EXAMPLES OF CORRUPT CORPORATE BEHAVIOR Part 3

Here are three recent examples of corrupt corporate behavior in the financial industry, where corruption is persistent and seems to know no bounds. The exposure of corruption and its triggering of the 2008 financial crash doesn’t seem to have changed anything. It seems that every week there’s another report of serious corruption in the financial industry. Here are three examples that show the depth and breadth of that corruption: one of long-term systemic corruption at a major bank, one of a specific example of corruption from a different major bank, and one from a small, relatively new member of the industry. (This previous post highlighted three other examples of corporate corruption, two from the pharmaceutical industry and one from the financial industry.)

Example #1: Deutsche Bank has fallen from the second largest bank in the world in 2008 to the 21st largest in 2020 due to a wide range of corrupt behavior that finally caught up with it. It postponed its financial collapse and shrinkage by overvaluing its assets, among other fraudulent accounting strategies. Its history of corruption is meticulously detailed in the book, Dark Towers. [1] In 2018, its long-time involvement in tax evasion and money laundering for wealthy individuals resulted in police raiding its Frankfurt, Germany, headquarters. This wasn’t the first time this had happened. In 2012, hundreds of government police had raided its office to gather evidence in a different tax evasion scheme that involved permits for carbon dioxide emissions.

Since 2012, Deutsche Bank has paid over $15 billion in settlements for illegal activities. As-of 2016, it was involved in over 7,000 legal cases and had set aside over $5 billion for the potential impact of those cases. It was a major contributor to the 2008 financial crash, which led to its payment in 2017 of over $7 billion in settlements for fraud in its sales of mortgage-backed securities. In 2015, it agreed to pay a fine of $2.5 billion for manipulating international interest rates, pleading guilty to fraud and agreeing to fire 29 employees who had been involved. (Not a single individual was charged with a crime, however.) In 2017, it was fined over $600 million for money laundering that moved over $10 billion of suspicious money out of Russia. In 2018, it agreed to pay $75 million to settle charges of improperly handling U.S. transactions involving foreign securities.

Deutsche Bank is or has been investigated for numerous other corrupt behaviors including manipulating foreign currency exchange rates and violating international sanctions by engaging in over $10 billion of illegal financial transaction with Iran, Syria, Libya, Sudan, and other sanctioned countries. Some of these transactions involved funding for terrorism and drug trafficking. It is under investigation for participating in a criminal cartel in Australia, $150 billion of money laundering with a Danish bank, and a multi-billion fraud scheme with a Malaysian development fund. And by the way, it has engaged in illegal spying on its critics. Its corruption goes back at least to the 1930s when it cooperated with the Nazis and funded their activities, which it tried to hide for many years thereafter.

Example #2: Goldman Sachs, the fifth largest U.S. bank, has agreed to pay $3 billion to regulators in multiple countries for a massive bribery scheme that stole hundreds of millions of dollars from the Malaysian government. Goldman Sachs took in $593 million in unusually large fees for its role in the underlying transactions. Although two of its executives have been indicted (a partner and a managing director) and its Malaysian subsidiary has pleaded guilty to bribery, many have criticized the settlement as not being a meaningful punishment both because of the scale of the criminal activity and the dollar amount of the settlement, which is less than 3 months of profits. Furthermore, Goldman Sachs has only partially cooperated with the investigation, delayed providing crucial information, and failed to self-report illegal activity that it knew about and is required by law to report. [2] By the way, this will bring the fines it has paid out since 1998 to over $10 billion. [3]

Example #3: Robinhood Financial LLC, a 2015 start-up that provides a smart phone app for buying and selling stocks, has agreed to pay a $65 million penalty to the federal Securities and Exchange Commission for misleading customers and costing them an estimated $34 million. Robinhood advertised no commission trades, however, it generated revenue by executing customers’ trades through companies that paid it fees for the trades. It failed to disclose this to its customers. It had an incentive to select companies that paid it the most for those trades even if customers got worse prices on the stocks they were buying. Nonetheless, Robinhood claimed the quality of its execution of its customers’ trades was as good or better than its rivals. [4] In addition to this federal settlement, Massachusetts regulators are pursuing a complaint against Robinhood for violating state securities laws by not providing accurate information to customers. The complaint also states Robinhood’s website has had several outages that have prevented customers from trading during important periods when stock prices were shifting significantly. [5]

To put financial industry corruption in a larger perspective, often federal cases of financial misbehavior, as in the Deutsche Bank and Goldman Sachs cases above, result in the financial corporations signing a Deferred Prosecution Agreement (DPA). This requires the corporation to pay a fine and agree to a period of probation (during which it promises not to repeat its bad behavior), but usually the corporation and its executives avoid criminal prosecution. However, there are multiple examples of money laundering cases against big banks where the corporations had already signed DPAs in previous money laundering cases, repeated their bad behavior, and received the same lenient treatment all over again. As a result, the big financial corporations appear to view fines for corrupt behavior as a routine cost of doing business. [6]

The persistence of corruption in the financial industry makes clear the need for stronger steps to deter future illegal behavior. Stronger government regulation and significant financial and criminal punishments for the corporations (e.g., truly significant fines and, ultimately, revocation of their corporate charters, putting them out of business) and for their executives (e.g., jail time and personal fines) are needed. The industry and its supporters among our elected officials have fought back hard and largely successfully against efforts to strengthen regulation and consumer protection in the wake of the 2008 financial collapse, so not only is there much work to do but, in addition, it will be a tough fight.

[1]      Enrich, D., 2020, “Dark Towers,” HarperCollins Publishers, NY, NY.

[2]      Woodman, S., 11/2/20, “Goldman Sachs 1MDB settlement: a meaningful punishment for major financial crimes?” International Consortium of Investigative Journalists (https://www.icij.org/inside-icij/2020/11/goldman-sachs-1mdb-settlement-a-meaningful-punishment-for-major-financial-crimes/)

[3]      Collins, C., 11/30/20, “Petulant plutocrat of the week,” Inequality.org weekly blog post from the Institute for Policy Studies (https://inequality.org/wp-content/uploads/2020/11/inequality-newsletter-november-30-2020.html)

[4]      Michaels, D., & Osipovich, A., 12/17/20, “Robinhood Financial to pay $65 million to settle SEC probe,” The Wall Street Journal

[5]      Denham, H., 12/18/20, “Robinhood agrees to $65m penalty to resolve SEC charges,” The Boston Globe from the Washington Post

[6]      Woodman, S., 11/2/20, see above

EXAMPLES OF CORRUPT CORPORATE BEHAVIOR Part 2

Here are three recent examples of corrupt corporate behavior. They show the breadth of greed-driven corporate corruption from seriously harming public health to illegal market manipulation to criminal money laundering. (This previous post highlighted three other examples.)

Example #1: As one of the most egregious cases of corporate corruption moves toward an end, Purdue Pharma (the maker and incredibly corrupt promoter of the addictive, opioid pain killer OxyContin) has pleaded guilty to criminal charges. It has admitted to:

  • Impeding the Drug Enforcement Agency (DEA) in its efforts to stem the crisis of opioid addiction,
  • Failing to have effective procedures to prevent diversion of prescription OxyContin to the black market while assuring the DEA that it did,
  • Lying to the DEA to get approval to produce greater amounts of OxyContin, and
  • Paying kickbacks to doctors and engaging in other illegal schemes to get doctors to increase their prescribing of OxyContin.

These guilty pleas were part of a settlement of criminal and civil charges with the federal Department of Justice that will require the company to pay $8.3 billion in penalties and forfeitures over a number of years. The majority of this money will go to state, local, and tribal governments to pay for treatment and prevention of opioid addiction. Over the last 20 years, the opioid crisis has contributed to over 470,000 deaths in the U.S. and it appears to be getting worse during the coronavirus pandemic. [1] The $8.3 billion amount, if calculated on a per death basis, values each death at less than $18,000, without including any calculation of the harm to those who have or are suffering from OxyContin-related drug abuse but have, so far, survived.

Attorneys general of about half of the states are opposing the settlement, asking for harsher penalties for the company and particularly for the members of the Sackler family who owned and controlled Purdue. Under current settlement provisions, the very wealthy Sackler family will pay only $225 million to settle civil charges. No criminal charges have been filed against them, although that is still a possibility. (Here’s a previous post with more details about Purdue.)

Example #2: Teva Pharmaceutical has been charged by the U.S. Department of Justice with conspiring to fix prices and manipulate the market for generic drugs. The criminal charges allege that these actions resulted in at least $350 million in overcharges over a 3 ½ year period. Five other generic drug makers that were also part of this investigation have pleaded guilty and have agreed to pay a total of $426 million to settle the charges against them. Teva and these other companies are also facing civil lawsuits by states’ attorneys general and others. [2]

Teva fills 10% of the generic drug prescriptions in the U.S. and a criminal conviction could lead to it being banned from doing business with Medicare and Medicaid. A conviction would also weaken its defense against the civil lawsuits.

Example #3: At least $100 billion a year of cash flows through U.S. banks that is abetting tax dodging, fraud, corruption, or money laundering for drug dealers, terrorists, and other unsavory individuals and entities. Banks are required to file Suspicious Activity Reports for transactions that may involve criminal activity. Typically, these reports are not public but over 2,000 of them were recently leaked and they identified over 18,000 suspicious transactions between 1999 and 2017. And this may just be the tip of the iceberg. Banks report these suspicious transactions but go ahead and process them (instead of blocking them) because they earn significant fees on them. Almost half of the suspicious money flowed through Deutsche Bank’s U.S. subsidiary, but just about every prominent U.S. bank was involved. [3]

Exacerbating the problem is the fact that often the corporations that conduct these cash transfers are created and registered in states, notably Delaware, or offshore tax havens (e.g., Cayman Islands and the Virgin Islands) where disclosure of the true owner(s) of the corporation (those who will benefit from its activities) is not required. This combination of corrupt banks, weak banking regulations, and lax corporate registration requirements has led to the U.S. being one of the preferred global destinations for tainted money.

One of the frequent activities of these shell companies (i.e., companies with unidentified owners and no purpose other than to facilitate anonymous movement of cash) is to purchase high-end real estate. A large portion of luxury real estate in Boston and Seattle, for example, is purchased by shell companies, often with cash (i.e., no mortgage loan). Experiments with temporary local transparency rules, such as requiring the disclosure of the true owners on cash real estate transactions of over $1 million, has resulted in declines in such transactions of 70% to 95%. Legislation has been introduced in Congress to require full disclosure of the beneficial owner(s) of all corporations but it is not making any progress.

Clearly, to prevent corrupt corporate behavior, the U.S. needs stronger regulation of corporations, from its biggest banks to drug companies to shell corporations. Without it, greed runs wild and corrupt U.S. corporations will aid and abet drug dealing, terrorism, and harm to the health and financial well-being of mainstream Americans. These corrupt activities also, of course, result in the rich in getting richer at the expense of everyday Americans.

[1]      Mulvihill, G., 11/25/20, “OxyContin maker Purdue pleads guilty to criminal charges,” The Boston Globe from the Associated Press

[2]      Griffin, R., 8/27/20, “Teva fights US claims of price fixing,” The Boston Globe from Bloomberg News

[3]      Collins, C., 9/21/20, “FinCen files shine spotlight on suspicious bank transfers,” Common Dreams (https://www.commondreams.org/views/2020/09/21/fincen-files-shine-spotlight-suspicious-bank-transfers)

HOW THE RICH GET RICHER Part 1

I’m planning on doing a series of, hopefully, short posts (although this one’s on the long side) with anecdotes on how the rich get richer, often at the expense of the rest of us. Here’s the first installment with three examples.

Example #1: At least 18 large companies have given executives large payouts just before filing for bankruptcy. These companies have laid off tens of thousands of workers but gave a collective $135 million to executives just before filing for bankruptcy. Bankruptcy attorneys note that the payouts were timed to skirt a 2005 law intended to prevent executives from prospering as their companies failed. The intent was to ban payouts that unfairly enrich the executives who drove their companies into bankruptcy. Such huge payouts are particularly egregious during an economic crisis when employees of the companies are suffering severe hardships. [1]

Example #2: Some members of Congress and some Trump administration supporters, who were privy to private early briefings on the seriousness of the coronavirus, made investment decisions that appear to have  been based on this non-public, inside information. Under the Stock Act of 2012, members of Congress are barred from using non-public information they get as a member of Congress to buy or sell personal stock holdings. However, at least four members of Congress made significant stock transactions in late February just before the stock market crashed. The private briefings they received on the potential seriousness of a pandemic would be considered insider information because this information was not available to the public. Moreover, at that time, the public information from the Trump administration and from an Op-Ed written by Senator Burr was reassuring the public that the U.S. was well prepared for a pandemic and had the coronavirus under control.

Senator Burr of North Carolina, as chair of the Senate Intelligence Committee, had received multiple briefings on the seriousness of the coronavirus. On February 13, 2020, less than a week after publishing his upbeat Op-Ed, he sold 33 stocks worth over $600 thousand (and perhaps as much as $1.7 million) in several industries likely to be hard hit by a pandemic. Senator Kelly Loeffler of Georgia made 29 stock transactions in late February, including buying over $100,000 worth of a company providing software tools for working remotely. Senator Inhofe of Oklahoma sold up to $750,000 worth of stock and Senator Dianne Feinstein of California sold millions of dollars of stocks. All four Senators have denied doing anything illegal. Senator Burr’s brother-in-law also sold significant stock holdings on the same day as the Senator. Providing investment tips to others based on inside information is illegal. [2]

On February 24 and 25, at a private meeting of the conservative Hoover Institution’s board, senior members of Trump’s economic team expressed uncertainty about how the coronavirus would affect the economy. However, on these same days, President Trump and the same economic advisers were saying publicly that the coronavirus was under control and that the economy and the stock market looked good. The president’s advisers appear to have been giving an early warning to wealthy party donors that contradicted their public statements. A hedge fund consultant, William Callanan, who is a Hoover board member and attended the meeting, circulated a memo about this to a hedge fund founder and others that gave them the ability to make investment decisions based on this non-public information. [3] This would appear to be illegal insider trading facilitated by the Trump administration’s private briefings.

Example #3: Insiders at companies developing COVID vaccines and treatments have been selling their companies’ stock and making millions of dollars. Insiders, including executives and board members, at a dozen of these companies have sold more than $1.3 billion in company stock since March 2020 when the seriousness of COVID became evident. In the same period last year, insiders at these companies sold just $74 million of stock, less than 6% of 2020 sales. Over $1.1 billion of these stock sales occurred at just three companies – Moderna, Regeneron Pharmaceuticals, and Vaxart. In particular, the chief medical officer (CMO) at Moderna is systematically liquidating all his stock, including stock obtained by exercising stock options granted to him, through planned weekly trades that are making him $1 million a week. Moderna’s chief executive officer (CEO) has sold nearly $58 million in stock, although he still retains substantial company stock.

Insiders are not allowed to sell company stock based on insider information, but can legally sell company stock under plans that schedule the stock sales in advance. However, these plans are relatively easy to change on short notice, which can make them at least appear to be an end run around illegal insider trading. Moderna’s CMO modified his plan on March 13 and its CEO did so on May 21 shortly after the company announced positive preliminary results from its vaccine development. Insiders have an incentive to exaggerate and hype good news while downplaying possible challenges or uncertainties in order to inflate their company’s stock price and increase their personal profit from sales of company stock. Vaxart is being sued by shareholders for misleading them while a hedge fund with ties to a board member was selling hundreds of millions of dollars of company stock.

This insider stock selling at companies working on COVID responses is particularly concerning because many of these companies have received substantial funding from the federal government under Operation Warp Speed, the government’s initiative to accelerate development of a COVID vaccine. Moderna is receiving $1 billion to support the clinical trial of a possible vaccine and has been promised another $1.5 billion to manufacture and distribute a successful vaccine. Taxpayers are paying for the risky up-front investments while executives and shareholders are (already) reaping the financial benefits even though no vaccine has yet completed testing. [4]

These last two examples indicate that selling (and buying) stocks based on non-public information is not uncommon. Some of it is clearly illegal but enforcement is sometimes difficult or lax and some of it either isn’t illegal or has been given a gloss of legality by allowing company insiders to engaged in scheduled stock sales.

In any case, it appears that the Trump Administration and federal government regulations have effectively institutionalized insider trading. Those investing in the stock market without insider connections should stand forewarned.

[1]      Washington Post, 10/28/20, “Failing firms’ executives got millions,” The Boston Globe

[2]      Burns, K., & Millhiser, I., 5/14/20, “Sen. Richard Burr and the coronavirus insider trading scandal, explained,” Vox (https://www.vox.com/policy-and-politics/2020/5/14/21258560/senator-richard-burr-coronavirus-insider-trading-scandal-explained)

[3]      Kelly, K., & Mazzetti, M., 10/15/20, “As virus spread early on, briefings from Trump administration fueled sell-off,” The Boston Globe from The New York Times

[4]      Wallack, T., 10/24/20, “Drug company insiders are profiting handsomely from the world’s desperate hope for a COVID-19 vaccine,” The Boston Globe

THE REST OF THE POST OFFICE STORY Part 2

The scandalous behavior of Louis DeJoy, the Trump administration’s new Postmaster General for the U.S. Postal Service (USPS), has gotten quite a bit of attention in the mainstream media, but there’s more to the story than they have been reporting. This post and my previous post present at least some of the rest of the story. (My previous post described DeJoy’s Friday night massacre of personnel and the role of Treasury Secretary Mnuchin, who obtained sweeping operational control over the USPS and unprecedented access to its information through negotiation of a $10 billion line of credit for the USPS from the Treasury. [1] [2] )

Despite the current characterization of the USPS has operating at a loss, the postal service wasn’t viewed as a profit-making business by our country’s founders or throughout most of its history. Moreover, Congress has put requirements and restrictions on it that mean it can’t be run like a business.

The USPS is a public good that supports our democracy, a civil society, and other economic activity, as roads and schools do; it shouldn’t be run like a business to make a profit. We don’t expect the military or the National Park Service to generate a profit, so why should we expect the USPS to generate a profit? Our country’s founders thought of the postal service as critical to ensuring that citizens of the new democracy were well informed and therefore believed it should, among other things, subsidize delivery of newspapers. According to the Postal Policy Act of 1958, the USPS provides an essential public service that promotes “social, cultural, intellectual, and commercial intercourse among the people of the United States”. The Act also states that the USPS is “clearly not a business enterprise conducted for profit.” [3]

However, in 1970, as the era of deregulation and privatization began under President Nixon, the Postal Reorganization Act made the USPS an independent federal agency (instead of a Cabinet agency like the Departments of Education or Defense) and required it to cover its costs. Nonetheless, the law limited the USPS’s ability to increase prices for its services, expected it to deliver mail to every household and business in America six days a week, and required it to keep postal rates the same across the whole country despite substantial differences in the costs of delivering mail in different areas. [4]

Since then, Republicans have been trying to privatize the USPS because it represents a large revenue stream, $71 billion a year, that they would like to see go to their friends and campaign contributors in the private sector. One strategy for doing this has been to undermine the USPS and make it look bad, to make it look like it’s poorly run, and to make it look like it’s operating at a deficit, in order to build an argument that privatizing it would make sense.

In 2006, in what many observers felt was an effort to make the USPS look financially unstable and therefore ripe for privatization, the Postal Accountability and Enforcement Act (PAEA) was passed. It required the USPS to pre-fund retiree health benefits far into the future, which no other federal agency or private business is required to do. Specifically, it required the USPS to pay $5 billion to $6 billion a year into a retiree health benefit fund from 2007 to 2017. This has made the USPS appear to be running a deficit, when, without these payments, the USPS would have reported operating surpluses from 2013 through 2018. [5]

The current slowing of mail service is just another tactic in the effort to make the USPS look bad. The resultant inability to deliver ballots or medicines in a timely fashion, not only makes it look bad, but also undermines its revenue because mailers and shippers are shifting their business to competing, private service providers. For example, the slowdown is forcing the Veterans’ Administration to use private shipping services to get medicines to patients in a timely fashion and Amazon is building up its in-house delivery capacity and its fleet of vehicles.

The USPS is prohibited by law from branching out into new business lines that could boost its revenue and its services to the public. Offering basic banking services is one example, for which there is historical precedent. From 1911 to 1967, the USPS offered savings accounts. In 1967, the Postal Savings System was terminated at the behest of private bankers who did not want its competition. Today, money orders are the only financial service offered by the USPS. [6]

Postal banking is now receiving renewed attention because there are sizable poor urban and rural areas where bank branches are scarce. In addition, private banks have a track record of charging high interest rates and fees to low-income account holders, as well as failing to provide equitable treatment in access to credit and other financial services. As a result, 9 million U.S. households are effectively excluded from banking services and are described as “unbanked”.

The payday lending business has emerged to fill this gap and has grown into a $90 billion business. However, its usurious interest rates and fees, and its business model of locking customers into a cycle of debt that it’s often difficult to escape from, have led to a search for more consumer-friendly alternatives. In 2014, the USPS’s Inspector General noted that the USPS could make profitable loans at a much lower costs to consumers than what payday lenders were and are providing.

In the presidential primaries, a number of the Democratic candidates proposed allowing the USPS to offer basic banking services and Senator Biden, the Democratic nominee for President, supports this policy proposal. It would make basic banking services more accessible and affordable, particularly for low-income households.

In the face of this revived interest in postal banking, which would help the finances of the USPS and benefit the public, Postmaster General DeJoy and Treasury Secretary Mnuchin have reportedly engaged in discussions with megabank JPMorgan Chase (JPMC) about putting its ATMs in post offices and giving JPMC the exclusive right to solicit banking business from postal customers. This is clearly a backdoor effort to eliminate the possibility of postal banking – competition private sector bankers and payday lenders vehemently oppose. (So much for the private sector’s belief in a free market and competition!) Moreover, this doesn’t address the issue of unbanked people because if they don’t have a bank account, they can’t use the ATM. JPMC has a particularly troubling track record in this regard as it has historically failed to provide branch services in low-income, minority, or immigrant neighborhoods. [7]

A postal banking system would provide free usage of Treasury Direct Express cards and other government payment services. This would have streamlined and simplified the distribution of the pandemic emergency relief funds to low-income households who badly needed the $1,200 but didn’t have bank accounts to which the money could be electronically transmitted. Furthermore, the privacy of users’ information would be much better protected by the USPS, which could only collect limited user information and is barred from sharing it. A private bank, on the other hand, will collect as much information as it possibly can and will use it, share it, and sell it for commercial, profit-making purposes.

Mnuchin and DeJoy are engaged in sabotage of the USPS, plain and simple. They want to discredit it as a public agency, undermine its union workers, and shift its revenue to private companies (namely their friends and campaign contributors).

My next post will review policy changes that would strengthen the USPS and better serve the public.

[1]      Dayen, D., 8/18/20, “Treasury’s role in postal sabotage,” The American Prospect (https://prospect.org/blogs/tap/treasurys-role-in-the-postal-sabotage)

[2]      Queally, J., 8/8/20, “ ‘Friday night massacre’ at US Postal Service as Postmaster General – a major Trump donor – ousts top officials,” Common Dreams (https://www.commondreams.org/news/2020/08/07/friday-night-massacre-us-postal-service-postmaster-general-major-trump-donor-ousts)

[3]      Editorial, 8/21/20, “The US postal service lost $0,” The Boston Globe

[4]      Morrissey, M., 8/11/20, “Trump’s war on the Postal Service helps corporate rivals at the expense of working families,” Economic Policy Institute (https://www.epi.org/blog/trumps-war-on-the-postal-service-helps-corporate-rivals-at-the-expense-of-working-families)

[5]      McCarthy, B., 4/15/20, “Widespread Facebook post blames 2006 law for US Postal Service’s financial woes,” PolitiFact, The Poynter Institute (https://www.politifact.com/factchecks/2020/apr/15/afl-cio/widespread-facebook-post-blames-2006-law-us-postal)

[6]      Shaw, C. W., 7/21/20, “Postal banking is making a comeback. Here’s how to ensure it becomes a reality.” The Washington Post (https://www.washingtonpost.com/outlook/2020/07/21/postal-banking-is-making-comeback-heres-how-ensure-it-becomes-reality/)

[7]      Carrillo, R., 8/30/20, “Postal banking: Brought to you by JPMorgan Chase?” Inequality.org (https://inequality.org/research/postal-banking-jpmorgan/)

PERSONNEL IS POLICY AND LARRY SUMMERS IS A DISASTER Part 2

As Senator Elizabeth Warren has stated on numerous occasions, “Personnel is policy.” The people who implement policies are the ones who ultimately determine what the policy is; their actions are more important than their or anyone else’s words.

Larry Summers is a classic example of this. My last post summarized his resume and his disastrous performance in President Clinton’s Treasury Department. It also noted that he is currently a senior adviser to Senator Joe Biden’s presidential campaign and that he may well aspire to a senior post under Biden if he is elected president. [1] Here are some additional reasons Biden needs to reject Summers and his policies.

After serving as Treasury Secretary under President Clinton, Summers returned to Harvard as its president in 2001 after George W. Bush won the 2000 presidential election. At Harvard he:

  • Alienated faculty members by denigrating many of them, including the whole sociology department,
  • Questioned the scholarship of Cornel West (a high-profile black professor),
  • Also questioned the ability of women to succeed in math and the sciences, and
  • Commandeered investment decision making, despite Harvard’s well-paid and highly successful money managers. Summers’ investment mistakes cost Harvard roughly $1.8 billion and had serious effects on its budget. [2]

As a result of all of this, and after a no-confidence vote by the faculty, Summers resigned as Harvard’s president in 2006. In 2008, before returning to the government, Summers earned $600,000 as a Harvard “University Professor”, $5.2 million from the private equity firm D.E. Shaw, and $2.7 million from speaking fees, largely from financial corporations. Clearly, Wall St. was the butter on his bread.

In 2009, Summers returned to the federal government as head of the President Obama’s Economic Council. As the Obama administration formulated its response to the Great Recession from the 2008 financial collapse (for which Summers bears significant responsibility), he pushed to reduce the size of the economic stimulus, to minimize the support for state and local governments, and for the budget deficit to be kept as small as possible. As a result, the recovery was slowed and high unemployment persisted. Summers promised substantial spending to provide foreclosure relief for homeowners and a reform of bankruptcy laws so that underwater homeowners could reduce the principal on their mortgages. However, he did not deliver on this rhetoric and seemed much more focused on rescuing the banks than homeowners. He also opposed a financial transaction tax, which would have generated needed revenue and curbed short-term trading that can destabilize financial markets, even though in 1989 he had co-authored an academic article arguing for such a tax. [3]

To summarize, no single person bears more responsibility than Larry Summers for Democrats’ support for Wall St. deregulation, outsourcing of jobs to foreign countries, fiscal austerity at home and abroad (even in the face of recessions and economic hardship for the masses), and privatization of public assets and responsibilities both in the U.S.  and internationally. [4] Summers’ consistent policy prescription has been to apply free market theory (which benefits his cronies in the financial industry, wealthy individuals, and large multi-national corporations), even when this was inappropriate for the situation. Other economists and policy makers raised concerns about Summers’ policies, but he persisted even after they led to disaster after disaster.

For example, Summers’ catastrophic policy decisions or miscalculations led to:

  • The 2008 financial collapse whose key triggers were his blocking of regulations on the financial industry and of all regulation of derivatives,
  • The slow recovery and enduring high levels of unemployment from the 2008 Great Recession due to his prioritizing of support for financial corporations while minimizing support for homeowners, workers, and the economy as a whole, and
  • Hyper-inflation, economic hardship for workers, and the discrediting of democracy as an effective form of government in Russia and Third World countries due to his policies demanding rapid privatization and free marketization.

Although Summers’ rhetoric has turned more progressive lately as he jockeys for a role in the Biden campaign and in the government if Biden wins, he has denounced wealth tax proposals from Senators Warren and Sanders in the presidential campaign, which are supported by many progressives. Moreover, his actions speak louder than his words and he has consistently supported deregulation and policies that benefit wealthy individuals and corporations – including his own work in the financial industry.

If you believe that:

  • Economic inequality is a problem that the U.S. needs to address,
  • The financial industry should be regulated so it doesn’t crash our economy again and again,
  • Consumers should be protected from dangerous, predatory financial products,
  • The world should be protected from destructive free market privatization and speculation, and
  • Workers should be protected from trade treaties that benefit large multi-national corporations and drive a race to the bottom for workers,

then Larry Summers is NOT your man – and he shouldn’t be Biden’s man either. Personnel is policy and if Summers is influential in Biden’s campaign or administration these issues will NOT be tackled through any significant policy initiatives.

I encourage you to keep an eye out for Summers and his policies. If they appear to be gaining traction with Biden or his administration if he’s elected, please be ready to object.

[1]      Kuttner, R., 8/7/20, “Did Summers jump, or was he pushed?” The American Prospect (https://prospect.org/blogs/tap/did-larry-summers-jump-or-was-he-pushed/)

[2]      Kuttner, R., 7/13/20, “Falling upward: The surprising survival of Larry Summers,” The American Prospect (https://prospect.org/economy/falling-upward-larry-summers/)

[3]      Kuttner, R., 7/13/20, see above

[4]      Dayen, D., 5/13/20, “Dr. Jekyll, or Mr. Biden?” The American Prospect (https://prospect.org/politics/dr-jekyll-or-mr-biden/)

PERSONNEL IS POLICY AND LARRY SUMMERS IS A DISASTER

As Sen. Elizabeth Warren has stated on numerous occasions, “Personnel is policy.” Platforms, policy statements, and rhetoric are nice, but the people who are in charge of implementing policies are more influential. In judging personnel, as well as candidates or elected officials, past actions are more important than words.

