Saturday, January 31, 2009

Governments across Europe tremble as angry people take to the streets

Governments across Europe tremble as angry people take to the streets

Go To Original

France paralysed by a wave of strike action, the boulevards of Paris resembling a debris-strewn battlefield. The Hungarian currency sinks to its lowest level ever against the euro, as the unemployment figure rises. Greek farmers block the road into Bulgaria in protest at low prices for their produce. New figures from the biggest bank in the Baltic show that the three post-Soviet states there face the biggest recessions in Europe.

It's a snapshot of a single day – yesterday – in a Europe sinking into the bleakest of times. But while the outlook may be dark in the big wealthy democracies of western Europe, it is in the young, poor, vulnerable states of central and eastern Europe that the trauma of crash, slump and meltdown looks graver.

Exactly 20 years ago, in serial revolutionary rejoicing, they ditched communism to put their faith in a capitalism now in crisis and by which they feel betrayed. The result has been the biggest protests across the former communist bloc since the days of people power.

Europe's time of troubles is gathering depth and scale. Governments are trembling. Revolt is in the air.

Athens

Alexandros Grigoropoulos, a 15-year-old middle-class boy going to a party in a rough neighbourhood on a December Saturday, was the first fatality of Europe's season of strife. Shot dead by a policeman, the boy's killing lit a bonfire of unrest in the city unmatched since the 1970s.

There are many wellsprings of the serial protests rolling across Europe. In Athens, it was students and young people who suddenly mobilised to turn parts of the city into no-go areas. They were sick of the lack of jobs and prospects, the failings of the education system and seized with pessimism over their future.

This week it was the farmers' turn, rolling their tractors out to block the motorways, main road and border crossings across the Balkans to try to obtain better procurement prices for their produce.

Riga

The old Baltic trading city had seen nothing like it since the happy days of kicking out the Russians and overthrowing communism two decades ago. More than 10,000 people converged on the 13th-century cathedral to show the Latvian government what they thought of its efforts at containing the economic crisis. The peaceful protest morphed into a late-night rampage as a minority headed for the parliament, battled with riot police and trashed parts of the old city. The following day there were similar scenes in Vilnius, the Lithuanian capital next door.

After Iceland, Latvia looks like the most vulnerable country to be hammered by the financial and economic crisis. The EU and IMF have already mounted a €7.5bn (£6.6bn) rescue plan but the outlook is the worst in Europe.

The biggest bank in the Baltic, Swedbank of Sweden, yesterday predicted a slump this year in Latvia of a whopping 10%, more than double the previous projections. It added that the economy of Estonia would shrink by 7% and of Lithuania by 4.5%.

The Latvian central bank's governor went on national television this week to pronounce the economy "clinically dead. We have only three or four minutes to resuscitate it".

Paris

Burned-out cars, masked youths, smashed shop windows, and more than a million striking workers. The scenes from France are familiar, but not so familiar to President Nicolas Sarkozy, confronting the first big wave of industrial unrest of his time in the Elysée Palace.

Sarkozy has spent most of his time in office trying to fix the world's problems, with less attention devoted to the home front. From Gaza to Georgia, Russia to Washington, Sarkozy has been a man in a hurry to mediate in trouble spots and grab the credit for peacemaking.

France, meanwhile, is moving into recession and unemployment is going up. The latest jobless figures were to have been released yesterday, but were held back, apparently for fear of inflaming the protests.

Budapest

A balance of payments crisis last autumn, heavy indebtedness and a disastrous budget made Hungary the first European candidate for an international rescue. The $26bn (£18bn) IMF-led bail-out shows scant sign of working. Industrial output is at its lowest for 16 years, the national currency - the forint - sank to a record low against the euro yesterday and the government also announced another round of spending cuts yesterday.

So far the streets have been relatively quiet. The Hungarian misery highlights a key difference between eastern and western Europe. While the UK, Germany, France and others plough hundreds of billions into public spending, tax cuts, bank bailouts and guarantees to industry, the east Europeans (plus Iceland and Ireland) are broke, ordering budget cuts, tax rises, and pleading for international help to shore up their economies.

The austerity and the soaring costs of repaying bank loans and mortgages taken out in hard foreign currencies (euro, yen and dollar) are fuelling the misery.

Kiev

The east European upheavals of 1989 hit Ukraine late, maturing into the Orange Revolution on the streets of Kiev only five years ago. The fresh start promised by President Viktor Yushchenko has, though, dissolved into messy, corrupt, and brutal political infighting, with the economy, growing strongly a few years ago, going into freefall.

Three weeks of gas wars with Russia this month ended in defeat and will cost Ukraine dearly. The national currency, at less than half the value of six months ago, is akin to the fate of Iceland's wrecked krona. Ukrainians have been buying dollars by the billion. In November the IMF waded in with the first payments in a $16bn rescue package.

The vicious power struggles between Yushchenko and the prime minister, Yuliya Tymoshenko, are consuming the ruling elite's energy, paralysing government and leaving the economy dysfunctional. Russia is doing its best to keep things that way.

Reykjavik

Proud of its status as one of the world's most developed, most productive and most equal societies, Iceland is in the throes of what is, by its staid standards, a revolution.

Riot police in Reykjavik, the coolest of capitals. Building bonfires in front of the world's oldest parliament. The yoghurt flying at the free market men who have run the country for decades and brought it to its knees.

An openly gay prime minister takes over today as head of a caretaker government. The neocon right has been ditched. The hard left Greens are, at least for the moment, the most popular party in the small Arctic state with a population the size of Bradford.

The IMF's bailout teams have moved in with $11bn. The national currency, the krona, appears to be finished. Iceland is a test case of how one of the most successful societies on the globe suddenly failed.

Japanese economy hit by "perfect storm"

Japanese economy hit by "perfect storm"

Go To Original

The outlook for the Japanese economy is bleaker than ever after employment, production and retail figures, all posted severe falls.

The indicators were so bad that analysts have described it as the day the "perfect storm" came ashore.

Japan's unemployment soared at the fastest rate in 44 years to 4.4 per cent in December, while industrial output fell a record 9.6 per cent in the same month and retail sales shrank 2.7 per cent, the fourth straight month of decline.

All the bad news undermined Prime Minister Taro Aso's confident declaration to Parliament on Wednesday that, "By taking bold countermeasures, Japan will aim to be the first to emerge from this recession."

Of particular concern will be the rapid increase in the unemployment figures, with 390,000 losing their jobs in December alone, bringing the national total to 2.7 million out of work.

"These figures are the perfect storm for the Japanese economy and were the only missing element that kept any optimism in the economy at all," said Martin Schulz, senior economist with the Fujitsu Research Institute.

"Not only are we now seeing Japanese companies adjusting their production, but they are kicking out their staff," he said. "It might be good for the companies, but what happens to the one-third of the workforce who are on part-time contracts?" Japanese households have already adjusted their consumption and spending patterns, he said, "But when there is no income because the jobs have gone, then the whole economy comes apart."

Indications of the depth of the problems facing Japanese companies are already apparent; Sony announced Thursday a Y18 billion (£ 142 million) group operating loss for the quarter that ended in December - a dramatic reverse from the Y236 billion (£ 31.86 billion) profit it posted for the same period last year - while Toyota is expecting its first net loss in more than four decades.

Reliant on export markets for a large proportion of their earnings, Japan's auto and electronics companies have been hardest hit by the strong yen.

"Exports have fallen apart, trade to Asia is virtually halted and now even domestic consumption is in free fall," said Mr Schulz. "I had been something of an optimist up until today and I expected that the domestic economy would remain flat, but not now."

Mr Schulz had anticipated minus 2 per cent growth in Japanese GDP in 2009, but now believes that might worsen to a contraction of as much as 4 per cent.

