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She Bear at the FDIC

Monday, December 24th, 2012

Bull By the Horns: Fighting to save main street from Wall Street and Wall Street from Itself, Sheila Bair, 2012

Hank Ben Sheila Tim Sheila Ben

There were four central regulatory players in the great financial crisis of 2008; Ben Bernanke of the Fed, Hank Paulson of Treasury, Tim Geithner of the New York Fed and Obama’s Treasury secretary, and Sheila Bair of the FDIC. Paulson left Treasury at the end of W’s term and wrote his account of the crisis which this reader has not read. Bair left the FDIC in 2011 and this is her account. Geithner is leaving the Obama administration and will no doubt give us his account. We will have to wait for Bernanke to leave the Fed for his account.

We previously reviewed the Suskind book which featured Geithner ignoring an order from Obama to come up with a plan to break up Citigroup ( Scamming the President ). Bair recalls the meeting in question where the breakup of Citibank is discussed with the President: “Tim seemed to view his job as protecting Citigroup from me, when he should have been worried about protecting the taxpayers from Citi.” Bair says she only learned that Summers was in favor of breaking up Citigroup after reading Suskind’s book. Had she known at the time, she could have insisted that Summers arrange another meeting with the President where she could discuss and advocate using FDIC to resolve Citigroup. She never doubted this breakup could have been done.

This is the first time we learn about the “systemic risk exception” where super majorities of the Fed and FDIC boards declare that putting an institution into an FDIC type resolution would cause “systemic ramifications”. This effectively means that Treasury and the President himself must approve the resolution. Bair says of the NY Fed invoking the exception for Bear Stearns:

In fact, prior to the 2008 financial crisis, the FDIC had never invoked the systemic risk exception. But here we had the NY Fed (Geithner) going out on its own and deciding to bail out a relatively small investment bank, a perimeter player at best…I was concerned about the precedent the NY Fed was setting.

Senator Elect Elizabeth Warren

As Suskind relates, both Geithner and Summers went to great lengths to control access to Obama and the administration had an all boys club atmosphere. Christina Romer, nominal head of the Counsel of Economic Advisers, left the administration early and gets one brief mention in Bair’s account. Bair did have a close working relationship with Elizabeth Warren, newly elected Senator from Massachusetts in Ted Kennedy’s old seat, and Bair still has high hopes for the Consumer Financial Protection Bureau.

She Bear

Bair is a tough, no nonsense, plain speaking advocate of the public interest. Her fierce and protective support of the FDIC against all critics led her staff to call her “She Bear”. When she arrived at the FDIC in 2006, moral was low and the agency hadn’t closed a bank in three years. The black clouds were on the horizon and the FDIC through its own and other regulators examinations had probably the clearest picture of the looming catastrophe. She launched a major offensive to educate the public and woo the media to the role of the FDIC, the mechanisms of the bank resolution process, and reassure the public that insured bank accounts were perfectly safe.

Tim and Sheila Adversaries

Almost immediately the FDIC was overrun with bank failures; Wachovia, Countrywide, Indymac, Washington Mutual and others. She ran into her first major conflict with Geithner who wanted his client Citigroup, despite their dismal financial condition to acquire Wachovia to add their FDIC insured deposits to Citigroups small deposits. Geithner was furious when Bair continued to press Wells Fargo to purchase Wachovia, which they did without any government assistance or guarantees. Geithner doesn’t fare well in Bair’s account in this book.

Rubin’s Acolytes

Bair does a good job explaining the complex structure of financial regulation in this country. The Fed has certain regulatory functions; the FDIC domain covers any institution with insured deposits; Treasury houses two regulatory agencies, the OCC for mega banks; and the OTS for the thrifts including WAMU, Countrywide, and Golden West. While the Fed and FDIC are more independent, the Treasury is highly politicized and has been under the sway of the financial industry for some time. Citigroup’s Bob Rubin (Clinton’s first Treasury Secretary) mentored both Larry Summers and Tim Geithner and it was under Clinton that Glass-Steagall was repealed and Derivatives declared free from all regulation. And Hank Paulson was former CEO at Goldman-Sachs. The SEC and CFTC are separate and are dependent on annual budget allocations.

When Senator Dodge advocated creating a single unified regulatory agency, Bair talked him out of it because she feared a single agency would more easily fall under the control of the financial industry and become a super OCC. Besides her wars with the Citigroup dominated Geithner, Bair had continuing problems with the OCC, with John Dugan and John Walsh, comptrollers of the currency, and OTS’s John Reich, who opposed Chase’s purchase of WAMU, Reich’s last bank. The OTS is now abolished. None of these were advocating for main street and the public interest.

Reich opposed Wamu sale

Bair strongly advocated using the government through the resolution process to clean up the toxic mortgage backed securities. The FDIC successfully demonstrated simplified methods to modify mortgages en-mass during the cleanup of the thrifts. Bair was a consistent advocate for loan modification as a way to keep people in their homes and minimize the overall losses to the industry and government. She called TARP, which Paulson sold as a fund to buy toxic assets, then used it to bail out the banks and wall street with capital infusions, a case of bait and switch. She explained some of the reasons for the failure of loan modification programs. Mortgages were lumped into securities which were sold with banks providing loan servicing for low flat fees. This meant the banks were understaffed, under trained, and unsupervised. Breaking the securities into tranches meant that holders of the “safest” tranches would not be hurt financially until perhaps 20% of the mortgages defaulted so were incentivized to prefer foreclosure to restructuring loans. When robo signing was uncovered where single bank workers were fraudulently claiming to have examined the loans being foreclosed the issue moved to the front burner but no effective action resulted. Banks still had separate groups working simultaneously on foreclosure and modification of the same mortgage with customers being approved for modification at the same time they are being evicted. To this date, loan modifications are woefully inadequate and the bulk of toxic assets are still looming.

During the debate on Dodge-Frank, there was considerable discussion of FDIC style regulatory resolution verses bankruptcy. Bair uses the infamous case of the Lehman Brothers bankruptcy to prove her case that regulatory resolution is far better. Legal and other fees topped $1.5 billion and to date, creditors have recovered 21 cents on the dollar. The Lehman brand is dead and all employees lost their jobs. An FDIC style resolution results in an instant solution, preserving the brand and jobs. Her staff estimated that an FDIC resolution would have recovered 97 cents on the dollar at Lehman.

Bair is generally positive on Dodge-Frank but worries that the industry will continue to attack and modify the measures. Much of the effectiveness of Dodge-Frank will depend on the regulatory implementation and the jury is still out on much of the new complex legislation.

Bair complains that Sorkin in his book Too Big To Fail and in his columns failed to contact the FDIC to get their perspective and thus misrepresented FDIC positions and actions.

Bair spends considerable time on the Basel II accords which greatly reduced capital requirements for banks allowing the European banks to load up on sovereign debt from Greece, Italy, Spain, and Portugal. Much of the current European financial crisis is attributable directly to Basel II. Bair with a little help from the Fed was able to prevent the US from adopting Basel II. Bair then pushed Basel III to greatly increase capital requirements and to require mega banks to have even higher (9.5%) capital reserves.

Geithner Grilled after Libor Scandal Breaks

Bair notes that the Barclay misconduct in the Libor interest rate fixing scandal from mid 2005 to early 2009 took place at Barclay’s NY trading desk which was subject to Geithner’s NY Fed. The investigation was conducted jointly by the CFTC, UK authorities and the Justice Department. The investigation did not involve the NY Fed. During his appointment hearings for Treasury, Geithner proudly stated “I have never been a regulator, for better or worse.” For once he seems to have been telling the truth. Unfortunately for us, regulating was his Fed job.

Bair is very disappointed in Obama and hopes he will appoint better people in his next administration. The FDIC currently has no head. Would it be too much to hope that Obama might appoint audacious Bair to Treasury?

Optimist anticipates participatory socialism and social federalism

Tuesday, June 23rd, 2020

Capital and Ideology, Thomas Piketty, 2020
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A continuation of Piketty’s earlier 2014 work extending his previous analysis starting from 1500 to the present and adding France, India, China, Germany, Spain. the Nordic countries, Russia and Eastern Europe, the Petro-Monarchies, etc.

Today, the postcommunist societies of Russia, China, and to a certain extent Eastern Europe…have become hypercapitalism’s staunchest allies. This is a direct consequence of the disaster of Socialism and Marxism and the consequence of all egalitarian internationalist ambitions. So great was the communist disaster that it overshadowed even the damage done by the ideologies of slavery, colonialism, and racialism and obscured the ties between those ideologies and the ideology of ownership and hypercapitalism–no mean feat.

Furthermore, social democrats never really reconsidered the issue of just ownership after the collapse of communism. The postwar social-democratic compromise was built in haste, and issues such as progressive taxation, temporary ownership, circulation of ownership (for example, by means of a universal capital grant financed by a progressive tax on property and inheritances), power sharing in firms (via co-management or self management), democratic budgeting and public ownership were never explored as fully or systematically as they might have been.

It (modern property law) originated…with Christian doctrine, which sought over many centuries to secure the property rights of the Church as both a religious and a property-owning organization.

…the concentration of private property, which was already extremely high in 1800-1810, only slightly lower than on the eve of the (French) Revolution, steadily increased throughout the nineteenth century and up to the eve of World War I…The case of Paris is especially noteworthy; there, the wealthiest 1 percent owned nearly 50 percent of all property in 1800-1810 and more than 65 percent on the eve of World War I.

As for achieving real equality, however, the great promise of the (French) Revolution went unfulfilled…And when a progressive income tax was finally adoption on July 15, 1914, it was not to finance schools or public services but to pay for war with Germany.

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When slavery was abolished in the 19th Century, the discussion in slave owning nations concerned compensation for the owner’s of slaves, never about compensation for the slaves.

It is easy to see that in a society where slaves represented virtually the entire work force, their market value could reach astronomical levels, potentially as high as seven or eight years of annual production…Recall that France saddled Haiti with a debt equivalent to three years of Haitian nation income in 1825 yet remained convinced that it was making sacrifices compared to what slaves in Saint-Dominique actually yielded in profit.

In 1860, the market value of (US) slaves (4 million in number) exceeded 250 percent of the annual income of the southern states and came close to 100 percent of the annual income of all the states. If compensation had been paid, it would have been saddled with interest and principal payments for decades.

The secession of the southern states and the resulting Civil War ended these discussions and US slave owners were never compensated for their loss of property as a result of the war and the emancipation proclamation.

Piketty follows the transformation, starting around 1500, of society from Ternary (Clergy, Nobility, Third estate–the workers) to Ownership societies with a centralized state. This transformation was accompanied by the rapid development of arms, warships, and navigation, needed to support the endless wars among the new nation states. This technological development of war tools enabled the co development of slavery and colonialism. Even the Ottoman and Chinese Empires were no match for the modern war machine. Gunboat diplomacy reigned supreme into the twentieth century. An extreme example are the two opium wars of Britain against China in the mid nineteenth century. Not only did China have to allow the sale of opium in China, but China was saddled with massive reparations for the costs of the wars.

Japanese Depiction of Perry’s black ships
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Japan reacted to the American (Admiral Perry), French and British visit by warship in the mid nineteenth century with the Meiji reformation, whereby Japan acquired and built its own advanced arms and warships and became a colonial power in its own right.

