Editor's Note: Zach Carter is out this week, but we've compiled a rundown of the biggest economy-related stories, including the rise of foreclosure mills and why social security isn't in jeopardy. Zach will be back next Tuesday, so stay tuned!
Who needs ethics when you've got foreclosure mills?
Want to make money quickly, but don't want ethics to get in the way? Big banks are outsourcing their foreclosure duties to fraudulent law firms, known as foreclosure mills, and getting away with it. Zach Carter explains the latest get rich quick scheme for AlterNet. Foreclosure mills are ethically questionable law firms that process legal documents for foreclosures. They tend to have an emphasis on quantity, not quality. Carter writes:
Big banks are not outsourcing their foreclosure processing to shady law firms with a history of breaking the law for a quick buck. These foreclosure scammers forge documents, backdate signatures, slap families with thousands of dollars in illegal fees and even foreclosure on borrowers who haven't missed a payment.
Andy Kroll chronicles the evolution of foreclosure mills for Mother Jones. Kroll also exposes a notorious Floridian law firm founded by David J. Stern that is using every trick in the book-including backdating documents and illegally charging clients massive fees-to profit from the foreclosure crisis:
While rushing foreclosures isn't illegal, Stern's fledgling firm was promptly accused of something that is: gouging people who are trying to get out of default. In October 1998, Tallahassee attorney Claude Walker filed a class-action lawsuit involving tens of thousands of claimants, alleging that Stern had piled excessive fees on families fighting to keep their homes. (Walker, who visited Stern's offices in 1999 to collect depositions, described the place as "a big warehouse" where hordes of attorneys holed up in tiny, crowded offices "like hamsters in a cage.")
Weekly Audit: Want Economic Justice? Then It's Time To Act.
by Zach Carter, Media Consortium blogger
On Thursday, the U.S. Senate passed a financial reform package that includes a handful of important reforms, but it won't fundamentally change the relationship between banks and society. Wall Street still has a vice grip on our economy, and lawmakers still find it very difficult to stand up to bigwig financiers.
The real fight for our economy will involve future legislative battles with bankers. Winning those battles will require sweeping action by engaged citizens. The good news is, critical progressive mobilization is already happening. Public outcry helped fuel the fire for Senate reform. Rep. Barney Frank (D-MA), has said that the Wall Street reform bill he pushed through the House last year would have been much stronger in today's atmosphere of outspoken economic unrest.
Focus on the Fed
So what's good about the bill the Senate just passed? As Annie Lowrey explains for The Washington Independent, the Federal Reserve's emergency lending programs will finally be subjected to public scrutiny.
The Fed served as the U.S. government's chief bailout engine during the crisis. It injected trillions of dollars into the banking system without any oversight. We still don't know who got the vast majority of that money, or what collateral the Fed accepted in return. There are all sorts of potential scandals, ranging from sweetheart deals the Fed cut with hedge funds to the trillions of dollars in loans to megabanks with no strings attached.
Of particular interest are the "Maiden Lane vehicles"-programs the Fed devised to purchase or guarantee assets from Bear Stearns and AIG. These were explicit bailouts for individual firms. We know almost nothing about the Bear Stearns bailout, and what little we do know about the AIG bailout is unsavory to say the least- big bonuses for AIG's employees, with little or no effort to limit the impact on taxpayers.
Reconciliation
There are still a handful of important fights as the House and Senate iron out the differences between their respective versions of the bill. As I emphasize for AlterNet, a host of major issues are still on the table, including consumer protection rules and fixing the derivatives casino. These changes could be gutted entirely or dramatically strengthened during negotiations between the House and Senate.
The final bill will not dramatically alter Wall Street. As Roger Bybee explains for In These Times, the Democratic leadership has been trying to both establish meaningful reforms and simultaneously maintain its campaign finance relationship with megabanks. Republicans have almost universally attempted to block any reform altogether.
Regulators will get a handful of important new tools, including the authority to shut down complex banks on the verge of collapse, the ability to monitor derivatives and a have new set of powers to protect consumers. That's all good, but we'll still be living with too-big-to-fail behemoth banks that engage in reckless trading and exploit consumers.
Engaging activists
That means that the real business of fixing the financial system is still to come. And, as Christopher Hayes emphasizes for The Nation, that business is not going to be accomplished without serious, organized progressive activists putting pressure on political leaders to act in the public interest, rather than the interests of the corporate class.
When the country suffered a trauma that massively discredited the establishment rulers, the Democratic Party became the establishment. And progressive groups in DC, under stern White House orders not to cause trouble (don't show up at his door! he's a donor! we might nominate him for something!), descended into what one organizer calls "grotesque transactionalism" . . . . If we're going to get reform on the scale we need, bank lobbyists and members of Congress alike have to be confronted with the terrifying thought that the system from which they profit might just be run over-that 700 angry protesters might show up on their lawn.
As Hayes details, Bank of America lobbyist Gregory Baer woke up last Sunday with exactly that-- 700 protesters in his front yard. That kind of pressure gets results. It took Franklin Delano Roosevelt seven years to enact his New Deal financial reforms. Earlier in the 20th Century, it took more than a decade for public opinion to align itself with the corporate crackdowns pushed by Republican President Theodore Roosevelt. It's reasonable to expect the fight for fair finance to take more than two years, and important to fight hard for it.
