Since that time absolutely nothing has changed. In fact, the SEC has allowed the stock market to become an even more dangerous place for “retail investors” (mom and pop) to keep their life savings.
The use of “limit orders” has become a joke. The only reason for using a limit order is to let your enemies (the predatory traders) know the maximum extent to which you will allow yourself to be screwed on a trade. Since July of 2009, I have discussed the threat posed to retail investors by the use of High-Frequency Trading (HFT) systems. Computers – programmed with predatory algorithms – can engage in “computerized front-running” through the use of “flash orders” to force your own limit order to be executed at its most extreme expense to you. I discussed this situation in more detail on May 18, 2010.
I rarely use “stop loss” orders. They are used by investors to limit their loss if a stock price sinks. The investor specifies a stop price (based on a percentage of the purchase price which is the maximum amount the investor is willing to lose on the stock). If the stock eventually drops to the price in the stop order, the transaction is initiated and the order goes out to the exchange as a market order – to be filled at the best available price at the time. In other words, there is no guarantee that the order will be filled at the price specified in the stop order. In the “flash crash” on May 6 of 2010, many investors lost their shirts because their stop orders were executed and by the time the investors tried to repurchase the stocks, the prices rebounded to where they were before the flash crash. Worse yet, by the time their stop orders were actually filled, the stock prices had dropped tremendously. Not only did those investors lose money on the stop orders for no good reason – but many chose to buy back their stocks at the pre-crash prices. As a result, they lost twice as much money just because of an emotional attachment to the stock. (Emotional attachment to a particular stock is a bad investment habit.) Since that time, a number of “mini flash crashes” have been engineered by predatory traders on particular stocks, forcing investors off their positions to take losses, which ultimately benefit the predators, who use stealthy tactics to reap those profits without being caught.
Maureen Farrell recently wrote an interesting piece for CNNMoney about the consequences of “mini flash crashes”. Here is some of what she had to say:
Stock exchanges have explicit rules for canceling “clearly erroneous trades” and for triggering so-called circuit breakers that halt trading. None of the trades mentioned in this story met that criteria.
Generally, trades can be canceled if they fall 5% to 10% from the last trade, but the rules vary, depending on the market cap of a company and its trading volume.
Investors still have to notify the exchange within 30 minutes if they want their trade to be canceled.
And because many of the wild swings aren’t extreme enough to be considered “clearly erroneous,” individual investors may not even be aware that certain trades are being executed.
Although the article noted that “(t)he SEC continues to make changes to try to combat the frequency and impact of the mini flash crashes”, there is apparently nothing being done by the SEC to prevent the predatory engineering of those crashes. The SEC is apparently doing nothing to allow investors to unwind trades triggered by those crashes. More important, the SEC is doing nothing to track down and prosecute the culprits responsible for engineering and profiteering from these events.
Matt Taibbi has done it again. His latest article in Rolling Stone focused on the case of United States of America v. Carollo, Goldberg and Grimm, in which the Obama Justice Department actually prosecuted some financial crimes. The three defendants worked for GE Capital (the finance arm of General Electric) and were involved in a bid-rigging conspiracy wherein the prices paid by banks to bond issuers were reduced (to the detriment of the local governments who issued those bonds).
The broker at the center of this case was a firm known as CDR. CDR would be hired by a state or local government which was planning a bond issue. Banks would then submit bids which are interest rates paid to the issuer for holding the money until payments became due to the various contractors involved in the project which was the subject of the particular bond. The brokers would tip off a favored bank about the amounts of competing bids in return for a kickback based on the savings made by avoiding an unnecessarily high bid. In the Carollo case, the GE Capital employees were supposed to be competing with other banks who would submit bids to CDR. CDR would then inform the bidders on how to coordinate their bids so that the bid prices could be kept low and the various banks could agree among themselves as to which entity would receive a particular bond issue. Four of the banks which “competed” against GE Capital in the bidding were UBS, Bank of America, JPMorgan Chase and Wells Fargo. Those four banks paid a total of $673 million in restitution after agreeing to cooperate in the government’s case.
The brokers would also pay-off politicians who selected their firm to handle a bond issue. Matt Taibbi gave one example of how former New Mexico Governor Bill Richardson received $100,000 in campaign contributions from CDR. In return, CDR received $1.5 million in public money for services which were actually performed by another broker – at an additional cost.
Needless to say, the mainstream news media had no interest in covering this case. Matt Taibbi quoted a remark made to the jury at the outset of the case by the trial judge, Harold Baer: “It is unlikely, I think, that this will generate a lot of media publicity”. Although the judge’s remark was intended to imply that the subject matter of the case was too technical and lacking in the “sex appeal” of the usual evening news subject, it also underscored the aversion of mainstream news outlets to expose the wrongdoing of their best sponsors: the big banks.
Beyond that, this case exploded a myth – often used by the Justice Department as an excuse for not prosecuting financial crimes. As Taibbi explained at the close of the piece:
There are some who think that the government is limited in how many corruption cases it can bring against Wall Street, because juries can’t understand the complexity of the financial schemes involved. But in USA v. Carollo, that turned out not to be true. “This verdict is proof of that,” says Hausfeld, the antitrust attorney. “Juries can and do understand this material.”
One important lesson to be learned from the Carollo case is a simple fact that the mainstream news media would prefer to ignore: This is but one tiny example of the manner in which business is conducted by the big banks. As Matt Taibbi explained:
The men and women who run these corrupt banks and brokerages genuinely believe that their relentless lying and cheating, and even their anti-competitive cartelstyle scheming, are all legitimate market processes that lead to legitimate price discovery. In this lunatic worldview, the bidrigging scheme was a system that created fair returns for everyone.
