There were so many contenders for TheCenterLane.com’s 2011 Jackass Of The Year award, I was ready to give up on making a decision. Former Congressman Anthony Weiner (who never even “got lucky” with any of the women who received his “Peter Tweets”) was certainly a contender. Another runner-up was Arnold Schwarzenegger, who chose to have an affair with his unattractive housekeeper – apparently just because she was there.
This year’s winner is Jon S. Corzine, the former Senator and Governor of New Jersey – in addition to having been the former CEO of Goldman Sachs. Most infamously, Corzine was named chairman and CEO of MF Global in March of 2010. It took Corzine only 20 months to drive the firm into bankruptcy. As Stephen Foley of The Independent reported, Corzine gambled $6 billion of the firm’s money on his belief that Italy would not default on its government bonds. When that wager was exposed, MF Global’s clients and trading partners stopped doing business with the firm. Within a few days, MF Global went belly-up, in what became one of the ten biggest bankruptcies in American history.
On Halloween, the Deal Book blog at The New York Times discussed what happened after a discovery by federal regulators that hundreds of millions of dollars (perhaps 950) in MF Global customers’ money had gone missing:
The recognition that money was missing scuttled at the 11th hour an agreement to sell a major part of MF Global to a rival brokerage firm. MF Global had staked its survival on completing the deal. Instead, the New York-based firm filed for bankruptcy on Monday.
Regulators are examining whether MF Global diverted some customer funds to support its own trades as the firm teetered on the brink of collapse.
One of those customers was a gentleman named Gerald Celente. On December 17, Mr. Celente appeared on Max Keiser’s television program, On the Edge to describe what happened with his contract (placed through MF Global in April) to purchase an undisclosed quantity of December gold for an amount slightly in excess of $1,400 per ounce. Celente skewered more individuals than Jon Corzine while describing a travesty which exposed even more of the ways by which the Commodity Futures Modernization Act has been destroying America. Be sure to watch the interview.
3. As a result of MF Global’s lobbying, key rules were deregulated. This allowed the firm to use client money to buy risky sovereign debt.
4. In 2010, someone from the Commodities Futures Trading Commission recognized these prior deregulations had dramatically ramped clients’ exposure to risk and proposed changing those rules. Jon Corzine, MF Global’s chief executive, successfully prevented the tightening of these regulations. Had the regulations been tightened, it would have prevented the kind of bets that lost MF Global’s segregated client monies.
5. None of MF Global’s Canadian clients lost any money thanks to tighter regulations there.
One would think that someone in Jon Corzine’s position would have learned something from the mistakes (such as excessive leveraging and risky bets) which contributed to the financial crisis. He didn’t. That’s why Jon S. Corzine is the winner of TheCenterLane.com’s 2011 Jackass Of The Year award. Congratulations, Jackass!
It’s been happening here in the United States since onset of the 2008 financial crisis. I’ve complained many times about President Obama’s decision to scoff at using the so-called “Swedish solution” of putting the zombie banks through temporary receivership. One year ago, economist John Hussman of the Hussman Funds discussed the consequences of the administration’s failure to do what was necessary:
If our policy makers had made proper decisions over the past two years to clean up banks, restructure debt, and allow irresponsible lenders to take losses on bad loans, there is no doubt in my mind that we would be quickly on the course to a sustained recovery, regardless of the extent of the downturn we have experienced. Unfortunately, we have built our house on a ledge of ice.
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As I’ve frequently noted, even if a bank “fails,” it doesn’t mean that depositors lose money. It means that the stockholders and bondholders do. So if it turns out, after all is said and done, that the bank is insolvent, the government should get its money back and the remaining entity should be taken into receivership, cut away from the stockholder liabilities, restructured as to bondholder liabilities, recapitalized, and reissued. We did this with GM, and we can do it with banks. I suspect that these issues will again become relevant within the next few years.
The plutocratic tools in control of our government would never allow the stockholders and bondholders of those “too-big-to-fail” banks to suffer losses as do normal people after making bad investments.
As it turns out, a few of those same banks are flexing their muscles overseas as the European debt crisis poses a new threat to Goldman Sachs and several of its ridiculously-overleveraged European counterparts. Time recently published an essay by Stephan Faris, which raised the question of whether the regime changes in Greece and Italy amounted to a “bankers’ coup”:
As in Athens, the plan in Rome is to replace the outgoing prime minister with somebody from outside the political class. Mario Monti, a neo-liberal economist and former EU commissioner who seems designed with the idea of calming the markets in mind, is expected to take over from Berlusconi after he resigns Saturday.
