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Obstruction of Justice

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Two years ago, I was inspired to write a piece entitled, “Justice Denied” after seeing hedge fund manager, David Einhorn interviewed by Charlie Rose.  I also discussed an essay Jesse Eisenger wrote for the DealBook blog at The New York Times entitled, “The Feds Stage a Sideshow While the Big Tent Sits Empty”.  The piece reinforced my suspicion that the “insider trading” investigation which received so much publicity in December of 2010 was simply a diversionary tactic to direct public attention away from the crimes which caused the financial crisis.

Since that time, a good deal of commentary has been written, lamenting the fact that no criminal charges have been brought against the miscreants who caused the financial crisis.  Unfortunately, Attorney General Eric Hold-Harmless has taken no action against those responsible, while the time for bringing those charges within the applicable Statutes of Limitations was allowed to tick away.

With the expiration of the relevant Statutes of Limitations, the next question becomes:  Does the failure to prosecute those cases rise to the level of obstruction of justice?  Although President Obama has repeatedly insisted that “no crimes were committed” which could have caused the financial crisis, we are now learning that such was not the case.

Jesse Eisenger recently wrote another piece for the Deal Book blog at the New York Times entitled, “Financial Crisis Lawsuit Suggests Bad Behavior at Morgan Stanley” which appeared on January 23.  In that essay, Eisenger discussed how the discovery process in civil lawsuits against the Wall Street Banks involved in the creation of the collateralized debt obligations (CDOs) based on subprime mortgages, revealed that those CDOs were known to be toxic at the time they were marketed.

The Naked Capitalism website has provided and excellent roadmap to the skulduggery involving the role CDOs played in causing the financial crisis.

Matt Taibbi has written another magnum opus on the financial crisis, this time focusing on sleazy conduct which took place after the meltdown.  In his article for Rolling Stone entitled, “Secrets and Lies of the Bailout”, we were reminded how the bank bailouts not only unjustly enriched the culprits who caused the problem – but they also provided the opportunity for those too-big-to-fail institutions to become even bigger while facilitating the cover-up of how the original mess occurred:

The public has been lied to so shamelessly and so often in the course of the past four years that the failure to tell the truth to the general populace has become a kind of baked-in, official feature of the financial rescue.  Money wasn’t the only thing the government gave Wall Street – it also conferred the right to hide the truth from the rest of us.  And it was all done in the name of helping regular people and creating jobs.  “It is,” says former bailout Inspector General Neil Barofsky, “the ultimate bait-and-switch.”

Despite so many efforts to hide the truth from “the little people”, the truth is slowly leaking out as a result of the dogged investigation by journalists and bloggers.  As discovery proceeds in the civil lawsuits against the megabanks, revealing the extent of criminal activity which brought about the most catastrophic economic disaster since the Great Depression, people will begin to ask:  “How did they get away with this?”  Perhaps the best way to answer that question would be to bring criminal charges against those who allowed the perpetrators to get away with it.


 

When Pat Robertson Gets It Right and Obama Gets It Wrong

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Of course, televangelist Pat Robertson says lots of strange things.  The host of the Christian Broadcasting Network’s program, The 700 Club has drawn criticism for such absurd statements as his claim that Hurricane Katrina was sent by God to punish America for leaglized abortion as well as his 2003 suggestion that State Department headquarters should be blown-up with a nuclear weapon.

Given that background, it must be particularly painful for President Obama when Pat Roberson is congratulated for speaking out sensibly on an issue which Obama is too timid to address.  Beyond that, when Robertson asserts a position which is supported by clear-thinking, prominent members of society, it must be particularly embarrassing for a President who has abdicated the “bully pulpit”.

Pat Robertson turned some heads in March, when he spoke out in favor of marijuana legalization.  Jesse McKinley of The New York Times discussed the reaction to a pro-legalization statement made by Robertson during a broadcast of The 700 Club:

Mr. Robertson’s remarks were hailed by pro-legalization groups, who called them a potentially important endorsement in their efforts to roll back marijuana penalties and prohibitions, which residents of Colorado and Washington will vote on this fall.

“I love him, man, I really do,” said Neill Franklin, executive director of Law Enforcement Against Prohibition, a group of current and former law enforcement officials who oppose the drug war.  “He’s singing my song.”

*   *   *

Mr. Franklin, who is a Christian, said Mr. Robertson’s position was actually in line with the Gospel.  “If you follow the teaching of Christ, you know that Christ is a compassionate man,” he said.  “And he would not condone the imprisoning of people for nonviolent offenses.”

*   *   *

And while Mr. Robertson said his earlier hints at support for legalization had led to him being “assailed by those who thought that it was terrible that I had forsaken the straight and narrow,” he added that he was not worried about criticism this time around.

“I just want to be on the right side,” he said.  “And I think on this one, I’m on the right side.”

It appears as though Pat Robertson is on the right side of another issue, with his recent comment about the Obama Justice Department’s failure to prosecute those responsible for causing the financial crisis.  While reading a great posting on Washington’s Blog about institutional corruption, I encountered a link to a piece by James Crugnale of the Mediaite blog, which focused on Robertson’s praise of Iceland for prosecuting its banksters and setting an example for countries such as the United States:

 “Guess what country is getting itself out of a financial problem by some draconian measures?” Robertson asked his co-host Terry Meeuwsen.  “Greece?” she asked.  “No, not even close.  Iceland!”  Robertson exclaimed.  “They are putting people in jail.  Prime ministers are being indicted.  They are going after banks.  The people said the banks are ripping us off.  We don’t like what they did, and they brought our country to ruin.  Suddenly, Iceland is turning around and they look like a big success story!”

“Think we could learn something?” Meeuwsen asked.

“We sure could!” Roberson continued.  “We could start putting all of those bankers in jail.  There was not one banker prosecuted and so many people were lying, and so-called “no-doc loans” and liars’ loans, and none of them have been held accountable.  I’m not for putting people in jail.  I’m sick of these – we’ve got too many penalties.  Too many penalties, too many criminal sanctions, too many people in prison.  But here is an opportunity for the people who wanted, you know, to enforce laws, to enforce that one.  There must be some laws against lying on documents.  I’m sure there are.”

“Lying to banks is a super no-no,” he added.  “It has criminal sanctions, but nobody so far has had to pay the price, but Iceland is leading the way and their GDP is growing, and all of a sudden, they were in a terrible mess, terrible mess, and look what is happening!”

With the release of the Department of Labor’s non-farm payrolls report for April, attention is again being focused on the issue of whether President Obama did enough to help the country recover from the financial crisis.  As the aforementioned Washington’s Blog essay made clear, the institutional corruption facilitated by the Obama administration’s failure to prosecute the culprits who caused the financial meltdown has brought even more harm to the American economy.  Consider this passage from the Washington’s Blog piece:

Nobel Prize winning economist Joseph Stiglitz says that we have to prosecute fraud or else the economy won’t recover:

The legal system is supposed to be the codification of our norms and beliefs, things that we need to make our system work.  If the legal system is seen as exploitative, then confidence in our whole system starts eroding.  And that’s really the problem that’s going on.