The minimum reforms are already clear. Essentially, we need to bring banking back to the model that persisted from the 1930s into the 1980s-an era with no serious financial crises or bailouts. Our current financial woes stem from the systematic dismantling and deregulation of this system over the past 30 years.
State-run banks?
But we also need to learn from more recent economic experiments. As Ellen Brown notes for Yes! Magazine, the state of North Dakota has been largely insulated from much of the fallout from the financial crisis of 2008. Part of the reason for the state's relative stability lies in the fact that it operates its own bank.
North Dakota's direct supervision of one institution among the hundreds of banks that operate in the state has helped insulate it from the credit storm on Wall Street. The state has its own engine of credit, and can keep funds flowing to businesses that need it, even in the middle of a crisis.
The prospect of state-run banking may seem radical, but it isn't. It's a practical proposal based on the established, real-life success of the Bank of North Dakota. As Brown notes, five other states have legislation pending that would create their very own banks-Massachusetts, Virginia, Washington, Illinois and Michigan, while Hawaii recently approved a study to determine the usefulness of a bank run by that state.
The financial reform bill the Senate just passed was a good start, but we've got a long way to go. We're not going to get there without a committed community of progressive activists who demand that the economy serve society, not only entrenched corporate interests.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.
Last week, the U.S. Senate rejected a plan that would have broken up the nation's six largest banks firms into firms that could fail without wreaking havoc on the economy. Even though the defeat reinforces Wall Street's political dominance, there is still room for a handful of other useful reforms, like banning banks from gambling with taxpayer money and protecting consumers from banker abuses. After looting our houses, banks are now pushing for the ability to bet on movie box-office receipts, and will keep trying to financialize anything they can unless Congress acts.
Wall Street calls the shots
Writing for The Nation, John Nichols details last week's Capitol Hill damage. Today's financial oligarchy, in which a handful of bigwig bankers and their lobbyists are able to write regulations and evade rules they don't like, will still be in place after the Wall Street reform bill is passed. The lesson is clear, as Nichols notes:
Whatever the final form of federal financial services reform legislation, one thing is now certain: The biggest of the big banks will still be calling the shots.
Still worth fighting for
As I emphasize for AlterNet, Congress has made a terrible mistake here, but there is still room for reform. It took President Franklin Delano Roosevelt seven years to enact his New Deal banking laws. It took even longer to reshape public opinion of monopolies when President Theodore Roosevelt took on Corporate America in the early 1900s.
What's still worth fighting for? We have to curb the derivatives market-the multi-trillion-dollar casino that destroyed AIG. We have to impose a strong version of the Volcker Rule, which would ban banks from engaging in speculative trading for their own accounts. We have to change the way the Federal Reserve does business and force the government's most secretive bailout engine to operate in the open. And we have to establish a strong, independent Consumer Financial Protection Agency to ensure that the horrific subprime mortgage abuses are not repeated.
As Nomi Prins details for The American Prospect, the current reform bill will not effectively deal with the dangers posed by hedge funds and private equity firms-companies that partnered with banks to blow up the economy through investments in subprime mortgages. That means that whatever happens with the current bill, Congress must again take action next year to rein in other financial sector excesses.
The derivatives casino at the movies
As Nick Baumann demonstrates for Mother Jones, banks are doing everything they can to gobble up other productive elements of the economy. The economy crashed in 2008 in large part because banks had used the derivatives market to place trillions of dollars in speculative bets on the housing market. This wasn't lending, it was pure gambling: Instead of using poker chips, bankers placed their bets with derivatives. But, as Baumann emphasizes, banks are now looking to expand the sort of thing they can make derivatives gambles with. The latest proposal is to allow banks to bet on the box office success of movies. That's right, banks would be gambling on movies.
Hollywood may be shallow, but it isn't stupid. It doesn't want to see the banking industry repeat its destructive looting of the housing industry on the movie business, and is pushing hard to ban banks from betting on movies. But we can't count on every industry having a powerful lobby group to counter every assault from the banking system.
Taking stock in schools
Consider the unsettling report by Juan Gonzales of Democracy Now!. Gonzales details how big banks gamed the charter school system to score huge profits while simultaneously saddling taxpayers with massive debts that make teaching kids supremely difficult. By exploiting multiple federal tax credits, banks that invest in charter schools have been able to double their money in seven years-no small feat in the investing world-while schools have seen their rents skyrocket. One school in Albany, N.Y. saw its rent jump from $170,000 to $500,000 in a single year.
About that unemployment rate...
It's not like public schools are flush with cash right now. The $330,000 increase in rent could pay the salaries of more than a few teachers. As the recession sparked by big bank excess grinds on, even the good news is pretty hard to swallow. As David Moberg emphasizes for Working In These Times, the economy added 290,000 jobs in April, but the unemployment rate actually climbed from 9.7 percent to 9.9 percent in March. That's because the unemployment rate only counts workers who are actively seeking a job-if you want a job but haven't found one for so long that you give up, you're not technically "unemployed." All of those "new" workers are driving the official figures up.
In other words, it's still rough out there. And likely to stay rough as state governments try to deal with the lost tax revenue from plunging home values and mass layoffs. Nearly half of all unemployed people in the U.S. have been out of a job for six months or more. And while we'd be much worse off without Obama's economic stimulus package, that percentage is likely to grow this year, Moberg notes.
