Sunday, April 05, 2009

Regulating The Money Changers

Regulate this! Albert J. Dunlap, also known as Chainsaw Al, graduated from West Point before becoming CEO of Lily Tulip Cup and Scott Paper. By firing thousands of employees at once and closing plants and factories, he forced up the share price of his companies and made billions. When shareholders were left holding an empty cup, he sometimes got fined a few million. Overall, toxicity's been profitable.

To be able to spit in their eye and do what you think is right and report the news and have enough readers to make some impact is such a pleasure that you forget, you forget what you are writing about. It becomes, you know, it like, you are like a journalistic Nero fiddling while Rome burns and having a hell of a good time or like a small boy covering a hell of a big fire. It's just wonderful and exciting. You are a cub reporter and God has given you big fire to cover. And you forget, you forget it is really burning.

---I.F. Stone

And when I was brought into the convention center to tell this story (of her arrest) to the networks, one of the reporters for the network said, "How come I didn't get arrested?" And I said, "Oh, were you out covering the protests?" And he said, "No."... You got to get out there. And if the problem with this... It's not just a violation of freedom of the press... It's a violation of the public's right to know. If they're just inside the convention, they get one message. The orchestrated message. And that's important to cover. You got to get into the corporate suites. Who's funding all of this? And you have to get into the streets. Democracy's a messy thing. And all of these voices must be heard.

---Amy Goodman

Watching the news over the over the last two days, while Obama, President Obama, is in London. Watching all of the demonstrators there, some of them violent and militant, but thousands of them not. Marching to a bank, and protesting. I thought of something you wrote recently. You said that for the magnitude of this financial crisis, there should be a lot more popular rage in this country. Why do you think there isn't? Because the taxi driver this morning, coming down here, to me, was angry as hell.

---Bill Moyers, on his PBS Journal, April 3, 2009

Obama's financial policy is coming under closer scrutiny in the media and on the Internet. The suspicion and anger on Main Street, to which supposedly this President listens and responds, is getting louder. Not a day goes by that some American doesn't walk into an office or factory somewhere and just start shooting. Are they all just nutcases, or is there a war starting? Are we going postal? It's time to take a closer look.

Who are these bankers and bosses who have emerged since Reagan? What is the free market like since Poppy Bush declared globalization, and Junior encouraged credit cards without limit and told us all to go shopping. It's your patriotic duty to go shopping. Under Obama, apparently it still is. The same guy seems to be running the show.

The 3 quotations above are from the transcript of Friday's Moyers Journal. I don't know about you, but here in Athens I can't find the show anymore. Our PBS station, with dozens of digital channels and one remaining analog, seems to broadcast it sometime...but between pledge drives and shifting schedules I have no idea where it is. Fortunately I still can go to and find out what happened. Apparently Friday's show was all about journalism and economic regulation. Since Amy Goodman is on a 70 city tour, promoting a new book, and coming here Thursday (broadcasting from a station that doesn't carry Democracy Now!), maybe we need a crash course in cash meltdown.

The first part of the Journal was given over to an interview with William J. Black, author of a book titled The Best Way To Rob A Bank Is To Own One. You get the idea. Mr. Black was a government regulator during the savings and loan scandal of the 1980s. Moyers introduced him thus~~~