There is perhaps no better example of this than Larry Summers, who is a senior adviser to Sen. Joe Biden’s presidential campaign. Everyone seems to agree that he is brilliant, politically nimble (or some might say shifty), and a consummate bureaucratic infighter. He is known for his boundless self-confidence and his vindictive retribution against those who oppose or expose him. He is well-connected, particularly to powerful Wall St. elites, and has numerous proteges who are or have been in powerful positions in government and the financial industry.

Summers recently announced that he would not take a job in a Biden administration. This was likely due to the strong resistance to him from progressives, which may have led Biden to decide that Summers should not be part of his administration. Nonetheless, Summers is still likely to be, either directly or through this proteges, an informal and potentially influential adviser to Biden. Summers is also known to covet the job as Chair of the Federal Reserve, a position he previously tried to get. Because it is technically not in the Biden administration but is a presidential appointment at the independent Federal Reserve, this position may not be ruled out by his statement. So, Summers, his influence and his potential to play a major role in a government entity, cannot be ignored. [1]

As background, his resume includes:

  • Harvard economics professor (1983-1991)
  • Chief Economist and Vice President of Development Economics at the World Bank (1991-1993)
  • S. Treasury Department (1993 – 2001 under President Clinton) as Undersecretary for international affairs (1993-1995), Deputy Secretary (1995-1999), and Treasury Secretary (1999-2001)
  • President of Harvard University (2001-2006); faculty member (2006-2008)
  • Simultaneously, Managing Director, D.E. Shaw (private equity firm) and highly paid speaker, typically for Wall St. firms (2006-2008)
  • Director, National Economic Council (2009-2010 under President Obama)
  • Harvard faculty member (2011 – current)
  • Simultaneously, Managing Director, D.E. Shaw (private equity firm) (2011 – current)

In his time at the U.S. Treasury, Summers pressured the former Soviet Union and Third World countries to rapidly adopt free market economies and privatize public assets. These efforts repeatedly proved to be disastrous. Financial crises in Russia, Mexico, and East Asia were the result. Typically, inflation soared, workers’ wages fell, government services were cut, oligarchs became rich and powerful, and in Russia, Putin took dictatorial power after the supposed transition to democracy was a total disaster and democratic governance was completely discredited. [2]

As Summers was driving U.S. Russia policy, his close friend and Harvard colleague, Andrei Shleifer, got a government contract and engaged in insider trading based on it. Shleifer headed up a Harvard-based project in Moscow that was the lead contractor for USAID in helping with Russia’s economic transition. According to federal prosecutors, Shleifer and his wife were making investments based on insider information they got through the USAID project. The case was finally settled in 2004, when Summers was president of Harvard, and Harvard paid a $26.5 million settlement and Shleifer paid $2 million but retained his tenured professorship at Harvard. This was one of the issues that led to Summers departure as Harvard’s president.

Summers also promoted trade agreements that benefited Wall St. financial businesses and large, multi-national corporations, at the expense of American workers. For example, he advocated for admitting China to the World Trade Organization and promoted the North American Free Trade Agreement (NAFTA). He also opposed reviving enforcement of antitrust laws, despite the clear growth in size and market power of huge corporations, and ignored the need to address climate change.

Summers aggressively opposed regulation of derivatives (financial instruments / investments based on or derived from other financial instruments such as mortgage-backed securities, options to buy or sell securities, credit default swaps, etc.). Through his efforts and those of his cronies regulation of derivatives by the federal government was banned by the Commodity Futures Modernization Act of 2000. It also banned states from regulating them.

Predatory lending practices (where borrowers had a high risk of default) proliferated under Summers’ deregulation of financial markets. “The interaction of predatory subprime lending with unregulated and opaque derivatives such as credit default swaps was the single most important cause of the 2008 financial collapse.” (page 23) [3]

Summers returned to Harvard as President in 2001 after George W. Bush won the 2000 presidential election. My next post will present a summary of his performance at Harvard and his return to government under President Obama.

[1]      Kuttner, R., 8/7/20, “Did Summers jump, or was he pushed?” The American Prospect (https://prospect.org/blogs/tap/did-larry-summers-jump-or-was-he-pushed/)

[2]      Kuttner, R., 7/13/20, “Falling upward: The surprising survival of Larry Summers,” The American Prospect (https://prospect.org/economy/falling-upward-larry-summers/)

[3]      Kuttner, R., 7/13/20, see above

RACISM IN HOUSING HAS BEEN EXPLICIT GOVERNMENT POLICY

The murder of George Floyd, a black man, by a white police officer kneeling on his neck for nine minutes (while three other officers facilitated the killing) has brought the racism of U.S. society to the forefront. The attention to racism has gone beyond this specific episode and has included the underlying, long-term racism of policies, practices, and funding of federal, state, and local governments. (See my previous post for more background.)

Throughout U.S. society, a powerful element of racism is discrimination in housing and the segregation that it has produced. The conventional wisdom in the U.S., including in legal circles and the courts, is that racial housing segregation is de facto, i.e., the result of private practices and personal preferences and not the result of government policies and laws. This belief has led courts to declare that governments have no responsibility to address segregation and its negative effects, other than perhaps in our public schools.

The truth is that housing segregation is clearly the result of government policies and practices throughout the last 140 years, including ones that persist to this day. The legal term for effects that are direct or intentional results of actions is de jure. Therefore, racial housing desegregation in the U.S. is de jure. If legally acknowledged as such, it is a violation of our Constitution, specifically the Fifth, Thirteenth, and Fifteenth Amendments, and of the Bill of Rights. Acknowledgement of this would mean that our governments have an obligation to respond to housing segregation and the harm that it has caused. The definitive case for this is made by Richard Rothstein in his book The Color of Law: A forgotten history of how our government segregated America. [1]

The Color of Law describes in detail the government policies and practices at the local, state, and federal levels that promoted and enforced racial segregation in housing, and even forced the segregation of communities that had been integrated. Some of this dates from the late 1800s and some still exists today. Furthermore, many discriminatory private policies and practices have been supported by the action (or inaction) of government entities, such as the police, the courts, and various government agencies and regulators.

I apologize for the length of this post, but I felt it was important to give a good sense of the breadth and depth of the government policies and practices behind the racism in housing. Skim by reading the bolded portions if your time is limited. Policies and practices that contributed to housing segregation include:

  • In the late 1800s, Jim Crow laws and explicit, enforced segregation became the way of life in the South after the 1878 removal of federal troops that had been protecting blacks and implementing Reconstruction. The discrimination and segregation of the South proceeded to spread throughout the country. For example, in the early 1900s, blacks were systematically expelled from Montana, where they had previously thrived. In 1890, there were blacks in all 56 counties in Montana. By 1930, there were none in eleven counties and few left in the others. In the state capital of Helena, there were 420 blacks in 1910, but only 131 in 1930 and 45 in 1970.
  • Beginning in 1910 and continuing to today, zoning restrictions have been widely and intentionally used to segregate housing, sometimes explicitly and sometimes by banning multiple family housing or requiring large lot sizes (which make property very expensive). These latter types of zoning laws exist quite widely today. In 1910, Baltimore was the first city to adopt an explicitly segregationist zoning law. It prohibited blacks from buying homes on blocks where whites were the majority and vice versa. Implementing the zoning ordinance proved difficult because many areas of the city were quite integrated at the time. West Palm Beach adopted a racial zoning ordinance in 1929 and maintained it until 1960. Kansas City and Norfolk, VA, maintained racist zoning practices until at least 1987. Racist zoning ordinances effectively prevented blacks from moving to the suburbs and, in many cases, effectively prevented them from buying homes, forcing them to rent their homes.
  • In the 1920s, restrictions written into in home ownership deeds prohibiting the selling of a home to a black person spread throughout the country and in some cases persisted into the 1970s. Governments at the local, state, and federal levels promoted and enforced these restrictive covenants. State courts upheld them. In 1948, the U.S. Supreme Court ruled that these covenants were private agreements and therefore not unconstitutional. However, it ruled that they represented discrimination that was illegal for the government to be a party to. Therefore, the power and resources of the government, including law enforcement and the courts, should not be used to enforce them. Shockingly, the FHA and other federal agencies, in complicity with state and local governments, effectively ignored this Supreme Court ruling for at least another decade. It wasn’t until 1972 that a federal court ruled that these covenants were illegal as a violation of the Fair Housing Act of 1968.
  • In the 1930s, the Federal Housing Authority (FHA) was created to promote home ownership, including by insuring home mortgage loans. Mortgage loans were newly available to middle class borrowers and insurance against default by the borrower made banks much more willing to make these loans. This insurance was, for all practical purposes, required by banks for mortgage loans. However, the FHA generally refused to insure mortgage loans for blacks, and definitely would not do so if the home being purchased was in a white neighborhood. Furthermore, the FHA would not insure a mortgage for a white person if the home was in a neighborhood where blacks were present. The FHA explicitly stated in its Underwriting Manual that segregated neighborhoods were preferable because segregated schools made neighborhoods more stable and desirable. (See pages 65 – 66 in The Color of Law.)
  • Up until 1962, the FHA also supported financing for developers building whites-only subdivisions in suburbia. It wasn’t until 1962, when President Kennedy issued an executive order banning the use of federal funds to support racial discrimination in housing, that the FHA stopped supporting subdivisions by developers who refused to sell homes to blacks.
  • As mortgage loans proliferated in the 1930s, federal bank regulators allowed banks to deny mortgages to blacks, as well as to whites buying in an integrated neighborhood. State regulated insurance companies that issued mortgages had similar policies. Federal bank regulators also allowed banks to “redline” areas and refuse to make mortgage loans for the purchase of any home within those areas, which were typically neighborhoods where blacks lived. This practice continued at least into the 1980s.
  • Starting in the 1940s, public housing was built. Initially, it was primarily for working- and lower-middle-class white families and was not heavily subsidized. In the late 1940s, as whites increasingly purchased homes in the suburbs and public housing became more available to blacks, most public housing was explicitly segregated until the 1970s and developments for whites were typically better built and built in nicer areas. By the 1960s, urban public housing had mostly poor, black residents and, by government policy, was built almost exclusively in black neighborhoods.
  • In the late 1940s, black World War II veterans were denied the government-guaranteed mortgages for purchasing homes that white veterans used in great numbers to buy suburban homes.
  • Beginning in the late 1940s, violence against blacks trying to move into white neighborhoods was not uncommon. However, law enforcement at the local, state, and federal levels rarely responded to these incidents until the 1980s. The proportion of these incidents where charges were filed against perpetrators grew from only 25% in 1985-6 to 75% in 1990, when roughly 100 such incidents occurred.
  • Numerous studies in the 1960s and 1970s found that blacks paid higher effective property tax rates on their homes than whites. This was typically accomplished by assessing black-owned properties at a high value compared to market value, while white-owned properties were assessed at a low comparative value. A 1973 study of ten cities by the U.S. Department of Housing and Urban Development found systematic under-assessment in white middle-class neighborhoods and over-assessment in black neighborhoods. In Baltimore, it found an effective property tax rate 9 times higher for blacks than for whites; in Philadelphia it was 6 times higher and in Chicago it was twice as high. A 1979 analysis of Chicago property taxes found the effective rate for blacks to be 6 times that for whites.
  • In the early 2000s, federal bank regulators failed to stop banks from providing subprime mortgages disproportionately to black customers – at two to three times the rate of white customers. Subprime mortgages were mortgage loans with onerous provisions or deceptive presentation that made it likely that the borrower would be unable to meet the terms the loan. Defaults on these subprime mortgages were a key factor in the 2008 financial collapse and the resultant foreclosures represented a huge loss of wealth for blacks in the U.S. Moreover, many of the blacks who received these predatory, subprime mortgages qualified for regular mortgages but were steered to these subprime mortgages typically because the mortgage broker made more money on them.

These policies, and others, both reinforced racially segregated housing where it existed and imposed segregation in places where it hadn’t previously existed. “In 1973, the U.S. Civil Rights Commission concluded that the ‘housing industry, aided and abetted by the Government, must bear the primary responsibility for the legacy of segregated housing. … Government and private industry came together to create a system of residential segregation.’” (page 75)

My next post will summarize effects on black people of housing and other discrimination that are evident today. I’ll also ask you to share your thoughts on how we should address racism in the U.S.

[1]      Rothstein, R., 2017, The Color of Law: A forgotten history of how our government segregated America, W. W. Norton & Co., Inc., NY, NY.

THE CONSUMER FINANCIAL PROTECTION BUREAU IS NEEDED TO PROTECT US FROM PREDATORY LENDING

The 2008 financial crash was triggered by predatory mortgage loans. As a result, the Consumer Financial Protection Bureau (CFPB) was created to protect consumers from dangerous financial products. There’s a Consumer Product Safety Commission to protect us from dangerous physical products, but prior to the creation of the CFPB, there wasn’t an agency dedicated to protecting consumers from dangerous financial products, such as predatory mortgages and other predatory loans.

Predatory loans are loans where the lender isn’t concerned about the borrower’s ability to repay the loan. In many cases, the lender is just as happy – and may benefit financially – if the borrower defaults on the loan. Predatory lenders usually target people who are desperate for cash or dying to purchase a home, a car, or a consumer product they can’t afford. The loans typically charge very high interest rates, as well as high fees for obtaining the loan and big penalties for failing to meet the terms of the loan, such as being late on a loan payment.

Unethical, deceptive, and/or blatantly fraudulent practices are almost inevitably part of predatory lending. These practices include lying to consumers about the interest rate, fees and other charges, or future payments. Borrowers are often convinced to accept unfair terms through deceptive, coercive, or unscrupulous statements and actions. A predatory lender may add costs for insurance or other services that the borrower doesn’t need or benefit from by presenting them deceptively or as a requirement for the loan.

Predatory lenders routinely target the poor, minorities, the elderly, people with low levels of education, those who don’t understand English well, and people who don’t understand loans or finances well.

Predatory lending is what free market capitalism looks like without regulation. It occurs across the financial industry when good regulation and enforcement aren’t in place, from student loans to car loans and from mortgage loans to payday loans.

Predatory lending is the bread and butter of much of the financial industry as it is a source of big profits. Therefore, the financial industry has fought hard against the CFPB and its efforts to regulate lending since the day the CFPB was conceived.

As a specific example, the predatory lending industry fought a CFPB rule known as the payday lending rule. Promulgated under the Obama administration, it required lenders to assess customers’ ability to repay their loans. This was unwelcome, to say the least, in an industry that makes huge sums of money by charging high fees when customers miss a loan payment (as the lender often expected they would) and then rolling the loan over into a new loan so they can repeat this process over and over. [1]

The predatory lending industry bought access to and influence in the Trump administration by making millions of dollars of contributions to Trump’s campaign and engaging in heavy lobbying. Trump replaced the Obama-appointed Director of the CFPB with a person who is much friendlier to the financial industry.

In addition to an industry-friendly Director, Trump further undermined the work of the CFPB by appointing Christopher Mufarrige as an “attorney-advisor” to the Director. Mufarrige had been the owner of a car dealership that used the “Buy Here Pay Here” model of selling used cars, which provides on-the-spot loans to buyers with poor credit ratings. The loans carry high interest rates and Mufarrige was quick to repossess the car if there was a default, i.e., a late payment. Then, he would sell the same car again and do the same deal all over again.

Mufarrige’s business was covered by the CFPB’s payday lending rule that required a lender to assess each borrower’s ability to repay. Mufarrige had stated that this rule was flawed and unnecessary. Nationwide, Buy Here Pay Here model car dealers were making $80 billion in loans annually and an investigation by the New Jersey Attorney General found that roughly one-quarter of their customers default on their loans.

Mufarrige and other political appointees at the CFPB used false statistics and manipulated evidence to claim there was no value to the requirement to assess a borrower’s ability to repay. This allowed the CFPB to justify proposing watered-down regulation of the payday lending industry that does not require it to assess customers’ ability to repay their loans.

Another example of the need for CFPB regulation of predatory financiers is Progressive Leasing, LLC, (a subsidiary of Aaron’s Inc.), which has as its mission “to provide convenient access to simple and affordable purchase options for credit challenged consumers.” It offers rent-to-own programs through major retailers at over 30,000 stores (including Best Buy, Lowe’s, Big Lots, and Kay Jewelers). In effect, its programs are predatory loans to consumers who can’t afford to pay for their purchases up-front.

Progressive Leasing, LLC, has just settled with the Federal Trade Commission (FTC) for the second time in three months over complaints that it uses deceptive practices. It leads customers to believe they are not being charged extra for financing their purchase. In reality, many customers end up paying more than double the sticker price of the item they purchased. In its training materials, Progressive Leasing instructs retail sales staff to say there isn’t an interest rate associated with the rent-to-own program because it is not a loan. They don’t inform customers of the fees and other charges that are part of the program. [2]

In April, Progressive Leasing paid $175 million to settle claims that it misled consumers after having paid another $175 million in February to settle claims about its disclosure practices. Despite tens of thousands of customer complaints, Progressive Leasing had continued to use the same practices. One FTC Commissioner said the most recent penalty did not go far enough, noting that customers had paid Progressive Leasing more than $1 billion in undisclosed fees and charges.

The Consumer Financial Protection Bureau is badly needed to protect consumers from the greed and unethical behavior of unrestrained lenders. Capitalism without regulation will prey on all of us when we are most in need of financial assistance. The financial industry has shown time and again that without good regulation and enforcement it will ruin people’s lives and our nation’s economy.

I urge you to contact your U.S. Representative and your Senators and ask them to support and protect the integrity of the Consumer Financial Protection Bureau. Encourage them to advocate for strong regulation and enforcement of responsible behavior in the financial industry.

You can find contact information for your US Representative at  http://www.house.gov/representatives/find/ and for your US Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

[1]      Dayen, D., 5/4/20, “CFPB appointee who helped water down payday lending rule operated a high-cost auto lender,” The American Prospect (https://prospect.org/power/cfpb-appointee-helped-water-down-payday-lending-rule/)

[2]      Bhattarai, A., 4/21/20, “Leasing company agrees to pay $175m,” The Boston Globe from the Washington Post

VULTURE CAPITALISTS ARE IN OUR HEALTH CARE SYSTEM!

Private equity financiers (I described them as “vulture capitalists” in a previous post) have done extensive damage to individual firms (e.g., Toys R Us and Sears) and whole industries (e.g., food supermarkets and local newspapers). (See this previous post for more detail.) Private equity investing (i.e., “vulture capitalism”) is financial manipulation used to extract profits from companies without regard to the health or survival of the companies, or the welfare of their workers, customers, and communities. Vulture capitalism fails to produce benefits for anyone other than the rich private equity financiers.

Vulture capitalists, driven by profits and greed and nothing else, have taken a truly scary step: they are invading our health care system. The main focus has been on smaller community and rural hospitals.

Perhaps the most dramatic case to-date is the closing of Hahnemann Hospital by its private equity owner. The hospital was a 171-year-old institution in central Philadelphia that primarily served low-income patients of color. It closed in September 2019, 18 months after it was bought by a private equity vulture capitalist who apparently was only interested in harvesting some short-term cash and then closing it to sell the valuable downtown real estate to a developer. The land’s redevelopment will presumably further the gentrification of the area. [1]

Even without the entry of private equity money into the hospital industry, the industry has been consolidating, resulting in growing concentration and monopolistic power as has happened in so many industries in the U.S. in recent years. (See this previous post on the growth of monopolistic power in the U.S. economy.) By 2016, 90% of hospital markets were deemed to be highly concentrated. Nonetheless, in 2017, 115 more mergers and acquisitions were announced. Hospital executives tell antitrust regulators that their mergers and acquisitions will improve quality and increase efficiency (as executives do in other industries).

The result has been increased concentration and reduced competition. Even if costs do decline, consumers do not benefit from lower prices or reduced health insurance premiums. Increased concentration and monopolistic power allow hospitals to increase their profits by negotiating higher prices with health insurers. There is some evidence that with increased concentration health outcomes are worse and the quality of care is more inconsistent. [2]

The pattern of the vulture capitalists in the hospital industry is just like their mode of operation in other industries: buy hospitals using lots of borrowed money (i.e., a leverage buyout) and then make the hospitals pay off the loan and interest. Often the hospital’s real estate or facilities are sold to a separate entity (usually controlled by or affiliated with the vulture capitalist) and then leased back to the hospital, requiring it to pay rent. In addition, the private equity firm often takes large dividend payments and significant management or monitoring fees from the hospitals. (These actions are routine in private equity deals.)

Typically, these vulture capitalists plan to take their profits in 3 to 5 years and then sell off the hospitals or put them into bankruptcy. Rarely is there any commitment to making investments in technology, workers’ skills, or quality. Moreover, the costs the vulture capitalists load onto the hospitals (i.e., debt, rent, and other payments) often require them to cut costs elsewhere, such as through staff reductions or pay cuts, and the termination of services that aren’t the most profitable ones.

One somewhat unique feature of private equity firms’ purchases in the hospital industry is that the hospitals are usually small ones often in geographically dispersed areas. This means the mergers and acquisitions often fall under the radar of antitrust regulators. In some cases, the vulture capitalists will buy a bigger hospital first and then add several smaller ones.

When a private equity firm closes a whole hospital or specific services of a hospital, it can create real hardship for patients in the area. If the hospital, let alone a group of hospitals, is in a rural area, the result may be that hospital services are simply not available to residents without traveling substantial distances. For example, in 1996, the private equity firm Forstmann Little & Co. began building a portfolio of dozens of hospitals. In 2016, amid a series of restructurings and sales, it created Quorum Health Corp. that consisted of 38 small, mostly rural hospitals, 84% of which were the sole provider of acute-care hospital services in their areas. Quorum was saddled with roughly $1 billion in loans to repay. In the next three years, Quorum closed or sold 11 of these rural hospitals, often leaving area residents with no or limited access to acute medical care. [3]

The private equity industry’s model of vulture capitalism, where profits supersede any consideration of the well-being of companies’ workers, customers, communities, or the economy as a whole, might arguably be okay in retail businesses for non-essential goods, but in essential businesses vulture capitalism should not be allowed. It reduces the financial stability and resiliency of companies so they don’t have the resources to invest in innovation or quality and often are so financially stressed that they cannot survive.

In health care, this literally becomes a matter of life and death. The rules that govern our financial system must be changed to rein in the private equity industry and prevent its vulture capitalism from doing serious harm to individuals, communities, and our economy.

[1]      Applebaum, E., 10/7/19, “How private equity makes you sicker,” The American Prospect (https://prospect.org/health/how-private-equity-makes-you-sicker/)

[2]      Applebaum, E., 10/7/19, see above

[3]      Applebaum, E., 10/7/19, see above

WHO WAS BAILED OUT AFTER THE 2008 FINANCIAL CRASH?

The 2008 financial crash and resultant bailout have been in the news recently for two reasons: 1) some critiques have been leveled at Sen. Bernie Sanders’ statement on the presidential campaign trail that no Wall St. executives went to jail and that they got a trillion-dollar bailout, and 2) a new book has come out: Crashed: How a decade of financial crises changed the world by Adam Tooze. The book has been described as insightful and telling a story that is both “opaquely complex and dazzlingly simple.” [1] In terms of Sen. Sanders’ statement, it takes a real spin doctor to dispute the truth of it (see below).

In the aftermath of the 2008 implosion of the huge Wall St. corporations, the U.S. government and Federal Reserve Bank came to the rescue. The government quickly made $700 billion available to bailout the Wall St. firms. Otherwise, twelve of the 13 largest ones probably would have gone bankrupt in late September or October of 2008 (as Lehman Brothers did before the rescue was in place and the scale of the disaster was clear). The government also bailed out the auto industry, insurance companies (e.g., AIG), and the quasi-public mortgage-purchasers Fannie Mae and Freddie Mac.

In addition, the Federal Reserve Bank (Fed) made unprecedented purchases of assets from the technically bankrupt financial corporations under the innocuous-sounding banner of “quantitative easing”, to the tune of over $4 trillion. The six largest firms alone (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley) also borrowed about $500 billion from the Federal Reserve Bank in peak periods of need. [2] Furthermore, the Fed extended what were effectively loans to the central banks of other countries of an also unprecedented $10 trillion. Estimates of the overall contribution of the Fed to the bailout range from $7.7 trillion to $29 trillion.

In addition, the U.S. government supported the big financial corporations in a variety of other ways. For example, short-selling of 799 financial stocks was banned in 2008 to protect these companies from free market speculation, which boosted their stock prices. Emergency bank charters were given to Goldman Sachs and Morgan Stanley on Sept. 21, 2008, so they could borrow from the Fed as only banks can do. In October, the Fed, for the first time in history, paid interest to the banks on required reserve deposits. Shortfalls in required reserves and failed stress tests were effectively ignored. And except for one relatively low-level officer at Credit Suisse, no one and no company was criminally prosecuted or went to jail. The value of all these benefits is truly incalculable.

Therefore, pinning down a single figure for the total bailout is impossible because there were so many different pieces and the amounts in some of them fluctuated daily, given that banks borrow money from the Fed daily to meet their reserve requirements. However, to state that it was a trillion-dollar bailout is definitely true and to say that no Wall St. executives went to jail is also true for all meaningful purposes.

With all this bailout money and support for the financial corporations and the financial system, one might think that some significant money or support would have been made available to bailout out the workers and homeowners caught in the maelstrom of Wall St. malfeasance. However, precious little assistance was made available to the millions of homeowners trying to pay mortgages on homes where the mortgage was now greater than the value of the home, given that many homes had lost half their value. Very little was done for the millions of homeowners who suffered foreclosure. And it was not only individuals who suffered; whole communities – usually minority and low-income communities – were underwater due to predatory and discriminatory mortgage lending by the big financial corporations and their agents. Moreover, millions were unemployed as the economy went into a severe recession due to the malfeasance on Wall St. [3]

Two things make all this truly galling. The first is that despite the massive intervention of the U.S. government and the Fed, the rescued financial corporations were not required to change their basic mode of operation. The instability of speculative financial transactions that is endemic in their model of profitability and the huge financial rewards for employees, especially executives, was left intact, along with public insurance against losses that threaten consumers’ deposits.

The second galling outcome is that no executives of the financial corporations were punished, either through significant loss of compensation or criminal prosecution, let alone jail time. Remember, that in the 1980s Savings and Loan crisis, which was much smaller in scale, nearly 900 executives of Savings and Loan banks went to jail.

“The contrast between the solicitous care shown the culpable financial sector and the negligence shown to the innocent homeowner was startling.” [4] As a result, class-based economic inequality in the U.S. was exacerbated and economic gaps in income and wealth between Whites and Blacks grew dramatically.

The bailed out financial corporations were expected to make loans available to help households and businesses, as well as to avoid foreclosures whenever possible. When foreclosure was unavoidable, it was expected that the financial corporations would promptly resell those homes. These actions would have helped individuals, businesses, and communities recover. However, no requirements were placed on bailed out banks to do these things and, therefore, they did not happen.

The programs that were supposed to assist homeowners typically had draconian rules to prevent “undeserving” homeowners from benefiting. The story line from Wall St. and its backers on Capitol Hill was that home buyers were the ones at fault; they should have known better than to be duped by the predatory practices of the mortgage brokers or that the home buyers were simply trying to live above their means. This concern about benefiting undeserving individuals clearly did not extend to the undeserving bank and financial sector executives responsible for perpetrating fraud in the mortgage business and crashing their companies and the economy.

Similar opposition blocked the expansion of unemployment benefits and job training for workers who had lost their jobs. On the other hand, there were no significant limits put on the pay of executives whose corporations were bankrupt without the bailout, let alone requirements that executives pay back compensation they had received based on profits generated by fraudulent activities.

As the Great Recession lingered on and jobs, homes, and economic security did not return (still true today for many people), the deep anger and discontent that set in was the breeding ground for support for Trump.

The 2008 financial crisis and the bailout of the financial corporations and their executives, but not the homeowners and workers who suffered from the resultant crash, are exhibit one in the indictment of the corporate takeover of U.S. policy making. I urge you to contact your elected officials and ask them to stand up against corporatocracy and demand democracy back. Our government should work for the people, the workers and homeowners of America, not the big corporations.

[1]      Bloom Raskin, S., Winter 2019, “Whose recovery was it?” The American Prospect (This article is a review and commentary on Tooze’s book.)

[2]      Taibbi, M., 3/18/19, “Turns out that trillion-dollar bailout was, in fact, real,” RollingStone

[3]      Bloom Raskin, S., Winter 2019, see above

[4]      Bloom Raskin, S., Winter 2019, see above, page 86

STOPPING VULTURE CAPITALISM

The term vulture capitalism is used to refer to financial manipulation techniques used to extract profits from companies without regard to their health or survival. [1] Workers, consumers, suppliers, and the communities where a company is based, as well as taxpayers, typically end up getting the short end of the stick while the vulture capitalists realize significant financial gains. In previous posts, I outlined the vulture capitalist business model and highlighted several examples of vulture capitalism in action.

Vulture capitalism is allowed and facilitated by existing laws and regulations. These need to be changed to restrict private financial gain at the expense of our society and economy. Vulture capitalism is like pollution, it harms the public good while private interests benefit.

