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License To Steal

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People are finally beginning to understand how our elected officials are benefiting from a system of “legalized graft” in the form of campaign contributions.  Voters have seen so many politicians breach their campaign promises while providing new meaning to the expression “follow the money”, that there now seems to be a resigned acceptance that political payoffs are an uncomfortable fact of life.  Worse yet, most people aren’t aware of another loophole in the law allowing Congress-cretins to make real money.

On January 26, 2009, Congressman Brian Baird introduced H.R.682, the “Stop Trading on Congressional Knowledge Act” (STOCK Act).  The bill was intended to resolve the situation concerning one of the more sleazy “perks” of serving in Congress.  As it presently stands, the law prohibiting “insider trading” (e.g. acting on confidential corporate information when making a transaction involving that company’s publicly-traded stock) does not apply to members of Congress.  Remember how Martha Stewart went to prison?  Well, if she had been representing Connecticut in Congress, she might have been able to interpose the defense that she was inspired to sell her ImClone stock based on information she acquired in the exercise of her official duties.  In that scenario, Ms. Stewart’s sale of the ImClone stock would have been entirely legal.  That’s because the laws which apply to you and I do not apply to those in Congress.  Needless to say, within six months of its introduction, H.R.682 was referred to the Subcommittee on the Constitution, Civil Rights, and Civil Liberties where it died of neglect.  Since that time, there have been no further efforts to propose similar legislation.

Here is a summary of the most important provisions of the “Stop Trading on Congressional Knowledge Act”:

Amends the Securities Exchange Act of 1934 and the Commodities Exchange Act to direct both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to prohibit purchase or sale of either securities or commodities for future delivery by a person in possession of material nonpublic information regarding pending or prospective legislative action if the information was obtained:  (1) knowingly from a Member or employee of Congress; (2) by reason of being a Member or employee of Congress; and (3) other federal employees.

Amends the Code of Official Conduct of the Rules of the House of Representatives to prohibit designated House personnel from disclosing material nonpublic information relating to any pending or prospective legislative action relating to either securities of a publicly-traded company or a commodity if such personnel has reason to believe that the information will be used to buy or sell the securities or commodity based on such information.

Back in September of 2009, a report by American Public Media’s Steve Henn discussed the investment transactions made by some Senators in September of 2008, after having been informed by former Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke, that our financial system was on the verge of a meltdown.  After quoting then GOP House Minority Leader John Boehner’s public acknowledgement that:

We clearly have an unprecedented crisis in our financial system.    .   .   .

On behalf of the American people our job is to put our partisan differences aside and to work together to help solve this crisis.

Mr. Henn proceeded to explain how swift Senatorial action resulted in a bipartisan exercise of greed:

The next day, according to personal financial disclosures, Boehner cashed out of a fund designed to profit from inflation.  Since he sold, it’s lost more than half its value.

Sen. Dick Durbin, an Illinois Democrat, who was also at that meeting sold more than $40,000 in mutual funds and reinvested it all with Warren Buffett.

Durbin said like millions of others he was worried about his retirement.  Boehner says his stock broker acted alone without even talking to him.  Both lawmakers say they didn’t benefit from any special tips.

But over time members of Congress do much better than the rest of us when playing the stock market.

*   *   *

The value of information that flows from the inner workings of Washington isn’t lost on Wall Street professionals.

Michael Bagley is a former congressional staffer who now runs the OSINT Group.  Bagley sells access and research. His clients are hedge funds, and he makes it his business to mine Congress and the rest of Washington for tips.

MICHAEL Bagley: The power center of finance has moved from Wall Street to Washington.

His firm is just one recent entry into Washington’s newest growth industry.

CRAIG HOLMAN: It’s called political intelligence.

Craig Holman is at Public Citizen, a consumer watchdog.  Holman believes lobbyists shouldn’t be allowed to sell tips to hedge funds and members of Congress shouldn’t trade on non-public information.  But right now it’s legal.

HOLMAN: It’s absolutely incredible, but the Securities and Exchange Act does not apply to members of Congress, congressional staff or even lobbyists.

That law bans corporate insiders, from executives to their bankers and lawyers, from trading on inside information.  But it doesn’t apply to political intelligence.  That makes this business lucrative.  Bagley says firms can charge hedge funds $25,000 a month just to follow a hot issue.

BAGLEY: So information is a commodity in Washington.

Inside information on dozens of issues, from bank capitol requirements to new student loan rules, can move markets.  Consumer advocate Craig Holman is backing a bill called the STOCK Act.  Introduced in the House, it would force political-intelligence firms to disclose their clients and it would ban lawmakers, staffers, and lobbyists from profiting on non-public knowledge.

Mr. Henn’s report went on to raise concern over the fact that there is nothing to stop members of Congress from acting on such information to the detriment of their constituents in favor of their own portfolios.

Take a look at the list below from opensecrets.org concerning the wealthiest members of Congress.  In light of the fact that these knaves are able to trade on “inside information” you now have the answer to the following question from the opensecrets website:

Congressional members’ personal wealth keeps expanding year after year, typically at rates well beyond inflation and any tax increases.  The same cannot be said for most Americans.  Are your representatives getting rich in Congress and, if so, how?

Here is the Top Ten List of the Richest Members of Congress from opensecrets.org:

NAME               MINIMUM NET WORTH    AVERAGE   MAXIMUM NET WORTH

Darrell Issa (R-Calif) $156,050,022      $303,575,011    $451,100,000

Jane Harman (D-Calif)  $151,480,522    $293,454,761   $435,429,001

John Kerry (D-Mass)    $182,755,534     $238,812,296   $294,869,059

Mark Warner (D-Va)     $65,692,210       $174,385,102   $283,077,995

Jared Polis (D-Colo)     $36,694,140        $160,909,068   $285,123,996

Herb Kohl (D-Wis)        $89,358,027           $160,302,011   $231,245,995

Vernon Buchanan (R-Fla)$-69,434,661    $148,373,160  $366,180,982

Michael McCaul (R-Texas) $73,685,086  $137,611,043  $201,537,000

Jay Rockefeller (D-WVa)  $61,446,018      $98,832,010   $136,218,002

Dianne Feinstein (D-Calif) $46,055,250    $77,082,134   $108,109,018

Jay Rockefeller’s position on the list is easy to understand, given the fact that he is the great-grandson of John D. Rockefeller.  How the first eight people on the list were able to become more wealthy than Jay Rockefeller should be matter of interest to the voting public.  In the case of  #10 — California Senator Dianne Feinstein  — we have an interesting situation.  As chair of the Senate Military Construction Appropriations subcommittee, she helped her husband, Iraq war profiteer Richard C. Blum, benefit from decisions she made as chair of that subcommittee.  In an article for bohemian.com, Peter Byrne discussed how Senator Feinstein was routinely informed about specific federal projects coming before her in which one of her husband’s businesses had a stake.  As Byrne’s article explained, the inside information Feinstein received was intended to help the senator avoid conflicts of interest, although it had the effect of exacerbating such conflicts.

