard clause in the swaps contracts left open to discussion whether the company writing protection must post collateral. The buyer of coverage typically could demand to see financial information, including the number of similar positions held, he said.

"If you see the (company) has entered into 150 credit-default swaps totaling $65 billion, and that all of them are the same type as your credit-default swaps, you know that they have taken huge amounts of risk and have very little capital to back that up," Raynes said.

"Unless you really want to close your eyes, you have to know what their condition is. If you don't know, then you're not doing your job, and I have too much respect for Goldman to say they are not doing their job."

DuVally said, however, that Goldman wasn't told about other swaps that AIG had written and didn't have access to AIG's internal financial information.

Goldman had served as an investment adviser for the insurer since as far back as 1987 and as recently as 2006, setting up offshore companies affiliated with AIG that served as loosely regulated reinsurers.

You'd think the SEC guys would welcome an investigative tour of a whole bunch of tropical islands.

AIG's insurance subsidiaries shined up their balance sheets by shifting hundreds of millions of dollars in liabilities to reinsurers, including some of those formed with Goldman's assistance.

Federal prosecutors and state regulators eventually nailed AIG for falsifying its financial statements and for using so-called "sidecar" companies to help Pittsburgh-based PNC Financial Corp. and an Indiana firm, Brightpoint Inc., hide liabilities. AIG paid more than $1.7 billion on to settle those and other charges in 2004 and 2006. Goldman wasn't implicated.

For years, Goldman and AIG have shared the same auditor, PricewaterhouseCoopers, a firm that AIG retained even after the SEC in 2006 directed it to find "an independent auditor."

They're also represented by the same New York law firm, Sullivan & Cromwell, which boasted on its website of its "significant experience in offshore reinsurance matters." The firm's senior chairman, Rodgin Cohen, is known as one of Wall Street's most formidable attorneys.

Sullivan & Cromwell! The Dulles Brothers old firm! The Nazi enablers. Still at the head of the beast. Mind if I get nostalgic for FDR and his supposed plan to nail these bastards after the war?

In August 2008, weeks before the rescue, AIG's newly installed chief executive, Robert Willumstad, invited senior officials of several major banks, including Goldman, Deutsche Bank, Lehman Brothers and Credit Suisse, to a meeting to see whether there was any way to reduce the insurer's huge portfolio of mortgage-related swaps.

Documents from Blackrock, a financial services firm that was assisting the Federal Reserve Bank of New York with the bailout, show that Goldman offered to negotiate a settlement on some of the swaps, but the two sides were too far apart on valuation of the securities to cut a deal.

DuVally said that Goldman offered only to settle for payment of its estimate of the market value of the swaps, which had appreciated sharply due to the securities' decline in value. To do so would have required AIG to book a massive loss.

On Aug. 18, 2008, Goldman's equity research department delivered another blow to AIG, issuing a sharply negative report on the insurer and lowering its target price for AIG shares to $23 from $30. The Goldman report heightened concerns among credit ratings agencies about AIG's condition, Willumstad said in an interview.

And Tony Soprano thought he was good at doing bustouts!

By September 2008, AIG was besieged with a chorus of collateral demands from other banks and a threat from credit ratings agencies to downgrade the insurer, an action that triggered more collateral calls and prompted Treasury Secretary Henry Paulson, a former Goldman chief executive, and Federal Reserve Chairman Ben Bernanke to initiate a bailout to prevent a meltdown of the global financial markets.

All republished content that appears on Truthout has been obtained by permission or license.
Support Truthout's work with a $10/month tax-deductible donation today!

The above being a pretty good summary and supplement of several pages worth of stuff from earlier in this thread!

Bust Out

From one of my favorite Sopranos episodes, Bust Out, Tony explains his bread and butter to Davey Scatino, owner of a large sporting goods store who insisted on playing at Tony's poker table with Tony's buddies, who cleaned him out, and is now predictably fucked as the gangsters occupy the store and plunder it for all they can.

http://www.correntewire.com/bust_out_th ... governance

Davey Scatino: You told me not to get in the game. Why'd you let me do it?

Tony Soprano: Well, I knew you had this business here, Davey. It's my nature. The frog and the scorpion, you know? Besides, if you would've won I'd be the one crying the blues, right?

Davey Scatino: What's the end?

Tony Soprano: The end... It's planned bankruptcy. Hey, you're not the first guy to get busted out. This is how a guy like me makes his living. This is my bread and butter. When this is over you're free to go. You can go anywhere you want.

In case you didn't see the epsisode in question... You're living it.

A "bust out" is a common tactic in the organized crime world where a business's assets and lines of credit are exploited and exhausted to the point of bankruptcy. Richie and Tony profit from busting out Davey Scatino's sporting goods store in this episode.

.

[JackRiddler]

.

Relatively mainstream critiques of the financial bill.

Feingold may actually manage to kill it.

Feingold on financial bill: "It caves to Wall Street interests and it won't get my vote."

Feingold: 'Standing Up to the Unholy Alliance Between Washington and Wall Street'
Statement by Senator Russ Feingold (D-WI)
June 30, 2010


WASHINGTON - Wall Street and its allies have been calling the shots in Congress for decades, so they must be glad to see how things are shaping up on financial regulatory reform. Congress is about to vote on a final bill that fails to fix the key flaws in the bills passed by both the House and Senate. At the start of this process I made clear that I had a simple test for financial reform -- will it stop another financial meltdown? This bill fails that test, and I won't support legislation that fails to protect the people of Wisconsin from the pain of another economic disaster. And I don't need to be lectured about this issue by people who supported the repeal of Glass-Steagall, which paved the way for this terrible recession.

I had hoped I would be able to support the legislation, given the clear need for strong reform. I cosponsored a number of critical amendments during Senate consideration of the bill including a Cantwell-McCain amendment to restore Glass-Steagall safeguards, Senator Dorgan's amendment that addressed the problem of "too big to fail" financial institutions, and another "too big to fail" reform offered by Senators Brown and Kaufman that proposed strict limits on the size of those institutions. Each of those amendments would have improved the bill significantly, and each of them either failed or was blocked from even getting a vote.

After that, it wasn't a close call for me. It would be a huge mistake to pass a bill that purports to re-regulate the financial industry but is simply too weak to protect people from the recklessness of Wall Street. That would be like building an impressive-looking dam without telling everyone that it has a few leaks in it. False security is no security at all.

Since the Senate bill passed, I have had a number of conversations with key members of the administration, Senate leadership and the conference committee that drafted the final bill. Unfortunately, not once has anyone suggested in those conversations the possibility of strengthening the bill to address my concerns and win my support. People want my vote, but they want it for a bill that, while including some positive provisions, has Wall Street's fingerprints all over it.