"The former Director of the Institute for Fraud Prevention now teaches Economics and Law at the University of Missouri, Kansas City. During the savings and loan crisis, it was Black who accused then-house speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L's in exchange for contributions and other perks. The senators got off with a slap on the wrist, but so enraged was one of those bankers, Charles Keating — after whom the senate's so-called 'Keating Five' were named — he sent a memo that read, in part, 'get Black — kill him dead.' Metaphorically, of course. Of course.
"Now Black is focused on an even greater scandal, and he spares no one — not even the President he worked hard to elect, Barack Obama. But his main targets are the Wall Street barons, heirs of an earlier generation whose scandalous rip-offs of wealth back in the 1930s earned them comparison to Al Capone and the mob, and the nickname 'banksters.'"
You need to see or read the whole interview, but here's an excerpt~~~
WILLIAM K. BLACK: AIG all by itself, cost the same as the entire Savings and Loan debacle.
BILL MOYERS: What did AIG contribute? What did they do wrong?
WILLIAM K. BLACK: They made bad loans. Their type of loan was to sell a guarantee, right? And they charged a lot of fees up front. So, they booked a lot of income. Paid enormous bonuses. The bonuses we're thinking about now, they're much smaller than these bonuses that were also the product of accounting fraud. And they got very, very rich. But, of course, then they had guaranteed this toxic waste. These liars' loans. Well, we've just gone through why those toxic waste, those liars' loans, are going to have enormous losses. And so, you have to pay the guarantee on those enormous losses. And you go bankrupt. Except that you don't in the modern world, because you've come to the United States, and the taxpayers play the fool. Under Secretary Geithner and under Secretary Paulson before him... we took $5 billion dollars, for example, in U.S. taxpayer money. And sent it to a huge Swiss Bank called UBS. At the same time that that bank was defrauding the taxpayers of America. And we were bringing a criminal case against them. We eventually get them to pay a $780 million fine, but wait, we gave them $5 billion. So, the taxpayers of America paid the fine of a Swiss Bank. And why are we bailing out somebody who that is defrauding us?
BILL MOYERS: And why...
WILLIAM K. BLACK: How mad is this?
BILL MOYERS: What is your explanation for why the bankers who created this mess are still calling the shots?
WILLIAM K. BLACK: Well, that, especially after what's just happened at G.M., that's... it's scandalous.
BILL MOYERS: Why are they firing the president of G.M. and not firing the head of all these banks that are involved?
WILLIAM K. BLACK: There are two reasons. One, they're much closer to the bankers. These are people from the banking industry. And they have a lot more sympathy. In fact, they're outright hostile to autoworkers, as you can see. They want to bash all of their contracts. But when they get to banking, they say, ‘contracts, sacred.' But the other element of your question is we don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.
BILL MOYERS: The cover up?
WILLIAM K. BLACK: Sure. The cover up.
BILL MOYERS: That's a serious charge.
WILLIAM K. BLACK: Of course.
BILL MOYERS: Who's covering up?
WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine.
These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because...
BILL MOYERS: What do you mean?
WILLIAM K. BLACK: Well, Geithner has, was one of our nation's top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he's a failed legacy regulator.
Frank Rich comes at it from a different angle this morning, but essentially he's covering the same story. Like Moyers, he's wondering why Rick Wagoner got singled out...but the bankers and brokers still are under cover~~~
"Sure, Rick Wagoner deserved his fate. He did too little too late to save an iconic American institution from devolving into a government charity case. He embraced the Hummer. G.M.’s share price fell from above $70 to under $3 on his watch. Yet few disputed the judgment of the Michigan governor, Jennifer Granholm, that Wagoner was a 'sacrificial lamb,' a symbolic concession to public rage ordered by a president who had to look tough after being blindsided by the A.I.G. bonuses. Detroit’s chief executive had to be beheaded so that the masters of the universe at the top of Wall Street’s bailed-out behemoths might survive.
"On this point even the left and the right could agree. The union leader Andy Stern publicly wondered why the administration didn’t also dethrone Ken Lewis of Bank of America. Thaddeus McCotter, a conservative Republican congressman from suburban Detroit, asked, 'When will the Wall Street C.E.O.’s receiving TARP funds summon the honor to resign? Will this White House ever bother to raise the issue?'