Here are some steps that should be taken to rein in vulture capitalism:

  • Reduce the amount of debt (i.e., loans) a company is allowed to have. Pass laws setting limits or institute bank regulations limiting lending to companies with high levels of debt.
  • Limit the payment of dividends to vulture capitalists in the period right after they buy a company. Dividends could be banned for two years after the acquisition of a company, which is what Europe does.
  • Require increased transparency from vulture capitalists, including the disclosure of all fees and expenses they charge to companies they control, as well as the share of profits they take.
  • Stop the favorable tax treatment of the income of vulture capitalists (aka the carried interest loophole). Currently, their income is taxed at only 15% while other high-income individuals typically pay 35% to 40%. Vulture capitalists’ income should simply be treated the same way as everyone else’s earned income.
  • Reduce the tax benefit of companies’ large interest payments by reducing the deductibility of interest expenses when debt exceeds a certain level. (Note: The 2017 Tax Cuts and Jobs Act took a step in this direction by limiting the deductibility of interest when calculating corporate income tax. Businesses with revenues over $25 million are only able to deduct interest expenses of up to 30 percent of adjusted taxable income. This targets the biggest leveraged buyout deals and was included in the tax bill because it raises $253 billion in government revenue over ten years.) [2]
  • End the favorable tax treatment of commercial real estate ownership so that sale / lease back deals are not profitable.
  • Make stock buybacks, which artificially boost the price of a stock, illegal, as they were before 1982, especially if borrowed money is used to pay for them.
  • Treat vulture capitalists as owners of companies (which they are) instead of passive investors (which is how they are typically treated in court today). This would make them liable for unsafe working conditions and illegal treatment of workers, such as wage theft. They could also be held responsible for worker retraining and pension liabilities, for example, instead of being able to avoid these responsibilities when they put companies through bankruptcy.
  • Establish strict rules about conflicts of interest for vulture capitalists, so they can’t engage in self-dealing that enriches them while the company they own is stripped of assets and stability. Prohibit them from being both a shareholder (e.g., owner) and a creditor who has made loans to the company. Prohibit them from buying assets sold by the company. Prohibit them from keeping or reacquiring control of the company after it has gone through bankruptcy.
  • Change bankruptcy laws so that lenders to a company are not the first ones to get paid in a bankruptcy. Workers (and their pension benefits), suppliers and other business partners, and even communities that are harmed should not have to wait in line behind those who have loaned a company money, which usually means they get nothing in a vulture capitalism bankruptcy. The priority for paying lenders first in bankruptcy provides too great an incentive to provide big loans to companies for leveraged buyouts, dividend payouts, and acquisitions of other companies.
  • Give workers voting representation (or increased representation) on the Board of Directors of a company in return for concessions workers make in pay, benefits, working conditions, or workforce levels. This would reflect the fact that the workers have made a major investment in the viability of the company. In Europe, it is routine for workers to have voting representation on companies’ Boards. A strong argument can be made that US companies would be more equitably run if this were the case here.

I urge you to ask your elected officials to take action to stop vulture capitalism. It undermines our economy and society, contributes to economic inequality, and does substantial harm to workers, suppliers, consumers, communities, and taxpayers. The only people who benefit are the greedy vulture capitalists.

[1]      Wikipedia, retrieved 10/24/18, “Vulture capitalist,” https://en.wikipedia.org/wiki/Vulture_capitalist

[2]      Dayen, D., 3/20/18, “Private equity: Looting ‘R’ us,” The American Prospect (http://prospect.org/article/private-equity-looting-r-us)

VULTURE CAPITALISM IN ACTION

The term vulture capitalism refers to techniques of financial manipulation (aka financial engineering) used to extract profits from companies without regard to the health or survival of the companies. [1] Workers, consumers, suppliers, and the communities where a company is based, as well as taxpayers in general, typically end up getting the short end of the stick while the vulture capitalists realize significant financial gains. In my previous post, I outlined the vulture capitalist business model.

Recent examples of vulture capitalism include the bankruptcies of Sears, Toys R Us, the Hostess confectionery company (maker of Twinkies), and seven grocery store chains.

The bankruptcy of Sears is a classic case of vulture capitalism. In addition, there are conflicts of interest and self-dealing by the vulture capitalist that are even worse than usual. The vulture capitalist who bought Sears is Eddie Lampert. He is a hedge fund operator and used his ESL Investments fund (ESL) as a partner in the deal. He and ESL bought Sears in 2005 and he installed himself as CEO and board chairman. Lampert became Sears’ largest shareholder (31%) and ESL owned another 18%. What is unusual is that Lampert’s ESL and a related fund are also the biggest lenders to Sears, having loaned it roughly $3 billion. Sears was paying roughly $250 million per year in interest to these Lampert-affiliated entities. Also unusual is Lampert’s claim on Sears’ real estate. In 2015, Lampert, as Sears’ CEO, sold many of Sears’ real estate holdings for $2.7 billion in a sale / leaseback deal to a real estate investment trust that is 43.5% owned by ESL and where Lampert is the chairman. Sears has paid roughly $400 million to this REIT in rent and other payments since 2015. Therefore, Sears was paying Lampert and his affiliated funds over $600 million per year in interest and rent, while he served as Sears’ CEO and board chairman. [2]

In 2014, Lampert, as Sears CEO, sold the Land’s End clothing brand to a consortium that was two-thirds controlled by his ESL fund. In 2016, he sold Sears’ Craftsman tool brand to pay down debt that was largely held by him and his funds. He has proposed selling of other Sears assets and has made bids himself to buy some of them. Sears’ other stockholders have already won a $40 million settlement over Lampert’s self-dealing and selling of assets at bargain prices to entities in which Lampert holds a large stake. As Sears’ largest lenders, Lampert and affiliated entities are in position to control whatever entity and assets may emerge from the bankruptcy process, in what may be the ultimate conflict of interest in this story filled with such conflicts. [3]

Over the last decade, 175,000 workers at Sears and its subsidiary Kmart have lost their jobs and another 68,000 jobs are at risk due to the recent bankruptcy filing.

In the newspaper business, a vulture capitalist hedge fund, Alden Global Capital (AGC), has aggressively pulled cash and other assets out of newspaper companies while radically cutting staff (i.e., costs) and loading debt on the companies. AGC owns the Denver Post and hundreds of other newspapers through Digital First Media (DFM). AGC took control of DFM in 2011 and since then has eliminated two-thirds of the staff at the newspapers. Meanwhile, AGC has pulled $241 million in cash and millions more in real estate from the newspapers. It has loaded the newspapers up with $200 million in debt and “borrowed” almost $250 million from the workers’ pension funds. [4]

Earlier this year, 70-year-old Toys R Us filed for bankruptcy and closed all its U.S. stores with 33,000 people losing their jobs. In 2005, it was bought by vulture capitalists Bain Capital, KKR, and Vornado Realty Trust. They loaded up the chain with $6.6 billion in debt, extracted windfall profits, and then filed for bankruptcy. Forty percent of all retail chain bankruptcies between January 2015 and April 2017 were by companies owned by vulture capitalists. Sixty-one percent of all retail job losses over this period were due to vulture capitalism. [5]

You may remember the 2012 bankruptcy of the Hostess confectionery company, which made Twinkies. The company had filed for bankruptcy in 2004 and its unions agreed to massive pay and benefit cuts worth at least $150 million annually in an attempt to help the company survive. A vulture capitalist fund, Ripplewood Holdings, bought the bankrupt company for $130 million, saddling it with debt approaching $1 billion. Ripplewood installed new management who received big pay checks as the company struggled – CEO Brian J. Driscoll had his pay tripled to $2.55 million before he was pushed out after failing to turn the company around. The next CEO got a pay raise as the company was again headed for bankruptcy and while it was demanding 30 percent salary and benefit cuts from its employees. The company had also stopped contributing to the union’s pension fund, ignoring its obligations under collective bargaining agreements. Nonetheless, it filed for bankruptcy, eliminated 18,000 jobs, and asked the bankruptcy judge to permit it to pay executives $1.75 million in bonuses to oversee the dissolution of the company. [6] [7]

Since 2015, seven major grocery store chains, including A&P, have filed for bankruptcy. All seven bankruptcies were driven by vulture capitalists. More than 125,000 workers’ jobs are at-risk as a result. The case of Southeastern Grocers is a classic example of vulture capitalism. It was owned by Lone Star Funds, whose billionaire owner, John Grayken, renounced his US citizenship to avoid taxes. Lone Star sold $145 million of the company’s real estate – stores and a distribution center – that the company then had to pay rent to use in a classic sale / leaseback vulture capital deal. Between 2011 and 2018, Lone Star received $980 million in dividends, much of it paid for by loans that cost Southeastern Grocers tens of millions of dollars a year in interest. By March 2018, when the company filed for bankruptcy its debt was $1.1 billion. [8]

By way of comparison, Kroger, a conventionally owned company that is one of the largest supermarket chains in the country, whose stock is traded on the New York Stock Exchange, is doing just fine. It has low debt and, because of low interest and rent expenses, can afford to invest roughly $3 billion per year in its facilities and operations. It is also investing in its workers through workforce development, increased pay and benefits, and pension benefits. These are things vulture capital-owned competitors are unable to do due to the interest and rent expenses foisted on them.

These are just a few examples among many of how vulture capitalism is hurting workers and our economy, enriching a few financial engineers, i.e., vulture capitalists, without producing any benefits for the companies, society, or anyone but themselves.

In my next post, I will identify policy changes that would rein in vulture capitalists.

[1]      Wikipedia, retrieved 10/24/18, “Vulture capitalist,” https://en.wikipedia.org/wiki/Vulture_capitalist

[2]      Dayen, D., 10/17/18, “How Sears was gutted by its own CEO,” The American Prospect (http://prospect.org/article/how-sears-was-gutted-its-own-ceo)

[3]      Cohan, W. D., 10/16/18, “The billionaire who led Sears into bankruptcy court,” The New York Times

[4]      Reynolds, J., 4/13/18, “Meet the vulture capitalists who savaged ‘The Denver Post’,” The Nation (https://www.thenation.com/article/meet-the-vulture-capitalists-who-savaged-the-denver-post/)

[5]      Dayen, D., 3/20/18, “Private equity: Looting ‘R’ us,” The American Prospect (http://prospect.org/article/private-equity-looting-r-us)

[6]      Adams, S., 11/21/12, “Why Hostess had to die,” Forbes (https://www.forbes.com/sites/susanadams/2012/11/21/why-hostess-had-to-die/#41e34edb6dfe)

[7]      Blumgart, J., 11/20/12, “Vulture capitalism – not unions – killed Twinkies,” Salon (https://www.salon.com/2012/11/20/vulture_capitalism_not_unions_killed_twinkies/)

[8]      Appelbaum, E., & Batt, R., Fall 2018, “Private equity pillage: Grocery stores and workers at risk,” The American Prospect (https://read.nxtbook.com/tap/theamericanprospect/theamericanprospectfall2018/private_equity_pillage_grocer.html)

VULTURE CAPITALISM

The term vulture capitalism is used to refer to techniques used to extract profits from companies without regard to the health or survival of the companies. The term has come into widespread use to differentiate these financial strategies from venture capitalism, which refers to funding provided to new and innovative companies that are too small or new to get bank loans or other forms of investment (e.g., from the stock market). Although risky, venture capital investments can have very high returns if the companies become successful.

Vulture capitalists acquire companies in the hope of making profits from them through financial manipulation (aka financial engineering) without regard to the ultimate success of the companies. [1] Sometimes they work to increase the company’s value by aggressively cutting costs and then selling it for a profit. Sometimes they split the company into pieces, hoping they can sell the pieces for more than their purchase price.

Often, vulture capitalists extract profits from companies and then have the companies file for bankruptcy. Due to their aggressive techniques and methods, workers, customers, suppliers, and the communities where a company is based, as well as taxpayers in general, typically end up getting the short end of the stick while the vulture capitalists realize significant financial gains.

Companies that are destroyed – run into bankruptcy – by vulture capitalists are no longer available to consumers, so consumer choice is reduced. This plays into the hands of big corporations, such as Walmart and Amazon, when, for example, vulture capitalists buy supermarket chains and drive them out of business. Consumer choice and competition suffer while vulture capitalists get rich.

Recent examples of vulture capitalism include the bankruptcies of Sears, Toys R Us, the Hostess confectionery company (maker of Twinkies), and seven grocery store chains. Vulture capitalists have also targeted newspapers from the Denver Post and Boston Herald to small community papers. Vulture capitalists typically use hedge funds or private equity funds to raise money for their acquisitions. These funds pool money from large investors and, because they are not open to the public or publicly traded on a stock exchange, they are exempt from most regulations and oversight.

The vulture capitalist business model is an example of hyper-capitalism. It destroys viable companies and hurts our economy. [2] The vulture capital model typically works like this [3]:

  1. Buy all or a controlling share of a company by borrowing most of the money (typically 70%) you pay for it (which is why these acquisitions are called leveraged buyouts (LBOs): the borrowed money leverages the relatively small amount of money the vulture capitalist and/or his fund are spending).
  2. Assign the debt to the acquired company, requiring it to pay all the interest on the large loan. An advantage to this strategy is that interest payments are a deductible business expense for tax purposes. Therefore, the high level of debt and high interest payments reduce what the company must pay in federal and state income taxes.
  3. Sell off the company’s valuable assets such as real estate. Often a company’s real estate (e.g., store sites, factories, operational facilities) is sold to a real estate investment trust (REIT), an investment fund, often run by the venture capitalist, which is eligible for favorable tax schemes. The company typically leases back the facilities from the REIT in what is called a “sale / leaseback” arrangement that requires to company to pay rent for the facilities it used to own.
  4. Pay high levels of dividends to shareholders, including the vulture capitalist and his fund. This often requires the company to take out more loans (i.e., more debt and more interest payments).
  5. Buy back shares of company stock to boost its value for shareholders, including the vulture capitalist and his fund. This often requires the company to take out more loans (i.e., more debt and more interest payments).
  6. Charge the company for expenses and a wide range of fees (e.g., management, transaction, advisory, and monitoring fees) that often add up to millions or tens of millions of dollars a year. In addition, take a share of any profits the company earns.

    Note: Items 2 – 6 all result in mandatory expenses, primarily interest and rent, for the company. These use up most, if not all (sometimes more than all), of the revenue and cash flow the company generates. This reduces the financial stability and resilience of the company, which is further hurt by the removal of assets such as real estate that could serve as a buffer in hard times. The company is strangled by these new expenses and doesn’t have the resources to invest in innovation or other steps that would keep or make it competitive.

  7. With the company under financial stress, extract concessions from workers (e.g., cutting their pay and benefits) telling them that this is necessary to avoid shutting the company down or filing for bankruptcy. Similarly, extract price cuts from suppliers.
  8. Sell the company or file for bankruptcy. Filing for bankruptcy voids union contracts and responsibility to pay past and present workers the pensions and retirement benefits they were promised – and earned. (Note: The federal government and we as taxpayers often end up paying some or all of earned pension benefits after a bankruptcy through the Pension Benefit Guaranty Corporation.)

The mainstream (corporate) media and vulture capitalists typically and inaccurately report that the bankruptcies were due to factors such as greedy unions and a changing business environment. However, other companies in the same industries survive, some very successfully and some with difficulty.

In my next posts, I will share specific examples of how the vulture capitalism model has played out and then identify policy changes that would rein in vulture capitalists.

[1]      Wikipedia, retrieved 10/24/18, “Vulture capitalist,” https://en.wikipedia.org/wiki/Vulture_capitalist

[2]      Kuttner, R., 10/16/18, “It was vulture capitalism that killed Sears,” The American Prospect (http://prospect.org/article/it-was-vulture-capitalism-killed-sears)

[3]      Appelbaum, E., & Batt, R., Fall 2018, “Private equity pillage: Grocery stores and workers at risk,” The American Prospect (https://read.nxtbook.com/tap/theamericanprospect/theamericanprospectfall2018/private_equity_pillage_grocer.html)

CONSUMER FINANCE PROTECTIONS UNDER ATTACK

Many in Congress and the Trump administration are openly working to weaken the Consumer Financial Protection Bureau (CFPB). It was created as part of the Dodd-Frank Law, the major piece of legislation passed to reform the financial industry after the 2008 crash. The CFPB protects consumers from abusive and fraudulent practices of financial corporations, such as mortgage loans that consumers can’t afford (which were a major element of the 2008 crash and the foreclosures that destroyed many families’ savings), abusive and discriminatory practices on student and auto loans, usury by payday lenders, and deceptive marketing. The CFPB also reduces the risk of future financial industry crashes by stopping the marketing of financial products that can create financial bubbles and lead to high rates of loan defaults and bankruptcies. These can threaten the stability of financial corporations, as happened with mortgages in 2008.

The CFPB’s role is to protect consumers from unsafe financial products and practices in the same way that the Consumer Product Safety Commission protects consumers from unsafe physical products – from appliances to toys. The financial industry has opposed the CFPB from when it was first included in drafts of the Dodd-Frank legislation. The financial industry does not want to be held accountable. It wants to be able to make profits with no holds barred. It has been lobbying hard to have the CFPB emasculated.

Despite the valuable roles the CFPB can and has been playing, Congress and the Trump administration, at the urging of the financial industry, have been working to keep the CFPB from being an effective advocate for consumers by:

  • Blocking or repealing its consumer protection regulations
  • Stopping its enforcement actions
  • Weakening its independence and effectiveness

For example, in April Congress passed and the President signed a law repealing a Consumer Financial Protection Bureau (CFPB) regulation that prevented car dealers and corporations making car loans from discriminating based on race. The CFPB had fined several lenders and dealers millions of dollars for charging higher interest rates to Black and Hispanic borrowers, even when they had the same credit scores as White borrowers. Consumer advocacy groups note that this discriminatory behavior is pervasive and repeal of this regulation will allow it to continue. [1]

In October, a law was passed repealing a CFPB regulation that allowed consumers to band together in class action lawsuits against financial corporations and prohibited financial corporations from forcing consumers into arbitration. Many financial institutions include mandatory arbitration clauses in the agreements consumers sign when they open a bank account, take out a loan, or get a credit card. This legal language, buried in the fine print, requires the consumer to pursue any claim against the company only through arbitration and not through the courts or a class action lawsuit. The arbitration process is skewed in favor of the financial institution and a typical consumer doesn’t have the time and resources to pursue their claim on their own. [2]

Forced arbitration language initially protected Wells Fargo and Equifax by preventing large-scale consumer scandals from coming to light. Forcing consumers to pursue claims individually in arbitration hid Wells Fargo’s opening of and charging millions of customers for unauthorized accounts. Only after many months did the authorities and the public become aware of the scandal and its scale, and force Wells Fargo to compensate customers. The same pattern occurred with Wells Fargo’s requirement that auto loan borrowers buy insurance they didn’t need and with Equifax’s huge data breach.

To respond to these problems, the CFPB issued a regulation banning the use of mandatory arbitration clauses by financial corporations in individual consumer agreements. However, at the behest of the financial industry, Republicans in Congress pushed through a bill repealing the regulation; Vice President Pence cast the tie-breaking vote in the Senate.

Separate from Congressional action, Mick Mulvaney, the acting director of the CFPB appointed by President Trump in November 2017, has delayed regulation of payday lenders, who charge usurious interest rates and often trap customers into loans they can never repay, while the lender collects huge amounts of interest and fees.

Mulvaney has also stalled the CFPB’s investigation of the Equifax data breach, which allowed hackers to obtain the personal information, including Social Security numbers and birth dates, of 145 million people. Equifax’s breach was particularly egregious because it was preventable: Equifax did not install a software patch that had been available for months. Equifax failed to disclose the breach for months while people’s identities and accounts were at-risk. And Equifax executives sold $2 million of stock in the months between the breach and its becoming public knowledge. [3]

Not content to just attack the regulations and enforcement actions of the CFPB, Mulvaney, the Trump administration, and members of Congress (mainly Republicans) have worked to weaken the CFPB’s organizational effectiveness and independence. In June, Mulvaney fired the agency’s 25-member advisory board which included consumer advocates, experts, and industry executives. It had played, and was created to play, an influential role in advising CFPB’s leadership on regulations and policies. Two days before their firing, eleven of the 25 members held a press conference to criticize Mulvaney for canceling legally required meetings of the advisory board, ignoring them and their advice, and making unwise changes at the CFPB. [4]

Mulvaney has stripped enforcement powers from the CFPB unit pursuing discrimination cases. He has undermined the consumer complaint system. [5] He has asked Congress to weaken CFPB’s power and independence by giving Congress and the executive branch more control over its budget and regulations. [6]

The reasons we need a strong and independent Consumer Financial Protection Bureau are clear. Its enforcement actions have led to a $1 billion fine on Wells Fargo for a series of misdeeds in consumer banking, lending, compliance with regulations, and overall management, [7] [8] as well as to a $335 million settlement with Citigroup for overcharging 1.75 million credit card customers over eight years. [9]

Since its creation, the CFPB has protected consumers from financial corporations that violate the law. It has gotten compensation of over $12 billion for more than 31 million victimized consumers. In less than 8 years, it has responded to over 1.5 million consumer complaints and issued, for example, new standards that make home mortgage documents clearer and easier to understand. At CFPB’s website, you can find information that will help you understand your credit score and make a good decision about a car or student loan. (See my earlier post about the CFPB here for more information.)

I urge you to contact your U.S. Representative and Senators and to ask them to support the Consumer Financial Protection Bureau and the very valuable work it does. The efforts to weaken the CFPB and regulation of the big financial corporations are putting consumers at-risk and increasing the likelihood of another collapse of the financial sector and our economy. You can find your US Representative’s name and contact information here and your Senators’ information here.

[1]      Merle, R., 4/18/18, “The Senate just voted to kill a policy warning auto lenders about discrimination against minority borrowers,” Washington Post

[2]      Freking, K., 10/25/17, “Senate votes to end consumer credit rule,” The Boston Globe from the Associated Press

[3]      Rucker, P., 2/4/18, “Exclusive: U.S. consumer protection official puts Equifax probe on ice – sources,” Reuters (https://www.reuters.com/article/us-usa-equifax-cfpb/exclusive-u-s-consumer-protection-official-puts-equifax-probe-on-ice-sources-idUSKBN1FP0IZ)

[4]      Merle, R., 6/7/18, “Consumer bureau chief fires advisers,” The Boston Globe from the Washington Post

[5]      Singletary, M., 4/8/18, “Switching from watchdog to lapdog,” The Boston Globe

[6]      Merle, R., 4/3/18, “Trump-appointed head of consumer watchdog asks Congress to hamstring his agency,” Washington Post

[7]      Dreier, P., 2/7/18, “Wells Fargo gets what it deserves – and just in time,” The American Prospect (http://prospect.org/article/wells-fargo-gets-what-it-deserves-and-just-time)

[8]      Flitter, E., & Thrush, G., 4/20/18, “US to slap $1b fine on Wells Fargo,” The Boston Globe from the New York Times

[9]      Hamilton, J., 6/30/18, “Citigroup will repay $335 million to customers,” The Boston Globe from Bloomberg

THE DISMANTLING OF POST-CRASH FINANCIAL INDUSTRY REFORMS

Many in Congress and the Trump administration have either forgotten or don’t care about protecting us from the risky and corrupt behavior of Wall St. financial corporations that caused the 2008 economic collapse and Great Recession. They are repealing, weakening, or failing to implement the policies that were put in place to reduce the likelihood that such behavior and events would happen again. Keep in mind that those policies didn’t go far enough to prevent such as event from happening again – such as breaking up to too-big-too-fail financial corporations or separating risky financial trading activity from federally-insured consumer banking.

The Dodd-Frank Law was the major piece of legislation passed to reform the financial industry and reduce the likelihood of another meltdown. It included the creation of the Consumer Financial Protection Bureau (CFPB) to protect consumers from unsavory practices by financial corporations, such as the making of mortgage loans that were highly likely, if not certain, to be unaffordable for the home owners.

The financial industry has fought the implementation of these new safeguards; industry-friendly regulators have moved so slowly that some of the provisions of the Dodd-Frank Law are just finally getting implemented eight years later. For example, the simple requirement that corporations disclose the ratio of the pay of the corporation’s Chief Executive Officer (CEO) to that of the midpoint of workers’ pay is just now being implemented. Honeywell Corporation just reported that its CEO made 333 times what it’s median employee earns. And it didn’t include the pay of employees in developing countries, which undoubtedly would have increased the ratio. Most measures of the CEO-to-worker pay ratio have found CEO pay to be between 200 and 350 times the pay of the median worker. Fifty years ago, the ratio was roughly 20 and even Harvard Business School gurus felt at the time that this ratio should be a ceiling on CEO pay. [1]

Meanwhile, Congress and the Trump administration, at the urging of Wall St. lobbyists, have been dismantling the Dodd-Frank financial reforms, including:

  • Weakening regulations that reduce the risk of big financial corporations going bankrupt
  • Blocking or repealing consumer protection regulations from the Consumer Financial Protection Bureau (CFPB)
  • Stopping enforcement actions of the CFPB
  • Weakening the CFPB’s independence and effectiveness

Regulations that limit the risks from speculative financial transactions by big financial corporations are being weakened. Industry-friendly regulators plan to weaken the so-called Volcker Rule, thereby giving banks more flexibility to engage in financial trading activity that can be highly profitable but also vulnerable to big losses. Given that these banks also have consumer deposits that are federally insured, big losses could lead to the need for taxpayer bailouts (again). [2] Paul Volcker, the former head of the Federal Reserve banking and oversight system, had recommended this regulation to limit financial corporations from engaging in financial risk-taking when government-funded-insurance would end up covering any big losses. The six largest US financial corporations have spent millions of dollars lobbying for this change. (They are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.)

Federal regulators are also proposing to reduce that amount of a financial corporation’s own money that must be available to cover any losses from lending, trading, speculating, and other activities. Currently, financial corporations must have only 6 cents of their own money (reserves) for every dollar of potential financial liability. This would mean that if the corporation sustained losses of just 6% on the tens of trillions of dollars of loans, trades, speculative investments, etc. that it has, that it would be bankrupt and looking for a government (i.e., taxpayer) bailout.

In 2008, the reserve requirement was only 3 cents on every dollar and the big financial corporations had losses of twice that amount. Therefore, the government and taxpayers had to provide trillions of dollars to bail them out and prevent bankruptcies that would have caused a much more severe economic collapse.

Given the experiences of 2008, it seems foolish to be reducing the reserves that financial corporations must hold to cover losses. However, reducing reserves and increasing leverage (as it is referred to) allows the financial corporations to make more and bigger financial transactions, which, if all goes well, can increase their profits. However, it also increases the risk that a bailout will be needed. [3]

The financial corporations claim that a reduction in reserve requirements will allow them to make more loans to spur business growth and the economy. However, there is no evidence of unmet demand for loans and experience indicates that the financial corporations will actually use the reduction in reserves to pay more to shareholders and executives, buyback stock, and engage in speculation and non-banking activities.

Note that the big financial corporations are all reporting record profits even before any of these changes goes into effect. Banks, overall, reported $56 billion in profits during the first quarter of 2018, up 28% from a year earlier. [4]

In May, Congress passed, and the President signed, a law reducing the stringency of the oversight of banks, weakening the oversight that the Dodd-Frank Law put in place to reduce the risk of bankruptcies and government bailouts. The 26 banks with between $50 billion and $250 billion in assets (including American Express and Ally Financial) are now exempt from the strictest oversight. The 12 biggest banks will still be subject to the strictest oversight, although they can probably take advantage of some of the weakening of oversight in the law.

One result of the law is expected to be mergers of small and medium size banks because they can get bigger without triggering stricter oversight. The law also exempts “small” banks (under $10 billion in assets) from the Volcker Rule banning risky financial speculation and from reporting detailed data on borrowers that was targeted at preventing discrimination. [5]

I urge you to contact your U.S. Representative and Senators and to ask them to support strong regulation of the big financial corporations. Encourage them not only to oppose efforts to weaken the regulations and oversight put in place by the post-collapse Dodd-Frank Law, but to strengthen regulations and oversight to prevent, not just reduce the likelihood of, another financial industry collapse and crisis for the economy. The weakening of the regulations and oversight of the big financial corporations is increasing the likelihood of another financial sector collapse that would do serious damage to our economy and require a government, taxpayer-funded bailout.

You can find your US Representative’s name and contact information at: http://www.house.gov/representatives/find/. You can find your US Senators’ names and contact information at: http://www.senate.gov/general/contact_information/senators_cfm.cfm.

[1]      Meyerson, H., 2/22/18, The American Prospect blog (http://prospect.org/blog/on-tap?page=6)

[2]      Flitter, E., & Rappeport, A., 5/30/18, “Big banks to get a break from limits on risky trading,” The New York Times

[3]      Hoenig, T.M., & Bair, S.C., 4/26/18, “Relaxing bank capital requirements would risk another crisis,” Wall Street Journal

[4]      Thomhave, K., 5/25/18, “A Great Deal for Banks, Not So Much for American Jobs,” The American Prospect (http://prospect.org/blog/tapped/great-deal-banks-not-so-much-american-jobs)

[5]      Werner, E., 5/25/18, “Trump signs bill easing banking rules passed after crisis,” The Boston Globe from the Washington Post

FIGHTING TAX AVOIDANCE BY THE WEALTHY

A recent Op Ed in the Boston Globe caught my attention and I couldn’t resist sharing it. If you want to understand how wealthy individuals and corporations use off-shore tax havens to avoid paying their fair share of taxes and what we can do about it, this article provides answers. [1]

  • The best estimate is that 11.5% of personal wealth (i.e., $8.7 trillion), globally, is stashed in off-shore tax havens.
  • This costs the U.S. government an estimated $32 billion a year in lost tax revenue from individuals. (Other countries’ governments probably lose $140 billion a year in tax revenue.)
  • In addition, corporations dodge about $70 billion a year in U.S. taxes by using off-shore tax havens. This represents about 20% (one-fifth) of what the U.S. does collect in corporate income taxes each year. (Other countries’ governments probably lose $60 billion a year in tax revenue.)
  • The roughly $100 billion per year the U.S. is losing to off-shore tax dodging is what the federal government spends on Food Stamps, other nutrition programs (such as school lunches), the Children’s Health Insurance Program (CHIP), Head Start, child care subsidies, and welfare COMBINED.
  • Taxing corporate income based on what is called formulary apportionment would stop this tax avoidance. Under this approach, a corporation would pay U.S. taxes based on the portion of its sales that are in the U.S., regardless of any accounting gimmicks or other strategies that made it look like the income from those sales was in another country. This tax approach is in wide use today; many states use it to calculate state corporate income taxes. It is a tax approach that has been used since the days of multi-state railroad construction in the 1800s.
  • Stopping individuals from using offshore accounts to avoid paying taxes would require international cooperation. Today, the IRS has a comprehensive system for tracking earned income. Even if you move from state to state or out of the country, the income you earn is reported to the IRS and you pay income taxes based on your total income. States with income taxes track income that you earn out-of-state and require you to pay state income tax on it. A similar approach should be applied to tracking other kinds of income and ownership of financial securities or assets that produce income. The U.S. passed the Foreign Account Tax Compliance Act in 2010 that requires foreign banks, including the notoriously secretive Swiss and Cayman Island banks, to share information with the IRS on accounts held by American clients. This is a starting point for the international cooperation needed to reduce tax dodging by the wealthy that hurts the U.S. and many other countries.