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Yet, until the moment he’s sworn in, Monti’s ascension is far from a done deal, and it didn’t take long after the markets had closed for the weekend for it to start to come under fire. Though Monti, a former advisor to Goldman Sachs, is heavily championed by the country’s respected president, many in parliament have spent the week whispering that Berlusconi’s ouster amounts to a “banker’s coup.” “Yesterday, in the chamber of deputies we were bitterly joking that we were going to get a Goldman Sachs government,” says a parliamentarian from Berlusconi’s government, who asked to remain anonymous citing political sensitivity.
At The New York Times, Ross Douthat reflected on the drastic policy of bypassing democracy to install governments led by “technocrats”:
After the current crisis has passed, some voices have suggested, there will be time to reverse the ongoing centralization of power and reconsider the E.U.’s increasingly undemocratic character. Today the Continent needs a unified fiscal policy and a central bank that’s willing to behave like the Federal Reserve, Bloomberg View’s Clive Crook has suggested. But as soon as the euro is stabilized, Europe’s leaders should start “giving popular sovereignty some voice in other aspects of the E.U. project.”
This seems like wishful thinking. Major political consolidations are rarely undone swiftly, and they just as often build upon themselves. The technocratic coups in Greece and Italy have revealed the power that the E.U.’s leadership can exercise over the internal politics of member states. If Germany has to effectively backstop the Continent’s debt in order to save the European project, it’s hard to see why the Frankfurt Group (its German members, especially) would ever consent to dilute that power.
Reacting to Ross Douthat’s column, economist Brad DeLong was quick to criticize the use of the term “technocrats”. That same label appeared in the previously-quoted Time article, as well:
Those who are calling the shots in Europe right now are in no wise “technocrats”: technocrats would raise the target inflation rate in the eurozone and buy up huge amounts of Greek and Italian (and other) debt conditional on the enactment of special euro-wide long-run Fiscal Stabilization Repayment Fund taxes. These aren’t technocrats: they are ideologues – and rather blinders-wearing ideologues at that.
Forget about euphemisms such as: “technocrats”, “the European Union” or “the European Central Bank”. Stephen Foley of The Independent pulled back the curtain and revealed the real culprit . . . Goldman Sachs:
This is the most remarkable thing of all: a giant leap forward for, or perhaps even the successful culmination of, the Goldman Sachs Project.
It is not just Mr Monti. The European Central Bank, another crucial player in the sovereign debt drama, is under ex-Goldman management, and the investment bank’s alumni hold sway in the corridors of power in almost every European nation, as they have done in the US throughout the financial crisis. Until Wednesday, the International Monetary Fund’s European division was also run by a Goldman man, Antonio Borges, who just resigned for personal reasons.
Even before the upheaval in Italy, there was no sign of Goldman Sachs living down its nickname as “the Vampire Squid”, and now that its tentacles reach to the top of the eurozone, sceptical voices are raising questions over its influence.
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This is The Goldman Sachs Project. Put simply, it is to hug governments close. Every business wants to advance its interests with the regulators that can stymie them and the politicians who can give them a tax break, but this is no mere lobbying effort. Goldman is there to provide advice for governments and to provide financing, to send its people into public service and to dangle lucrative jobs in front of people coming out of government. The Project is to create such a deep exchange of people and ideas and money that it is impossible to tell the difference between the public interest and the Goldman Sachs interest.
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The grave danger is that, if Italy stops paying its debts, creditor banks could be made insolvent. Goldman Sachs, which has written over $2trn of insurance, including an undisclosed amount on eurozone countries’ debt, would not escape unharmed, especially if some of the $2trn of insurance it has purchased on that insurance turns out to be with a bank that has gone under. No bank – and especially not the Vampire Squid – can easily untangle its tentacles from the tentacles of its peers. This is the rationale for the bailouts and the austerity, the reason we are getting more Goldman, not less. The alternative is a second financial crisis, a second economic collapse.
The previous paragraph explains precisely what the term “too-big-to-fail” is all about: If a bank of that size fails – it can bring down the entire economy. Beyond that, the Goldman situation illustrates what Simon Johnson meant when he explained that the United States – acting alone – cannot prevent the megabanks from becoming too big to fail. Any attempt to regulate the size of those institutions requires an international effort:
But no international body — not the Group of -20, the Group of Eight or anyone else — shows any indication of taking this on, mostly because governments don’t wish to tie their own hands. In a severe crisis, the interests of the state are usually paramount. No meaningful cross-border resolution framework is even in the cards. (Disclosure: I’m on the FDIC’s Systemic Resolution Advisory Committee; I’m telling you what I tell them at every opportunity.)