In the period 1880-1914, the United Kingdom and France earned so much from their investments in the rest of the world (roughly 5 percent additional national income for France and more than 8 percent for the United Kingdom) that they could allow themselves to run persistent structural trade deficits (an average of 1-2 percent of national income for both countries) while continuing to accumulate claims on the rest of the world at an accelerated pace. In other words, the rest of the world labored to increase consumption and standard of living of the colonial powers, even as it became increasingly indebted to those powers.

On Colonial state tax revenues in the eighteenth century:

…both countries (England and France) were taking in 600-900 tons of silver in 1700, 800-1100 tons in the 1750’s, and 1600-1900 tons in the 1780’s, leaving all other European powers far behind. Importantly, Ottoman tax receipts remained virtually unchanged from 1500 to 1780; barely 150-200 tons. After 1750, it was not only France and England that had a far greater tax capacity than the Ottoman Empire; so did Austria, Prussia, Spain, and Holland.

…the development of the modern state involved two great leaps forward. The first unfolded between 1500 and 1800 in the leading states of Europe, which were able to increase their tax revenues from barely 1-2 percent of national income to about 6-8 percent. This process was accompanied by the development of ownership societies at home and colonial empires abroad. The second leap forward came in the period 1930-1980, when the rich countries as a group went from tax revenues of 8-10 percent of national income on the eve of World War I to revenues of 30-50 percent of national income in the 1980s. This transformation was accompanied by a broad process of economic development and historic improvement in living conditions and gave rise to various forms of social-democratic society…It proved difficult to extend the second leap forward to poorer countries in the late twentieth and early twenty-first centuries…

If we include all military conflicts across the continent in each period, we find that European countries were at war 95 percent in the sixteenth centry, 94 percent in the seventeenth century, and still 78 percent in the eighteenth century (compared to 40 percent in the nineteenth century and 54 percent in the twentieth century). The period 1500-1800 was one of incessant rivalry among Europe’s military powers, and this is what fueled the development of unprecedented fiscal capacity as well as numerous technological innovations, particularly in the areas of artillery and warships.

By the end of the American Revolutionary and Napoleonic Wars (1792-1815), British public debt had soared to more than 200 percent of national income, the debt was so high that one-third of the taxes paid by British taxpayers between 1815 and 1914 (mainly by people of middle and low income) was devoted to repayment of the debt and interest (profiting the wealthy who had lent the government money to pay for the wars)…It also might have been preferable to tax the wealthy rather than allow them to become still wealthier by buying government bonds…with political power in the hands of the wealthy, the choice was made to spend money on the military and to finance it with public debt, and this helped to secure European domination over the rest of the world.

…these protectionist and mercantilist measures, imposed on the the rest of the world at gunpoint, played a significant role in achieving British and European industrial domination. According to available estimates, the Chinese and Indian share of global manufacturing output, which was still 53 percent in 1800, had fallen to 5 percent by 1900.

The colonial ideology that seeks to liberate and civilize nations in spite of themselves generally leads to disaster, no matter what the color of the colonizer’s skin (Japan).

The success of Japan’s proprietarian and industrial transition shows that the mechanisms at work have nothing whatsoever to do with Christian culture or Eueopean civilization…the Japanese experiences shows that proactive policies, especially regarding public infrastructure and investments in education, can overcome very strong and longstanding status inequalities in a matter of decades…we will see that the reduction of social inequality in Japan was further assisted by an ambitious program of agrarian reform in the period 1945-1950 as well as by highly progressive taxation of top incomes and large estates.

The fall of ownership society in the period 1914-1945 can be analyzed as a consequence of three challenges; the challenge of inequality with European ownership societies, which led to the emergence first of counterdiscourses and then of communist and social-democratic counter-regimes in the late nineteenth and first half of the twentieth centuries; the challenge of inequality among countries, which led to critiques of the colonial order and the rise of increasingly powerful independence movements in the same period; and finally a nationalist and identitarian challenge, which heightened competition among the European powers and eventually led to their self-destruction through war and genocide in the period 1914-1945.

The period from 1726-1914 saw low inflation and complete stability in the value of the pound sterling and the French gold franc. World War I put an end to monetary stability and the suspension of convertibility of their currencies into silver or gold.

…from 1914 to 1950 inflation averaged 13 percent a year in France (equivalent to a hundred fold increase in the price level) and 17 percent in Germany (a three hundredfold price increase).

…ownership societies that seemed so prosperous and solid on the eve of World War I collapsed between 1914-and 1945. The collapse was so complete that nominally capitalist countries actually turned into social democracies between 1950 and 1980 through a mixture of policies including nationalizations, public education, health and pension reforms, and progressive taxation of the highest incomes and largest fortunes. Despite undeniable success, however, these social-democratic societies began to run into trouble in the 1980’s. Specifically, they proved unable to cope with rampant inequality that began to develop more of less everywhere around that time.

Why did social democratic societies fail after 1980?

Ronald Reagan (R) and Margaret Thatcher wave after their arrival in Camp David, 22 december 1984, before their meeting. (Photo credit should read ARCHIVES UPI/AFP/Getty Images)

In the first place, attempts to institute new forms of power sharing and social ownership of firms remained confined to a small number of countries (especially German and Sweden). This avenue of reform was never explored fully as it might have been, even though it offered one of the most promising responses to the challenge of transcending private property and capitalism. Second, social democracy did not have a good answer to one pressing question; how to provide equal access to education and knowledge, particularly higher education. Finally, we will look at social-democratic thinking about taxation, especially progressive taxation of wealth. Social democracy did not succeed in building new transnational federal forms of shared sovereignty or social and fiscal justice. Today’s globalized economy is one in which regulation in all its forms has been undermined by free trade and free circulation of capital, instituted by agreements to which social democrats consented or even instigated. In any case, they had no alternative to offer. The resulting heightened international competition has gravely endangered the social contract (and consent to taxation) on which the social-democratic states of the twentieth century were built.

The French and British never embraced corporate power sharing and social ownership preferring nationalization of private companies:

Then in 1986-1988 the Gaullist and liberal parties returned to power in a new context of privatization and deregulation under Thatcher and Reagan, while at the the same time the Communist bloc was slowly crumbling. This led to the privatization of most of the companies that had been nationalized between 1945-1982.

…from 1917 to 1991, new thinking about private property was blocked by the bipolar opposition of Soviet Communism and American capitalism. One was either for unlimited state ownership or for full private shareholder ownership….The fall of the Soviet Union inaugurated a new period of unlimited faith in private property from which we have not yet completely emerged but which is beginning to show serious signs of exhaustion.

On the massive inequality that developed in the United States from about 1980:

The bottom 50 percent of the income distribution claimed about 20 percent of national income from 1960 to 1980, but that share has been divided in half, falling to just 12 percent in 2010-2015. The top centile’s share has moved in the opposite direction, from barely 11 percent to more than 20 percent…the share of total income going to the bottom 50 percent in Europe remains significantly larger than the share going to the top centile.

To sum up: in the light of the history of the past two centuries, educational equality played a more important sole in economic development than the sacrilization of inequality, property, and stability. More generally, history demonstrated the recurrent risk of an “inequality trap” which many societies have faced throughout the ages. Elite discourse tends to overvalue stability, and especially the perpetuation of existing property rights, whereas development often requires a redefinition of property relations and opening up of opportunities to new groups.

On the failures of progressive taxation:

First, parties of the left failed to foster the kind of international cooperation needed to protect and extend progressive taxation; indeed at times they contributed to the fiscal competition that has proved devastating to the very idea of fiscal justice. Second, thinking about just taxation too often neglected the idea of a progressive wealth tax, despite its importance for any ambitious attempt to transcend private capitalism, particularly if used to finance a universal capital endowment and promote greater circulation of wealth.

…we now know that the top centile’s share of total wealth can fall from 70 percent to 20 percent without impeding growth (quite the contrary, as Western European experience in the twentieth century shows). We know from experience with Germanic and Nordic versions of co-management that employee and shareholder representatives can each control half the voting rights in a firm and that such power sharing can improve overall economic performance.

On tax havens:

…this minimum estimate implies that the financial assets tucked away in tax havens are roughly equal to the total amount of all financial assets legal owned by Russian households inside Russia (roughly one year of national income). In other words, off shore property has become at least as important in macroeconomic terms as legal financial property…In a sense, illegality has become the norm.

…by exploiting data made public by the Bank for International Settlements (BIS) and the Swiss National Bank (SNB) on countries where assets are held, one can estimate each country’s approximate share of offshore assets held in tax havens relative to the total (lawful and unlawful) assets held by residents of each country. The results are as follows; “only” 4 percent for the United States, 10 percent for Europe, 22 percent for Latin America, 30 percent for Africa, 50 percent for Russia, and 57 percent for the petroleum monarchies.

On China:

China thus appears to have settled on a mixed-economy property structure: the country is no longer communist since nearly 70 percent of all property is now private, but it is not completely capitalist either because public property still accounts for a little more than 30 percent of the total–a minority share but still substantial. Because the Chinese government, led by the CCP, owns a third of all there is to own in the country, its scope for economic intervention is large: it can decide where to invest, create jobs, and launch regional development programs.

If we compare China to the other Asian giant, India, it is clear that since the early 1980s China has been both more efficient in terms of growth and more egualitarian in terms of income distribution (or, rather, less inegalitarian, in the sense that concentration of income has increased less dramatically than in India)…one reason for this difference is that China has been able to invest more in public infrastructure, education, and health care. China achieved a much higher level of tax revenue than India, where basic health-care and educational services remain notoriously underfinanced. China has nearly matched Western levels of taxation, taking in roughly 30 percent of national income in taxes (and roughly 40 percent if one includes profits from public firms and sale of public lands).

On the dangers posed by the central banks:

After the bankruptcy of Lehman Brothers in September 2008 and the ensuing financial panic, things changed completely…The world’s major central banks devised increasingly complex money-creation schemes collectively described by the enigmatic term “quantitative easing” (QE). In concrete terms, QE involves lending to the banking sectors for longer and longer periods (three months, six months, or even a year rather than a few days or weeks) and buying bonds issued by private firms and governments with even longer duration (of several years) and in much greater quantities than before. The Federal Reserve was the first to react In September 2008 its balance sheet increased from the equivalent of 5 percent of GDP to 15 percent; in other words the Fed created money equivalent to 10 percent of US GDP in a few weeks time. This proactive stance would continue in subsequent years; the Fed’s balance sheet had risen to 25 percent of GDP by the end of 2014…In Europe the reaction was slower. The ECB and other European authorities took longer to understand that massive intervention by the central bank was the only way to stabilize financial markets and reduce the “spread” between the interest rates of the various European countries. Since then, the ECB purchases of public and private bonds have accelerated, however, and the ECB’s balance sheet stood at 40 percent of Eurozone GDP at the end of 2018…By avoiding cascading bank failures and acting as “lender of last resort”, the Fed and ECB did not repeat the errors that the central banks committed in the interwar years, when orthodox “liquidationist” thinking (based on the idea that bad banks must be allowed to fail so that the economy can restart) helped push the world over the edge of the the abyss…What makes central banks so powerful is their ability to act extremely rapidly.