Tax avoidance by the wealthy contributes to the astronomical and growing inequality of wealth and income. It also means that everyone else must pay more in taxes to make up for the lost taxes when wealthy individuals and corporations don’t pay their fair share.

[1]      Scharfenberg, D., 1/21/18, “A world without tax havens,” The Boston Globe

PROTECTING CONSUMERS FROM WALL STREET

The collapse of the financial corporations in 2008 was due in large part to their predatory and illegal practices in pushing unaffordable home mortgages onto gullible home buyers. Congress and President Obama enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (known as Dodd-Frank) to help protect consumers from such abusive behavior.

Dodd-Frank’s most notable consumer protection provision was the creation of the Consumer Financial Protection Bureau (CFPB). The CFPB’s role is to protect consumers from illegal and predatory practices, as well as discrimination, by financial corporations and to work to ensure that consumers receive the information necessary to make good financial decisions and to avoid “unsafe” financial products and services.

Since its creation, the CFPB has been hard at work punishing financial corporations that violate the law, returning almost $12 billion to over 29 million victimized consumers. In less than 8 years, it has helped consumers by responding to over 1.2 million complaints and issuing, for example, new standards for home mortgage documents that are clearer and easier to understand. At CFPB’s website you can find information on understanding your credit score and to help you make a good decision about a car or student loan.

Given that financial products and services (such as bank accounts, credit cards, and car and student loans) are essential for individuals, families, and our economy, appropriate regulation of them is necessary. Before the creation of the CFPB, financial services regulation was spread among 6 federal agencies and state regulators. None of them had consumer protection as its sole or primary role nor had the power to establish a single set of regulations for the whole financial industry. The CFPB has this power and a sole focus on consumer protection, much as the Consumer Product Safety Commission does for non-financial products. [1]

In July, the CFPB finalized a rule prohibiting financial corporations from putting mandatory arbitration clauses in their customer contracts. These clauses, which are in most agreements consumers sign when they open a bank account or get a loan or credit card, prohibit customers from suing the financial corporation in court. (They are also in many contracts or agreements for other consumers products and services, such as cell phones and cable TV, Internet, and phone services.) They require the customer to submit any complaint, even one due to illegal activity, to an arbitrator, who is usually selected by the financial corporation. They eliminate the ability of customers to band together in a class action lawsuit, and require them to pursue any grievances only through individual arbitration cases.

In addition to preventing class action lawsuits, the mandatory arbitration clauses often prohibit customers from sharing their experiences with regulatory or law enforcement agencies and the media. Corporations know that consumers will rarely spend the time and money (the typical cost to file an arbitration claim is $161) to pursue arbitration, given that the amount of money at stake is usually small. The result is that corporations evade accountability and can hide illegal or unethical behavior. [2]

The CFPB rule banning mandatory arbitration clauses was put in place after 5 years of study and development pursuant to a Congressional directive to study mandatory arbitration clauses and restrict or ban them if they harm consumers. The CFPB study found that customers win only 1 out of 11 arbitration cases and when they win they receive an average of $5,389. However, when a financial corporation makes a claim or counterclaim against a customer, it wins 93% of the time and the customer is ordered to pay, on average, $7,725 to the financial corporation! [3]

The CFPB study also found that in an average year 6,800,000 consumers get cash awards due to class action lawsuits while only 16 do so in arbitration cases. Consumers in these lawsuits receive a total of $440,000,000 (after deducting lawyers’ and courts’ fees), while consumers across all arbitration cases receive a total of $86,216.

Three recent examples of practices by Wells Fargo & Company make clear the significance and importance of banning mandatory arbitration clauses and allowing class action lawsuits by customers. (By the way, Wells Fargo is the third largest US bank and a multi-national financial corporation headquartered in San Francisco with $22 billion in annual profits.) It recently paid $185 million to settle with the CFPB and other regulators for having illegally opened and charged customers for over 2 million unauthorized checking and credit card accounts. When customers tried to sue Wells Fargo for this starting back in 2013, it forced them to make their claims in individual arbitration cases. This allowed Wells Fargo to continue its illegal behavior and theft from customers for 3 more years (5 years in total) before its behavior came to the attention of regulators.

In July, another class action lawsuit was filed against Wells Fargo based on illegal behavior on car loans. Apparently, Wells Fargo was requiring customers with car loans to buy car insurance they didn’t need (it was typically redundant with insurance they already had). And Wells Fargo was getting kickbacks from the company selling the insurance. The extra cost of the unneeded insurance pushed 250,000 car loan customers into default on their loan payments and resulted in 25,000 cars being repossessed. If these customers are forced into arbitration and are unable to participate in a class action lawsuit, it’s likely that most of them will not receive any compensation from Wells Fargo for its illegal and harmful behavior.

Finally, Wells Fargo is the defendant in an on-going, 8-year-old case over overdraft fees and practices. It is arguing in court that these customers’ claims must be handled in individual arbitration cases rather than a class action lawsuit, despite complaints from customers in 49 states. [4]

Despite these examples, and the fact that Congress has banned mandatory arbitration in home mortgage agreements, members of Congress have quickly introduced legislation to repeal the Consumer Financial Protection Bureau’s new rule banning mandatory arbitration clauses in financial product and service agreements. [5] Weakening or eliminating the CFPB in general, not just its ban on mandatory arbitration, has been a goal of Wall St. corporations and their friends in Congress ever since its creation by the Dodd-Frank law.

I urge you to contact your US Representative and Senators and ask them to support the Consumer Financial Protection Bureau and its ban on mandatory arbitration clauses in consumer product and service agreements.

[1]      Servon, L.J., 7/17/17, “Will Trump kill the CFPB?” The American Prospect (http://prospect.org/article/will-trump-kill-cfpb)

[2]      Germanos, A., 7/12/17, “Serving Wall Street predators, GOP launches swift attack on new rule protecting consumers,” Common Dreams (https://www.commondreams.org/news/2017/07/12/serving-wall-street-predators-gop-launches-swift-attack-new-rule-protecting)

[3]      Shierholz, H., 8/1/17, “Correcting the record: Consumers fare better under class actions than arbitration,” Economic Policy Institute (http://www.epi.org/publication/correcting-the-record-consumers-fare-better-under-class-actions-than-arbitration/)

[4]      Brumback, K., 8/25/17, “Wells Fargo wants customer suits tossed,” The Boston Globe from the Associated Press

[5]      Germanos, A., 7/12/17, “Serving Wall Street predators, GOP launches swift attack on new rule protecting consumers,” Common Dreams (https://www.commondreams.org/news/2017/07/12/serving-wall-street-predators-gop-launches-swift-attack-new-rule-protecting)

PROTECTING OUR ECONOMY FROM WALL STREET SPECULATION

After the collapse of the financial corporations in 2008 due to their greed, predatory and illegal practices, and malfeasance, Congress and the President enacted legislation to try to prevent such a collapse in the future. This was the Dodd-Frank Wall Street Reform and Consumer Protection Act (known as Dodd-Frank).

The Dodd-Frank law is not as strong as many people thought it should be, because Wall St. executives, along with their lobbyists and friends in Congress, worked hard to weaken it as it was being written and passed. For example, it did not break up the “too-big-too-fail” financial corporations or limit their growth. (They are now all bigger than they were in 2008.)

A key provision of Dodd-Frank, known as the Volcker Rule, restricts banks from making certain kinds of speculative investments that do not benefit their customers and actually put customers’ deposits (and the banks and the economy) at risk if large investment losses result. Such speculative investments and big losses from them played a key role in causing the 2008 financial collapse. The Volcker Rule restricts but does not ban such investments, as many people thought it should and as had been the case from 1933 to 1999 under the Glass-Steagall Act. [1] In particular, many people believe that banks with deposits insured by the Federal Deposit Insurance Corporation (FDIC) should be prohibited from making such risky investments because these investments, which only benefit the bank’s executives and shareholders, are, in effect, insured against big losses by the FDIC, i.e., the federal government and taxpayers.

The Volcker Rule was supposed to be implemented in 2010, but continuing opposition from Wall St. and its supporters has continued to delay (and further weaken) the rule. It finally went into effect in 2015, but banks continue to be granted extensions for when they have to come into compliance with its provisions.

The Trump Administration, through the five agencies that regulate the financial industry, is currently working to rewrite and further weaken the Volcker Rule. They are moving to loosen the restrictions on risky investments, even though they were a major cause of the 2008 financial collapse. [2]

The Dodd-Frank law in general, not just its Volcker Rule, has been a target for weakening and delaying tactics ever since its original drafting and passage, as well as at every step in its implementation. The US House recently passed the so-called Financial Choice Act that would significantly weaken Dodd-Frank’s regulation of the financial industry.

I urge you to contact your US Representative and Senators and ask them to:

  • Oppose efforts to weaken the Volcker Rule and to support an outright ban on speculative investment activity by banks that have customer deposits and FDIC insurance, and
  • Oppose efforts to weaken the Dodd-Frank law in general and its regulations that reduce the likelihood of another financial industry collapse.

[1]      Wikipedia, retrieved 8/15/17, “Volcker Rule,” (https://en.wikipedia.org/wiki/Volcker_Rule)

[2]      Bain, B., & Hamilton, J., 8/1/17, “Wall Street regulators are set to rewrite the Volcker Rule,” Bloomberg News (https://www.bloomberg.com/news/articles/2017-08-01/volcker-rewrite-is-said-to-start-as-trump-regulators-grab-reins)

SAVING OUR REGULATORS FROM THE WAR ON REGULATION

The war on regulation is a war not only on regulations themselves, but on the regulatory agencies that work to protect consumers, workers, and the public. The federal regulatory agencies that we rely on include the:

  • Consumer Financial Protection Bureau (CFPB) that protects us from deceptive financial products (e.g., loans and credit cards) and abusive financial corporations (e.g., banks, payday lenders, and loan sharks);
  • Consumer Product Safety Commission (CPSC) that protects us from dangerous physical consumer products (e.g., toys, children’s car seats, cribs, power tools, appliances, cigarette lighters, and household chemicals);
  • Environmental Protection Agency (EPA) that protects us from pollution of our air and water;
  • Federal Trade Commission (FTC) that protects us from unfair and deceptive practices in the marketing of consumer goods (e.g., products that promise that your baby can learn to read);
  • Food and Drug Administration (FDA) that protects us from tainted food and unsafe medications;
  • National Labor Relations Board (NLRB) that protects workers from unfair treatment on the job;
  • Occupational Health and Safety Administration (OSHA) that protects workers from unhealthy and unsafe working conditions; and
  • Securities and Exchange Commission (SEC) that protects investors from unfair or deceptive practices in the buying and selling of securities.

The Consumer Financial Protection Bureau (CFPB) is the newest of these agencies. It was created after the financial collapse of 2008 as part of the Dodd-Frank financial reform act. Its creation was spearheaded by Massachusetts Senator Elizabeth Warren. It is stopping the abusive and deceptive mortgage loans that were a major contributor to the financial collapse and to the loss of over 9 million homes by middle and working-class Americans.

The CFPB works to protect consumers from unfair, discriminatory, deceptive, and abusive practices by banks and other financial institutions. It provides consumers with information and tools to make good financial decisions. It receives and responds to consumer complaints. And it takes action against financial corporations that break the law. In its short life, it has handled over 1 million consumer complaints and obtained $12 billion in relief for over 29 million consumers.

Because the CFPB regulates Wall Street firms and holds them accountable, it has been in the crosshairs of the big banks and investment corporations. Since before the CFPB came into existence, Wall Street, through its campaign spending, its lobbyists, and its friends in government offices (both elected and appointed ones), has worked to weaken, delay, and eliminate the CFPB and its regulations. Currently, CFPB’s opponents are working to reduce the power of its director or to get him to resign so Trump can appoint someone who won’t stand up for consumers and take on the big financial corporations. They are also trying to cut its budget and weaken its independence by putting it under the control of the President and Congress. [1] [2]

President Trump and Scott Pruitt, his head of the Environmental Protection Agency (EPA), are working hard to weaken the EPA. They have proposed dramatic budget cuts for it and significant weakening of its regulations promoting clean air and water, as well as its efforts to reduce global warming and climate change. The proposed budget cut, from $8.2 billion to $5.65 billion (31%), is the greatest percentage cut proposed for any federal agency. It would have so many very serious implications that many of them will get very little if any attention from the media.

For example, the proposed budget for the EPA would eliminate federal funding for protecting children from poisoning by lead paint. According to a 2014 report from the Centers for Disease control, 243,000 children in the U.S. have lead levels in their blood that exceed the danger threshold for permanent neurological damage. Moreover, there is compelling evidence that significantly lower blood lead levels can cause serious harm.

The Lead Risk Reduction Program at the EPA educates the public and certifies home renovators on the safe removal of lead paint. This program’s $2.5 million and 73 employees would be eliminated in the Trump budget. The supposed rationale for this is that state and local governments can do this better than the federal government. However, the proposed budget also eliminates the $14 million for grants to state and local governments to help them address the risks of lead paint. [3]

I urge you to contact your U.S. Representative and Senators. Ask them to stand up for children and all of us by supporting a strong, well-funded EPA, as well as a strong and independent Consumer Financial Protection Bureau. Strong consumer and worker protections, in general, should be the priority, not kowtowing to large corporations.

[1]      Frank, B., 5/2/17, “The art of the deal: Bait and switch division,” The Boston Globe

[2]      Freking, K., & Gordon, M., 5/5/17, “GOP-led House panel votes to overhaul Dodd-Frank,” The Boston Globe from the Associated Press

[3]      Mooney, C., & Eilperin, J., 4/6/17, “EPA programs to protect kids from lead paint may end,” The Boston Globe from the Washington Post

THE YEAR-END TAX BILL: A BIG WIN FOR CORPORATIONS AND A LITTLE WIN FOR WORKING AMERICANS

Because of the gridlock in Congress, so few bills pass that those that have to pass get laden with special interest provisions and riders like ornaments on a Christmas tree. The recent year-end spending bill (2,009 pages long) and tax legislation (233 pages long) are the latest two examples. There were literally thousands of riders attached to these two massive and complicated bills. Many special interest provisions are slipped in by powerful legislators, typically on behalf of corporate lobbyists, when there is little time for other legislators (let alone the public) to scrutinize them. Nonetheless, these provisions can produce significant, windfall benefits for the targeted beneficiaries. Not surprisingly, the executives of the corporations that stand to reap the benefits are often large campaign contributors. [1]

The tax legislation Congress passed on December 18 was a $686 billion 10-year package. In it, Congress made permanent two recent expansions of tax credits that support low-income, working families: the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC). Over the next 10 years, this will put $118 billion in the pockets of low-income working Americans. This will keep 16 million people from falling into poverty or deeper into poverty and it will help the economy by putting money in the pockets of people who will spend it at local businesses.

Congress also renewed the American Opportunity Tax Credit. It provides a tax credit of up to $2,500 per year for the costs of college. This will give a helping hand to millions of families struggling with the costs of higher education.

Overall, nearly 40% of the tax breaks in this legislation – approximately $250 billion – benefit working Americans who are overwhelmingly low- and middle-income. Typically, when the year-end tax cut package is passed low- and middle-income Americans have gotten just 20% of the tax breaks. So this year, with advocacy by many progressive leaders and activists, the benefits for working families were double what they usually are. [2]

This is the difference that political activism can make. Thank you to all of you who contributed your time, efforts, and voices to this fight.

Nonetheless, corporations got more than $400 billion in tax breaks. For example, heavy lobbying by Wall Street financial institutions made permanent a supposedly temporary, major tax loophole that makes it easier to stash profits offshore and avoid taxation here at home. This $78 billion (over 10 years) tax loophole has helped General Electric go five straight years without paying any federal income tax, and instead getting billions in refunds. Another offshore tax loophole was extended for five years at a cost of $8 billion. A special tax provision on the depreciation of equipment, intended as a temporary measure to fight the 2008 recession, was extended for another six years costing $28 billion in lost corporate tax revenue. Corporate lobbyists helped draft the language of at least some of these tax giveaways.

The hypocrisy of the supposed deficit fighters in Congress was on full display. None of the $400 billion in corporate tax breaks was paid for; their cost was simply added to deficit. Not one loophole was closed or tax subsidy eliminated to pay for this largesse. Yet when a provision to extend benefits for 9/11 first responders came up, the supposed deficit hawks insisted that it had to be paid for with spending cuts and new revenue!

My next post will cover highlights of the year-end spending bill.

[1]       Moyers, B., 12/22/15, “The Plutocrats Are Winning. Don’t Let Them!” Common Dreams (http://www.commondreams.org/views/2015/12/22/plutocrats-are-winning-dont-let-them)

[2]       Clemente, F., 12/22/15, “Families Advance With Recent Tax Bill, But Corporations Got a Lot More,” The Huffington Post (http://www.huffingtonpost.com/frank-clemente/families-advance-with-rec_b_8861986.html)

BIG CORPORATIONS BEHAVING BADLY PART 2

In my previous post, I focused on the big Wall St. corporations’ efforts to weaken financial regulations and consumer protections. In this post, I’ll share two much less visible examples of the power of big corporations to tilt the playing field in their favor:

  • H-1B visas
  • Consumer agreements and employee contracts

First, large corporations are dominating and gaming the H-1B visa program set up to help US companies hire foreign workers with special skills needed for their businesses that they are unable to find among US citizens. Only 85,000 of these visas are issued each year and many small companies with such needs are being shut out by large corporations requesting tens of thousands of the visas. It used to be that companies could apply and get one of these visas at any point during the year when the need arose. Now, immediately after the application process starts on April 1 each year, big corporations request thousands of visas so that a week later applications have already exceeded the year’s supply. [1]

Just twenty corporations took nearly 40% of the visas last year, about 32,000 of them, with one company applying for over 14,000. Thirteen of these 20 corporations are global outsourcing operations that typically bring in their employees from India to fulfill large contracts with US corporations that are outsourcing customer contact, marketing, or other functions. Their dominance and gaming of the system mean that many of the 10,000 other companies, many of them small businesses, that want and need these visas can’t get them.

These large corporations’ claims that they can’t find US citizens to perform these jobs is somewhat suspect. It seems likely that in some cases they simply want to pay the foreign workers less than they would have to pay Americans to do these jobs. Furthermore, a number of these corporations aren’t actually US corporations; they have their headquarters in India or Ireland, for example.

On a different front, many of the agreements that consumers must sign or agree to to shop online, rent a car, put a relative in a nursing home, or to get a credit card, cell phone, or many other products and services, contain a clause that goes something like this: “the company may elect to resolve any claim by individual arbitration.” Increasingly, this language is also showing up in contracts individuals must sign to get a job. This means that the corporate employer or provider of the product or service can force employees and consumers to resolve any complaint, problem, or claim, including ones that may involve fraud, illegality, or serious risk to the individual, through a corporate-controlled arbitration process and as an individual (i.e., not through any group action such as a class-action lawsuit).

This prevents the individual from going to court, from suing, and from joining with others in a class-action lawsuit. Class-action lawsuits, where a group of individuals who have been similarly harmed by a corporation’s actions band together to bring a lawsuit, are often the only realistic way to fight the power and deep pockets of a large corporation. Many attempts to bring class-action lawsuits have been rejected by the courts due to such arbitration clauses, including ones against Time Warner Cable for unauthorized charges on customers’ bills, AT&T for excessive cancellation fees, a travel booking website for price fixing, and ones for predatory lending, wage theft, and multiple cases of race and sex discrimination. The evidence indicates that once a class-action suit is blocked, most individuals simply drop their claims because they aren’t worth pursuing on an individual basis given the time and effort required and the small likelihood of winning any significant compensation.

“This is among the most profound shifts in our legal history. Ominously, business has a good chance of opting out of the legal system altogether and misbehaving without reproach,” according to US District Judge William Young, a Reagan appointee. The effort to prevent class-action lawsuits was led by a coalition of credit card companies and retailers; it has been underway for 10 years. The Attorneys General of 16 states have written to the Consumer Financial Protection Bureau (CFPB) warning that “unlawful business practices” could flourish with the growing inability to use class-action lawsuits to seek compensation for victims. [2]

In October, the Consumer Financial Protection Bureau outlined rules to prevent financial corporations from banning class-action lawsuits in consumer agreements. Wall St. and the US Chamber of Commerce immediately mobilized to block the CFPB’s effort.

Large corporations are continuously working to gain benefits for themselves at a cost to consumers, workers, and small businesses. I urge you to contact your elected officials and tell them that big corporations don’t need or deserve a playing field that’s tipped in their favor. If anything, the field should be tipped in favor of the little guy – individuals and small companies.

[1]       Preston, J., 11/11/15, “Top companies ‘game’ visa system, leaving smaller firms out of luck,” The Boston Globe from The New York Times

[2]       Silver-Greenberg, J., & Gebeloff, R., 11/1/15, “Hidden in fine print, clause stacks deck against consumers,” The Boston Globe from The New York Times

BIG CORPORATIONS BEHAVING BADLY

FULL POST: One of the themes that runs through many of my blog posts is the prevalence of corporate power in our politics, policies, economy, and lives. The power of large, often multi-national, corporations is evident in:

as well as in consumer protection laws, workplace and labor law, and the topics that our corporate media cover and don’t cover.

In this post, I’ll focus on efforts to weaken financial regulations and consumer protections, including some that are likely to come up in Congress in the near future. In my next post, I’ll share some other examples of the power of big corporations to tilt the playing field in their favor.

The large Wall St. financial corporations are wielding their power in opposing regulations and oversight intended to prevent another financial sector collapse and bailout like the one in 2008. Much of the fighting is over provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including the Consumer Financial Protection Bureau that it created. Wall St. has been working hard to delay, water down, and repeal regulations under the Dodd-Frank law, in spite of their success in weakening the original law.

One of their tactics is to slip provisions weakening regulations and oversight into unrelated legislation that must pass, hoping their provisions will pass with little or no attention in Congress or among the public. Last December, when a must-pass year-end budget bill was being considered, they slipped in a provision repealing the requirement that their trading of risky investments called swaps (a kind of derivative) had to be conducted by entities separate from those that held insured deposits from individuals. The budget bill passed as did the repeal of the swap regulation. This means that $10 trillion of risky trades are held by banks that have federal deposit insurance. If these risky trades turn sour and produce big losses, the Federal Deposit Insurance Corporation and perhaps other government agencies will have to bailout the banks to make sure depositors don’t lose their insured deposits.

More recently, in October, Wall St. lobbied hard as bank regulators set the amount of money banks have to keep in reserve to cover potential losses on these risky trades. They were able to reduce the amount of these reserves, called the “margin requirement,” which increases the likelihood of a bailout at taxpayers’ expense.

With two pieces of must-pass legislation coming up Congress, the expectation is that Wall St. will again try to slip additional provisions into these bills to weaken regulation and oversight. The two bills are the year-end budget bill and the bill funding highway construction and maintenance. [1] One target appears to be the Consumer Financial Protection Bureau, which was the target of a recent $500,000 advertising campaign that falsely accuses the CFPB of denying people loans. (The CFPB doesn’t make loans; it regulates lenders to prevent them from making predatory and fraudulent loans.)

We have a Consumer Product Safety Commission to regulate and protect us from dangerous consumer products and a National Highway Traffic Safety Administration to protect us from dangerous automobiles (e.g., ones with faulty air bags or ignition switches). However, until Dodd-Frank passed, we did not have an agency to protect consumers from unsafe or predatory financial products. In Canada, where they did have such an agency, the incidence of predatory lending and mortgages was a tiny fraction of what it was in the US in the years leading up to the financial crash. This is a key reason the impact of the crash on homeowners and consumers in Canada was minor compared to the trillions of dollars of losses suffered by Americans.

I urge you to keep an eye out for efforts by our large corporations to bend policies – laws and regulations – to benefit themselves at a cost to consumers, workers, citizens, and small businesses. Contact your Members of Congress and tell them you’re tired of big corporations making out like bandits (sometimes literally) and getting away with it at your expense.

[1]       Hopkins, C., & Brush, S., 11/11/15, “Lawmakers urge regulators to hold the line on risky trades,” The Boston Globe from Bloomberg News

PROTECTING OUR ECONOMY AND DEMOCRACY FROM WALL STREET

We need to protect our economy from the risky behavior of the big Wall Street banks and financial corporations. This is the fourth of the Ten Big Ideas to Save the Economy, presented by Robert Reich and MoveOn.org. [1] We need to prevent these Wall St. giants from crashing the financial system and sending our economy into a severe recession again – as they did in 2008. Millions of Americans lost their jobs, their homes, and their savings in the Great Recession of 2008. The Wall Street corporations and their senior managers got bailed out, but the rest of us got sold out.

The giant Wall St. banking corporations are bigger than ever and are up to their old tricks. Given their increased size, they are even more potent economically and politically than before the 2008 crash. They continue to engage in speculative trading and other risky financial activities that could bring them and our economy crashing down again. They are pushing to repeal even the very modest financial regulations that were put in place to better protect us after the 2008 crash (by the Dodd-Frank law). They have friends in Congress (from both parties), as well as in the administration, who are supporting their efforts. They press their case by spending tens of millions of dollars on campaign contributions and lobbying.

Three actions need to be taken:

  • Reinstate the requirement that banking activities involving government-insured deposits be kept separate from risky financial activities. The Glass-Steagall Act that used to do this – and kept our banking system safe for 70 years – was repealed in the late 1990s. This led to the 2008 collapse and bailout.
  • Re-institute a small transaction tax, a sales tax, on the purchase of financial assets. This would discourage speculative activity that has no value beyond self-enrichment (especially high-volume, computer-driven trading) and would produce significant revenue that could be put to good use. A 0.5% sales tax on the purchase of financial assets ($5 on every $1,000) would generate roughly $500 billion per year. (See my posts of 10/8/12 and 9/29/12 for more details.)
  • Split the big banks into multiple, smaller entities. Currently, they are too big to fail, which should mean that they are too big to exist. Their size gives them too much clout, both economically and politically. This makes them dangerous to our economy and our democracy. In the past, the country used its anti-trust laws to break up the big oil companies and the telephone monopoly ATT. Similarly, we should break up the giant Wall St. financial corporations of today. They are so big that a speculative trade that goes sour and puts them into bankruptcy threatens our whole financial system and economy, and, therefore, requires a public bailout. And they are so big that through spending on campaigns and lobbying, coupled with the revolving door that puts former employees in key government positions, they are able to bend the rules of our financial system and economy to their benefit.

[1]       You can watch the 3 minute video at: http://civic.moveon.org/tamewallstreet/share.html?id=116548-5637721-c7x9Tcx.

GOVERNMENT BY THE BIG WALL ST. CORPORATIONS

ABSTRACT: The big Wall St. financial corporations just got another big gift. The Federal Reserve announced that it will give Wall St. a year’s delay (to mid-2017) on the implementation of the Volcker Rule, which would ban Wall St. from engaging in risky investments with federally-insured deposits. Many observers believe that this delay will simply give the financial corporations time to kill the Volcker Rule before it ever goes into effect through their lobbying and campaign contributions. The financial corporations’ incessant lobbying and cumulative campaign contributions weakened the Dodd-Frank bill to begin with, and now are delaying, weakening, and repealing its pieces during implementation. Citigroup spent $5.6 million on lobbying in 2013 and its political action committee and employees gave $2.1 million to candidates for federal office in the 2014 election cycle. JPMorgan Chase spent and gave similar amounts.

In addition to huge, risky investments with taxpayer-insured deposits, other risks in the banking and financial system are growing. The bottom line is that the huge financial corporations, which were too-big-to-fail in 2008 and therefore got trillions of dollars in a public bailout, are now bigger than ever and getting riskier by the day. Another bailout and crash of our economy are one financial mistake or economic surprise away.

We need to push back and tell our elected officials that:

  • The Dodd-Frank law’s financial reforms need to be strengthened,
  • Financial corporations should not be allowed to gamble with taxpayer-insured deposits, and
  • Too-big-to-fail financial corporations should be broken up.