“Inside information” empowers the party in possession of that knowledge with something known as “information asymmetry”, allowing that person to take advantage of (or steal from) the less-informed person on the other side of the trade.  Because membership in Congress includes a license to steal, can we ever expect those same individuals to surrender those licenses?  Well, if they were honest .   .   .


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Getting Rolled By Wall Street

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August 5, 2010

For the past few years, investors have been flocking to exchange-traded funds (ETFs) as an alternative to mutual funds, which often penalize investors for bailing out less than 90 days after buying in.  The ETFs are traded on exchanges in the same manner as individual stocks.  Investors can buy however many shares of an ETF as they desire, rather than being faced with a minimum investment as required by many mutual funds.  Other investors see ETFs as a less-risky alternative than buying individual stocks, since some funds consist of an assortment of stocks from a given sector.

The most recent essay by one of my favorite commentators, Paul Farrell of MarketWatch, is focused on the ETFs that are based on commodities, rather than stocks.  As it turns out, the commodity ETFs have turned out to be yet another one of Wall Street’s weapons of mass financial destruction.  Paul Farrell brings the reader’s attention to a number of articles written on this subject – all of which bear a theme similar to the title of Mr. Farrell’s piece:  “Commodity ETFs: Toxic, deadly, evil”.

Mr. Farrell discussed a recent article from Bloomberg BusinessWeek, exposing the hazards inherent in commodity ETFs.  That article began by discussing the experience of a man who invested $10,000 in an ETF called the U.S. Oil Fund (ticker symbol: USO), designed to track the price of light, sweet crude oil.  The investor’s experience became a familiar theme for many who had bought into commodity ETFs:

What happened next didn’t make sense.  Wolf watched oil go up as predicted, yet USO kept going down.  In February 2009, for example, crude rose 7.4 percent while USO fell by 7.4 percent.  What was going on?

What was going on was something called “contango”.  The BusinessWeek article explained it this way:

Contango is a word traders use to describe a specific market condition, when contracts for future delivery of a commodity are more expensive than near-term contracts for the same stuff.  It is common in commodity markets, though as Wolf and other investors learned, it can spell doom for commodity ETFs. When the futures contracts that commodity funds own are about to expire, fund managers have to sell them and buy new ones; otherwise they would have to take delivery of billions of dollars’ worth of raw materials.  When they buy the more expensive contracts — more expensive thanks to contango — they lose money for their investors.  Contango eats a fund’s seed corn, chewing away its value.

*   *   *

Contango isn’t the only reason commodity ETFs make lousy buy-and-hold investments.  Professional futures traders exploit the ETFs’ monthly rolls to make easy profits at the little guy’s expense.  Unlike ETF managers, the professionals don’t trade at set times.  They can buy the next month ahead of the big programmed rolls to drive up the price, or sell before the ETF, pushing down the price investors get paid for expiring futures.  The strategy is called “pre-rolling.”

“I make a living off the dumb money,” says Emil van Essen, founder of an eponymous commodity trading company in Chicago.  Van Essen developed software that predicts and profits from pre-rolling.  “These index funds get eaten alive by people like me,” he says.

A look at 10 well-known funds based on commodity futures found that, since inception, all 10 have trailed the performance of their underlying raw materials, according to Bloomberg data.

*   *   *

Just as they did with subprime mortgage-backed securities, Wall Street banks are transferring wealth from their clients to their trading desks.  “You walk into a casino, you expect to lose money,” says Greg Forero, former director of commodities trading at UBS (UBS).  “It’s the same with these products.  You’re playing a game with a very high rake, a very high house advantage, and you’re not the house.”

Another problem caused by commodity ETFs is the havoc they create by raising prices of consumer goods – not because of a supply and demand effect – but purely by financial speculation:

Wheat prices jumped 52 percent in early 2008, setting records before plunging again, and sugar more than doubled last year even as the economy slowed, forcing Reinwald’s Bakery in Huntington, N.Y., to fire five of its 32 employees.  “You try and budget to make money, but that’s becoming impossible to predict,” says owner Richard Reinwald, chairman of the Retail Bakers of America.

Paul Farrell also brought our attention to an article entitled “ETFs Gone Wild” to highlight the hazards these products create for the entire financial system:

In Bloomberg Markets’ “ETFs Gone Wild,” investors are warned that many ETFs are “stuffed with exotic derivatives,” at risk of becoming “the next financial time bomb.”  In short, thanks to ETFs, Wall Street is already creating a dangerous new kind of global weapon of mass destruction — a bomb primed to detonate like the 2000 dot-coms, the 2008 subprimes — and detonation is dead ahead.

Mr. Farrell’s essay included a discussion of a Rolling Stone article by McKenzie Funk, describing the exploits of Phil Heilberg, a former AIG commodity trader.  The Rolling Stone piece demonstrated how commodity ETFs are just the latest weapon used to advance “Chaos Capitalism”:

And yet, as Funk puts it:  “Heilberg’s bet on chaos is beginning to play out on the streets.”  The toxic trail of commodity ETFs is already proving to be deadly, starving thousands worldwide, while the new Capitalists of Chaos only see incredible profit opportunities, as they make huge bets that they’ll get even richer in the next round of catastrophes, disasters, poverty, starvation and wars.

Bottom line: Commodity ETF/WMDs are mutating into a toxic pandemic fueled (and protected by) the insatiable greed of banks, traders and politicians whose brains are incapable of giving up their profit machine, won’t until it implodes and self-destructs.  The Wall Street Banksters have no sense of morals, no ethics, no soul, no goal in life other than getting very rich, very fast.  They care nothing of democracy, civilization or the planet.

Don’t count on the faux financial “reform” bill to remedy any of the problems created by commodity ETFs.  As the BusinessWeek article pointed out, the Commodity Futures Trading Commission is going to have its hands full:

How much the new law will help remains to be seen, says Jill E. Sommers, one of the agency’s five commissioners, because Congress still needs to appropriate funds and write guidelines for implementation and enforcement.

Let’s not overlook the fact that those “guidelines” are going to be written by industry lobbyists.  The more things change — the more they remain the same.



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How The Democrats Self-Destruct

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June 29, 2009

For the past few days, we have been inundated with news reports detailing the self-destructive behavior of the late singing sensation, Michael Jackson.  Perhaps it is this heightened awareness of self-destruction that is causing people to take a closer look at the self-destructive behavior taking place within the Democratic Party.