Piketty does not discuss the New Deal US Federal Deposit Insurance Corporation FDIC program which allows the federal government to instantly take over failing banks, reorganize them with new management, and reopen them after a single weekend, assuring depositors that their savings are insured and immediately available. Obama and his treasury secretary Tim Geithner refused to allow the Shiela Bair led FDIC to break up and reorganize the failing banks during the 2008 crisis. This would have been the available and desired solution to the failures.

…the danger is that these monetary policies, by avoiding the worst gave the impression that no broader structural change in social, fiscal, or economic policy was necessary. Nevertheless, the fact is that central banks are not equipped to solve all the world’s problems or to serve as the ultimate regulator of the capitalist system…To combat excessive financial deregulation, rising inequality, and climate change, other public institutions are necessary; laws, taxes, and treaties drafted by parliaments relying on collective deliberation and democratic procedures.

In the abstract, there is nothing to stop central banks from enlarging their balance sheets by a factor of ten or even more…From a strickly technical standpoint, the Fed or ECB could create dollars or euros worth 600 percent of GDP and attempt to buy all the private wealth of the United States or Western Europe…central banks and their boards of governors are no better equipped to administer all of a country’s property than were the Soviet Union’s central planners.

…the Bank of Japan and Swiss National Bank both have balance sheets in excess of 100 percent of GDP…It is nevertheless impossible to rule out that similar things will someday happen to the Eurozone or the United States. Financial globalization has assumed such proportions that it may lead those responsible for setting monetary policy step by step toward decisions that would have been unthinkable only a few years before.

Many citizens have quite understandably begun to ask why such sums were created to bail out financial institutions, with little apparent effect in jump-starting the European economy, and why it shouldn’t be possible to mobilize similar resource to help struggling workers, develop public infrastructure, or finance large investments in renewable sources of energy. Indeed it would be by no means absurd for European governments to borrow at current low interest rates to finance useful investments, on two conditions; first, such investments should be decided democratically, in parliament with open debate, and not by a Governing Council meeting behind closed doors; and second, it would be dangerous to lend credence to the notion that every problem can be resolved by printing money and taking on debt. The principal instrument for mobilizing resources to undertake common political projects was and remains taxation, democratically decided and levied on the base of each taxpayer’s economic resources and ability to pay, in total transparency.

And yet the Democratic presidents who followed Reagan, Bill Clinton (1992-2000) and Barack Obama (2008-2016) never made any real attempt to revise the narrative or reverse the policies of the 1980s. In particular, in regard to the reduction of the progressive income tax (whose top marginal rate fell to an average of 39 percent from 1980 to 2018, half its level in the period 1932-1980) and the de-indexing of the federal minimum wage (which led to a clear loss of purchasing power since 1980), the Clinton and Obama administrations basically validated and perpetuated the basic thrust of policy under Reagan…But it may also be that acceptance of the new fiscal and social agenda was partly due to the transformation of the Democratic electorate and to a political and strategic choice to rely more heavily on the party’s new and highly educated supporters, who may have found the turn toward less redistributive policies personally advantageous.

In particular, higher-income voters voted more heavily for Tony Blair’s New Labour in the period 1997-2005 than they had voted for Labour previously. That may seem logical given that New Labour also attracted more and more votes among college-educated people and its fiscal policies were relatively favorable to high earners. Just as the Clinton (1992-2000) and Obama (2008-2016) administrations had validated and perpetuated the Reagan reforms of the 1980s, New Labour governments in the period 1997-2010 largely validated and perpetuated the fiscal reforms of the Thatcher era.

I have tried to highlight the significant dangers posed by the rise of socioeconomic inequality since 1980. In a period marked by internationalization of trade and rapid expansion of higher education, social-democratic parties failed to adapt quickly enough, and the left-right cleavage that had made possible the mid-twentieth-century reduction of inequality gradually fell apart. The conservative revolution of the 1980s, the collapse of Soviet communism, and the development of neo-proprietarian ideology vastly increased the concentration of income and wealth in the first two decades of the twenty first century. For want of a constructive egalitarian and universal political outlet, these tensions have fostered the kinds of nationalist identity cleavages that we see today in practically every part of the world…When people are told that there is no credible alternative to the socioeconomic organization and class inequality that exists today, it is not surprising that they invest their hopes in defending their borders and identities instead.

In the broadest terms, the tax system of the just society would rest on three principal progressive taxes: a progressive annual tax on property, a progressive tax on inheritances, and a progressive tax on income. As indicated here, the annual property tax and the inheritance tax would together yield about 5 percent of national income, all of which would be used to finance capital endowments. The progressive income tax, would yield about 45 percent of national income, which would be used to finance all other public expenditures, including the basic income and, above all, the welfare state (which would cover health, education, pensions, and so on).

The model of participatory socialism proposed here rests on two key pillars; first, social ownership and shared voting rights in firms, and second, temporary ownership and circulation of capital. These are the essential tools for transcending the current system of private ownership. By combining them, we can achieve a system of ownership that has little in common with today’s private capitalism; indeed it amounts to a a genuine transcendence of capitalism.

If every individual is to have a chance of finding decently remunerated employment, we must put an end to the hypocritical practice of investing more in elitist educational programs and institutions than in institutions that cater to the disadvantaged. The labor code and, more generally the entire legal system need to be overhauled. New systems of wage bargaining, a higher minimum wage, a fairer wage scale, and sharing of voting rights within firms between workers and shareholders can all contribute to the establishment of a just wage, a more equal distribution of economic power, and a deeper involvement of workers in shaping the strategy of their employers.

The central goal of democratic equality vouchers is to promote participatory and egalitarian democracy. Currently, the prevalence of private (political) financing significantly biases the political process. This is particularly true of the United States where campaign finance laws (always inadequate) have been set aside by recent decisions of the Supreme Court. But it is also true in emerging democracies such as India and Brazil as well as in Europe, where current laws are equally inadequate and in some cases totally scandalous.

The redefinition of the global legal framework will require abandonment of some existing treaties, most notably those concerning the free circulation of capital that came into effect in the 1980s-1990s because these stand in the way of meeting the above mentioned goals. These treaties will need to be replaced by new rules based on the principles of financial transparency, fiscal cooperation, and transnational democracy.

Finally it should be noted that this book was written before the start of the global covid19 pandemic and the global recession/depression. Undoubtedly much is about to change socially and politically in response.

Where Did all the Houses Go After the Financial Crisis of 2007-2008?

Tuesday, November 19th, 2019

Homewreckers; How a Gang of Wall Street Kingpins, Hedge Fund Magnates, Crooked Banks, and Vulture Capitalists Suckered Millions Out of Their Homes and Demolished the American Dream, Aaron Glantz, 2019

Steve Mnuchin, Poster Child of the Homewreckers

10 million Americans lost their homes as a result of the Financial Crisis of 2007-2008. By 2010 more than 10% of Americans were unemployed. The Financial Crisis left 45 more million Americans below the poverty line. This book focuses on a handful of predators whose actions would not have been possible without the full cooperation and assistance of the Federal government and the Obama administration. Most of those houses became rentals owned by a handful of huge LLC limited partnerships. The new owners of all these houses are holding them waiting for real estate prices to recover sufficiently to satisfy their greedy requirements to profit from a disaster. These houses are not available to individual home buyers which is artificially driving the prices of homes higher. Charts (not shown in this book) illustrate the changes.

The financial crisis of 2007-2008 was the direct result of a Federal government failure of regulation of the banking industry and the confusion of FDIC banking with Wall Street style speculation. Three critical changes were required to assure it didn’t happen again: 1) Reestablish the Glass-Steagall Act to again separate FDIC regulated banking from Wall Street Speculation. This act was passed in 1933 and repealed in 1999 under Clinton. 2) Severely Regulate or outlaw financial derivatives, created by the Commodity Futures Modernization Act of 2000 signed into law by Clinton. 3) Break up the big banks and separate their FDIC insured portions from their Wall Street operations. Since all banks were insolvent by 2008, the FDIC had full authority to take over all banks, remove all management, and do whatever was necessary to restore sound banking practice. See also Sheila Bair’s book. The Obama administration did none of these things. These three changes were necessary and possible but re regulation would have required even more changes before banking could return to its rightful boring self. The blame for what happened to those 10 million American families who lost their homes couldn’t be clearer. Clinton broke banking and Obama didn’t fix it even though he could have. Now this book;

Through all of this, the administration of Barack Obama, like George W. Bush’s before him, did very little to stem the tide of foreclosures. …Congress passed a massive bank bailout that did little to help individual borrowers. The terms of the deals the federal government brokered afterward, like the sale of IndyMac to Steve Mnuchin’s group of hedge fund managers, encouraged foreclosures.
Then, as foreclosures spiraled out of control and the number of vacant and foreclosed homes mounted, the federal government did almost nothing to prevent communities from collapsing entirely…The Neighborhood Stabilization Program, extended grants to hard-hit communities to provide “emergency assistance to stabilize communities with high rates of abandoned and foreclosed homes.” …A typical NSP grant went to Riverside, California, where fourteen thousand homes were lost to foreclosure… The city…received just $6.5 million–barely enough to buy fifty homes (not even 1 percent of Riverside’s foreclosures).

The Barracks

The Depression era HOLC, by contrast, acquired nearly two hundred thousand properties through foreclosure. 90 percent of those home were sold to families. The Obama Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, simply bundled foreclosed houses into blocks sized between 500 and 10,000 homes at a time to be sold to the Federally subsidized (bailed out) banks and eventually to vulture LLCs. The banks had no intention of finding individual buyers and issuing mortgages so all these homes so they unloaded then in bulk to the vulture LLCs. No attempt was made to determine if the buyers were qualified to manage these properties. There were no promises by buyers to maintain the properties, keep rents affordable, or engage with the community. The home were simply dumped by the government and the banks. And house prices kept dropping through 2012. Las Vegas, Phoenix, Spokane, Riverside and San Bernadino County saw prices drop more than 50 percent. By late 2011 the fire sale was on. The book features Tom Barrack whose source of money to make the home purchases is murky but involves the Cayman Islands and strong suspicions of money laundering and tax evasion. It all ends with Delaware (Biden) LLCs and ultimately to Barrack’s parent company, Colony Capital LLC. Colony eventually amassed an empire of 31,000 houses, rivaling the size of Blackstone’s house empire. Chase lent Colony $1.1 Billion for 7,563 homes. This giant bundle created a derivative that was carved up into tranches and sold on the bond market. But the two LLC predatory vulture groups featured in this book taken together total about 60,000 houses which represent about .6 percent of the 10 million houses lost. Where are the rest of those 10 million houses?

The book outlines the takeover of two failed banks, BankUnited of Florida, and IndyMac of California. Both deals were very costly for the government and resulted in private equity LLC ownership by wealth seeking individuals without a shred of empathy for who was hurt by their actions. The preditors see themselves as simply taking advantage of market opportunities presented by the federal government.

Attention is also given to the unloading of OneWest bank to a who’s who of investors for $1.6 billion. The deal left the government on the hook for any losses incurred in dumping the bank’s mortgages. When the new owners stripped and sold the bank, their return was $5 billion tripling their investment in less than 5 years. The investors included George Soros, John Thain, John Paulson, J.C. Flowers, and others.