FULL POST: The big Wall St. financial corporations just got another big gift. First, the ban on derivatives trading with federally-insured deposits was repealed in the year-end budget bill. (See blog post on 12/14/14.) Then, the Federal Reserve announced that it will give Wall St. a year’s delay (to mid-2017) on the implementation of the Volcker Rule. This Rule, which is a key part of the Dodd-Frank post-2008 crash financial reform legislation, would ban Wall St. from engaging in other types of risky investments with federally-insured deposits. The Volcker Rule is a partial re-implementation of the Glass-Steagall Act, which was enacted after the Great Depression and prohibited banks with federally insured deposits from engaging in investment banking activities. (It kept our banking system safe for 70 years until its repeal in 1999.) The prohibited investment activities include participation in private equity funds and hedge funds, which are basically unregulated investment activities and can be very risky. Goldman Sachs has $11 billion in such investments, while Morgan Stanley has $5 billion. [1]

Many observers believe that this delay will simply give the financial corporations time to kill the Volcker Rule before it ever goes into effect through their lobbying and campaign contributions. This is exactly what happened to the ban on derivatives: it was delayed from 2013 to mid-2015 and has now been repealed so it never went into effect. Citigroup, whose lobbyists wrote the repeal of the derivative ban, held over $60 trillion of derivatives (that’s right, trillion not billion) at the end of 2013 and this huge, risky investment will now continue to be protected by federal deposit insurance. [2]

The financial corporations’ incessant lobbying and cumulative campaign contributions weakened the Dodd-Frank bill to begin with, and now are delaying, weakening, and repealing its pieces during implementation. Citigroup spent $5.6 million on lobbying in 2013 and its political action committee (PAC) and employees gave $2.1 million to candidates for federal office in the 2014 election cycle. JPMorgan Chase spent $5.5 million on lobbying in 2013 and its PAC and employees gave $2.6 million to federal candidates for the 2014 election. Most of the members of Congress who voted for the budget bill that contained the repeal of the derivatives ban had received campaign contributions from one or both of these huge financial corporations. [3]

In addition to huge, risky investments with taxpayer-insured deposits, other risks in the banking and financial system are growing. The requirement for down payments on mortgages was recently decreased to 3%. The number of subprime auto loans has grown to $21 billion; some of them give borrowers 6 or 7 years to pay off the loan. This weakening of credit standards is the same pattern that triggered the 2008 collapse. The large financial corporations are also engaging in a growing amount of lending and trading in investments, some quite risky, that are beyond the scrutiny of regulators. This is all very reminiscent of the situation that led to the 2008 crash. [4]

The bottom line is that the huge financial corporations, which were too-big-to-fail in 2008 and therefore got trillions of dollars in a public bailout, are now bigger than ever and getting riskier by the day. Another bailout and crash of our economy are one financial mistake or economic surprise away. Nothing substantial has changed from the 2008 scenario.

To avoid another collapse and bailout, we need to push back and tell our elected officials that:

  • The Dodd-Frank law’s financial reforms and their implementation need to be strengthened, not weakened or delayed,
  • Financial corporations should not be allowed to gamble on risky investments with taxpayer-insured deposits, and

 

  • Too-big-to-fail financial corporations should be broken up to reduce the risks they present to our financial system and economy.

[1]       Queally, J. 12/19/14, “Just in time for the holidays, another Wall Street giveaway,” Common Dreams (http://www.commondreams.org/news/2014/12/19/just-time-holidays-another-wall-street-giveaway)

[2]       Eskow, R., 12/26/14, “Wall Street had a merry Christmas. The New Year’s still up for grabs.” Campaign for America’s Future (http://www.commondreams.org/views/2014/12/26/wall-street-had-merry-christmas-new-years-still-grabs)

[3]       Choma, R., 12/12/14, “Wall Street’s omnibus triumph, and others,” Open Secrets (http://www.opensecrets.org/news/2014/12/wall-streets-omnibus-triumph-and-others/)

[4]       Wiseman, P., 12/16/14, “Memories of financial crisis fading as risks rise,” Associated Press (http://hosted2.ap.org/APDEFAULT/f70471f764144b2fab526d39972d37b3/Article_2014-12-15-US–Financial%20Crisis-Forgotten%20Lessons/id-1422b6cbcd4d4b06a93fca295eaf1b7e)

WALL STREET BAILOUT REVIVED

ABSTRACT: As you probably know, Congress just rushed to pass a $1.1 trillion spending bill that keeps the federal government operating. Such last minute, have-to-pass pieces of legislation are ideal vehicles for enacting laws on unrelated matters that wouldn’t withstand the scrutiny of the regular legislative process.

One such provision in this bill repeals a piece of the Dodd-Frank financial industry regulation law entitled “Prohibition against federal government bailouts of swap entities.” The Dodd-Frank law does not prohibit banks from owning these derivatives, but requires them to do so in a separate entity that is not insured by the federal government. Derivatives were a major contributor to the 2008 financial collapse. Repealing this piece of the Dodd-Frank law benefits a very few, very large, very profitable, financial corporations. The actual language of the repeal provision was written by a lobbyist for Citicorp, one of those large financial corporations. Senator Elizabeth Warren (D MA) took the lead in fighting this provision because it raises the risk of another financial collapse and another taxpayer-funded bailout.

Wall Street held the whole federal government’s budget hostage. It, in effect, demanded federal insurance for its gambling with derivatives or the federal government would shut down for lack of a budget. Teddy Roosevelt broke up the trusts in the early 1900s because they had too much political power and this undermined democracy. We’re at that point again.

Another unrelated provision in the budget bill allows an individual to give almost $800,000 per year to a political party. This would exacerbate the already disproportionate influence these very few, very wealthy individuals have over our elected officials and our government. These individuals are investing and looking forward to a nice return on their investment from the politicians whose elections they supported.

I encourage you to contact your US Representative, your Senators, and the President. Tell them you are outraged by these provisions in the budget bill that undermine our democracy and increase the risk of another financial collapse and another bailout of private, Wall Street corporations with the public’s money.

FULL POST: As you probably know, Congress, having procrastinated until the last hour, just rushed to pass a $1.1 trillion spending bill that keeps most of the federal government operating through next September. At least partly by design, such last minute, have-to-pass pieces of legislation are ideal vehicles for enacting laws on unrelated matters that wouldn’t withstand the scrutiny of the regular legislative process. In some cases, these tacked on provisions are passed and become law despite the public, and many members of Congress, being unaware of their existence. There are quite a few of them buried in this over 1,000 page budget bill.

One such provision repeals a piece of the Dodd-Frank financial industry regulation law, which was passed after the 2008 financial meltdown and bailout, in an effort to prevent them from happening again. [1] [2] This provision repeals a section of the Dodd-Frank law entitled “Prohibition against federal government bailouts of swap entities,” which prohibits federally insured banks from owning highly speculative financial instruments known as “swaps.” These are one kind of what are called derivatives, which are bets (i.e., gambling) on how certain other financial securities or factors, such as interest rates, will change over time.

The Dodd-Frank law does not prohibit banks from owning these derivatives, but requires them to do so in a separate entity that is not insured by the federal government, which ultimately means insured by the taxpayers. Derivatives were a major contributor to the 2008 financial collapse and to the need for what was ultimately a multi-trillion dollar bailout of large Wall Street corporations.

Repealing this piece of the Dodd-Frank law benefits a very few, very large, very profitable, financial corporations. The actual language of the repeal provision, which was slipped into the bill at the last minute, was written by a lobbyist for Citicorp, one of those large financial corporations.

Senator Elizabeth Warren (Democrat from Massachusetts) took the lead in fighting this provision because it raises the risk of another financial collapse and another taxpayer-funded bailout. [3] Somehow this provision made it into this crucial piece of legislation despite apparent, strong bipartisan support for ensuring that we never have to bail out Wall Street again. For example, opposition to the 2008 bailout was a central issue in the rise of the Tea Party movement.

As Senator Warren states, this is all about power and money. There were no public hearings, no debate, and no transparency. This was all inside, backroom, backdoor politics by Wall Street. Warren highlights the extraordinary influence of one of the large, Wall Street financial corporations, Citicorp. She notes that 3 of the last 4 Secretaries of the Treasury have come from Citicorp, along with the Vice-chairman of the Federal Reserve. She identifies at least 5 other senior officials in the executive branch who have worked for Citicorp. She notes that Citicorp has spent tens of millions of dollars on lobbying and campaign contributions, as well as additional, unknown amounts on think tanks and PR campaigns.

These expenditures and the movement of people through the revolving door from Wall Street to government (and often back to Wall Street) has proven to be an investment with a big payoff. Citicorp alone got roughly $500 billion from the bailout and then went right back to making huge profits and paying huge amounts to senior executives. During the development of the Dodd-Frank legislation, there was a proposal to break up Citicorp and the other huge financial corporations because they were too big to fail, and therefore a danger to the economy and likely to receive a bailout with public money if they got in trouble. This proposal was killed by those on Wall Street and their friends at the Treasury Department. Now, these huge financial corporations are even bigger than they were before.

Wall Street held the whole federal government’s budget hostage. It, in effect, demanded federal insurance for its gambling with derivatives or the federal government would shut down for lack of a budget. This is the power that Wall Street has, and it is far too much power. It means we do not have a democracy; we have a corporatocracy.

When Teddy Roosevelt broke up the trusts in the early 1900s, he did it not primarily because their power was distorting the economy and markets, but because they had too much political power. He stated that this undermined democracy. Well, we’re at that point again, without a doubt.

Underscoring this point, another unrelated provision in the budget bill allows an individual to give almost $800,000 per year to a political party (up from the current limit of just under $100,000). A few hundred people – out of the 300 million in this country – give that kind of money to political campaigns. This would exacerbate the already disproportionate influence these very few, very wealthy individuals have over our elected officials and our government. And these individuals aren’t throwing their money to the wind; they are investing and looking forward to a nice return on their investment from the politicians whose elections they supported.

US Although the budget bill passed Congress on Saturday and will presumably be signed by the President, I encourage you to contact your Representative, your Senators, and the President. Tell them you are outraged by these provisions in the budget bill that undermine our democracy and increase the risk of another financial collapse and another bailout of private, Wall Street corporations with the public’s money.

(You can contact your Representative and Senators by calling the Congressional switchboard at 202-224-3121. You can find contact information for your US Representative at http://www.house.gov/representatives/find/ and for your US Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm. You can email the President at http://www.whitehouse.gov/contact/submit-questions-and-comments. You can call the White House comment line at 202-456-1111 or the switchboard at 202-456-1414).

[1]       Bierman, N., & Meyers, J., 12/12/14, “A late rush to fund government,” The Boston Globe

[2]       Taylor, A., 12/10/14, “Massive $1.1 trillion spending bill unveiled,” Daily Times Chronicle from the Associated Press

[3]       I encourage you to watch 2 speeches (each less than 10 minutes) that Senator Warren gave in Congress in the past week. They’re on YouTube at: https://www.youtube.com/watch?v=LgsN7ilcWL4 and https://www.youtube.com/watch?v=DJpTxONxvoo. She very powerfully makes the case that the repeal of this piece of the Dodd-Frank law is unjustifiable, undemocratic, and dangerous special interest law making.

HOLDER’S FAILURE AT JUSTICE

ABSTRACT: As Attorney General Eric Holder leaves office, one of his legacies will be his Department of Justice’s (DOJ) treatment of the major banks and financial corporations. Of particular note is the failure to prosecute any of the senior officers at the banks and financial corporations that caused the 2008 financial collapse. Bill Black calls this “the greatest strategic failure in the history of the Department of Justice.” This lack of prosecution leaves the management in place at these huge corporations. When dishonest people and their illegal activity produce success, they and their organizations have a competitive advantage. As a result, their bad ethics drive good ethics out of the market place.

In the Savings and Loan Crisis of the 1980s and 1990s, over 1,000 bankers were convicted of criminal activity, even though this crisis was less than one-tenth the size of the 2008 crisis. The civil fines and penalties that the financial corporations have paid for their fraudulent activities that caused the 2008 crash were not sufficiently large to put a real dent in their multi-billion dollar revenues and profitability. Furthermore, the costs of these fines and penalties were not borne by the senior executives, but by the shareholders and the taxpayers (given that they typically were deducted from revenue as a cost of doing business and therefore reduced profits and taxes on them). The executives got to keep all their compensation and bonuses, despite their being based on profits generated from illegal activity.

The lack of criminal prosecutions is even more astounding when one looks at the repeated engagement in illegal activity that was widespread among this handful of very large financial corporations and the collusion among them.

The relationship between Wall St. and our federal government, including regulators and legislators, is built on campaign contributions, lobbyists, and the revolving door. This cozy relationship serves Wall Street’s interests rather than the public interest and will be hard to break. Bill Black says to Bill Moyers, “there’s never going to be a decisive victory against power and money and finance. We have to fight. Every generation has to engage in this struggle.”

FULL POST: As Attorney General Eric Holder leaves office, one of his legacies will be his Department of Justice’s (DOJ) treatment of the major banks and financial corporations. Of particular note is the failure to prosecute any of the senior officers at the banks and financial corporations that caused the 2008 financial collapse. In addition, the fines and penalties paid by these huge corporations, although large in dollar amounts, were not large enough to have any meaningful effect.

Bill Black calls this “the greatest strategic failure in the history of the Department of Justice.” He should know. He is the author of The Best Way to Rob a Bank is to Own One and was a bank regulator intimately involved with the Savings and Loan crisis of the 1980s and 1990s. [1] He recently appeared on Bill Moyers’ TV show and this post summarizes their conversation. [2]

The lack of prosecution of the financial corporations’ senior officers leaves them in charge of these huge corporations. Furthermore, they now know that there are no bad consequences for them for massive fraud and repeated illegal behavior. When dishonest people and their illegal activity produce success, they and their organizations have a competitive advantage. As a result, their bad ethics drive good ethics out of the market place. Enforcement of the rule of law is essential to protecting not just consumers, but also to incentivizing honest and ethical people and behavior. Prosecuting the executives of banks and financial institutions that engaged in massive fraud and illegal activity would have important, positive effects on accountability and deterrence.

In the Savings and Loan Crisis of the 1980s and 1990s, President George H.W. Bush and his administration were committed to cleaning up the mess they inherited. As a result, over 1,000 bankers were convicted of criminal activity, even though this crisis was less than one-tenth the size of the 2008 crisis. Among other things, this ensured that these individuals would never lead a financial institution again because of their criminal records.

President Obama and his administration focused instead on ensuring the stability of the huge financial corporations. They avoided prosecutions of individuals even though it is unlikely that such prosecutions would have had much impact on the corporations. Many members of the Obama administration, including Holder and Treasury Secretary Geithner, had come to the administration through the revolving door from the industry or roles where they had close relationships with the industry. In addition, President Obama received very large amounts in campaign contributions from Wall Street, with JP Morgan Chase CEO Jamie Dimon as a leading contributor and fundraiser. Many people believe that without this big money from Wall Street Obama would have lost the primary to Hillary Clinton or that he might have lost the final election to John McCain.

The civil fines and penalties that the financial corporations have paid for their fraudulent activities that caused the 2008 crash were not sufficiently large to put a real dent in their multi-billion dollar revenues and profitability. This is consistent with the Obama administration’s overall approach of putting the stability of these corporations first. Furthermore, the costs of these fines and penalties were not borne by the senior executives, but by the shareholders and the taxpayers (given that they typically were deducted from revenue as a cost of doing business and therefore reduced profits and taxes on them). The executives got to keep all their compensation and bonuses, despite their being based on profits generated from illegal activity. Moreover, the civil settlements did not prohibit these financial corporations from continuing to engage in the lines of business where they had engaged in fraudulent and illegal activity. The settlements either explicitly or implicitly granted all the senior executives immunity from prosecution, ensuring that lower level executives’ testimony against senior executives could not be leveraged through individual offers of immunity or leniency for cooperation with prosecutors (as was done in the Enron case, for example).

The lack of criminal prosecutions is even more astounding when one looks at the repeated engagement in illegal activity that was widespread among this handful of very large financial corporations, and the fact that the illegal activities often required collusion among them. Over the last 10 years, these illegal activities have included:

  • Encouraging home owners to take on fraudulently underwritten and financially unviable mortgages
  • Knowingly selling those toxic mortgages to investors (including Fannie Mae and Freddie Mac) while fraudulently vouching for their quality
  • Fraudulently foreclosing on hundreds of thousands of home owners
  • Rigging the Libor interest rate that is used to price trillions of dollars of securities
  • Rigging bond prices and the underwriting of the issuing of bonds, and
  • Laundering money for viciously violent drug cartels, terrorist groups, and countries that had been officially banned from financial transactions as state sponsors of terrorism

The relationship between Wall St. and our federal government, including regulators and legislators, is built on campaign contributions, lobbyists, and the revolving door. This cozy relationship serves Wall Street’s interests rather than the public interest and will be hard to break, especially given the Supreme Court’s Citizens United and other decisions that allow huge amounts of money from corporations and their wealthy senior executives to flow into our political campaigns. Bill Black says to Bill Moyers, “there’s never going to be a decisive victory against power and money and finance. We have to fight. Every generation has to engage in this struggle.” The corporations live forever and their thirst for profits will never stop. Therefore, they will continually work to subvert our democracy and its laws to serve their interests unless we and our elected representatives are continually vigilant and fight back.

[1]       William K. Black was formerly the litigation director of the Federal Home Loan Bank Board from 1984 to 1986, deputy director of the Federal Savings and Loan Insurance Corporation (FSLIC) in 1987, senior vice president and general counsel of the Federal Home Loan Bank of San Francisco from 1987 to 1989, and senior deputy chief counsel of the Office of Thrift Supervision.

[2]       Moyers, B., with Black, W.K., 10/3/14, “Too Big to Jail?” Moyers and Company (http://billmoyers.com/episode/full-show-big-jail/)

CEO PAY: THE RACE TO THE TOP FOR THOSE AT THE TOP

ABSTRACT: CEO pay has increased over 50% in the last 4 years while pay for workers has barely increased. The typical CEO’s pay in 2013 was $10.5 million. The industry with the fastest growth in pay was the banking industry where CEO pay grew 22% in 2013 – on top of 22% growth the year before. While the economy remains weak and unemployment is high, the executives in the banking sector – that we as taxpayers bailed out after they crashed our economy – are making money hand over fist.

CEO pay has increased dramatically over not only the last 4 years but over the last 35 years for a variety of reasons. There also are a variety of reasons that the average workers’ pay has barely increased over the last 4 years and over the last 35 years as well. (See below for more detail.)

As income and wealth inequality have grown dramatically in the US over both the last 4 years and the last 35 years, the wealthy have re-invested part of their windfall in buying influence in our political system through campaign spending and lobbying. They have succeeded in tilting government policies to favor them and their large, typically multi-national, corporations.

Our elected representatives can and should change government policies and actions so that the growing inequality in the US is reduced. We, as the voters in a democratic political system, need to – and can – make them do so.

FULL POST: CEO pay has increased over 50% in the last 4 years while pay for workers has barely increased. CEO pay is now 257 times that of the average worker, up sharply from 181 times workers’ pay in 2009. The typical CEO’s pay in 2013 was $10.5 million – topping the $10 million mark for the first time. The highest paid CEO got over $68 million and the top 10 were all over $31 million. [1] CEO pay was up 8.8% last year while the average workers’ pay rose only 1.3%. [2] And CEO’s wealth is increasing dramatically too, in part because over 40% of their pay is in stock, where gains are taxed at a lower rate than regular cash income.

The industry with the fastest growth in pay was the banking industry where CEO pay grew 22% in 2013 – on top of 22% growth the year before. While the economy remains weak and unemployment is high, the executives in the banking sector – that we as taxpayers bailed out after they crashed our economyare making money hand over fist.

CEO pay has increased dramatically over not only the last 4 years but over the last 35 years for a variety of reasons. One reason is that CEO pay is set by corporate Boards of Directors that include many current and former CEOs of other corporations and often include members hand-picked by the CEO him or herself. When friends and peers set your pay level, is it any surprise you get big increases? Furthermore, every corporation and board want to tout their CEO as the best and the brightest – and, of course, therefore, the highest paid. Hence, it becomes a race to the top for those at the top. [3] If shareholder approval were required for CEO pay, perhaps things would be different.

There also are a variety of reasons that the average workers’ pay has barely increased over the last 4 years and over the last 35 years as well. Over the last 4 years, high unemployment has meant that workers have little leverage to ask for pay raises and corporations don’t need to reward workers because there is little opportunity for workers to quit and find another job. Workers’ negotiating power has also been eroded over the last 35 years by the decline of union membership and power. In 1983, over 20% of workers were members of unions compared to 11% in 2013. Globalization and technology have played a role by reducing the number of middle class jobs in the US, which tends to increase unemployment and reduce workers’ bargaining power and wages. However, their effects could have been ameliorated through rules governing trade that better protect workers both at home and abroad, as well as by policies and programs for job retraining and retention. [4]

As income and wealth inequality have grown dramatically in the US over both the last 4 years and the last 35 years, the wealthy have re-invested part of their windfall in buying influence in our political system through campaign spending and lobbying. They have succeeded in tilting government policies to favor them and their large, typically multi-national, corporations. These policies include:

  • Tax laws that a) have dramatically reduced the income tax rate on high incomes, b) have even lower rates for unearned income (i.e., income from investments), and c) favor corporations;
  • Government spending priorities, that include bailouts for financial and banking corporations but not for homeowners and workers who were devastated by the recession caused by the financial and banking industry; and
  • Labor and other laws that weaken workers’ bargaining power and fail to increase the minimum wage to keep up with inflation.

Our elected representatives can and should change government policies and actions so that the growing inequality in the US is reduced. We, as the voters in a democratic political system, need to – and can – make them do so.

[1]       Sweet, K., 5/28/14, “Median pay for CEOs rises sharply to $10.5m,” The Boston Globe from the Associated Press

[2]       Boak, J., 5/28/14, “Why executives get lavish compensation as rank-and-file wages lag,” The Boston Globe from the Associated Press

[3]       Boak, J., 5/28/14, see above

[4]       Boak, J., 5/28/14, see above

REASONS FOR LACK OF PROSECUTIONS AFTER 2008 COLLAPSE

ABSTRACT: In Judge Rakoff’s article entitled “The Financial Crisis: Why have no high-level executives been prosecuted?” [1] he discusses the reasons given by officials of the Department of Justice (DOJ) for the failure to criminally prosecute either individuals or corporations.

Finding the publicly presented explanations for the failure to prosecute unconvincing, Rakoff then proposes some other reasons. First, he suggests that law enforcement agencies had other priorities and limited resources. Another possible explanation is the government’s own involvement in setting the stage for the 2008 financial crisis. The de-regulation of banks and the financial industry was a contributing factor. The federal government also had for years encouraged the growth of home ownership and the availability of mortgages, including to low income home buyers. It had also supported less stringent documentation and underwriting standards for obtaining a mortgage.

Finally, Rakoff notes a 30-year trend toward prosecuting corporations rather than prosecuting individuals. He states that the traditional approach was based on the fact that organizations do not commit crimes, only their human agents do. Rakoff believes that prosecuting individuals has a much stronger deterrence value than prosecuting corporations. He also believes that prosecuting just the corporation and not any individual is both legally and morally wrong.

FULL POST: In Judge Rakoff’s * article entitled “The Financial Crisis: Why have no high-level executives been prosecuted?” [2] (See previous post of 2/9/14 for more details:  https://lippittpolicyandpolitics.org/2014/02/09/too-little-punishment-for-misbehavior-in-the-financial-sector/), he discusses the reasons given by officials of the Department of Justice (DOJ) for the failure to criminally prosecute either individuals or corporations that were involved in causing the 2008 crisis. First, they argue that proving fraudulent intent is difficult. However, Rakoff points out that with clear evidence of mortgage fraud (e.g., numerous reports of suspected mortgage fraud from within the financial institutions themselves), executives couldn’t escape prosecution by claiming they didn’t know what was going on. Furthermore, convictions, despite claims ignorance, are well established in criminal law based on the doctrine that “willful blindness” or “conscious disregard” does not exonerate a defendant.

Second, Department of Justice (DOJ) officials sometimes argue that fraud couldn’t be proved because the buyers of the mortgage-backed securities were sophisticated investors who knew enough not to rely on any misrepresentations and deception by the sellers. Rakoff states that this “totally misstates the law.” The law says that if society or the market is harmed by the lies of a seller, criminal fraud has occurred.

Third, Attorney General Holder himself said in testimony to Congress that in considering a criminal prosecution the impact on the US and world economies had to be taken into consideration. This is called the “too big to jail” excuse. Holder has said that his comment was misconstrued. Rakoff notes that this rationale is irrelevant in terms of prosecuting individuals because no one believes that a large financial corporation would collapse if one or more of its high level executives was prosecuted.

Finding the publicly presented explanations for the failure to prosecute unconvincing, Rakoff then proposes some other reasons. First, he suggests that law enforcement agencies had other priorities and limited resources. He notes that in 2001 the FBI had over 1,000 agents assigned to investigating financial fraud. In 2007, there were only 120 agents working on financial fraud and they had more than 50,000 reports of possible mortgage fraud to review. The shift of agents to anti-terrorism after 9/11 and budget limitations are the two causes he cites for this reduced capacity to respond to financial fraud.

The Securities and Exchange Commission (SEC) has been focused on Ponzi schemes and misuse of customers’ funds. It too is experiencing significant budget limitations. The DOJ has been focused on insider trading cases. When the 2008 financial collapse occurred, it spread the investigation of financial fraud among numerous US Attorney’s Offices in various states, many of which had little or no previous experience with sophisticated financial fraud.

Another possible explanation of the failure to prosecute, according to Rakoff, is the government’s own involvement in setting the stage for the 2008 financial crisis. The de-regulation of banks and the financial industry, including the repeal of Glass-Steagall, was a contributing factor. Both the SEC and the Treasury Department had had their power and oversight weakened by de-regulation. The federal government also had for years encouraged the growth of home ownership and the availability of mortgages, including to low income (and therefore higher risk) home buyers. It had also supported less stringent documentation and underwriting standards for obtaining a mortgage. Hence, the federal government helped create the conditions that led to mortgage fraud and a corporate executive could, with some justification, claim in his defense that he believed he was only trying to further the government’s goals.

In addition, after the 2008 collapse, the government made little effort to hold the financial corporations accountable when it bailed them out.

Finally, Rakoff notes a 30-year trend toward prosecuting corporations rather than prosecuting individuals. He states that the traditional approach was based on the fact that organizations do not commit crimes, only their human agents do. In addition, prosecuting an organization inevitably punishes totally innocent employees and shareholders. However, in recent years “deferred prosecution agreements” and even “non-prosecution agreements” with corporations have become the standard fare. Under these, a corporation and its employees avoid prosecution by agreeing to take internal, preventive measures to protect against future wrongdoing, often while paying a fine.

Rakoff believes that prosecuting individuals has a much stronger deterrence value than the internal preventive measures of “deferred prosecution agreements” that are often little more than window dressing. He also believes that prosecuting just the corporation and not any individual is both legally and morally wrong. Under the law, a corporation should only be prosecuted if one can prove a managerial agent of the corporation committed the alleged crime. If so, why not prosecute that manager? Morally, punishing a corporation and many innocent employees and shareholders for crimes committed by an unprosecuted individual(s) seems unjust.

*    Jed Rakoff is a United States District Judge on senior status for the Southern District of New York. A full-time judge from 1996 to 2010, he moved to senior status in 2010. Senior status is a form of semi-retirement for judges over 65 where they continue to work part-time. Judge Rakoff is a leading authority on securities laws and the law of white collar crime, and has authored many articles on those topics. He is a former prosecutor with the U.S. Attorney’s office in New York. [3]


[1]       Rakoff, J.S., 1/9/14, “The Financial Crisis: Why have no high-level executives been prosecuted?” The New York Review of Books

[2]       Rakoff, J.S., 1/9/14, see above

[3]       Wikipedia, retrieved 2/5/14, “Jed S. Rakoff,” http://en.wikipedia.org/wiki/Jed_S._Rakoff

TOO LITTLE PUNISHMENT FOR MISBEHAVIOR IN THE FINANCIAL SECTOR

ABSTRACT: One person who has both spoken out and acted when he felt the punishment for misbehavior in the financial sector was too lenient or lacking is federal District Court Judge Jed Rakoff.* In 2011, he refused to approve a proposed settlement with Citigroup related to the 2008 financial crisis because he thought that it was too lenient. Currently, he is withholding approval of settlement of an insider trading case. The proposed settlement would allow two men to settle the case for $4.8 million without admitting guilt.

SAC Capital, a huge, $15 billion hedge fund, has been charged in what probably is the biggest insider trading scandal ever. Five employees of SAC have already pleaded guilty to insider trading and the company itself has agreed to a record $616 million settlement. However, it is unlikely that anyone will go to jail and the head of SAC, despite any fines and restitution he may be required to pay, is likely to remain a billionaire.

Judge Rakoff recently wrote an article entitled “The Financial Crisis: Why have no high-level executives been prosecuted?” [1] Multiple authorities, including enforcement agencies, have describe what occurred in the run up to the 2008 financial crisis as fraud. Rakoff states that if the financial crisis was the result of intentional fraud, then “the failure to [criminally] prosecute those responsible must be judged one of the most egregious failures of the criminal justice system in many years.”

Rakoff notes that in previous financial crises individual perpetrators were successfully prosecuted. In the 1980s savings and loan crisis, which has strong parallels to the 2008 crisis but at a much smaller scale, over 800 individuals were successfully, criminally prosecuted.

Rakoff concludes by writing, “if it was [fraudulent misconduct] – as various governmental authorities have asserted it was – then the failure of the government to bring to justice those responsible … bespeaks weaknesses in our prosecutorial system that need to be addressed.”

FULL POST: One person who has both spoken out and acted when he felt the punishment for misbehavior in the financial sector was too lenient or lacking is federal District Court Judge Jed Rakoff.* For example, in 2011, he refused to approve a proposed settlement by the Securities and Exchange Commission (SEC) with Citigroup related to the 2008 financial crisis because he thought that it was too lenient.