In fact, reports indicate that the administration and conference leaders have gone to significant lengths to avoid making the bill stronger. Rather than discussing with me ways to strengthen the bill, for example, they chose to eliminate a levy that was to be imposed on the largest banks and hedge funds in order to obtain the vote of members who prefer a weaker bill. Nothing could be more revealing of the true position of those who are crafting this legislation. They had a choice between pursuing a weaker bill or a stronger one. Their decision is clear.

On this bill, like the others that preceded it, the biggest financial interests have won.

I've seen this too many times before. When I was in the Wisconsin State Senate, I chaired the Senate Banking Committee for nearly a decade, and fought against enactment of an interstate banking law that resulted in the concentration of financial assets and most large Wisconsin banks being bought up by even larger out-of-state banks.

Shortly after I came to the U.S. Senate we considered a national interstate banking bill, the Riegle-Neal Interstate Banking and Branching Act of 1994, which accelerated the concentration of financial assets, and the creation of "too big to fail" firms. I was one of only four senators to oppose that legislation. Five years later, I was one of only eight Senators to oppose the Gramm-Leach-Bliley Act, the bill that repealed Glass-Steagall and paved the way for this disastrous recession, which has been an economic nightmare for so many Americans.

Those two measures -- the 1994 law and the 1999 law -- accelerated the trend toward increased concentration of financial assets, aggravating the problem of "too big to fail." Before those two laws were enacted, the six largest U.S. banks had assets equal to 17 percent of our GDP. Today the six largest U.S. banks have assets equal to more than 60 percent of our GDP.

Ultimately, it was the threat of the failure of the nation's largest financial institutions that spurred the Wall Street bailout. I opposed that measure as well, in part because it was not tied to any fundamental reforms of our financial system that would prevent a future crisis and the need for another bailout. We could have had a much tougher reform package if the bailout had been tied to such a measure.

Every single one of those bills caved to Wall Street and the biggest financial interests, and so does the current regulatory reform bill. Economist Dean Baker called this bill a "fig leaf," and former IMF Economist Simon Johnson has slammed the bill's failure to address "too big to fail." These experts paint an accurate picture of this bill's failings, and frankly those failings shouldn't come as a surprise. Many of the critical actors who shaped this bill were present at the creation of the financial crisis. They supported the enactment of Gramm-Leach-Bliley, deregulating derivatives, even the massive Interstate Banking bill that helped grease the "too big to fail" skids. It shouldn't be a surprise to anyone that the final version of the bill looks the way it does, or that I won't fall in line with their version of "reform."

This bill caves to Wall Street interests, it doesn't meet the test of preventing another financial crisis, and it won't get my vote.

http://www.commondreams.org/headline/2010/06/30-9

-------------------------------------------

Feingold Statement on Financial Regulatory Reform Conference Report


Monday, June 28, 2010



“As I have indicated for some time now, my test for the financial regulatory reform bill is whether it will prevent another crisis. The conference committee’s proposal fails that test and for that reason I will not vote to advance it. During debate on the bill, I supported several efforts to break up ‘too big to fail’ Wall Street banks and restore the proven safeguards established after the Great Depression separating Main Street banks from big Wall Street firms, among other issues. Unfortunately, these crucial reforms were rejected. While there are some positive provisions in the final measure, the lack of strong reforms is clear confirmation that Wall Street lobbyists and their allies in Washington continue to wield significant influence on the process.”

Senator Feingold was one of eight senators to oppose the repeal of Glass-Steagall in 1999. Senator Feingold also opposed the Wall Street bail-out in 2008. During consideration of the financial regulatory reform bill, Feingold cosponsored a number of key amendments to ensure that banks are no longer too big to fail, and that depression-era reforms to create a firewall between Wall Street and Main Street are restored, among other critical issues. None of these amendments were included in the final bill, which is why it failed Feingold’s test for real reform. Amendments Feingold cosponsored included:

Cantwell-McCain-Feingold amendment to restore the Glass-Steagall firewall between Wall Street and Main Street
Senator Dorgan’s “too big to fail” amendment, which requires that no financial entity be permitted to become so large that its failure threatens the financial stability of the U.S.
Brown-Kaufman amendment proposing strict limits on the size of financial institutions
Dorgan amendment to ban so-called naked credit default swaps, speculative bets that played a role in the economic crisis
Merkley-Levin amendment to prohibit any bank with government insured deposits from engaging in high-risk finance, like investing in hedge funds or private equity funds

http://feingold.senate.gov/record.cfm?id=326020

Okay, Dylan Ratigan of MSNBC…

http://www.alternet.org/story/147339/
(Article reproduced here under fair-use provisions, with original link given, solely for non-commercial purposes of archiving, education and discussion.)

Wall Street 'Reform' in a Nutshell: The Politicians Lied, Media Applauded, and We Americans Will Suffer


By Dylan Ratigan, AlterNet
Posted on June 26, 2010, Printed on June 30, 2010



The same Washington spinsters who have driven our country into the ground seemed to be out in full force on Friday, claiming that their latest policy "victory" is the most "sweeping change" of our financial regulatory since the Great Depression.

Actually, it is nothing more than window dressing.

The real sweeping change of our financial system took place over the past 20 years. The irresponsible repeal of Glass-Steagall in 1999. The Commodities and Futures Modernization Act of 2000 by Larry Summers and Bob Rubin -- the one that legalized the most destructive financial instruments of all, derivatives. The leverage exemption at the SEC in 2004, asked for (in person) and received by Hank Paulson and friends.

Of course, there are small victories here -- there is better investor protection and, most importantly, an awakened citizenry.

What's not fixed?

- The Cops (regulators and ratings agencies) working for the crooks.

- Banks still Too Big To Fail.

- Banks gambling with your deposits.

- Banks allowed to "mark to myth" and use off-balance sheet accounting to bonus themselves into the atmosphere, with the taxpayer taking the fall.

- Banks getting trillions from the Fed, Fannie and Freddie -- AKA you, the future and present taxpayer.

What does it mean for us?

It means that the same people who brought you these horrible changes -- rising wealth discrepancy, massive unemployment and a crumbling infrastructure -- have now further institutionalized the policies that will keep the causes of these problems firmly in place.

Meanwhile, all involved in the facade try to pretend that this should be considered a success because, gosh, real financial reform is just too hard and those crafty banksters will just outsmart us anyhow. Many in the media are either too complicit, too confused or too lazy to contradict this spin, but the rest of us shouldn't buy that BS. Real and lasting financial reform is actually quite easy to implement -- and the last time we had a crisis of this magnitude, we kept the banksters in check for 70 years.

Time and time again in America, they don't win -- we do.

WTF? Where'd that come from?