Most notable is the behavior of President Obama.  As his Inauguration approached, many people were surprised to learn that some principal players selected for Obama’s economic team were the same people responsible for creating this mess during the Clinton years.  The most prominent of these is Larry Summers, who is expected to replace Ben Bernanke as Chairman of the Federal Reserve in January.  On June 24, Robert Scheer, on his Truthdig website, bemoaned the fact that Obama is following the “trickle down” strategy of bailing out the big banks, while doing nothing to really solve the mortgage crisis:

It’s not working.  The Bush-Obama strategy of throwing trillions at the banks to solve the mortgage crisis is a huge bust.  The financial moguls, while tickled pink to have $1.25 trillion in toxic assets covered by the feds, along with hundreds of billions in direct handouts, are not using that money to turn around the free fall in housing foreclosures.

*    *    *

Here again the administration, continuing the Bush strategy, is working the wrong end of the problem.  Although President Obama was wise enough to at least launch a job stimulus program, a far greater amount of federal funding benefits Wall Street as opposed to Main Street.

*    *    *

Why was I so naive as to have expected this Democratic president to not do the bidding of the banks when the last president from that party joined the Republicans in giving the moguls everything they wanted?  Please, Obama, prove me wrong.

If President Obama doesn’t prove Robert Scheer wrong, Obama might find himself facing some hostile crowds at the “town hall” meetings as 2012 approaches.

The President might also be surprised to encounter large-scale Democratic grassroots disappointment over his proposed “overhaul” of the financial regulatory system.  As I pointed out on June 18, President Obama’s financial reform proposal, released on that date, drew immediate criticism for the expanded powers granted to the Federal Reserve.  On June 24, The Nation (which prides itself on having a liberal bias) ran a harshly critical piece by William Greider, entitled:  “Obama’s False Reform”.  In addition to criticizing the expanded powers granted to the Federal Reserve, Greider emphasized that the proposal did not contain any significant measures, or “hard rules”, to reform the financial system.  Beyond that, Greider took Obama to task for the false claim that the regulatory system was overwhelmed by “the speed, scope and sophistication of a 21st century global economy”.  The article emphasized the need to “slow down the rush to weak solutions” by taking the time to find out about the root causes of the breakdown and then to address those causes:

Give subpoena power to Elizabeth Warren the Congressional Oversight Board she chairs.  Hire some of those investigative reporters who have no political investment in digging deeper into the mulch.  What exactly went wrong?  Who has bloody hands?  Where are the fundamental reforms?  If the economy returns to “normal’ rather soon, the ardor for serious reform might dissipate with much left undone.  That is a small risk to take, especially if the alternative is enacting the bankers’ pallid version of reform.

President Obama is now taking pride for the passage in the House of Representatives of the “climate change bill” (H.R. 2454, the American Clean Energy and Security Act of 2009).  Despite the claim of House Majority Leader Steny H. Hoyer (D-Md.) that the bill’s passage in the House was “a transformative moment”, 44 Democrats voted against the bill.  One harsh critic of the bill is Democrat Dennis Kucinich.  Here’s some of what Mr. Kucinich had to say:

It won’t address the problem.  In fact, it might make the problem worse.  It sets targets that are too weak, especially in the short term, and sets about meeting those targets through Enron-style accounting methods.  It gives new life to one of the primary sources of the problem that should be on its way out — coal — by giving it record subsidies.  And it is rounded out with massive corporate giveaways at taxpayer expense.

*   *   *

.  .  .  the bill does not require any greenhouse gas reductions beyond current levels until 2030.

Worse yet is the Democrats’ fumbling and bumbling with their efforts at healthcare reform legislation.  Polling wiz Nate Silver of fivethirtyeight.com, did a meta-analysis of the polls conducted to assess public support for the so-called “public option”in healthcare coverage, wherein people have the option to buy health insurance from the government.  The insurance companies obviously aren’t interested in that sort of competition and they have launched advertising campaigns portraying it as controversial and flawed.  Nevertheless, Nate Silver’s report revealed that five of the six polls analyzed, demonstrated lopsided support for the public option, exceeding 60 percent.  Despite the strong popular support for the public option, Mr. Silver pointed out in another posting, how there is a great risk that Democrats might oppose the measure due to payoffs from lobbyists:

Lobbying contributions appear to have the largest marginal impact on middle-of-the-road Democrats.  Liberal Democrats are likely to hold firm to the public option unless they receive a lot of remuneration from healthcare PACs.  Conservative Democrats may not support the public option in the first place for ideological reasons, although money can certainly push them more firmly against it.  But the impact on mainline Democrats appears to be quite large:  if a mainline Democrat has received $60,000 from insurance PACs over the past six years, his likelihood of supporting the public option is cut roughly in half from 80 percent to 40 percent.

Awareness of this venality obviously has many commentators expressing outrage.  On June 23, Joe Conason wrote such an article for The New York Observer:

If Congress fails to enact health care reform this year –or if it enacts a sham reform designed to bail out corporate medicine while excluding the “public option” — then the public will rightly blame Democrats, who have no excuse for failure except their own cowardice and corruption.  The punishment inflicted by angry voters is likely to be reduced majorities in both the Senate and the House of Representatives — or even the restoration of Republican rule on Capitol Hill.

*  *  *

The excuses sound different, but all of these lawmakers have something in common — namely, their abject dependence on campaign contributions from the insurance and pharmaceutical corporations fighting against real reform.

*  *  *

Whenever Democratic politicians are confronted with this conflict between the public interest and their private fund-raising, they take offense at the implied insult.  They protest, as a spokesman for Senator Landrieu did, that they make policy decisions based on what is best for the people of their states, “not campaign contributions.”  But when health reform fails — or turns into a trough for their contributors, who will believe them?  And who will vote for them?

Those Democrats inclined to oppose the public option don’t appear to be too concerned about public indignation over their behavior.  Take California Senator Dianne Feinstein for example.  Do you really believe she gives a damn about voter outrage?  She was re-elected in 2006, despite criticism that as chair of the Senate Military Construction Appropriations subcommittee, she helped her husband, Iraq war profiteer Richard C. Blum, benefit from decisions she made as chair of that subcommittee.  So what if MoveOn.org is targeting her for ambivalence about the issue of healthcare reform?  MoveOn.org is also targeting other Democrats who are attempting to eliminate the public option.  If these officials have so much hubris as to believe that they can get away with scoffing at the public will, they had better start looking for new jobs now  . . . because the market isn’t very good.

Obama Unveils His Most Ambitious Plan

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June 18, 2009

On Wednesday, June 18, President Obama released his anxiously-awaited, 88-page proposal to reform the financial regulatory system.  An angry public, having seen its jobs and savings disappear as home values took a nosedive, has been ready to set upon the culprits responsible for the economic meltdown.  Nevertheless, the lynch mobs don’t seem too anxious to string up former Federal Reserve Chairman, Alan Greenspan.  Perhaps because he is so old, they might likely prefer to see him die a slow, painful death from some naturally-occurring degenerative disease.  Meanwhile, a website, Greenspan’s Body Count, has been keeping track of the number of suicides resulting from the recent financial collapse.  (The current total is 96.)  As usual, President Obama has been encouraging us all to “look forward”.  (Sound familiar?  . . . as in:   “Forget about war crimes prosecutions because some Democrats might also find themselves wearing orange jumpsuits.”)