Defense Department Establishes Civilian Expeditionary Workforce

Defense Department Establishes Civilian Expeditionary Workforce

Gerry J. Gilmore

Go To Original

The Defense Department is forming a civilian expeditionary workforce that will be trained and equipped to deploy overseas in support of military missions worldwide, according to department officials.

The intent of the program “is to maximize the use of the civilian workforce to allow military personnel to be fully utilized for operational requirements,” according to a Defense Department statement.

Deputy Defense Secretary Gordon England signed Defense Department Directive 1404.10, which outlines and provides guidance about the program, on Jan. 23.

Certain duty positions may be designated by the various Defense Department components to participate in the program. If a position is designated, the employee will be asked to sign an agreement that they will deploy if called upon to do so. If the employee does not wish to deploy, every effort will be made to reassign the employee to a nondeploying position.

The directive emphasizes, however, that volunteers be sought first for any expeditionary requirements, before requiring anyone to serve involuntarily or on short notice. Overseas duty tours shall not exceed two years.

Employees in deployable-designated positions will be trained, equipped and prepared to serve overseas in support of humanitarian, reconstruction and, if absolutely necessary, combat-support missions.

The program also is open to former and retired civilian employees who agree to return to federal service on a time-limited status to serve overseas or to fill in for people deployed overseas.

Program participants are eligible for military medical support while serving in their overseas duty station.

All participants will undergo pre- and post-deployment medical testing, including physical and psychological exams.

Defense civilians reassigned from their normal duty to serve overseas will be granted the right to return to the positions they held prior to their deployment or to a position of similar grade, level and responsibility within the same organization, regardless of the deployment length .

Families of deployed Defense Department civilian employees shall be supported and provided with information on benefits and entitlements and issues likely to be faced by the employee during and upon return from a deployment.

Defense civilian employees who participate in the expeditionary program shall be treated with high regard as an indication of the department’s respect for those who serve expeditionary requirements.

Expeditionary program participants’ service and experience shall be valued, respected and recognized as career-enhancing.

Participants who meet program requirements would be eligible to receive the Secretary of Defense Medal for the Global War on Terrorism.

Worst US economic contraction in quarter century

Worst US economic contraction in quarter century

By Peter Symonds

Go To Original

More grim figures released by the US Commerce Department yesterday provide further confirmation of the severity of the economic contraction in the US and globally. The US economy shrank at an annualised rate of 3.8 percent in the fourth quarter of 2008—its worst result since 1982. The decline followed a contraction of 0.5 percent in the third quarter—the first successive quarterly GDP declines since 1990-91.

A survey of 79 economists by Bloomberg.com had predicted that the result would be worse for the final quarter of 2008 at 5.5 percent. The latest statistics offer little cause for comfort, however. The main factor in the lower-than-expected decline was a sharp rise in inventories—that is, the piling up of unsold goods in warehouses. Without the rise in inventories, the contraction would have been 5.1 percent.

Nigel Gault, chief US economist at IHS Global Insight, told the New York Times, "My only explanation is that companies could not cut production fast enough." Other commentators warned that the rise in inventories foreshadowed further production cuts, more job losses and another sharp contraction in the first quarter of 2009. Insight Economics analyst Steven Wood commented in the Wall Street Journal, "This suggests that the [first-quarter] GDP will also contract, probably more sharply than it did in [the fourth quarter of 2008]."

President Obama lamely declared that the figures represented "a continuing disaster" for working families and urged Congress to pass his administration's $819 billion stimulus package. But few economists believe that the measures will have any significant impact. The Financial Times noted that federal government efforts to boost the economy were less effective in the final quarter of 2008 than in the previous one, contributing just 0.4 percentage points of economic growth.

At the local and state level, governments in the US are in severe financial crisis and as a result are cutting jobs and services. Economic consultant Joshua Shapiro explained to the Financial Times, "States and localities are busy slashing spending to try to balance budgets that are hemorrhaging red ink, so this will partly offset the federal government's upward impetus."

The avalanche of job losses is continuing. Target announced that it would slash 600 existing jobs and 400 vacant positions, mainly in its hometown of Minneapolis, and close a distribution centre in Little Rock, Arkansas, later this year, with a further loss of 500 jobs. PPG Industries, the world's second largest paint maker, foreshadowed a cut of as many as 4,500 employees, or 10 percent of its workforce.

Analysts were uniformly pessimistic about future prospects. Commenting on the December quarter figures, Mickey Levy, chief economist at Bank of America, said, "It's a severe contraction. No sector of the economy is safe right now." Speaking from the Davos World Economic Forum, Stephen Roach, chairman of Morgan Stanley Asia, told Bloomberg Television that this was "a severe, steep, broadly based recession" and warned there would be "no quick fix."

Virtually every sector of the US economy recorded a sharp decline. Consumer spending, which accounts for two thirds of the economy, fell by 3.5 percent in the final quarter, on top of 3.8 percent in the third quarter—the first time that purchases have declined by more than 3 percent in two consecutive quarters since records began in 1947.

Spending on durable goods such as vehicles, furniture and domestic appliances plunged far faster—by 22.4 percent—the largest fall since 1987. This followed a third quarter fall of 14.8 percent. Purchases of food and clothing dropped by 7.1 percent—the steepest quarterly decline since 1950.

The residential housing sector continued to decline, with investment falling by 23.6 percent in the final quarter on top of a fall of 16 percent in the third quarter. Business spending plummetted by 19.1 percent—the largest drop since the first quarter of 1975. Business investment in structures fell by 1.8 percent, while purchases of computers and software decreased by 27.8 percent.

Sharp falls in US trade figures reflected the rapid contraction of the global economy and declining world trade. US exports fell by 19.7 percent in the final quarter and imports by 15.7 percent. Speaking to the New York Times, Josh Bivens, economist at the Economic Policy Institute, described the trade figures as "distressing." "That's been the real key strength to the economy. They were punching above their weight for a couple of years, but they have really collapsed."

The US statistics come on top of the International Monetary Fund (IMF) economic outlook released this week, once again revising global growth forecasts for 2009 downwards. The overall prediction for world growth was just 0.5 percent—far less than the 2.2 percent predicted in November. All the major economies are predicted to contract—the US by 1.6 percent, the Eurozone 2 percent, Japan 2.6 percent and Britain 2.8 percent.

All the signs point to falling world trade in 2009. The IMF forecast a contraction of 2.8 percent for 2009, after an overall rise of 4.1 percent last year. The International Air Transport Association reported this week that international air freight traffic had fallen by 22.6 percent in December compared to a year before. Speaking at Davos, Australian trade minister Simon Crean warned that falling global trade would compound the economic downturn. "If trade is a multiplier in growth, it has the potential to be a multiplier in reverse," he said.

The latest data from Japan, which is heavily dependent on exports, underlined the unravelling of world trade. Factory orders slumped in December at an unprecedented annualised rate of 9.6 percent, surpassing the previous record—set in November—of 8.5 percent. The IMF prediction of a 2.6 percent contraction in Japan for this year would be the country's worst since World War II.

NEC, Japan's largest personal computer manufacturer, announced this week that it would cut more than 20,000 jobs at home and abroad—the largest layoff in Japan since the economic crisis began to hit last year. Hitachi reversed its previous predictions of a 15 billion yen profit to a loss of 700 billion yen ($7.78 billion) and indicated that it may slash 7,000 jobs. Other major companies that posted quarterly losses this week included Mizuho Financial Group, Daiwa Securities Group, Nippon Oil and Honda Motor.

The jobless rate in Japan has climbed to 4.4 percent from 3.9 percent. While the figure may appear low by international standards, the official statistics utilise a very strict definition of unemployment. Noriaki Matsuoka, an economist at Daiwa Asset Management, warned, "The jobless rate could rise to around 5 percent, giving us reasons not to expect consumer spending to support the economy."