* * *
That, ultimately, is what this case was about. Capitalism is a system for determining objective value. What these Wall Street criminals have created is an opposite system of value by fiat. Prices are not objectively determined by collisions of price information from all over the market, but instead are collectively negotiated in secret, then dictated from above
* * *
Last year, the two leading recipients of public bond business, clocking in with more than $35 billion in bond issues apiece, were Chase and Bank of America – who combined had just paid more than $365 million in fines for their role in the mass bid rigging. Get busted for welfare fraud even once in America, and good luck getting so much as a food stamp ever again. Get caught rigging interest rates in 50 states, and the government goes right on handing you billions of dollars in public contracts.
By now we are all familiar with the “revolving door” principle, wherein prosecutors eventually find themselves working for the law firms which represent the same financial institutions which those prosecutors should have dragged into court. At the Securities and Exchange Commission, the same system is in place. Worst of all is the fact that our politicians – who are responsible for enacting laws to protect the public from such criminal enterprises as what was exposed in the Carollo case – are in the business of lining their pockets with “campaign contributions” from those entities. You may have seen Jon Stewart’s coverage of Jamie Dimon’s testimony before the Senate Banking Committee. How dumb do the voters have to be to reelect those fawning sycophants?
Yet it happens . . . over and over again. From the Great Depression to the Savings and Loan scandal to the financial crisis and now this bid-rigging scheme. The culprits never do the “perp walk”. Worse yet, they continue on with “business as usual” partly because the voting public is too brain-dead to care and partly because the mainstream news media avoid these stories. Our political system is incapable of confronting this level of corruption because the politicians from both parties are bought and paid for by the banking cabal. As Paul Farrell of MarketWatch explained:
Seriously, folks, the elections are relevant. Totally. Oh, both sides pretend it matters. But it no longer matters who’s president. Or who’s in Congress. Money runs America. And when it comes to the public interest, money is not just greedy, but myopic, narcissistic and deaf. Money from Wall Street bankers, Corporate CEOs, the Super Rich and their army of 261,000 highly paid mercenary lobbyists. They hedge, place bets on both sides. Democracy is dead.
Why would anyone expect America to solve any of its most pressing problems when the officials responsible for addressing those issues have been compromised by the villains who caused those situations?
In case you might be wondering whether the miscreants responsible for causing the financial crisis might ever be prosecuted by Attorney General Eric Hold-harmless – don’t hold your breath. At the close of 2010, 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.
During that same week, former New York Mayor Ed Koch wrote an article which began with the grim observation that no criminal charges have been brought against any of the malefactors responsible for causing the financial crisis:
Looking back on 2010 and the Great Recession, I continue to be enraged by the lack of accountability for those who wrecked our economy and brought the U.S. to its knees. The shocking truth is that those who did the damage are still in charge. Many who ran Wall Street before and during the debacle are either still there making millions, if not billions, of dollars, or are in charge of our country’s economic policies which led to the debacle.
“Accountability” is a relative term. If you believe that the imposition of fines – resulting from civil actions by the Justice Department – could provide accountability for the crimes which led to the financial crisis, then you might have reason to feel enthusiastic. On the other hand if you agree with Matt Taibbi’s contention that some of those characters deserve to be in prison – then get ready for another disappointment.
Last week, Reuters described plans by the Justice Department to make use of President Obama’s Financial Fraud Task Force (which I discussed last January) by relying on a statute (FIRREA- the Financial Institutions Reform, Recovery, and Enforcement Act) which was passed in the wake of the 1980s Savings & Loan crisis:
FIRREA allows the government to bring civil charges if prosecutors believe defendants violated certain criminal laws but have only enough information to meet a threshold that proves a claim based on the “preponderance of the evidence.”
Adam Lurie, a lawyer at Cadwalader, Wickersham & Taft who worked in the Justice Department’s criminal division until last month, said that although criminal cases based on problematic e-mails without a cooperating witness could be difficult to prove, the same evidence could meet a “preponderance” standard.
On the other hand, William K. Black, who was responsible for many of the reforms which followed the Savings & Loan Crisis, has frequently emphasized that – unlike the 2008 financial crisis – the S&L Crisis actually resulted in criminal prosecutions against those whose wrongdoing was responsible for the crisis. On December 28, Black characterized the failure to prosecute those crimes which led to the financial crisis as “de facto decriminalization of elite financial fraud”:
The FBI and the DOJ remain unlikely to prosecute the elite bank officers that ran the enormous “accounting control frauds” that drove the financial crisis. While over 1000 elites were convicted of felonies arising from the savings and loan (S&L) debacle, there are no convictions of controlling officers of the large nonprime lenders. The only indictment of controlling officers of a far smaller nonprime lender arose not from an investigation of the nonprime loans but rather from the lender’s alleged efforts to defraud the federal government’s TARP bailout program.
What has gone so catastrophically wrong with DOJ, and why has it continued so long? The fundamental flaw is that DOJ’s senior leadership cannot conceive of elite bankers as criminals.