In reacting to Obama’s new financial reform initiative, some critics have observed that the failure to oust those officials responsible for our current predicament, could set us up for a repeat experience.  For example, The Hill quoted the assessment of Dean Baker, Co-director of the Center for Economic Policy and Research:

However, the big downside to this reform proposal is the implication that the problem was the regulations and not the regulators.  The reality is that the Fed had all the power it needed to rein in the housing bubble, which is the cause of the current crisis.  However, they chose to ignore its growth, either not recognizing or not caring that its collapse would devastate the economy. If regulators are not held accountable for such a monumental failure (e.g., by getting fired), then they have no incentive to ever stand up to the financial industry.

The Wall Street Journal‘s Smart Money magazine provided some similarly-skeptical criticisms of this plan:

Influential bank analyst Richard Bove of Rochedale Securities believes the Obama rules will only add costs to the system and will not lead to more effective oversight.  After all, a regulatory framework is already in place, Bove says, but the political will to enforce it has been absent — and that’s just the way Washington wants it.  Indeed, the only truly aggressive SEC director since the Kennedy administration was Harvey Pitt, Bove says. “[And] when he got religion about regulation, he got removed.”

Dr. Walter Gerasimowicz of New York-based Meditron Asset Management is dubious about a number of proposals, especially that of expanding the Fed’s role.  “What I find to be very disconcerting is the fact that our Federal Reserve is going to have extensive power over much of the industry,” Gerasimowicz says.  “Why would we give the Fed such powers, especially when they’ve failed over the past 10 years to monitor, to warn, or to bring these types of speculative bubbles under control?”

Our government was kind enough to provide us with an Executive Summary of the financial reform proposal.  Here is how that summary explains the “five key objectives” of the plan, along with the general recommendations for achieving those objectives:

(1)  Promote robust supervision and regulation of financial firms.  Financial institutions that are critical to market functioning should be subject to strong oversight.  No financial firm that poses a significant risk to the financial system should be unregulated or weakly regulated.  We need clear accountability in financial oversight and supervision.  We propose:

  • A new Financial Services Oversight Council of financial regulators to identify emerging systemic risks and improve interagency cooperation.
  • New authority for the Federal Reserve to supervise all firms that could pose a threat to financial stability, even those that do not own banks.
  • Stronger capital and other prudential standards for all financial firms, and even higher standards for large, interconnected firms.
  • A new National Bank Supervisor to supervise all federally chartered banks.
  • Elimination of the federal thrift charter and other loopholes that allowed some depository institutions to avoid bank holding company regulation by the Federal Reserve.
  • The registration of advisers of hedge funds and other private pools of capital with the SEC.

(2)  Establish comprehensive supervision of financial markets. Our major financial markets must be strong enough to withstand both system-wide stress and the failure of one or more large institutions. We propose:

  • Enhanced regulation of securitization markets, including new requirements for market transparency, stronger regulation of credit rating agencies, and a requirement that issuers and originators retain a financial interest in securitized loans.
  • Comprehensive regulation of all over-the-counter derivatives.
  • New authority for the Federal Reserve to oversee payment, clearing, and settlement systems.

(3)  Protect consumers and investors from financial abuse.  To rebuild trust in our markets, we need strong and consistent regulation and supervision of consumer financial services and investment markets.  We should base this oversight not on speculation or abstract models, but on actual data about how people make financial decisions.  We must promote transparency, simplicity, fairness, accountability, and access. We propose:

  • A new Consumer Financial Protection Agency to protect consumers across the financial sector from unfair, deceptive, and abusive practices.
  • Stronger regulations to improve the transparency, fairness, and appropriateness of consumer and investor products and services.
  • A level playing field and higher standards for providers of consumer financial products and services, whether or not they are part of a bank.

(4)  Provide the government with the tools it needs to manage financial crises.  We need to be sure that the government has the tools it needs to manage crises, if and when they arise, so that we are not left with untenable choices between bailouts and financial collapse.  We propose:

  • A new regime to resolve nonbank financial institutions whose failure could have serious systemic effects.
  • Revisions to the Federal Reserve’s emergency lending authority to improve accountability.

(5)  Raise international regulatory standards and improve international cooperation.  The challenges we face are not just American challenges, they are global challenges.  So, as we work to set high regulatory standards here in the United States, we must ask the world to do the same.  We propose:

  • International reforms to support our efforts at home, including strengthening the capital framework; improving oversight of global financial markets; coordinating supervision of internationally active firms; and enhancing crisis management tools.

In addition to substantive reforms of the authorities and practices of regulation and supervision, the proposals contained in this report entail a significant restructuring of our regulatory system.  We propose the creation of a Financial Services Oversight Council, chaired by Treasury and including the heads of the principal federal financial regulators as members.  We also propose the creation of two new agencies. We propose the creation of the Consumer Financial Protection Agency, which will be an independent entity dedicated to consumer protection in credit, savings, and payments markets. We also propose the creation of the National Bank Supervisor, which will be a single agency with separate status in Treasury with responsibility for federally chartered depository institutions.  To promote national coordination in the insurance sector, we propose the creation of an Office of National Insurance within Treasury.

So there you have it.  Most commentators expect that the real fighting over this plan won’t begin until this fall, with healthcare reform taking center stage until that time.  Regardless of whatever form this financial reform initiative takes by the time it is enacted, it will ultimately be seen by history as Barack Obama’s brainchild.  If this plan turns out to be a disaster, it could overshadow whatever foreign policy accomplishments may lie ahead for this administration.

Defending Reagan

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June 4, 2009

In case you’ve wondered whether Nobel laureates ever emit brain farts, Paul Krugman answered that question in the May 31 edition of The New York Times.  His column of that date targeted former President Ronald Reagan for causing our current economic crisis:

There’s plenty of blame to go around these days.  But the prime villains behind the mess we’re in were Reagan and his circle of advisers — men who forgot the lessons of America’s last great financial crisis, and condemned the rest of us to repeat it.

I was never a big fan of Ronald Reagan.  My reaction to his nomination as the Republican Presidential candidate in 1980, conjured up James Coburn’s sarcastic line from the movie In Like Flint:  “An actor for President!”  Reagan’s legacy was exaggerated — which is why the book, Tear Down This Myth by Will Bunch, is available on this site, under the “Featured Books” section on the left side of this page.  I never believed that Reagan deserved all the credit he was given for the collapse of the former Soviet Union.  In my opinion, that distinction belongs to Lech Walesa, leader of Solidarity (the former Soviet bloc’s first independent trade union) and his old buddy, Karol Wojtyla, who later became Pope John Paul II.  In fact, former Soviet leader Mikhail Gorbachev admitted that the demise of the Iron Curtain would have been impossible without John Paul II.