Economic and Fiscal Policy Minister Kaoru Yosano told the media on Thursday: "We're in a very grave situation. Japan is being hit by a wave of weakening global demand." Junko Nishioka, an economist at RBS Securities Japan, was even blunter in comments to Bloomberg.com: "Japan's economy is falling off a cliff. There's really nothing out there to drive growth."

The air of despair and desperation openly expressed in the US, Japan and Europe testifies to the bankruptcy of all those defenders of capitalism who foresaw nothing, urged the public to place its faith in the anarchic workings of the market, and whose only solution to the economic disaster is to attempt to impose the burden on working people through savage cutbacks in jobs and living standards.

Obama’s calculated anger over Wall Street bonuses

Obama’s calculated anger over Wall Street bonuses

By Tom Eley

Go To Original

On Thursday, President Obama publicly criticized Wall Street bankers who awarded themselves more than $18 billion in annual bonuses even as their banks collapsed, driving the US and world economy into the greatest economic crisis since the Great Depression.

Obama called the bonuses, which came to light in a Wednesday New York Times article, "shameful." Though there was a sharp decline in the bonuses from the last three years, when year-end bonuses ranged between $28 billion and $37 billion, this year's haul was still the sixth-largest on record.

Obama's remarks were a carefully calculated and scripted affair. In the course of his remarks, delivered from the White House Oval Office with Treasury Secretary Timothy Geithner at his side, Obama made clear his primary concern: that the behavior of the top financial executives might provoke a backlash against the new handouts his administration is preparing for the finance industry. According to media reports, the administration is planning on announcing a "big bang" financial bailout program next week.

Obama noted that the bonuses came after a year "when most of these institutions are teetering on collapse and they are asking for taxpayers to sustain them." This, he said, is "the height of irresponsibility."

"The American people understand that we've got a big hole we've got to dig ourselves out of. They don't like people digging a bigger hole even as they're being asked to fill it up," Obama said.

Even the mainstream press noted the cynical character of Obama's comments—which were delivered without a trace of sincerity—and their transparent relationship to a new bailout being prepared for Wall Street that will dwarf the infamous Troubled Asset Relief Program (TARP).

The New York Times commented, "He struck his populist tone as he confronted the possibility of having to ask Congress for additional large sums of money, beyond the $700 billion already authorized, to prop up the financial system."

The Wall Street Journal noted that Obama's criticism of the financial executives "had a political purpose: eliciting support for an expensive and unpopular bailout program that will likely require more cash from Congress."

In other words, Obama is asking the financial elite to show a bit of decorum while his administration prepares to hand it hundreds of billions, or perhaps trillions, more. "There will be time for them to make profits, and there will be time for them to get bonuses," Obama said. "Now is not that time."

Media accounts of the new Wall Street bailout have begun to bring the massive operation into focus. It appears that it will cost between $2 and $4 trillion dollars—larger than Obama's "stimulus" and the initial TARP plan combined—and may involve the formation of a taxpayer-owned "bad bank" that would buy up worthless assets from banks. It will likely also involve government guarantees of future bank losses as well as new cash infusions. According to a report in the Financial Times, there will likely be some form of nominal cap on executive compensation as part of the deal—to make the whole program easier to sell to the public.

Obama's calculated anger against Wall Street bonuses is hypocritical, to say the least. Obama played a critical role in passage of the TARP program in October in the weeks before he was elected president. At the time, Obama insisted that to avoid a meltdown of the US economy it was urgent to award $700 billion to the biggest banks. There was no time to discuss restrictions on the way the money would be used. The money, he insisted, would cause the financial institutions to resume lending, which would in turn create jobs.

Just the opposite has happened. While layoffs pile up by the hundreds of thousands, the financial institutions have horded the TARP cash, used it to buy up other banks, and handed the money out to the members of the financial elite, as the revelations about the $18 billion in Wall Street bonuses suggest.

Obama's rush in October to bail out Wall Street with no limits on executive pay stood in stark contrast to his approach to the incomparably smaller bailout of the auto industry in November. When it came to the paychecks of the autoworkers, who earn a tiny fraction compared to the compensation of the finance CEOs, Obama lined up with the political and media elite in insisting that any loan had to be predicated on massive concessions in pay and working conditions. (See: A tale of two bailouts)

Then in January, even prior to taking the oath of office, Obama took as his first order of business securing Congressional approval for the allocation of the second $350 billion installment of the TARP money—even though the failure of the first installment was already patently apparent.

In his remarks, Obama returned once more to what has become a theme of the early days of his administration: "responsibility." "One point I want to make," he said, "all of us are going to have responsibilities to get this economy moving again." The "responsibilities" Obama assigns to the working class and to the financial aristocracy, however, are two different things.

It is noteworthy that in his supposedly "angry" criticisms of Wall Street bonuses, Obama made no demand that the money be returned. Obama's overriding concern is that the financial aristocracy not endanger its own enrichment through provocative actions, emphasizing that he is "asking for help" from the financial elite, "to show some restraint, show some discipline, and to show some sense of responsibility".

But for the working class, there are no limits to the demands Obama is prepared to make. Among the "tough choices" he envisions are the gutting of the entitlement programs Social Security and Medicare. Workers must accept, furthermore, a drastic decline in their social positions, and content themselves with an economic order with endemic unemployment, declining wages, and poverty.

The Obama administration, like its predecessor, it determined that any measures adopted in response to the economic crisis be based on defending and advancing the interests of the financial elite—the same individuals who are responsible for the crisis.

Geithner, speaking at a Capitol Hill meeting on the TARP the same day as Obama made his criticisms of executive bonuses, was at pains to stress this point: "We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system," the newly appointed treasury secretary said.

A resolution to the looming depression, which threatens the livelihood of billions of people around the world, is fundamentally a class question. It is a question of who owns the giant banks and corporations, and in whose interests they are operated. The working class must settle accounts with the financial aristocracy, which bears responsibility for the catastrophe.

What is required is the expropriation of all the ill-gotten gains of the CEOs and financiers, without compensation. These funds—which add up to hundreds of billions, if not trillions of dollars, should be used to meet the basic needs of working people for jobs and housing. The books and business dealings of the big banks must be opened to public scrutiny, with criminal investigations into illegal practices.

Obama’s New Bank Giveaway

Obama’s New Bank Giveaway

Is this administration’s bank policy Bush-3 – or Clinton-5 or Reagan 8?

by Michael Hudson

Go To Original

After

(1) threatening for eight years that the prospect of a trillion-dollar deficit spread over a generation or so is sufficient reason to stiff Social Security recipients and abolish debts to the nation’s retirees, and

(2) after the Bush administration provided $8 trillion over the past three months in cash-for-trash swaps of good Treasury bonds for Wall Street junk derivatives, the Obama Administration is now speaking of

(3) some $2 to $4 trillion more to be given in just the next week or so.

Not a single Republican Congressman went along, just as Rep. Boehmer refused to support the Bush bailout on that fatal Friday when Mr. McCain and Mr. Obama debated each other over marginal issues not touching on the giveaway, which both candidates passionately supported. The Party of Wealth sees the political handwriting on the wall, for which the Party of Labor seems happy to take all responsibility. This probably is the only place where I’d like to see "bipartisanship." Watch the campaign contributions flow for an index of how well this will pay off for the Democrats!

How many families would like a "give-back" on every bad investment they’ve ever made? It’s like a parent coming to a child who has just broken a toy, saying "That’s all right. We’ll just go out and buy you a new one." This from the apostles of "responsibility" for poverty, for mortgage debtors owing more than they can afford to pay, for people who get sick and can’t afford medical care, and for states and cities now left high and dry by the fiscal wipe-out that the Bush-Obama "cleanup" has foisted onto the economy. No do-over for anyone but the hundred or so billionaires who have just been endowed with enough free money to become America’s ruling elite for the rest of the 21st century.