This is what unrestrained banking behemoths do. They book big profits and bonuses for themselves, regardless of the consequences for the rest of the economy. Congress absolutely must impose serious financial reform this year. After the November election, breaking up the banks must once again be on the agenda when Congress considers the future fate of hedge funds, private equity firms, Fannie Mae and Freddie Mac. If we don't rein in Wall Street, banks will continue to wreak havoc on our homes, our jobs and even our schools. Congress must act.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.
Last week, the Securities and Exchange Commission filed fraud charges against Goldman Sachs and underscored what most Americans have believed for some time: Wall Street has rigged the economy in its own favor, and will stop at nothing-not even outright theft-to boost its profits. What's worse, Goldman's scam could have been completely prevented by better regulations and law enforcement.
Goldman's heist
Let's be clear. "Financial fraud" means "theft." Goldman Sachs sold investors securities that were stocked with subprime mortgages and had been cherry-picked by a hedge fund manager named John Paulson. Paulson believed these mortgages were about to go bust, so he helped Goldman Sachs concoct the securities so that he could bet against them himself.
Goldman Sachs, like Paulson, also bet against the securities. But when Goldman sold the securities to investors, it didn't tell them that Paulson had devised the securities, or that he was betting on their failure. By withholding crucial information from investors, Goldman directly profited from the scam at the expense of its own clients. If ordinary citizens did what the SEC's alleges Goldman did, we'd call it stealing.
As Nick Baumann emphasizes for Mother Jones, the SEC's suit against Goldman is just the tip of the iceberg. During the savings and loan crisis of the late 1980s, literally thousands of bankers were jailed for financial fraud. Today's crisis was much larger in scope, yet the Goldman allegations are among the first serious charges of legal wrongdoing to emerge (other complaints have been filed against Regions Bank and former Countrywide CEO Angelo Mozilo). If the SEC or the FBI are doing their jobs, we should see many more of these cases.
Bust 'em up.
How do banks get away with these kinds of shenanigans and still secure epic taxpayer bailouts? It's all about their political clout, as Robert Reich notes for The American Prospect. So long as banks are so enormous that they can ruin the economy with their collapse, the institutions will always carry tremendous political clout.
Even in the case of Goldman Sachs, which is too-big-to-fail by any reasonable standard, the SEC's fraud case is being filed three years after the company's alleged offense. That's well after the company rode to safety on the Troubled Asset Relief Program, the AIG bailout and billions more in other indirect assistance-and only after multiple journalists made Goldman's offensive transactions general public knowledge.
If we don't break up the big banks, politically connected Wall Street titans will make sure they get bailed out when the next crisis hits, regardless of whatever laws we have on the books.
Fix the derivatives casino
If Congress doesn't soon pass a bill to break up behemoth banks, it will be neglecting the gravest problem in our financial system today. But several other reforms are needed if Wall Street is ever going to serve a useful economic function again.
As Nomi Prins emphasizes for AlterNet, much of the Wall Street profit machine has been divorced from the economy that the rest of us live in. These days, banks make most of their money from securities trades and derivatives deals. Their actual lending business is taking a beating. That means big banks have very little incentive to promote economic well-being for every day citizens. We need to create these incentives by banning economically essential banks from engaging in securities trades, and make sure all derivatives transactions are conducted on open, transparent exchanges, just like ordinary stocks and bonds.
Better derivatives regulations could help protect against fraud. If Goldman Sachs' sketchy subprime deal had been subject to market scrutiny on an exchange, it's very unlikely that any investor would have bought into it. Goldman Sachs almost got away with it because the deal was secretive and beyond the scope of most regulatory oversight.
Protect whistleblowers
The Goldman case also raises significant questions about the government's enforcement of existing financial fraud laws. Bradley Birkenfeld, a banker for Swiss financial giant UBS, helped the Department of Justice bring the largest tax fraud case in history against his company, which was helping rich Americans hide money from the IRS in offshore bank accounts.
For his cooperation, Birkenfeld was rewarded with a four-year prison sentence, even though nobody else at UBS-nobody-has been sentenced to prison over the scam. As Juan Gonzalez and Amy Goodman emphasize for Democracy Now!, Birkenfeld's imprisonment could have something to with who exactly is hiding money with UBS.
Gonzalez discusses an interview with Birkenfeld, in which the former banker notes that the bank had a special office to handle the accounts of "politically exposed persons"- American politicians. Moreover, the top brass at UBS includes key advisors to top politicians in both parties. This is exactly the kind of influence smuggling that breaking up the banks would help fix. UBS is a multi-trillion-dollar institution with no less than 27 U.S. subsidiaries.
But protecting Birkenfeld would accomplish still more-by jailing him, the Justice Department is actively discouraging others from coming forward, and making it more difficult for regulators to enforce the law.
Greenspan's failure
It's abundantly clear that almost every major regulatory agency charged with curtailing financial excess failed to prevent the Crash of 2008. But that failure doesn't mean that effective regulation is impossible-it only shows that the regulators in power failed. The top bank regulator in the U.S., John Dugan, was a former bank lobbyist.