***

I think we ought to go do what we did in the S&L [crisis] and actually put many of these guys in prison.  Absolutely.  These are not just white-collar crimes or little accidents.  There were victims.  That’s the point.  There were victims all over the world.

***

Economists focus on the whole notion of incentives.  People have an incentive sometimes to behave badly, because they can make more money if they can cheat.  If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.

Think about it:  Joe Stiglitz and Pat Robertson are on the same page, while President Obama is somewhere else.  Yikes!


 

Barack Oblivious

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As I’ve been discussing here for quite a while, commentators from across the political spectrum have been busy criticizing the job performance of President Obama.  The mood of most critics seems to have progressed from disappointment to shock.  The situation eventually reached the point where, regardless of what one thought about the job Obama was doing – at least the President could provide us with a good speech.  That changed on Monday, August 8 – when Obama delivered his infamous “debt downgrade” speech – in the wake of the controversial decision by Standard and Poor’s to lower America’s credit rating from AAA to AA+.  This reaction from Joe Nocera of The New York Times was among the more restrained:

When did President Obama become such a lousy speech-maker?  His remarks on Monday afternoon, aimed at calming the markets, were flat and uninspired — as they have consistently been throughout the debt ceiling crisis.  “No matter what some agency may say,” he said, ”we’ve always been and always will be a triple-A country.”  Is that really the best he could do?  The markets, realizing he had little or nothing to offer, continued their swoon.  What is particularly frustrating is that the president seems to have so little to say on the subject of job creation, which should be his most pressing concern.

Actually, President Obama should have been concerned about job creation back in January of 2009.  For some reason, this President had been pushing ahead with his own agenda, while oblivious to the concerns of America’s middle class.  His focus on what eventually became an enfeebled healthcare bill caused him to ignore this country’s most serious problem:  unemployment.  Our economy is 70% consumer-driven.  Because the twenty-five million Americans who lost their jobs since the inception of the financial crisis have remained unemployed — goods aren’t being sold.  This hurts manufacturers, retailers and shipping companies.  With twenty-five million Americans persistently unemployed, the tax base is diminished – meaning that there is less money available to pay down America’s debt.  The people Barry Ritholtz calls the “deficit chicken hawks” (politicians who oppose any government spending programs which don’t benefit their own constituents) refuse to allow the federal government to get involved in short-term “job creation”.  This “savings” depletes taxable revenue and increases government debt.  President Obama — the master debater from Harvard – has refused to challenge the “deficit chicken hawks” to debate the need for any sort of short-term jobs program.

Bond guru Bill Gross of PIMCO recently lamented this administration’s obliviousness to the need for government involvement in short-term job creation:

Additionally and immediately, however, government must take a leading role in job creation.  Conservative or even liberal agendas that cede responsibility for job creation to the private sector over the next few years are simply dazed or perhaps crazed.  The private sector is the source of long-term job creation but in the short term, no rational observer can believe that global or even small businesses will invest here when the labor over there is so much cheaper.  That is why trillions of dollars of corporate cash rest impotently on balance sheets awaiting global – non-U.S. – investment opportunities.  Our labor force is too expensive and poorly educated for today’s marketplace.

*   *   *

In the near term, then, we should not rely solely on job or corporate-directed payroll tax credits because corporations may not take enough of that bait, and they’re sitting pretty as it is.  Government must step up to the plate, as it should have in early 2009.

Back in July of 2009 – five months after the economic stimulus bill was passed – I pointed out how many prominent economists – including at least one of Obama’s closest advisors, had been emphasizing that the stimulus was inadequate and that we could eventually face a double-dip recession:

A July 7 report by Shamim Adam for Bloomberg News quoted Laura Tyson, an economic advisor to President Obama, as stating that last February’s $787 billion economic stimulus package was “a bit too small”.  Ms. Tyson gave this explanation:

“The economy is worse than we forecast on which the stimulus program was based,” Tyson, who is a member of Obama’s Economic Recovery Advisory board, told the Nomura Equity Forum.  “We probably have already 2.5 million more job losses than anticipated.”

Economist Brad DeLong recently provided us with a little background on the thinking that had been taking place within the President’s inner circle during 2009:

In the late spring of 2009, Barack Obama had five economic policy principals: Tim Geithner, who thought Obama had done enough to boost demand and needed to turn to long-run deficit reduction; Ben Bernanke, who thought that the Fed had done enough to boost demand and that the administration needed to turn to deficit reduction; Peter Orszag, who thought the administration needed to turn to deficit reduction immediately and could also use that process to pass (small) further stimulus; Larry Summers, who thought that long-run deficit reduction could wait until the recovery was well-established and that the administration needed to push for more demand stimulus; and Christina Romer, who thought that long-run deficit reduction should wait until the recovery was well-established and that the administration needed to push for much more demand stimulus.

Now Romer, Summers, and Orszag are gone.  Their successors – Goolsbee, Sperling, and Lew – are extraordinary capable civil servants but are not nearly as loud policy voices and lack the substantive issue knowledge of their predecessors.  The two who are left, Geithner and Bernanke, are the two who did not see the world as it was in mid-2009.  And they do not seem to have recalibrated their beliefs about how the world works – they still think that they were right in mid-2009, or should have been right, or something.

I fear that they still do not see the situation as it really is.

And I do not see anyone in the American government serving as a counterbalance.

Meanwhile, the dreaded “double-dip” recession is nearly at hand.  Professor DeLong recently posted a chart on his blog, depicting daily Treasury real yield curve rates under the heading, “Treasury Real Interest Rates Now Negative Out to Ten Years…”  He added this comment:

If this isn’t a market prediction of a double-dip and a lost decade (or more), I don’t know what would be.  At least Hoover was undertaking interventions in financial markets–and not just blathering about how cutting spending was the way to call the Confidence Fairy…

President Obama has been oblivious to our nation’s true economic predicament since 2009.  Even if there were any Hope that his attentiveness to this matter might Change – at this point, it’s probably too late.


 

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Discipline Problem

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At the conclusion of a single, five-year term as Chair of the Federal Deposit Insurance Corporation (FDIC) Sheila Bair is calling it quits.  One can hardly blame her.  It must have been one hell of an experience:  Warning about the hazards of the subprime mortgage market, being ignored and watching the consequences unfold . . .  followed by a painful, weekly ritual, which gave birth to a website called Bank Fail Friday.

Bair’s tenure at the helm of the FDIC has been – and will continue to be – the subject of some great reading.  On her final day at the FDIC (July 8) The Washington Post published an opinion piece by Ms. Bair in which she warned that short-term, goal-directed thinking could bring about another financial crisis.  She also had something to brag about.  Despite the efforts of Attorney General Eric Hold-harmless and the Obama administration to ignore the malefaction which brought about the financial crisis and allowed the Wall Street villains to profiteer from that catastrophe, Bair’s FDIC actually stepped up to the plate:

This past week, the FDIC adopted a rule that allows the agency to claw back two years’ worth of compensation from senior executives and managers responsible for the collapse of a systemic, non-bank financial firm.