After spending a lifetime denouncing socialism as inherently unfair, Wall Street is now doing a hideous parody – as if "socialism for the rich" were not an oxymoron in the first place. Certainly the banks are not being "nationalized." Giving away the largest sum of spendable securities in history without direct managerial power that goes with ownership is not "nationalization." Ask Lenin.

Now that the details of the new, larger but definitely not improved bank giveaway of between $2 and $4 trillion more have been leaked out in time for Wall Street’s Davos attendees to celebrate, we may ask whether, financially speaking, the Obama Administration should best be thought of as Bush-3 – or indeed, whether it is still on a pro-creditor trend that may better be traced as Clinton-5, or perhaps even Reagan-8. Since 1980 the financial sector has made a sustained money grab at the expense of labor and "taxpayers." More accurately, it has been a debt grab, on the opposite side of the balance sheet from assets.

Backed by Mr. Summers, Boris Yeltsin’s Harvard Boys transferred trillions of dollars of Russian mineral wealth and public enterprises into the hands of kleptocrats. That was an asset transfer, pure and simple. In 1997, to be sure, the IMF gave Russia a loan that immediately disappeared into the kleptocrats’ bank accounts, to be paid out of subsequent oil-export proceeds. But assets were the name of the game. Today’s U.S. giveaway has a new twist. The analogy is the "watered stocks" and bonds that railroad magnates and Wall Street emperors of finance gave themselves and their political mouthpieces, simply adding the interest coupons and dividends onto the prices charged the public as if they were real "costs." Today’s version – "watered Treasury bonds" – are being created on the public sector’s balance sheet. "Taxpayers" must pay bear the interest charges – leaving less for the infrastructure investment that Mr. Obama suggests we may need.

The Bush-Obama bailout bore "small print" already has given Wall Street a decade’s tax-free status by letting it count its financial losses against its tax liability. So not only has there been a great fiscal giveaway, there has been a tax shift off finance onto labor and industry. States and localities already have begun to announce plans to sell off roads and airports, land and other public assets to the financial sector in order to finance their looming budget deficits (which localities are not allowed to run under present legislation). No federal funding has been granted to finance the cities as their tax receipts plunge. There has been a token amount to relieve some low-income families saddled with junk mortgages. But this does not involve actually giving them a spendable money "bonus." Their role is simply to be trotted out like widows and orphans used to be, as justification to bail out banks for their bad gambles on currency, interest rates and bond derivative gambles. Insolvent debtors are merely passive vehicles to get a book-credit of mortgage relief that the government will turn over in their name to their bankers to make these institutions whole.

Whole, and then some! Chris Matthews just reported his statistic of the day (January 29): $18.4 billion in Wall Street bonuses, paid for out of the government giveaway.

This is called "saving the economy." That is as much an oxymoron as "socializing the losses." Socializing the losses would mean wiping the mortgages and other bank loans of debtors off the books. These giveaways are to keep the debts on the books, but for the government to buy them and make the creditors whole – while a quarter of real estate has fallen into Negative Equity as its debts are not being bailed out but kept on the books. The economy’s "toxic waste" remains. But a matching volume of new waste is being created and given to a few hundred families. No wonder the stock market soared by 200 points on Wednesday, led by bank stocks!

In the seemingly frenetic ten days since Mr. Obama took office, it is beginning to look as if his good political decisions regarding Guantanamo, Iraq, employee rights to sue for employer wrongdoing, are sugar coating for the giveaway to Wall Street, a quid pro quo to avert opposition from his Democratic Party constituency. At least this seems to be their effect. To accuse Mr. Obama of a giveaway would seem at first glance to contradict the basic thrust of his actions – or would be if one did not take into account his appointments of Larry Summers at the White House and the conspicuous leadership role in the bailout played by Barney Frank in the House and Chuck Schumer in the Senate.

There is a simple way to think about what has happened – and why it won’t help the economy, but will hurt it. Suppose the new $4 trillion "bad bank" works. The government shell will give away Treasury bonds for bad bank loans and derivatives gambles, without the government "marking to market." (So much for the pretense that giving Wall Street credit is "free market" policy. But the alternative to free markets does not turn out to be "socialism" at all, even if "socialism for the rich." There are worse words for it, which I won’t use here.)

The real question is what the Wall Street elite will do with the money. From Chuck Schumer and Barney Frank through Larry Summers, the Obama administration hopes that the banks will lend it out to Americans. Borrowers are to take on yet more debt – enough to start re-inflating house prices and making homes yet more unaffordable, requiring buyers to take on yet larger mortgages. Larger mortgages at rising prices are supposed to help the banks rebuild their balance sheets – to earn enough to compensate for their gambling losses.

But this neglects the fact that today’s looming depression is caused by debt deflation. Families, businesses and government having to spend more wage income, profits and tax revenues on debt service instead of buying goods and services. So why is the solution to this debt overhead held to be yet MORE debt? Is there not something crazy here?

The government’s solution, placed in its hands by the financial lobbyists, is to bail out the bankers and Wall Street while leaving the "real" economy even more highly indebted. All this talk about "more credit" being needed, all this begging of banks to lend more money and then extract yet more interest and amortization from the economy, is leading it even deeper into the debt hole. It is not helping families repay their debts. And indeed, homeowners whose mortgages already exceed the market price of their property are not going to be able to borrow more.

It would take only $1 trillion or so – or simply to let "the market" work its magic in the context of renewed debtor-oriented bankruptcy laws – to cure the debt problem. But that obviously is not what the government aims to solve at all. It simply wants to make creditors whole – creditors who are, after all, the largest political campaign contributors and lobbyists these days.

The most important thing to understand about the present economic crisis is that it was not necessary technologically, politically or fiscally. Government at the state, local and federal levels are strapped for funds – but only because the natural source of taxation, land rent and monopoly rent and the user fees from public enterprise have been financialized. That is, whereas property taxes used to finance about three-quarters of state and local budgets back in 1930, today they supply only about a sixth. The shrinkage has not been passed on to homeowners and renters or commercial users. Prices for homes and office buildings are set by the marketplace. The rise in market price has been pledged to bankers as mortgage interest. The financial sector thus has replaced government as recipient of the economic surplus – leaving the public sector starved of cash.

The financial sector also has replaced the government as economic planner. This role has followed from its monopoly in credit creation, which turns out to be the key to resource allocation.

Bank credit is created freely. Governments could do the same. Indeed, this is what the U.S. Treasury did during America’s Civil War, when it issued greenback credit.

If today’s looming economic depression is a manmade (that is, lobbyist-financed) phenomenon, then what policy is needed as a remedy?

2009 Bailout.

Georgia’s voter ID law upheld in federal appeals court ruling

Georgia’s voter ID law upheld in federal appeals court ruling

Lawsuit dismissed: Panel says state needn’t prove fraud exists, citing U.S. Supreme Court decision on Indiana voter ID law

Go To Original

The federal appeals court in Atlanta on Wednesday upheld Georgia’s voter identification law, saying the burden of presenting a government-issued photo ID at the polls is trumped by the need to safeguard the integrity of elections.

“The insignificant burden imposed by the Georgia statute is outweighed by the interests in detecting and deterring voter fraud,” Judge Bill Pryor wrote for a unanimous three-judge panel of the 11th U.S. Circuit Court of Appeals.

The decision dismisses a lawsuit filed by two elderly voters, one in Rome and another in Screven County, the NAACP and other civil rights groups.

The law has been assailed by Democratic lawmakers as a Republican ploy to suppress minority voting. But GOP lawmakers say it is needed to prevent voter fraud.

In 2006, the General Assembly approved a revised version of the law almost entirely along party lines, with Republicans voting for it and Democrats in opposition.