Another literary deflation of that aspect of the Reagan legend can be found in The Rebellion of Ronald Reagan:  A History of the End of the Cold War by James Mann.  In his review of that book for The Washington Post, Ronald Steel noted how James Mann addressed the claim that Reagan broke up the Soviet Union:

And in 1991 the Soviet Communist Party disintegrated and with it ultimately the Soviet Union itself.  Did Reagan make it happen?  This would be too strong, Mann insists.  The Cold War ended largely because Gorbachev “had abandoned the field.”

Despite my own feelings about the Reagan legacy, upon reading Paul Krugman’s attempt to blame Ronald Reagan for the economic meltdown, I immediately rejected that idea.  What became interesting was that in the aftermath of that article, commentators from “left-leaning” news sources voiced objections to the piece.  For example, William Greider is the national affairs correspondent for The Nation.  On his own blog, Greider wrote an essay entitled:  “Krugman Gets His History Wrong”.  While upbraiding Krugman, Mr. Greider took care to note the complicity of the Democrats in causing the current economic crisis:

What Krugman leaves out is that financial deregulation actually started two years earlier — before the Gipper got to Washington.  A Democratic Congress and Democratic president (Jimmy Carter) enacted the Monetary Control Act of 1980 which removed all remaining controls on interest rates and repealed the federal law prohibiting usury (note that sky-high interest rates and ruinous predatory lending have been with us ever since).  It was the 1980 legislation that took the lid off banking and doomed the savings and loan industry, the mainstay that used to provide housing loans and home mortgages.  The thrifts were able to raise capital because they were allowed to pay a half percent more in interest to depositors.  Bankers wanted them out of the way.  The Democratic party obliged.

Robert Scheer is the editor of Truthdig.  The columns he writes for Truthdig regularly appear in The Nation.  (He is famous for getting Jimmy Carter to admit for Playboy magazine, that Carter often “lusts in his heart for other women”.)  Mr. Scheer’s reaction to Krugman’s vilification of Reagan as the saboteur of the economy includes such words as “disingenuous” and “perverse”.  Beyond that, Sheer lays blame for this crisis where it properly belongs:

Reagan didn’t do it, but Clinton-era Treasury Secretaries Robert Rubin and Lawrence Summers, now a top economic adviser in the Obama White House, did.  They, along with then-Fed Chairman Alan Greenspan and Republican congressional leaders James Leach and Phil Gramm, blocked any effective regulation of the over-the-counter derivatives that turned into the toxic assets now being paid for with tax dollars.

*    *    *

How can Krugman ignore the wreckage wrought during the Clinton years by the gang of five?  Rubin, who convinced President Clinton to end the New Deal restrictions on the merger of financial entities, went on to help run the too-big-to-fail Citigroup into the ground.  Gramm became a top officer at the nefarious UBS bank.  Greenspan’s epitaph should be his statement to Congress in July 1998 that “regulation of derivatives transactions that are privately negotiated by professionals is unnecessary.”  That same week Summers assured banking lobbyists that the Clinton administration was committed to preventing government regulation of swaps and other derivatives trading.

Thank goodness Eliot “Socks” Spitzer is still around, writing for Slate.  His most recent article about the economy not only provides an accurate assessment of the cause of the problem  —  it also suggests some solutions:

We have had a fundamentally misguided industrial policy over the past decade.  Yes, industrial policy is a dirty phrase to many, some of whom would argue that we haven’t had one, and indeed shouldn’t.  But the truth is we did have one:  to leverage up and guarantee the bets of a financial services sector that has now collapsed and left nothing of value in its wake.

What would be a better approach?  A policy to support those sectors that actually create goods and value.  Investment in transformational technology and infrastructure are core national needs.  So why not start with a government order for 500,000 electric cars, subject to an RFP two years from now, by which time a true electric car prototype will have been developed?  It should be open to any manufacturer, as long as 75 percent of the value of the car is domestically produced.  I don’t care if the name on the plate is GM or Toyota, as long as the value added is here.  (I prefer a “Toyota” produced in Tennessee to a “GM” produced in China.  Why struggle to save the shell of a company –GM– that intends to ship jobs overseas anyway?)  Guaranteeing an order of 500,000 will give manufacturers the needed scale to generate profits and reassure private customers that service and support will be around for the long haul.  And the federal government could also issue an RFP for recharging stations, to be built by private companies, along the interstate highway system, wherever there is a traditional filling station, so that recharging will be possible.

(By the way:  An “RFP” is a Request for Proposals, or bids, on a government project — just in case you were thinking it might mean “request for prostitutes”.)

I have always been a fan of Socks Spitzer.  His personal story underscores the simple truth that all of us, regardless of our accomplishments, are only human and we all make mistakes  —  even Nobel Prize winners such as Paul Krugman.

A Consensus On Conspiracy

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May 21, 2009

I guess I can throw away my tinfoil hat.  I’m not so paranoid, after all.

Back on December 18, after discussing the bank bailout boondoggle, I made this observation about what had been taking place in the equities markets during that time:

Do you care to hazard a guess as to what the next Wall Street scandal might be?  I have a pet theory concerning the almost-daily spate of “late-day rallies” in the equities markets.  I’ve discussed it with some knowledgeable investors.  I suspect that some of the bailout money squandered by Treasury Secretary Paulson has found its way into the hands of some miscreants who are using this money to manipulate the stock markets.  I have a hunch that their plan is to run up stock prices at the end of the day, before those numbers have a chance to settle back down to the level where the market would normally have them.  The inflated “closing price” for the day is then perceived as the market value of the stock.  This plan would be an effort to con investors into believing that the market has pulled out of its slump.  Eventually the victims would find themselves hosed once again at the next “market correction”.  I don’t believe that SEC Chairman Christopher Cox would likely uncover such a scam, given his track record.

Some people agreed with me, although others considered such a “conspiracy” too far-flung to be workable.

Thanks to Tyler Durden at Zero Hedge, my earlier suspicions of market manipulation were confirmed.  On Tuesday, May 19, Mr. Durden posted a video clip from an interview with (among others) Dan Schaeffer, president of Schaeffer Asset Management, previously broadcast on the Fox Business Channel on May 14.  While discussing the latest “bear market rally”, Dan Schaeffer made this observation:

“Something strange happened during the last 7 or 8 weeks. Doreen, you probably can concur on this — there was a power underneath the market that kept holding it up and trading the futures.  I watch the futures every day and every tick, and a tremendous amount of volume came in at several points during the last few weeks, when the market was just about ready to break and shot right up again.  Usually toward the end of the day — it happened a week ago Friday, at 7 minutes to 4 o’clock, almost 100,000 S&P futures contracts were traded, and then in the last 5 minutes, up to 4 o’clock, another 100,000 contracts were traded, and lifted the Dow from being down 18 to up over 44 or 50 points in 7 minutes.  That is 10 to 20 billion dollars to be able to move the market in such a way. Who has that kind of money to move this market?