Currently, he is withholding approval of settlement of an insider trading case where two men, acting on an illegal insider’s tip, bought $90,000 worth of securities a day before the announcement of the buyout of H.J. Heinz (the ketchup maker). The next day, when the buyout was announced, the securities became worth $1.8 million. The SEC’s proposed settlement would allow the two men to settle the case for $4.8 million without either admitting or denying guilt. Such settlement language had been standard practice for insider trading cases until a public debate erupted, prompted in large part by Judge Rakoff. In June 2013, the new chair of the SEC, Mary Jo White, announced a new SEC policy that would require some defendants to admit guilt. [2]

There have been a number of insider trading cases in the news lately. These are cases where an individual buying or selling securities benefited from illegally obtained, confidential information that gave him or her an unfair opportunity to profit from securities transactions. For example, SAC Capital, a huge, $15 billion hedge fund, responsible for about 1% of all US securities exchanges’ average daily trading, has been charged in what probably is the biggest insider trading scandal ever. Five employees of SAC have already pleaded guilty to insider trading and the company itself has agreed to a record $616 million settlement for more than 10 years of trading based on illegal tips from corporate insiders. More legal action is still to come, but it is unlikely that anyone will go to jail and the head of SAC, Steven A. Cohen, despite any fines and restitution he may be required to pay, is likely to remain a billionaire. [3][4]

However, Judge Rakoff’s primary focus has not been on insider trading but on the financial industry’s misbehavior that led to the 2008 financial crisis and the Great Recession. He recently wrote an article entitled “The Financial Crisis: Why have no high-level executives been prosecuted?” [5] In it, he explores why there have been no criminal prosecutions when multiple authorities, including enforcement agencies, have describe what occurred in the run up to the 2008 financial crisis as fraud (i.e., intentional deception for financial or personal gain). Rakoff states that if the financial crisis was the result of intentional fraud (and he makes clear that he has no personal knowledge of whether that was the case or not), “the failure to [criminally] prosecute those responsible must be judged one of the most egregious failures of the criminal justice system in many years.”

Rakoff notes that in previous financial crises – the junk bond scandal of the 1970s, the savings and loan (S&L) crisis of the 1980s, and the accounting frauds of the 1990s (e.g., Enron and WorldCom) – individual perpetrators were successfully prosecuted. Specifically, in the S&L crisis, which has strong parallels to the 2008 crisis but at a much smaller scale, over 800 individuals were successfully, criminally prosecuted.

There is strong evidence of criminal fraud in the events leading to the 2008 crisis. The federal government’s Financial Crisis Inquiry Commission uses the word “fraud” 157 times in its report describing what led to the crisis. Furthermore, indications that fraud was occurring emerged well before the 2008 collapse. There were 20 times as many reports of suspected mortgage fraud in 2005 as in 1996, and the number kept growing. In 2008, the number of fraud reports was double that of 2005. As early as 2004, the FBI was publicly warning of the “pervasive problem” of mortgage fraud. In the years before the 2008 crisis, sub-prime mortgages, in other words mortgages with more risk of default than normal mortgages, increasingly provided the underpinnings for mortgage-backed securities that continued to be sold with AAA ratings. This rating is supposed to identify securities of very low risk. It seems impossible that this could have occurred without fraud taking place.

Rakoff discusses reasons given by officials of the Department of Justice (DOJ) for the failure to criminally prosecute either individuals or corporations and finds them unconvincing. He then proposes some reasons that he finds more believable. I’ll summarize all of this in my next post.

Rakoff concludes by writing, “if it was [fraudulent misconduct] – as various governmental authorities have asserted it was – then the failure of the government to bring to justice those responsible for such colossal fraud bespeaks weaknesses in our prosecutorial system that need to be addressed.”

*    Jed Rakoff is a United States District Judge on senior status for the Southern District of New York. A full-time judge from 1996 to 2010, he moved to senior status in 2010. Senior status is a form of semi-retirement for judges over 65 where they continue to work part-time. Judge Rakoff is a leading authority on securities laws and the law of white collar crime, and has authored many articles on those topics. He is a former prosecutor with the U.S. Attorney’s office in New York. [6]


 

[1]       Rakoff, J.S., 1/9/14, “The Financial Crisis: Why have no high-level executives been prosecuted?” The New York Review of Books (http://www.nybooks.com/articles/archives/2014/jan/09/financial-crisis-why-no-executive-prosecutions/?pagination=false)

[2]       Raymond, N., 1/30/14, “U.S. judge takes on SEC again, questions Heinz insider trading pact,” Reuters

[3]       Editorial, 7/27/13, “Pursuit of SAC Capital sends needed message to Wall St.,” The Boston Globe

[4]       Lattman, P., 7/31/13, “Ex-analyst charged in insider-trading crackdown,” The Boston Globe (from The New York Times)

[5]       Rakoff, J.S., 1/9/14, see above

[6]       Wikipedia, retrieved 2/5/14, “Jed S. Rakoff,” http://en.wikipedia.org/wiki/Jed_S._Rakoff

WEAK PENALTIES FOR FINANCIAL CORPORATIONS’ MISBEHAVIOR

ABSTRACT: If you follow the financial news, you regularly hear about financial corporations paying penalties as they reach settlements with regulators for their misbehavior. Although the amounts of some of the recent penalties have been noteworthy, keep in mind that to these large corporations they barely put a dent in their annual profits. Furthermore, in many cases the penalties are tax deductible as a business expense. This means that, in effect, the government and we as taxpayers are subsidizing the penalty by allowing the corporations to reduce their taxes by deducting the amount of the penalty from their income. In other cases, the corporations are allowed to take credit for having paid all or part of the settlement based on other actions they have taken.

This has led Senators Elizabeth Warren (MA Democrat) and Tom Coburn (OK Republican) to propose a Truth in Settlements bill in Congress that would require government regulators to disclose whether they are allowing all or part of the settlement amount to be deducted from income or paid with credits.

In most cases, the corporations are agreeing to the settlements without having to admit wrongdoing. There have been very few criminal charges against the corporations and none against any executive of any of the large financial corporations. Furthermore, the executives have continued to be lavishly rewarded despite behavior that plunged the world into a financial crisis and a recession.

If we are going to prevent another financial collapse and resulting recession, we must prevent serious misbehavior by our large financial corporations. Stronger laws, oversight, and enforcement, with stronger penalties for executives and corporations, including criminal prosecutions, are needed. These would provide the strong incentives necessary to ensure legal, ethical, and prudent behavior by executives and, hence, the corporations they run.

FULL POST: If you follow the financial news, you regularly hear about financial corporations paying penalties as they reach settlements with regulators for their misbehavior. Many of these settlements are for misbehavior that contributed to the 2008 financial collapse where enforcement actions are finally being concluded. Some are for more recent misbehavior. (See posts of 8/14/13, Large Financial Corporations Continue Illegal Activity [https://lippittpolicyandpolitics.org/2013/08/14/large-financial-corporations-continue-illegal-activity/] and 8/29/12, Big Financial Corporation Scandals Continue [https://lippittpolicyandpolitics.org/2012/08/29/big-financial-corporation-scandals-continue/] for more detail on financial corporations’ misbehavior.)

Although the amounts of some of the recent penalties – in the billions of dollars – have been noteworthy, keep in mind that to these large corporations this barely puts a dent in their annual profits. Their stocks have been performing well, despite the penalties. In many cases the penalties are tax deductible as a business expense, which means that the impact on the corporation is typically only two-thirds of the stated amount. As a result, in effect, the government and we as taxpayers are subsidizing the penalty by allowing the corporations to reduce their taxes by deducting the amount of the penalty from their income. In other cases, the corporations are allowed to take credit for having paid all or part of the settlement based on other actions they have taken. For example, in a 2013 settlement with 13 mortgage service providers for illegal foreclosures, over 60% of the announced $8.5 billion settlement could be paid through credits for modifications to existing mortgages.

This has led Senators Elizabeth Warren (MA Democrat) and Tom Coburn (OK Republican) to propose a Truth in Settlements bill in Congress that would require government regulators to disclose whether they are allowing all or part of the settlement amount to be deducted from income or paid with credits. The regulators would generally have to make settlement agreements public and for any that were kept confidential, they would have disclose that fact and their rationale for doing so. [1] Bills have also been filed to prohibit the deduction of penalties as a business expense.

In most cases, the corporations are agreeing to the settlements without having to admit wrongdoing. There have been very few criminal charges against the corporations. Most of the enforcement actions have been civil actions, which seriously limits the consequences, even if the corporation misbehaves again, even in a similar manner.

Also noteworthy, is that no executive of any of the large financial corporations has been charged with criminal activity. (My next post will explore this issue.) Furthermore, the executives have continued to be lavishly rewarded despite behavior that plunged the world into a financial crisis and a recession. A corporate culture of immunity for senior executives from the consequences of their actions appears to persist despite public outrage. [2]

For example, JPMorgan’s CEO, Jamie Dimon, will be paid $20 million for 2013. This is up substantially from the $11.5 million he was paid last year, despite the $20 billion in fines and penalties JPMorgan paid in 2013 (due to a variety of corporate misbehavior) and the very large related legal expenses. Apparently, JPMorgan’s Board of Directors feels Dimon did a great job of handling these matters with the regulators and that pay cuts in 2008 and 2012 had already punished him for having gotten the corporation into trouble in the first place. [3] The corporation’s stock did have a good year. It was up 37%, out pacing both its peers and the overall market. (Note: If JPMorgan’s Directors and shareholders feel the settlement agreements were so positive, maybe the regulators have let Dimon and JPMorgan off too lightly!) In 2008, Dimon received a $1 million salary and no bonus, presumably because of the problems that led to the financial crisis and the need for the government to bail out JPMorgan (among other financial industry corporations). However, by 2011 his compensation was up to $23 million. It was cut to $11.5 million for 2012, which was viewed as a strong rebuke by the corporation’s Board for the $6 billion loss on speculative trading that occurred in 2012.

Final figures for 2013 CEO compensation at two smaller financial corporations, Goldman Sachs and Morgan Stanley, were not available yet, but are expected to be above the 2012 levels that were $21 million and $9.75 million, respectively.

If we are going to prevent another financial collapse and resulting recession, we must prevent serious misbehavior by our large financial corporations. Stronger laws, oversight, and enforcement, with stronger penalties for executives and corporations, including criminal prosecutions, are needed. These would provide the strong incentives necessary to ensure legal, ethical, and prudent behavior by executives and, hence, the corporations they run.


 

[1]       Associated Press, 1/9/14, “Mass. Democrat: Settlements need more transparency,” in the Daily Times Chronicle

[2]       Stewart, J.B., 2/1/14, “Accounting for Dimon’s big jump in pay,” The New York Times

[3]       Silver-Greenberg, J., & Craig, S., 1/24/14, “Despite scandals, JPMorgan awards CEO raise,” The Boston Globe from The New York Times

“TRADE” AGREEMENTS & CORPORATE POWER

ABSTRACT: The Trans-Pacific Partnership (TPP) “trade” treaty that is currently being negotiated (see post of 9/10) would give corporations the right to sue governments if their laws, regulations, or actions negatively affect current or expected future profits. Under existing trade agreements, over $380 million has already been paid to corporations by governments. Furthermore, there are 18 pending suits by corporations against governments for $14 billion. Corporations will use or set up foreign subsidiaries to file suits under investor-state dispute resolution provisions of trade treaties (corporations are referred to as “investors”), thereby avoiding a country’s legal system and relying instead on the international tribunals (i.e., courts) created by the treaties.

The TPP would require countries to allow corporations to compete for the delivery of public services. The result could well be that some people cannot afford a corporation’s fees for basic, formerly universal, public services (such as water).

If ratified, the Trans-Pacific Partnership treaty would enhance the power and rights of corporations while weakening US sovereignty. Given its unlimited term and the virtual impossibility of making changes (which require the unanimous consent of the parties), it amounts to a Constitutional change that gives foreign corporations equal (if not greater) legal status and power than the US and other governments. Furthermore, it would foster a race to the bottom for public health, the environment, and workers, especially well-paid blue and white collar workers, as jobs continue to move overseas and compensation and safety are attacked as limiting profits.

The secrecy and potency of the TPP make it feel like a conspiracy among our corporate and political elite to give corporations the ultimate power in our society. I strongly urge you to call your US Senators, and your Representative as well, to ask them to oppose “fast-track” rules for consideration of the Trans-Pacific Partnership “Trade” Treaty and to demand full disclosure and discussion of its provisions in Congress and with the public.

FULL POST: The Trans-Pacific Partnership (TPP) “trade” treaty that is currently being negotiated (see post of 9/10) would give corporations the right to sue governments if their laws, regulations, or actions negatively affect current or expected future profits. The North American Free Trade Agreement (NAFTA) between the US, Canada, and Mexico and other treaties that are already in place give corporations similar rights. Under existing trade agreements, over $380 million has already been paid to corporations by governments. Furthermore, there are 18 pending suits by corporations against governments for $14 billion. [1] For example, Chevron is suing Ecuador over its environmental laws, Eli Lilly is suing Canada over its patent laws, and European investment firms are suing Egypt over its minimum wage laws. [2]

Philip Morris is suing Australia over its cigarette labeling laws. However, because the US – Australia trade agreement doesn’t include investor-state dispute resolution provisions (corporations are referred to as “investors”) that allow such suits, Philip Morris is using other trade treaties and its Swiss and Hong Kong subsidiaries to file its suits. [3] Corporations will use or set up foreign subsidiaries to file suits under investor-state dispute resolution provisions of trade treaties, thereby avoiding a country’s legal system and relying instead on the international tribunals created by the treaties.

Other examples of corporations suing governments include:

  • Under NAFTA, a US corporation sued and received $13 million from Canada, which then reversed its ban on a gasoline additive that contains a known human neurotoxin.
  • Another US corporation has filed a $250 million investor-state suit against Canada under NAFTA because of its ban on fracking.
  • A French and a US company have succeeded in separate suits totaling close to $300 million against Argentina because its federal government failed to override 2 provinces’ limits on water rate increases after water systems were privatized in a period of economic distress, even though it would have been an unconstitutional intervention in provincial affairs for the federal government to do so. [4]
  • (There are many more examples and much more information on the TPP at www.citizen.org/TPP.)

The TPP language would require countries to allow corporations to compete for the delivery of public services, such as water and sewer, electricity, education, and transportation services. The result could well be, as has occurred in Argentina and other South American countries, that some people cannot afford a corporation’s fees for basic, formerly universal, public services (such as water), or that a distinctly two-tiered system emerges with high quality services for those who can afford to pay and poorer quality services for those who can’t. [5]

If the TPP is ratified by the US, it would, for example, undermine efforts to make the giant international mining corporation Rio Tinto abide by the Clean Air Act at its massive copper mine west of Salt Lake City. [6] Under the TPP, US and local regulations could be nullified or forced to change in areas such as:

  • Worker safety and the minimum wage
  • Importation of food and food labeling
  • Fracking for and exportation of natural gas
  • The length of patent protection on drugs (which could raise drug prices by delaying availability of generic versions of drugs)
  • The separation of banking from financial speculation that has been proposed as part of the answer to the 2008 financial collapse (i.e., reinstating Glass-Steagall provisions). Furthermore, TPP would prohibit a transaction tax on the buying and selling of securities, derivatives, and other financial instruments (as has been proposed in the US and as is being implemented in Europe).

If ratified, the Trans-Pacific Partnership treaty would enhance the power and rights of corporations while weakening US sovereignty. Given its unlimited term and the virtual impossibility of making changes (which require the unanimous consent of the parties), it amounts to a Constitutional change that gives foreign corporations equal (if not greater) legal status and power than the US and other governments. This is in total contradiction to the design of US democracy where there is a balance of power, checks and balances, elections every two years, and law making that can change policies and the course of the country on a regular basis.

Furthermore, it would foster a race to the bottom for public health and the environment by giving corporations the right to challenge health and environmental laws and regulations in pursuit of ever higher profits. Similarly, it would foster a race to the bottom for workers, especially well-paid blue and white collar workers, as jobs continue to move overseas (as they have done under NAFTA), and compensation and safety are attacked as limiting profits.

I’m not one who generally buys conspiracy theories, but the secrecy and potency of the TPP make it feel like a conspiracy among our corporate and political elite to give corporations, which are totally focused on maximizing profits, the ultimate power in our society. Therefore, corporations, not our governments or other civic organizations, would determine our well-being as individuals, communities, and nations, as well as, ultimately, the well-being of our planet. I strongly urge you to call your US Senators, and your Representative as well, to ask them to oppose “fast-track” rules for consideration of the Trans-Pacific Partnership “Trade” Treaty and to demand full disclosure and discussion of its provisions in Congress and with the public.

(You can find out who your Congress people are and get their contact information at: http://www.senate.gov/general/contact_information/senators_cfm.cfm for your Senators and http://www.house.gov/representatives/find/ for your Representative.)


[1]       Public Citizen, retrieved 9/9/13, “TPP’s investment rules harm public access to essential services,” www.citizen.org/TPP

[2]       Hightower, J., August 2013, “The Trans-Pacific Partnership is not about free trade. It’s a corporate coup d’état – against us!” The Hightower Lowdown

[3]       Public Citizen, retrieved 9/9/13, “TPP’s investment rules harm public health,” www.citizen.org/TPP

[4]       Public Citizen, retrieved 9/9/13, “TPP’s investment rules harm the environment,” www.citizen.org/TPP

[5]       Hightower, J., August 2013, “The Trans-Pacific Partnership is not about free trade. It’s a corporate coup d’état – against us!” The Hightower Lowdown

[6]       Moench, B., 6/25/12, “America: A fire sale to foreign corporations,” Common Dreams (http://www.commondreams.org/view/2012/06/25-0)

DETROIT’S BANKRUPTCY

ABSTRACT: Detroit’s bankruptcy is the result of a long term decline with many contributing factors. Detroit’s bankruptcy proceeding will favor the big financial corporations because of federal bankruptcy laws, which give priority to paying off financial firms’ interest rate swaps before paying pensions or bond holders. If Detroit ends up cutting workers’ pensions and defaulting on its municipal bonds, it will create dangerous precedents. Other financially ailing cities and municipalities may consider filing for bankruptcy, too, to relieve pension and debt costs.

It will be interesting to watch how the state and federal governments respond. Many precedents will be set. We will learn whether our big corporations and their executives and employees are more important from the federal government’s perspective than our cities, their residents and municipal workers, and their municipal bond holders.

FULL POST: Detroit’s bankruptcy is the result of a long term decline with many contributing factors. Since the financial system collapse of 2008, the federal government has done little to help municipalities that took a double hit from the loss of tax revenue due to the recession itself, as well as from the decline of property tax revenue due to falling property values and homeowners in distress. Certainly, state and federal policies for urban America and trade agreements that let manufacturing jobs, especially in the auto industry, move out of the country played a role. Mismanagement by and corruption of Detroit’s elected leadership played a role as well.

Detroit’s bankruptcy proceeding will favor the big financial corporations because of the 2005 changes in federal bankruptcy laws. Those changes, lobbied for heavily by Wall Street, give priority to paying off financial firms’ interest rate swaps before paying pensions or bond holders. (These interest rate swaps are sold by the big financial firms to cities as insurance to protect them from increases in interest rates. However, unlike insurance, they are really interest rate speculation because they require the cities to pay the financial corporations if interest rates fall. And they have fallen dramatically in the wake of the 2008 financial collapse, which was caused by the big financial corporations.) So the financial firms that speculated on interest rates with Detroit will get paid first and its bondholders and employees’ pensions will get whatever is left over. [1]

If Detroit defaults on its municipal bonds, in other words pays less than it owes, it would set a dangerous precedent for the municipal bond market. Other financially ailing cities and municipalities may consider filing for bankruptcy too, to reduce what they owe bondholders. And it is likely to make borrowing more expensive for states, municipalities, and school districts as municipal bonds will no longer be viewed as virtually risk-free. [2]

Similarly, if Detroit ends up cutting workers’ pensions, it will create a scary precedent for other municipal and government employees. (The average pension owed to Detroit municipal workers, incidentally, is less than $23,000 per year. [3]) Other cities, municipalities, or even states could declare bankruptcy as a way to reduce pension costs. [4] In the private sector, declaring bankruptcy has become a standard tactic for cutting pensions and other benefits for retirees. The airline industry has done this and it has been a standard tactic in leveraged buyouts of private companies. (This was a tactic used by Bain Capital, Mitt Romney’s firm, and became an issue when he ran for President.) In many cases, when a corporation declares bankruptcy, the pensions of its workers become the responsibility of the federal government’s Pension Benefit Guaranty Corporation (PBGC). In 2012, PBGC paid for monthly retirement benefits for nearly 887,000 retirees in 4,500 pension plans that could not pay promised benefits. However, it does not cover state or municipal pension plans. [5] (This is another example, along with bailouts, of how the federal government picks up the pieces when corporations fail to meet their commitments.)

It will be interesting to watch how the state and federal governments respond. Here are two interesting tidbits:

  • While the Michigan state government is doing little to help the city itself, it has approved $450 million in bonds to build a new arena for the Red Wings hockey team and its billionaire owners (who also own Little Caesars Pizza and the Tigers baseball team). Decades of studies have shown that sports facilities’ subsidies are massive wastes of taxpayer money. There is no evidence of a return to the public (as opposed to the private owners of the teams) and they are not an efficient way to create jobs. [6]
  • The federal government has been providing about $100 million a year to Detroit under a variety of federal programs. By way of comparison, US aid to Columbia (the South American country) is about $323 million a year to combat drug trafficking and violence. However, Detroit’s homicide rate is 81% higher than Columbia’s. [7]

Many precedents will be set as Detroit moves through the bankruptcy process. It will be interesting to see who the big winners and losers are, as well as whether the federal government steps in to help out the city as it did the big financial corporations and the big auto companies. We will learn whether our big corporations and their executives and employees are more important from the federal government’s perspective than our cities, their residents and municipal workers, and their municipal bond holders.


[2]       Brown, E., 8/6/13, see above

[3]       Kuttner, R., 8/11/13, “We are all Detroit,” The Huffington Post, (http://www.huffingtonpost.com/robert-kuttner/we-are-all-detroit_b_3741418.html?utm_hp_ref=email_share)

[4]       Brown, E., 8/6/13, see above

[5]       The Pension Benefit Guaranty Corporation, A U.S. Government Agency, http://www.pbgc.gov/home.html

[6]       Jackson, D. Z., 7/31/13, “Motor City hustle,” The Boston Globe

[7]       Christoff, C., & McCormick, J., 8/1/13, “US aid to Colombia tops help for Detroit, but more is unlikely,” The Boston Globe (from Bloomberg News)

LARGE FINANCIAL CORPORATIONS CONTINUE ILLEGAL ACTIVITY

ABSTRACT: The large US financial corporations, whose illegal and unethical activities caused the 2008 financial crash and recession, continue to engage in a wide variety of illegal activity. Clearly, the fines and penalties they’ve paid to-date, although hundreds of millions of dollars, haven’t been sufficient to deter them. Or they are so large and so impossible to manage that they are just out of control. The only way to reduce the risk to our financial system and economy, and to stop these illegal activities, is to break them up and institute much tighter regulation.

Their past behavior includes fraudulent creation of mortgages and the fraudulent packaging and selling of risky mortgage-backed securities, fraudulent foreclosures on home owners, manipulation of interest rates in multiple settings, money laundering for criminals and countries under international sanctions, and out-of-control speculative trading. Despite this, it doesn’t look like any senior managers will be charged with criminal activity.

More recently uncovered activities include speculation in and manipulation of commodities markets that costs consumers billions, fraudulent debt collection practices, and the selling of inappropriate securities to, among others, elderly investors seeking secure investments.

These are highlights of what we know about, and, therefore, are the tip of an iceberg of unknown size. The executives who profit (through pay, bonuses, and stock options) from these criminal and unethical activities currently have no reason to stop committing or allowing them.

The variety of illegal activities, the involvement of literally all the large financial corporations, and the scale of the impact on our economy and us individually is breathtaking. We need better laws and regulation overseeing these large financial institutions. See my posts of 8/6 and 8/4 for steps that are needed to move in that direction, including petitions of support you can sign.

FULL POST: The large US financial corporations, whose illegal and unethical activities caused the 2008 financial crash and recession, continue to engage in a wide variety of illegal activity. Clearly, the fines and penalties they’ve paid to-date, although hundreds of millions of dollars, haven’t been sufficient to deter them. Or they are so large and so impossible to manage that they are just out of control. In either case, they present a significant risk for another financial collapse, another possible bailout, and another recession. The only way to reduce the risk to our financial system and economy, and to stop these illegal activities, is to break them up and institute much tighter regulation. This is what the 21st Century Glass Steagall Act, recently proposed in the US Senate (see post of 8/6/13), and the Dodd-Frank Act (if appropriately implemented) would go a long way toward doing.

You probably remember the fraudulent creation of mortgages and the fraudulent packaging and selling of risky mortgage-backed securities as “safe” investments. These activities were key contributors to the 2008 financial system collapse. You may remember that these same handful of corporations engaged in fraudulent foreclosures on home owners, manipulation of interest rates in multiple settings, money laundering for criminals and countries under international sanctions, and out-of-control speculative trading (which cost JPMorgan $6 billion in early 2013). Many of these activities are still under investigation with penalties still to be finalized, but it doesn’t look like any senior managers will be charged with criminal activity. (In the Savings and Loan crash of the late 1980s, which was less than one-tenth the size of the 2008 crash, over 1,000 senior managers were convicted of felonies.) (See posts of 8/29/12 and 7/12/12 for more detail.)

Here are some other examples of illegal or unethical behavior by the large financial corporations that have come to light more recently.

Their speculation in and manipulation of commodities markets costs consumers billions. This includes oil and gasoline (see post of 3/5/12 for more detail), electricity, aluminum, wheat, cotton, coffee, and other commodities. [1] In the last year, US regulators have accused three financial corporations of manipulating electricity prices, including JPMorgan, which recently agreed to a $410 million settlement. [2][3]

In the commodities market for aluminum, Goldman Sachs and others make millions in profits that end up costing consumers many times that. Using special exemptions from the Federal Reserve and relaxed regulations approved by Congress, the large financial corporations have purchased much of the infrastructure used to store and deliver aluminum (and other commodities) as they are traded on commodities exchanges. Three years ago, Goldman Sachs bought one of the largest firms storing and delivering aluminum; almost a quarter of the supply of 1,500 pound aluminum bars bought and sold on commodities exchanges is in its 27 warehouses (1.5 million tons). Goldman, over the last three years, has increased the delivery wait time for customers from an average of six weeks to roughly 70 weeks. This significantly increases the rent and fees paid to Goldman for the storage and delivery of the aluminum in its warehouses. [4][5][6]

JPMorgan and other big financial corporations are under investigation for their debt collection practices. It has recently come to light that their efforts to collect delinquent credit card debt have suffered from faulty or forged documents, improperly reviewed documentation, and failure to notify debtors of legal filings. These are some of the same practices that resulted in the lawsuits and settlements over improper home foreclosures! [7]

Morgan Stanley just settled claims that it sold inappropriate securities to, among others, elderly investors seeking secure investments. [8]

These are highlights of what we know about, and, therefore, are the tip of an iceberg of unknown size. The amounts of the fines and settlements sound large, but they’re just a cost of doing business when compared to the revenue and profits at these mega-financial corporations. (See post of 2/20/12 on the mortgage foreclosure settlement for an example with more detail.) Because shareholders and not corporate executives bear the cost of these settlements, and, furthermore, they are subsidized by us as taxpayers because they are typically considered a business expense (which reduces taxable income), the executives who profit (through pay, bonuses, and stock options) from these criminal and unethical activities have no reason to stop committing or allowing them. And the record shows they are continuing. [9]

The variety of illegal activities, the involvement of literally all the large financial corporations, and the scale of the impact on our economy and us individually is breathtaking. We need better laws and regulation overseeing these large financial institutions. See my posts of 8/6 and 8/4 for steps that are needed to move in that direction, including petitions you can sign to support such actions. (See posts of 7/31/12, 5/31/12, 5/29/12, 3/25/12, 3/23/12, and 2/29/12 for more on the need for regulation of these giant financial corporations.)


[1]       Kocieniewski, D., 7/21/13, “Aluminum shuffle is pure gold to the banks,” The Boston Globe (from The New York Times)

[2]       Silver-Greenberg, J., & Protess, B., 8/8/13, “JPMorgan Chase faces civil, criminal inquiries,” The Boston Globe (from The New York Times)

[3]       Associated Press, 7/31/13, “JPMorgan owes $410 million in energy suit,” The Boston Globe

[4]       Kocieniewski, D., 7/21/13, see above

[5]       Morgenson, G., 8/1/13, “Goldman Sachs offers to speed up metal delivery,” The Boston Globe (from The New York Times)

[6]       Chan, K., 8/6/13, “Goldman Sachs, LME sued over aluminum storage,” The Boston Globe (from the Associated Press)

[7]       Silver-Greenberg, J., & Wyatt, E., 7/10/13, “Big lenders face scrutiny on collections,” The Boston Globe (from The New York Times)

[8]       Associated Press, 7/31/13, “Morgan Stanley settles EFT claims,” The Boston Globe

[9]       Eskow, R.J., 8/7/13, “7 Things About Prosecuting Wall Street You Wanted to Know (But Were Too Depressed to Ask),” The Huffington Post

FINANCIAL SYSTEM REFORM

ABSTRACT: The need for financial system reform was made clear by the 2008 crash. One of the goals of the Dodd-Frank financial reform law was to end speculative trading by large financial corporations that are also banks because it has the potential to jeopardize consumer deposits. However, speculative trading has continued.

Therefore, a tri-partisan group of Senators, led by Sen. Elizabeth Warren, has recently proposed new legislation, the 21st Century Glass Steagall Act, that would require the separation of speculative trading and consumer bank deposits. You can sign on as a citizen sponsor of this proposed federal legislation at: http://my.elizabethwarren.com/page/s/glass-steagall?source=20130711emf.

