Wall Street, Englewood, and the Rule of Law

On April 18, 2010, in The Public, by Joe Costello

Well, the SEC has finally brought a case, cheers to that. Though the SEC has proved itself particularly hapless over the past couple decades, one must nonetheless always allow for the restitution of any system. Let’s hope this is just a start, a case against a Goldman underling is only that. The fraud on Wall Street is systemic. It is an industry that has turned predatory against both their clients and the greater society. People need to go to jail, and not the underlings, but the heads of the firms.

The NYT editorializes:

We urge everyone to keep a close eye on this case. If it is handled correctly, it should finally answer the question of whether malfeasance — and not merely unbridled greed, incompetence and weak regulation — was also responsible for the financial meltdown.

There is no question of malfeasance, it is rampant. The only question is what perpetrators go to jail. At the FT, Gillian Tett writes:

Thus while Goldman Sachs might have been the focus of Friday’s suit – and makes a tempting target for politicians – its practices were certainly not unique. I would not be at all surprised if other names eventually jump into the SEC gunsights too.

Of course, it remains to be seen in court whether any of this will actually produce convictions. Precisely because the subprime and CDO markets were so opaque during the credit boom, it was often very unclear what was legal – or not. Moreover, bankers were extremely adept at “innovating” to get round the law.

In what other industry is breaking the law considered innovation? If you want a layman’s view of what was happening across the industry, check out Dylan Ratigan’s explanation here. The greatest problem is the SEC brings civil not criminal cases, and a few slaps on the wrists to underlings and token fines, combined with fraudulent reform isn’t going to do anything. The president needs to get the Attorney General to start bringing criminal cases. The problem with that is he will have to start prosecuting some of his funders. We’ve heard endlessly about the president’s stint as a community organizer, but very little about how he received more Wall Street money than any candidate in American history. Of course you won’t hear about that from the Republicans, because they’re still scratching their heads trying to figure out how the hell the Democrat’s became the party of Wall Street.

This is where real courage is necessary and if the President needs some fortitude, I suggest next time he’s back in Chicago, he take a stroll from his house in Hyde Park and head a few blocks south and west to Englewood, in his old state senate district. Englewood has lit up lately, 40 shootings in a couple days, four dead. Now, pretty much everyone in Englewood has a relative or knows someone in jail, and if the President was to tally up the total money pilfered by everyone from Englewood sitting in a jail cell, it wouldn’t add up to one tranche of one fraudulent Wall Street CDO. Yet, the Englewood folks are all in jail, while Wall Street enjoys record bonuses.

If you want to see what happens to a society when the rule of law breaks down, just head to Englewood. As the report states, “A gulf of mistrust remains between many Englewood residents and police.” Can you imagine after forty years of “law and order” as ubiquitous campaign policy across America and thirty years after Morning in America, there’s people in this country that mistrust the police?

Residents say, unfortunately, similar incidents –while tragic– are neither shocking, nor surprising, not in Englewood.

“It’s something you come to expect around here. So, on a hot day, don’t get too far from your house so when the shots start, you can run. Really. Always, around here, somebody is going to want revenge,” a neighbor said.

When the rule of law breaks down, revenge replaces justice.

Cross-posted from Archein: Wall Street, Englewood, and the Rule of Law

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Fraud and the Economy

On April 18, 2010, in The Public, by Joe Costello

In her book Econned, Yves Smith showed the role Magnetar hedge fund played in manipulating the last two years of the sub-prime bubble. By going in and buying the worst of the worst and then betting against it with derivatives, Magnetar innovated the classic pump and dump scheme, riding off with hundreds of millions of dollars. The President calls this “savvy” business. Smith more recently connected Magnetar with Obama’s Chief of Staff Rahm Emmanuel. Rahm’s made a political

career out of bringing Wall Street money to Democrats, first with the Clintons, and then in the Congress. It has been the greatest aspect of his success in politics.

Again, this all shows the great elements of fraud and corruption that are missing from the “debate” on the financial system. Of course, it’s lacking because our politics are bought and sold by Wall Street and other assorted interests, which no one seems to argue about now, though no one seems to want to do anything about either. Any suggestion a political process, which can’t deal with fraud and is drowning in money from Wall Street, is going to come up with any sort of financial reform is simply ludicrous. Dylan Ratigan has put up an excellent video completely catching the zeitgeist, Change the Law. It’s a for the times variation of the 1970′s “School House Rock” video, I’m Just a Bill. My suggestion is watch both.

Earlier in the week, I attended the Levy Institute’s forum on the financial mess. Eliot Spitzer spoke and it made me want to cry. In fifteen minutes, every aspect of what’s missing from the talk of the financial debacle, he nailed. Fraud, clawing back the outrageous bonuses, the capture of the regulatory agencies, the complete corruption of the NY Fed, and the overall costs to the economy, Spitizer talked about. His most important point on the current financial regulation “debate” was how the banks’ public hemming and hawing about an already weak “Consumer Protection” plan was a giant bait and switch, distracting from all the other more essential elements the banks’ lobbyists and elected officials are writing into law. He also made the great and essential point against those arguing for keeping the mega-banks together, that the most innovative aspect of the American economy of the last thirty years happened by breaking up AT&T. The only way we are going to get reform in the American political economy is by breaking up power, both corporate and government.