Sandy Jolley Reverse Mortgage Whistle blower

Drawing special attention here is the reverse mortgage for the elderly, pioneered during the Reagan years but kept small by government rules. By 2006, the cap was raised to 275,000. Even the government was selling them and packaging its own fully guaranteed reverse mortgages into mortgage backed securities, sold and sliced by the same speculators that brought down the whole system. Most troubling, subprime specialists like IndyMac started selling reverse mortgages using “boiler room” sales tactics and preying on seniors lacking the mental capacity to understand the contracts they signed. Glantz features one deal involving an elderley wife with Alzheimer’s and a dying husband unable to understand the reverse mortgage he was agreeing to. When the husband died, the daughter Sandy Jolley moved back home to care for her mother and fight off foreclosure. In any system with a functioning justice system, the reverse mortgage contracts would have been vacated, the home restored, and damages assessed. None of this happened but Jolley kept fighting, assembling a large group of similarly displaced homeowners and becoming a federal whistle blower. Twelve years after her parent’s reverse mortgage was signed, the case was settled in 2017 with a typical slap on the wrist award and no admission of wrongdoing. Sandy Jolley’s whistle blower’s reward was $978,000.

Too big to fail ($50 billion plus in assets enshrined under Dodd-Frank now raised to $250 billion) Chase bank acquired Bear Sterns and Washington Mutual Bank in 2008. Wells Fargo acquired Wachovia Bank in 2008. Bank of America acquired Merrill Lynch in 2008. All banks accelerated their foreclosure and bundled them for sale to vulture capital LLCs as the easiest way to get the houses off their books, and the Obama government was guaranteeing any losses incurred. All banks greatly decreased their mortgage business and offered mortgages only to customers with high income and impeccable credit. From 2014 to 2016 Chase issued six thousand mortgages under the FHA program (usually used by first time buyers). During this same period Chase loaned Tom Barrack’s Colony $3.3 billion as it created six mortgage backed securities covering 23,000 homes. For first time home buyers an entire generation has had no reasonably priced starter homes and no way to buy the few that were out there. Yet the Federal Reserve held interest rates at near zero throughout the period. Practically, this has meant FDIC deposits are practically free for banks and cheap money was available for speculation and vulture purposes.
The Vulture LLCs that acquired all these houses, bundled them into large groups and securitized them using the same vehicles journalists were calling weapons of mass destruction in 2008. The bundles were diced into trenches to receive different ratings by the same agencies like Moodies who contributed to the 2008 collapse. Typically 80 percent of the bundles received AAA ratings. Glantz researched a tiny Los Angeles Home which listed a mysterious LLC as owner and a lien for $500 million (later refinanced for $900 million).

When housing prices reach a suitably high level, no doubt the LLCs will start selling their huge collections of houses but for the time being they can continue to collect ever increasing rents while spending a minimum on maintenance. Expect these houses to be in awful shape when they eventually reenter the housing market as single family homes.

An article in RCLCO real estate advisors in 2016 found that the seven largest LLCs owned and rented out a total of 170,000 single family houses. A chart in this article shows that single family rental units now comprise 35 percent of total rentals. If there are 43 million renters, then 15 million would be renting single family units. The 10 million foreclosed homes must represent a very sizable portion of these rentals. The article puts the increase in occupied single family rentals during the period 2005-2014 at 3.8 million (probably under estimated) while the increase in single family ownership increased by just a tiny 482,000. It appears the government does little to actually track statistically what happened to foreclosed houses or to track what the deals assuring that banks or LLCs wouldn’t lose money from foreclosures actually cost the government. Mother Jones in 2009 put the financial crisis federal bailout cost at a staggering $14.4 trillion. At present, we seem to have no accurate way to determine what happened to the bulk of those 10 million foreclosed houses. The $14 trillion figure also appears in Ron Suskind’s 2011 Book.

Many of the vultures moved to the Trump administration and the administration’s big tax reduction giveaway showered particular largess on corporations and LLCs.

Uncontrollable Corporate Megalomania Google, Facebook, etc.

Wednesday, March 27th, 2019

The Age of Surveillance Capitalism; The Fight for a Human Future at the New Frontier of Power, Shoshana Zuboff, 2018

This is a look at the transformation of Google, Facebook, and others from their initial mission to serve their users to the exploitation of those users by selling their privacy to the highest bidder to achieve enormous personal wealth and power.

In her personal experience Zuboff describes sitting as a nineteen year old in the back of a seminar where Thomas Friedman (founder of the Chicago school of economics) instructs doctoral students who will soon run the economy of Chile after the CIA inspired coup and assassination of elected President Salvador Allende in favor of the Pinochet military dictatorship in 1973.

Thomas Friedman and Friedrich Hayek, economics as ideology and their opposite John Maynard Keynes

Zuboff also briefly alludes to debates she had at Harvard with the aging and discredited behaviorist BF Skinner, author of the novel Walden Two. She spends time in the book discussing Alex Pentland of the MIT media lab who she considers a BF Skinner intellectual successor armed with the tools Skinner could only dream of having and using. She calls Pentland a high priest of Surveillance capitalism. Pentland helps provide the intellectual justification that legitimizes instrumentarian (a new word coined by Zuboff) practices. Pentland never mentions Skinner in his work but his behavior modification goals are the same.
BF Skinner at Harvard and Alex Pentland of MIT Media Lab

Zuboff explains why user consent through opt-in or opt-out has been rendered meaningless under Surveillance Capitalism. To read a single contract agreement in detail might take hours and with third parties almost always involved there may be 1,000 individual contracts to read and digest. If you opt out surveillance capitalists will threaten to downgrade your system and will probably still collect and distribute your information without your permission. You have no way to find out what they are doing. If you ask for the information collected, as a Belgium privacy attorney attempted to do of Google, they are unable to retrieve it for you. It is buried somewhere in a second tier of automatic computation technology. The user has no way of determining what software is currently running on your computers or smart phones or what peripherals like GPS, cameras, microphones, etc. have been usurped for external control. To add insult to injury, you will pay for the transmission bandwidth they secretly steal from you to illegally surveil your activities. If you have installed smart home devices like thermostats or security systems you have no way to know what these smart devices are observing and collecting. Your car driving behavior can be monitored with bad insurance consequences, not only by your new car, but by your smart phone. Your new car can be disabled by the finance company and its GPS location sent to the REPO people to come get your car. Then imagine advances in voice and face recognition and you start to get the terrifying idea. Then imagine all of this surveillance capability in the hands of a non democratic government like China. You can’t do anything at all without the state monitoring (and influencing) your behavior.

What does older capitalistic history teach us?

It (government interventions into free market capitalism) appeared in the trust busting, civil society, and legislative reforms of the Progressive Era. Later it was elaborated in the legislative, judicial, social, and tax initiatives of the New Deal and the institutionalization of Keynesian economic during the post-World War II era; labor market, tax, and social welfare policies that ultimately increased economic and social equality.

In fact the Bretton Woods conference of 1944 created a new world economic order based on a US-centric dollar based fixed exchange rate system, created the IMF and World Bank, and was a complete repudiation of Keynesian economics. This system worked only so long as the US remained the dominant manufacturing power, creating large trade surpluses that the US could recycle as investments. When trade reversed around 1970 and the US became a trade debtor nation, the American economy shifted from manufacture to financialization, convincing trade creditors to invest their surpluses with Wall Street, who kept inventing new and innovative ways to use the mountains of cash suddenly at their disposal. The Neoliberal contribution to all this was the erosion of government regulation of corporations and the use of IMF and Worldbank loans to vulnerable nations and colonies whose defaults resulted in the massive transfers of state owned commons into private hands like Wall Street hedge funds. See Greek Spring by Yanis Varoufakis. None of this history is clear from her book. For an excellent introduction to macro economics from Bretton Woods to the present see Yanis Varoufakis’ minotaur book. The breakup of the Soviet Union in the 1990’s was another opportunity for the Neoliberals who descended on the former Soviet Union members with plans to transfer all public commons into private hands. The result was to create a new class of asset owners in each country that more resembled a mafia than capitalists. We remain in this condition to this day. The massive and fundamental shift of the American economy from manufacture to financialization is not mentioned by Zuboff.

To her credit, Zuboff does site French economist Thomas Piketty’s monumental work on wealth and income distribution in England and America from the eighteenth century to the present.

A market economy…if left to itself…contains powerful forces of divergence, which are potentially threatening to democratic societies and to the values of social justice on which they are based…If we are to regain control of capital, we must bet everything on democracy.

Our present economic system has been accurately described as corporate welfare with massive government subsidies for agriculture, energy, extraction, and other industries. Hayek and Friedman would turn over in their graves if they knew where American capitalism has taken us. This trend reached its pinnacle (we only hope) with the Bush-Obama massive bailouts of the financial institutions and Zuboff’s beloved General Motors after the sub-prime financial scandal-crisis of 2008. Shiela Bair (W appointee to head the FDIC) was fully prepared to break up the big banks starting with Citibank using her FDIC authorization and charter, but was prevented from doing so by Tim Geithner who was shockingly appointed by Obama as his treasury secretary. See more at Scamming a President. No meaningful reforms were enacted to prevent a recurrence of this collapse and we anxiously await the next iteration.

Zuboff mentions Rand Corporation futurist Herman Kahn’s 1967 book The Year 2000, where the author anticipates the future possibilities of computer power intrusions into our lives characterizing this as “a twenty-first century nightmare”. She says Kahn was the model for the character of Dr. Strangelove in Stanley Kubrick’s 1964 movie. No!

Herman Kahn wrote an earlier book published in 1960 “On Thermonuclear War” where Kahn speculated that it would be possible to create a “Doomsday Machine“; a vast collection of nuclear weapons connected to an automated trigger mechanism that, upon detection of a threat and without any human intervention, would initiate nuclear holocaust. Most experts at the time believed such a system could not be built. In fact the Soviet Union built just such a secret machine called The Dead Hand whose current status is unknown. See Daniel Ellsberg’s Doomsday Machine book. Kahn’s 1960 book was the inspiration for Kubrick’s movie where the Soviet Union have successfully built a doomsday machine but have kept it secret from the US. The character Dr. Strangelove is a caricature of a former Nazi scientist, not Kahn. Kahn was a consultant on the movie.

Zuboff uses a discussion of totalitarianism to illustrate how slow academics and intellectuals are to understand completely sui generis unprecedented developments. Our understanding of totalitarianism came into focus only in the 1960’s, well after the demise of European Fascism and dramatic changes following Stalin’s reign of terror. She points out that between 1930 and 1953 Stalin appears ten times on the cover of Time magazine. She leaves out any discussion of Mao’s China, but China emerges later in her discussion of State uses of surveillance capitalism.

She introduces and coins Instrumentarian power as a contrast to totalitarian power.

Instumentarian power moves differently and toward an opposite horizon. Totalitarianism operated through the means of violence, but intrumentarian power operates through the means of behavioral modification, and this is where our focus must shift. Intrumentarian power has no interest in our souls or any principal to instruct. There is no training or transformation for spiritual salvation, no ideology against which to judge our actions. It does not demand possession of each person from the inside out. It has no interest in exterminating or disfiguring our bodies and minds in the name of pure devotion. It welcomes data on the behavior of our blood and shit, but it has no interest in soiling itself with our excretions. It has no appetite for our grief, pain, or terror, although it eagerly welcomes the behavioral surplus that leaches from our anguish. It is profoundly and infinitely indifferent to our meanings and motives. Trained on measurable action, it only cares that whatever we do is accessible to its ever-evolving operations of rendition, calculation, modification, monetization, and control.

