Naming Names: A Baker's Dozen of Financial Rogues

Late last week, in the penultimate edition of Bill Moyer's Journal (which ends forever this week) the best journalist in television interviewed Prof. William K. Black. Refreshingly, Prof. Black names names while discussing who should bear responsibility for bringing the world to the edge of financial collapse during the waning days of the Bush Administration.

It's a crowded, bi-partisan recitation of rogues, sociopaths, and bureaucratic nitwits. The list includes --

1. Federal regulators who did everything they could to subvert prudential financial regulations;
   
2. Alan Greenspan and other directors of the Federal Reserve;
   
3. Mortgage loan brokers who deliberately wrote and then palmed off on others "liar's loans;"
4. Corporate banking executives who fired whistle-blowers and promoted cheats and con-men;
   
5. Accountants who deliberately failed to call out liar's loans for fear of losing customers;
6. "Pathogenic" employee pay policies that rewarded fraud while punishing honesty;
   
7. Timothy Geithner, former head of the influential New York FED during the Bush Administration and now Obama's U.S. Treasury Secretary;
   
8. Bush appointees (former) SEC chairman Cris Cox and FED chairman Ben Bernanke;
9. The giant blood-sucking "vampire squid" known as Goldman Sachs;
   
10. "Top" Goldman Sachs executives from CEO Lloyd Blankfein on down the corporate chain of command;
    
11. The entire "Bush wrecking crew" of anti-regulation regulators who remain to this day embedded in the federal bureaucracy;
12. Goldman Sachs alum Robert Rubin's many "protégés" whom President Obama has named to virtually every choke-point in the financial regulatory system; and
    
13. As a bonus, the extremist ideologues in Academia and on the bench who teach and write that Wall Street doesn't need and shouldn't enforce anti-fraud laws because the system is "self-cleansing." Really. They teach that to young business students.

Undoubtedly, this is only a partial list. Prof. Black didn't even mention former Texas senator Phil (Mr. Enron") Gramm, or Wall Street's bond-rating agencies, or all of the Senators and Congressmen who voted to abolish Glass-Steagall. These self-dealing gamblers all played a major part in bringing about the near-collapse of the American economy, too.

The televised interview can be seen here. A written transcript is here.

Pensacola Banking Losses

It was only two months ago we found ourselves in casual conversation with a mid-level bank employee who assured us, "You can have confidence in Bank of America. We are the strongest bank in the country."

One month ago, that same employee lost her job. We called the other day to offer our commiserations. She said all she had left were her paltry shares in BAC.

Carleton Proctor of the Pensacola News Journal yesterday resurrected the local history of bank stock ownership and the picture isn't pretty:

Declining bank stock values erode the foundations of a community's wealth, and that is being felt acutely here in Pensacola. The stocks of Bank of America and Regions Bank are both widely held among Pensacolians due to acquisitions of large local financial institutions by those companies many years ago.

First Mutual was the largest financial institution in Pensacola for years before it was acquired by AmSouth back in the mid 1980s. AmSouth later merged with Regions. The "old" C&P Bank was acquired by Barnett Bank in 1993 and Barnett later was acquired by NationsBank which was then acquired by Bank of America.

One local banker told me many people who originally held C&P stock rode the wave through the series of mergers and never sold. Many regret that decision now that the values of those stocks has declined precipitously, and their dividends are reduced to almost nothing.

It can only get worse for local shareholders who, like the ex-employee we spoke with, "never sold."

Nouriel Roubini has been hinting for some time that once we summon the political will we will have to nationalize the "behemoth banks" if we're ever going to clean up the finance mess Wall Street created. Yesterday in the Washington Post he made it explicit:

Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end

Nobel Prize winning economist Paul Krugman is of much the same opinion. As is his fellow Nobel Prize winner, economist Joseph Stiglitz.

Joe Nocera identifies several other banking analysts who agree. You know that nationalization of banks is inevitable when even ubber-conservative U.S. Senator Lindsey Graham says its time has come.

So, when a mega-bank like Bank of America is nationalized, what happens to local stockholders? Their holdings will get further diluted, if not wiped out altogether.

Already, B of A stock has fallen nearly 85% from its high of the last six months. Unless they dump what's left, it seems most likely that local investors who have ridden this falling meteor all the way down from the Barnett Bank days are about to smash into the ground.

New Deal Memories: Pensacola High School

More than ever, as we have said, we think it would be a service for someone to track down surviving area residents, workers, and visitors and add their memories of the New Deal years in Pensacola to existing archives, contemporary reports, collected letters, exhibits, and now web sites.

Plenty has been written or recorded, of course. But still out there are many who remember, as children, how it was. Human nature being what it is, their memories probably have softened over the years. Looking back on hard times, one tends to fondly remember the good times more than the bad, especially if you were young at the time.