As Christopher Hayes demonstrates for The Nation, former Federal Reserve Chairman Alan Greenspan has never had any interest in regulation whatsoever. After the crash, Greenspan insisted that nobody could have seen it coming. But as Hayes notes, many people did-Greenspan simply didn't listen to them. These days, Greenspan is revising his story, claiming that he did in fact see the crisis coming, but that nobody could have prevented it. That is simply not credible.
Hayes draws a useful parallel Hurricane Katrina, a problem sparked by a natural event that became a catastrophe when regulators failed to take the necessary precautions. The lesson from both Katrina and the financial crash is not that government always screws up-we have plenty of examples of government preventing floods and economic calamity. The lesson we should learn is that people who don't believe in government will never do a good job governing. As Hayes notes:
If Greenspan couldn't figure things out, that doesn't mean others can't. In fact, developing systems for doing just that is called-quite simply-progress, and Alan Greenspan continues to be one of its enemies.
That is exactly the task that now presents itself before Congress: Developing a system to prevent and constrain economic destruction wielded by Wall Street. The U.S. had a system that did exactly this for more than fifty years. For the last thrity years, it has been systematically dismantled. How well Congress lives up to that challenge will define much of our economic future for decades to come.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.
In a landmark decision last week, the Supreme Court ruled that corporations could spend unlimited funds to influence American elections, overturning a century of legal precedent. The Court's ruling in Citizens United v. FEC undermines the integrity of the U.S. government, as President Barack Obama emphasized at his State of the Union address. But the decision also deals a damaging blow to the U.S. economy by encouraging lawmakers to write economic rules that benefit specific companies at the expense of everyone else.
The editors of The Nation lay out the High Court's hubris in no uncertain terms:
The Citizens United campaign finance decision by Chief Justice John Roberts and a Supreme Court majority of conservative judicial activists is a dramatic assault on American democracy, overturning more than a century of precedent in order to give corporations the ultimate authority over elections and governing. This decision tips the balance against active citizenship and the rule of law by making it possible for the nation's most powerful economic interests to manipulate not just individual politicians and electoral contests but political discourse itself.
Citizens United and the financial crisis
How does this ruling have any bearing on the economy? Markets are not simply the product of random interactions between consumers and producers. Even under the most radical, laissez-faire economic theories, markets are defined, coordinated and policed by the government. For the economy to function at all, we need the government to define what constitutes fair play.
But over the past few decades, we've watched Congress and the executive branch rewrite those rules of the game under heavy corporate influence, creating artificial profits for a set of favored companies with very bad consequences for the broader economy.
The U.S. banking industry serves as a prime example. Since the 1980s, banks have been spending like crazy in all kinds of elections, and getting just about anything they want in return. I interviewed Harvard University Law Professor and TARP Oversight Panel Chair Elizabeth Warren for AlterNet, and she presented a concise but unsettling economic history of consumer protection law:
Thirty years ago we had laws that put some basic fairness into the consumer credit market. Over time, the large financial institutions captured the regulators who were supposed to be the cops on the beat to enforce those laws. They also pumped hundreds of millions of dollars into Washington to make sure that no new cops were put on the beat. Without good laws, the industry started selling ever-more-deceptive products, and their friendly regulators looked the other way.
The bank lobby and the AIG bailout
In Mother Jones, Corbin Hiar reveals how even a bank that engineered a massive tax fraud scheme was able to benefit from the AIG bailout. Major financial institutions convinced Congress to block any regulation of credit default swaps (CDS) all the way back in 2000. CDS contracts were essentially insurance on the value of financial assets-if the assets lost value, banks would still get paid as if they were highly profitable.
CDS insurance encouraged banks to engage in risky mortgage lending, and allowed them to book huge profits on those risky mortgages during the housing boom, even though many of those mortgages were doomed from the get-go. AIG binged so heavily on CDS that the company was on the brink of bankruptcy in the fall of 2008. But an AIG bankruptcy would have hammered the major banks who served as AIG's betting partners, most notably Goldman Sachs. Those banks would have received just pennies on the dollar from a bankrupt AIG. But under the bailout, the New York Federal Reserve paid the banks off at full value, without demanding any concessions whatsoever.
"The credit crunch was an existential threat to every over-leveraged big bank. What's most shocking about the AIG bailout ... is that these endangered banks were able to extract such a sweet deal from the government," Hiar writes. "The banks were paid the full value of all the CDS contracts they had made with AIG-including those mortgage-backed securities they had bought when it was clear the subprime market was collapsing."
The only AIG counterparty to even consider taking CDS losses was Swiss banking giant UBS, which was negotiating a separate settlement with the U.S. government over a massive tax evasion scheme. But even the tax fraudsters at UBS ultimately received full payment on their CDS exposure, and it now appears that the Swiss bank will be able to protect its wealthy tax-evading clients.
With the AIG bailout, the corporate takeover came full-circle. The banks purchased radical deregulation in Congress, and when the deregulated banks destroyed themselves, the government paid out billions to save them. The rest of the economy was ravaged by predatory lending, and taxpayers, not bankers, footed the bill for bank losses.