“On top of that, the market has rallied up during the stress test uncertainty and moved the bank stocks up, and the bank stocks issues secondary — they issue stock — they raised capital into this rally.  It was a perfect text book setup of controlling the markets — now that the stock has been issued …”

Mr. Schaeffer was then interrupted by panel member, Richard Suttmeier of ValuEngine.com.

My fellow foilhats likely had no trouble recognizing this market manipulation as the handiwork of the Plunge Protection Team (also known as the PPT).  Many commentators have considered the PPT as nothing more than a myth, with some believing that this “myth” stems from the actual existence of something called The President’s Working Group on Financial Markets.  For a good read on the history of the PPT, I recommend the article by Ambrose Evans-Pritchard of the Telegraph.  Bear in mind that Evans-Pritchard’s article was written in October of 2006, two years before the global economic meltdown:

Hank Paulson, the market-wise Treasury Secretary who built a $700m fortune at Goldman Sachs, is re-activating the ‘plunge protection team’ (PPT), a shadowy body with powers to support stock index, currency, and credit futures in a crash.

Otherwise known as the working group on financial markets, it was created by Ronald Reagan to prevent a repeat of the Wall Street meltdown in October 1987.

Mr Paulson says the group had been allowed to languish over the boom years.  Henceforth, it will have a command centre at the US Treasury that will track global markets and serve as an operations base in the next crisis.

*    *    *

The PPT was once the stuff of dark legends, its existence long denied.  But ex-White House strategist George Stephanopoulos admits openly that it was used to support the markets in the Russia/LTCM crisis under Bill Clinton, and almost certainly again after the 9/11 terrorist attacks.

“They have an informal agreement among major banks to come in and start to buy stock if there appears to be a problem,” he said.

“In 1998, there was the Long Term Capital crisis, a global currency crisis.  At the guidance of the Fed, all of the banks got together and propped up the currency markets. And they have plans in place to consider that if the stock markets start to fall,” he said.

The only question is whether it uses taxpayer money to bail out investors directly, or merely co-ordinates action by Wall Street banks as in 1929.  The level of moral hazard is subtly different.

John Crudele of the New York Post frequently discusses the PPT, although he is presently of the opinion that it either no longer exists or has gone underground.  He has recently considered the possibility that the PPT may have “outsourced” its mission to Goldman Sachs:

Let’s remember something.

First, Goldman Sachs accepted $10 billion in government money under the Troubled Asset Relief Program (TARP), so it is gambling with taxpayer money.

But the bigger thing to remember is this:  The firm may be living up to its nickname – Government Sachs – and might be doing the government’s bidding.

The stock market rally these past seven weeks has certainly made it easier for the Obama administration to do its job.  That, plus a little fancy accounting during the first quarter, has calmed peoples’ nerves quite a bit.

Rallies on Wall Street, of course, are good things – unless it turns out that some people know the government is rigging the stock market and you don’t.

That brings me to something called The President’s Working Group on Financial Markets, which is commonly referred to as the Plunge Protection Team.

As I wrote in last Thursday’s column, the Team has disappeared.

Try finding The President’s Working Group at the US Treasury and you won’t.

The guys and girls that Treasury Secretary Hank Paulson relied on so heavily last year when he was forcing Bank of America to buy Merrill Lynch and when he was waterboarding other firms into coming to Wall Street’s rescue has gone underground.

Anybody who has read this column for long enough knows what I think, that the President’s Working Group Plunge Protectors have, in the past, tinkered with the financial markets.

We’ll let interrogators in some future Congressional investigation decide whether or not they did so legally.

But right now, I smell a whiff of Goldman in this market. Breath in deeply, it’s intoxicating – and troubling.

Could Goldman Sachs be involved in a conspiracy to manipulate the stock markets?  Paul Farrell of MarketWatch has been writing about the “Goldman Conspiracy” for over a month.  You can read about it here and here.  In his May 4 article, he set out the plot line for a suggested, thirteen-episode television series called:  The Goldman Conspiracy.  I am particularly looking forward to the fourth episode in the proposed series:

Episode 4. ‘Goldman Conspiracy’ is manipulating stock market

“Something smells fishy in the market. And the aroma seems to be coming from Goldman Sachs,” says John Crudele in the New York Post.  Stocks prices soaring.  “So, who’s moving the market?”  Not the little guy.  “Professional traders, with Goldman Sachs leading the way.”   NYSE numbers show “Goldman did twice the number of so-called big program trades during the week of April 13,” over a billion shares, creating “a historic rally despite the fact that the economy continues to be in serious trouble.”   Then he tells us why: Because the “Goldman Conspiracy” is using TARP and Fed money, churning the markets.  They are “gambling with taxpayer money.”

It’s nice to know that other commentators share my suspicions … and better yet:   Some day I could be watching a television series, based on what I once considered my own, sensational conjecture.

Spinning Away From The Truth

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May 14, 2009

Wednesday was a rough day on Wall Street.  The Dow Jones Industrial Average dropped 184 points (just over two percent) to 8284; the Standard and Poor’s 500 index gave up over 24 points (2.69 percent) closing at 883.92 and the NASDAQ 100 index gave up 51.73 points (3.01 percent).  One didn’t have to look very far to find the reason.  At The Daily Beast website on Wednesday evening, item number 2 on the Cheat Sheet was a link to an article from The Wall Street Journal by Peter McKay, entitled:  “Signs of Consumer Strain Hit Stocks”.  The morning’s bad news was described by Mr. McKay in these terms:

The Commerce Department reported that retail sales fell 0.4% in April from the prior month, a steeper decline than the 0.1% gain economists expected.  Sales in March were revised down, falling 1.3% instead of 1.2% as previously reported.

The Wall Street Journal also ran an article on this subject by Justin Lahart:  “Retail Sales Stall on Consumer Caution”.  Mr. Lahart’s piece underscored the message reverberating through the evening’s financial reporting:

Indeed, retail sales rose in January and February after sliding for six straight months.  But those hopes were undermined by the 1.3% drop in retail sales in March as well as April’s decline.

The data suggest that a recovery won’t come until the second half of the year, and that when it does arrive it will be sluggish, said Michael Darda, an economist at MKM Partners in Stamford, Conn.