"When reporters did raise the issue of a double standard to the White House press secretary, Robert Gibbs, they got double talk: 'I don’t have anything specific on Bank of America.'
"But even as that unanswered question hangs in the air, a more revealing inquiry might be this: Why is there any sympathy whatsoever for a Detroit C.E.O. who helped wreck his company, ruined investors and cost thousands of hard-working underlings their jobs, when there is no mercy for those who did the same on Wall Street? Might we, too, have a double standard? Could we still be in denial of the reality that greed and irresponsibility were not an exclusive Wall Street franchise during our national bender?"
But the most devastating writing I came across on this whole mess is at the Forum section of---sorry, The writer is named Mark Ames, and I guess he maintains a column there called Backstabber. This article is called "Class War 101," and sets forth they hypothesis that the "economic elite" are not the same kind of human like you and me. Their reptilian brains work differently...and so do the hormones that create their hunger. Sound too cynical for you? Maybe. Born in California in 1965, Ames went to a private Episcopalian school, then the University of California. During the Reagan, both Bushes, and the Clinton years, he became more and more disillusioned with the United States. So why didn't he move to Russia if he didn't like it here. He did. He started a newspaper there called The Exiled, but the government shut him down when he was critical of the Georgian invasion. He's written a book with Rolling Stones' Matt Taibbi, if that gives you an idea of his flavor. See if any of this makes sense to you~~~
"If we’d cared to look around us at any time since the Reagan Revolution, we’d realize that the CEOs, billionaires and finance stars are behaving no differently today than they have been for nearly three decades. When we look back, what will pain us most is the way we admired the billionaires even as they brought about our ruin, turning them into TV celebrities and magazine-cover heroes, worshipping them like rock stars right up to the end.
"A perfect example of the kind of person who benefited from the Reagan Revolution is Al 'Chainsaw' Dunlap, a corporate superstar during the peak Clinton years, when Reaganomics accelerated under the guiding hands of Alan Greenspan, Larry Summers, and Robert Rubin. It was during Clinton’s centrist pro-business presidency that innovations like the like mass-layoff (rebranded as 'downsizing') became a regular feature of economic booms, rather than of economic busts, as they had been in the past. Layoffs expanded right with the economy for the simple reason that each mass firing freed up millions or billions of dollars that had gone to workers, but now could be divided up between executives and major shareholders. The problem was finding people cold-blooded enough to do the job—which is to say, there was no problem whatsoever. As Dunlap himself boasted in a 1998 interview with Fortune magazine, 'Mickey Mouse could do the cost cutting.'...
"This same arc has been repeated all over the American economy—what we once thought were isolated cases turned out to be a pattern, and the pattern repeated so much up down corporate America that it finally became clear: These things are the rule. No wonder the SEC never came down hard on anyone: it would have meant shutting down the entire economy and starting from scratch. "In the past, when downsizings and payouts happened, they were seen as a necessary evil in the overall march to a free-market utopia. Now we understand that what really happened wasn’t as complicated or theoretical as it was made out to be. It was a straight-forward transfer of wealth out of the pockets of, say, 11,200 employees at Scott Paper into the pockets of Wall Street bankers and their CEO henchmen. No matter how many words like 'efficiency' and 'restructuring' you gloss it with, it’s still taking money that formerly went into one group’s pocket, and giving to another, much smaller group.
"What’s so strange, looking back, isn’t just the blatant, shameless plundering of thousands of American families for a few individual’s excessive profit, but the way we all adored them while they were in mid-plunder. They didn’t even try to pretend to be likeable or even human, and we still licked their boots."
Like Taibbi, Mark Ames writes graphically. Visits to the sites of Rolling Stone and Playboy, like purchasing the magazines, can be risky business if you seek to avoid cussing and the sight of flesh. But this is muckraking time...and it's not pretty.
During the Obama campaign there were the same concerns, from Left and Right, about his Chicago connections, and beyond, to wealthy backers and financial interests. Is he just another front man? Except for this area...and maybe Afghanistan...he has stepped forward with answers when questions were raised. Hello Grassroots, do you have any questions?