To date, the FDIC has authorized suits against 248 directors and officers of failed banks for shirking their fiduciary duties, seeking at least $6.8 billion in damages.  The rationales the executives come up with to try to escape accountability for their actions never cease to amaze me.  They blame the failure of their institutions on market forces, on “dead-beat borrowers,” on regulators, on space aliens.  They will reach for any excuse to avoid responsibility.

Mortgage brokers and the issuers of mortgage-based securities were typically paid based on volume, and they responded to these incentives by making millions of risky loans, then moving on to new jobs long before defaults and foreclosures reached record levels.

The difference between Sheila Bair’s approach to the financial/economic crisis and that of the Obama Administration (whose point man has been Treasury Secretary “Turbo” Tim Geithner) was analyzed in a great article by Joe Nocera of The New York Times entitled, “Sheila Bair’s Bank Shot”.  The piece was based on Nocera’s “exit interview” with the departing FDIC Chair.  Throughout that essay, Nocera underscored Bair’s emphasis on “market discipline” – which he contrasted with Geithner’s fanatic embrace of the exact opposite:  “moral hazard” (which Geithner first exhibited at the onset of the crisis while serving as President of the Federal Reserve of New York).  Nocera made this point early in the piece:

On financial matters, she seemed to have better political instincts than Obama’s Treasury Department, which of course is now headed by Geithner.  She favored “market discipline” – meaning shareholders and debt holders would take losses ahead of depositors and taxpayers – over bailouts, which she abhorred.  She didn’t spend a lot of time fretting over bank profitability; if banks had to become less profitable, postcrisis, in order to reduce the threat they posed to the system, so be it.  (“Our job is to protect bank customers, not banks,” she told me.)

Bair’s discussion of those early, panic-filled days during September 2008 is consistent with reports we have read about Geithner elsewhere.  This passage from Nocera’s article is one such example:

For instance, during the peak of the crisis, with credit markets largely frozen, banks found themselves unable to roll over their short-term debt.  This made it virtually impossible for them to function.  Geithner wanted the F.D.I.C. to guarantee literally all debt issued by the big bank-holding companies – an eye-popping request.

Bair said no.  Besides the risk it would have entailed, it would have also meant a windfall for bondholders, because much of the existing debt was trading at a steep discount.  “It was unnecessary,” she said.  Instead, Bair and Paulson worked out a deal in which the F.D.I.C. guaranteed only new debt issued by the bank-holding companies.  It was still a huge risk for the F.D.I.C. to take; Paulson says today that it was one of the most important, if underrated, actions taken by the federal government during the crisis.  “It was an extraordinary thing for us to do,” Bair acknowledged.

Back in April of 2009, the newly-appointed Treasury Secretary met with similar criticism in this great article by Jo Becker and Gretchen Morgenson at The New York Times:

Last June, with a financial hurricane gathering force, Treasury Secretary Henry M. Paulson, Jr. convened the nation’s economic stewards for a brainstorming session.  What emergency powers might the government want at its disposal to confront the crisis? he asked.

Timothy F. Geithner, who as president of the New York Federal Reserve Bank oversaw many of the nation’s most powerful financial institutions, stunned the group with the audacity of his answer.  He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele Davis, then an assistant Treasury secretary.

The proposal quickly died amid protests that it was politically untenable because it could put taxpayers on the hook for trillions of dollars.

“People thought, ‘Wow, that’s kind of out there,’ ” said John C. Dugan, the comptroller of the currency, who heard about the idea afterward.  Mr. Geithner says, “I don’t remember a serious discussion on that proposal then.”

But in the 10 months since then, the government has in many ways embraced his blue-sky prescription.  Step by step, through an array of new programs, the Federal Reserve and Treasury have assumed an unprecedented role in the banking system, using unprecedented amounts of taxpayer money, to try to save the nation’s financiers from their own mistakes.

Geithner’s utter contempt for market discipline again became a subject of the Nocera-Bair interview when the conversation turned to the infamous Maiden Lane III bailouts.

“I’ve always wondered why none of A.I.G.’s counterparties didn’t have to take any haircuts.  There’s no reason in the world why those swap counterparties couldn’t have taken a 10 percent haircut.  There could have at least been a little pain for them.”  (All of A.I.G.’s counterparties received 100 cents on the dollar after the government pumped billions into A.I.G.  There was a huge outcry when it was revealed that Goldman Sachs received more than $12 billion as a counterparty to A.I.G. swaps.)

Bair continued:  “They didn’t even engage in conversation about that.  You know, Wall Street barely missed a beat with their bonuses.”

“Isn’t that ridiculous?” she said.

This article by Gretchen Morgenson provides more detail about Geithner’s determination that AIG’s counterparties receive 100 cents on the dollar.  For Goldman Sachs – it amounted to $12.9 billion which was never repaid to the taxpayers.  They can brag all they want about paying back TARP – but Maiden Lane III was a gift.

I was surprised that Sheila Bair – as a Republican – would exhibit the same sort of “true believer-ism” about Barack Obama as voiced by many Democrats who blamed Rahm Emanuel for the early disappointments of the Obama administration.  Near the end of Nocera’s interview, Bair appeared taken-in by Obama’s “plausible deniability” defense:

“I think the president’s heart is in the right place,” Bair told me.  “I absolutely do.  But the dichotomy between who he selected to run his economic team and what he personally would like them to be doing – I think those are two very different things.”  What particularly galls her is that Treasury under both Paulson and Geithner has been willing to take all sorts of criticism to help the banks.  But it has been utterly unwilling to take any political heat to help homeowners.

The second key issue for Bair has been dealing with the too-big-to-fail banks. Her distaste for the idea that the systemically important banks can never be allowed to fail is visceral.  “I don’t think regulators can adequately regulate these big banks,” she told me.  “We need market discipline.  And if we don’t have that, they’re going to get us in trouble again.”

If Sheila Bair’s concern is valid, the Obama administration’s track record for market discipline has us on a certain trajectory for another financial crisis.



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Goldman Sachs In The Crosshairs

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Last December, I expressed my disappointment and skepticism that the culprits responsible for having caused the financial crisis would ever be brought to justice.  I found it hard to understand why neither the Securities and Exchange Commission nor the Justice Department would be willing to investigate malefaction, which I described in the following terms:

We often hear the expression “crime of the century” to describe some sensational act of blood lust.  Nevertheless, keep in mind that the financial crisis resulted from a massive fraud scheme, involving the packaging and “securitization” of mortgages known to be “liars’ loans”, which were then sold to unsuspecting investors by the creators of those products – who happened to be betting against the value of those items.  In consideration of the fact that the credit crisis resulting from this scam caused fifteen million people to lose their jobs as well as an expected 8 – 12 million foreclosures by 2012, one may easily conclude that this fraud scheme should be considered the crime of both the last century as well as the current century.