Senator Warren was on CNBC to talk about the importance of this new legislation. You can watch the informative and entertaining video clip (under 3 minutes) at: http://gawker.com/nbc-censors-video-of-elizabeth-warren-taking-cnbc-to-th-837411782.

FULL POST: The need for financial system reform was made clear by the 2008 crash. We are now at the third anniversary of the passage of the Dodd-Frank financial reform law. However, implementation has been slow, due to the complexity of the law, efforts by the large financial corporations to block and delay it, and obstructionism by Republicans, particularly in the Senate. For example, a Director for the Consumer Financial Protection Bureau, created by Dodd-Frank, was finally approved by the Senate on July 17. (See post of 7/26/12 for background.)

One of the goals of the Dodd-Frank financial reform law was to end speculative trading by large financial corporations that are also banks. Such trading has the potential to generate large losses that could jeopardize consumer deposits at these banks, requiring a federal government bailout. Dodd-Frank and the so-called Volcker Rule were supposed to end such trading. However, speculative trading has continued. (See posts of 5/31/12 and 5/29/12 for more details.)

Therefore, a tri-partisan group of Senators, led by Sen. Elizabeth Warren, has recently proposed new legislation, the 21st Century Glass Steagall Act, that would require the separation of speculative trading and consumer bank deposits.

You can sign on as a citizen sponsor of this proposed federal legislation at: http://my.elizabethwarren.com/page/s/glass-steagall?source=20130711emf. It will reduce risk-taking by big financial corporations that enjoy federal insurance of depositors’ money, thereby reducing the risk of another government bailout of these huge corporations and enhancing the safety of consumer deposits.

Senator Elizabeth Warren (Democrat, MA), an expert on the financial system, states that we need to learn from the financial crisis of 2008 and, moving forward, to prevent the kinds of high-risk activities that made a few people rich but nearly destroyed our economy. She has joined forces with Senators John McCain (Republican, AZ), Maria Cantwell (Democrat, WA), and Angus King (Independent, ME) to introduce the 21st Century Glass Steagall Act to modernize core banking safety.

This legislation would reinstate some of the protections of the original Glass Steagall Act put in place after the Great Depression but repealed in 1999. For over 50 years before this repeal, the banking system was stable and our middle class grew stronger. Wall Street had spent 66 years and millions of dollars lobbying for repeal, and, eventually, the big financial corporations won.

This new law will rebuild a firewall between the banks where American families have checking and savings accounts, and the investment banks that engage in risky financial speculation. It will make sure Wall Street doesn’t gamble with your money, and will help prevent another financial crisis. The bill will give a five year transition period for financial institutions to split their business practices into distinct entities – shrinking their size and taking an important step toward ending “Too Big to Fail” once and for all, while minimizing the risk of future bailouts.

The Federal Deposit Insurance Corporation (FDIC) insures our banks to keep your money safe. That way, when you want to withdraw your money, you know the money will be there. That’s what makes our banking system safe and dependable. But the government should NOT be insuring hedge funds, swaps dealing, and other risky investment banking activities. When the same institutions that take these huge risks are also the ones that control your savings account, the entire banking system is riskier.

This is an important bill that will implement the lessons we learned from the 2008 crisis and make sure we hold Wall St. accountable. Click here to become a citizen sponsor of the new 21st Century Glass Steagall Act. (Paste the following address into your web browser if the link doesn’t work: http://my.elizabethwarren.com/page/s/glass-steagall?source=20130711emf.)

Senator Warren was on CNBC to talk about the importance of this new legislation. The video clip of Warren’s appearance was on You Tube, but CNBC and NBC in effect censored it, claiming copyright infringement. They did so, apparently, because Warren did such a good job of defending the legislation and, in the process, made the CNBC commentators look bad because they were critical of the legislation and tried to attack Warren and her arguments for the legislation. This is a reflection of how our mainstream media, which are all big corporations themselves, report on – or in many cases don’t report on – news that is not favorable to corporate America.

You can read an article about this censorship and watch the informative and entertaining video clip (under 3 minutes) at: http://gawker.com/nbc-censors-video-of-elizabeth-warren-taking-cnbc-to-th-837411782. (Paste the address above into your web browser if the link doesn’t work automatically.)

NOTE: Please let me know by submitting a comment on this post if you would like me to continue sharing links to on-line petitions on issues I have written about. These petitions are an easy way to express your opinion and increase its weight by combining it with that of others. The effectiveness of these petitions varies greatly based on a wide range of factors, but there’s little downside given how quick and easy it is to do. Each petition also will give you a link to the advocacy organization sponsoring it. If it’s an issue you are particularly interested in, you may want to engage directly with the organization. One forewarning: in many cases when you sign a petition the sponsoring organization will put you on their email list. In some cases, there is a check box on the petition that you can uncheck if you don’t want the organization to start sending you information. You can, of course, always unsubscribe via any email you get from such an organization

OVERSIGHT OF FINANCIAL CORPORATIONS – PETITIONS YOU CAN SIGN

INTRO: The need for strong oversight of our large financial corporations was made starkly clear by their collapse in 2008. Nonetheless, necessary changes have not happened. The six huge financial corporations are bigger than ever, despite concern that they were too big to fail back in 2008. News of illegal activity in the financial sector continues to surface regularly and financial corporations are increasingly engaging in activities similar to those that led up to the 2008 crash. [1] (See posts of 8/29/12 and 7/12/12 for background.)

Strong oversight and regulation are needed from the Federal Reserve and the Securities and Exchange Commission, among others. (See posts of 7/31/12, 5/31/12, and 5/29/12 for background.) The government bailout (trillions of dollars in total) and the economic recession (that we still haven’t recovered from) that followed must not be allowed to happen again.

Here are two steps that should happen to increase oversight and accountability, while reducing risk of a re-occurrence of the 2008 crash. I include (see below) links to petitions you can sign (each in a minute or less) that will register your support for them:

  • President Obama should NOT to nominate Larry Summers as the next head of the Federal Reserve (the Fed)
  • The Securities and Exchange Commission (SEC) should implement and enforce disclosure of the compensation given to the heads of the big financial corporations

TELL PRESIDENT OBAMA NOT TO APPOINT SUMMERS AS FED CHAIRMAN

Larry Summers is apparently Obama’s leading candidate to replace Ben Bernanke as the chairman of the Federal Reserve in January. Summers is a former Treasury Secretary, Obama economic advisor, and Harvard University President. He is currently a paid consultant to Citigroup, one of the six huge Wall St. financial corporations.

Summers contributed to the financial collapse — he helped lead the charge to deregulate Wall Street in the 1990s, he blocked efforts to regulate derivatives (which were a key cause of the 2008 collapse), and he dismissed concerns about deregulation just before the 2008 crash that tanked the economy. [2]

We need strong leadership at the Fed. We need someone willing to stand up to Wall Street instead of letting them play by their own rules and bailing them out when the going gets tough. Larry Summers is not that man.

Please email President Obama via the Daily Kos website now — tell him not to appoint Larry Summers to lead the Fed. (from Michael Langenmayr, Campaign Director, Daily Kos blog site. Paste the following address into your web browser if the link doesn’t work: http://campaigns.dailykos.com/p/dia/action3/common/public/?action_KEY=505)

TELL THE SECURITIES AND EXCHANGE COMMISSION TO IMPLEMENT DISCLOSURE OF CEOs’ PAY

Please urge the Securities & Exchange Commission (SEC) to enforce the law on disclosure of CEO’s salaries. Excessive CEO salaries contributed to the reckless financial culture that nearly ruined our economy.

The Dodd-Frank financial reform law, which Congress passed in 2010, requires publicly traded corporations to disclose how much their executives make and compare it to their average worker’s pay. Three years later, the law still hasn’t been implemented. Why? Because the SEC has not produced the regulations needed to implement the law. Meanwhile, big corporations are putting pressure on the SEC and Congress to quietly kill this requirement.

This is basic public information that we have the right to know, and will help prevent the next financial crisis. Join Daily Kos and USAction by signing this petition to the SEC, urging them to enforce Dodd-Frank’s provision on disclosing CEO salaries. (from Paul Hogarth, Daily Kos blog site. Paste the following address into your web browser if the link doesn’t work: http://campaigns.dailykos.com/p/dia/action3/common/public/?action_KEY=518)

My next post will describe, and give you the opportunity to be a citizen co-sponsor of, Congressional legislation to reduce risk and improve stability at our big bank corporations. It will reduce the risk of a future government bailout while enhancing the safety of your deposits.

NOTE: Please let me know by submitting a comment on this post if you would like me to continue sharing links to on-line petitions on issues I write about. These petitions are an easy way to express your opinion and increase its weight by combining it with that of others. The effectiveness of these petitions varies greatly based on a wide range of factors, but there’s little downside given how quick and easy it is to do. Each petition also will give you a link to the advocacy organization sponsoring it. If it’s an issue you are particularly interested in, you may want to engage directly with the organization. One forewarning: in many cases when you sign a petition the sponsoring organization will put you on their email list. In some cases, there is a check box on the petition that you can uncheck if you don’t want the organization to start sending you information. You can, of course, always unsubscribe via any email you get from such an organization.


[1]       Popper, N., 4/18/13, “Wall St. redux: Arcane names hiding big risk,” The New York Times

[2]       Editorial, 8/2/13, “Tornado at the Fed? Obama has better choices than Summers,” The Boston Globe

REDUCING INTEREST ON STUDENT LOANS

ABSTRACT: The interest rate on new federal student loans is scheduled to increase from 3.4% to 6.8% in July. Senator Elizabeth Warren (MA) has introduced legislation to give students the same interest rate that the big bank corporations get when they borrow from the Federal Reserve: 0.75%. Warren’s bill highlights the enormous advantages and preferences the federal government gives to large corporations and the contrast with what the government does (or doesn’t do) for students, their families, and 99% of taxpayers in general.

 Student debt exceeds $1 trillion and is a substantial drag on the economy. Some financial experts have warned that the student debt problem has parallels to the housing mortgage loan crisis.

You can become a citizen co-sponsor of Warren’s Bank on Students Loan Fairness Act at http://my.elizabethwarren.com/page/s/studentloans?source=20130516em.

FULL POST: The interest rate on new federal student loans is scheduled to increase from 3.4% to 6.8% in July. Senator Elizabeth Warren (MA) has introduced legislation to give students the same interest rate that the big bank corporations get when they borrow from the Federal Reserve: 0.75%.

Senator Warren’s bill in the Senate (her first) and Representative Tierney’s companion bill in the House would have the Federal Reserve make funds available to the Department of Education for student loans at this low rate for one year, to give Congress time to find a long-term solution to the student debt problem. As she writes, “If the government can float huge sums of money to large financial institutions at low interest rates to grow the economy, surely it can float the money necessary to fund our students, keep us competitive, and grow our middle class.” [1]

In addition to providing some relief to students, Warren’s bill highlights the enormous advantages and preferences the federal government gives to large corporations, in this case the large banks (who crashed our economy). It starkly draws a contrast with what the government does (or doesn’t do) for students, their families, and 99% of taxpayers in general, including homeowners who got little help while the large financial corporations involved with the housing collapse got bailed out.

At a time when the federal government can borrow money at 0.25% for 2 years, under 1% for 5 years, at 2% for 10 years, and roughly 3% for 30 years, [2] it hardly seems fair to be charging students even 3.4%, let alone 6.8%.

Student debt exceeds $1 trillion, which is more than all credit card debt. It is a substantial drag on the economy. (See post of 6/6/12 for more detail.) It depresses spending by students and their families. Because consumer spending is roughly two-thirds of our economic activity, depressed consumer spending slows our economic recovery. And if the default rate on student loans grows, which seems likely given that many students are having a very hard time finding jobs, let alone ones with good pay, the impact on our economy, government, and financial institutions could be significant. That’s why some financial experts have warned that the student debt problem has parallels to the housing mortgage loan crisis. [3]

You can become a citizen co-sponsor of Warren’s Bank on Students Loan Fairness Act at http://my.elizabethwarren.com/page/s/studentloans?source=20130516em.


[1]       Warren, E., 5/16/13, “If it’s good enough for the banks, it’s good enough for students,” Elizabeth Warren for Senate Newsletter

[2]       Bloomberg, 5/17/13, “United States Government Bonds, US Treasury yields,” retrieved from the Internet at http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

[3]       Zumbrun, J., & Torres, C., 5/7/13, “Bankers warn Fed of farm, student loan bubbles echoing subprime,” Bloomberg

THE FINANCIAL TRANSACTION TAX

ABSTRACT: A financial transaction tax (FTT) could generate $350 to $500 billion of revenue per year by applying a very low tax rate to financial transactions. The US had a financial transaction tax from 1914 to 1966 and 40 other countries have such a tax. It would not only generate needed revenue, it would also provide a disincentive for high volume, short-term, speculative trading. It has been dubbed “The Robin Hood Tax” (see www.robinhoodtax.org).

Multiple bills to create a FTT have been introduced in Congress, one of which, HR 6411, would rebate the tax to households with incomes under $75,000. It is also aligned with a broad, international campaign for the FTT.

FULL POST: As presented in my previous post (9/29/12), a financial transaction tax (FTT) could generate $350 to $500 billion of revenue per year by applying a very low tax rate to financial transactions. This would in effect be a sales tax on Wall St. transactions.

The US had a financial transaction tax from 1914 to 1966 and 40 other countries have such a tax. The US tax on purchases and sales of stock was 0.04% (40 cents on a $1,000 transaction). Currently, the US has a very small 0.0034% tax (3.4 cents per $1,000) that is levied on stock transactions to support the operating costs of the Securities and Exchange Commission (SEC), which regulates financial markets. However, much of the revenue is being diverted to other purposes. [1]

A financial transaction tax would not only generate needed revenue, it would also provide a disincentive for high volume, short-term, speculative trading. Such trading produces profits for speculators, but no benefit for the overall economy. It actually harms the economy by contributing to increased market volatility and increased prices for commodities such as food and gasoline (see blog post 3/5/12).

The financial transaction tax has been dubbed “The Robin Hood Tax” and is being supported by National Nurses United (www.nationalnursesunited.org) and others (see www.robinhoodtax.org). Multiple bills to create a FTT have been introduced in Congress. One is House bill HR 6411, The Inclusive Prosperity Act. It would impose a 0.5% tax on stock trades ($5 per $1,000) and a lesser rate on other financial transactions (e.g., trading of bonds, currencies, and derivatives). The tax would be rebated to households with incomes under $75,000. It would generate an estimated $350 billion per year that could be used for deficit reduction or social and human needs, as recommended in the bill. It is aligned with a broad, international campaign for the FTT, including a very active effort in the European Union. The international campaign includes a specific focus on using revenue generated to address climate change and global health issues. [2]


[1]       Wikipedia, retrieved 9/28/12, “Financial transaction tax,” en.wikipedia.org/wiki/Financial_transaction_tax

[2]       Vanden Heuvel, K., 9/26/12, “The better bargain: Transaction tax, not austerity,” The Nation

BIG FINANCIAL CORPORATION SCANDALS CONTINUE

ABSTRACT: Things are rotten in the big financial corporations. News of illegal activity continues to surface regularly. The fines that have been imposed haven’t been a sufficient deterrent to stop this bad behavior. Multiple big banks have paid penalties of over $100 million for 1) money-laundering for countries subject to US economic sanctions, 2) selling inappropriately risky investments to conservative investors including municipalities and non-profits, 3) fraudulently foreclosing on mortgages, 4) interest rate manipulation in multiple scenarios, and 5) discriminating against minority borrowers.

Despite this repeated wrong doing, the Securities and Exchange Commission (SEC) and the Justice Department announced recently that they have ended their investigation of Goldman Sachs for fraud related to selling mortgage-backed securities to customers when it knew the securities were likely to be bad investments. This is the latest indication that there will be no significant accountability for the banks that brought on the collapse of the financial sector and our economy.

These huge financial corporations are not just too big to fail, they are simply too big and complex to control by either internal management or outside regulators. Either these huge financial corporations need to be broken up into smaller and less complex entities, or government regulation of them needs to be dramatically changed and strengthened. We cannot allow them to continue to pocket the gains from their risky business practices when we know that we will bear the costs when things go wrong.

FULL POST: Things are rotten in the big financial corporations. News of illegal activity continues to surface regularly across a broad range of banks and financial activities. Here are some of the latest. The fines that have been imposed (which sound like big amounts but are small compared to the size and profitability of these corporations) haven’t been a sufficient deterrent to stop this bad behavior. (In terms of the size of these financial firms, JP Morgan Chase took a $6 billion loss on internal, speculative securities trades and still had a profit for the quarter.)

  • Standard Chartered, a big British bank, has agreed to a $340 million penalty with New York State to settle charges of money-laundering for countries subject to US economic sanctions. It admitted to concealing transactions with Iran of over $250 billion over nearly 10 years. The bank made hundreds of millions of dollars in fees on the transactions. It agreed to increased monitoring but received no other sanctions on its business. A former US Treasury official noted his disappointment in the small penalty and the lack of criminal charges. A federal investigation is on-going. Since 2005, the US Treasury has imposed fines of over $2 billion on banks for violating US economic sanctions including ING Bank ($617 million), Lloyds Bank ($350 million), UBS ($100 million), Barclays ($176 million), and JP Morgan Chase ($88 million). HSBC bank has been accused of laundering billions of dollars for drug cartels and terrorists and has yet to settle, but has set aside $700 million for potential penalties. [1][2]
  • Wells Fargo bank is paying $6.5 million to settle charges that it sold inappropriately risky investments to conservative investors including municipalities and non-profits. A Wells Fargo vice president will pay $25,000 and serve a 6 month ban on working in the securities industry. Wells Fargo and its vice president have neither admitted nor denied wrongdoing, as is typical in these cases. Last month, Wells Fargo paid $175 million to settle charges that it discriminated against minority borrowers. [3]

Despite repeated wrongdoing, the Securities and Exchange Commission (SEC) and the Justice Department announced recently that they have ended their investigation of Goldman Sachs for fraud related to selling mortgage-backed securities to customers when it knew the securities were likely to be bad investments. They will not pursue criminal charges against the corporation or its employees. This occurred despite President Obama’s announcement of a special investigative task force in January, despite a formal notice from the SEC in February that it intended to pursue legal action, and despite the $550 million fine Goldman Sachs paid in 2010 for failing to make appropriate disclosures to investors on a similar security. This is the latest indication that there will be no significant accountability for the banks that brought on the collapse of the financial sector and the economy, especially given that the deadline to file cases is fast approaching. [4] [5]

Whatever the reasons are for these huge financial corporations not being held accountable, it is clear that they are not just too big to fail, but simply too big and complex to control. Internal management seems unable to control traders and stop illegal activity (assuming they intend to). Outside regulators have an extremely difficult time detecting and responding to illegal and harmful behavior, not to mention doing so in a timely manner that might prevent the worst of the consequences.

Dramatic changes are needed. Either these huge financial corporations need to be broken up into smaller and less complex entities, or government regulation of them needs to be dramatically changed and strengthened. Otherwise, the risk that they will do serious damage to our economy again is simply too high. We cannot allow them to continue to pocket the gains from their risky business practices when we know that we will bear the costs when things go wrong.


[1]       Rooney, B., 8/14/12, “Standard Chartered pays $340 million to settle Iran charges,” CNN Money

[2]       Sanati, C., 8/8/12, “Why London bankers are shrugging of Standard Chartered threat,” CNN Money

[3]       O’Toole, J., 8/14/12, “Wells Fargo in $6.5 million SEC settlement over risk disclosure,” CNN Money

[4]       Protess, B., & Ahmed, A., 8/9/12, “SEC and Justice Dept. end mortgage investigations in Goldman,” DealBook of The New York Times

[5]       Mattingly, P., 8/10/12, “US won’t prosecute Goldman Sachs, employees over CDO deals,” Bloomberg Businessweek

WHY WE NEED STRONG REGULATION

ABSTRACT: A fierce battle is occurring over government regulation. Key arguments against regulation are that corporations will regulate themselves and that the discipline of free market capitalism will punish bad corporate behavior and reward good behavior. The series of scandals in our large banks have clearly proven these arguments are wrong. And there are many examples beyond the recent bad behavior in the financial industry.

The market is unable to detect, publicize, and punish bad behavior before very serious damage has been done. Corporations resist efforts to exert control or set standards from outside and our huge corporations have the power to successfully do so. As Robert Sherrill wrote, “thievery is what unregulated capitalism is all about.” “Trust but verify” seems applicable here. We need strong regulators and regulations to verify that large corporations are behaving in a legal and ethical manner. Albert Einstein defined insanity as “doing the same thing over and over and expecting different results.” Deregulation is insanity; we’ve seen the results time and again. Strong regulation of corporations, particularly large corporations, by government is necessary.

FULL POST: A fierce battle is occurring in Congress and the federal government over regulation of the financial industry and over government regulation in general. Key arguments against regulation are that corporations will regulate themselves (with minimal standards from government) and that the discipline of free market capitalism will punish bad corporate behavior and reward good behavior. President George W. Bush asserted that these forces were effective and sufficient as he promoted deregulation.

Over the last couple of years, the series of scandals in our large banks have clearly proven these arguments are wrong. The large banks have not regulated themselves. The mortgage and LIBOR scandals (among others) have shown a pattern of behavior by many banks over many years where they clearly did not regulate themselves, but spun further and further out of control and into illegal and unethical behavior. The recent huge JPMorgan trading loss, currently estimated at $6 billion, shows that they simply cannot control internal behavior despite strong incentives to do so. And there are many examples beyond the recent bad behavior in the financial industry: for example, the Savings and Loan scandal of the late 1980s, Enron and WorldCom’s collapses of 2001 and 2002, and the “dot com” stock bubble of 2000. Our large corporations don’t even seem to be able to exert reasonable control over executive compensation.

The discipline of a competitive market place has also clearly not been effective as a deterrent for bad behavior. The recent scandals have shown as false the assumption that banks would behave honestly to protect their reputations with customers. Moreover, it is clear in all of the examples cited above that the market is unable to detect, publicize, and punish bad behavior before very serious damage has been done. [1]

Finally, corporate capitalism, where the goal is to maximize profits, clearly has strong incentives for promoting self-interest. Conversely, the corporations have strong incentives to resist the public interest, such as worker safety, fair employee compensation, and clean air and water, because they might increase costs and reduce profits. Therefore, corporations resist efforts to exert control or set standards from outside. And our huge corporations have the power to successfully do so, in the market place, in the courts, and in our elections and government.

As Robert Sherrill (the reporter and investigative journalist for The Nation, the Washington Post, and the New York Times Magazine, among others, and the author of numerous books on politics and society [2] ) wrote about the Savings and Loan scandal, “thievery is what unregulated capitalism is all about.” The recent behavior of our large banks seems to have proven this statement again.

“Trust but verify,” a phrase President Reagan popularized when he used it to describe relations with the Soviet Union, seems applicable here. [3] We need strong regulators and regulations to verify that large corporations are behaving in a legal and ethical manner.

Finally, Albert Einstein is quoted as defining insanity as “doing the same thing over and over and expecting different results.[4] Deregulation of the financial industry in particular, and corporate America in general, is insanity. We’ve seen the results time and again over the last 30 years of deregulation and in the events leading up to the Great Depression. We’re paying a very steep price right now in high unemployment, lost wealth in homes and investments, and over the longer haul in lower wages and reduced benefits for workers.

We need to push back against the large corporations and their special interests in the name of the public interest and the interests of we the people. Strong regulation of corporations, particularly large corporations, by government is necessary.


[1]       Surowiecki, J., 7/30/12, “Bankers gone wild,” The New Yorker

[2]       Wikipedia, retrieved 7/25/12, “Robert Sherrill,” en.wikipedia.org/wiki/Rovbert_Sherrill

[3]       Wikipedia, retrieved 7/26/12, “Trust, but verify,” en.wikipedia.org/wiki/Trust_but_verify

[4]       BrainyQuote, retrieved 7/26/12, “Albert Einstein quotes,” http://www.brainyquote.com/quotes/quotes/a/alberteins133991.html

DODD-FRANK & CFPB ANNIVERSARIES

ABSTRACT: We have just reached the second anniversary of the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the first anniversary of the Consumer Financial Protection Bureau (CFPB) that it created. Much has been accomplished despite efforts of the financial industry and some in Congress to block, weaken, and/or delay progress. The CFPB, in its first major enforcement action, ordered Capital One Bank to pay $210 million to settle charges of deceptive marketing. The CFPB has received 45,000 complaints and projects over 200,000 per year. (To file a complaint go to http://www.consumerfinance.gov/complaint.)

For the Dodd-Frank law overall, it is estimated that 31% of the rule making required by the law has been finalized. This effort is extensive because Congress was unable to resolve many of the complex and controversial issues and instead passed them on to the regulators’ rulemaking process. The financial industry has been lobbying heavily (over $200 million over the last two years and 1,300 meetings with three key regulatory agencies) to delay, weaken, and complicate the rulemaking and implementation. Sheila Bair, the very effective former chair of the Federal Deposit Insurance Corporation (FDIC) writes, “we see regulators who are too timid … they try to placate industry lobbyists … We need a regulatory system focused on the public interest, not the special interest. … and Congress needs to support them.” [1]

I urge you to let your representatives in or candidates for Congress know that you support strong regulation of the financial industry and strong penalties, including jail time, for violators.

FULL POST:We have just reached the second anniversary of the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the first anniversary of the Consumer Financial Protection Bureau (CFPB) that it created. (The existence of a similar agency in Canada has been credited by some with having avoided the mortgage fraud and predatory lending that contributed to the financial and housing market collapse in the US. [2]) Much has been accomplished despite efforts of the financial industry and some in Congress to block, weaken, and/or delay progress. Most notably, Senate Republicans blocked President Obama’s appointment of anyone to head the CFPB to prevent it from functioning effectively. Obama eventually appointed a head of the CFPB in January 2012 without Senate approval when it was in recess.

The CFPB, in its first major enforcement action, ordered Capital One Bank to pay $210 million to settle charges of deceptive marketing to credit card customers. In addition, the CFPB has:

  • Engaged in lots of fact-finding and gathering of input from a wide range of constituencies
  • Undertaken its “Know Before You Owe” initiative to help people understand the consequences of debt
  • Proposed a redesign of mortgage forms to enhance disclosure and understanding
  • Started developing a range of mortgage regulations making them safer for borrowers and lenders, including a ban on balloon payments and prepayment penalties, and a cap on late fees
  • Jointly with the Education Department, issued a report on subprime-style lending in the private student loan market and created a model document on college costs and financing options [3]
  • Initiated oversight of companies reporting on individuals’ creditworthiness
  • Launched a database that tracks credit card complaints

The CFPB has received 45,000 complaints, many about credit cards and mortgages. The frequency is increasing and is projected to exceed 200,000 per year, perhaps by a lot. [4][5] (To file a complaint go to http://www.consumerfinance.gov/complaint.)

For the Dodd-Frank law overall, it is estimated that 31% of the rule making required by the law has been finalized (123 of 398 rules). To-date, 8,843 pages of rules and regulations have been created by 10 regulatory agencies. The CFPB is responsible for 1,013 of those pages and most of the 1,561 pages devoted to consumer protection. The other major contributors are the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) each with 3,200 pages and the Federal Reserve with 1,439 pages. [6] This effort is so extensive because Congress was unable to resolve many of the complex and controversial issues and instead passed them on to the regulators’ rulemaking process.

The financial industry has been lobbying heavily (over $200 million over the last two years and 1,300 meetings with three key regulatory agencies: the Treasury, the Federal Reserve, and the CFTC) to delay, weaken, and complicate the rulemaking and implementation. For example, new requirements for reserves to protect against losses won’t begin kicking in until January and won’t be fully implemented until 2019. New rules on trading of derivatives won’t start until later this year and will apply to many fewer companies than originally envisioned. The Volcker Rule, to prevent excessive, risky trading by federally insured banks, is still in the works with no draft released and nothing implemented, despite JPMorgan’s recent huge loss on such trading, estimated to be $6 billion. [7][8]

Sheila Bair, the very effective, former chair of the Federal Deposit Insurance Corporation (FDIC), writes, “Yet, still, we see regulators who are too timid … they try to placate industry lobbyists by creating this clarification or that exception, resulting in indecipherable rules that are hundreds, and in some cases, thousands of pages long. … And the irony is that once the rules have ballooned … the lobbyists who sought all the clarifications and exceptions ridicule the regulators for … red tape. … We need a regulatory system focused on the public interest, not the special interest. And we need strong, credible voices who will weigh into the debate on the side of the population at large. … The system is not getting fixed and we need to send a message to Washington. … We need regulators to write rules that the public can understand and the [bank] examiners can enforce. … and Congress needs to support them.” [9]

I hope this information and that in previous posts will help you do anything you can to support strong regulation of the financial industry. I urge you to let your representatives in or candidates for Congress know that you support strong regulation of the financial industry and strong penalties, including jail time, for violators. Tell them your personal stories about how the financial collapse has affected you and your family. Only strong grassroots pressure by voters will ultimately make the difference.