On Wednesday, the 11th Circuit relied heavily on a U.S. Supreme Court decision last April upholding a similar voter ID law in Indiana.

In that ruling, the high court stated, “There is no question about the legitimacy or importance of the state’s interest in counting only the votes of eligible voters.”

In the Georgia lawsuit, the plaintiffs argued that the state was never forced to prove that in-person voter fraud existed and that requiring a photo ID would solve such a problem.

But Pryor wrote that the U.S. Supreme Court did not require Indiana to prove specific instances of voter fraud. “We decline to impose that burden on Georgia,” he wrote.

Georgia Secretary of State Karen Handel, a supporter of the law, praised the ruling.

“In the 2008 general election and general runoff alone,” she said, “over 5 million ballots were cast in person by voters with photo ID. I applaud this latest confirmation of Georgia’s common-sense photo ID requirement.”

What Cooked the World's Economy? It wasn't your overdue mortgage.

What Cooked the World's Economy?

It wasn't your overdue mortgage.

By James Lieber

Go To Original

James Lieber is a lawyer whose books on business and politics include Friendly Takeover (Penguin) and Rats in the Grain (Basic Books). This is his fifth article for the Voice.

It's 2009. You're laid off, furloughed, foreclosed on, or you know someone who is. You wonder where you'll fit into the grim new semi-socialistic post-post-industrial economy colloquially known as "this mess."

You're astonished and possibly ashamed that mutant financial instruments dreamed up in your great country have spawned worldwide misery. You can't comprehend, much less trim, the amount of bailout money parachuting into the laps of incompetents, hoarders, and miscreants. It's been a tough century so far: 9/11, Iraq, and now this. At least we have a bright new president. He'll give you a job painting a bridge. You may need it to keep body and soul together.

The basic story line so far is that we are all to blame, including homeowners who bit off more than they could chew, lenders who wrote absurd adjustable-rate mortgages, and greedy investment bankers.

Credit derivatives also figure heavily in the plot. Apologists say that these became so complicated that even Wall Street couldn't understand them and that they created "an unacceptable level of risk." Then these blowhards tell us that the bailout will pump hundreds of billions of dollars into the credit arteries and save the patient, which is the world's financial system. It will take time—maybe a year or so—but if everyone hangs in there, we'll be all right. No structural damage has been done, and all's well that ends well.

Sorry, but that's drivel. In fact, what we are living through is the worst financial scandal in history. It dwarfs 1929, Ponzi's scheme, Teapot Dome, the South Sea Bubble, tulip bulbs, you name it. Bernie Madoff? He's peanuts.

Credit derivatives—those securities that few have ever seen—are one reason why this crisis is so different from 1929.

Derivatives weren't initially evil. They began as insurance policies on large loans. A bank that wished to lend money to a big, but shaky, venture, like what Ford or GM have become, could hedge its bet by buying a credit derivative to cover losses if the debtor defaulted. Derivatives weren't cheap, but in the era of globalization and declining American competitiveness, they were prudent. Interestingly, the company that put the basic hardware and software together for pricing and clearing derivatives was Bloomberg. It was quite expensive for a financial institution—say, a bank—to get a Bloomberg machine and receive the specialized training required to certify analysts who would figure out the terms of the insurance. These Bloomberg terminals, originally called Market Masters, were first installed at Merrill Lynch in the late 1980s.

Subsequently, thousands of units have been placed in trading and financial institutions; they became the cornerstone of Michael Bloomberg's wealth, marrying his skills as a securities trader and an electrical engineer.

It's an open question when or if he or his company knew how they would be misused over time to devastate the world's economy.


Fast-forward to the early years of the Clinton administration. After an initial surge of regulatory behavior in favor of fair markets, especially in antitrust, that sort of behavior was abandoned, and free markets triumphed. The result was a morass of white-collar sociopathy at Archer Daniels Midland, Enron, and WorldCom, and in a host of markets ranging from oil to vitamins.

This was the beginning of the heyday of hedge funds. Unregulated investment houses were originally based on the questionable but legal practice of short-selling—selling a financial instrument you don't own in hopes of buying it back later at a lower price. That way, you hedge your bets: You cover your investment in a company in case a company's stock price falls.

But hedge funds later diversified their practices beyond that easy definition. These funds acquired a good deal of popular mystique. They made scads of money. Their notoriously high entry fees—up to 5 percent of the investment, plus as much as 36 percent of profits—served as barriers to all but the richest investors, who gave fortunes to the funds to play with. The funds boasted of having genius analysts and fabulous proprietary algorithms. Few could discern what they really did, but the returns, for those who could buy in, often seemed magical.

But it wasn't magic. It amounted to the return of the age-old scam called "bucket shops." Also sometimes known as "boiler rooms," bucket shops emerged after the Civil War. Usually, they were storefronts where people came to bet on stocks without owning them. Unlike their customers, the shops actually owned blocks of stock. If customers were betting that a stock would go up, the shops would sell it and the price would plunge; if bettors were bearish, the shops would buy. In this way, they cleaned out their customers. Frenetic bucket-shop activity caused the Panic of 1907. By 1909, New York had banned bucket shops, and every other state soon followed.

In the mid-'90s, though, the credit-derivatives industry was hitting its stride and argued vehemently for exclusion from all state and federal anti-bucket-shop regulations. On the side of the industry were Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and his deputy, Lawrence Summers. Holding the fort for the regulators was Brooksley Born, who headed the Commodity Futures Trading Commission (CFTC). The three financial titans ridiculed the virtually unknown and cloutless, but brilliant and prophetic Born, who warned that unrestricted derivatives trading would "threaten our regulated markets, or indeed, our economy, without any federal agency knowing about it." Warren Buffett also weighed in against deregulation.

But Congress loved Greenspan—a/k/a "the Maestro" and "the Oracle"—and Clinton loved Rubin. The sleepy hearings received almost no public attention. The upshot was that Congress removed oversight of derivatives from the CFTC and preempted all state anti-bucket-shop laws. Born resigned shortly afterward.

Soon, something odd started to happen. Legitimate big investors, often with millions of dollars to place, found that they couldn't get into certain hedge funds, despite the fact that they were willing to pay steep fees. In retrospect, it seems as if these funds did not want fussy outsiders looking into what they were doing with derivatives.


Imagine that a person is terminally ill. He or she would not be able to buy a life insurance policy with a huge death benefit. Obviously, third parties could not purchase policies on the soon-to-be-dead person's life. Yet something like that occurred in the financial world.

This was not caused by imprudent mortgage lending, though that was a piece of the puzzle. Yes, Fannie Mae and Freddie Mac were put on steroids during the '90s, and some people got into mortgages who shouldn't have. But the vast majority of homeowners paid their mortgages. Only about 5 to 10 percent of these loans failed—not enough to cause systemic financial failure. (The dollar amount of defaulted mortgages in the U.S. is about $1.2 trillion, which seems like a princely sum, but it's not nearly enough to drag down the entire civilized world.)

Much more dangerous was the notorious bundling of mortgages. Investment banks gathered these loans into batches and turned them into securities called collateralized debt obligations (CDOs). Many included high-risk loans. These securities were then rated by Standard & Poor's, Fitch Ratings, or Moody's Investors Services, who were paid at premium rates and gave investment grades. This was like putting lipstick on pigs with the plague. Banks like Wachovia, National City, Washington Mutual, and Lehman Brothers loaded up on this financial trash, which soon proved to be practically worthless. Today, those banks are extinct. But even that was not enough to cause a worldwide financial crisis.

What did cause the crisis was the writing of credit derivatives. In theory, they were insurance policies for investors; in practice, they became a guarantee of global financial collapse.

As insurance, they were poised to pay off fabulously when these weak bundled securities failed. And who was waiting to collect? Well, every gambler is looking for a sure bet. Most never find it. But the hedge funds and their ilk did.