Fortunately, the tide seems to have turned with the recent release of the Senate Investigations Subcommittee report on the financial crisis.  The two-year, bipartisan investigation, led by Senators Carl Levin (D-Michigan) and Tom Coburn (R-Oklahoma) has given rise to new hope that the banks responsible for causing the financial crisis – particularly Goldman Sachs – could face criminal prosecution.  Tom Braithwaite of the Financial Times put it this way:

The Senate report criticised rating agencies, regulators and other banks.  But Goldman has drawn particular focus.  Eric Holder, attorney-general, said this month the justice department was looking at the report “that deals with Goldman”.

Will Attorney General Eric Hold-harmless initiate criminal proceedings against President Obama’s leading private source of 2008 campaign contributions?  I doubt it.  Nevertheless, the widespread meme that no laws were violated by Goldman or any of the other Wall Street megabanks, is coming under increased attack.  Matt Taibbi recently wrote an excellent piece for Rolling Stone entitled, “The People vs. Goldman Sachs”, which took a humorous jab at those who deny that the financial crisis resulted from illegal activity:

Defenders of Goldman have been quick to insist that while the bank may have had a few ethical slips here and there, its only real offense was being too good at making money.  We now know, unequivocally, that this is bullshit.  Goldman isn’t a pudgy housewife who broke her diet with a few Nilla Wafers between meals – it’s an advanced-stage, 1,100-pound medical emergency who hasn’t left his apartment in six years, and is found by paramedics buried up to his eyes in cupcake wrappers and pizza boxes.  If the evidence in the Levin report is ignored, then Goldman will have achieved a kind of corrupt-enterprise nirvana.  Caught, but still free:  above the law.

Taibbi focused on the easiest case to prosecute:  a perjury charge against Goldman CEO Lloyd Blankfein for his testimony before the Levin-Coburn Senate Subcommittee.  Blankfein denied under oath that his firm had a “short” position, betting against the very Collateralized Debt Obligations (CDOs) that Goldman had been selling to its customers.  As Taibbi pointed out, this conflict of interest was the subject of a book by Michael Lewis entitled, The Big Short.  At issue is the response Blankfein gave to the question about whether Goldman Sachs had such a short position:

“Much has been said about the supposedly massive short Goldman Sachs had on the U.S. housing market.  The fact is, we were not consistently or significantly net-short the market in residential mortgage-related products in 2007 and 2008.  We didn’t have a massive short against the housing market, and we certainly did not bet against our clients.”

As Tom Braithwaite explained in the Financial Times, Senator Levin expressed concern that Blankfein could defend a perjury charge, based on his use of the words “consistently or significantly” in the above-quoted response.  Levin’s concern is that those words could be deemed significantly equivocal as to prevent the characterization of Blankfein’s response as a denial that Goldman had such a short position.  Nevertheless, the last sentence of the response is an unqualified, compound statement, which could support a perjury charge:

We didn’t have a massive short against the housing market, and we certainly did not bet against our clients.

I would be very amused to watch someone make the specious argument that Goldman’s $13 billion short position was not “massive”.

Meanwhile, New York Attorney General Eric Schneiderman is moving ahead to pursue an investigation concerning the role of the Wall Street banks in causing the financial crisis.  Gretchen Morgenson of The New York Times provided this explanation of Schneiderman’s current effort:

The New York attorney general has requested information and documents in recent weeks from three major Wall Street banks about their mortgage securities operations during the credit boom, indicating the existence of a new investigation into practices that contributed to billions in mortgage losses.

*   *   *

It is unclear which parts of the byzantine securitization process Mr. Schneiderman is focusing on. His spokesman said the attorney general would not comment on the investigation, which is in its early stages.

*   *   *

The requests for information by Mr. Schneiderman’s office also seem to confirm that the New York attorney general is operating independently of peers from other states who are negotiating a broad settlement with large banks over foreclosure practices.

By opening a new inquiry into bank practices, Mr. Schneiderman has indicated his unwillingness to accept one of the settlement’s terms proposed by financial institutions – that is, a broad agreement by regulators not to conduct additional investigations into the banks’ activities during the mortgage crisis.  Mr. Schneiderman has said in recent weeks that signing such a release was unacceptable.

*   *   *

It is unclear whether Mr. Schneiderman’s investigation will be pursued as a criminal or civil matter.

Are the banksters running scared yet?  John Carney of CNBC’s NetNet blog, noted some developments, which could signal that some potential “persons of interest” might be seeking cover:

A Warning Sign:  CFOs Resigning

The chief financial officers of both Wells Fargo and Bank of America recently resigned.  JPMorgan Chase replaced its CFO last year.  While each of these moves has been spun as benign news by the banks, it could be a warning sign that something is deeply amiss.

Hope springs eternal!


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Obama Fatigue

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Since President Obama first assumed office, it hasn’t been too difficult to find harsh criticism of the new administration.  One need only tune in to the Fox News, where an awkward Presidential sneeze could be interpreted as a “secret message” to Bill Ayers or George Soros.  Nevertheless, with the passing of time, voices from across the political spectrum have joined a chorus of frustration with the Obama agenda.

On February 26, 2009 – only one month into the Obama Presidency – I voiced my suspicion about the new administration’s unwillingness to address the problem of systemic risk, inherent in allowing a privileged few banks to enjoy their “too big to fail” status:

Will Turbo Tim’s “stress tests” simply turn out to be a stamp of approval, helping insolvent banks avoid any responsible degree of reorganization, allowing them to continue their “welfare queen” existence, thus requiring continuous infusions of cash at the expense of the taxpayers?  Will the Obama administration’s “failure of nerve” –  by avoiding bank nationalization — send us into a ten-year, “Japan-style” recession?  It’s beginning to look that way.

By September of 2009, I became convinced that Mr. Obama was suffering from a degree of hubris, which could seal his fate as a single-term President:

Back on July 15, 2008 and throughout the Presidential campaign, Barack Obama promised the voters that if he were elected, there would be “no more trickle-down economics”.  Nevertheless, his administration’s continuing bailouts of the banking sector have become the worst examples of trickle-down economics in American history – not just because of their massive size and scope, but because they will probably fail to achieve their intended result.

Although the TARP bank bailout program was initiated during the final months of the Bush Presidency, the Obama administration’s stewardship of that program recently drew sharp criticism from Neil Barofsky, the retiring Special Inspector General for TARP (SIGTARP).  Beyond that, in his March 29 op-ed piece for The New York Times, Mr. Barofsky criticized the Obama administration’s failure to make good on its promises of “financial reform”:

Finally, the country was assured that regulatory reform would address the threat to our financial system posed by large banks that have become effectively guaranteed by the government no matter how reckless their behavior.  This promise also appears likely to go unfulfilled.  The biggest banks are 20 percent larger than they were before the crisis and control a larger part of our economy than ever.  They reasonably assume that the government will rescue them again, if necessary.

