April 2013 - Represent Consumers

Latest D.C.-Wall Street brainstorm – bailouts with your bank deposits

Think your federally insured bank deposits are safe? Think again.

The geniuses that are supposed to be protecting your money have dreamed up a scary idea to use your money to help fund the next bailout.

This is not some paranoid conspiracy theory.

In December, the U.S. Federal Deposit Insurance Corp. (which is supposed to insure your money in the bank) and the Bank of England proposed using your bank deposits to defray the costs of rescuing a too big to fail bank when it gets in trouble. Wall Street hates the term “bailout,” so they’ve came up with a more innocuous term: “resolution.” The report, “Resolving Globally Active, Systematically Important Financial Institutions,” is linked here.

“In all likelihood [in a bank collapse],” the report’s authors write, “shareholders would lose all value and unsecured creditors [including depositors] should thus expect that their claims would be written down to reflect any losses that shareholders did not cover.”

People who trusted the bank and put their money there would not get their money back under this proposal. Instead their deposits would be turned into shares in the newly resuscitated bank.

A version of this already happened as a result of the Cyprus financial crisis. Now FDIC/BOE have proposed a similar approach for the U.S. and England the next time the big bankers fail.

Inside the Washington-Wall Street bubble, that’s not an “if.” It’s a “when.”

This latest proposal is what passes for smart thinking inside the bubble, untroubled by the bad banker behavior it enables or any concern for the public outrage simmering outside.

The proposal stems from a fact that surprised me when I learned it: when you put your money in the bank, you no longer own it; the bank does. It becomes the banks’ asset, which it promises to give you back under certain conditions. In legal terms, the depositor becomes an “unsecured creditor” of the bank. Under the terms of the FDIC/BOE joint December 2012 proposal, the unsecured creditors’ money could be used to offset the costs of resuscitating a bank that the geniuses in Washington and Wall Street determine is too big to fail.

The bankers and their faux regulators are in the hunt for new source of bailout fund because, under Section 716 of the Dodd-Frank law passed in the aftermath of the 2008 meltdown, they can’t use taxpayer funds the next time the $230 trillion derivatives market tanks.

Derivatives, you will recall, are those pieces of paper, unconnected to any physical assets, that created the house of cards that collapsed back in 2008 because nobody could figure out what the derivatives were worth.

Why not just let banks that engage in derivatives speculations and lose fold? The firms’ executives, bondholders and investors would get hurt. And we can’t let that happen, of course.

So they want to “resolve” a bank’s excessive risk-taking with our money.

In Cyprus, only the wealthiest’s deposits were seized. The FDIC is supposed to insure individual depositors’ account up to $250,000 per depositor per account. But under the FDIC/BOE proposal, even accounts of $250,000 or less could be seized by the failing bank and converted to stock as part of a bailout scheme.

Meanwhile, what about the purchasers of those risky derivatives, which the banks are still trafficking in more than ever? They would fare better than lowly depositors because they are treated as “secured creditors,” under a little-noticed provision that the bankers’ lobbyists had inserted into a 2005 rewrite of U.S. bankruptcy law.

I’ve been surprised by how little attention this proposal has gotten. It’s been covered mainly by Ellen Brown, a longtime critic of the banking sector and the government’s failure to regulate it. Certainly a major reason for the paucity of mainstream coverage is the lack of transparency around the regulation of banking institutions, and the media’s failure to push back against that. The big media, with few exceptions, has largely bought the narrative that the Obama administration has been selling, which is that the Dodd-Frank financial reform law successfully reined in banks and solved the TBTF issue, and that we have left the bad old days of financial collapses and bailouts behind us.

Nothing could be further from the reality, as the FDIC/BOE proposal makes clear. The banks continue to engage in risky derivatives gambling, resist any efforts to get them to stop, and enlist their allies at the Fed and other faux regulators to find someone else to absorb the costs of their own inevitable gambling losses.

Much of the regulations that would implement Dodd-Frank are being watered down behind closed doors, where the public is locked out and bank lobbyists have easy access to apply relentless pressure.