Exhibit A: Someone by the name of Del Jupiter, in a letter to the editor of the Atlanta Constitution, reminisces about Franklin Roosevelt's visit to Pensacola and the old and new segregated high school building:

I agree with Jonathan Zimmerman that “Schools desperately need traditional federal aid” (issue Feb. 11). I remember so well the dilapidated high school in Pensacola, Fla., which blacks attended with its pot-bellied stoves, no science labs, no library, no cafeteria, and worst of all, the smelly bathrooms outdoors. We benefited from PWA and WPA funding which resulted in a gleaming, new school building.

My diary entry attests to the fact that on Aug. 9, 1938, President Franklin D. Roosevelt visited our city. The next day our family went to see the new high school. I am sure the building of that new school provided jobs for the community as well as educational opportunity for the students. So why can’t the Republican opposition restore federal funds for school construction to the bailout money?

DEL JUPITER

As for who should do it, we nominate Charley Reese and J. Earle Bowden, both of whom grew up in Pensacola exactly at the time we have in mind.

Stimulating a Bank Brain Drain

According to the New York Times, U.S. Senator Chris Dodd (D-CT) embedded a provision in the Economic Stimulus bill, which passed both houses of Congress last night, that "would impose restrictions on executive bonuses at financial institutions that are much tougher than those proposed 10 days ago by the Treasury Department."

The restriction with the most bite would bar top executives from receiving bonuses exceeding one-third of their annual pay. Any bonus would have to be in the form of long-term incentives, like restricted stock, which could not be cashed out until the TARP money was repaid in full.
* * *
“The decisions of certain Wall Street executives to enrich themselves at the expense of taxpayers have seriously undermined public confidence,” Mr. Dodd said Friday. “These tough new rules will help ensure that taxpayer dollars no longer effectively subsidize lavish Wall Street bonuses.”
* * *
In addition, the Congressional rules would affect not just a bank’s top management, but also star traders, investment bankers, fund managers and commission-based sales representatives. They have traditionally received multimillion-dollar payouts based on their year-end results.

Good for Dodd.

But the restrictions were opposed by the Obama White House. Why? The Times claims:

Top economic advisers to President Obama adamantly opposed the pay restrictions, according to Congressional officials, warning lawmakers behind closed doors that they went too far and would cause a brain drain in the financial industry during an acute crisis. Another worry is the tougher restrictions may encourage executives to more quickly pay back the government’s investments.

Or, as more succinctly stated by an "independent compensation consultant"who talked to the Times, the pay restrictions "won't work." He claims:

"Any smart executive will (a) pay back TARP money ASAP or (b) get another job.”

There may be a potential legal problem with the Dodd salary restriction; most notably, if true, that it applies retroactively to executives who took TARP money from the Bush administration when the governing rule was "anything goes" for Wall Street miscreants and nincompoops. Whether that part survives court review heavily depends on the exact wording of the retroactivity provision.

But the suggestion that pay restrictions are bad because CEOs will pay back taxpayer money early is hardly persuasive. If anything, that's devoutly to be desired. The earlier Wall Street bankers get off the TARP money train, the better. Out here in the rest of America, normal people would see the prospect of lifting the bonus restriction as an incentive to speed the clean-up of balance sheets.

As for 'getting another job' -- who in his right mind could complain about that? Any Wall Street exec or trader who quits because he can't soak the taxpayers for a bonus "exceeding one-third" of annual pay should go into another line of work -- one more suitable to their character, like robbing banks.

Dead Butterfly on a Shoe?

In light of this we have to wonder: Did someone step on a butterfly?

Spare Change You Can't Count On

OK, we get it. While we were gone, apparently, there was a giant recount and the Republicans won.

• Extraordinary rendition is still OK with the Justice Department...


• and so the White House cover-up of U.S. torture policies will continue.
  


• The Republican-dominated U.S. Senate is still throwing Americans out of work....


• ... and still spending more while adding to the jobless lines...
  
  
• ... and refusing to expand health care to the unemployed, elderly, and poor people...
  


• ... while the White House will continue protecting the jobs and perks of the bankers, brokers, and stockholders who wrecked the economy...


• State and municipal governments are still being told to suck wind...
  


• ... while the Administration agrees, in effect, with Republican proposals "to tax teachers, fire fighters, and Joe the Plumber to protect the wealth of the banks' shareholders and to pay high salaries to their top executives."


• God has endorsed Norm Coleman as U.S. Senator from Minnesota.

We need to go on another cruise.

Short vs. Long Term Stimulus

Monday evening Jim Lehrer's News Hour featured an intelligent, informative, and measured discussion of the challenges posed for the Obama administration and Congress in fashioning an effective stimulus package. Truly "fair and balanced", so Fox News fans need not apply.

Participants were David Leonhardt and Greg Ip.