In effect, equal enforcement of the law is not simply important for democracy or to ensure that economic activity takes place, it is fundamental to ensuring that capitalism works. Without equal enforcement of the law, the economy operates with participants who are competitively advantaged and disadvantaged. The rogue firms are in effect receiving a giant government subsidy: the freedom to engage in profitable activities that are prohibited to lesser entities. This becomes a self-reinforcing cycle (like the growth of WorldCom from a regional phone carrier to a national giant that included MCI), so that inequality becomes ever greater. Ultimately, we all lose as our entire economy is distorted, valuable entities are crushed or never get off the ground because they can’t compete on a playing field that is not level, and most likely wealth is destroyed.
Does the Justice Department really believe that it is going to impress us with FIRREA lawsuits? We’ve already had enough theatre – during the Financial Crisis Inquiry Commission hearings and the April 2010 Senate Permanent Subcommittee on Investigations hearing, wherein Goldman’s “Fab Four” testified about selling their customers the Abacus CDO and that “shitty” Timberwolf deal. It’s time for some “perp walks”.
Much has changed since the inception of the Occupy Wall Street movement. When the occupation of Zuccotti Park began on September 17, the initial response from mainstream news outlets was to simply ignore it – with no mention of the event whatsoever. When that didn’t work, the next tactic involved using the “giggle factor” to characterize the protesters as “hippies” or twenty-something “hippie wanna-bes”, attempting to mimic the protests in which their parents participated during the late-1960s. When that mischaracterization failed to get any traction, the presstitutes’ condemnation of the occupation events – which had expanded from nationwide to worldwide – became more desperate: The participants were called everything from “socialists” to “anti-Semites”. Obviously, some of this prattle continues to emanate from unimaginative bloviators. Nevertheless, it didn’t take long for respectable news sources to give serious consideration to the OWS effort.
One month after the occupation of Zuccotti Park began, The Economist explained why the movement had so much appeal to a broad spectrum of the population:
So the big banks’ apologies for their role in messing up the world economy have been grudging and late, and Joe Taxpayer has yet to hear a heartfelt “thank you” for bailing them out. Summoned before Congress, Wall Street bosses have made lawyerised statements that make them sound arrogant, greedy and unrepentant. A grand gesture or two – such as slashing bonuses or giving away a tonne of money – might have gone some way towards restoring public faith in the industry. But we will never know because it didn’t happen.
Reports eventually began to surface, revealing that many “Wall Street insiders” actually supported the occupiers. Writing for the DealBook blog at The New York Times, Jesse Eisinger provided us with the laments of a few Wall Street insiders, whose attitudes have been aligned with those of the OWS movement.
By late December, it became obvious that the counter-insurgency effort had expanded. At The eXiledblog, Yasha Levine discussed the targeting of journalists by police, hell-bent on squelching coverage of the Occupy movement. In January, New York Mayor Michael Bloomberg lashed out against the OWS protesters by parroting what has become The Big Lie of our time. In response to a question about Occupy Wall Street, Mayor Bloomberg said this:
“It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.”
The counterpunch to Mayor Bloomberg’s remark was swift and effective. Barry Ritholtz wrote a piece for The Washington Post entitled “What caused the financial crisis? The Big Lie goes viral”. After The Washington Post published the Ritholtz piece, a good deal of supportive commentary emerged – as observed by Ritholtz himself:
Since then, both Bloomberg.com and Reuters each have picked up the Big Lie theme. (Columbia Journalism Review as well). In today’s NYT, Joe Nocera does too, once again calling out those who are pushing the false narrative for political or ideological reasons in a column simply called “The Big Lie“.
Once the new year began, the Occupy Oakland situation quickly deteriorated. Chris Hedges of Truthdig took a hard look at the faction responsible for the “feral” behavior, raising the question of whether provocateurs could have been inciting the ugly antics:
The presence of Black Bloc anarchists – so named because they dress in black, obscure their faces, move as a unified mass, seek physical confrontations with police and destroy property – is a gift from heaven to the security and surveillance state.
Chris Hedges gave further consideration to the involvement of provocateurs in the Black Bloc faction on February 13:
Occupy’s most powerful asset is that it articulates this truth. And this truth is understood by the mainstream, the 99 percent. If the movement is severed from the mainstream, which I expect is the primary goal of the Department of Homeland Security and the FBI, it will be crippled and easily contained. Other, more militant groups may rise and even flourish, but if the Occupy movement is to retain the majority it will have to fight within self-imposed limitations of nonviolence.
Despite the negative publicity generated by the puerile pranks of the Black Bloc, the Occupy movement turned a corner on February 13, when Occupy the SEC released its 325-page comment letter concerning the Securities and Exchange Commission’s draft “Volcker Rule”. (The Volcker Rule contains the provisions in the Dodd-Frank financial reform act which restrict the ability of banks to make risky bets with their own money). Occupy the SEC took advantage of the “open comment period” which is notoriously exploited by lobbyists and industry groups whenever an administrative agency introduces a new rule. The K Street payola artists usually see this as their last chance to “un-write” regulations.
The most enthusiastic response to Occupy the SEC’s comment letter came from Felix Salmon of Reuters:
Occupy the SEC is the wonky finreg arm of Occupy Wall Street, and its main authors are worth naming and celebrating: Akshat Tewary, Alexis Goldstein, Corley Miller, George Bailey, Caitlin Kline, Elizabeth Friedrich, and Eric Taylor. If you can’t read the whole thing, at least read the introductory comments, on pages 3-6, both for their substance and for the panache of their delivery. A taster:
During the legislative process, the Volcker Rule was woefully enfeebled by the addition of numerous loopholes and exceptions. The banking lobby exerted inordinate influence on Congress and succeeded in diluting the statute, despite the catastrophic failures that bank policies have produced and continue to produce…
The Proposed Rule also evinces a remarkable solicitude for the interests of banking corporations over those of investors, consumers, taxpayers and other human beings.