And I believe as we head towards election time with leaders whose only plan for creating new jobs is a few more workers manicuring soon-to-be even bigger Bankster bonus-fueled estates coupled with a few more government handouts, this lesson will be learned once again.


© 2010 Independent Media Institute. All rights reserved.
View this story online at: http://www.alternet.org/story/147339/

Simon Johnson (former IMF).

http://baselinescenario.com/2010/06/21/ ... orm-fails/
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Dead On Arrival: Financial Reform Fails

with 224 comments

By Simon Johnson

The House-Senate reconciliation process is still underway and some details will still change. But the broad contours of “financial reform” are already completely clear; there are no last minute miracles at this level of politics. The new consumer protection agency for financial products is a good idea and worth supporting – assuming someone sensible is appointed by the president to run it. Yet, at the end of the day, essentially nothing in the entire legislation will reduce the potential for massive system risk as we head into the next credit cycle.

Go, for example, through the summary of “comprehensive financial regulatory reform bills” in President Obama’s letter to the G20 last week.

The president argues for more capital in banking – and this is a fine goal, particularly as the Europeans continue to drag their feet on this issue. But how much capital does his Treasury team think is “enough”? Most indications are that they will seek tier one capital requirements in the range of 10-12 percent – which is what Lehman had right before it failed. How would that help?

“Stronger oversight of derivatives” is also on the president’s international agenda but this cannot be taken seriously, given how little Treasury and the White House have pushed for tighter control of derivatives in the US legislation. If Senator Lincoln has made any progress at all – and we shall see where her initiative ends up – it has been without the full cooperation of the administration. (The WSJ today has a more positive interpretation, but even in this narrative you have to ask – where was the administration on this issue in the nine months of intense debate and hard work prior to April? Have they really woken up so recently to the dangers here?)

“More transparency and disclosure” sounds fine but this is just empty rhetoric. Where is the application – or strengthening if necessary – of anti-trust tools so that concentrated market share in over-the-counter derivatives can be confronted. The White House is making something of a show from Jamie Dimon falling out of favor, but all the points of substance that matter, Dimon’s JP Morgan Chase has won. The Securities and Exchange Commission is beginning to push in the right direction, but the reconciliation conference looks likely to deny them the self-funding – CFTC and FDIC, for example, collect fees from the industry – that could help build as a regulator. At the same time, the conference legislation would send a large number of important questions to the SEC “for further study”. None of this makes any sense – unless the goal is to block real reform.

The president also asks for a “more effective framework for winding down large global firms” but his experts know this is politically impossible. The G20 (and other) countries will not agree to such a cross-border resolution mechanism – and this was an important reason why Senators Sherrod Brown and Ted Kaufman argued so strongly that big banks had to become smaller (and be limited in how much they could borrow). Now administration officials brag to the press, on the record, about how they killed the Brown-Kaufman amendment. These people – in the White House and around the Treasury – simply cannot be taken seriously.

And as for “principles for the financial sector to make a fair and substantial contribution towards paying for any burdens”, this is a sad joke. This is not an oil spill, Mr. President. This is the worst recession since World War II, a 40 percentage points increase in government debt (attempting to prevent a Second Great Depression), loss of at least 8 million jobs in the United States, and a painfully slow recovery (in terms of unemployment) – not to mention all the collateral damage in so many parts of the world, including Europe. Could someone in the White House at least come to terms with this issue and provide the president with a sensible and clear text? Honestly, as staff work, this is embarrassing.

There is great deference to power in the United States, and perhaps that is appropriate.

???

But those now calling the shots should remember that they will not be in power for ever and – at some point in the not too distant future – there will be a more balanced assessment of their legacies.

Yeah, like they really care.

Simply claiming that the president is “tough” on big banks simply will not wash. There are too many facts, too much accumulated evidence, pointing exactly the other way. The president signed off on the most generous and least conditional bailout in world financial history. This is now widely understood. The administration has scrambled to create some political cover in terms of “reform” – but the lack of substance here is already clear to people who follow it closely and public perceptions will shift quickly.

The financial crisis of fall 2008 revealed serious dangers have developed in the heart of the world’s financial system. The Bush-Obama bailouts of 2008-09 confirmed that our biggest banks are “too big to fail” and the left, center, and right can agree with Gene Fama when he says: “too big to fail” is perverting activities and incentives.

This is not a leftist message, although you hear people on the left make the point. But people on the right also increasingly understand what is going on – there is excessive and abusive power at the heart of our financial system that completely distorts markets (and really amounts to a hidden, unfair and dangerous taxpayer subsidy).

This administration and this Congress had ample opportunity to confront this problem and at least wrestle hard with it. Some senators and representatives worked long and hard on precisely this issue. But the White House punted, repeatedly, and elected instead for a veneer of superficial tweaking. Welcome to the next global credit cycle – with too big to fail banks at center stage.

[JackRiddler]

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Ellen Brown discussing VAT vs. Tobin Tax.

The New York State governor, who is in a big confrontation with the legislature to force austerity, for a day advanced the idea of taxing hedge fund managers for income, instead of capital gains. Even Mark Cuban might agree with that (see below). Bermuda Bloomberg stepped up in defense of his class, and the fucking governor of Connecticut announced he would welcome hedge funds to move to CT. Today the idea's already dead. Motherfuckers tolerate not a penny less for them.

http://counterpunch.org/brown06302010.html
(Article reproduced here under fair-use provisions, with original link given, solely for non-commercial purposes of archiving, education and discussion.)

The Tobin Tax or the VAT?
Who Will Pay: Wall Street or Main Street?
June 30, 2010


By ELLEN BROWN

The financial reform bill agreed to on June 25 may have carved out some protections for consumers, but for Goldman Sachs and the derivatives lobby, the bill was a clear win, leaving the Wall Street gambling business intact. In a June 25 Newsweek article titled “Financial Reform Makes Biggest Banks Stronger,” Michael Hirsh wrote that the bill “effectively anoints the existing banking elite. The bill makes it likely that they will be the future giants of banking as well.”

The federal government and Federal Reserve have advanced literally trillions of dollars to save the big Wall Street players, to the point where the government’s own credit rating is in jeopardy; but Wall Street has not had to pay for the cleanup. Instead, the states and the citizens have been left to pick up the tab. On June 17, Time featured an article by David von Drehle titled “Inside the Dire Financial State of the States,” reporting that most states are now facing persistent budget shortfalls of a sort not seen since the 1930s. Unlike the Wall Street banks, which can borrow at the phenomenally low fed funds rate of .2% and plow that money back into speculation, states don’t have ready access to credit lines. They have to borrow through bond issues, and many states are so close to bankruptcy that their municipal bond ratings are collapsing. Worse, states are not legally allowed to default. Unlike the federal government, which can go into debt indefinitely, states must balance their budgets; and they cannot issue their own currencies. That puts them in the same position as Greece and other debt-strapped European Union countries, which are forbidden under EU rules either to issue their own currencies or to borrow from their own central banks.