The transcript is here. Now, you can also view the segment here:

The WPA in Pensacola: Yesterday and Today

Pensacola News Journal reporters Louis Cooper and Jamie Page have combined with two front page, above-the-fold articles in today's paper that answer a lot of questions rumbling around in local minds -- and then some. It's terrific business journalism with context, something for everyone, and an inspired editorial assignment.

"Remembering the WPA" by Cooper describes the kinds of WPA projects that brought "creative works as well as brick-and-mortar economic stimulus projects to ... Northwest Florida" during the Great Depression. And, what do you know! Two photos of Milton's recently rescued prize mural by George Snow Hill are included.

One of the photos is partly visible behind Milton historian Nathan Woolsey, on line here. The other is a long black-and-white photo by Katie King, in the newspaper's print edition only, of the complete work.

King's may well be the only professionally done full reproduction of "Loading Pulpwood" in the whole world. It needs to be made more widely available, perhaps in a lithograph format. (We'll take a hundred or two, ourselves, to give as gifts.)

"Local Projects Seek Federal Stimulus Help" by Paige and Cooper is the perfect companion piece. It give us the first shopping list we've seen of specific projects local community governments are seeking, from Pensacola to Navarre and Perdido Key to the little town of Century.

Santa Rosa County, Paige and Cooper report, "has identified nearly $70 million in projects for potential funding in the federal stimulus package, with more than $67.5 million of that in road projects." Escambia County, of course, is still "preparing a list."

The article also identifies legitimate concerns local leaders have that many local priorities could be hijacked by state officials in Tallahasee:

“Large blocks of dollars from the federal government rarely come available like this. Not since the WPA days have they tried to do this kind of stimulus,” Pensacola City Manager Al Coby said.
* * *
Because the stimulus bill is constantly changing, it’s hard to tell how the money will be funneled to local governments, Escambia County Administrator Bob McLaughlin said.

The Florida Department of Transportation is telling cities and counties that transportation funding will come through individual states.

“There is the concern that if the money goes through the state to local governments, how much is it going to be after it goes through those filters,” Coby said. “Those funds could be siphoned or redirected to other places.”

All in all, the two articles and accompanying photos constitute an outstanding example of down-to-earth business journalism with a local focus that educates and informs. Let's hope it inspires follow-ups as the News Journal tries to track down any surviving residents who remember the local WPA, and perhaps finds a way to invite and publish public input on stimulus projects that would meet local needs.

Infrastructure versus Tax Cuts

The American Society of Civil Engineers has issued a detailed report card about the failing infrastructure in the U.S. Overall grade: the dunce's D.

As NYT columnist Bob Herbert writes today about the Economic Stimulus bill proposals ("Risking the Future"):

We’re rushing to bail out the banking industry for what? What kind of country will we have once the bankers are fat and happy again? The U.S. will still be a nation with a pathetic mid-20th-century infrastructure struggling to make it in a dynamic 21st-century world. It’s a blueprint for sustained national decline.

Meanwhile, Mitch McConnell and the diminishing Republican minority continue stalling the stimulus bill and demanding -- what else? -- tax cuts for the rich. We tried that trickle-down nonsense over the last eight years, as David Kay Johnston points out, and look what it got us:

"[T]ax cuts have not worked. The Bush tax cuts, all of them were financed with borrowed money. And where did we end up at the end of the Bush administration? If you add up all of the bailouts that the Bush administration did in the fall, the investments, the spending and the guarantees, it’s over $8 trillion. How much money is that? It is more than all of the income taxes paid by all Americans for the entire eight years of the Bush administration."

Canadian economists agree: Infrastructrure is the preferred way to create jobs and revive the economy.

Obama's big push for bipartisanship is fine as far as it goes, but not to the extent of caving in to bad ideas that have proven themselves worse than worthless.

Everyone by now should know these elementary principles of political economics, part of which is illustrated in the table, below, taken from the recent testimony of the non-partisan Congressional Budget Office director, Douglass Elmendorf:

• Tax cuts work fast, but even in the best of circumstances the multiplier effect in the broader economy is comparatively modest.
  
• These are not the best of circumstances. As Michael Sesit wrote last week for Bloomberg News, "even if you weren’t in hock up to your eyeballs, the odds are you will deposit the extra cash in the bank -- rather than spend it -- especially if you don’t feel secure about your job."
  
• If we have to have tax cuts, they are better directed at lower wage citizens with little or no disposable income than the wealthy. Low-wage workers are more likely to spend the money immediately than rich people who've already hunkered down with their savings.
  
• The economic impact of tax cuts are not long-lasting. Once spent, they are gone.
• Infrastructure spending and the jobs it creates have a vastly greater multiplier effect for the economy as a whole, although it may take several months before being felt.
• Sure, "spending hundreds of billions of dollars takes time," as David Leonhart recently wrote for the Times. But the latest CBO estimate is that"about 64 percent of the money, or $526 billion, would be spent by next September."
• Infrastructure spending continues to boost the economy for years, and often decades, after completion.
  