Deng Xiaoping Architect of Democracy Free Capitalism in China

Instrumentarian power in the hands of non democratic States like China is almost beyond comprehension in its potential power. Yanis Voroufakis describes Singapore under Lee Kuan Yew and his disciple Deng Xiaoping who transformed China’s economy using the Singapore model as democracy free capitalism.

Voroufakis primary point in Voroufakis Ted talk is that Western capitalist corporations are hording massive mountains of profit, investing only in corporate consolidation, and are in direct contradictions of Keynesian economics to recycle surpluses to level the cycles of boom and bust. These uninvested surplus mountains may doom democracy and life as we know it.

Industrial capitalism depended upon the exploitation and control of nature, with catastrophic consequences that we only now recognize. Surveillance capitalism…depends instead upon the exploitation and control of human nature. The market reduces us to our behavior, transformed into another fictional commodity and packaged for others’ consumption.

Surveillance capitalism’s successful claims to freedom and knowledge, its structural independence from people, its collectivist ambitions, and the radical indifference that is necessitated, enable, and sustained by all three now propel us toward a society in which capitalism does not function as a means to inclusive economic or political institutions. Instead, surveillance capitalism must be reckoned as a profoundly antidemocratic social force.

As Thomas Paine noted in the Eighteenth century; “…a body of men holding themselves accountable to nobody, ought not to be trusted by any body.”

Surveillance capitalism’s antidemocratic and anti egalitarian juggernaut is best described as a market-driven coup from above. It is not a coup d’etat in the classic sense but rather a coup de gens: an overthrow of the people concealed as a technological Trojan horse that is Big Other…It is a form of tyranny that feeds on people but is not of the people.

The young people we have considered…are the spirits of Christmas yet to come. They live on the frontier of a new form of power that declares the end of a human future, with its antique allegiances to individuals, democracy, and the human agency necessary for moral judgment. Should we awaken from distraction, resignation, and psychic numbing…it is a future that we may still avert.

Zuboff starts her book with the assertion that Surveillance capitalism cannot be controlled or contained through the lens of antitrust or privacy. She mentions the EU regulation the General Data Protection Regulation (GDPR) which only went into effect in May 2018 and only within the EU. It is too early to see if this ambitious effort will have any impact as it works its ways through EU regulators and the courts. She appears sceptical. For the Guardian’s take on GDPR. So what do we do?

If democracy is to be replenished in the coming decades, it is up to us to rekindle the sense of outrage and loss over what is being taken from us. In this I do not mean only our “personal information”. What is at stake here is the human expectation of sovereignty over one’s own life and authorship of one’s own experience. What is at stake is the inward experience from which we form the will to will and the public spaces to act on that will…That Surveillance capitalism has usurped so many of our rights in these domains is a scandalous abuse of digital capabilities and their once grand promise to democratize knowledge and meet our thwarted needs for effective life.

For more on the despotic behavior of Facebook and Google

Scamming the President

Tuesday, December 20th, 2011

Confidence Men, Wall Street, Washington, and the Education of a President, Ron Suskind 2011

The title is intended as a play on the word “confidence”, used to describe the primary motivations of Tim Geithner, Ben Bernanke and Larry Summers in dealing with the financial crisis as in “the proper role of government is to restore confidence in the financial institutions”. The second intended meaning of Suskind is how this small group of men manipulated, conned, scammed the President into following their policies and not the policies actually desired if not ordered by the President. Pretty strong stuff.

The book is a long rambling story telling of events from the long run for President, through the financial meltdown and the first years of the Presidency with an emphasis on the financial crisis but with excursions into health care reform and the auto bailout. It is so rambling that sometimes Suskind gets his facts mixed up as when he says health care insurers have revenues totaling $12 billion of the $2.5 trillion industry (page 193). Insurers profits alone exceed $12 billion! He sometimes loses the narrative as when he implies that Obama has already decided on an insurance mandate at the first health care summit where he gave the last word to insurance lobbyist Karen Ignagni. Then later in the book when health care reform again comes up for discussion it seems Obama has not decided on a mandate. And then Obama campaigned promising a public option. But here the problem may not be with the storyteller but with the man himself and this reader suggests this book is best seen as an imperfect study of the enigma that is our President.

After all, it doesn’t take a genius to figure out how these key players would act given their outsized egos, their personalities, and their history. Summers is a bully with highly toned rhetorical debating skills who is not embarrassed to dominate a discussion on subjects he knows nothing about. As Treasury Secretary in 1999 he was the moving force behind the Clinton administration dismantling of Glass-Steagall to allow Citibank to merge with Travelers Insurance bring Solomon and Smith Barney, two wall street investment banks into the Citi fold. He also made sure that the derivatives market would remain unregulated. These acts make Summers next only to Fed Chair Greenspan the most culpable enablers of the financial meltdown. It is equally revealing that Summers existed totally in the shadow of Bob Rubin so long as Rubin was Treasury Secretary for Clinton. Bullies know their place in the kicking order.

Geithner is a lifelong public servant who spend time in Washington and New York. At the New York Fed he was the shoe shine boy of wall street and the bankers who called him the “boy scout” behind his back. He and Bernanke together with former Goldman CEO ($750 million compensation) Hank Paulson engineered the bank rescue plan and further consolidation of finance as Wachovia, Washington Mutual, Bear Sterns, and Merill Lynch were swallowed up by the big banks. Geithner is not a public servant, he is a servant of Wall Street. It also turns out he is a tax cheat, failing to pay the IRS $34,000. Either he is cheating or he is incompetent, great choice! Incidentally, it seems Geithner’s father at the Ford foundation met Obama’s mother at least once in Indonesia. From Wikipedia;

From January 1981 to November 1984, Dunham (Barack’s mom) was the program officer for women and employment in the Ford Foundation’s Southeast Asia regional office in Jakarta. While at the Ford Foundation, she developed a model of microfinance which is now the standard in Indonesia, a country that is a world leader in micro-credit systems. Peter Geithner, father of Tim Geithner (who later became U.S. Secretary of the Treasury in her son’s administration), was head of the foundation’s Asia grant-making at that time.

Bernanke Lavishes free $14 Trillion on Wall Street

Ben Bernanke was touted as an expert on the Great Depression when he became Chairman of the Fed at the beginning of the meltdown. He was at all the merger and bailout meetings but we only now are learning the extent to which the Fed was secretly lending money to troubled institutions throughout the period. Recent Freedom of Information material acquired by Bloomberg is finally starting to shed some light on the extent of the exposure of the public in Fed lending to the banksters. The Fed has secretly loaned a peak of $1.2 Trillion to Wall Street and the banks including many European banks. Yes, public money has been loaned to European firms. That $1.2 trillion is the same total as all delinquent and foreclosed US home loans. Suskind put the figure at $3.5 trillion from 2007 to 2009. This brings the total Fed issuance to $14 trillion. If that money is used to purchase Treasuries at 3% this free money would yield the banks about $350 billion. So much for lessons on the Great Depression.

But the problem is not these characters who would be expected to act as they have. The important question is how did the President come to appoint them to positions where they could do more damage. Even Bernanke could have been replaced in 2009 when his first term ended.

President elect with Paul Volcker and Austan Goolsbee

Suskind characterized this question as Team A verses Team B. Team A, led by venerable Paul Volcker, was with Obama from the beginning of his candidacy and in-so-far as Obama’s superior knowledge of the workings and problems in the financial sector secured him election, it is thanks to Team A education and advice. On team A were Volcker, Austan Goolsbee, Robert Wolf (CEO of UBS and eyewitness of the meltdown meetings), Robert Reich, Stanley O’Neill, and William Donaldson. All expected significant rolls in the new administration, with Volcker as Treasury Secretary.

Obama Picks Team B

So how and why did Obama go with team B led by Geithner and Summers? We don’t have a clue. Byron Dorgan, Senator from North Dakota put it most eloquently; “You’ve picked the wrong people…I don’t understand how you could do this. You’ve picked the wrong people.” We voters all felt the same way. Where’s our change?

Daschle Master of Congress Left Behind

But Obama was not done yet. He needed to choose between longtime master of the senate, the low key, soft spoken, extremely tough Tom Daschle, and the brash, volatile, inexperienced, caustic, egotistical fourth ranked representative Rahm Emmanuel for his Chief of Staff, doorkeeper to the President. Tough choice right? We’ll go with the much hated in Congress Rahm. What is this man doing to himself? And even worse, Obama spent so much political capital getting Geithner appointed despite his personal tax problems that Obama loses entirely the services of Dacshle, who has a minor problem in failing to report the use of a lobbyist provide car while in Washington. Dacshle could have been confirmed before Geithner but not after. So Obama trades Dacshle for Geithner.

During this transition period, Obama is reading up on FDR who in his first hundred day in office passed the Emergency banking and Glass-Steagall acts, establishes the FDIC to insure deposits, created the Civilian Conservation Corps and the Tennessee Valley Authority. He passed the Farm Credit, Truth in Securities, and the National Recovery Acts, and others. The basis of the entire New Deal were in place within 100 days of FDR assuming office. While detractors point out that full recovery did not happen until WWII started, there was never doubt in Americans minds that the country was back on track early in 1933. Obama assumed office with no plans whatever; none; nada! So much for the legacy of FDR. And he appoints a team guaranteed to continue undermining the FDR legacy.

Two million people showed up in the freezing cold to watch the Obama inauguration and hope. Elizabeth Warren first met Obama at a campaign event in Chicago. Afterward Obama talked about being inside the bubble; “I haven’t been living in this bubble very long. I’m in it now, but not that long ago I had a real life.”

“And she (Warren) would wonder, replaying that last conversation in her head, if it was really about the bubble or the character of the man inside the bubble, and if in Chicago she had seem what she hoped to see, rather than what was really there.”

There are a lot of us wondering this same thing now.
Elizabeth Warren will not head Consumer Financial Protection Bureau

See Warren As TARP Oversight Chair Take on Geithner

You can’t run a policy based on a misdirection or a fiction. I don’t know what the president is thinking. I don’t see the president. He meets with bankers. He doesn’t meet with me. But if he’s involved in this at all, he’s got to know that his angry words at Wall Street, and their recklessness and dangerous incentives in compensation, about how they do their business in ways utterly divorced from what’s actually good for the economy – that he can’t just say that sort of thing and then just dump money in their laps and be credible. Tim and Larry’s whole plan is just like Argentina’s in the 1980s. There was this giant hole marked “Banks” and the government just dumped money in that hole, as much as they had, while they lied about it. That’s what Larry thinks, that the U.S. is Argentina.”

Elizabeth Warren, who was the driving force in establishing the Consumer Financial Protection Bureau to which Obama failed to make its first head and which was crippled at its inception by placing it in the Federal Reserve – toothless. This leads Suskind to another startling theme that links Obama, Summers, Emmanuel, and Geithner, their seeming inability to deal with women professional as equals. Suskind suggests that Summers was fired from the Presidency of Harvard not only because he suggested that women were genetically unsuited to science, but because during his tenure only four women were promoted at Harvard. Hillary, as a world recognized force of nature is the sole exception, viewed not as a woman, but as a power base. Suskind suggests that Christina Romer was given a “safe” ie. non threatening to Geithner and Summers appointment in a nod to gender equality.