As I scanned through a number of websites to peruse the evening’s news stories, I was quite shocked to see the following headline on the Huffington Post blog, with screaming, bright red, upper-case, oversized font:  “BLOOMBERG NEWS:  CONSUMERS FEELING ‘INSPIRED’ TO SPEND MORE”.  Huh?   Just below the headline were three large photos.  The photo on the left featured a lineup of luxurious yachts, reminiscent of what can be found along Indian Creek during the Miami Beach Boat Show.  The middle picture showed that guy from Lifestyles of the Rich and Famous, raising a silver goblet in a toast to the photographer.  The photo on the right depicted a headless woman, adorned in enough jewelry to turn Ruth Madoff green with envy.  Had someone hacked into the HuffPo website and put this up as a gag?  (Later in the evening, I checked back at the site.  Although there was a new main headline relating to a different story, the link to the “inspired consumers” story was still there, although down the page.)

Clicking on the “inspired consumers” headline brought me to a story from Bloomberg News, entitled:  “‘Good Bad’ Economy Inspires Consumers As Slump Eases”.  “Good bad economy”?  I had trouble figuring out what that meant because I lost my George Orwell Decoder Ring.  Looking at this slice from the story told me enough about what they were trying to say:

Investor Exuberance

A Bloomberg survey of users on six continents showed that confidence in the global economy rose to the highest level in 19 months.

Antarctica and what five other continents?

The Huffington Post‘s BizarroWorld headline struck me as an attempt to imbue readers with a perception of Happy Days in Obamaland.  That headline and its incorporated story reminded me of a point recently made by one of my favorite bloggers, Jr. Deputy Accountant:

You know, there are times when I wonder just how difficult it is to keep the PR machine running at full speed and keep the market propped up artificially and massage Goldman’s nuts all at once.  Somehow, the powers-that-be are pulling it off, and I imagine that a large part of the dirty work, at least when it comes to PR, is taken care of by our moronic friends in mainstream media who feed up gems like this:  Citi using most of TARP capital to make loans.

(As an aside:  the reference to “Goldman” is Goldman Sachs, the second largest contributor to President Obama’s election campaign.)

Instead of relying on “the PR machine” to feed me propaganda about the economy, I rely on some of the sources included on this website’s blogroll.  Most of the writers for those sites are credentialed professionals, regarded as experts in their field (as opposed to the dilettantes, who cheerlead for Wall Street in the mainstream media).  One of these experts is Yves Smith of Naked Capitalism.  If you want to keep up with what’s really happening in the financial world, I suggest that you read her blog.

The truth of what the economy has in store for us is not pretty.  If you are ready to have a look at it, read Jeremy Grantham’s most recent report.  His bottom line is that late this year or early next year there will be a stock market rally, bringing the Standard and Poor’s 500 index near the 1100 range.  After that, get ready for seven really lean years:

A large rally here is far more likely to prove a last hurrah — a codicil on the great bullishness we have had since the early 90s or, even in some respects, since the early 80s.  The rally, if it occurs, will set us up for a long, drawn-out disappointment not only in the economy, but also in the stock markets of the developed world.

Unfortunately, it’s already too late for President Obama to accept the following rationale from Mr. Grantham’s essay:

We should particularly not allow ourselves to be intimidated by the financial mafia into believing that all of the failing financial companies — or very nearly all — had to be defended at all costs.  To take the equivalent dough that was spent on propping up, say, Goldman or related entities like AIG (that were necessary to Goldman’s well being), as well as the many other incompetent banks and spending it instead on really useful, high return infrastructure and energy conservation and oil and coal replacement projects would seem like a real bargain for society.  Yes, we would certainly have had a very painful temporary economic hit from financial and other bankruptcies if we had decided to let them go, but given the proven resilience of economies, it would still have seemed a better long-term bet.

After reading Jeremy Grantham’s recent quarterly letter, ask yourself this:  Do you feel “inspired” to spend more?

Somebody Really Loves Goldman Sachs

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May 17, 2009

The recent article about Treasury Secretary “Turbo” Tim Geithner by Jo Becker and Gretchen Morgenson, appearing in the April 26 edition of The New York Times, seems to have helped fan the flames of the current outrage concerning the Federal Reserve Bank of New York.  Turbo Tim was president of the New York Fed during the five years prior to his appointment as Treasury Secretary.  Becker and Morgenson pointed out many of the ways in which “conflict of interest” seems to be one of the cornerstones of that institution:

The New York Fed is, by custom and design, clubby and opaque.  It is charged with curbing banks’ risky impulses, yet its president is selected by and reports to a board dominated by the chief executives of some of those same banks. Traditionally, the New York Fed president’s intelligence-gathering role has involved routine consultation with financiers, though Mr. Geithner’s recent predecessors generally did not meet with them unless senior aides were also present, according to the bank’s former general counsel.

By those standards, Mr. Geithner’s reliance on bankers, hedge fund managers and others to assess the market’s health — and provide guidance once it faltered — stood out.

The New York Fed is probably the most important of the nation’s twelve Federal Reserve Banks, since its jurisdiction includes the heart of America’s financial industry.  As the Times piece pointed out, this resulted in the same type of “revolving door” opportunities as those enjoyed by members of Congress who became lobbyists and vice versa:

A revolving door has long connected Wall Street and the New York Fed.  Mr. Geithner’s predecessors, E. Gerald Corrigan and William J. McDonough, wound up as investment-bank executives.  The current president,William C. Dudley, came from Goldman Sachs.

The New York Fed’s current chairman, Stephen Friedman, has become a subject of controversy these days, because of his position as director and shareholder of Goldman Sachs.   Goldman sought and received expedited approval to become a “bank holding company” last September, thus coming under the jurisdiction of the Federal Reserve and becoming eligible for the ten billion dollars in TARP bailout money it eventually received.  After Goldman became subject to the New York Fed’s oversight (with Friedman as the New York Fed chairman) the Fed made decisions that impacted Goldman’s financial state.  Although this controversy was discussed here and here by The Wall Street Journal, that publication’s new owner, Rupert Murdoch, now requires a $104 annual on-line subscription fee to read his publication over the Internet. Sorry Rupert:  Homey don’t play that.  Although Slate provided us with an interesting essay on the Friedman controversy by Eliot “Socks” Spitzer, the best read was the commentary by Robert Scheer, editor of Truthdig.  Here are some important points from Scheer’s article, “Cashing In on ‘Government Sachs’ “:

When N.Y. Fed Chairman Stephen Friedman bought stock in the company that he once headed, and where he still serves as a director, he was already in violation of Federal Reserve policy and was hoping for a waiver to permit him to hold his existing multi-million-dollar stock stash and to remain on the Goldman board.  The waiver was requested last October by Timothy Geithner, then the president of the N.Y. Fed and now Treasury secretary.  Yet,without having received that waiver, Friedman went ahead in December and purchased 37,300 additional shares.  With shares he added in January, after the waiver was granted, he ended up with 98,600 shares in Goldman Sachs, worth a total of $13,330,720 at the close of trading on Tuesday.

*    *    *

As Jerry Jordan, former president of the Fed Bank in Cleveland, told the Journal in reference to Friedman’s obvious conflict of interest, “He should have resigned.”