Redefining corruption
So the Citizens United decision will not introduce corporate influence in elections. Instead, it takes an uneven playing field and tilts it further in the favor of corporate executives. The Roberts court didn't just open the floodgates for corporate cash in U.S. elections and call it a day. It also explicitly redefined "corruption" to give corporations-and anyone else-greater leeway to financially curry favor with politicians. Heather K. Gerken details the new definition for The American Prospect:
The most important line in the decision ... was this one: "ingratiation and access ... are not corruption." For many years, the Court had gradually expanded the corruption rationale to extend beyond quid pro quo corruption (donor dollars for legislative votes). It had licensed Congress to regulate even when the threat was simply that large donors had better access to politicians or that politicians had become "too compliant with the[ir] wishes." Indeed, at times the Court went so far as to say that even the mere appearance of "undue influence" or the public's "cynical assumption that large donors call the tune" was enough to justify regulation. "Ingratiation and access," in other words, were corruption as far as the Court was concerned.
Most of us would consider the key lawmakers ensnared in the Jack Abramoff scandal as fundamentally corrupt-Abramoff flew former Republican Whip Tom DeLay of Texas to Scotland for golfing vacations in an effort to win greater leverage over DeLay's legislative agenda. The court's ruling claims that this kind of activity is not corrupt, and bars Congress from passing any laws to counteract it. As filmmaker Alex Gibney emphasizes in an interview with Amy Goodman of Democracy Now!, the court has essentially taken Tom DeLay's corporatist philosophy and made it a piece of constitutional law.
"Tom DeLay's view is, we spend more money on potato chips than we do on political campaigns. His view would be, let the money rush down like great waters,," Gibney says. "I think the court was channeling Tom DeLay when they issued their recent decision."
Why citizens need to speak out now
So what can we do about this? As GRITtv's Laura Flanders discusses in a roundtable discussion with several progressive leaders, there will be a long fight for a Constitutional Amendment to ban corporate influence in politics. Until then, as progressive strategist Mike Lux explains, citizens will have to take an aggressive stance against Corporate America as shareholders. Corporate power is exercised by a handful of executives, but the resources that support that power come from ordinary Americans who own stock in those companies, primarily through retirement plans. By demanding that the giant firms we own do not highjack our democracy with lobbying, we can limit some of the damage from the court's recent decision.
If you liked the bank bailouts, then there's plenty for you to love about the Citizens United decision. If you didn't, then it's time to speak up.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.
The AIG bailout is one of the largest redistributions of wealth from ordinary taxpayers to bigwig bankers in history, one in which current Treasury Secretary Timothy Geithner played a key role. Newly uncovered emails reveal that Treasury Secretary Timothy Geithner's New York Federal Reserve office urged AIG to conceal key information about the bailout from the Securities and Exchange Commission.
If Geithner was involved in those decisions, he could face charges of securities fraud. As John Nichols explains for The Nation, the quality of Geithner's judgment is no longer in question-we already knew he committed plenty of errors while negotiating the AIG bailout as president of the New York Federal Reserve. The question now is whether Geithner needs to be prosecuted for misleading federal regulators.
AIG bet on the housing market with credit default swaps, a new form of financial derivative that helped the company score big profits during the housing boom. But when the market tanked, the company couldn't cover its losses. AIG's housing market gambles were completed with help from some of the largest banks in the world, including Goldman Sachs, Merrill Lynch, Bank of America, and Citigroup. If AIG had filed for bankruptcy in September of that year, those banks would have been required to accept much lower payouts on those bets-as little as 10% of their face value.
Instead, when the government swooped in to save AIG, the banks ended up with amazing deals. As a chief negotiator in the AIG bailout, Geithner allowed Goldman and others to receive full payout at 100 cents on the dollar. That meant U.S. tax dollars were going to the banks with no strings attached. But Geithner refused to tell the public which banks were benefiting from the bailout for almost six months. He finally relented when the AIG bonus outrage boiled over in March.
Last week, we learned the most damaging development yet: Geithner's New York Fed urged AIG to keep the SEC in the dark about its sweetheart deals for the banks. Withholding key information from the SEC can be a criminal offense, and if Geithner was involved in the push to mislead the SEC, he must be held accountable.
For now, the Obama administration is standing by Geithner, saying that the decision to pressure AIG against cooperating with the SEC "did not rise to his level at the Fed" last Friday. But as Mike Lillis notes for The Washington Independent, that explanation strains credulity:
The federal government had recently bailed out AIG to the tune of $180 billion; AIG was funneling that cash to other (already bailed out) Wall Street giants; the New York Fed was telling AIG not to disclose those payments; and that decision didn't rise to the level of the Fed chairman?
Lately, the government hasn't had a very good record on prosecuting financial crime. Prosecutors wouldn't have uncovered a massive tax evasion scheme at Swiss banking giant UBS without the help of whistleblower Bradley Birkenfeld. And the tax fraud was indeed massive-the Justice Department believes that UBS illegally helped shield over 19,000 wealthy clients from paying taxes.
But, as Amy Goodman reveals for Democracy Now!, in return for uncovering the biggest tax fraud in history, the Justice Department has successfully pushed to have Birkenfeld jailed for more than three years. By contrast, almost everyone involved in the scam is getting off with fines, probation, or less. What signal do you think this sends to other potential whistleblowers?
The housing boom encouraged banks to pour money into speculative investments outside the traditional mortgage market, especially by making loans to property developers to build high-end condominiums. When the housing bubble burst, it became clear that there were far more fancy condos than anybody wanted. Today, most economists expect the loans that financed these developments to prove nearly worthless.