jazzolog said...

I believe the official Obama title for former Clinton Treasury Secretary Lawrence Summers (known as "Larry" in nickname-loving business circles) is head of the National Economic Council. I guess it makes up policy. Tenured economics professor at Harvard in '83, chief economists for the World Bank in '91, president of Harvard in 2001, the man climbs ladders. But whose side is he on?

Yesterday's New York Times reveals his real-world education has come after Harvard. So have the big bucks he earned devising the strategies that may have led to the country's ruin. See how much money you can make!

On Saturday Glenn Greenwald, who was on the Moyers Journal with Amy Goodman, wrote a piece in Salon about the huge money Summers was paid by Wall Street immediately upon the news Obama had selected him. Greenwald calls the one-day $135,000 fee from Goldman Sachs "basically an advanced bribe." It's here with an update, and 530 comments so far.

Quinty said...

Should anyone be surprised by the current mess?

Well, not anyone who remembers US history and knows a little about human nature. After all, some of the popular slogans during the Reagan era included “lean and mean,” and “greed is good.” Hollywood even came up with a good movie about it all, with Michael Douglas, called “Wall Street,” dramatizing how it works.

What with deregulation and taxation viewed as a venal sin and bubbles constantly falling one upon another like dominoes what else can we expect? No need to be an economist, or to understand the tortured jargon of today’s financial world. It’s all really rather simple. Those who became predators could have chosen some simple basics instead. Ie, Just stay off the gravy train, quit defending it, and remember our past: but the players, of course, ignored and will continue to ignore all that without regulation.

So the Republicans are fighting like mad to save their idol’s (Ronald Reagan) tarnished image. (There are those who even blame the current crisis on a lack of deregulation and too much taxation!) And it appears apparent that Obama is at least offering his moral support to the status quo. If 2 and 2 equal 4 then surely we have to ask ourselves: Why did Obama pick the cream of the Wall Street crop to reform Wall Street.? If 2 and 2 equals 4 then the conclusion is not reassuring.

On regulation Obama has said he would get tough. There are those in the Congress who fully see the need for re-regulation who opposed the deregulation in the first place. (Senator Byron Dorgan, in fact, quite accurately predicted the current crisis.) Will Obama circumvent them?

Nausicaa said...

I'll have to go along with Quinty on this. I believe that Obama is essentially suffering the classical Democrats' complex (someday some psychologist will come up wit a name for it) as his predecessors did (like Kerry, or Al Gore, who was too afraid he would be "radicalized" by the media if he talked about "Earth in the balance," while running for office). Democrats stick to the status quo because they are afraid that any move away from that will cause them to be "tarred" as some bunch of wacko pinko socialists, which is kind of a joke considering that the reality of it is that there is really no "Left" to speak of in the USA. There is a Right-wing (which of recent date has been more or less radicalized, depending on the bag of mixed nuts the GOP's base is made of---I'd say that to that regard the neoconservative Bush governance was quite radical), and there is a Center-Right, that is the Democrats, for the most part.

Now, are the Democrats lacking a vision? Or is it that they need to grow a pair, as the saying goes? (Probably both!) Yet, are the Democrats not also just simply realistic about their expectations? (Certainly, there is a lesson to be learned from the 1994 failure of Hillary Clinton's healthcare plan.)

All the signs do point out that while G. W. Bush has been allowed to glide through most of his two terms without much scrutiny from the main stream media, every thing Obama does is being taken apart and examined for anything that can be spun to support the GOP-made ready-narrative that Obama is some kind of a North American Hugo Chavez. This is how Democrats are hamstrung. And this is how Liberal Democracies perish---not with a bang but with a whimper.

Those are not ordinary times, and I am not just talking about the economy here, yet we keep handling things as if it were business as usual.

Things are hardly better on the other side of the Atlantic. While it is true that the Western Europeans democracies have a wider political representation, the Left-wing finds it increasingly more difficult to pursue any kind of realistic progressive agenda in the face of the new world order, which is a free-for-all global corporate wild wild west. The most famous example being French president Francois Mitterrand, a socialist, who became the first French left-wing head of state since 1957, and who while in office essentially ended-up presiding over what turned out to be a pretty center-right kind of economic policies. The Social Democratic Party of Germany which forms a grand coalition with the CDU-CSU of Angela Merkel (each party has an equal number of cabinet seats) fares no better.

Back in Feudal times, the Landlords made the law, and for most people, serfdom was the law of the land. And who owns the land today? Not the fledging modern liberal democracies. (How so very young, they are!) The simple truth is that everything (or almost) is privatized. And who set the prices? The invisible hand of the market? Partly so, but for the most part prices are "fixed" by private groups on the basis of "whatever the market can bear"---or in other words "whatever the dominant private groups can get away with," regardless of whether it is good for the market, as we saw recently, of for the people of the land and their families, or for the planet. And so, profiteering and price gouging are common practices---and are even regarded as fair and desirable practices.