Even after multiple foreclosure fraud scandals, the LIBOR interest-rate fixing scandal, and the J.P. Morgan London Whale derivatives trade scandal, the media is more interested in touting the revival of the merger and acquisitions market than doing skeptical reporting on big banks and regulators.

Another reason that the reality gets lost is that it doesn’t fit neatly into the Republican-Democrat frame through which most of the media sees all policy. While Democrats at least rhetorically favor regulation and Republicans blame government for all the banks’ problems, beyond a little political stagecraft the two parties have collaborated smoothly to continue to bury the issue and let the bankers off the hook. This gives members of both parties a wide berth to keep raising campaign money from the bankers, and their congressional staffers a pathway unobstructed by any unpleasantness on their way to lucrative employment on Wall Street when they want to cash in.

This FDIC/BOE proposal is just the latest example of the government regulators protecting the bankers’ interests and throwing the rest of us to the wolves. That’s not what a majority of Americans want, obviously. According to this Rasmussen poll, 50 percent of all Americans favor breaking up the big banks so they don’t pose such a threat to our financial future, and can’t continue to dominate our political landscape. Only 23 percent oppose such a breakup.

Sen. Bernie Sanders, the independent socialist from Vermont, has introduced legislation to break up the banks. Rep. Brad Sherman, a Democratic legislator from Los Angeles, has said he will introduce companion legislation in the House.

Breaking up the banks is critical, but its only the first step. We need the re-imposition of a modern-day version of the Glass-Steagall Act, the Depression-era law that barred banks from mixing in other financial businesses that place depositors’ money at risk. Its repeal in 1999 led directly to the 2008 meltdown.

In the updated Glass-Steagall, federally insured banks should be barred from gambling in derivatives or other complicated investments.

Meanwhile, we need full public hearings on the FDIC/BOE proposal, and any other proposals regulators are considering about how to pay for future bailouts that involves taxpayers or consumers.

Contact your senator and representative and demand an end to big banks and publicly insured bank gambling. This FDIC/BOE proposal is a grim reminder of what we get when we’re left out of the political process, and we leave our financial system in the hands of the politicians, the experts and the bankers.

Can left & right unite – against cat food diet?

If our dysfunctional politicians can collaborate to do the bidding of the 1 percent, why can’t members of the 99 percent find ways to work with those we disagree with to protect all of our interests?

Specifically, can progressive Democrats who oppose President Obama’s proposed cuts to Social Security work with members of the Tea Party who also oppose the cuts – along with everything else the president does?

The gulf between these two groups is obviously deep and wide.

Rank and file Democrats tend to want to put government to work in their interests, and believe that it can. Meanwhile, the Tea Party sees the government as the perpetual problem, and the only good thing it could do is ... disappear altogether.

But on the single issue of Social Security, the two groups appear to enjoy a rare agreement – along with most of the rest of the country.

According to this 2011 Marist poll, voters identified with the Tea Party oppose cuts to Social Security nearly as strongly as voters from across the political spectrum: nearly 8 in 10 Tea Partiers are against the cuts. Of all voters, slightly more than 8 in 10 dislike such cuts.

As for the president, he would rather not be seen as cutting Social Security benefits at all. What he’s suggesting is a change to the way cost of living adjustments are calculated, called chained CPI, in exchange for more tax hikes. Supporters say chained CPI is more accurate because it reflects how people actually react to price increases.

According to this theory, if the price of hamburger goes up, people will switch to beans. So why should the government give you more money to buy hamburger, if you’re just going to go out and eat beans? Under chained CPI, Social Security benefits would be limited to increases in the cost of beans. As economist Michael Hudson says of chained CPI, “It’s not really a cost of living index. It’s a cost of lower living standards index.”

Naked Capitalism’s Yves Smith has labeled it, “the cat food index.”

For many rank and file Democrats, it’s a bitter betrayal of President Obama’s 2012 campaign pledge to strengthen the middle class. It’s also a reversal of one of Obama’s unequivocal campaign promises as a candidate back in 2008. Drawing a contrast to his opponent, John McCain, Obama said McCain favored raising the retirement age and reducing Social Security cost of living adjustments. “Let me be clear,” candidate Obama said. “I will not do either.”