States, of course, don’t even have their own state-owned banks, with one exception -- North Dakota. North Dakota is also the only state now sporting a budget surplus, and it has the lowest unemployment and mortgage delinquency rates in the country. As von Drehle observes, “It’s a swell time to be North Dakota.”

But most states are dealing with serious, chronic defaults, putting them in the same debt trap as Greece: they are being forced to lay off workers, sell public assets, and look for ways to squeeze more taxes out of an already over-taxed populace. And their situation is slated to get worse, since the federal government’s stimulus package will soon be cut, along with assistance to the states.

The federal government is not only leaving the states high and dry but is threatening to impose even more taxes on their beleaguered citizens. Paul Volcker, former Federal Reserve Chairman and current White House economic adviser, said in April that Congress needs to consider a Value Added Tax (VAT) – a tax on various stages of production of consumer goods. A VAT of 17.5% is now imposed in Britain, and 20% is being proposed; while some EU countries already have a VAT as high as 25%. In Europe, at least the citizens get something for their money, including federally-funded health care; but that is not likely to happen in the U.S., where even a “public option” in health care is no longer on the agenda. The VAT hits the lower and middle classes particularly hard, since they spend most of their incomes on consumables. The rich, on the other hand, put much of their money into speculative trades, and those sales are not currently taxed.

Business Cycle or Class War?

Ismael Hossein-Zadehi, who teaches economics at Drake University in Iowa, calls the whole economic crisis a class war. What is being billed as public debt began as the private debt of financial speculators who offloaded it onto the public. The governments that bailed out these insolvent speculators then became insolvent themselves; but the bailed-out banks, rather than lending a helping hand in return, have demanded their pound of flesh, with payment in full. The perpetrators are blaming the victims and insisting on “fiscal responsibility.” Wall Street bankers are dictating the terms of repayment for debts they themselves incurred.

“Fiscal responsibility” means cutting spending, something that is inherently deflationary during a recession, as seen in the disastrous Depression-era policies of President Herbert Hoover. Not that it was solely a Republican error. In 1937, President Franklin Roosevelt also cut public spending, tipping the economy back into recession. Spending cuts cause tax revenues to shrink, which results in more spending cuts. Contrary to what we have been told, national governments are not like households. They do not have to balance their budgets and “live within their means,” because they have the means to increase the money supply. They not only have the means, but they must engage in public spending when the private economy is shrinking, in order to keep the wheels of the economy turning. Virtually all money now originates as bank-created credit or debt; and today the money supply has been shrinking at a rate not seen since the 1930s, because the banking crisis has made credit harder and harder to get.

Instead of “reflating” the collapsed economy, however, national governments are insisting on “fiscal responsibility;” and the responsibility is all being put on the states and the laboring and producing classes. The financial speculators who caused the debacle are largely getting off scot free. They not only pay no tax on the purchase and sale of their “financial products,” but they pay very little in the way of income taxes. Goldman Sachs paid an effective income tax rate of only 1% in 2008. Prof. Hossein-Zadehi writes:
“It is increasingly becoming clear that the working majority around the world face a common enemy: an unproductive financial oligarchy that, like parasites, sucks the economic blood out of the working people, simply by trading and/or betting on claims of ownership. . . . The real question is when the working people and other victims of the unjust debt burden will grasp the gravity of this challenge, and rise to the critical task of breaking free from the shackles of debt and depression.”

Working people don’t rise to the task because they have been propagandized into believing that “fiscal austerity” is something that needs to be done in order to save their children from an even worse fate. What actually needs to happen in a deflationary collapse is to spend more money into the system, not pull it back out by paying off the federal debt; but the money needs to go into the real economy – into factories, farms, businesses, housing, transportation, sustainable energy systems, health care, education. Instead, the stimulus money has been hijacked, diverted into cleaning up the toxic balance sheets of the financial gamblers who propelled the economy into its perilous dive.

Evening Up the Score

While Congress caters to the banks, the states have been left to fend for themselves. Where is the money to come from to pull off the impossible feat of balancing their budgets? Bleeding a VAT tax out of an already-anemic working class is more likely to kill the patient than to alleviate the disease. “Unlike EU countries, where the VAT is the largest single source of tax revenue,” notes Professor Randall G. Holcombe in a recent study, “the states of the United States already tax the VAT tax base with their sales taxes.” This doubling down on the same base would not only reduce the amount of money states are able to raise, but it would seriously hinder VAT’s role as a money generator. By 2030, says Prof. Holcombe, this effect would have offset any increase in government revenue from the VAT.

A more viable and more equitable solution would be to tap into the only major market left on the planet that is not now subject to a sales tax – the “financial products” that are the stock in trade of the robust financial sector itself. A financial transaction tax on speculative trading is sometimes called a “Tobin tax,” after the man who first proposed it, Nobel laureate economist James Tobin. The revenue potential of a Tobin tax is huge. The Bank for International Settlements reported in 2008 that total annual derivatives trades were $1.14 quadrillion (a quadrillion is a thousand trillion). That figure was probably low, since over-the-counter trades are unreported and their magnitude is unknown. A mere 1% tax on $1 quadrillion in trades would generate $10 trillion annually in public funds. That is only for derivatives. There are also stocks, bonds and other financial trades to throw in the mix; and more than half of this trading occurs in the United States.

A Tobin tax would not generate these huge sums year after year, because it would largely kill the computerized high-frequency program trades that now compose 70% of stock market purchases. But that is a worthy end in itself. The sudden, thousand-point drop in the Dow Industrial Average on May 6 showed the world how vulnerable the stock market is to manipulation by these sophisticated market gamblers. The whole high-frequency trading business needs to be stopped, in order to protect legitimate investors using the stock market for the purposes for which it was designed: to raise capital for businesses. As Mark Cuban observed in a May 9 article titled “What Business Is Wall Street In?”:

“Creating capital for business has to be less than 1pct of the volume on Wall Street in any given period. . . . My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business. Whether it’s through a use of taxes on trades, or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for 5 years or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years. However we need to do it, we need to get the smart money on Wall Street back to thinking about ways to use their capital to help start and grow companies. That is what will create jobs. That is where we will find the next big thing that will accelerate the world economy. It won’t come from traders trying to hack the financial system for a few pennies per trade.”

Besides protecting legitimate savers and investors by exempting stock held five years or more, they could be exempted from a Tobin tax on total stock purchases of under $1 million per year. That would make the tax literally a millionaire’s tax -- and a small one at that, at only 1% per trade.