What we are left with is a situation wherein the taxpayers are the insurers of the privileged elite, who invest in banks managed by greedy, reckless megalomaniacs. When those plutocrats are faced with the risk of losing money – then democracy be damned! Contempt for democracy is apparently a component of the mindset afflicting the “supply side economics” crowd. Creepy Stephen Moore, of The Wall Street Journal’s editorial board, has expounded on his belief that capitalism is more important than Democracy. We are now witnessing how widespread that warped value system is.
We all know how this awful week began. For Rupert Murdoch, one of his prized investments — Sarah Palin — had become the subject of heated debate. Murdoch’s News Corp publishes her ghost-written books and Palin works for News Corp’s Fox News as a contributor. While a team of doctors in Tucson heroically scrambled to save the life of Representative Gabrielle Giffords, a team of spin doctors at Fox News scrambled to save the political life of Sarah Palin. At this point, I defer to an excellent piece written by Glynnis MacNicol of The Business Insider:
It is clear that Palin spent the last few days testing the waters and leaving the heavy lifting of the defending her to the folks at Fox News, most notably Glenn Beck.
As Ms. MacNicol explained, Palin returned to her Facebook page on January 12:
In equally typical fashion, Palin offered little introspection into her role in the political dialogue of the past year and laid the blame directly at the feet of the media, whom she accused of “blood libel.”
As MacNicol and many other commentators pointed out, this choice of words exemplified yet another classic Palin mistake. Palin’s gaffe drew criticism from the Anti-Defamation League and it gave her critics yet another opportunity to emphasize that Palin has been in over her head with her attempts to establish a national leadership identity. The Hill quoted what Representative James Clyburn had to say about Palin’s latest misstep:
“You know, Sarah Palin just can’t seem to get it, on any front. I think she’s an attractive person, she is articulate,” Clyburn said on the Bill Press radio show. “But I think intellectually, she seems not to be able to understand what’s going on here.”
While Rupert Murdoch’s investment in Sarah Palin was obviously deteriorating and becoming an embarrassment for his Fox News organization, things were headed in a more catastrophic direction in his Australian homeland. The intense flooding that had been ongoing for the past several weeks was being attributed to climate change. A report from Reuters began with this statement:
Climate change has likely intensified the monsoon rains that have triggered record floods in Australia’s Queensland state, scientists said on Wednesday, with several months of heavy rain and storms still to come.
An article from the Treehugger website provided details about how badly conditions had deteriorated in Queensland:
When 75% of Queensland is disaster declared due to flooding, that is a huge area, roughly equivalent to two Texas’s or the entirety of South Africa. On the 31st of December Reuters was saying flood water was “covering an area bigger than France and Germany combined, inundating 22 towns and stranding 200,000 people.” This is a continually unfolding natural disaster, of which the financial bill alone was projected to reach $5 billion AUD, and that was before the flash flooding of the past day or so.
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Australia is a rich, industrialised ‘First World’ country. But it’s third most populous state, Queensland, is currently coping with floods which have already decimated food crops, livestock, road and rail infrastructure, mining and so on. The impacts of which will flow on (pardon the pun) to effect most every Australian. Already some particular fruits have all but disappeared from commercial markets.
If all that weren’t bad enough, what must have been the most chilling news for Rupert Murdoch came from Julian Assange of Wikileaks. Ian Burrell of The Independent provided this report:
A year that has begun badly for Rupert Murdoch grew a little worse yesterday after the founder of WikiLeaks, Julian Assange, claimed to be in possession of secret documents damaging to the media mogul and his News Corp empire.
Mr Assange told John Pilger in the New Statesman he had withheld a cache of confidential US government cables and files relating to Mr Murdoch’s business as “insurance”. He has claimed that his life is in danger if he is extradited to Sweden to face allegations of sexual assault.
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Mr Assange indicated that he had paperwork which could be hurtful to News Corp. “There are 504 US embassy cables on one broadcasting organisation and there are cables on Murdoch and News Corp.”
Assange does lots of talking about documents he is holding as “insurance”. Nevertheless, many commentators have mentioned the possibility all this boasting could amount to nothing more than a bluffing strategy.
In addition to discussing the Wikileaks threat, the Independent article provided us with the perspective of a former Murdoch associate on the possibility that Rupert might not be too happy with the way things are going at Fox News:
In a further broadside yesterday, one of Mr Murdoch’s former henchmen, Andrew Neil, publicly questioned whether the world’s most powerful media figure retained his grip over his organisation.