Rubin Tanks Citigroup – Obama Wants to Dismantle Citi

Citigroup, under the leadership of Bob Rubin (himself now toxic in Washington) loaded up with toxic CDOs late in the game, was insolvent and ready to go under. Sheila Bair of FDIC tells the White House she is ready do an FDIC resolution of the bank, something the FDIC has been doing successfully since 1933 without a single mishap. Geithner panics because, of course, Citi is “too big to fail”, but Bair points out that at heart Citi is a bank, unlike the Wall Street firms they were dealing with in the past so of course the FDIC knows exactly how to resolve it.

The White House has been discussing the coming implosion from the start and Obama has centered on a “Japan or Sweden” theme. Japan repeatedly bailed out its financial institutions without insisting they clean up their toxic assets leading to the “lost decade” when Japan stopped growing economically. Sweden nationalized its banks, cleaned out the toxic assets, restructured and then closely moved to privatize the banks as they regained their feet. Sweden quickly recovered economically. Obama made it absolutely clear he favored Sweden.

Shiela Bair Ready to Resolve Citibank

When Bair announced her intention, Obama held a meeting at which he indicated his desire to restructure the entire banking industry. Having made his wishes known he left the meeting to have dinner with his family (dinner is more important than restructuring the financial system!) As soon as Obama leaves, Rahm says restructuring the entire industry is a non-starter because Congress will never approve the funds necessary. Note that he waits for Obama to leave before scuttling the entire plan. Obama comes back and Summers tells him they can’t afford the restructure the entire industry. Obama says, OK, we’ll start with Citi and when we show that works we can ask Congress for money for the rest of the industry. New decision, new plan. By this time Summers and Romer are in favor of the restructuring.

Geithner is terrified of restructuring Citi and has Treasury working feverishly on bank stress tests as an alternative to determine the real state of health of the industry. Industry insiders roll their eyes because the big unknown of course are the extent of toxic CDOs which are usually kept off the books to deceive investors and regulators and will not be uncovered by stress tests. Geithner simply wants to buy time and is determined to pump money to shore up confidence. He never seriously considered a resolution of citibank.

Bizarrly, Shiela Bair, government’s only expert on the resolving of banks is never consulted. Summers and Romer seem to think the ball is in Geithner’s hands but unknown to them, Geithner uses the excuse that the FDIC is too leak prone to discuss the possible restructuring of Citi. Geithner is, of course, doing nothing to plan for Citi’s restructure. When Obama asks how the plan is coming Geithner only talks about stress tests. Geithner is directly defying the express wishes and orders of his President. Nothing happens and Citi is never restructured. Bair is never brought into the loop. Welcome to Japan (or are we now Argentina) – so long Sweden. Geithner keeps his job as Treasury Secretary after monumental insubordination.

After this, Summers felt free to “re-litigate” every decision Obama thought he had made. Obama finds himself facing the same decisions over and over. More insubordination.

What is happening here is what seems increasingly to happen to Presidents, both Republican and Democratic, they are being managed by the staff that is supposed to support and implement their wishes. Only the President is elected by the people and only he has the mandate to govern. But in the modern Presidency including Clinton, W, and Obama, the staffs have taken the central policy development role and have their own constituencies. This has been true of three Treasury Secretaries to three Presidents; Rubin under Clinton, Paulson under W, and Geithner under Obama. Who do these guys work for and who do they serve? Certainly not their Presidents. The isolation is increased with a Summers who controls what the President sees and who he hears and with Rahm who arbitrarily dictates what is legislatively possible. Generally nothing is said to be possible. A President who can assemble two million citizens on the Washington Mall can pass any legislation he wants to, at least for a while. And it was Rahm’s job to figure out how to pass the President’s wishes into law, not to tell what can’t be done. Dacshle would have figured it out. So who is Obama and why has he allowed all this to happen – not happen.

Volcker reflects on Obama;

I think Obama understands everything intellectually, very easily, near as I can see. What we don’t know is whether he has the courage to follow through. He understands it, but does he feel it in the belly? I don’t know.

Volcker was vehemently oppossed to Gethner’s stress test idea because it puts the government into the position of choosing winners and losers. Finally fed up, Volcker agreed to appear before Barney Frank’s committee to give his opinion and Volcker pulled no punches. Glass-Steagall needed to be restored;

The point is not only the substantial risks inherent in capital market activities. There are deep seated, almost unmanageable, conflicts of interest with normal banking relationships – individuals, businesses, investment management clients, seeking credit, underwriting, and unbiased advisory services. I also think we have learned enough about the challenges and distractions for management posed by the risks and complexities of highly diversified activities.

Summers opined to many senior staff members in widely quoted terms;

We’re home alone. There’s no adult in charge. Clinton would never have allowed these mistakes.

Then there was the treatment of the many women on the staff. As Anita Dunn recalled;

This place would be in court for a hostile workplace…Because it actually fit all of the classic legal requirements for a genuinely hostile workplace to women.

Obama, Summers, Geithner, and Emmanuel are all implicated in creating this hostile workplace.

Early in his term Obama brings a group of Congressional leaders of both parties to the White House to discuss the budget. Out of nowhere, Obama blurts out to the Republicans present “I’m prepared to give you tort reform. What will you give me?” What does tort reform have to do with the budget? This leads one participant to think of the movie Dave, where an actor look alike is brought into the White House to impersonate a secretly comatose President.

Obama assembled a team, led by M&A banker Steven Rattner, to deal with the auto industry crisis. So it is no surprise the team approached the auto industry totally from the perspective of a financial acquisition where 17 out of 20 firms end up being liquidated. The team called saving Chrysler rather than liquidating it and collaterally destroying the suppliers and dealers as a side effort of liquidation “a close call”. No one in the room was looking out for the worker, the industry retiree, the jobs.

For the next 200 pages, Obama and the white house virtually disappear – in a book about the presidency!

The banks and Wall Street are back to normal behavior with over $35 trillion in outstanding credit default swaps by 2011. The repo (daily refinancing of off the books securities) is fully up and running. Profits are at record levels as are compensations to the top executives. Then the Goldman scandal revealed by the SEC that hedge fund manager John Paulson was creating derivatives designed to fail that Goldman could then sell to suckers, like German Banks while they purchased CDS insurance against these same CDOs, reigniting the public furor at wall street’s unethical and illegal behavior. Goldman made $3.7 billion in 2007 from Paulson’s hand crafted weapons of mass destruction. This was on top of the previous disclosure that large amounts of TARP funds had flowed through AIG directly to Goldman as 100% payment for CDS insurance claims. No haircut for Goldman!

Larry Fink $9 trillion toxic asset cover guy

Meanwhile Treasury handed off $9 trillion in toxic troubled mortgage assets to Blackrock to manage. $5.5 trillion came from Freddie and Fannie and the rest came largely from the Lehman bankrupcty and from the AIG CDs insurance payouts. Blackrock was paid $300 million a year to manage these “assets”. Suskind doesn’t pursue this but the reader thinks this means that the government and the Obama administration are the direct owners of a heck of a lot of mortgages. How many houses are still occupied? Are restructured loans being offered? Are these loans being foreclosed on? What is the state of the paperwork on these loans? Are they fragments or tiers of CDOs or can whole mortgages be reconstructed? It seems there is a potential here to do a lot of good for people and the economy. It looks like Geithner and Treasury may be sitting on this toxic stuff just like Wall Street and banks so no one has to recognize the losses entailed.

The Dodd-Frank bank reform bill passes which promises to do nothing for bank reform. Even the Volcker rule has been neutered. Deriratives, those weapons of mass destruction, may be moved to separate subsidiaries but no clearinghouse and no exchange required. Obama, who was MIA during its development publicly praises the bill.

Gary Gensler, Scourge of Wall Street

Suskind spends some time on Gary Gensler, formerely of Goldman and now chair of the obscure regulatory agency Commodities Futures Trading Commission CFTC. As a condition of his senate approval Gensler had to promise Maria Cantwell (and Bernie Sanders) that he would push for derivatives to be traded through an exchange and with a formal clearinghouse.

He meets Voightman who ran Lehman’s mortgage finance arm and asks him when he knew the mortgages were in trouble. Voightman said that by August 2005 10% of mortgagees were failing to make their first payment. But he said Goldman saw mortgage underwriting standards deteriorate in 2004 and demand for CDOs skyrocketed. Goldman quickly realized someone was needed to take the short side or “downside” to assure the liquidity of these CDOs. “Goldman did that as fast as was humanly possible, and then some.” Goldman anticipated the financial collapse in 2004!

Gensler studlied Morgan Stanley’s financials and discovers they have an $80 billion derivatives book of which $55 billion is uncovered – un-collateralized; roughly 60%. Wall Street hasn’t changed its behavior at all. Digging further he came across figures from the Basel Committee on Banking Supervision whose conclusions supported that Morgan was not alone. Goldman, JP Morgan, insurance companies, and others have an over the counter derivatives book of $400 trillion of which more than half is unsecured or un-collaterized – there is nothing in reserve when these unregulated derivatives blow up. The next financial collapse is primed and ready.

Gensler finds a former colleague is working for Senator Blanche Lincoln and works with them to develop a bill to require regulation of derivatives. Her bill passes committee. The bill fails, Lincoln attempts to attach it to other bills but it ultimately disappears. Gensler is called the most dangerous man in Washington by Wall Street, he receives death threats, one threatener is arrested, and Gensler is assigned a security detail. Wall Street plays hardball to protect their sacred compensation which largely depends on unregulated derivatives. Gensler’s initiatives missed Dodd-Frank but Gensler is still out there trying to reign in those derivatives. Obama is MIA.

Bernanke’s first term ends in 2009 and Geithner recommends that Obama retain him. Summers, who thought he had an understanding with Obama that he would be the next Fed Chairman, is furious. He acts out like a little kid, throwing tantrums, and demanding new perks if he is to stay. He fortunately decides to leave. At the end we go through the complete staff reorganization at the White House. Only Geithner remains, but alongside Bernanke, that is all Wall Street needs. Imagine Geithner’s payoff once he leaves office in five years – unless the next financial meltdown has already begun.

Don’t Prosecute Wall Street or Bank Executives

Missing from the book are some pretty significant details. Attorney General Eric Holder is mentioned once as a member of the committee to select a VP. Occupy Wall Street (and Michael Moore) wonder why there have been no arrests or prosecutions of Walls Street “banksters” for their frauds leading to the financial meltdown. The executives themselves maintain that they broke no laws, but their attorneys, as reported by Suskind, are actually advising them that their activities “would be hard to prosecute” – slightly different than not breaking any laws. The book also reports someone suggesting that a few hundred “perp” walks would do wonders to reform the behavior on Wall Street. The answer has to be that Obama or his administration has instructed Holder that there will be no prosecutions of Wall Street or the bankers, under the cover of “confidence”. This would be consistent with Summer’s and Geithner’s “do no harm” wimpy non approach to financial reform. (Just paper over the problem with money!) This is a major and key oversight for Suskind. Criminal prosecutions would have changed the entire dynamic for this wimpiest of administrations.

The SEC should have also figured in this book even if only to call attention to their lack of action. Finally (after the book is published) the SEC has announced fraud prosecution against top executives in Fannie Mae and Freddie Mac, which are both under control of the government. There is unlikely to be criminal charges coming out of this SEC action. To see how regulators are supposed to act in a financial crisis see William Black.