The mantra of entrepreneurial culture is that high risk goes with high reward. But unregulated and opaque derivatives trading was countercultural in the sense that low or no risk led to quick, astronomically high rewards. By plunking down millions of dollars, a hedge fund could reap billions once these fatally constructed securities plunged. Again, the funds did not need to own the securities; they just needed to pay for the derivatives—the insurance policies for the securities. And they could pay for them again and again. This was known as replicating. It became an addiction.

About $2 trillion in credit derivatives in 1989 jumped to $8 trillion in 1994 and skyrocketed to $100 trillion in 2002. Last year, the Bank for International Settlements, a consortium of the world's central banks based in Basel (the Fed chair, Ben Bernanke, sits on its board), reported the gross value of these commitments at $596 trillion. Some are due, and some will mature soon. Typically, they involve contracts of five years or less.

Credit derivatives are breaking and will continue to break the world's financial system and cause an unending crisis of liquidity and gummed-up credit. Warren Buffett branded derivatives the "financial weapons of mass destruction." Felix Rohatyn, the investment banker who organized the bailout of New York a generation ago, called them "financial hydrogen bombs."

Both are right. At almost $600 trillion, over-the-counter (OTC) derivatives dwarf the value of publicly traded equities on world exchanges, which totaled $62.5 trillion in the fall of 2007 and fell to $36.6 trillion a year later.

The nice thing about public markets is that they act as canaries that give warnings as they did in 1929, 1987 (the program trading debacle), and 2001 (the dot-com bubble), so we can scramble out with our economic lives. But completely private and unregulated, the OTC derivatives trade is justly known as the "dark market."


The heart of darkness was the AIG Financial Products (AIGFP) office in London, where a large proportion of the derivatives were written. AIG had placed this unit outside American borders, which meant that it would not have to abide by American insurance reserve requirements. In other words, the derivatives clerks in London could sell as many products as they could write—even if it would bankrupt the company.

The president of AIGFP, a tyrannical super-salesman named Joseph Cassano, certainly had the experience. In the 1980s, he was an executive at Drexel Burnham Lambert, the now-defunct brokerage that became the pivot of the junk-bond scandal that led to the jailing of Michael Milken, David Levine, and Ivan Boesky.

During the peak years of derivatives trading, the 400 or so employees of the London unit reportedly averaged earnings in excess of a million dollars a year. They sold "protection"—this Runyonesque term was favored—worth more than three times the value of parent company AIG. How could they have not known that they were putting at risk the largest insurer in the world and all the businesses and individuals that it covered?

This scheme that smacks of securities fraud facilitated the dreams of buyers called "counterparties" willing to ante up. Hedge fund offices sprouted in Kensington and Mayfair like mushrooms after a summer shower. Revenue from premiums for derivatives at AIGFP rose from $737 million in 1999 to $3.26 billion in 2005. Cassano reportedly hectored ever-willing counterparties to "play the power game"—in other words, gobble up all the credit derivatives backing CDOs that they could grab. As the bundled adjustable-rate mortgages ballooned, stretched home buyers defaulted, and the exciting power game became about as risky as blasting sitting ducks with a Glock.

People still seem surprised to read that hedge principals have raked in billions of dollars in a single year. They shouldn't be. These subprime-time players knew how to score. The scam bled AIG white. In mid-September, when it was on the ropes, AIG received an astonishing $85 billion emergency line of credit from the Fed. Soon, that was supplemented by another $67 billion. Much of that money, to use the government's euphemism, has already been "drawn down." Shamefully, neither Washington nor AIG will explain where the billions went. But the answer is increasingly clear: It went to counterparties who bought derivatives from Cassano's shop in London.


Imagine if a ring of cashiers at a local bank made thousands of bad loans, aware that they could break the bank. They would be prosecuted for fraud and racketeering under the anti-gangster RICO Act. If their counterparties—the debtors—were in on the scam and understood that they didn't have to pay off the loans, they could be charged, too. In fact, this scenario played out at subprime-pushing outlets of a host of banks, including Washington Mutual (acquired last year by JP Morgan Chase, which itself received a $25 billion bailout); IndyMac (which was seized by FDIC regulators); and Lehman Brothers (which went belly-up). About 150 prosecutions of this type of fraud are going forward.

The top of the swamp's food chain, where the muck was derivatives rather than mortgages, must also be scrutinized. Apparently, that is the case. AIGFP's Cassano has hired top white-collar litigator and former prosecutor F. Joseph Warin (profiled in the 2004 Washingtonian piece, "Who to Call When You're Under Investigation!"). Neither Cassano nor his attorney responded to interview requests.

AIG's lavishly compensated counterparties were willing participants and likewise could be considered for prosecution, depending on what they knew. Who were they?

At a 2007 conference, Cassano defined them as a "global swath" that included "banks and investment banks, pension funds, endowments, foundations, insurance companies, hedge funds, money managers, high-net-worth individuals, municipalities, sovereigns, and supranationals." Abetting the scheme, ratings agencies like Standard & Poor's gave high grades to the shaky mortgage-backed securities bundled by investment banks such as Goldman Sachs and Lehman Brothers.

After the relative worthlessness of these CDOs became clear, the raters rushed to downgrade them to junk status. This occurred suddenly with more than 4,000 CDOs in the first quarter of 2008—the financial community now regards them as "toxic waste." Of course, the sudden massive downgrading raises the question: Why had CDOs been artificially elevated in the first place, leading banks to buy them and giving them protective coloring just because the derivatives writers "insured" them?

After the raters got real (i.e., got scared), the gig was up. Hedge funds fled in droves from their luxe digs in London. The industry remains murky, but some observers feel that more than half of all hedges will fold this year. Not necessarily a good sign, it seems to show that the funds were one-trick ponies living mainly off the derivatives play.

We know that AIG was not the only firm that sold derivatives: Lehman and Bear Stearns both dealt them and died. About 20 years ago, JP Morgan, the now-defunct investment bank, had brought the idea to AIGFP in London, which ran with it. Seeing the Cassano group's success, Morgan jumped in with both feet. Specializing in credit default swaps—a type of derivative triggered to pay off by negative events in the lives of loans, like defaults, foreclosures, and restructurings—Morgan had a distinctive marketing spin. Its "quants" were classy young dealers who could really do the math, which of course gave them credibility with those who couldn't. They abjured street slang like "protection." They pitched their sophisticated swaps as "technologies." The market adored them. They, in turn, oversold the product, made huge commissions, and wounded Morgan, which had to sell itself to Chase, becoming JP Morgan Chase—now the country's biggest bank.

Today, the real question is whether the Morgan quants knew the swaps didn't work and actually were grenades with pulled pins. Like Joseph Cassano, such people should consult attorneys.


Secrecy shrouds the bailout. The 21 banks that each received more than $1 billion from the Fed won't disclose how, or even if, they're lending it, which hardly quells fears of hoarding. The Treasury says it can't force disclosure because it took only preferred (non-voting) stock in exchange for the money.

If anything, the Fed had been less candid. It stonewalls requests to reveal the winners (mainly banks and corporations) of $1.5 trillion in loans, as well as the securities it received as collateral. A Freedom of Information Act (FOIA) suit to obtain this information by Bloomberg News has been rebuffed by the Fed, which insists that a loophole in FOIA exempts it. Bloomberg will probably lose the case, but at least it's trying to probe the black hole of bailout money. Of course, Barack Obama could tell the Fed to release the information, plus generally open the bailout to public eyes. That would be change that we could believe in.

As for Bloomberg, its business side, Bloomberg L.P., has been less than forthcoming. Requests to interview someone from the company—and Michael Bloomberg, who retains a controlling interest—about the derivatives trade went unanswered.