At the G20 summit in Toronto last weekend, a financial transaction tax was discussed and supported by France and Germany but was opposed by the U.S. and Canada, although nothing binding was resolved. However, the states do not have to wait for the federal government or the G20 to act.

They could levy a Tobin tax themselves. Objection might be made that the Wall Street speculators would take their revenues and go elsewhere, but big banks and brokerages have branches in every major city in every state.

They are hardly likely to pack up their tents and leave lucrative centers of business. Nor can it be argued that we should cater to the pirates who are looting our stock markets because they are paying us a nice bribe, because they aren’t even paying a bribe. Financial trades do not currently generate tax revenues.

Two Green Party candidates for governor, Laura Wells in California and Rich Whitney in Illinois, have included a state-imposed Tobin tax in their platforms. Both are also campaigning for state-owned banks in their states, on the model of the Bank of North Dakota. People around the world look to the United States for boldness and innovation, and California and Illinois are two of the hardest hit states in the nation. If those states manage to turn their economies around, they could establish a model for economic sovereignty globally.

Ellen Brown is the author of Web of Debt: the Shocking Truth About Our Money System and How We Can Break Free. She can be reached through her website.

[JackRiddler]

250,000 pages of documents on the New York Fed's handling of the AIG bailout were released through the Congressional committee that held a hearing on it a couple of days ago with Joe Cassano there to testify. 823 were posted by the NY Times, whose Louise Story/Gretchen Morgenson duo has been good on this story.

http://documents.nytimes.com/aig-bailout-documents

I ain't going through that yet. Sigh.

If you'd like to see all 250,000 pages...
http://documents.republicans.oversight. ... nic-files/

This is the usual agency Plan B for rendering investigation impossible. If you can't stonewall and withhold, just bomb them with too much to process.

The two Morgenson/Story articles go over the same ground as the McClatchy treatment above, with some new stuff, the second going into Goldman bust out of AIG.

http://www.nytimes.com/2010/06/30/busin ... nted=print
(Article reproduced here under fair-use provisions, with original link given, solely for non-commercial purposes of archiving, education and discussion.)

In U.S. Bailout of A.I.G., Forgiveness for Big Banks
June 29, 2010
By LOUISE STORY and GRETCHEN MORGENSON

At the end of the American International Group’s annual meeting last month, a shareholder approached the microphone with a question for Robert Benmosche, the insurer’s chief executive.

“I’d like to know, what does A.I.G. plan to do with Goldman Sachs?” he asked. “Are you going to get — recoup — some of our money that was given to them?”

Mr. Benmosche, steward of an insurer brought to its knees two years ago after making too many risky, outsize financial bets and paying billions of dollars in claims to Goldman and other banks, said he would continue evaluating his legal options. But, in reality, A.I.G. has precious few.

When the government began rescuing it from collapse in the fall of 2008 with what has become a $182 billion lifeline, A.I.G. was required to forfeit its right to sue several banks — including Goldman, Société Générale, Deutsche Bank and Merrill Lynch — over any irregularities with most of the mortgage securities it insured in the precrisis years.

But after the Securities and Exchange Commission’s civil fraud suit filed in April against Goldman for possibly misrepresenting a mortgage deal to investors, A.I.G. executives and shareholders are asking whether A.I.G. may have been misled by Goldman into insuring mortgage deals that the bank and others may have known were flawed.

This month, an Australian hedge fund sued Goldman on similar grounds. Goldman is contesting the suit and denies any wrongdoing. A spokesman for A.I.G. declined to comment about any plans to sue Goldman or any other banks with which it worked. A Goldman spokesman said that his firm believed that “all aspects of our relationship with A.I.G. were appropriate.”

A Legal Waiver

Unknown outside of a few Wall Street legal departments, the A.I.G. waiver was released last month by the House Committee on Oversight and Government Reform amid 250,000 pages of largely undisclosed documents. The documents, reviewed by The New York Times, provide the most comprehensive public record of how the Federal Reserve Bank of New York and the Treasury Department orchestrated one of the biggest corporate bailouts in history.

The documents also indicate that regulators ignored recommendations from their own advisers to force the banks to accept losses on their A.I.G. deals and instead paid the banks in full for the contracts. That decision, say critics of the A.I.G. bailout, has cost taxpayers billions of extra dollars in payments to the banks. It also contrasts with the hard line the White House took in 2009 when it forced Chrysler’s lenders to take losses when the government bailed out the auto giant.

As a Congressional commission convenes hearings Wednesday exploring the A.I.G. bailout and Goldman’s relationship with the insurer, analysts say that the documents suggest that regulators were overly punitive toward A.I.G. and overly forgiving of banks during the bailout — signified, they say, by the fact that the legal waiver undermined A.I.G. and its shareholders’ ability to recover damages.

“Even if it turns out that it would be a hard suit to win, just the gesture of requiring A.I.G. to scrap its ability to sue is outrageous,” said David Skeel, a law professor at the University of Pennsylvania. “The defense may be that the banking system was in trouble, and we couldn’t afford to destabilize it anymore, but that just strikes me as really going overboard.”

“This really suggests they had myopia and they were looking at it entirely through the perspective of the banks,” Mr. Skeel said.

Regulators at the New York Fed declined to comment on the legal waiver but disagreed with that viewpoint.

“This was not about the banks,” said Sarah J. Dahlgren, a senior vice president for the New York Fed who oversees A.I.G. “This was about stabilizing the system by preventing the disorderly collapse of A.I.G. and the potentially devastating consequences of that event for the U.S. and global economies.”

This month, the Congressional Oversight Panel, a body charged with reviewing the state of financial markets and the regulators that monitor them, published a 337-page report on the A.I.G. bailout. It concluded that the Federal Reserve Bank of New York did not give enough consideration to alternatives before sinking more and more taxpayer money into A.I.G. “It is hard to escape the conclusion that F.R.B.N.Y. was just ‘going through the motions,’ ” the report said.

About $46 billion of the taxpayer money in the A.I.G. bailout was used to pay to mortgage trading partners like Goldman and Société Générale, a French bank, to make good on their claims. The banks are not expected to return any of that money, leading the Congressional Research Service to say in March that much of the taxpayer money ultimately bailed out the banks, not A.I.G.

A Goldman spokesman said that he did not agree with that report’s assertion, noting that his firm considered itself to be insulated from possible losses on its A.I.G. deals.

Even with the financial reform legislation that Congress introduced last week, David A. Moss, a Harvard Business School professor, said he was concerned that the government had not developed a blueprint for stabilizing markets when huge companies like A.I.G. run aground and, for that reason, regulators’ actions during the financial crisis need continued scrutiny. “We have to vet these things now because otherwise, if we face a similar crisis again, federal officials are likely to follow precedents set this time around,” he said.