As Alyssa Katz details for The American Prospect, scores of those buildings are now nearly vacant in New York City alone. In order to create these useless towers, developers cleared the land by forcing out tenants in affordable housing complexes, and shut down productive businesses. If these spaces are to be used productively-say, for affordable rental housing-banks and developers need to acknowledge that their market has tanked, accept their losses and move on.
Instead, Katz notes, federal regulators are letting banks apply very optimistic accounting values to these commercial real estate projects. This accounting creates illusory short-term profits for banks and eliminates incentives to let the land go to socially useful enterprises. If regulators don't force banks to get serious about their commercial real estate losses, the government will effectively be subsidizing a rash of useless eyesores, allowing neighborhoods to decay in the process.
Subprime shenanigans from AIG, UBS and other banks helped tank the global economy. We're still feeling the job fallout from a financial crisis that banks triggered over two years ago. Last week, the government reported that the economy lost 85,000 jobs in December, while the unemployment rate held even at 10%. David Moberg explains why we desperately need the Senate to approve a robust jobs bill in a blog for Working In These Times. A $174 billion package passed the House last month, but it's a pittance compared to what the government has pledged to save Wall Street.
So how did we get here-saving the crooked jerks who created the mess while leaving everyone else out to dry? Kevin Drum's story in Mother Jones on the bank lobby offers critical insight into the operations of the U.S. democratic process, and also stands up as one of a handful of investigative journalism masterpieces that have stemmed from the financial crisis. In the last dozen years, elite financiers have secured government approval to shoulder greater risks and pay bigger bonuses, despite a series of near-catastrophic financial market failures. Drum details the financial industry's pervasive influence over lawmakers in Congress, key policymakers at the Federal Reserve and federal regulators in other agencies, influence often purchased outright with campaign contributions and massive lobbying efforts.
These days, the money still talks in American government. But the true economic coup is not financial. It's ideological: Bankers have convinced leaders of both political parties that what's good for Wall Street is always good for America, even if the cost of boosting the bottom line involves dismantling productive firms, ravaging neighborhoods with foreclosures or scamming poor people with massive overdraft fees.
"...There's more to the finance lobby than just money and political influence," Drum writes. "Their real power lies in the fact that they've so thoroughly changed our collective attitude toward financial regulation that sometimes they barely need to lobby in the traditional sense at all."
This is precisely how we got stuck with banker apologists like Geithner, a Justice Department that punishes whistleblowers while letting corporate crooks go free, and why we're allowing neighborhoods to rot away for no reason. We have to demand more from our government, regardless of which party is in power. If we don't, we'll get stuck with the same save-Wall-Street-first policies forever, regardless of the consequences for society.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.
The Treasury Department claimed earlier today that the latest scandal surrounding Tim Geithner's sweetheart deals to AIG doesn't matter, because AIG is on track to pay back the loan. Even if it were true, that response is still highly offensive, because it assumes that a few billion dollars of Fed money--rather than, say, a crashed economy and government collusion to protect the people who crashed the economy--is all that made people upset about the bailouts.
But what's more, the Treasury Department's claim that AIG will pay back the full loan is completely false. The New York Fed forgave $25 billion of the loan to take an ownership stake in AIG that meant no actual control. From a letter Representative Alan Grayson sent to Ben Bernanke:
The New York Fed's entire loan was $25 billion. On top of low interest payments, no limits on executive pay, and other sweetheart deals, the New York Fed allowed AIG to be forgiven for 30% of the entire loan for utterly meaningless concessions in return. So, even though the Treasury Department's response to the latest scandal would have been offensive even if it were true, it isn't true at all.
Oh, and here are some more results of Geithner's decision to allow AIG to regulate itself. Most of the bonuses AIG execs promised to give back in order to avoid legislative action were not actually given back (hat-tip reader JD):
When word spread earlier this year that American International Group had paid more than $165 million in retention bonuses at the division that had precipitated the company's downfall, outrage erupted, with employees getting death threats and President Obama urging that every legal avenue be pursued to block the payments.
New York Attorney General Andrew M. Cuomo threatened to publicize the recipients' names, prompting executives at AIG Financial Products to hastily agree to return about $45 million in bonuses by the end of the year.
But as the final days of 2009 tick away, a majority of that money remains unpaid. Only about $19 million has been given back, according to a report by the special inspector general for the government's bailout program.
I am angry about this not just as someone who finds the policies involved abhorrent, and not just as someone who has taken a really big hit because of the Great Recession. I am pissed about all of this as a Democrat. Watching the Obama administration and center-right Democrats in Congress continue to collude with the financial services industry is sickening (even apart from the bailout, check out the outcomes of the mortgage reform, student loan reform, and financial regulation fights). They are pissing away our generational opportunity to really help people, and seriously imperiling the Democratic Party at the ballot box in the process.
As Natasha reminded me earlier today, we worked as hard as we could to put these people in charge, and these are the results we are getting. It turns my stomach. What a waste.
The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer's payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.
AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008.