Finally, no one can argue the Fed’s continued money pumping isn’t having an impact. JP Morgan and B of A announced great profits on their trading desks, but continued problems with their loan portfolios. We seem to have innovated our financial system into a variant of the 19th century boom-bust system, but, we now have the Fed to pump money in as each bubble pops. How this all works out, well, place your bets. The Democrats are betting it will be good enough by November they can keep control of the Congress. And who am I to argue? The political skill of the Democrats is immense. Who else could take a completely unpopular group like the Republicans — after 30 years, a completely exhausted and discredited political force — and with control of the presidency and large majorities in the Congress, within a year, bring the Republicans right back into the game. That is a sublime politics beyond this fool’s simple imagination.
Cross-posted from Archein: Fraud and the Economy

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On political economy culture

On April 13, 2010, in The Public, by Joe Costello
Oh God save history

God save your mad parade
Lord God have mercy
All crimes are paid!
God Save the Queen

Culture’s are powerful forces, bending physical reality to their own ends. Today in the United States, we have a decadent political and economic culture, bordering on nihilism. We have the trappings, symbols, pageants, and even institutions of the old republic, that is democracy, but the political culture, is in opposition to its professed ends. The majority are led to believe politics works for their interests, yet nothing is further from the truth.

Satyajit Das has an excellent piece at Naked Capitalism on the culture of economics and modern finance. It reveals our last several decades cult of liquidity, which is an extremely important underlying factor to our financial mess, and yet there is little understanding. Draining liquidity from the system, that is making things less trade-able, is in fact, a most necessary step to making a sounder financial system, yet it is completely absent from the debate. Our response to the financial mess to date has been exactly the opposite. Das extrapolates further, trying to understand what the cult of liquidity has meant not just for finance but the larger culture:

In contrast with its ‘solid’ shape, ‘liquid’ modernity created new and unprecedented challenges. Social forms and institutions no longer had enough time to solidify into accepted frames of reference for human actions and long-term plans. Individuals now had to be flexible and adaptable, pursuing available opportunities. Liquid modernity required calculation of the likely gains and losses of acting (or failing to act) under conditions of endemic uncertainty.

The rise of financial markets and financialisation of everyday life is the irresistible result of liquid modernity. The rise of debt fuelled consumption and speculation derives directly from an uncertain world where risk taking is an essential survival strategy.

This doesn’t diminish the importance of the culture of outright fraud endemic to finance, but it is necessary thinking in how we create a more stable system.

Speaking of cultures or more appropriately cults, the New York Times seems a little discombobulated these days. In the last week, they seemed to go full gear promoting the economy was coming back to…uhm…”normal”. David Brooks had a piece how the 2000s weren’t so bad, everybody was makng a 100K

a year. Flyod Norris had a piece asking “Why So Glum,” the recovery was in full swing, pointing to all the other post-war recoveries as example. They even had a big completely unreadable piece by their economic Nobel Prize winner claiming the same system creating our environmental problems, of which he is an expert, was going to solve those problems. I guess that means our corporate Democrats are getting ready to take on energy, morning in America, once again.

But, it was today’s editorial on the financial mess that belies a great air of confusion. The Times claims apologies from our financial titans aren’t enough, more importantly stating:

Congress’s efforts at financial reform appear to be weakened daily by politicians who are more concerned with campaign donations than regulating the financial system. This week, for instance, a Senate committee is expected to propose new regulations for derivatives that are more loophole than rule.

Well, that’s news right? The role of the NYT in our political culture is to set the limits of sanctioned political debate in this country, you know, what’s acceptable dinner conversation in DC and Manhattan. One thing that remains unacceptable to our establishment political culture, despite all the physical evidence, is that our politics are broken, and our elected officials are subservient to Wall Street and our mega-corporations, and really, anyone who wants to write a big enough check. That maybe true, but it’s damn impolite to talk about. But don’t worry, if the Democrats manage to get a finance bill, the front page of the NYT will call it historic, same as with an energy bill. We have one sick political culture.

Archein: On political economy culture

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a spine evolves in Washington

On March 16, 2010, in The Public, by Joe Costello

Mr. President, last week’s revelations about Lehman Brothers reinforce what I’ve been saying for some time. The folly of radical deregulation has given us financial institutions that are too big to fail, too big to manage, and too big to regulate. If we have any hope of returning the rule of law to Wall Street, we need regulatory reform that the addresses this central reality. As I said more than a year ago: ” At the end of the day, this is a test of whether we have one justice system in this country or two. If we don’t treat a Wall Street firm that defrauded investors of millions of dollars the same way we treat someone who stole 500 dollars from a cash register, then how can we expect our citizens to have faith in the rule of law? For our economy to work for all Americans, investors must have confidence in the honest and open functioning of our financial markets. Our markets can only flourish when Americans again trust that they are fair, transparent, and accountable to the laws.” — Senator Ted Kaufman

Three cheers to Senator Kaufman, you can and should read the whole speech.(tx zh). What we need to understand is much of the financial innovation of the past decades was fraudulent, allowing simple manipulation at a massive scale. Bill Black and Eliot Spitzer have an excellent piece at New Deal 2.0 calling for congressional investigations, this has to be done. Any so-called financial reform, without extensive background to what was done, is simply a charade, but DC’s very good at that these days.

Zero Hedge also has a very

good piece on securitization, particularly mortgage CD0s, writing, “But even smart people can be fooled by CDO terminology, which is Orwellian by design.” It’s a good take on how Michael Lewis, who in the past has written some excellent pieces on Wall Street, completely missed the plot in his newest book. Lewis praises a handful of traders who were shorting(betting against) all the debt dreck. What Lewis misses, shorting was a big part of the game. Firms such as Goldman were knowingly peddling garbage to their customers with one hand and shorting with the other. Of course, it took the AIG and the rest of the bailouts to make their bets good. Yves Smith has a very important piece on this coming shortly.

All this begs the question, how much fraud was involved — the short answer a lot. If much of the debt was fraudulent, let’s declare it null and void, starting with what’s on the books at the Fed, Fannie and Freddie. That will help the deficit. What say you Mr. Gross?(tx ames)

Cross-posted from Archein: a spine evolves in Washington

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