Under the new legislation, the Federal Deposit Insurance Corporation will have the power to untangle the financial affairs of troubled entities, but bailed-out companies will pay most of their trading partners 100 cents on the dollar for outstanding contracts. (In some cases, the government will be able to recoup some of those payments later on, which the Treasury Department says will protect taxpayers’ interest. )

Sheila C. Bair, the chairwoman of the F.D.I.C., has said that trading partners should be forced to accept discounts in the middle of a bailout.

Regardless of the financial parameters of bailouts, analysts also say that real financial reform should require regulators to demonstrate much more independence from the firms they monitor.

In that regard, the newly released Congressional documents show New York Fed officials deferring to bank executives at a time when the government was pumping hundreds of billions of taxpayer dollars into the financial system to rescue bankers from their own mistakes. While Wall Street deal-making is famously hard-nosed with participants fighting for every penny, during the A.I.G. bailout regulators negotiated with the banks in an almost conciliatory fashion.

On Nov. 6, 2008, for instance, after a New York Fed official spoke with Lloyd C. Blankfein, Goldman’s chief executive, about the Fed’s A.I.G. plans, the official noted in an e-mail message to Mr. Blankfein that he appreciated the Wall Street titan’s patience. “Thanks for understanding,” the regulator said.

From the moment the government agreed to lend A.I.G. $85 billion on Sept. 16, 2008, the New York Fed, led at the time by Timothy F. Geithner, and its outside advisers all acknowledged that a rescue had to achieve two goals: stop the bleeding at A.I.G. and protect the taxpayer money the government poured into the insurer.

One of the regulators’ most controversial decisions was awarding the banks that were A.I.G.’s trading partners 100 cents on the dollar to unwind debt insurance they had bought from the firm. Critics have questioned why the government did not try to wring more concessions from the banks, which would have saved taxpayers billions of dollars.

Mr. Geithner, who is now the Treasury secretary, has repeatedly said that as steward of the New York Fed, he had no choice but to pay A.I.G.’s trading partners in full.

But two entirely different solutions to A.I.G.’s problems were presented to Fed officials by three of its outside advisers, according to the documents. Under those plans, the banks would have had to accept what the advisers described as “deep concessions” of as much as about 10 percent on their contracts or they might have had to return about $30 billion that A.I.G. had paid them before the bailout.

Had either of these plans been implemented, A.I.G. may have been left in a far better financial position than it is today, with taxpayers at less risk and banks forced to swallow bigger losses.

A spokesman for Mr. Geithner, Andrew Williams, said it was easy to speculate about how the A.I.G. bailout might have been handled differently, but the government had limited tools.

“At that perilous moment, actions were chosen that would have the greatest likelihood of protecting American families and businesses from a catastrophic failure of another financial firm and an accelerating panic,” Mr. Williams said.

For its part, the Treasury appeared to be opposed to any options that did not involve making the banks whole on their A.I.G. contracts. At Treasury, a former Goldman executive, Dan H. Jester, was the agency’s point man on the A.I.G. bailout. Mr. Jester had worked at Goldman with Henry M. Paulson Jr., the Treasury secretary during the A.I.G. bailout. Mr. Paulson previously served as Goldman’s chief executive before joining the government.

A Close Association

Mr. Jester, according to several people with knowledge of his financial holdings, still owned Goldman stock while overseeing Treasury’s response to the A.I.G. crisis. According to the documents, Mr. Jester opposed bailout structures that required the banks to return cash to A.I.G. Nothing in the documents indicates that Mr. Jester advocated forcing Goldman and the other banks to accept a discount on the deals.

Although the value of Goldman’s shares could have been affected by the terms of the A.I.G. bailout, Mr. Jester was not required to publicly disclose his stock holdings because he was hired as an outside contractor, a job title at Treasury that allowed him to forgo disclosure rules applying to appointed officials. In late October 2008, he stopped overseeing A.I.G. after others were given that responsibility, according to Michele Davis, a spokeswoman for Mr. Jester.

Ms. Davis said that Mr. Jester fought hard to protect taxpayer money and followed an ethics plan to avoid conflict with all of his stock holdings. Ms. Davis is also a spokeswoman for Mr. Paulson, and said that he declined to comment for this article.

The alternative bailout plans that regulators considered came from three advisory firms that the New York Fed hired: Morgan Stanley, Black Rock, and Ernst & Young.

One plan envisioned the government guaranteeing A.I.G.’s obligations in various ways, in much the same way the F.D.I.C. backs personal savings accounts at banks facing runs by customers. On Oct. 15, Ms. Dahlgren wrote to Mr. Geithner that the Federal Reserve board in Washington had said the New York Fed should try to get Treasury to do a guarantee. “We think this is something we need to have in our back pockets,” she wrote.

Treasury had the authority to issue a guarantee but was unwilling to do so because that would use up bailout funds. Once the guarantee was off the table, Fed officials focused on possibly buying the distressed securities insured by A.I.G. From the start, the Fed and its advisers prepared for the banks to accept discounts. A BlackRock presentation outlined five reasons why the banks should agree to such concessions, all of which revolved around the many financial benefits they would receive. BlackRock and Morgan Stanley presented a number of options, including what BlackRock called a “deep concession” in which banks would return $6.4 billion A.I.G. paid them before the bailout.

The three banks with the most to lose under these options were Société Générale, Deutsche Bank and Goldman Sachs. Société Générale would have had to give up $322 million to $2.1 billion depending on which alternative was used; Deutsche Bank would have had to forgo $40 million to $1.1 billion, while Goldman would have had to give up $271 million to $892 million, according to the documents.

Société Générale and Deutsche Bank both declined to comment.

Ultimately, the New York Fed never forced the banks to make concessions. Thomas C. Baxter Jr., general counsel at the New York Fed, explained that a looming downgrade of A.I.G. by the credit rating agencies on Nov. 10 forced the regulator to move quickly to avoid a default, which would have unleashed “catastrophic systemic consequences for our economy.”

“We avoided that horrible result, got the job done in the time available, and the Fed will eventually get out of this rescue whole,” he said in an interview.

And yet two Fed governors in Washington were concerned that making the banks whole on the A.I.G. contracts would be “a gift,” according to the documents.

Gift or not, the banks got 100 cents on the dollar. And on Nov. 11, 2008, a New York Fed staff member recommended that documents for explaining the bailout to the public not mention bank concessions. The Fed should not reveal that it didn’t secure concessions “unless absolutely necessary,” the staff member advised. In the end, the Fed successfully kept most of the details about its negotiations with banks confidential for more than a year, despite opposition from the media and Congress.