* * *
There’s lots more where that comes from, including the indelible vision of how “the Volcker Rule simply removes the government’s all-too-visible hand from underneath the pampered haunches of banking conglomerates”. But the real substance is in the following hundreds of pages, where the authors go through the Volcker Rule line by line, explaining where it’s useless and where it can and should be improved.
John Knefel of Salon emphasized how this comment letter exploded the myth that the Occupy movement is simply a group of cynical hippies:
The working group’s detailed policy position gives lie to the common claim that the Occupy Wall Street movement is “well intentioned but misinformed.” It shows there’s room in the movement both for policy wonks and those chanting “anti-capitalista.”
Even Mayor Bloomberg’s BusinessWeek spoke highly of Occupy the SEC’s efforts. Karen Weise interviewed Occupy’s Alexis Goldstein, who had previously worked at such Wall Street institutions as Deutsche Bank, where she built IT systems for traders:
Like Goldstein, several members have experience in finance. Kline says she used to be a derivatives trader. Tewary is a lawyer who worked on securitization cases at the firm Kaye Scholer, according to his bio on the website of his current firm, Kamlesh Tewary. Mother Jones, which reported on the group in December, says O’Neil is a former Wall Street quant.
There are parts of the rule that Occupy the SEC would like to see toughened. For example, Goldstein sees a “big loophole” in the proposed rule that allows banks to make proprietary trades using so-called repurchase agreements, by which one party sells securities to another with the promise to buy back the securities later. The group wants to make sure other parts aren’t eroded.
From the perspective of someone who’s spent a lot of time in working groups of Occupy Boston, what I love about this story is that it’s early evidence of what Occupy can and will do, beyond “changing the discourse,” which is the best that sympathetic people who haven’t been involved seem to be able to say about Occupy, or just going away and dying off, which is what non-sympathizers think has happened to Occupy. Many of us have been quietly working away over the winter, and the results will start to be seen in the coming months.
If Chris Sturr’s expectation ultimately proves correct, it will be nice to watch the pro-Wall Street, teevee pundits get challenged by some worthy opponents.
Comments Off on Psychopaths Caused The Financial Crisis
Two months ago, Barry Ritholtz wrote a piece for The Washington Post in rebuttal to New York Mayor Michael Bloomberg’s parroting of what has become The Big Lie of our time. In response to a question about Occupy Wall Street, Mayor Bloomberg said this:
“It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.”
Ritholtz then proceeded to list and discuss the true causes of the financial crisis. Among those causes were Alan Greenspan’s Federal Reserve monetary policy – wherein interest rates were reduced to 1 percent; the deregulation of derivatives trading by way of the Commodity Futures Modernization Act; the Securities and Exchange Commission’s “Bear Stearns exemption” – allowing Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns to boost their leverage as high as 40-to-1; as well as the “bundling” of sub-prime mortgages with higher-quality mortgages into sleazy “investment” products known as collateralized debt obligations (CDOs).
After The Washington Post published the Ritholtz piece, a good deal of supportive commentary emerged – as observed by Ritholtz himself:
Since then, both Bloomberg.com and Reuters each have picked up the Big Lie theme. (Columbia Journalism Review as well). In today’s NYT, Joe Nocera does too, once again calling out those who are pushing the false narrative for political or ideological reasons in a column simply called “The Big Lie“.
Purveyors of The Big Lie are also big on advancing the claim that the “too big to fail” beneficiaries of the TARP bailout repaid the money they were loaned, at a profit to the taxpayers. Immediately after her arrival at CNN, former Goldman Sachs employee, Erin Burnett made a point of interviewing a young, Occupy Wall Street protester, asking him if he was aware that the government actually made a profit on the TARP. Unfortunately, the fiancée of Citigroup executive David Rubulotta didn’t direct her question to Steve Randy Waldman – who debunked that propaganda at his Interfluidity website:
Substantially all of the TARP funds advanced to banks have been paid back, with interest and sometimes even with a profit from sales of warrants. Most of the (much larger) extraordinary liquidity facilities advanced by the Fed have also been wound down without credit losses. So there really was no bailout, right? The banks took loans and paid them back.
Bullshit.
* * *
During the run-up to the financial crisis, bank managers, shareholders, and creditors paid themselves hundreds of billions of dollars in dividends, buybacks, bonuses and interest. Had the state intervened less generously, a substantial fraction of those payouts might have been recovered (albeit from different cohorts of stakeholders, as many recipients of past payouts had already taken their money and ran). The market cap of the 19 TARP banks that received more than a billion dollars each in assistance is about 550B dollars today (even after several of those banks’ share prices have collapsed over fears of Eurocontagion). The uninsured debt of those banks is and was a large multiple of their market caps. Had the government resolved the weakest of the banks, writing off equity and haircutting creditors, had it insisted on retaining upside commensurate with the fraction of risk it was bearing on behalf of stronger banks, the taxpayer savings would have run from hundreds of billions to a trillion dollars. We can get into all kinds of arguments over what would have been practical and legal. Regardless of whether the government could or could not have abstained from making the transfers that it made, it did make huge transfers. Bank stakeholders retain hundreds of billions of dollars against taxpayer losses of the same, relative to any scenario in which the government received remotely adequate compensation first for the risk it assumed, and then for quietly moving Heaven and Earth to obscure and (partially) neutralize that risk.