*   *   *

Worse, Treasury apparently has chosen to ignore rather than support real efforts at reform, such as those advocated by Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, to simplify or shrink the most complex financial institutions.

*   *   *

In the final analysis, it has been Treasury’s broken promises that have turned TARP – which was instrumental in saving the financial system at a relatively modest cost to taxpayers – into a program commonly viewed as little more than a giveaway to Wall Street executives.

It wasn’t meant to be that.  Indeed, Treasury’s mismanagement of TARP and its disregard for TARP’s Main Street goals – whether born of incompetence, timidity in the face of a crisis or a mindset too closely aligned with the banks it was supposed to rein in – may have so damaged the credibility of the government as a whole that future policy makers may be politically unable to take the necessary steps to save the system the next time a crisis arises.  This avoidable political reality might just be TARP’s most lasting, and unfortunate, legacy.

Another unlikely critic of President Obama is the retired law school professor who blogs using the pseudonym, “George Washington”.  A recent posting at Washington’s Blog draws from a number of sources to ponder the question of whether President Obama (despite his Nobel Peace Prize) has become more brutal than President Bush.  The essay concludes with a review of Obama’s overall performance in The White House:

Whether or not Obama is worse than Bush, he’s just as bad.

While we had Bush’s “heck of a job” response to Katrina, we had Obama’s equally inept response and false assurances in connection with the Gulf oil spill, and Obama’s false assurances in connection with the Japanese nuclear crisis.

And Bush and Obama’s response to the financial crisis are virtually identical:  bail out the giant banks, let Wall Street do whatever it wants, and forget the little guy.

The American voters asked for change.  Instead, we got a different branch of the exact same Wall Street/military-industrial complex/Big Energy (BP, GE)/Big Pharma party.

Another commentator who has become increasingly critical of President Obama is Robert Reich, Secretary of Labor in the Clinton Administration.  Mr. Obama’s failure to push back against the corporatist politicians, who serve as “reverse Robin Hoods” enriching CEOs at the expense of American workers, resulted in this rebuke from Professor Reich:

President Obama and Democratic leaders should be standing up for the wages and benefits of ordinary Americans, standing up for unions, and decrying the lie that wage and benefit concessions are necessary to create jobs.  The President should be traveling to the Midwest – taking aim at Republican governors in the heartland who are hell bent on destroying the purchasing power of American workers.  But he’s doing nothing of the sort.

As attention begins to focus on the question of who will be the Republican nominee for the 2012 Presidential election campaign, Obama Fatigue is causing many people to appraise the President’s chances of defeat.  The excitement of bringing the promised “change” of 2008 has morphed into cynicism.  Many of the voters who elected Obama in 2008 might be too disgusted to bother with voting in 2012.  As a result, the idea of a Democratic or Independent challenger to Obama is receiving more consideration.  Rolling Stone’s Matt Taibbi recently provided this response to a letter inquiring about the possibility that Elizabeth Warren could make a run for the White House in 2012:

A few months ago I heard a vague rumor from someone who theoretically would know that such a thing was being contemplated, but I don’t know anything beyond that.  I wish she would run.  I’m not sure if it would ultimately be a good thing or a bad thing for Barack Obama – she could fatally wound his general-election chances by exposing his ties to Wall Street – but I think she’s exactly what this country needs. She’s totally literate on the finance issues and is completely on the side of human beings, as opposed to banks and oil companies and the like.  One thing I will say:  if she did run, she would have a lot more support from the press than she probably imagines, as there are a lot of reporters out there who are reaching the terminal-disappointment level with Obama ready to hop on the bandwagon of someone like Warren.

If Elizabeth Warren ultimately decides to make a run for The White House, Mr. Obama should do the right thing:  Stop selling the sky to people and step aside.


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Those Smart Bond Traders

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There seems to be a consensus that bond traders are smarter than stock traders.  Consider this thought from Investopedia’s Financial Edge website:

Many investors believe bond traders understand the economy better than equity traders.  Bond traders pay very close attention to any economic factor that might affect interest rates.  Equity traders recognize that changes in bond prices provide a good indication of what bond traders think of the economy.

Widespread belief that Ben Bernanke’s Zero Interest Rate Policy (ZIRP) has created a stock market “bubble” has led to fear that the bubble may soon pop and cause the market to crash.  It was strange to see that subject discussed by John Melloy at CNBC, given the news outlet’s reputation for stock market cheerleading. Nevertheless, Mr. Melloy recently presented us with some ominous information:

The Yale School of Management since 1989 has asked wealthy individual investors monthly to give the “probability of a catastrophic stock market crash in the U.S. in the next six months.”

In the latest survey in December, almost 75 percent of respondents gave it at least a 10 percent chance of happening.  That’s up from 68 percent who gave it a 10 percent probability last April, just before the events of May 6, 2010.

*   *   *

The Flash Crash Commission – containing members of the CFTC and SEC – made a series of recommendations for improving market structure Friday, including single stock circuit breakers, a more reliable audit trail on trades, and curbing the use of cancelled trades by high-frequency traders.  They still don’t know what actually caused the nearly 1,000-point drop in the Dow Jones Industrial Average in a matter of minutes.

*   *   *

Overall volume has been very light in the market though, as the individual investor put more money into bonds last year than stocks in spite of the gains.  Strategists said this has been one of the longer bull markets (starting in March 2009) with barely any retail participation.  Flows into equity mutual funds did turn positive in January and have continued this month however, according to ICI and TrimTabs.com.  Yet the fear of a crash persists.

Whether or not one is concerned about the possibility of a market crash, consensual ambivalence toward equities is on the rise.  Felix Salmon recently wrote an article for The New York Times entitled, “Wall Street’s Dead End”, which began with the observation that the number of companies listed on the major domestic exchanges peaked in 1997 and has been declining ever since.  Mr. Salmon discussed the recent trend toward private financing of corporations, as opposed to the tradition of raising capital by offering shares for sale on the stock exchanges:

Only the biggest and oldest companies are happy being listed on public markets today.  As a result, the stock market as a whole increasingly fails to reflect the vibrancy and heterogeneity of the broader economy.  To invest in younger, smaller companies, you increasingly need to be a member of the ultra-rich elite.

At risk, then, is the shareholder democracy that America forged, slowly, over the past 50 years.  Civilians, rather than plutocrats, controlled corporate America, and that relationship improved standards of living and usually kept the worst of corporate abuses in check.  With America Inc. owned by its citizens, the success of American business translated into large gains in the stock portfolios of anybody who put his savings in the market over most of the postwar period.

Today, however, stock markets, once the bedrock of American capitalism, are slowly becoming a noisy sideshow that churns out increasingly meager returns.  The show still gets lots of attention, but the real business of the global economy is inexorably leaving the stock market — and the vast majority of us — behind.