Our modern Democracies are partly unwilling and mostly unable to regulate any aspect of this.

I am talking about the Market and the Global Economy at large, but no need to be so abstract. Let's look at something easy, closer to us, and possibly in our very own backyard, for those lucky enough to have one.

Case in point: Real Estate

Specifically, consider the percentage of net income most US residents spend on rent in big cities, those days:

There was a time, when it was 25%.

50% or more is nowadays the norm.


Is there any objective reason to it? Overpopulation? City congestion? Limited space? High demand?

All those reasons are plausible explanations. They are also convenient alibi. The fact of the matter is that Real Estate is one of the areas of the market where predatory practices are the more prevalent. It is an area that has long been a favorite playground of speculators, buying and turning properties over, for a quick profit. Some predatory Landlords can, very much like vampires, suck the life-force out of their thralldom (the business operating onto their property) and, like Vampires, sometimes they kill their victims. The story of a prosperous popular community seeing its local shops and boutiques (some of which had contributed to the charm and appeal of the place) closing one after another because they can no longer afford their lease is alas a rather common event. Those businesses are typically replaced by chains and department stores that can afford the rent. The charm and the diversity which made the appeal of the place in the first place, as well as its subsequent prosperity, disappears. The place lose some of its appeal. The department stores do not do as well as they thought they were going to do (very often they operate at a loss, just so as to maintain a presence and dominate the competition---a form of dumping). Some of the department stores and chains start closing down. And the community is left with a lot of vacant spaces, and a destroyed economy.

This is your local economy. This is your local economy in the invisible hand of the market.

Any questions?

We all have our invisible friends. Some speak in tongues, and some speak Economese.

The simple truth is that there are circumstances in which the invisible hand of the market works and there are areas where it is highly destructive. The work of regulators is to know which is which and to legislate accordingly.

Yet, real estate, just like the free hand, is a sacred cow. Anything having to do with regulation---any kind of regulation---is violently rejected as un-American. The same kind of knee-jerk reaction exists when it comes to such notions as establishing a celling on leases or the idea of any form of rent control. I wonder why? Modern rent controls were first adopted in response to WWII-era shortages, and later as a result of Richard Nixon's 1971 wage and price controls. An no one think that Nixon was a communist. While some of that remains in effect or has been reintroduced in some cities with large tenant populations, most of it is slowly being stripped away---some of which by state referenda.

It is a funny thing that the same people, who will oftentimes take issue with Government taking away their hard earned money (according to the The Tax Foundation, government at all levels will collect 30.8% of the nation's income for 2008), are apparently comfortable with landlord barons collecting up to 50% or more of their personal income on the ground that it is the American way.

I don't know. Someone explains to me how that is different from the villeins in the Middle age who rented small homes, with or without land, and who, as part of the contract with their landlord, were expected to provide a rent of money or goods and/or use some of their time to farm the lord's fields

No no no! What am I saying? Villeins were tied to the land and could not move away. We are all free now, right? What a relief! So, I guess, a better analogy with the Middle Age would have to be the situation of the Freemen who were essentially rent-paying tenant who owed little or no service to the lord. It's not so bad, I suppose; within his constraints, a serf had some freedom. And, hey, as the Libertarians keep telling us, a serf might still accumulate personal property and wealth. A well-to-do serf might even be able to buy his freedom. And the landlord cannot dispossess his serfs without cause and is supposed to protect them from the depredations of outlaws or other lords, and he is expected to support them by charity in times of, wait, wrong again!...that last part is not at all the duty of the landlords anymore, nor is it any longer the duty of the corporate economic barons, that would be the responsibility of the government!

I rest my case.

Quinty said...

Another sign of the times.....

Middle class Republicans who spend more than a thousand a month on private health insurance and aren't happy with their coverage, since it is highly limited. Yet oppose a national system because it would be too expensive and would infringe on their freedoms.