The banks were bailed out. Big time.
Another overlooked cause of the financial crisis was the fact that there were too many psychopaths managing the most privileged Wall Street institutions. Not only had the lunatics taken over the asylum – they had taken control of the world’s largest, government-backed casino, as well. William D. Cohan of Bloomberg News gave us a peek at the recent work of Clive R. Boddy:
It took a relatively obscure former British academic to propagate a theory of the financial crisis that would confirm what many people suspected all along: The “corporate psychopaths” at the helm of our financial institutions are to blame.
Clive R. Boddy, most recently a professor at the Nottingham Business School at Nottingham Trent University, says psychopaths are the 1 percent of “people who, perhaps due to physical factors to do with abnormal brain connectivity and chemistry” lack a “conscience, have few emotions and display an inability to have any feelings, sympathy or empathy for other people.”
As a result, Boddy argues in a recent issue of the Journal of Business Ethics, such people are “extraordinarily cold, much more calculating and ruthless towards others than most people are and therefore a menace to the companies they work for and to society.”
Professor Boddy wrote a book on the subject – entitled, Corporate Psychopaths. The book’s publisher, Macmillan, provided this description of the $90 opus:
Psychopaths are little understood outside of the criminal image. However, as the recent global financial crisis highlighted, the behavior of a small group of managers can potentially bring down the entire western system of business. This book investigates who they are, why they do what they do and what the consequences of their presence are.
Matt Taibbi provided a less-expensive explanation of this mindset in a recent article for Rolling Stone:
Most of us 99-percenters couldn’t even let our dogs leave a dump on the sidewalk without feeling ashamed before our neighbors. It’s called having a conscience: even though there are plenty of things most of us could get away with doing, we just don’t do them, because, well, we live here. Most of us wouldn’t take a million dollars to swindle the local school system, or put our next door neighbors out on the street with a robosigned foreclosure, or steal the life’s savings of some old pensioner down the block by selling him a bunch of worthless securities.
But our Too-Big-To-Fail banks unhesitatingly take billions in bailout money and then turn right around and finance the export of jobs to new locations in China and India. They defraud the pension funds of state workers into buying billions of their crap mortgage assets. They take zero-interest loans from the state and then lend that same money back to us at interest. Or, like Chase, they bribe the politicians serving countries and states and cities and even school boards to take on crippling debt deals.
Do you think that Mayor Bloomberg learned his lesson . . . that spreading pro-bankster propaganda can provoke the infusion of an overwhelming dose of truth into the mainstream news? Nawwww . . .
You can count me among those who believe that the non-stop Republican Presidential debates are working to President Obama’s advantage. How many times have you heard some television news commentator remark that “the big winner of last night’s Republican debate was Barack Obama”? As Julianna Goldman reported for Bloomberg BusinessWeek, two recent polls have revealed that Obama is no longer looking quite as bad as he did a few months ago:
Forty-nine percent of Americans approve of how Obama is handling his job, according to an ABC News/Washington Post poll and another conducted for CNN. The rate was the highest in both surveys since a short-lived bump the president got following the killing of al-Qaeda leader Osama bin Laden in May.
Nevertheless, there is an unstoppable wave of criticism directed against the President by his former supporters as well as those disgusted by Obama’s subservience to his benefactors on Wall Street. In my last posting, I discussed Bill Black’s rebuttal to President Obama’s most recent attempt to claim that no laws were broken by the banksters who caused the 2008 financial crisis.
The wave of disgust at Obama’s exoneration of the financial fraudsters has gained quite a bit of momentum since that outrageous remark appeared on the December 11 broadcast of 60 Minutes. Matt Taibbi of Rolling Stone focused on the consequences of this level of dishonesty:
What makes Obama’s statements so dangerous is that they suggest an ongoing strategy of covering up the Wall Street crimewave. There is ample evidence out there that the Obama administration has eased up on prosecutions of Wall Street as part of a conscious strategy to prevent a collapse of confidence in our financial system, with the expected 50-state foreclosure settlement being the landmark effort in the cover-up, intended mainly to bury a generation of fraud.
* * *
In other words, Geithner and Obama are behaving like Lehman executives before the crash of Lehman, not disclosing the full extent of the internal problem in order to keep investors from fleeing and creditors from calling in their chits. It’s worth noting that this kind of behavior – knowingly hiding the derogatory truth from the outside world in order to prevent a run on the bank – is, itself, fraud!
* * *
The problem with companies like Lehman and Enron is that their executives always think they can paper over illegalities by committing more crimes, when in fact all they’re usually doing is snowballing the problem so completely out of control that there’s no longer any chance of fixing things, thereby killing the only chance for survival they ever had.
This is exactly what Obama and Geithner are doing now. By continually lying about the extent of the country’s corruption problems, they’re adding fraud to fraud and raising such a great bonfire of lies that they probably won’t ever be able to fix the underlying mess.
John R. MacArthur, president and publisher of Harper’s Magazine, caused quite a stir on December 14, when an essay he wrote – entitled, “President Obama Richly Deserves to Be Dumped” – was published by the The Providence Journal (Rhode Island). For some reason, this article does not appear at the newspaper’s website. However, you can read it in its entirety here. MacArthur began the piece by highlighting criticism of Obama by his fellow Democrats:
Most prominent among these critics is veteran journalist Bill Moyers, whose October address to a Public Citizen gathering puts the lie to our barely Democratic president’s populist pantomime, acted out last week in a Kansas speech decrying the plight of “innocent, hardworking Americans.” In his talk, Moyers quoted an authentic Kansas populist, Mary Eizabeth Lease, who in 1890 declared, “Wall Street owns the country.. . .Money rules.. . .The [political] parties lie to us and the political speakers mislead us.”