In his economic address at Cooper Union last spring, Obama argued for new regulations, which he called "the rules of the road," and for a $30 billion stimulus package, that now seems quaint. In the OTC swaps trade, the Bloomberg L.P.'s computer terminals are the road, bridges, and tunnels for "real-time" transactions. The L.P.'s promotional materials declare: "You're either in front of a Bloomberg or behind it." In terms of electronic trading of certain securities, including credit default swaps: "Access to a dealer's inventory is based upon client relationships with Bloomberg as the only conduit." In short, the L.P. looks like a dominant player—possibly, a monopoly. If it has a true competitor, I can't find it. But then, this is a very dark market.

Did Bloomberg L.P. do anything illegal? Absolutely not. We prosecute hit-and-run drivers, not roads. But there are many questions—about the size of the derivatives market, the names of the counterparties, the amount of replication of derivatives, the role of securities ratings in Bloomberg calculations (in other words, could puffing up be detected and potentially stop a swap?), and how the OTC industry should be reported and regulated in order to prevent future catastrophes. Bloomberg is a privately held company—to the chagrin of would-be investors—and quite private about its business, so this information probably won't surface without subpoenas.


So what do we do now? In 2000, the 106th Congress as its final effort passed the Commodity Futures Modernization Act (CFMA), and, disgracefully, President Clinton signed it. It opened up the bucket-shop loophole that capsized the world's economic system. With the stroke of a presidential pen, a century of valuable protection was lost.

Even with that, the dangerous swaps still almost found themselves subjected to state oversight. In 2000, AIG asked the New York State Insurance Department to decide if it wanted to regulate them, but the department's superintendent, Neil Levin, said no. The question was not posed by AIGFP, but by the company's main office through its general counsel, a reminder that not long ago, AIG was a blue chip with a triple-A rating that touted its integrity.

We can't know why Levin rejected the chance to regulate the tricky trade. He died in the restaurant at the top of the World Trade Center on the morning of 9/11. A Pataki-appointed former Goldman Sachs vice president, Levin may have shared other Wall Streeters' love of derivatives as the last big-money sure thing as the IPO craze wound down. Or maybe he saw swaps as gambling rather than insurance, hence beyond his jurisdiction. Regardless, current Insurance Superintendent Eric Dinallo told me, "I don't agree with his answer." Maybe the economic crisis could have been averted if Levin had answered otherwise. "How close we came . . ." Dinallo mused.

Deeply occupied with keeping AIG, the parent company, afloat since the bailout, Dinallo saw the carnage that the swaps caused and, with the support of Governor Paterson, pushed anew for regulatory oversight, a position also adopted by the President's Working Group (PWG), which includes the Treasury, Fed, SEC, and CFTC.

But regulation isn't enough to stop a phenomenon called "de-supervision" that occurs when officials can't, or won't, oversee a market. For instance, the Fed under Greenspan had authority to regulate mortgage bankers and brokers, the industry's cowboys who kicked off this fiasco. Because Greenspan's libertarian sensibilities prevented him from invoking the Fed's control, the mortgage market careened corruptly until the wheels came off. Notoriously lax and understaffed, the SEC did nothing to limit investment banks that bundled, pitched, and puffed non-prime mortgages as the raters cheered. It's doubtful that any agency can be relied on to control lucrative default swaps, which should be made illegal again. The bucket-shop loophole must be closed. The evil genie should go back in the bottle.

Will Obama re-criminalize these financial weapons by pushing for repeal of the CFMA? This should be a no-brainer for Obama, who, before becoming a community organizer in Chicago, worked on Wall Street, studied derivatives, and by now undoubtedly knows their destructive power.

What about the $600 trillion in credit derivatives that are still out there, sucking vital liquidity and credit out of the system? It's the tyrannosaurus in the mall, the one that made Henry Paulson, the former Treasury Secretary who looks like Daddy Warbucks, get down on his knees and beg Nancy Pelosi for a bailout.

Even with the bailout, no one can get their arms around this monster. Obviously, the $600 trillion includes not only many unseemly replicated death bets, but also some benign derivatives that creditors bought to hedge risky loans. Instead of sorting them out, the Bush administration tried to protect them all, while keeping the counterparties happy and anonymous.

Paulson has taken flack for spending little to bring mortgages in line with falling home values. Sheila Bair, the FDIC chief who often scrapped with Paulson, said this would cost a measly $25 billion and that without it, 10 million Americans could lose their homes over the next five years. Paulson thought it would take three times as much and balked. Congress is bristling because the Emergency Economic Stabilization Act (EESA) could provide mortgage relief—and some derivatives won't detonate if homeowners don't default. Obama's nominee for Treasury Secretary, Timothy Geithner, could back such relief at his hearings.

The other key appointment is Attorney General. A century ago, when powerful trusts distorted the market system, we had AGs who relentlessly tracked and busted them. Today's crisis is missing, so far, an advocate as dynamic and energetic as the mortgage bankers, brokers, bundlers, raters, and quants who, in a few short years, littered the world with rotten loans, diseased CDOs, and lethal derivatives. During the Bush years, white-collar law enforcement actually dropped as FBI agents were transferred to antiterrorism. Even so, according to William Black, an effective federal litigator and regulator during the 1980s savings-and-loan scandal, by 2004, the FBI perceived an epidemic of fraud. Now a professor of law and finance at the University of Missouri–Kansas City, Black has testified to Congress about the current crisis and paints it as "control fraud" at every level. Such fraud flows from the top tiers of corporations—typically CEOs and CFOs, who control perverse compensation systems that reward cheating and volume rather than quality, and circumvent standard due diligence such as underwriting and accounting. For instance, AIGFP's Cassano reportedly rebuffed AIG's internal auditor.

The environment from the top of the chain—derivatives gang leaders—to the bottom of the chain—subprime, no-doc loan officers—became "criminogenic," Black says. The only real response? Aggressive prosecution of "elites" at all stages in this twisted mess. Black says sentences should not be the light, six-month slaps that white-collar criminals usually get, or the Madoff-style penthouse arrest.

As staggering as the Madoff meltdown was, it had a refreshing side—the funds were frozen. In the bailout, on the other hand, the government often seems to be completing the scam by quietly passing the proceeds to counterparties.

The advantage of treating these players like racketeers under federal law is that their ill-gotten gains could be forfeited. The government could recoup these odious gambling debts instead of simply paying them off. In finance, the bottom line is the bottom line. The bottom line in this scandal is that fantastically wealthy entities positioned themselves to make unfathomable fortunes by betting that average Americans—Joe Six-Packs and hockey moms—would fail.

Black suggests that derivatives should be "unwound" and that the payouts cease: "Close out the positions—most of them have no social utility." And where there has been fraud, he adds, "clawback makes perfect sense." That would include taking back the ludicrously large bonuses and other forms of compensation given to CEOs at bailed-out companies.

No one knows how much could be clawed back from the soiled derivatives reap. Clearly, it's not $600 trillion. William Bergman, formerly a market analyst at the Chicago Fed in "netting"—what's left after financial institutions pay each other off for ongoing deals and debts—makes a "guess" that perhaps only 5 percent could be recouped, which he concedes is unfortunately low. Still, that's $30 trillion, a huge number, more than 10 times what the Fed can deploy and over twice the U.S. gross domestic product. Such a sum, if recovered through the criminal justice process, could ease the liquidity crisis and actually get the credit arteries flowing. Not everyone would like it. What's left of Wall Street and hedge funds want their derivatives gains; so do foreign banks.


A tangle of secrecy, conflicts of interest, and favoritism plagues the process of recovery.

Lehman drowned, but Goldman Sachs, where Paulson was formerly CEO, was saved. The day before AIG reaped its initial $85 billion bonanza, Paulson met with his successor, Lloyd Blankfein, who reportedly argued that Goldman would lose $20 billion and fail unless AIG was rescued. AIG got the money.