During the A.I.G. bailout, New York Fed officials prepared a script for its employees to use in negotiations with the banks and it was anything but tough; it advised Fed negotiators to solicit suggestions from bankers about what financial and institutional support they wanted from the Fed. The script also reminded government negotiators that bank participation was “entirely voluntary.”

The New York Fed appointed Terrence J. Checki as its point man with the banks. In e-mail messages that November, he was deferential to bankers, including the e-mail message in which he thanked Mr. Blankfein for his patience.

Many Thank-Yous

After UBS, a Swiss bank, received details about the Fed’s 100-cents-on-the-dollar proposal, Mr. Checki thanked Robert Wolf, a UBS executive, for his patience as well. “Thank you for your responsiveness and cooperation,” he said in an e-mail message. “Hope the benign outcome helped offset any aggravation. Thank you again.”

The Congressional Oversight Panel, which interviewed A.I.G.’s trading partners about how tough the government was during the negotiations, concluded that many of the governments efforts were merely “desultory attempts.”

All of this was quite different from the tack the government took in the Chrysler bailout. In that matter, the government told banks they could take losses on their loans or simply own a bankrupt company; the banks took the losses.

During the A.I.G. bailout, the Fed seemed more focused on extracting concessions from A.I.G. than from the banks. Mr. Baxter, in an interview, conceded that the way that the New York Fed handled the negotiations meant that any resulting deal “took most of the upside potential away from A.I.G.”

The legal waiver barring A.I.G. from suing the banks was not in the original document that regulators circulated on Nov. 6, 2008 to dissolve the insurer’s contracts with the banks. A day later a waiver was added but the Congressional documents show no e-mail traffic explaining why that occurred or who was responsible for inserting it. The New York Fed declined to comment.

Policy experts say it is not unusual for parties to waive legal rights when public money is involved. Mr. Moss, the Harvard professor, said the government might have been concerned that the insurer would use taxpayer money to sue banks. “The question is: was this legitimate?” he asked. “The answer depends on the motivation. If the reason was to avoid a slew of lawsuits that could have further destabilized the financial system in the short term, this may have been reasonable.”

But two people with direct knowledge of the negotiations between A.I.G. and the banks, who requested anonymity because the talks were confidential, said the legal waiver was not a routine matter — and that federal regulators forced the insurer to accept it.

Even if the waiver was warranted, experts say it unfairly handcuffed A.I.G. and has undermined the financial interests of taxpayers. If, for example, the banks misled A.I.G. about the mortgage securities A.I.G. insured, taxpayer money could be recouped from the banks through lawsuits.

Unless A.I.G. can prove it signed the legal waiver under duress, it cannot sue to recover claims it paid on $62 billion of about $76 billion of mortgage securities that it insured. (A.I.G. retains the right to sue on about $14 billion of the mortgage securities that it insured.)

If A.I.G. had the right to sue, and if banks were found to have misrepresented the deals or used improper valuations on securities A.I.G. insured to extract heftier payouts from the firm, the insurer’s claims could yield tens of billions of dollars in damages because of its shareholders’ lost market value, according to Mr. Skeel.

A.I.G. still has the right to sue in connection with exotic securities it insured called “synthetic collateralized debt obligations,” which are known as C.D.O.’s. Such instruments do not contain actual bonds, which is why they were not accepted as collateral by the Fed.

A.I.G. had insured $14 billion of synthetic C.D.O.’s,, including seven Goldman deals known as Abacus. One of the Abacus deals is the subject of the S.E.C.’s suit against Goldman. A.I.G. did not insure that security, but A.I.G.’s deals with Goldman are similar to the one in the S.E.C. case.

Throughout the A.I.G. bailout, as Congressional leaders and the media pressed for greater disclosure, regulators fought fiercely for confidentiality.

Even after the New York Fed released a list of the banks made whole in the bailout, it continued to resist disclosing information about the actual bonds in the deals, including codes known as “cusips” that label securities. “We need to fight hard to keep the cusips confidential,” one New York Fed official wroteon March 12, 2009.

Regulators said they wanted confidentiality because they did not want investors trading against the government’s portfolio. Others dispute that, saying that Wall Street insiders already knew what bonds were in the portfolio. Only the public was left in the dark.

“The New York Fed recognizes the public’s interest in transparency and has over time made more information available about the A.I.G. transactions,” a Fed spokesman said about the matter.

It was not until a Congressional committee issued a subpoena in January that the New York Fed finally turned over more comprehensive records. The bulk remained private until May, when some committee staff members put them online, saying they lacked the resources to review them all.

This article has been revised to reflect the following correction:

Correction: July 1, 2010
An article on Wednesday about the leniency shown to big banks during the bailout of the American International Group misstated the year that the federal government bailed out the automaker Chrysler. It was 2009, not 2008.

http://www.nytimes.com/2010/07/01/busin ... nted=print
(Article reproduced here under fair-use provisions, with original link given, solely for non-commercial purposes of archiving, education and discussion.)

Documents Show Goldman Pressure on A.I.G.

June 30, 2010
By GRETCHEN MORGENSON and LOUISE STORY

Executives of Goldman Sachs and the American International Group, the Wall Street titans whose long alliance dissolved into a battle that shook the financial world, defended their actions on Wednesday before the federal commission investigating the financial crisis.

But perhaps more revealing than the executives’ explanations was the release of 500 pages of documents by the panel, the Financial Crisis Inquiry Commission, showing how Goldman’s aggressive and repeated demands for billions in cash from A.I.G. drove the insurer to the brink of failure in September 2008.

The documents also revealed for the first time the dollar amounts behind Goldman’s negative bet on A.I.G., which Goldman put in place to hedge its risk that A.I.G. might fail and not pay its obligations.

“Goldman was first going in the door asking for collateral. Goldman was by far the most aggressive in terms of the timing and amount asked for,” Phil Angelides, the chairman of the commission, said. “You were way ahead of everyone else in terms of the amount being demanded and the timing for that.”

The collapse of A.I.G., once the world’s largest insurer, and its dealings with Goldman and other major banks in the months leading up to that failure, have been the subject of significant Congressional interest since it was bailed out by taxpayers in the fall of 2008.

Under the terms of the $182 billion rescue, which was overseen by the Federal Reserve Bank of New York and the Treasury, the banks that had insured mortgage securities with A.I.G. were made whole on those contracts when they agreed to unwind them. Some $46 billion of the A.I.G. bailout money went to those banks.

In his first public appearance since A.I.G.’s collapse, Joseph J. Cassano, the former chief executive of the unit that insured the mortgage securities, said that he had fought back against demands for cash from banks like Goldman until his retirement from A.I.G. in March 2008.

He told commission members that he could have saved taxpayers billions of dollars if he had stayed at the company as its “chief negotiator” because he knew the ins and outs of A.I.G.’s legal contracts with the banks.