That is bad enough. The Treasury Department's offensive response to these revelations shows just how clueless and pro-Wall Street they actually are (emphasis mine):
The Treasury's response this morning is, essentially, no harm no foul. Meg Reilly, a Treasury spokeswoman, released a statement: "In the transaction at the heart of this dispute... the FRBNY made a loan of $25 billion which is on track to be paid back in full with interest so that taxpayers will be made whole. Somehow that fact that the government's loan is 'above water' gets lost in all the consternation despite its mention on page 2 of the SIG-TARP report (and weekly updates on the FRBNY's web site."
Here is my response to this response, which is hardly the first of its kind around the nation: fuck you. Made whole? Seriously, fuck you. And then fuck you again.
Geithner and the Treasury Department seem to think that the only thing Americans care about in this deal is that AIG pays back their loans. What they care about is that the economy was crashed by people like AIG. What they care about is that these fuckers are not only not being punished for fucking millions of people, but that they are getting deals from the federal government that preserve their bonuses and offer them interest rates no individual American could ever receive.
Tens of millions of Americans are facing crushing debt payments because interest rates on the loans they received are so high. They are losing their jobs. They are losing their homes. They would love to get the kind of help that people like AIG got. Loans with little or no interest would be fantastic. Loans like that could actually be repaid by Americans facing crippling mortgage, college, credit card and other debts.
However, the only people getting deals with loans large enough, and at low enough interest rates, and with direct-possibly illegal--assistance from the government, are the same fuckers who crashed the economy. Those people are being helped by the government. Everyone else is still suffering. It reeks of an unholy alliance between big business and big government designed to frock over everyone else.
Made whole? Fuck you. You just don't fucking get it at all.
Last week, President Barack Obama released key legislation designed to fight the banking industry's too-big-to-fail problem. But Obama's plan doesn't actually address too-big-to-fail at all. It reinforces a broken system in which economically dangerous companies are bailed out whenever they drive themselves to the brink of failure.
If we want the economy to support all people, we have to break up the big banks and start treating the creation of good jobs as an economic priority on par with Wall Street rescues.
The editors of The Nation break the political debate over banking into three camps:
The first camp is composed of bank lobbyists, Republicans and conservative Democrats and wants to do nothing.
Camp two, endorsed by the White House and influential Rep. Barney Frank (D-MA), would impose tougher regulations on too-big-to-fail banks to keep them from getting out of control.
The third camp wants to go even further: If a bank is too-big-to-fail, it is also too-big-to-regulate. Companies that pose a danger to the economy have to be split up into smaller firms that cannot induce economic ruin.
The Nation editors rightly see the third strategy as the most sensible. While the "break-up-the-banks" policy is being portrayed as a left-wing pipe dream by cable news networks, the policy actually relies on an age-old observation of conservative economists. Regulators make mistakes, and they often get co-opted by the very industries they are supposed to be supervising.
The practical policy is to impose structural limits on what activities banks can participate in and how big they can get. Just look at the list of high-profile supporters: former Federal Reserve Chairman Paul Volcker, former Citigroup Chairman John Reed, Bank of England Governor Mervyn King. I don't remember seeing any of those guys at the Iraq War protests.
Many of the regulatory blind spots that brought down the economy were obvious to some policymakers for years. Back in 1994, Sen. Byron Dorgan (D-ND) wrote an article for The Washington Monthly warning that derivatives trading was putting the economy in grave danger. Commodities Futures Trading Commission Chair Brooksley Born tried to take action on these derivatives, but was overruled by other regulators, including then-Fed Chair Alan Greenspan, and then-Treasury Secretary Lawrence Summers, now the top economic adviser to President Obama. Summers and Greenspan even convinced Congress to pass a law banning the regulation of key derivatives, including credit default swaps, which ultimately brought down insurance giant AIG.
Fifteen years after Dorgan's article first ran, The Washington Monthly is featuring it again, along with a recent speech by Dorgan that details massive failures in Wall Street and Washington.
"We had regulators come to town in recent years and willfully boasted that they wanted to be blind as regulators," Dorgan says.
There are good elements of Obama's plan to deal with too-big-to-fail. It gives policymakers the option of putting a too-big-to-fail institution through a special bankruptcy process administered by the executive branch, thus avoiding the problems created in bankruptcy court when Lehman Brothers failed. But the bad part is really bad: Officials would also have the option to provide unlimited bailouts to Big Finance via loans, guarantees and even asset purchases.
As Mike Lillis notes for The Washington Independent, some responsible Democrats like Rep. Brad Sherman (D-CA) have been objecting to this aspect of the legislation for months. Sherman, in fact, calls it "TARP on steroids," noting that the bank bailout at least came with some meager oversight and a limit on the program's actual size.
The bank lobby is spending money like mad to maintain their stranglehold on the economy. Neither Congress or the administration will change course without intense public pressure. So it was very reassuring last week to see thousands of people protesting the annual meeting of top bank lobby group, the American Bankers Association. David Moberg chronicles the protest in a blog post for Working In These Times that covers speeches by both key union leaders and ordinary people facing foreclosure after watching their tax dollars go to the very bankers who wrecked the economy.
"There was broad agreement on anger at the banks for providing so little, if any, public benefit for the massive bail-out, and for so quickly returning to the greed and abuse that precipitated the crisis," Moberg writes.