A former aide to Lyndon Johnson who knows politics from the inside, Moyers then delivered the coup de grace: “[Lease] should see us now. John Boehner calls on the bankers, holds out his cup, and offers them total obeisance from the House majority if only they fill it. Barack Obama criticizes bankers as fat cats, then invites them to dine at a pricey New York restaurant where the tasting menu runs to $195 a person.”
* * *
What’s truly breathtaking is the president’s gall, his stunning contempt for political history and contemporary reality. Besides neglecting to mention Democratic complicity in the debacle of 2008, he failed to point out that derivatives trading remains largely unregulated while the Securities and Exchange Commission awaits “public comment on a detailed implementation plan” for future regulation. In other words, until the banking and brokerage lobbies have had their say with John Boehner, Max Baucus, and Secretary of the Treasury Tim Geithner. Meanwhile, the administration steadfastly opposes a restoration of the Glass-Steagall Act, the New Deal law that reduced outlandish speculation by separating commercial and investment banks. In 1999, it was Summers and Geithner, led by Bill Clinton’s Treasury Secretary Robert Rubin (much admired by Obama), who persuaded Congress to repeal this crucial impediment to Wall Street recklessness.
I have frequently discussed the criticism directed at Obama from the political Center as well as the Left (see this and this). I have also expressed my desire to see Democratic challengers to Obama for the 2012 nomination (see this and this). In the December 20 edition of The Chicago Tribune, William Pfaff commented on John R. MacArthur’s above-quoted article, while focusing on the realistic consequences of a Democratic Primary challenge to Obama’s nomination:
John MacArthur’s and Bill Moyers’ call for the replacement of Barack Obama as the Democratic presidential candidate next year is very likely to fail, and any Democratic replacement candidate is likely to lose the presidency. As a veteran Democratic Party activist recently commented, this is the sure way to elect “one of those idiots” running for the Republican nomination. Very likely he is right.
However, the two may have started something with interesting consequences. Nobody thought Sen. McCarthy’s challenge was anything more than a futile gesture. Nobody foresaw the assassinations and military defeat to come, or the ruin of Richard Nixon. Nobody knows today what disasters may lie ahead in American-supervised Iraq, or in the dual war the Pentagon is waging in Afghanistan and Pakistan. The present foreign policy of the Obama government is fraught with risk.
As for the president himself, the objection to him is that his Democratic Party has become a representative of the same interests as the Republican Party. The nation cannot bear two parties representing plutocratic power.
The current battle over the payroll tax cut extension reminded me of a piece I wrote last August, in which I included Nate Silver’s observation that it was President Obama’s decision to leave the issue of a payroll tax cut extension “on the table” during the negotiations on the debt ceiling bill. My thoughts at that time were similar to William Pfaff’s above-quoted lament about the nation’s “two political parties representing plutocratic power”:
As many observers have noted, the plutocracy has been able to accomplish much more with Obama in the White House, than what would have been achievable with a Republican President. This latest example of a bipartisan effort to trample “the little people” has reinforced my belief that the fake “two-party system” is a sideshow – designed to obfuscate the insidious activities of the Republi-Cratic Corporatist Party.
It’s nice to see that the tsunami of disgust continues to flow across the country.
Comments Off on Wall Streeters Who Support The Occupy Movement
Forget about what you have been hearing from those idiotic, mainstream blovaitors – who rose to prominence solely because of corporate politics. Those bigmouths want you to believe that the Occupy Wall Street movement is anti-capitalist. Nevertheless, the dogma spouted by those dunder-headed pundits is contradicted by the reality that there are quite a number of prominent individuals who voice support for the Occupy Wall Street movement, despite the fact that they are professionally employed in the investment business. I will provide you with some examples.
On October 31, I discussed the propaganda war waged against the Occupy Wall Street movement, concluding the piece with my expectation that Jeremy Grantham’s upcoming third quarter newsletter would provide some sorely-needed, astute commentary on the situation. Jeremy Grantham, rated by Bloomberg BusinessWeek as one of the Fifty Most Influential Money Managers, finally released an abbreviated edition of that newsletter one month later than usual, due to a busy schedule. In addition to expressing some supportive comments about the OWS movement, Grantham noted that he will be providing a special supplement, based specifically on that subject:
Meriting a separate, special point are the drastic declines in both U.S. income equality – the U.S. has become quite quickly one of the least equal societies – and in the stickiness of economic position from one generation to another. We have gone from having been notably upwardly mobile during the Eisenhower era to having fallen behind other developed countries today, even the U.K.! The net result of these factors is a growing feeling of social injustice, a weakening of social cohesiveness, and, possibly, a decrease in work ethic. A healthy growth rate becomes more difficult.
* * *
Sitting on planes over the last several weeks with nothing to do but read and think, I found myself worrying increasingly about the 1% and the 99% and the appearance we give of having become a plutocracy, and a rather mean-spirited one at that. And, one backed by a similarly mean-spirited majority on the Supreme Court. (I will try to post a letter addressed to the “Occupy … Everywhere” folks shortly.)