Investors who decided to keep their money in bonds, heard some discouraging news from bond guru Bill Gross of PIMCO on February 2.   Gus Lubin of The Business Insider provided a good summary of what Bill Gross had to say:

His latest investment letter identifies four scenarios in which bondholders would get burned.  Basically these are sovereign default, currency devaluation, inflation, and poor returns relative to other asset classes.

In other words, you can’t win.  Gross compares Ben Bernanke to the devil and calls ZIRP a devil’s haircut:  “This is not God’s work – it has the unmistakable odor of Mammon.”

Gross recommends putting money in foreign bonds and other assets that yield more than Treasuries.

I was particularly impressed with what Bill Gross had to say about the necessary steps for making America more competitive in the global marketplace:

We need to find a new economic Keynes or at least elect a chastened Congress that can take our structurally unemployed and give them a chance to be productive workers again.  We must have a President whose idea of “centrist” policy is not to hand out presents to the right and the left and then altruistically proclaim the benefits of bipartisanship.  We need a President who does more than propose “Win The Future” at annual State of the Union addresses without policy follow-up.  America requires more than a makeover or a facelift.  It needs a heart transplant absent the contagious antibodies of money and finance filtering through the system.  It needs a Congress that cannot be bought and sold by lobbyists on K Street, whose pockets in turn are stuffed with corporate and special interest group payola.  Are record corporate profits a fair price for America’s soul?  A devil’s bargain more than likely.

You can’t discuss bond fund managers these days, without mentioning Jeffrey Gundlach, who recently founded DoubleLine Capital.  Jonathan Laing of Barron’s wrote a great article about Gundlach entitled “The King of Bonds”.  When I reached the third paragraph of that piece, I had to re-read this startling fact:

His DoubleLine Total Return Bond Fund (DBLTX), with $4.5 billion of assets as of Jan. 31, outperformed every one of the 91 bond funds in the Morningstar intermediate-bond-fund universe in 2010, despite launching only in April.  It notched a total return of 16.6%, compared with returns of 8.36% for the giant Pimco Total Return Fund (PTTAX), run by the redoubtable Bill Gross  . . .

The essay described how Gundlach’s former employer, TCW, feared that Gundlach was planning to leave the firm.  Accordingly, TCW made a pre-emptive strike and fired Gundlach.  From there, the story gets more interesting:

Five weeks after Gundlach’s dismissal, TCW sued the manager, four subordinates and DoubleLine for allegedly stealing trade secrets, including client lists, transaction information and proprietary security-valuation systems.  The suit also charged that a search of Gundlach’s offices had turned up a trove of porn magazines, X-rated DVDs and sexual devices, as well as marijuana.

*    *    *

He charges TCW with employing “smear tactics … to destroy our business.” As for “the sex tapes and such,” he says, they represented “a closed chapter in my life.”

That’s certainly easy to understand.  Porn just hasn’t been the same since Ginger Lynn retired.

Jeff Gundlach’s December webcast entitled, “Independence Day” can be found here.  Take a good look at the graph on page 16:  “Top 0.1% Income Earners Share of Total Income”.  It’s just one of many reminders that our country is headed in the wrong direction.


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Tool-Trashing Time

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I never liked Joe “The Tool” Lieberman.  If you run that name (nickname included) on the search bar at the upper-right corner of this page, you will find a total of 13 previous entries wherein I discussed him in uncomplimentary terms.  What bugs me most about Lieberman is that so many people consider him as the personification of centrism.  I believe that Lieberman gives centrism a bad name because he is simply an opportunist.    The guy doesn’t really appear to stand for anything in particular – he is simply a tool for whatever lobbyist or other interest group is willing to play his quid pro quo game.  After Lieberman lost the Democratic Primary for his Senate seat in 2006, he chose to run as an Independent and in the process, he betrayed those individuals who contributed to his election campaign, believing that Lieberman would champion the causes he advanced before he had to sell his soul to Bush and Cheney in order to save his political hide.  It was only because Ned Lamont (the man who defeated him in the Democratic Primary) came down with a bad case of  The Smug – spending more time vacationing than campaigning for the November election – that Lieberman managed to win a fourth term as junior Senator from Connecticut.

Needless to say, Emily Bazelon’s recent article for Slate, “Good Riddance, Joe Lieberman – Why I loathe my Connecticut Senator” was a real treat.  It was nice to see that a good number of people were as thrilled as I to hear that The Tool was calling it quits.  While discussing the celebratory outpouring of enthusiasm by anti-Lieberman-ites Ms. Bazelon mentioned this:

Another friend, Judy Chevalier, burned up her iPad tonight when I asked her to enumerate why she hates Joe Lieberman.  She ticked off a half-dozen reasons and then said, “The thing is, I did not come up with most of these myself.  They come from many rounds of playing the peculiar Connecticut liberal cocktail party game ‘I hated Joe Lieberman before you hated Joe Lieberman.’ ”  Longtime Lieberman haters, she says, look all the way back to 1993, when Lieberman led a hedge-fund-friendly charge in the Senate against the Financial Accounting Standards Board, which at the time wanted to close the accounting loophole that let corporations duck the recording of stock options on their balance sheets.

As an aside, the first half of that passage was characterized as “the money quote” by the Red State blog and other far-right commentators, anxious to avenge Sarah Palin since her “crosshairs” SarahPac campaign ad was criticized after the attempted assassination of Representative Gabrielle Giffords.  The magic word, “hate” gave the hard right the opportunity to argue that “liberals hate politicians, too”.  Actually, the real “money quote” can be found by clicking on the highlighted language discussing the fight over the Financial Accounting Standards Board rules:

Corporate America aligned with the accounting industry to fight the FASB proposal, with the result that in 1994, the Senate, led by Senator Joseph Lieberman (D-Conn.), passed a non-binding resolution condemning the proposal by a vote of 88-to-9.

“It wasn’t an accounting debate,” says Jim Leisenring, the vice chairman of FASB from 1988 to 2000.  “We switched from talking about, ‘Have we accurately measured the option?’ or, ‘Have we expensed the option on the proper date?’ to things like, ‘Western civilization will not exist without stock options,’ or, ‘There won’t be jobs anymore for people without stock options.’ … People tried to take the argument away from the accounting to be just plainly a political argument.”

Does that rhetoric sound familiar?

After his 2006 victory, Lieberman continued to betray the people of Connecticut by abandoning his duties in the Senate to follow John McCain all along the 2008 campaign trail (including McCain’s trip to Afganistan) in the hope of securing a place for himself in the would-be McCain administration.  The Tool knew he would never win a fifth term in the Senate.  His only hope was to latch on to McCain’s pantsleg and hang on for dear life.  In the wake of that fiasco, The Tool’s approval rating continued to slide and by October of 2010, it was down to 31 percent.  A fifth term in the Senate was definitely out of the question.  His campaign war chest could be put to better uses – such as buying “friendships” before beginning a new career as a lobbyist.