Laura Flanders covers the protests for GRITtv, including video of protesters chanting "Bust up big banks!" In a roundtable discussion with Christina Clausen of the United Food & Commercial Workers Union, George Goehl of National People's Action and Rob Robertson of the Right To The City Alliance, Rolling Stone journalist Matt Taibbi explains the overriding impotence of the regulations Congress is about to approve. Regulators will not be able to crack down on abusive derivatives, a full 8,000 of 8,200 banks will be exempt from Consumer Financial Protection Agency oversight, while the same agencies that screwed up heading into this crisis will be charged with preventing the next one.
"They've had sweeping powers to do whatever they wanted," Taibbi says. "They've had this regulatory power all along."
What we need are good jobs, and lots of them. Obama's economic stimulus package has made tangible economic progress. It's saved hundreds of thousands of jobs, and is clearly responsible for the turnaround in gross domestic product (GDP) we saw in the third quarter. But a full 17% of the workforce remains unable to find full-time work, as Julianne Malveux explains for The Progressive.
When Wall Street crashed in 1929 and unleashed the Great Depression, the government eventually stepped in as an employer-of-last-resort. The Works Progress Administration (WPA) and Civilian Conservation Corps (CCC). built schools, parks, roads and bridges which still serve our communities today. Both the WPA and the CCC employed literally millions of people-in the 1930s. It's a model that could work very well today.
As the current recession makes clear, ending too-big-to-fail and guaranteeing a good job for everyone in our society who wants one are the two most critical structural reforms our economy needs. Don't let lawmakers forget it.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.
by Zach Carter, Media Consortium MediaWire Blogger
Now that Treasury Secretary Timothy Geithner isn't going to impose pay restrictions on bailed out Wall Street executives, it's critical to remember that severe economic inequality was a major factor in the financial meltdown. Our tax code funnels money into the hands of our wealthiest citizens, which means that our financial system protects the interests of the affluent—not the the average citizen. The broad divergence between our core democratic values and the existing U.S. economic structure must become part of the public debate over financial reform.
Climate, health care, financial re-regulation - there's a lot of heavy lifts for the Obama administration these days.
Some reports suggest that another big endeavor is being considered. Last week, new U.S. Trade Representative Ron Kirk announced that he wants to move Bush’s leftover NAFTA-style Panama Free Trade Agreement (FTA) through Congress “as expeditiously as possible.” In his first major policy speech, USTR Kirk contradicted President Obama’s specific and frequent calls for a change of course on our failed trade policy and an end to the tax loopholes that promote job offshoring.
As my colleague Lori Wallach said, "The last time a new Democratic president took on a Bush trade agreement despised by his base, the result was the destruction of the political momentum and honeymoon he needed to pass health care reform and the defeat of the Democratic majority in the next midterm election."
This deal is being pushed by financial firms like Citigroup and AIG, who have subsidiaries in Panama and who can evade U.S. taxes by parking their income there.
The trade deal does nothing to resolve Panama's tax-haven status, and could even make it worse by giving corporations new tools to challenge U.S. anti-tax haven policy.
The nitty gritty on the trade deal and Panama's tax dodging is detailed in this 50-page report my group Public Citizen just put out... the much shorter conclusion summarizes the report, and what can be done to fix the deal and Panama's tax-haven problems.
Some of the largest U.S. banks may be on the ropes these days, but the disparity between the plight of financial executives and ordinary Americans has never been starker. Over the past two decades, the banking system has grown accustomed to scoring massive profits by preying on its own customers, making 2009's transition to pilfering taxpayer wallets an easy one. After burying the economy under a mountain of unaffordable debt, bank CEOs are now finding ways to subsidize their own paychecks with taxpayer bailout funds.
Suzanne Garment leads us to think that Populist anger is a dangerous irrational public reaction, which must be controlled; asserting that "the president's job is not to express populist anger, but to address the anger and talk sense to it."
She also compares the modern anger with the post-Civil War populism that disenfranchised African-Americans in the South.
by Zach Carter, Media Consortium MediaWire Blogger
With new bailout plans for Wall Street being unveiled almost every week, it's easy to forget that nearly all of the work that fuels our economy takes place outside of Manhattan. While reviving the financial sector is an important part of recovery, any lasting economic solution must also empower American workers and protect them from corporate abuses.
You probably never wondered how much an American soldier gets paid for active duty on a forward base in Afghanistan or Iraq, and I'm not going to try tell you, because the military pay scale is so complicated and variable between reservists and national guard and regular army of various ranks and seniorities that by the time we went through all the many qualifications, it wouldn't make much sense anyway.
But there's one element in the military pay scale that's so simple anyone can understand it: "imminent danger pay," a bonus only for soldiers exposed to enemy fire on a regular basis.
And how much of a bonus does the US government pay soldiers in some God-forsaken forward base in Afghanistan, exposed to sniper-fire 24/7, shitting in a hole in the hard ground, with no electricity or running water?
$225 per month.
And meanwhile back home the families of reservists are losing the little that they have when one income of a two-income family is reduced again and again to the Army pay-scale, for three or four tours of no-choice stop-loss duty in Iraq or Afghanistan.
Maybe one fine day Rush Limbaugh could take a few minutes off from explaining how so many CEO's deserve their multi-hundred-million-dollar bonuses, and explain instead...
How many minutes would it take for the average executive at AIG to earn $225?
STATE BLOGS