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“My own view is [Fox] is out of control,” Neil told Richard Bacon yesterday on BBC Radio 5 Live. “I think Rupert Murdoch has lost control of it. I know from sources he’s not happy with a lot that appears on it and I think he’s lost over the Glenn Becks and the O’Reillys,” said Mr Neil.
“[Murdoch] is uncomfortable with Glenn Beck and various other positions they take and some of the things they say.” Neil, who fell out with Mr Murdoch in the early Nineties, claimed he had “very good sources at the heart of News Corp”.
If there is any truth to Andrew Neil’s revelations, it will be very interesting to see if Mr. Murdoch makes any changes at Fox News, due to his reported concerns. Either way, 2011 could turn out to be a very important year for Rupert Murdoch.
On Friday, March 19, former Federal Reserve chair, Alan Greenspan appeared before the Brookings Institution to present his 48-page paper entitled, “The Crisis”. The obvious subject of the paper concerned the causes of the 2008 financial crisis. With this document, Greenspan attempted to add his own spin to history, for the sake of restoring his tattered public image. The man once known as “The Maestro” had fallen into the orchestra pit and was struggling to preserve his prestige. After the release of his paper on Friday, there has been no shortage of criticism, despite Greenspan’s “enlightened” change of attitude concerning bank regulation. Greenspan’s refusal to admit the Federal Reserve’s monetary policy had anything to do with causing the crisis has placed him directly in the crosshairs of more than a few critics.
Mr. Greenspan, who has long argued that the market is often a more effective regulator than the government, has now adopted a more expansive view of the proper role of the state.
He argues that regulators should enforce collateral and capital requirements, limit or ban certain kinds of concentrated bank lending, and even compel financial companies to develop “living wills” that specify how they are to be liquidated in an orderly way.
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. . . Mr. Greenspan warned that “megabanks” formed through mergers created the potential for “unusually large systemic risks” should they fail.
Mr. Greenspan added: “Regrettably, we did little to address the problem.”
That is as close as Greenspan came to admitting that the Federal Reserve had a role in helping to cause the financial crisis. Nevertheless, these magic words from page 39 of “The Crisis” are what got everybody jumping:
To my knowledge, that lowering of the federal funds rate nearly a decade ago was not considered a key factor in the housing bubble.
The lack of regulatory enforcement was a huge factor in allowing the credit bubble to inflate, and set the stage for the entire credit crisis. But it was intricately interwoven with the ultra low rates Alan Greenspan set as Fed Chair.
So while he is correct in pointing out that his own failures as a bank regulator are in part to blame, he needs to also recognize that his failures in setting monetary policy was also a major factor.
In other words, his incompetence as a regulator made his incompetence as a central banker even worse.
Paul La Monica wrote an interesting post for CNN Money’s The Buzz blog entitled, “Greenspan and Bernanke still don’t get it”. He was similarly unimpressed with Greenspan’s denial that Fed monetary policy helped cause the crisis:
This argument is getting tiresome. Keeping rates so low helped inflate the bubble.
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“The Fed wasn’t the sole culprit. But if not for an artificially steep yield curve, we probably would not have had a global financial crisis,” said John Norris, managing director of wealth management with Oakworth Capital Bank in Birmingham, Ala.
“Greenspan and Bernanke are missing the point. It all stems from monetary policy,” Norris added. “If you give bankers an inducement to lend more than they ordinarily would they are going to do so.”
The former US Federal Reserve chairman, the wizened wiseman of laissez-faire economics, shocked us all — and probably himself — when he told a congressional panel in 2008 that he had found “a flaw in the model I perceived is the critical functioning structure that defines how the world works, so to speak”. He meant that he had realised banks cannot be trusted to manage their own risks, and that markets do not smoothly self-correct.
But instead of taking that revelation and helping to point the way to a new, post-crisis financial world, he has shuddered to an intellectual halt. It is the same intellectual stop sign that Wall Street’s bankers are at. The failure to move forward is regrettable, dangerous and more than a little self-serving.
These reactions to Greenspan’s paper are surely just the beginning of an overwhelming backlash. The Economist has already weighed in and before too long, we might even see a movie documenting the Fed’s responsibility for helping to cause The Great Recession.
TheCenterLane.com offers opinion, news and commentary on politics, the economy, finance and other random events that either find their way into the news or are ignored by the news reporting business. As the name suggests, our focus will be on what seems to be happening in The Center Lane of American politics and what the view from the Center reveals about the events in the left and right lanes. Your Host, John T. Burke, Jr., earned his Bachelor of Arts degree from Boston College with a double major in Speech Communications and Philosophy. He earned his law degree (Juris Doctor) from the Illinois Institute of Technology / Chicago-Kent College of Law.