Unfortunately, this was not the view during the reign of Geithner, who argued that Friedman needed to remain chairman of the N.Y. Fed board to find a suitable replacement for Geithner as he moved on to be secretary of the Treasury.  Friedman chose a fellow former Goldman Sachs exec for the job.

*    *    *

Geithner is a protege of former Goldman Sachs chairman Rubin.  And it was therefore not surprising when he picked Mark Patterson, a registered lobbyist for Goldman Sachs, to be his chief of staff at the Treasury Department.  That appointment was made on the same day that Geithner announced new rules for limiting the influence of registered lobbyists.  Need more be said?

Yes, there are a couple more things:  Goldman Sachs was the second largest contributor to Barack Obama’s Presidential election campaign, with a total of $980,945 according to OpenSecrets.org.  President Obama nominated Gary Gensler of Goldman Sachs to become Chairman of the Commodity Futures Trading Commission.  As Ken Silverstein reported for Harpers, this nomination has stalled, since a “hold” was placed on the nomination by Vermont Senator Bernie Sanders.  Mr. Silverstein quoted from the statement released by the office of Senator Sanders concerning the rationale for the hold:

Mr. Gensler worked with Sen. Phil Gramm and Alan Greenspan to exempt credit default swaps from regulation, which led to the collapse of A.I.G. and has resulted in the largest taxpayer bailout in U.S.history.   He supported Gramm-Leach-Bliley, which allowed banks like Citigroup to become “too big to fail.”  He worked to deregulate electronic energy trading, which led to the downfall of Enron and the spike in energy prices.  At this moment in our history, we need an independent leader who will help create a new culture in the financial marketplace and move us away from the greed, recklessness and illegal behavior which has caused so much harm to our economy.

“Change you can believe in”, huh?

Understanding The Creepy Bailouts

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March 26, 2009

The voting, taxpaying public had no trouble understanding the outrageousness of AIG’s use of government-supplied, bailout money to pay $165 million in bonuses to its employees.  As we all saw, there was a non-stop chorus of outrage, running from letters to the editors of small-town newspapers to death threats against AIG employees and their next-of-kin.  However, what most people don’t really understand is how this crisis came about and what the failed solutions have been.  Some of us have tried to familiarize ourselves with the alphabet soup of acronyms for those government-created entities, entrusted with the task of solving the most complex financial problems of all time.  Nevertheless, we are behind the curve with our own understanding and we will remain behind the curve regardless of how hard we try.  It’s no accident.  Opacity is the order of the day from the Federal Reserve, the Treasury, the Securities and Exchange Commission and the Commodity Futures Trading Commission.  In other words:  You (the “little people”) are not supposed to know what is going on.  So just go back to work, pay your taxes and watch the television shows that are intended to tie-up your brain cells and dumb you down.

This week, Wall Street was excited to learn the details of Treasury Secretary “Turbo” Tim Geithner’s latest version of what, last week, was called the Financial Stability Plan.  In order to make the unpopular plan sound different, it was given a new name: the PPIP (Public-Private Investment Partnership or “pee-pip”).  Those economists who had voiced skepticism about the plan’s earlier incarnations were not impressed with the emperor’s new clothes.  As Nobel laureate and Princeton University Professor Paul Krugman explained in The New York Times:

But the real problem with this plan is that it won’t work.  Yes, troubled assets may be somewhat undervalued.  But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem.  They lost that bet.  And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.

The plan’s supporters now claim that Professor Nouriel Roubini, an advocate for “nationalization” (or more accurately:  temporary receivership) of insolvent banks now supports the “new” plan.  As one can discern from the New York Daily News op-ed piece by Dr. Roubini and fellow New York University Professor Matthew Richardson, they simply described this plan a “a step in the right direction”.  More important were the caveats they included in their article:

But let’s not have any illusions.  The government bears the risk if and when the investors take a bath on the taxpayer-provided loans.  If the economy gets worse, it could get very ugly, very quickly.  The administration should be transparent in making clear that there is still a wealth transfer taking place here – from taxpayers to investors and banks.

*    *    *

Moreover, there’s the issue of transparency – or lack thereof.  No one knows what the loans or securities are worth.  Competing investors will help solve this by promoting price discovery.  But be careful what you wish for.  We might not like the answers.

James K. Galbraith (the son of famed economist John Kenneth Galbraith) has a PhD in Economics from Yale and is a professor at the University of Texas at Austin.  His reaction to the PPIP appears on The Daily Beast website in an article entitled:  “The Geithner Plan Won’t Work”:

The ultimate objective, and in President Obama’s own words, the test of this plan, is whether it will “get credit flowing again.”  (I have dealt with that elsewhere.)  Short answer:  It won’t.  Once rescued, banks will sit quietly on the sidelines, biding their time, until borrowers start to reappear.  From 1989 to 1994, that took five years.  From 1929 to 1935 — you get the picture.

*    *    *

And the reality is, if the subprime securities are truly trash, most of the big banks are troubled and some are insolvent.  The FDIC should put them through receivership, get clean audits, install new management, and begin the necessary shrinkage of the banking system with the big guys, not the small ones.  It should not encumber the banking system we need with failed institutions.  And it should not be giving CPR to a market for toxic mortgages that never should have been issued, and certainly never securitized, in the first place.

Back in May of 2006, Dr. Galbraith wrote an article for Mother Jones that is particularly relevant to the current economic crisis.  Many commentators are now quoting Galbraith’s observations about how “the predator class” is in the process of crushing the rest of us:

Today, the signature of modern American capitalism is neither benign competition, nor class struggle, nor an inclusive middle-class utopia.  Instead, predation has become the dominant feature — a system wherein the rich have come to feast on decaying systems built for the middle class.  The predatory class is not the whole of the wealthy; it may be opposed by many others of similar wealth.  But it is the defining feature, the leading force.  And its agents are in full control of the government under which we live.

The validity of Galbraith’s argument becomes apparent after reading Matt Taibbi’s recent article for Rolling Stone, called “The Big Takeover”.  Taibbi’s article is a “must read” for anyone attempting to get an understanding of how this mess came about as well as the sinister maneuvers that were made after la mierda hit the fan.  It’s not a pretty picture and Matt deserves more than congratulations for his hard work on this project, putting the arcane financial concepts and terminology into plain, easy-to-understand English.  Beyond that, he provides the Big Picture, which, for those who read Galbraith’s discourse on predation, is all too familiar:

People are pissed off about this financial crisis, and about this bailout, but they’re not pissed off enough.  The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d’etat.  They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.

The crisis was the coup de grace:  Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess.  And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve — “our partners in the government,” as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.

The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class.  But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.

Let’s hope I haven’t scared you out of reading Matt’s article.  Besides:  If you don’t — you are going to feel really stupid when you have to admit that you don’t know what the ABCPMMMFLF is.