Despite Lieberman’s crucial effort in the repeal of the military’s “don’t ask – don’t tell” policy, it is interesting to observe how many gay people are willing to overlook that good deed while celebrating Lieberman’s retirement.  A review of the comments at the joemygod blog exposes these reactions:

Good riddance.  DADT capped an otherwise awful career as a spoiler.

*   *   *

Thanks for DADT, but not terribly sorry you’re leaving the Senate.  And I really didn’t want the anxiety of watching a 3-way race in CT, which might have sent a wingnut from the Right to the Senate.

*   *   *

good riddance to the man who killed the public option to satisfy his insurance industry friends in Connecticut. a terrible person

So much for that legacy thing   .   .   .

Daniela Altimari of The Hartford Courant’s CapitolWatch blog, revealed a wide spectrum of reactions to Lieberman’s announcement.  As one might expect, the remarks from politicians were painfully cordial, polite and not worth our time here.  I’ll provide you with two of the more interesting quotes:

“Joe Lieberman took millions from insurance companies, Wall Street banks, and other corporate interests – and then did their dirty work in Congress, including killing the public option.  As a result, Lieberman’s poll numbers were disastrous in Connecticut.  His decision to quit in the face of assured defeat is a huge victory for the progressive movement and all Americans who want Democrats to put regular families ahead of corporate interests.”

—  Keauna Gregory, Progressive Change Campaign Committee

*   *   *

“Of all the horrible things Joe Lieberman has done in his hideous career, depriving everyone of the joy at seeing him lose is near the top”

—  Glenn Greenwald of Salon (via Twitter)

The Connecticut Mirror provided these reactions:

“It’s the first thing he’s done in 10 years to make Connecticut Democrats completely happy.”

—  Bill Curry, former state comptroller, as quoted in The New York Times

*   *   *

“He couldn’t leave the Senate fast enough as far as I’m concerned. He’s not only driving Democrats nuts down here, but he’s become a right-wing extremist on everything except the environment and gay rights.”

—  Ralph Nader, as quoted in The Hartford Courant

*   *   *

“He will leave behind a long list of achievements, from helping to consolidate the nation’s intelligence gathering services in a way that appears to make it more difficult to gather intelligence, to threatening to filibuster the health care reform act until it had been watered down to suit his own high principles.  You will find it all in my upcoming book, ‘Everything Bad Is Joe Lieberman’s Fault.’ ”

—  Gail Collins, writing in The New York Times

As we approach The Tool’s final days in the Senate, I will be looking forward to similar tributes.


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A Preemptive Strike By Tools Of The Plutocracy

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The Financial Crisis Inquiry Commission (FCIC) was created by section 5 of the Fraud Enforcement and Recovery Act (or FERA) which was signed into law on May 20, 2009.   The ten-member Commission has been modeled after the Pecora Commission of the early 1930s, which investigated the causes of the Great Depression, and ultimately provided a basis for reforms of Wall Street and the banking industry.  As I pointed out on April 15, more than a few commentators had been expressing their disappointment with the FCIC.  Section (5)(h)(1) of  the FERA established a deadline for the FCIC to submit its report:

On December 15, 2010, the Commission shall submit to the President and to the Congress a report containing the findings and conclusions of the Commission on the causes of the current financial and economic crisis in the United States.

In light of the fact that it took the FCIC eight months to conduct its first hearing, one shouldn’t be too surprised to learn that their report had not been completed by December 15.  The FCIC expects to have the report finalized in approximately one month.  This article by Phil Mattingly and Robert Schmidt of Bloomberg News provides a good history of the partisan struggle within the FCIC.  On December 14, Sewell Chan of The New York Times disclosed that the four Republican members of the FCIC would issue their own report on December 15:

The Republican members of the panel were angered last week when the commission voted 6 to 4, along partisan lines, to limit individual comments by the commissioners to 9 pages each in a 500-page report that the commission plans to publish next month with Public Affairs, an imprint of the Perseus Books Group, one Republican commissioner said.

Beyond that, Shahien Nasiripour of the Huffington Post revealed more details concerning the dissent voiced by Republican panel members:

During a private commission meeting last week, all four Republicans voted in favor of banning the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report, according to a person familiar with the matter and confirmed by Brooksley E. Born, one of the six commissioners who voted against the proposal.

I gave those four Republican members more credit than that.  I was wrong.  Commission Vice-Chairman Bill Thomas, along with Douglas Holtz-Eakin, Peter Wallison, and Keith Hennessey issued their own propaganda piece as a preemptive strike against whatever less-than-complimentary things the FCIC might ultimately say about the Wall Street Plutocrats.  The spin strategy employed by these men in explaining the cause of the financial crisis is to blame Fannie Mae and Freddie Mac for the entire episode.  (That specious claim has been debunked by Mark Thoma and others many times.)  This remark from the “Introduction” section of the Republicans’ piece set the tone:

While the housing bubble, the financial crisis, and the recession are surely interrelated events, we do not believe that the housing bubble was a sufficient condition for the financial crisis. The unprecedented number of subprime and other weak mortgages in this bubble set it and its effect apart from others in the past.

Many economists and other commentators will have plenty of fun ripping this thing to shreds.  One of the biggest lies that jumped right out at me was this statement from page 5 of the so-called Financial Crisis Primer:

Put simply, the risk of a housing collapse was simply not appreciated.  Not by homeowners, not by investors, not by banks, not by rating agencies, and not by regulators.

That lie can and will be easily refuted —  many times over —  by the simple fact that a large number of essays had been published by economists, commentators and even dilettantes who predicted the housing collapse.

Yves Smith provided a refreshing retort to the Plutocracy’s Primer at her Naked Capitalism website:

This whole line of thinking is garbage, the financial policy equivalent of arguing that the sun revolves around the earth.  Yes, the US and other countries provide overly generous subsidies to housing, and curtailing them over time would not be a bad idea.  But that’s been our policy for decades.  Calling that a major, let alone primary, cause of the crisis, is simply a highly coded “blame the poor” strategy.  In reality, both the run-up to the crisis and its aftermath were one of the greatest wealth transfers from the citizenry at large to a comparatively small group of rentiers in the history of man.

*   *   *

This pathetic development shows how deeply this country is in thrall to lobbyists.  But these so-called commissioners, who are really no more than financial services minions out to misbrand themselves as independent, look to have overplayed their hand.  This stunt shows more than a tad of desperation on the part of banks and their operatives in their excessive efforts block any remotely accurate, and therefore critical, report on the industry.

Perversely, this development may be a positive indicator on several fronts.  First, the FCIC report may be tougher and more probing than I dared hope.

The fact that a pre-emptive strike by the Plutocratic “Gang of Four” has been initiated with the release of their Primer could indeed suggest that that their patrons are worried about the ultimate conclusions to be published by the FCIC next month.  The release of this Primer will surely draw plenty of criticism and attract more attention to the FCIC’s final report.  Nevertheless, will the resulting firestorm motivate the public to finally demand some serious action beyond the lame “financial reform” fiasco?  Adam Garfinkle’s recent essay in The American Interest suggests that such hope could be misplaced:

Obsessed with vacuous celebrity, Americans make it easier than ever for plutocrats to sail under the radar.  Corporate heavyweights and bankers may be suborning Congress and ripping off  “we the people” left and right, but we’re too busy dancing with the stars to notice.