I have tried to ram - yes, ram - through that logic on a somewhat conservative site only to be dismissed as a "socialist."

Speak of blinders!

Tom Bombadil said...

I suspect that "logic" has nothing to do with it.

Take, for instance, this highly popular bogus quote incorrectly attributed to Benjamin Franklin and widely circualted amongst Neoconservative and Libertarian circles:

"Democracy is two wolves and a sheep voting on what to have for dinner."

A second line is often added:

"Liberty is a well-armed sheep contesting the vote."

What is being promoted, here, by those who would shrink government "down to the size where [they] can drown it in the bathtub" (another popular quote among Neoconservatives and Libertarian circles) is basically a regression of society to a Warlords system. (Remember Blackwater?)

If you want to see how wolves and sheep coexist in a nation in which for all practical purpose no government is empowered, look no further than Somalia. The sheeps have no much say there about what's for dinner.

Liberal Democracies are a step up and away from a system, which essentially was the feudal model to which Nausicaa was alluding to. Modern governments have evolved out of an attempt by the so-called "sheep" (when sheep come together an try to gain some measure of control over their destiny, they are no longer sheep) to organize themselves so as to protect their interests (and individual liberties) against the warlords and the robber barons of their time.

That the so-called "wolves" would try to undermine any attempt from the so-called "sheep" to self-organize is neither new nor unexpected: just take a look at how a company like WallMart reacts when employees attempt to unionize.

That wolves in sheep's clothing would try to take control and subvert our modern Republics is neither new nor unexpected either: the founding fathers wrote at long length about it, or, of more recent date, Three Men in a Room: The Inside Story of Power and Betrayal in an American Statehouse is quite an informative book on how those things work.

But a working remedy has never been for the "sheep" to give up and go back to the law of the jungle and throw themselves at the mercy and the good-will of the unchecked power of the wolves.

There is a price to freedom: "eternal vigilance." This is what freedom means and this is what building a government truly "of, for and by the people" is all about, isn't it?

It's not an easy thing.

"It is the common fate of the indolent to see their rights become a prey to the active. The condition upon which God hath given liberty to man is eternal vigilance; which condition if he break, servitude is at once the consequence of his crime and the punishment of his guilt."
----John Philpot Curran

The way I look at it, I'd say that "two wolves and a sheep" still beats "three men in a room," but what do I know?

Quinty said...

This from Newsweek.....

jazzolog said...

Thank you for your interest and comments. The Newsweek column from yesterday that Quinty links is discouraging. Senior Editor Michael Hersh hardly could be called a leftwinger, but like so many well-credentialed analysts he sees the blocks being rebuilt just the way they were...with huge resistance to regulation~~~

"At issue is whether trading in credit default swaps and other derivatives—and the giant, too-big-to-fail firms that traded them—will be allowed to dominate the financial landscape again once the crisis passes. As things look now, that is likely to happen. And the firms may soon be recapitalized and have a lot more sway in Washington—all of it courtesy of their supporters in the Obama administration. With its Public-Private Investment Program set to bid up and buy toxic assets, the administration is handing these companies another giant federal subsidy. But this time the money will come through the back door, bypassing Congress, mainly via FDIC loans. No one is quite sure how the program will work yet, but it's very likely going to make a lot of the same Wall Street houses much richer at taxpayer expense. Meanwhile, the big banks that still need help will almost certainly get another large infusion once the stress tests are completed by the end of the month.

"The financial industry isn't leaving anything to chance, however. One sign of a newly assertive Wall Street emerged recently when a bevy of bailed-out firms, including Citigroup, JPMorgan and Goldman Sachs, formed a new lobby calling itself the Coalition for Business Finance Reform. Its goal: to stand against heavy regulation of 'over-the-counter' derivatives, in other words customized contracts that are traded off an exchange. Companies like these kinds of contracts, which are agreed to privately between firms, because they allow them to tailor a hedge perfectly against a firm-specific risk for a certain time period. But in order to preserve its right to negotiate these cheaper private contracts, Wall Street is apparently willing to argue for the same lack of public transparency and to permit the systemic risk that led to the crash."

Quinty said...