As James Galbraith has pointed out, another advantage infrastructure spending has over tax cuts is that infrastructure spending can be directly targeted "to stabilize parts of the economy that are otherwise in severe danger of collapsing." Among these are many of the state and local governments whose "expenditures on public services... are very, very strongly affected by declining property tax revenues and the requirement that those states and localities balance their budgets if their revenues decline."

Build new schools, for example, and hire more teachers, fund state highway and bridge repairs, and you not only create jobs and stimulate the economy but you also invest in America's future for coming generations.

It's a whole lot more sensible than paying a bank to stage a $10 million Super Bowl party.

Stimulus versus Bailout,

Nobel Prize-winning economist Paul Krugman yesterday efficiently articulated the important distinction between a "stimulus plan" and a "bailout":

[T]he fiscal stimulus plan — ... should, on its face, be very popular — and the bank bailouts, which are deeply (and understandably) unpopular. Spending on infrastructure commands broad support; rescuing bankers from the consequences of their own folly, broad revulsion.

And he rightly takes the Obama administration to task for not doing much "to make the distinction" as clear as he has. Stimulus, si! Bailout, no!

The Kucinich Credit Crisis Plan...

... because whatever Lola wants, Lola gets:

Friday Fun

Uncle Sam and you have just saved Wall Street from itself. It's great fun watching the heads of the laissez-faire, greed is good crowd explode on CNBC. Every capitalist principle they've clung to has been exposed as a myth.

Sound Investment Advice

This morning, short term U.S. Treasury bills have been selling at a negative rate of return. That is to say, if you want to put your money in what once was known as the safest investment vehicle in the world, you'll have to pay more to buy a Treasury bill than you'll ever get back in interest.

Buy a short-term U.S. bond and you're guaranteed a loss on your money!

Writes Princeton economics professor Paul Krugman:

This didn’t even happen in the Great Depression. Professionally, I’m fascinated. As a citizen, I’m terrified.

True, it is unprecedented. But one must remember that the alternative safe place for your money -- a mattress -- doesn't come free, either. That's why we strongly recommend using an old mattress, one that you already have on hand.

If you'd like to thank us for this investment advice, just write your thank-you note on the back of a $100 bill and mail it in.

If You Like the Credit Crisis...

If you like the mortgage mess and the credit crisis it has brought on, then you'll really enjoy John McCain's likely pick for Secretary of Treasury -- former Texas senator (and close McCain friend) Phil Gramm. Throughout his career Gramm has "worked to weaken or remove regulations that allowed the government to keep an eye on big business."

He's known as "John McCain's brain on economic matters." He drafted the "economic plan" McCain is running on. He also drafted the two laws that brought us the Enron collapse and the current banking crisis:

Gramm orchestrated the Gramm-Leach-Bliley Act in 1999 which “destroyed the Depression-era barrier to the merger of stockbrokers, banks and insurance companies.” He also pushed the Commodity Futures Modernization Act in 2000, which made legal “the mortgage swaps distancing the originator of the loan from the ultimate collector.” The Nation writes that “those two acts effectively ended significant regulation of the financial community.

As Princeton economist Paul Krugman says, "we could manage to have another Great Depression if we work at it hard enough. I think Phil Gramm might be just the guy to do it."

Caring Conservatism

Turns out, Duncan Black was right: "We're all communists now." It cost more than twice what was estimated yesterday, but now Uncle Sam effectively owns American International Group, Inc. (AGI).

When is the first shareholders' meeting?

A.I.G. in a Nutshell

Some CNBC hair-do is talking about A.I.G. right now. "I don't see what the problem is. It has plenty of assets. It's just a liquidity problem."

Right. Only $90 billion in liquidity is needed.

"It's just that some accountant says so," he adds, acerbically.

Not quite. A.I.G. signed contracts that require it to maintain a certain amount of liquidity. It filed formal undertakings with state regulators that its insurance subsidiaries would do so. It sold bonds that guaranteed it would do so. It is required by federal and state laws to do so.

If A.I.G. doesn't abide by its contracts, assurance, guarantees, promises, and laws, then the other guy gets to foreclose. Right? Every homeowner and credit card owner in America knows this.

But Wall Street thinks they are exempt from all of that. And if they all whine loudly enough, the taxpayers will pick up the bill.

'Consoling' on Wall Street

CNN (unintentionally) captures two guys necking behind their on-screen Wall Street reporter and says they were "consoling" each other. CNN needs a dictionary.

Console: verb (used with object). To alleviate or lessen the grief, sorrow, or disappointment of; give solace or comfort.

Investment Advice in Hard Times

What to do with your money when no one trusts the U.S. financial system? Diversify, diversify, diversify. Use lots of different mattresses.