Hedge fund manager Barry Ritholtz is the author of Bailout Nation and the publisher of one of the most widely-read financial blogs, The Big Picture. Among the many pro-OWS postings which have appeared on that site was this recent piece, offering the movement advice similar to what can be expected from Jeremy Grantham:
To become as focused and influential as the Tea Party, what Occupy Wall Street needs a simple set of goals. Not a top 10 list — that’s too unwieldy, and too unfocused. Instead, a simple 3 part agenda, that responds to some very basic problems regardless of political party. It must address the key issues, have a specific legislative agenda, and finally, effect lasting change. By keeping it focused on the foibles of Wall Street, and on issues that actually matter, it can become a rallying cry for an angry nation.
I suggest the following three as achievable goals that will have a lasting impact:
1. No more bailouts: Bring back real capitalism
2. End TBTF banks
3. Get Wall Street Money out of legislative process
* * *
You will note that these three goals are issues that both the Left and the Right — Libertarians and Liberals — should be able to agree upon. These are all doable measurable goals, that can have a real impact on legislation, the economy and taxes.
But amending the Constitution to eliminate dirty money from politics is an essential task. Failing to do that means backsliding from whatever gains are made. Whatever is accomplished will be temporary without campaign finance reform . . .
Writing for the DealBook blog at The New York Times, Jesse Eisinger provided us with the laments of a few Wall Street insiders, whose attitudes are aligned with those of the OWS movement:
Last week, I had a conversation with a man who runs his own trading firm. In the process of fuming about competition from Goldman Sachs, he said with resignation and exasperation: “The fact that they were bailed out and can borrow for free – it’s pretty sickening.”
* * *
Sadly, almost none of these closeted occupier-sympathizers go public. But Mike Mayo, a bank analyst with the brokerage firm CLSA, which is majority-owned by the French bank Crédit Agricole, has done just that. In his book “Exile on Wall Street” (Wiley), Mr. Mayo offers an unvarnished account of the punishments he experienced after denouncing bank excesses. Talking to him, it’s hard to tell you aren’t interviewing Michael Moore.
* * *
I asked Richard Kramer, who used to work as a technology analyst at Goldman Sachs until he got fed up with how it did business and now runs his own firm, Arete Research, what was going wrong. He sees it as part of the business model.
“There have been repeated fines and malfeasance at literally all the investment banks, but it doesn’t seem to affect their behavior much,” he said. “So I have to conclude it is part of strategy as simple cost/benefit analysis, that fines and legal costs are a small price to pay for the profits.”
Mr. Kramer’s contention was supported by a recent analysis of Securities and Exchange Commission documents by The New York Times, which revealed “that since 1996, there have been at least 51 repeat violations by those firms. Bank of America and Citigroup have each had six repeat violations, while Merrill Lynch and UBS have each had five.”
At the ever-popular Zero Hedge website, Tyler Durden provided us with the observations of a disillusioned, first-year hedge fund analyst. Durden’s introductory comments in support of that essay, provide us with a comprehensive delineation of the tactics used by Wall Street to crush individual “retail” investors:
Regular readers know that ever since 2009, well before the confidence destroying flash crash of May 2010, Zero Hedge had been advocating that regular retail investors shun the equity market in its entirety as it is anything but “fair and efficient” in which frontrunning for a select few is legal, in which insider trading is permitted for politicians and is masked as “expert networks” for others, in which the government itself leaks information to a hand-picked elite of the wealthiest investors, in which investment banks send out their “huddle” top picks to “whale” accounts before everyone else gets access, in which hedge funds form “clubs” and collude in moving the market, in which millisecond algorithms make instantaneous decisions which regular investors can never hope to beat, in which daily record volatility triggers sell limits virtually assuring daytrading losses, and where the bid/ask spreads for all but the choicest few make the prospect of breaking even, let alone winning, quite daunting. In short: a rigged casino. What is gratifying is to see that this warning is permeating an ever broader cross-section of the retail population with hundreds of billions in equity fund outflows in the past two years. And yet, some pathological gamblers still return day after day, in hope of striking it rich, despite odds which make a slot machine seem like the proverbial pot of gold at the end of the rainbow. In that regard, we are happy to present another perspective: this time from a hedge fund insider who while advocating his support for the OWS movement, explains, in no uncertain terms, and in a somewhat more detailed and lucid fashion, both how and why the market is not only broken, but rigged, and why it is nothing but a wealth extraction mechanism in which the richest slowly but surely steal the money from everyone else who still trades any public stock equity.
The anonymous hedge fund analyst concluded his discourse with this point:
In other words, if you aren’t in the .1%, you have no access to the derivatives markets, you have no access to the special deals that hedge funds and other wealthy investors get, and you have no access to the resources, information, strategic services, tax exemptions, and capital that the top .1% is getting.
If you have any questions about what some of the concepts above mean, ask and I will try my best to answer. I’m a first-year analyst on Wall Street, and based on what I see day in and day out, I support the OWS movement 100%.
You are now informed beyond the influence of those presstitutes, who regularly attempt to convince the public that an important goal of the Occupy Movement is to destroy the livelihoods of those who work on Wall Street.
Comments Off on Elizabeth Warren Should Run Against Obama
Now that President Obama has thrown Elizabeth Warren under the bus by nominating Richard Cordray to head the Consumer Financial Protection Bureau (CFPB), she is free to challenge Obama in the 2012 election. It’s not a very likely scenario, although it’s one I’d love to see: Warren as the populist, Independent candidate – challenging Obama, the Wall Street tool – who is already losing to a phantom, unspecified Republican.