So why do I keep telling myself, wait and see, wait and see? When there is so much evidence that something here powerfully stinks? But I do.

I think we will fully know in which direction the administration is going when the new regulations are set in place. Even Summers admits he was wrong in the past and according to a talk he offered on CSPAN claims the new regulations will prevent this form of abuse.

We'll see. This is from Truthdig....

Living Large and in Charge

Posted on Apr 7, 2009

By Robert Scheer

Not surprisingly, Lawrence Summers is convinced that he deserved every penny of the $8 million that Wall Street firms paid him last year. And why shouldn’t he be cut in on the loot from the loopholes in the toxic derivatives market that he pushed into law when he was Bill Clinton’s treasury secretary? No one has been more persistently effective in paving the way for the financial swindles that enriched the titans of finance while impoverishing the rest of the world than the man who is now the top economic adviser to President Obama.

It is especially disturbing that Summers got most of the $8 million from a major hedge fund at a time when such totally unregulated rich-guys-only investment clubs stand to make the most off the Obama administration’s plan for saving the banks. The scheme, as announced by Treasury Secretary Timothy Geithner, a Summers protégé, is to clean up the toxic holdings of the banks using taxpayer money and then turn them over to hedge funds that will risk little of their own capital. At least the banks are somewhat government-regulated, which cannot be said of the hedge funds, thanks to Summers.

It was Summers, as much as anyone, who in the Clinton years prevented the regulation of the hedge funds that are at the center of the explosion of the derivatives bubble, and the fact that D.E. Shaw, a leading hedge fund, paid the Obama adviser $5.2 million last year does suggest a serious conflict of interest. That sum is what Summers raked in for a part-time gig, in addition to the $2.77 million he received for 40 speaking engagements, largely before banks and investment firms, and on top of the $587,000 he was paid as a professor at Harvard.

Summers was a top adviser to the Democratic presidential candidate last year, and that might have enhanced his speaking fees, which seem to have a base rate of $67,500, the amount he received on each of two occasions when he appeared at Lehman Brothers before that company went bankrupt. Lehman had purchased a 20 percent stake in D.E. Shaw while Summers was employed by the hedge fund, and it would be interesting to know if the subject of the overlapping business came up during Summers’ visit to Lehman.

Lehman was only one on an impressive list of top financial firms that consulted Summers during a troubled period. Goldman Sachs was so interested in his thoughts that it paid him more than $200,000 for two talks, even though it soon needed $12 billion in taxpayer bailout funds. Citigroup, which has been going through hard times, managed only a $54,000 fee for a Summers rap. Merrill Lynch could pony up only a scant $45,000 for a Summers appearance last Nov. 12, but that was at a point when Merrill was in deep trouble, with the government arranging its sale. Summers, anticipating an appointment in the administration of the newly elected Obama and perhaps wanting to avoid any embarrassment the fee might bring, decided to turn over the $45,000 to a charity.

Why was someone as compromised as Summers made the White House’s point man overseeing $2.86 trillion in bailout funds to the financial moguls whom he had enabled in creating this mess and many of whom had benefited him financially? Will no congressional panel ever quiz Summers about his grand theory that the derivatives market required no government supervision because, as he testified to a Senate subcommittee in July of 1998: “The parties to these kinds of contracts are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies. … ”

Think of the sophisticates at AIG when you read that sentence, and then ask why Summers is once again at large in the public sector. Or take White House spokesman Ben LaBolt’s word for it that “Dr. Summers has been at the forefront of this administration’s work … to put in place a regulatory framework that will strengthen the financial system and its oversight—all in an effort to help the families across America who have paid a very steep price for risky decisions made by Wall Street executives.”

The very same executives that Summers had previously assured us could be trusted without any regulation. Why should we now trust Summers any more than we trust them? Couldn’t Summers just take his ill-gotten gains and go hide out in some offshore tax haven? If this was happening in a Republican administration, scores of Democrats in Congress would be all over it, asking tough questions about what exactly did Summers do to earn all that money from the D.E. Shaw hedge fund. As it is, with their silence they are complicit in this emerging scandal of the banking bailout.