Had Goldman bought from AIG credit derivatives that it needed to redeem? Like most other huge financial traders, Goldman has a secretive hedge fund, Global Alpha, that refuses to reveal its transactions. Regardless, Paulson's meeting with Blankfein was a low point. If Dick Cheney had met with his successor at Halliburton and, the very next day, written a check for billions that guaranteed its survival, the press would have screamed for his head.

The second most shifty bailout went to Citigroup, a money sewer that won last year's layoff super bowl with 73,000. Instead of being parceled to efficient operators, Citi received a $45 billion bailout and $300 billion loan package, at least in part because of Robert Rubin's juice. While Treasury Secretary under Clinton, Rubin led us into the derivatives maelstrom, deported jobs with NAFTA, and championed bank deregulation so that companies like Citi could mimic Wall Street speculators. After he joined Citi's leadership in 1999, the bank went long on mortgages and other risks du jour, enmeshed itself in Enron's web, tanked in value, and suffered haphazard management, while Rubin made more than $100 million.

Rubin remained a director and "senior counselor" at Citi until January 9, 2009, and is an economic adviser to Obama. In truth, he probably shouldn't be a senior counselor anywhere except possibly at Camp Granada. Like Greenspan, he should retire before he breaks something again, and we have to pay for it. (Incidentally, the British bailout, which is more open than ours and mandates mortgage relief, makes corporate welfare contingent on the removal of bad management.)

The third strangest rescue involved the Fed's announcement just before Christmas that hedge funds for the first time could borrow from it. Apparently, the new $200 billion credit line relates to recently revealed securitized debts including bundled credit card bills, student loans, and auto loans. Obviously, it's worrisome that the crisis may be morphing beyond its real estate roots.


To say the bailout hasn't worked so far is putting it mildly. Since the crisis broke, Washington's reaction has been chaotic, lenient to favorites, secretive, and staggeringly expensive. An estimated $7.36 trillion, more than double the total American outlay for World War II (even correcting for inflation), has been thrown at the problem, according to press reports. Along the way, banking, insurance, and car companies have been nationalized, and no one has been brought to justice.

Combined unemployment and underemployment (those who have stopped looking, and part-timers) runs at nearly 20 percent, the highest since 1945. Housing prices continue to hemorrhage—last fall's 18 percent drop could double. Holiday shopping fizzled: 160,000 stores closed last year, and 200,000 more are expected to shutter in '09. Some forecasts place eventual retail darkness at 25 percent. In 2008, the Dow dropped further—34 percent—than at any time since 1931. There is no sound sector in the economy; the only members of the 30 Dow Jones Industrials posting gains last year were Wal-Mart and McDonald's.

Does Obama's choice for Attorney General, Eric Holder, have the tenacity and will to tackle the widest fraud in American history? Parts of his background don't necessarily augur well: He worked on a pardon for Marc Rich, the fugitive billionaire tax evader once on the FBI's Most Wanted List whom Clinton cleared. After leaving the Clinton era's Justice Department, Holder went to work for Covington & Burling, a D.C. firm that represents corporate heavies including Big Tobacco. He defended Chiquita Brands in a notorious case, in which it paid a $25 million fine for using terrorists in Columbia as security. Holder fits well within the gaggle of elite D.C. lawyers who move back and forth between government and defending corporate criminals. He doesn't exactly have the sort of résumé that startles robber barons.

Can Holder design and orchestrate a muscular legal response, including prosecution and stern punishment of top executives, plus aggressive clawbacks of money? There seems little question that he has the skill, so the decision on how aggressive the Justice Department will be is up to Obama.

Holder could ask for and get well-organized FBI white-collar teams. The personnel hole caused by shifts to antiterrorism would have to be more than filled to their pre-9/ll staffing if the incoming administration decides to break this criminogenic cycle rather than merely address it symbolically.

Black contends that aggressive prosecution would be good for the economy because it may help prevent cheating and fraud that inevitably cause bubbles and destroy wealth. The Sarbanes-Oxley law passed in Enron's wake, for instance, is supposed to make corporations now keep the kinds of documents necessary to assess criminality. Whether the CEOs, CFOs, and others who controlled the current frauds will do so is another matter.

"Don't count on them keeping records for long," Black warns. "It's time to get out the subpoenas."

Move to End Internet Neutrality Seen as Blow to Ordinary Bloggers

Move to End Internet Neutrality Seen as Blow to Ordinary Bloggers

by Lawrence R. Velvel

Go To Original

If the cable and phone companies that transmit Internet data are allowed to charge higher rates to some producers for faster service the result will be “a ten pin strike against political freedom,” a prominent legal authority warns.

That’s because the change will enable the wealthy to “quickly take over the high speed transmissions (for their trash commercial content) just as they completely monopolize radio and TV, and just as their incredibly greedy profit-seeking has had a very deleterious effect on print journalism,” writes Lawrence Velvel, dean of the Massachusetts School of Law at Andover.

Velvel’s plea for “internet neutrality” comes in his new book “An Enemy of The People,” subtitled “The Unending Battle Against Conventional Wisdom(Doukathsan).” Essentially, he writes, the proposed change is an “attempt by the wealthy to make the internet into yet another repository of their power…”

Under the new scheme sought by transmission firms, Velvel writes, “large companies would pay more, no doubt a lot more, in order to have their messages, videos, audios, and any other content transmitted rapidly. The rest of us peasants, who could not afford to have our content move fast, would pay less and have it move more slowly.”

“One can be sure that the average guy with something he wants to say will be relegated to lower speed transmissions,” Velvel writes. “Blogdom, and the use of the internet by average people for political purposes, will likely be as good as dead.”

According to Save The Internet.com(STI):

“The nation’s largest telephone and cable companies — including AT&T, Verizon, Comcast and Time Warner — want to be Internet gatekeepers, deciding which Web sites go fast or slow and which won’t load at all.”

“What we have here,” Velvel explained, “is a bunch of unregenerate capitalists, who think that nothing else is important except trying to make as much as they can conceivably get away with. As with the oil companies and the investments banks, huge profit margins and scores of millions annually for their chairmen and CEOs isn’t enough for them. They want more. Always more. Nothing else matters to them. The pipes (transmission) companies are no different.”

Velvel pointed out, “The average guy can’t be published in a newspaper, and cannot afford the money to pay to be on radio or television. His voice is limited. The great benefit of the internet, the reason it bade fair to be the new version of the poor man’s printing press (which is what picketing and marching were once called), is that it gave everyone a chance to have his or her say in a way that was immediately available to anyone who found it or knew of it and wanted to read it.”


“That is why tens of millions of blogs sprang up,” Velvel continued, “with (at least) many thousands of them being on political subjects, and with blogdom sometimes having major political impacts.”

Others besides Velvel have also commented on efforts to destroy net neutrality. As a consequence of a 2005 decision by the Bush Federal Communications Commission, Internet Neutrality, “the foundation of the free and open internet — was put in jeopardy,” STI says. “Now cable and phone company lobbyists are pushing to block legislation that would reinstate Net Neutrality.”

“Without Net Neutrality, startups and entrepreneurs will be muscled out of the marketplace by big corporations that pay for a top spot on the Web,” STI says.

“If Congress turns the Internet over to the telephone and cable giants, everyone who uses the Internet will be affected,” STI continues. “Connecting to your office could take longer if you don’t purchase your carrier’s preferred applications. Sending family photos and videos could slow to a crawl. Web pages you always use for online banking, access to health care information, planning a trip, or communicating with friends and family could fall victim to pay-for-speed schemes.”

STI warned the consequences of abandoning Internet Neutrality would be “devastating.” “Innovation would be stifled, competition limited, and access to information restricted. Choice and the free market would be sacrificed to the interests of a few corporate executives.”