The environment doesn’t even get a mention in this book it is so far down the list of Obama’s priorities. We know he embraces “drill baby drill” and was only momentary delayed by the BP Gulf disaster from approving new drilling leases (including some to BP). We know he overrode the EPA to soften air control standards. We know he is delaying action of international climate change carbon emissions commitments. We know he delayed a decision on the oil sands pipeline as a political expediency to get him through the next election before he has to make a choice. The Republicans are attempting to force him into a decision before the election knowing any decision will anger some of Obama’s constituents. Wimp-in-chief.

We know Obama is secretly rebuilding the nuclear arsenal at enormous public expense. We know that Obama ordered that there would be no prosecutions of the W officials for war crimes. “Let’s Look Forward. Move on.” Obama promised to close Guantanamo, then failed to do so. Obama promised to end torture, then tortures American citizen Bradley Manning in America. Not satisfied with torture, both Obama and Biden publicly declare Manning guilty of leaking the secrets, declare him a terrorist, leaving a fair trial for Manning impossible anywhere.

Adding to this outrage, Obama becomes “Assassin-in-Chief” ordering Osama Bin Laden killed illegally by having the military violate the territory of Pakistan to shoot, extract, and then dispose of the body at sea. What happened to due process, the rule of international law, the example of Nuremberg and Japan after WWII. He then expands on this assassin persona by killing American Citizen Anwar al-Awlaki in Yemen. He also assassinated al-Awlaki’s innocent 16 year old American son. Who is this Harvard trained law professor guy?

Will the Internet Be Closed

Thursday, February 3rd, 2011

The Master Switch, Tim Wu, 2010

Here is a history of the rise and fall of information empires including telephone, radio, television, cable, film, and the Internet. It focuses on the bigger than life empire creators: Theodore Vail of the Bell telephone system, David Sarnoff of the RCA/NBC radio and television empire, Adolph Zukor of Paramount Pictures, one of the five studios comprising the movie empire, and Ted Turner of Turner cable. This history is viewed through the lens of Joseph Schumpeter’s cycle of corporate birth and death he called “Creative Destruction”. Wu argues that these empires did not crumble when a new and destructive innovation emerged but consistently exhibited the “Kronos effect” after the Greek legend of Kronos, the rule of the universe, who so worried that his children would dethrone him that he ate them.

Bell labs invented a devise to record telephone conversations in 1934 using magnetically recorded tape. This invention was so “eaten” by the Bell system that researchers only uncovered the patents in 1990. Magnetic recording which was the foundation of audio and video recording and is still the foundation of mass computer storage depend instead on German patents of a much later time.

David Sarnoff sarnoff Philo Farnsworth farnsworth Edwin Armstrong armstrong

FM radio was invented by Edwin Armstrong of Columbia University in 1934 in work funded by David Sarnoff of RCA. Sarnoff correctly recognized FM as a destructive technological advance and prevented its introduction until the 1970’s when it was carefully introduced under the full control of RCA. Armstrong killed himself in 1954.

Philo Farnsworth invented electronic cathode ray television in 1928 in the San Francisco bay area. Sarnoff sent his top scientist under the guise of consideration an investment to try to uncover the secrets of the invention. Rather than license or buy the patent, RCA labs spent years reinventing television. While Britain and Germany introduced broadcast television by 1935, the US did not see broadcast television until after WWII in 1946 all thanks to the efforts of Sarnoff. After extensive litigation, Sarnoff was forced to license Armstrong’s invention for $1 million in 1939. Sarnoff did prevent television from undermining his radio empire. In an incredible rewriting of history, Sarnoff has been widely recognized as the inventor of both FM and television.

John Baird baird

The British inventor of television, John Baird, would go on to invent high definition analog color television decades before either were introduced. For a time Baird and Armstrong teamed up in Britain but their research was destroyed in the Crystal Palace fire of 1936.

The role of government comes under scrutiny here as well particularly anti trust activity and the mostly tarnished history of the FCC which is charged with regulating communications commerce. To prevent its breakup by active anti trust activities, AT&T agreed in 1913 to divest itself of its Western Electric manufacturing arm and to become a “common carrier” a benign public utility operating in close cooperation with the government to provide universal and non discriminatory telephone service to all Americans. Thus AT&T was allowed to continue its monopoly until the 1970’s when it broke its non discriminatory vow in an attempt to kill MCI, the first real threat to its long lines monopoly. MCI built a backbone using microwave radio but needed to connect through Bell for the “last mile” connections to most customers. AT&T engaged in extensive litigation, discriminatory pricing, and finally thug tactics of damaging MCI equipment and “accidentally” dropping service connections. The Federal government finally had enough and brought anti trust action to break up AT&T in 1984 into eight regional “baby Bells” and AT&T long distance company.

Clay Whitehead Nixon’s Telecommunications Czar Breaks Up Bell whitehead

AT&T in the 1970’s had already lost the battle to prevent foreign devices from being attached to their network when the government ordered them to install standard RJ45 connecting jacks to all their phone lines. After this decision, customers were free to connect their own telephones, answering machines, facsimile machines, and data modems to their phone lines. There was an overnight explosion of equipment and services following this one simple change to the monopoly.

Today AT&T has once again consolidated itself into a near monopoly, merging five of the baby Bells into long distance AT&T. Verizon has its own long distance network and combines two East coast baby Bells. USWest merged with independent QWest to form the third regional telephone company. This new consolidation made the illegal wiretaps requested by W Bush to be implemented on a vast scale. Senator Obama voted to give AT&T and other carriers immunity from prosecution for participating in this illegal activity.

The FCC has a very tarnished record in both telephone and radio television regulation. Except for one brief moment when the FCC opened up spectrum in the early radio days, the FCC has been heavily on the side of entrenched monopolies and against innovation. They have gone out of their way to block new companies and new ideas and to make life as difficult as possible for new entrants like moving the FM spectrum for no technical reason, forcing companies and consumers to discard their old equipment and buy new. The tarnished record continues, in Wu’s view in the approval of the Comcast NBC merger and in the compromised net neutrality provisions.

Paramount’s Adolph Zukor 1929 man of the year zukor

The early Edison film trust used its patents on projectors and cameras to create a monopoly on the early production and distribution of film. But by the 1910’s independent film companies were springing up outside of New York, particularly in Hollywood where they could quickly decamp to Mexico if the trust came after them. The Edison trust emphasis on short (ten minute), cheap (no movie stars) productions quickly fell victim to the more lavish, longer films featuring stars. Five studios emerged in Hollywood and they quickly formed a cartel controlling stars, prices, and distribution. The Hollywood cartel reached its zenith when the studios acquired ownership of virtually all theaters in the hundred largest US markets. Now they could effectively prevent the screening of independent and foreign films. The only movies seem by wide audiences from 1920 through the 1950’s were studio films. Worrying about anti trust breakup, the studio imposed on themselves a bizarre code of self censorship in an attempt to convince the government their product promoted national values and morals. This strategy worked until the late 1940’s when anti trust broke up the studios, ordering them to sell their theaters. What emerged from this breakup was the film industry we have today with producers, distributors, and exhibitors (more and more self exhibits via VHS, DVD, and now Internet streaming.

Ted Turner Television Revolutionary turner

The discussion of cable focuses on the television innovations of Ted Turner (Turner Classic Movies), sports, and CNN. But also emerging are MTV, ESPN, Discovery, Weather, and other specialized cable (or satellite) only channels. But he quickly turns to the attempts at conglomeration, where media companies are combined with film companies with cable companies. He covers the disastrous merger of Time Warner with the dying AOL that destroyed most of Ted Turners fortune. But he also covers the Disney mergers and worries about the effects of an NBC Comcast merger which was completed shortly after the book’s publication.

Paul Baran Inventor of the Packet Network baran

Vinton Cerf Bob Kahn created TCP/IP using Encapsulation cerf kahn

Finally, after all this history of information empires, Wu turns his attention to the Internet with a good brief history of its origins in the ARPANET. The architects reveal that the structure of the Internet was an inevitable outcome of the problem of interconnection so many incompatible machines in the Universities and government. They had to invent and impose a standard protocol TCP/IP that all computers would need to support and implement. Used initially for messaging, it was quickly understood that any digital content could be carried from point to point via the packets and the world wide web, HTML, packet voice and video were invented. Most importantly, the system is open by its very design and architecture. Proprietary computers and products can be attached and used, but the architecture of the Internet itself remains open and free.

WU asks the question that is central to the book: Will the Internet remain free and open or will it succumb to an information empire or cartel who will close the Internet to all but approved content and application? He poses two alternate visions: Apple (closed system) and Google (open system at present).

Cable companies are merging with media giants into ever larger combines with NBC Comcast as the largest yet. Today’s cable companies offer telephone service and broadband Internet in addition to their traditional television broadcasts. To access the Internet today, consumers must have service from a telephone or a cable company. There is some talk of building wireless Internet access networks (WIFI) but beyond a handful of business locations and most motels, WIFI is not a practical way for consumers to get Internet access. Will the telephone companies and cable companies close the Internet (a la China) or leave it open?

Steve Jobs, starting with the creation of the Macintosh in the 1980’s has moved apple from an open to a closed technology company. You needed a special key to open the Macintosh case and were not invited to engineer any add ons to the computer. This was a dramatic change from the Wozniak designed Apple II which was open and its engineering details available to anyone. Jobs has continued the closed designs with ever slicker desirable products including the IPOD, the IPHONE, and now the IPAD. All start with I for Internet, but Jobs view of the Internet is very different from that of open system advocates. With the IPOD, Jobs negotiate special deals with music producers to market their products via a closed ITunes store where the user can purchase a single song to download to his computer and IPOD. The entire system is closed, proprietary, and exclusive. With the IPHONE, Jobs negotiated an exclusive deal with AT&T for two years. Now the IPHONE can be used with a second carrier, Verizon. The IPHONE includes down loadable applications which must be written to Apple specifications and must be approved by Apple and are available for download only from Apple. The latest IPOD now runs many of the IPHONE applications. The IPAD, which by all accounts is another hit for Apple is available in either an IPOD or an IPHONE version. It is an IPOD, IPHONE with a bigger display. What they all have in common as far as the Internet is concerned is that access is filtered by Apple approved applications. For Wu, this is very worrying, since Apple has a propensity to make its exclusive deals with companies having inherently closed system and monopolistic histories.

Google was created as an open system at Stanford using Stanford computing resources. Their professed philosophy of “do no evil” is reminiscent of the professions of AT&T “universal affordable telephone access” and the studio’s self censorship, and NBC and CBS emphasis on values and public service. Wu argues that search is the Internet’s “master switch”, the key to finding Internet content, and that at 65% of Internet search dominance, Google easily qualifies as a monopoly. Will Google remain the benign, neutral presenter of search results or will they evolve into something more ominous? Wu finds it encouraging that Google has not used its vast resources to create access infrastructure or to buy content. They seem content to digitize libraries, offer shared videos (Youtube) and stay away from owning content.