Will this situation ever change?



Turning Point

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As we approach Election Day, many commentators are confirming an observation used as the theme of my posting from September 6:

The steps taken by the Obama administration during its first few months have released massive, long-lasting fallout, destroying the re-election hopes of Democrats in the Senate and House.

Too many people whom the President thought he could count among his supporters have become his biggest critics.  One might expect that after eight years of outrage over the antics of the Bush administration, Maureen Dowd would be thrilled about the work done by the Obama White House.  Nevertheless, her most recent discussion of Obama’s performance was less than flattering:

In 2008, the message was him.  The promise was him.  And that’s why 2010 is a referendum on him.

With his coalition and governing majority shattering around him, President Obama will have to summon political skills — starting Wednesday — that he has not yet shown he has.

*   *   *

With the exception of Obama, most Americans seemed to agree that the “right” thing to do until the economy recovered was to focus on jobs instead of getting the Congress mired for months in making over health insurance and energy policy.  And the “right” thing to do was to come down harder on the big banks for spending on bonuses instead of lending to small businesses that don’t get bailouts.

Contrary to the President’s expectations, the voting public has not overlooked the administration’s refusal to heed the advice of Bill Black, Robert Reich, and the roster of economists that included Adam Posen and Matthew Richardson advocating the use of the so-called “Swedish solution” of putting the zombie banks through temporary receivership.  To the dismay of everyone in the world (outside of Obama’s inner circle) the new President chose to follow the advice of Larry Summers and put the welfare (as in corporate welfare) of those insolvent, too-big-to-fail banks ahead of the nation’s economic health.  When President Obama appeared on The Daily Show with Jon Stewart on October 27, Stewart began the discussion by asking Obama to explain the rationale underlying his appointment of Larry Summers (a retread from the Clinton administration) as director of the National Economic Council.  President Obama fell back on his two-year-old claim that to follow any course other than that recommended by Summers, would have resulted in the failure of at least 100 banks.  Obama’s claim that the cost of the financial crisis was less than 1% of GDP did not slip past Yves Smith of the Naked Capitalism website.  Ms. Smith (who voted for Obama in 2008) didn’t pull any punches in refuting that claim:

I’m so offended by the latest Obama canard, that the financial crisis of 2007-2008 cost less than 1% of GDP, that I barely know where to begin.  Not only does this Administration lie on a routine basis, it doesn’t even bother to tell credible lies.  And this one came directly from the top, not via minions.  It’s not that this misrepresentation is earth-shaking, but that it epitomizes why the Obama Administration is well on its way to being an abject failure.

*   *   *

The reason Obama makes such baldfacedly phony statements is twofold:  first, his pattern of seeing PR as the preferred solution to all problems, and second, his resulting slavish devotion to smoke and mirrors over sound policy.

*   *   *

But Team Obama is no doubt rationalizing this chicanery:  if they can keep from recognizing losses until the recovery takes place, then the ultimate damage will be lower.  But Japan’s post bubble record shows that doesn’t work.  You simply don’t get a recovery with a diseased financial system.  You need to purge the bad assets, only then will meaningful growth resume.

Financial risk management guru, Chris Whalen, recently expressed his anguish over the administration’s unwillingness to restructure the zombie banks:

The reluctance comes partly from what truths restructuring will reveal.  As a result, these same large zombie banks and the U.S. economy will continue to shrink under the weight of bad debt, public and private.  Remember that the Dodd-Frank legislation was not so much about financial reform as protecting the housing GSEs.

Because President Barack Obama and the leaders of both political parties are unwilling to address the housing crisis and the wasting effects on the largest banks, there will be no growth and no net job creation in the U.S. for the next several years.  And because the Obama White House is content to ignore the crisis facing millions of American homeowners, who are deep underwater and will eventually default on their loans, the efforts by the Fed to reflate the U.S. economy and particularly consumer spending will be futile.

The idea that Obama sees “PR as the preferred solution to all problems” surfaced again in a great piece by Peter Baker of The New York Times, which included this observation:

Rather than entertaining the possibility that the program they have pursued is genuinely and even legitimately unpopular, the White House and its allies have concluded that their political troubles amount to mainly a message and image problem.

Baker’s article focused on the most recent gripe made by Obama at another one of his highbrow fundraisers.  Remember the blowback from the President’s recent diatribe at a fundraiser hosted by the appropriately-named Rich Richman?  Well, something similar happened again.  The setting this time was a $15,200-per-ticket affair for doctors at the home of a wealthy hospital executive in Boston.  While addressing this audience, the President explained that the reason why the voters have not embraced the Democrats during this election cycle is because the voters are having trouble thinking clearly, as they are “scared”.  Not surprisingly, this re-ignited the controversy focused on Obama’s elitism.

The Tea Party spokespeople aren’t the only ones who are accusing President Obama of elitism.  The Progressive-oriented TruthDig website, recently published an interesting essay by Chris Hedges, author of  Death of the Liberal Class.  Hedges points out that elitism is exactly the problem afflicting not only Obama, but the entire group, referred to as “the liberal class”.  Consider his argument:

The liberal class, which once made piecemeal and incremental reform possible, functioned traditionally as a safety valve.  During the Great Depression, with the collapse of capitalism, it made possible the New Deal.  During the turmoil of the 1960s, it provided legitimate channels within the system to express the discontent of African-Americans and the anti-war movement.  But the liberal class, in our age of neo-feudalism, is now powerless.  It offers nothing but empty rhetoric.  It refuses to concede that power has been wrested so efficiently from the hands of citizens by corporations that the Constitution and its guarantees of personal liberty are irrelevant.  It does not act to mitigate the suffering of tens of millions of Americans who now make up a growing and desperate permanent underclass.  And the disparity between the rhetoric of liberal values and the rapacious system of inverted totalitarianism the liberal class serves makes liberal elites, including Barack Obama, a legitimate source of public ridicule.  The liberal class, whether in universities, the press or the Democratic Party, insists on clinging to its privileges and comforts even if this forces it to serve as an apologist for the expanding cruelty and exploitation carried out by the corporate state.

*   *   *
As long as the liberal class had even limited influence, whether through the press or the legislative process, liberals were tolerated and even respected.  But once the liberal class lost all influence it became a class of parasites.  The liberal class, like the déclassé French aristocracy, has no real function within the power elite.  And the rising right-wing populists, correctly, ask why liberals should be tolerated when their rhetoric bears no relation to reality and their presence has no influence on power.

As Maureen Dowd pointed out, Wednesday is going to be a big day.  If President Obama thought he had his hands full going into this election   .  .  .  wait until the aftermath.