A good number of people were disappointed when Obama failed to nominate Warren to chair the CFPB, which was her brainchild. It was bad enough that Treasury Secretary “Turbo” Tim Geithner didn’t like her – but once the President realized he was getting some serious pushback about Warren from Senate Republicans – that was all it took. Some Warren supporters have become enamored with the idea that she could challenge Scott Brown for his seat representing Massachusetts in the Senate. However, many astute commentators consider that as a really stupid idea. Here is the reaction from Yves Smith of Naked Capitalism:
We argued yesterday that the Senate was not a good vehicle for advancing Elizabeth Warren’s aims of helping middle class families, since she would have no more, and arguably less power than she has now, and would be expected to defend Democrat/Obama policies, many of which are affirmatively destructive to middle class interests (just less so than what the Republicans would put in place).
A poll conducted in late June by Scott Brown and the Republican National Committee raises an even more basic question: whether she even has a shot at winning.
* * *
The poll shows a 25 point gap, which is a massive hurdle, and also indicates that Brown is seen by many voters as not being a Republican stalwart (as in he is perceived to vote for the state’s, not the party’s, interest). A 25 point gap is a near insurmountable hurdle and shows that Warren’s reputation does not carry as far as the Democratic party hackocracy would like her fans to believe. But there’s no reason not to get this pesky woman to take up what is likely to be a poisoned chalice. If she wins, she’s unlikely to get on any important committees, given the Democratic party pay to play system, and will be boxed in by the practical requirements of having to make nice to the party and support Obama positions a meaningful portion of the time. And if she runs and loses, it would be taken as proof that her middle class agenda really doesn’t resonate with voters, which will give the corporocrats free rein (if you can’t sell a liberal agenda in a borderline Communist state like Massachusetts, it won’t play in Peoria either).
Obviously, a 2012 challenge to the Obama Presidency by Warren would be an uphill battle. Nevertheless, it’s turning out to be an uphill battle for the incumbent, as well. David Weidner of MarketWatch recently discussed how Obama’s failure to adequately address the economic crisis has placed the President under the same pressure faced by many Americans today:
He’s about to lose his job.
* * *
Blame as much of the problem on his predecessor as you like, the fact is Obama hasn’t come up with a solution. In fact, he’s made things worse by filling his top economic posts with banking-friendly interests, status-quo advisers and milquetoast regulators.
And if there’s one reason Obama loses in 2012, it’ll be because he failed to surround himself with people willing to take drastic action to get the economy moving again.
In effect, Obama’s team has rewarded the banking industry under the guise of “saving the economy” while abandoning citizens and consumers desperate for jobs, credit and spending power.
There was the New York Fed banker cozy with Wall Street: Timothy Geithner.
There was the former Clinton administration official who was the architect of policies that led to the financial crisis: Larry Summers.
There was a career bureaucrat named to lead the Securities and Exchange Commission: Mary Schapiro.
To see just how unremarkable this group is, consider that the most progressive regulator in the Obama administration, Federal Deposit Insurance Corp. Chairman Sheila Bair, was a Republican appointed by Bush.
* * *
The lack of action by Obama’s administration of mediocrities is the reason the recovery sputters. In essence, the turnaround depends too much on a private sector that, having escaped failure, is too content to sit out what’s supposed to be a recovery.
* * *
What began as a two-step approach: 1) saving the banks, and then 2) saving homeowners, was cut short after the first step.
Instead of extracting more lending commitments from the banks, forcing more haircuts on investors and more demands on business, Obama has let his team of mediocrities allow the debate to be turned on government. The government caused the financial crisis. The government ruined the housing market.
It wasn’t true at the start, but it’s becoming true now.
Despite his status as the incumbent and his $1 billion campaign war chest, President Obama could find himself voted out of office in 2012. When you consider the fact that the Republican Party candidates who are currently generating the most excitement are women (Bachmann and the undeclared Palin) just imagine how many voters might gravitate to a populist female candidate with substantially more brains than Obama.
The disillusionment factor afflicting Obama is not something which can be easily overlooked. The man I have referred to as the “Disappointer-In-Chief” since his third month in office has lost more than the enthusiasm of his “base” supporters – he has lost the false “progressive” image he had been able to portray. Matt Stoller of the Roosevelt Institute explained how the real Obama had always been visible to those willing to look beyond the campaign slogans:
Many people are “disappointed” with Obama. But, while it is certainly true that Obama has broken many many promises, he projected his goals in his book The Audacity of Hope. In Audacity, he discussed how in 2002 he was going to give politics one more shot with a Senate campaign, and if that didn’t work, he was going into corporate law and getting wealthy like the rest of his peer group. He wrote about how passionate activists were too simple-minded, that the system basically worked, and that compromise was a virtue in and of itself in a world of uncertainty. His book was a book about a fundamentally conservative political creature obsessed with process, not someone grounded in the problems of ordinary people. He told us what his leadership style is, what his agenda was, and he’s executing it now.
I expressed skepticism towards Obama from 2005, onward. Paul Krugman, Debra Cooper, and Tom Ferguson among others pegged Obama correctly from day one. Obama broadcast who he was, through his conservative policy focus (which is how Krugman pegged him), his bank backers (which is how Ferguson pegged him), his political support of Lieberman (which is how I pegged him), and his cavalier treatment of women’s issues (which is how Debra Cooper pegged him). He is doing so again, with his choice to effectively remove Elizabeth Warren from the administration.
I just wish Elizabeth Warren would fight back and challenge Obama for The White House. If only . . .
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:
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?
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 . . .
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.