“I would have gone to the counterparties, and I think even then I would have been able to negotiate substantial discounts by using the rights available to us, such that the taxpayer would not have had to accelerate the $40 billion to the counterparties,” Mr. Cassano said.

A.I.G.’s battle with Goldman began in the summer of 2007 and, the documents show, centered on the value of the underlying mortgage securities that A.I.G. had insured. The documents include a timeline of Goldman’s collateral calls and show that in the summer of 2008, Goldman at one point had received nearly half of all the cash A.I.G. gave to counterparties, even though Goldman’s deals with A.I.G. made up only a fifth of the insurer’s book of business insuring complex mortgage securities.

While Mr. Cassano remained at A.I.G., the insurer resisted when Goldman demanded cash to shore up deterioration in the securities; A.I.G. officials argued that the investment bank’s valuations were inappropriately low and were well below those of any other dealer on Wall Street, the documents show.

For example, on Feb. 6, 2008, even as A.I.G.’s dispute with Goldman over valuations was escalating, the documents indicate that requests for cash from Société Générale, another large A.I.G. trading partner, used values that were in line with A.I.G.’s assessments.

After Mr. Cassano left A.I.G., Goldman succeeded in more of its demands for cash. When Mr. Cassano left, A.I.G. had put up $3 billion; six months later, A.I.G. had transferred $7 billion to Goldman.

The market for mortgage securities was declining during this period, but the commission documents indicate that Goldman’s demands were far more aggressive than that of other banks.

When asked by commission members about this, Goldman’s executives explained that their valuations came from actual trades at the time the cash demands were made.

Mr. Angelides of the commission asked Goldman to provide evidence that such trades had actually occurred.

Most of the contracts were dismantled by the Federal Reserve Bank of New York during the bailout of 2008. It retained the risk of the mortgage securities that A.I.G. had insured.

Goldman was one of the largest banks on the other side of A.I.G.’s mortgage deals, and executives from that bank, including Gary D. Cohn, the president of Goldman, also testified on Wednesday.

Mr. Cohn said that Goldman’s collateral demands of A.I.G. were justified under the bank’s valuation rules.

“We did not call for collateral because we anticipated the eventual scale of A.I.G.’s problems,” Mr. Cohn said in his testimony. “We simply stuck to our risk management protocols.”

Mr. Cohn also said that as Goldman issued demands on A.I.G., it bought insurance on A.I.G. as a whole, in case the insurer failed. The commission released the dollar amounts of that protection over time, showing that Goldman first bought the insurance in July 2007, when it began making demands on A.I.G. At that time, Goldman bought just $100 million of insurance in case A.I.G. collapsed, but that amount grew to $3 billion over the next year.

Of course, when Goldman bought that insurance, it knew that A.I.G. was facing its demands for cash, but Mr. Cohn said making that bet against A.I.G. was needed for risk management. “If someone owes you money, you must go out and take protection,” Mr. Cohn said.

After Goldman received much of the collateral it desired from A.I.G. in August 2008, the bank reduced some of its insurance on the company.

In his posted testimony, Mr. Cassano acknowledged that A.I.G. had made a large bet that the housing market would do well. But he defended A.I.G.’s risk decisions, saying the insurer had stopped issuing new insurance on mortgage securities in 2006. He also said he believed that the insurance instruments — known as credit-default swaps — would have performed fine over time, if left in place.

He said the contracts’ performance for the Fed was good. “The portfolios are withstanding the test of time in extremely difficult circumstances,” he added.

Until recently, Mr. Cassano was under investigation by the Securities and Exchange Commission over whether he had intentionally made misleading statements about the value of the mortgage contracts A.I.G. entered into with banks. The S.E.C. dropped the case in June.

Also questioned were Martin J. Sullivan, A.I.G.’s former chief, and Robert Lewis, chief risk officer. Mr. Angelides asked about statements that they had not understood the exposure in Mr. Cassano’s unit until it was too late.

“The liquidity aspect was something quite frankly we didn’t focus on to the extent that we now know we should have,” Mr. Lewis said.

[JackRiddler]

Damn, Tarpley's a bad actor in anything to do with "movement," but he can really crank out the history. In this case, on the Great Depression, distant enough that he avoids the distortions that can creep in with him.

In this talk on Guns and Butter, he goes through the three phases of the Great Depression.

1) 1929 stock market crash.

2) Collapse of Europe at the end of the Sucker's Market 18 months later. Chain reaction starting with Eastern European defaults takes down KreditAnstalt in Austria, derivatives bring down Datta and the German banking system, and it culminates with Britain ending pound convertibility in September 1931, two years into the crisis. This basically shut down world trade because most of it was being balanced through banks in London. The world currency ended in a day.

Germany turned to austerity under the conservative Bruening government, something that Bruening acknowledged as a disaster many years later. Bruening governed largely by sending decrees to the president, bypassing the parliament (today this is done by appointing commissions). Cutting spending raised unemployment and caused revenues to decline, increasing German debt. This is the point at which the Nazis suddenly jumped from 9 seats in the Reichstag to more than 100 in a 1931 election. Bruening later wished he'd dealt with unemployment instead of deficits. Interesting bit about a plan by a German economist named List to have the central bank lend massively at low interest to infrastructure projects, like the autobahn which was already planned prior to Hitler, which Tarpley claims could have revived the German economy and avoided the Nazi takeover.

3) Run on the banks during the months after the 1932 election forces every US state to declare bank holidarys by the day of FDR's inauguration, at which point he declared a national bank holiday.

Some of it sound familiar? If history is repeating, then not because of mystic cycles, but because the same damn strategies are being followed again.

http://kpfa.org/archive/id/62073

"The Collapse of Europe As the Second Phase In Two World Depressions" with Webster Tarpley.

Comparison of the three waves of the depression of the 1930s with the progression of the current depression: the October 1929 New York Stock Market crash; the summer 1931 banking panic and collapse of Europe, including the destruction of the world monetary system which depended on the British pound; and the subsequent banking panic and closure of the banks in the United States.

And Michael Hudson was also on for an hour earlier this month:

http://kpfa.org/archive/id/61891

"Europe's Financial Class War Against Labor, Industry and Government" with Dr. Michael Hudson.

Economic crisis in Europe created by predatory lending; European Central Bank stranglehold on the Eurozone; the Euro; foreign banks decimate Greece's social structure; Marx's industrial capital versus fictitious capital; Latvia as a model for the rest of Europe; Hudson's financial and fiscal plan for Latvia; the Cold War and its ruinous effect on progressive economic thought.

[JackRiddler]

Latest communique from the terrorists.

Moody's Warns It May Downgrade Spain

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