Apple and Google Battle of the Phones jobs schmidt

Apple and Google used to sit on one another’s boards and were quite close. When Apple showed signs of limiting Google with its approved IPHONE applications, Google countered by creating a competing and open operating system based on Linux specifically designed for mobile telephones called Android. Android is now found in a number of manufacturers phones and is being promoted openly by those manufactures as IPHONE killers. Google offers Android free of charge with the only provision that Android phones will offer unfiltered Internet access. Clearly Google is worried about monopolistic limitations on the Internet that AT&T, the cable conglomerates, and Apple may impose to limit free and unfettered access to the Internet. Google attempted to work within the constraints imposed by the Chinese government, decided this wasn’t who they were as a culture and pulled out of China. We hope, with Wu, that this remains who Google is and what they stand for. Google is today’s master switch.

Blood in the Water

Saturday, November 28th, 2009

Too Big to Fail, Andrew Ross Sorkin, 2009

This book focuses on the period from the sale of Bear Sterns to JP Morgan (JPM) in March 2008 through the climactic weekend in September 2008 that decided the fates of Lehman Brothers, Merrill Lynch, and AIG, and finishing with the nine biggest wall street firms being forced to accept TARP money in exchange for stock warrants; the unthinkable temporary nationalization of the American financial system in October 2008 by a Republican administration. Like the account of Bear Sterns collapse, this book reads like a page turning novel.

Lehman Headquarters

Unlike William Cohen’s account, this book does not give a detailed history of the central firms, or attempt a detailed explanation of the securitized mortgages, sub-prime mortgages, and credit default swaps (insurance policies) at the heart of the crisis. Instead, Sorkin argues that even Alan Greenspan, with his extensive mathematical training, was unable to grasp the new investment vehicles, so clearly the wall street executive decision makers, the risk assessors, and the ratings agencies were unable to understand the investments they were rating or making. In other words don’t even try to understand the things at the very heart of the crisis. The only clear thing is that the real estate bubble burst and everyone’s home has lost value, along with 401Ks, etc.

Thus the Quants (quantitative analysts) who invented the complex strategies and instruments that led to the collapse of LTCM in 1998, who invented hedging investment strategies universally accepted whereby big investors hedge their risky investment bets by also betting on the opposite outcome, and who invented securitized asset vehicles that carve up a bundle of individual loans or assets into different risk valued slices that can be sold separately making it almost impossible to find or value the original loan or asset, and finally to credit default swaps (CDOs) as insurance or hedge options which serve to give the appearance of low risk and allow the investor to leverage their investments even further, go largely unexamined here. Someone needs to write a book about these creative geniuses whose work nearly brought on the second great depression.

Ultimate Gambler Einhorn

Some attention is given to short sellers like noisy David Einhorn who featured large in the demise of Bear Sterns. Once Bear was gone, Einhorn immediately focused on Lehman, calling into question their accounting and asset valuations. Thus was launched the short selling that quickly drove Lehman stock into the ground. The other Wall Street firms well understood the dynamic that they would be picked off one by one by the short sellers in order of size Bear first, following by Lehman, Merrill, Morgan, and Goldman. Citicorp was not far behind. But until it was their turn as the biggest firm still standing they said little about the practice. The short sellers were not limited to those who invest solely on the basis of shorting stock, but has spread to hedge fund managers and other institutional investors who now believe it is necessary to hedge your bets by placing opposing bets in order to minimize losses. The CEOs at Bear, Lehman (Fuld) and Merrill (Thain) railed against the short sellers but the government never seriously considered stopping the practice. They played with the uptick rule which Sorkin says is easy to get around. The British, by contrast, banned short selling for 30 days at the height of the crisis.

The Losing CEOs in Denial Thain Fuld Cayne

From March to September, the heads of all remaining investment banks on wall street should have seen the writing on the wall with the collapse of Bear Sterns and sought shelter through acquisition or transformation (to a bank or bank holding company) but the CEO of each, particularly Dick Fuld of Lehman and John Thain of Merrill remained in denial of the new realities of their world. Despite repeated pressure from Paulson at Treasury to raise equity or find a buyer both dithered the months away until it was too late. The section dealing with this interval reads like the lives of the rich and infamous as we meet and follow the handful of “masters of the universe” as they go about their daily lives; the private jets, the second homes, the globe trotting, the exclusive conferences. We meet second tier executives who need $13 million a year just to support their life style. No bridge players here but several masters ski regularly at Vail. The hobby of choice is golf with one CEO getting in 13 rounds of golf a week as his company goes up in flames. (Does even Tiger ever play 13 rounds of golf in a week?)

What really strikes home is how few masters of the universe there are and getting fewer by the day. They all know one another and share career histories as they move from firm to firm or into and out of government. Typically CEOs have previously lost battles for the top spot and retain that bitterness. They share a lack of trust in one another and seldom miss the chance to exploit an opportunity at the expense of a rival. In any crisis like those of last year they gather like sharks to try to learn the inside secrets of the failing firms and see what parts they may be able to devour or steal. They are less than honest even with themselves and seldom even consider the stockholder’s interests except to the extent that they themselves hold stock. They measure themselves in terms of their total compensation and not the success of the companies they lead. More and more, their compensation is untied to stocks and they can maximize their bonuses by creative accounting right up to day they file for bankruptcy. There are so few of them and now even fewer after the events of the last year that they can sit around a small conference table. A surprising number of them were mentored by Robert Rubin as if they are all his children, even Geithner. Warren Buffet hates and distrusts them all but still willing to capitalize on an opportunity if it is sweet enough.

The Key Government Players Paulson, Bernanke, Geithner, Duggan, Cox

The unexpected exception here is Paulson, a Christian Scientist, who lives comparatively modestly with a 1200 square foot apartment in New York, who hates traveling by private jet, who likes to ride his bicycle with his wife Wendy around Rock Creek Park in Washington, and whose main indulgence seems to have been the purchase of a piece of a bird preserve island in Georgia for $30+ million. Not expectantly, Paulson is the central character in this drama.

As to the conspirator’s government Goldman, Sorkin doesn’t believe it but recognizes how many Goldman CEOs have served in government. He relates a delightful story of Secretary Paulson and the Goldman management team coincidentally in Russia at the same time arranging a secret meeting in Moscow and terrified word might leak.

New York Federal Reserve

Tim Geithner is the second central character as head of the New York Fed and who comes across as decisive but imperious, loving to order the masters of universe around like he is a school master giving exams to his pupils. The masters refer to him as the boy scout. Largely missing here is Ben Bernanke who comes across as professorial and detached, who frustrates both Geithner and Paulson for his unwillingness to use Fed powers in creative and expansive ways to deal with the unfolding crisis. Most of the climactic scenes in this book take place in the New York Fed building with one memorable scene where the emergency room with its defibrillator still hanging on the wall at the Fed is quickly converted into a conference room for the Lehman team during the fateful weekend. The irony is not missed by Lehman.

But lots is happening during the lull from March to September. Countrywide, Indymac, and Washington Mutual banks fail and are quietly taken over by the FDIC and Shiela Bair, the only woman of power in this story. Neither Geithner nor Paulson cares much for Bair but they respect her work and ultimately recruit her to help in the TARP bank takeover in October. Perhaps the most significant event of this lull is the failure and government takeover of Freddie Mac and Fannie Mae, a move engineered by Paulson, who many believe tricked congress into giving him authorization. Both Freddie and Fannie keep armies of lobbyists, are insular and arrogant, and can bring enormous pollitical pressure when given enough time. Paulson surprised everyone by instantly nationalizing both firms and firing their management in July. Had Freddie and Fannie who hold more than 50% of the countries mortgages and who freely participated in buying sub prime and mortgage backed securities failed, the entire financial system would have melted down.

And finally we get to the dramatic climax of the book, the weekend in September when a three ring circus is convened to determine the fates of Lehman, Merrill, and AIG. That’s right, all three outcomes were determined in one chaotic sleepless weekend. As we enter the weekend, it is understood that Lehman will not survive to open on Monday, it has been discovered that out of control AIG has another undiscovered $20 billion loss in a real estate investment division bringing its total immediate capital need to at least $60 billion.

Paulson has pressured Bank of America to purchase Lehman but insists that he has burned all his political capital with Bear and the takeover of Freddie and Fannie and will be unable to do a “Jimmie” (Dimond of JPM) where Treasury guaranteed $39 billion in losses for the purchase of Bear. British Barclay is also readying a bid for Lehman and neither BofA nor the British believe Paulson will not participate with a guarantee. Suddenly BofA decides that Merrill is a better fit and unknown to most participants, drops its efforts to acquire Lehman to concentrate of Merrill. Barclay finalizes a bid but at the last minute the British regulators and government refuse to allow the deal fearing the wall street contagion will spread to London (as if they were somehow insular otherwise). Out of time and out of options (how can Paulson and Treasury guarantee losses to a British company?) Lehman is forced into bankruptcy. Fuld alone loses $850 million in stock value. Barclay immediately approaches the bankruptcy judge to buy the New York trading arm (the piece they were after to begin with) and the judge agrees to sell to them to preserve the US jobs. In the meanwhile, and without government intervention or help, BofA agrees to buy Merrill. BoA comes to regret this decision as the true state of Merrill comes to light.

Geithner focuses on AIG this critical weekend and realizes that a failure and default on all its CDOs will be disastrous and collapse the financial system so he masterminds a takeover of AIG which takes place Tuesday and costs taxpayers almost $80 billion (now up to $180 billion). Paul Krugman joked that Paulson’s free market moral hazard lesson issued to Lehman had lasted all of 24 hours.

Joseph Cassano “Patient Zero”

Sorkin includes a picture of Joseph Cassano head of AIGs financial products unit intriguingly dubbed the man who crashed Wall Street. Like Ralph Cioffi of Bear, Cassano single handedly brought down AIG as his quants invented the CDO. Cassano used to brag that CDOs were so perfect AIG would never lose $1 on a CDO. The correct number is $180 billion and counting. Warren Buffet has called the CDOs weapons of mass destruction. More detail on Cassano’s activities and how it destroyed AIG would have been useful. Maybe another book? Incidentally, in a monumental miscarriage of justice, Bear Sterns’ Cioffi and sidekick Matthew Tannin were recently acquitted on charges of lying about their investments.

The book now winds down to the anticlimactic meeting in Washington where the nine largest financial institutions are forced to take government money and government participation. Did all this government intervention save us from catastrophe? Did Lehman’s bankruptcy make thing worse. Sorkin believes that the Fed and Treasury were winging it, moving from crisis to crisis and making numerous sequential and inconsistent decisions which confused the market. TARP was intended to correct this but somehow morphed from buying toxic assets to direct investment in banks. Sorkin thinks the government inconsistency rather than the Lehman bankruptcy itself exacerbated the problems in the markets. Had the government a better regulatory system in place to unwind failing wall street firms like the FDIC would the crisis have looked completely different and would the outcome have been better? One can only speculate.

So what did we learn from all this? Absolutely nothing according to Sorkin’s two page wrap up. Rather than fix some problems with regulation and orderly liquidation, Obama has moved on to other priorities. Wall street continues to focus on generating fees for themselves rather than clients. They see enormous potential profits from the collapse of the commercial real estate bubble. They are taking bigger risks than ever now that they know the government is there if they get into trouble. Even as bank holding companies, leverage is beyond belief. Egos are as big as ever. The survivors feel invulnerable. Humility is totally absent. Compensation and profits are at record levels. We eagerly await the next crisis. Too bad these two books aren’t really novels.