[1]       Bair, S., 7/20/12, “Two years after Dodd-Frank, why isn’t anything fixed?” Yahoo! Finance

[2]       Krugman, P., 2/1/10, “Good and boring,” The New York Times

[3]       Dougherty, C., & Lorin, J., 7/20/12, “CFPB says students victimized by ‘subprime-style’ lending,” Bloomberg Businessweek

[4]       Singletary, M., 7/11/12, “Consumer protection bureau nears its first anniversary,” The Boston Globe

[5]       Puzzanghera, J., 7/23/12, “Cordray marks consumer protection agency’s 1st year,” Los Angeles Times

[6]       Davis Polk & Wardwell LLP (law firm), 7/20/12, “Dodd-Frank progress report,” http://www.davispolk.com/dodd-frank-rulemaking-progress-report

[7]       Liberto, J., 7/21/12, “Two-thirds of Dodd-Frank still not in place,” CNN Money

[8]       Drutman, L., 7/19/12, “Big banks dominate Dodd-Frank meetings with regulators,” Sunlight Foundation

[9]       Bair, S., 7/20/12, “Two years after Dodd-Frank, why isn’t anything fixed?” Yahoo! Finance

BAD BEHAVIOR AT THE BIG BANKS

Abstract: Two “new” major, multi-bank scandals have gotten attention recently: the manipulation of the LIBOR interest rate index from 2005 – 2009 and the rigging of interest rates on municipal deposits over at least ten years. These far-reaching scandals are but the tip of the iceberg, which includes the endemic fraudulent mortgage practices that led to the 2008 financial collapse and more. JPMorgan Chase, among others, is involved in all of the above. It has also paid a $153 million fine for fraud in securities trading and a $700 million penalty for its misbehavior in municipal finance.

Despite overwhelming evidence of serious, chronic criminal behavior at the big banks, penalties are mere slaps on the wrist, no senior executive has been prosecuted, and the banks continue to do business as if they had done nothing wrong. This behavior and the unhealthy economic and political power of the big banks must be stopped. The only way to do so is to prosecute bankers and send some of them to jail.

Full post: On the heels of the large trading losses at JPMorgan Chase (somewhere between $2 and $9 billion) comes news of two major, multi-bank scandals: the manipulation of the LIBOR interest rate and the rigging of interest rates on municipal deposits.

Barclays Bank, based in London, has paid British and American regulators a fine of $450 million for rigging the London Inter-Bank Offered Rate (LIBOR) from 2005 through 2009. This is a big deal because LIBOR is used worldwide to set the variable interest rates on an estimated $500 trillion worth of financial contracts, including mortgages, credit cards, and many commercial and personal loans. The rate rigging helped Barclays’ traders make more money and made their bank look stronger in the midst of the financial crisis. Other banks were clearly involved in the scheme and more penalties are expected. [1]

The second scandal, rigging interest rates on municipal deposits, has, at least so far, received far less attention. Three low level employees at GE Capital (the financial services subsidiary of General Electric) have been convicted in a scheme that involved virtually every major bank and finance company on Wall St. They conspired to skim billions from cities and towns across the country by paying them lower interest rates on their deposits. The cities and towns are generally legally required to get competitive bids from at least three banks. The bidding is managed by a broker. In this scheme, the banks divvied up the business so there was a prearranged winner of the bidding. The broker was bribed to tell the prearranged winner what the other two bids were, so it could come in just over those bids. [2]

This conspiracy had been going on for at least ten years. The municipalities’ deposits were the multi-million proceeds of bonds that were sold to finance major projects and were spent over the multiple years those projects, such as building a school or sewer system, took to complete. Therefore, lowering the interest rate the municipality is paid by just a 100th of a percent (e.g., 5.00% instead of 5.01%) could cheat a city or town out of tens of thousands of dollars, and save the bank the same amount. Overall, municipalities lost tens of millions of dollars on tens of billions of dollars of municipal deposits. To-date, four banks – UBS, Bank of America, JPMorgan Chase, and Wells Fargo – have admitted involvement and have paid $673 million in restitution and fines.

These two new scandals, amazingly, are but the tip of the iceberg in terms of fraud in the financial industry. Fraudulent writing of mortgages, fraudulent packaging and selling of them as supposedly safe AAA-rated securities, and fraudulent mortgage foreclosures (see blog post / newsletter issue #19, 2/20/12) led to the 2008 financial collapse.

JPMorgan Chase, to focus on one of the big banks, is involved in all of the wrongdoing mentioned above. It has also paid a $153 million fine for fraud in the trading of collateralized debt obligations (CDOs) and a $700 million penalty for its misbehavior in the funding of a $300 million sewer system in Birmingham and Jefferson County Alabama. In this latter scandal, it bribed Goldman Sachs with $3 million not to compete with it and bribed local officials (some of whom are now in jail) to accept a complex financial deal that means the $300 million sewer system will cost $3 billion. This provided profits to JPMorgan while saddling local households, some of them quite poor, with sewer bills of at least $50 month. [3]

The pattern of repeated misbehavior in the financial system is clear. Our big banks’ executives are more interested in their profits and bonuses than serving their customers or playing by the rules. The fines and penalties they’ve paid are mere slaps on the wrist given their size and profitability. None of these payments have meant even one quarter where a bank reported a loss instead of a profit. Despite the overwhelming evidence of serious, repeated criminal behavior, there has been no prosecution of any senior official – not a one, and the banks continue to do business, including with local, state, and the federal governments, as if they had done nothing wrong. [4] (In the Savings and Loan collapse, which was truly miniscule by comparison, over 1,000 senior officials were convicted of felonies.)

Joseph Stiglitz, a Nobel Prize winner and former World Bank economist, believes we must break the unhealthy economic and political power of the financial sector in order to have a more just and prosperous society. He believes the only way to do this is to prosecute bankers and send some of them to jail. [5]


[1]       Morgenson, G., 7/7/12, “The British, at least, are getting tough,” The New York Times

[2]       Taibbi, M., 7/5/12, “The scam Wall Street learned from the Mafia,” Rolling Stone

[3]       Moyers & Company, 6/22/12, “How big banks victimize our democracy,” Public Affairs Television, Inc.

[4]       Eskow, R., ???, “Wall Street’s unpunished crimes,” Huffington Post

[5]       Common Dreams staff, 7/2/12, “Following Barclays’ scandal, Stiglitz says, ‘Send bankers to jail’,” http://www.commondreams.org/headline/2012/07/02-4

REGULATING THE BIG BANKS (Part 2)

Here’s issue #33 of my Policy and Politics Newsletter, written 5/31/12. The previous issue of the newsletter laid out the rationale and need for strong regulation of the six big banks that dominate the industry. It closed by noting that JPMorgan Chase’s recent multi-billion dollar loss from securities trading has re-focused attention on bank regulation. This issue of the newsletter takes a look at the response to the JPMorgan loss.

The over $2 billion trading loss at JPMorgan has strengthened support for the Volcker Rule, which bans speculative and risky proprietary trading by banks. It has reinvigorated the discussion about financial institutions that are “too big to fail.” The six biggest US banks are bigger now than they were before the recent financial collapse and have assets ($9.5 trillion) equal to 2/3 of the entire US economy. Many believe that the collapse of any one of them would trigger events that would cripple the US economy. Therefore, despite the provisions of the Dodd-Frank law that state there will be no future bailout, many find it hard to believe that a bailout wouldn’t happen because these huge banks truly are too big to fail. [1]

Opponents of stronger bank regulation will characterize the push for the Volcker Rule and splitting up the six big banks as an attack on successful businesses, business people, and the wealthy. But JPMorgan CEO Dimon’s own reputation disproves this. Until the current fiasco, he and his leadership at JPMorgan had been praised and celebrated. The call for strong regulation is not an attack on success or wealth, but on bad and unethical business practices, failures of risk management, greed, and bad judgment that harm the public good. [2]

Because of the historical inability of these banks to control risk, as was just demonstrated by the best of them, and because of the inability of government to effectively regulate, oversee, and hold accountable these extremely large, complex, and powerful financial corporations, many experts are arguing that breaking them up into smaller entities is the only real solution. These experts include four regional Federal Reserve presidents and the head of research at one of the regional Federal Reserve banks. [3]

One example of the power of these banks and the conflicts of interest that exist in our financial system is that JPMorgan CEO Dimon sits on the Board of the Federal Reserve Bank of New York. Among other responsibilities, it regulates and oversees JPMorgan and the other Wall Street banks. Many experts see this as a major conflict of interest and are calling on him to step down. For example, Simon Johnson (professor at MIT’s Sloan School of Management and former chief economist of the International Monetary Fund) says, “he should, under these circumstances, absolutely step down from that role. It’s completely inappropriate to have such a big bank represented in this fashion.” [4]

Our current recession and financial crisis were caused by bad risk management, unethical business practices, and greed at our large financial institutions coupled with a failure of government oversight, enforcement, and regulation. The result has been high unemployment, extensive loss of homes and home value, and large losses of revenue for governments at the federal, state, and local levels. The bailout of the financial industry and the steep loss of revenue due to the recession are major factors contributing to the large federal government deficit with which we are struggling.

The big banks are working hard to weaken and delay (if not prevent) the implementation of the Volcker Rule and support for it. I am amazed they have any credibility to lobby against regulation after the financial debacle and recession they just caused. Some of their supporters, including in Congress, appear to have an ideology that corporations can do no wrong and that there is no such thing as a good regulation. Others, I believe, are swayed by the large campaign contributions from the financial sector and the new potential of unlimited spending by it through Super PACs.

The Volcker Rule is needed to prevent proprietary trading losses, like the one just experienced at JPMorgan, from seriously impacting our banking system, our federal government, and our economy. It is one, critically important step in regulation and oversight of our financial system that is necessary to reduce and, hopefully eventually eliminate, the potential for too big to fail banks again requiring a taxpayer bailout and crashing our economy.


[1]       Moyers, B. & Johnson, S., 5/17/12, “Are JPMorgan’s losses a canary in a coal mine?” Common Dreams

[2]       Editorial, 5/15/12, “Dimon in the rough,” The Boston Globe

[3]       Rohde, D., 5/11/12,  “Break up the big banks,” Reuters

[4]       Moyers, B. & Johnson, S., see above

REGULATING THE BIG BANKS (Part 1)

Here’s issue #32 of my Policy and Politics Newsletter, written 5/29/12. JPMorgan Chase’s recent multi-billion dollar loss from securities trading has focused attention on the regulation of our large banks. This issue of my newsletter and the next one take a look at this issue.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010. Its goal was to put an end to practices in the financial industry that led to the 2008 collapse of the financial sector and our economy.

One of its goals was to prevent speculative securities trading by banks that many equate to gambling with taxpayers’ money. This trading, called proprietary trading, enhances banks’ profits (when things go right) and senior managers’ bonuses, but do not benefit or serve bank customers. The Volcker Rule, named after former Chairman of the Federal Reserve (under Presidents Carter and Reagan), Paul Volcker, who proposed and supports it, is the specific piece of the Dodd-Frank law that bans such trading by banks. It would reinstate a key provision of the Glass-Steagall Act, put in place after the Great Depression but repealed in 1998, that required separation of banking from proprietary trading.

The reason for separating banking and proprietary trading is that banking is protected and supported by the federal government to ensure the safety of depositors’ money. Banks’ deposits are insured by the Federal Deposit Insurance Corporation (FDIC) and banks have access to very low cost funds from the Federal Reserve. Proprietary trading is speculative and risky, providing potentially big gains and big losses to the banking corporation and its executives. If a bank, while protected and supported by the government, is allowed to engage in proprietary trading, this amounts gambling with taxpayers’ money. [1] And as we have just experienced, banks that are “too big to fail” will receive bailouts using taxpayer funds if their bets go bad.

During the process of writing the Dodd-Frank law, and now during the writing of regulations to implement the law, including the Volcker Rule, the financial industry from Wall Street has worked tirelessly to water down, delay, complicate, and confuse the process. [2] Using legions of lawyers and lobbyists, large campaign contributions, media campaigns, and friends in Congress and the Executive Branch (some who have traveled through the revolving door of moving between financial industry and government jobs), Wall Street works to add provisions and loopholes that complicate the result, and to undermine support for reform. Those working to create solid regulation and limitations try to write provisions that allow reasonable activities but close loopholes, knowing that after the fact the financial institutions will exploit any loopholes they can find.

The Volcker Rule’s ban on proprietary trading by banks only significantly affects the six biggest banking corporations, [3] as they are the ones who engage in extensive proprietary trading. Proprietary trading is not an essential banking activity and it creates a conflict of interest between the bank and its customers. The other 20 regional banks and 7,000 community banks are generally supportive of the Volcker Rule but find it “impossible … to challenge” the six big banks on this issue. The Volcker Rule is scheduled to go into effect in July 2012, but the banks have managed to get a two year delay and will have until 2014 to comply. [4] Two of the six big banks, Goldman Sachs and Morgan Stanley, got their banking licenses during the recent financial crisis specifically to reassure their depositors that their deposits were protected by the FDIC and to get access to support from the Federal Reserve. [5]

The recent $2 billion plus proprietary trading loss at JPMorgan Chase really grabbed everyone’s attention because JPMorgan is touted as having the best risk management in the industry. Its highly regarded CEO, Jamie Dimon, has been leading the charge against the Volcker Rule, claiming it is unnecessary. [6] If proprietary trading at JPMorgan in calm financial markets could result in such a big loss, many are wondering how great the current risk of huge losses at other banks might be, let alone what it would be when financial markets are more volatile.

The next issue of my newsletter will cover the response to this JPMorgan trading loss.


[1]       Silver-Greenberg, J., &Schwartz,N.D., 5/17/12, “JPMorgan losses reportedly up $1b,” The Boson Globe

[2]       Taibbi, M., 5/24/12, “How Wall Street killed financial reform,” Rolling Stone

[3]       The six biggest banks are JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley. They average $1.6 trillion in assets.

[4]       Rohde, D., 5/11/12,  “Break up the big banks,” Reuters

[5]       Moyers, B., with Volcker, P., 4/5/12, “Gambling with your money,” Moyers & Company on National Public Radio

[6]       Gogoi, P., 5/15/12, “Dimon likely to face ire, not ouster at JPMorgan meeting,” The Boston Globe

THE 2008 FINANCIAL COLLAPSE: CONTEXT AND FOLLOW-UP

Here’s issue #25 of my Policy and Politics Newsletter, written 3/25/12. The previous issue provided highlights from the movie Inside Job, a documentary on the 2008 collapse of US financial firms that caused our current recession, which I highly recommend. Here’s some context and follow-up on the 2008 financial collapse.

The 2008 collapse was the product of deregulation of the financial industry over the last 30 years that led to three financial crises, each of increasing severity. These three crises were the Savings and Loan (S&L) crisis of the late 1980s, the “dot-com” stock bubble burst of 2000-2001, and the financial collapse of 2008.

In the early 1980s, the S&Ls were deregulated and by the end of the 1980s their newly allowed risky investments brought numerous bankruptcies that cost taxpayers $124 billion. 747 out of the 3,234 S&Ls failed, contributing to the 1990–91 economic recession. [1]

Then in 2000-2001, the bubble in stock prices burst resulting in $5 trillion in losses and again contributing to a recession. This “dot-com” bubble was the result of speculation fueled by respected business publications, such as Forbes and the Wall Street Journal, that encouraged the public to invest in risky companies, despite some of the companies’ disregard for basic financial and even legal principles. Not all of the companies involved were actually “dot-com” companies. Enron and WorldCom engaged in illegal accounting practices to exaggerate profits. Several companies and their executives were accused or convicted of fraud and the Securities and Exchange Commission (SEC) fined top investment firms like Citigroup and Merrill Lynch millions of dollars for misleading investors – encouraging them to buy stocks the companies knew were risky at best. In all, large financial firms paid $1.4 billion to settle possible claims and promised not to engage in misleading practices again. [2] Nonetheless, similar misleading practices occurred with mortgage-backed derivatives leading up to the 2008 collapse.

The US Senate’s investigation of the 2008 financial collapse found “that the crisis was not a natural disaster, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regu-lators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.” [3] As in the S&L crisis, the regulators had been too close to the industry and had ignored problems. Moreover, two years after the 2008 crash, the FBI’s investigation had one-fourth of the resources the agency used during the S&L crisis, despite the fact that the 2008 collapse was 10 times as large. [4] While the S&L debacle led to felony convictions of over 1,000 senior S&L executives, no significant criminal charges have been filed based on the 2008 collapse. [5]

Economist Paul Krugman notes that Canada, despite a similar concentration of its financial industry in five large firms, exhibited remarkable stability while US firms were in crisis. He and others believe that this is because of stricter oversight and regulation. For example, Canada has: [6]

  • An independent Financial Consumer Agency to protect consumers from deceptive lending
  • Strong restrictions on subprime-type lending
  • Limits on the packaging of mortgages and other debt into securities to be sold to investors
  • Limits on the risks banks can take and on the reserves they have to keep to protect against losses

The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 addresses some of the causes of the 2008 collapse, although many analysts believe it is too weak to prevent another crisis. Nonetheless, Wall St. and its allies on Capitol Hill are trying to weaken the law and block its implementation. This is an example, both before and after the fact, of crony capitalism – cozy relationships between our financial corporations and our public officials in Washington, in Congress and in the Executive and Judicial branches of government, blocking meaningful regulation that is necessary to protect citizens and our economy.


[1]       Wikipedia, retrieved 3/21/12, “Savings and loan crisis,” http://en.wikipedia.org/wiki/Savings_and_loan_crisis

[2]       Wikipedia, retrieved 3/21/12, “Dot-com bubble,” http://en.wikipedia.org/wiki/Dot-com_bubble

[3]       Wikipedia, retrieved 3/21/12, “Late-2000s financial crisis,” http://en.wikipedia.org/wiki/Late-2000s_financial_crisis

[4]      Willoughby, J., 4/13/09, “The Lessons of the Savings-and-Loan Crisis,” Barron’s

[5]       Black, W. K., 5/4/10, “Wall St. Fraud and Fiduciary Responsibilities: Can Jail Time Serve as an Adequate Deterrent for Willful Violations?” Testimony before US Senate, Committee on the Judiciary, Subcommittee on Crime and Drugs

[6]       Krugman, P., 2/1/10, “Good and boring,” The New York Times

INSIDE JOB: THE 2008 COLLAPSE OF US FINANCIAL FIRMS

Here’s issue #24 of my Policy and Politics Newsletter, written 3/23/12. Last week, I finally watched the movie Inside Job, a documentary on the 2008 collapse of US financial firms that caused our current recession. I highly recommend it. Here are some highlights.

The movie Inside Job documents how the deregulation of the financial industry over the last 30 years has led to three financial crises, each of increasing severity. These three crises were the Savings and Loan (S&L) crisis of the late 1980s, the Internet stock bubble burst of 2000-2001, and the financial collapse of 2008.

The 2008 collapse was the worst of the crises and was largely caused by risky and fraudulent practices in the mortgage industry and by financial firms’ packaging of mortgages into securities that were sold to investors. These practices had fueled a bubble in the housing market – unwarranted price increases and over-building – that then caused a dramatic decline in house prices. This resulted in millions of mortgage defaults and foreclosures, and an economic recession – often called the Great Recession – that is the worst since the Great Depression of the 1930s. The losses in households’ wealth, primarily in housing and investment assets, exceed $14 trillion. Tens of millions of homeowners, who had significant equity in their homes in 2007, now have little or nothing. It is estimated that homeowners who owe more on their mortgages than their homes are worth – who are “underwater” – owe $700 billion more than their homes are worth. [1]

Inside Job documents that despite warning signs former Federal Reserve Board Chairman Alan Greenspan, Treasury Secretaries Lawrence Summers and Henry Paulson, and SEC Chairman Arthur Levitt (among others) vehemently opposed any regulation of complex financial instruments known as “derivatives” (because they are “derived” from other financial instruments such as mortgages). They blocked efforts of the Commodity Futures Trading Commission under the leadership of Brooksley Born to regulate derivatives. By the late 1990s, the unregulated derivatives market involved $50 trillion of securities and was (and is) described by many as legalized gambling.

The movie notes that an orchestrated campaign by Wall St. and its lobbyists for deregulation of the financial industry, along with the incestuous revolving door which had formerWall St. executives in senior positions in government, succeeded in creating widespread support for deregulation. Greenspan, Summers, Paulson, and other senior government officials, as well as many in Congress, supported deregulation. This led to:

  • The 1999 repeal of the Glass–Steagall Act of 1933, passed in the aftermath of the Great Recession, which had required the separation of Wall Street investment firms and their risky investments from banks to reduce the risks that banks and their depositors would need a government bailout
  • Staff cuts at the Securities and Exchange Commission (SEC), which oversees our financial markets
  • Financial firms being allowed to decrease their reserves that protect against bankruptcy to as little as 3% of their assets, increasing the risk of the need for a taxpayer bailout
  • Academic economists supporting deregulation and downplaying risks
  • Specific warnings about high levels of risk being ignored
  • Credit rating agencies (e.g. Standard & Poor’s) covering up the risks of mortgage-related derivatives

The mortgage industry pushed unaffordable, sub-prime mortgages on unwitting customers because it received higher fees for them. Then, financial firms packaged these mortgages into derivatives and sold them as safe investments when the firms knew they were risky – and often made side bets that underlying mortgages would go into default and that the derivatives would decline in value.

The next issue of my newsletter will provide more context and some follow-up on the 2008 financial collapse, including steps to take to reduce the likelihood of another financial crisis. Unfortunately, it is not at all clear that Congress and the regulators will take these steps.


[1]       Wikipedia, retrieved 3/21/12, “Late-2000s recession,” http://en.wikipedia.org/wiki/Late-2000s_recession

GASOLINE PRICES: WHY SO HIGH?

Here’s issue #22 of my Policy and Politics Newsletter, written 3/5/12. This issue takes a look at gasoline prices and why they are so high.

Gasoline prices have been rising and have become an issue in the presidential campaign. So why are prices so high and is there anything that can be done about it?

Current gas prices are NOT driven by supply and demand. Supplies of oil and gas are up and demand in the US is down; so basic economics says that the price should be low. According to the Energy Information Administration, supply is higher than three years ago when gas prices fell (briefly) to around $2.00. And demand is at the lowest level since April 1997. [1] The US is actually producing more oil and gas than we can use, so we are exporting 3 million barrels of oil products per day. [2] All of this suggests that gas prices should be low.

Tension over Iran and concern about the oil it supplies to world markets is putting some upward pressure on oil prices. Financial speculators see this as an opportunity to make money and jump into the market heavily, which drives prices up much more. Wall Street firms and other financial players dominate the buying and selling of oil, even though they have no intention of ever taking possession of the oil they buy. Ten years ago, producers and end users (airlines, oil refiners and retailers, etc.) were responsible for 70% of the trading of oil; now the financial speculators make up 65% – 80% of the market. The only reason they are in the market is to make money and the money they make comes out of our pockets through higher prices. [3]

Estimating how much speculation increases the price of oil and gasoline is difficult; however, many experts, including ones from Exxon Mobil, Delta Airlines, and Goldman Sachs, believe that speculation drives up the price of oil by 40%. This is a “speculators’ tax” that we all pay. There is historical evidence to support this. For example, in the summer of 2008, when speculators were driving the oil market, gas prices spiked to over $4.00 a gallon before declining sharply to $2.00. [4]

Congress and the President tried to reduce the impact of this speculation as part of the Dodd-Frank financial reform legislation. The law directed the Commodity Futures Trading Commission, which regulates this market, to set a cap on how many contracts for oil any one trader or company could control, which would limit the level and impact of speculation. After significant delays, such a cap was proposed in October 2011. However, many supporters of the cap view the proposal as quite weak. Nonetheless, the speculators are suing to block the implementation of even this modest reform. [5]

Through speculation in the oil markets, the Wall Street-based financial industry is making substantial sums of money that are coming out of the pockets of average Americans. The motivation is to make money for the few; however, there’s no added value for society at large, only costs. This is a variation on the theme that also drove the subprime mortgage market – make money regardless of the consequences. Due to campaign contributions, lobbying, and the revolving door between Wall Street and the federal government – in other words, due to crony capitalism – it’s likely that nothing significant will be done and we will all continue to pay this “speculators’ tax.” As a result, the Wall Street speculators will get richer while we get poorer as we pay more for gas than we should.


[1]       Sanders, B., 2/28/12, “Wall street greed fueling higher gas prices,” CNN.com

[2]       McClatchy Newspapers, 2/21/12, “Once again, speculators behind sharply rising oil and gasoline prices,” The Sacramento Bee

[3]       McClatchy Newspapers, see above

[4]       Sanders, B., see above

[5]       Common Dreams staff, 3/2/12, “Obama’s oil speculation task force missing in action,” CommonDreams.org

CRONY CAPITALISM AND WINNER TAKE ALL POLITICS

Here’s issue #21 of my Policy and Politics Newsletter, written 2/29/12. This issue will begin to link the issues of corporate power, great inequality of income and wealth, and campaign finance. It is a bit long, as it is a summary of the first three shows of Bill Moyers’ return to public TV.

In case you haven’t heard, Bill Moyers is back on public television. (In theBostonarea, he’s on Sunday at 4:00 on channel 2. Or you can do what I do, download the podcasts from billmoyers.com or other sources.)

His first show back on (Jan. 13) was on Winner Take All Politics, the title of a recent book by Hacker and Pierson, whom Moyers interviews. The book and show document that the huge income disparity in the US (see issue #4 of my newsletter) is, in large part, the result of government policies over the last 30 years. Although globalization, technological change, and other changes in our economy have been factors, the real culprit is our public policies and how they have responded to these challenges. Other countries face these same challenges but have not experienced the dramatic increase in inequality that has occurred in theUS.

Over the last 30 years, the top income tax rate has been reduced from 70% to 35% (see issue #7 of my newsletter) with even lower rates for unearned (i.e., investment) income. As we’ve heard recently, multi-millionaires like Presidential candidate Romney are paying less than 15% of their income in taxes. If you were making around $20 million a year as he is, every one percentage point reduction in your tax rate puts $200,000 in your pocket. And with your tax rate cut in half, you are saving $3 million or more a year, or over $90 million over the last 30 years. Specifically, the Bush tax cuts of the early 2000s have given $50 to $100 million to each of the 400 richest Americans over the last 10 years.

This sets up a reinforcing cycle as some of these riches are funneled back into our political system through campaign contributions and Super PACs, further increasing the influence of the well-off and getting them favorable treatment. In addition, the lobbying capacity of the corporations and very rich has grown, while that of the middle class, particularly unions, has shrunk, further expanding the gap in political power and influence.

Hacker and Pierson note that politicians have learned that they can get re-elected despite ignoring or only giving symbolic support to the middle class, while moving the agenda of the corporations and very rich forward.

On Moyers’ second show (Jan. 20), David Stockman, President Reagan’s budget chief, was a guest. Stockman is writing a book entitled The Triumph of Crony Capitalism. He defines crony capitalism: using political power such as campaign contributions and lobbying to get returns that can’t be gotten in the market. He states that in theUS we do not have free market capitalism or democracy, but crony capitalism.

Stockman believes that we need to re-institute and strengthen the separation of the investment business and its risks from the banking system, as was in place prior to 1999 under a law called Glass-Steagall. Otherwise, he predicts that we will have recurring economic crashes. He says that financial institutions that are too big to fail are too big to exist and he advocates for banning corporate money from our political system and capping all campaign contributions at $100.

Moyers’ third show (Jan. 27) was with John Reed, who retired as CEO of Citigroup in 2000 after presiding over the merger of Citibank with Travelers Insurance. This merger led to and actually required the repeal of the Glass-Steagall law. The mantra at the time was that the new, enhanced financial system could handle the increased risk better than before and therefore repealing the separation of banking from the investment business wouldn’t be a problem. There was an extensive public relations and lobbying campaign to deliver this message, which ultimately skewed almost everyone’s thinking about this deregulation.

Reed, in retrospect, says that it’s amazing that everyone was so wrong and that the system as a whole went so far off the tracks that it caused the great recession we are now experiencing. He states that this was the result of crony capitalism between Wall Street executives andWashington politicians.

In other countries, including Canada, the crisis in the financial institutions wasn’t nearly as bad as here in the US. Our financial deregulation allowed financial institutions (including banks) to take great risks and to provide huge rewards to their people, an important part of our income and wealth inequality. And ultimately, these institutions and individuals did not bear the risk when things went wrong; the government and the public bailed them out.

Reed calls for re-regulation of the financial system, noting that regulations are need so that appropriate risks can be taken. He makes the analogy that cars have brakes (regulation) so that we can drive fast (take risks), but control our speed as needed. If cars did not have brakes, we’d all drive only very slowly. He is amazed that those lobbying against re-regulation and strengthening of oversight of financial institutions have any credibility given the crash they caused with deregulation. He notes that when corporations and the wealthy can buy the rules (or lack thereof), the situation is unstable.

One person who loudly warned of the dangers and, as Glass-Steagall was being repealed in 1999, predicted that in 10 years we would all come to realize that a big mistake was being made, was Senator Byron Dorgan of North Dakota. He noted that the deregulation was designed by those with a self-interest and that the complex securities, i.e. “derivatives,” that have been created are casino gambling with trillions and trillions of dollars. He states that the Dodd-Frank re-regulation law, which is being heavily lobbied against by Wall Street, is too weak to prevent the next collapse.

Another Moyers guest was Gretchen Morgenson of The New York Times who has written a book entitled Reckless Endangerment. She noted that there have been no meaningful penalties for the individuals or institutions that caused the collapse of the financial system and no one has gone to jail. Furthermore, the same people who drove the ship into the iceberg are still in leadership roles on Wall Street and in the federal government.

Moyers closes by calling the Supreme Court’s Citizens United decision, which allows unlimited spending by corporations in our political campaigns, “grotesque,” stating that it corrupts our political system and means that those with no (or little) money have no speech. He calls Winner Take All Politics immoral and notes that we have experienced a deep undermining our democratic institutions.

He cites a sign he saw at Occupy Wall Streetas telling it like it is: “The system isn’t broken, it’s fixed.

I encourage you to listen to the podcasts of these three shows. They are 52 minutes each and will provide you the richness and depth that I can’t in this summary.