Stopping the president’s scheme will take more than just the efforts of his disgruntled base. President Obama seems to welcome their opposition, wearing it as a badge of honor. He would like people to think he’s making a principled, political sacrifice for the greater good of the country against the wishes of his own base.

Getting the 99 percenters in the Democratic base to work with their opposite numbers in the Tea Party might not be as outlandish as it first appears.

One of the founders of the Tea Party has already been reaching out to Democratic Party activists to discuss specific issues. Earlier this year, Mark Meckler met with MoveOn.org’s Joan Blades.about crony capitalism and with activist Jose Antonio Vargas about immigration. These talks haven’t yielded action – yet. Here’s Meckler talking about it.

The Tea Party has its own links to the 1 percent that undermine its credibility as a grassroots activist movement – and its ability to fight for the interests of ordinary Americans.

The Tea Party has been closely linked to the Club for Growth and Freedomworks, big-money conservative Republican operations that in the past have pushed for privatization of Social Security, most recently pushed by President George W. Bush. Privatization would be a financial bonanza for Wall Street… and would have been a catastrophe for the rest of us if George Bush’s 2005 plan had gone into effect. Most Americans would have lost all their benefits in the great crash of 2008.

Earlier this month, when one conservative Oregon Republican member of Congress criticized the president’s Social Security scheme as “a shocking attack on seniors,” the Club for Growth threatened to find an even more conservative Republican to run against him. The Club for Growth apparently thinks chained CPI is a good downpayment on further, deeper Social Security cuts down the road.

Members of the Tea Party will have to decide whether they want to work for the interests of the elites in Club for Growth and Freedomworks or join with other ordinary citizens to fight for their own interests. (Meckler quit his leadership role with the Tea Party, saying it was becoming too top down)

The Democratic base will face its own challenges. Is it prepared to fight the president and Democratic leadership that,not so long ago it worked so hard to elect, and has defended so vociferously, despite growing income inequality and continuing high unemployment?

If the two groups found a way to move beyond their disagreements, that would really be something fresh in American politics, showing leadership to replace stale rhetoric with robust action in support of the majority of Americans. Not only could that coalition mobilize a successful campaign against Social Security cuts, it could throw a genuine scare into a complacent political class and the 1 percent it serves.

Austerity / Bipartisanship / Martin Column / President Barack Obama / Social Security / Tea Party - 04/22/2013

Revolve this

For many of the government officials cashing in, it seems that the more spectacular their failure to serve the public, the more valuable they are to the big Washington players that hire them.

Our government may be a dysfunctional mess, but for the public officials leaving their jobs, it’s been a banner couple of months. Unemployment may be above 9 percent in Washington, D.C., but our top government officials don’t have to spend too much time on the unemployment line.

Take for example, Mary Schapiro, who recently left her post as head of the Securities and Exchange Commission to go to work for a consulting firm named Promontory Financial, which is filled with former bank regulators making big bucks – working for banks!

You may recall Promontory as one of the “consulting” firms that banks got paid a total of $2 billion to do internal investigations of the banks’ foreclosures, in the wake of the robo-signing scandal. They were supposed to find out how widespread the robo-signing – using forged or otherwise fraudulent documents – was.

But the consultants’ investigations were shut down because the investigations themselves were such a mess. I wrote about it here. Basically $2 billion that could have gone to assist troubled homeowners and stabilize the housing market went instead to enrich a bunch of former bank regulators for shoddy work, while helping few of the many Americans who had victims of fraudulent foreclosures. A Senate subcommittee will holding hearing on the flawed foreclosure investigations beginning Thursday in Washington. Will Schapiro be working in the background, helping her new employer avoid accountability?

Schapiro’s tenure at the SEC is notable in the agency’s failure to go after a single high-ranking official at a too big to fail banks for the fraud and recklessness that led to the 2008 financial collapse. In academic circles, this is known by the polite name of “regulatory capture,” which is an overly nice way to describe the sinister legalized corruption that constitutes the status quo in Washington.

We don’t know how much Promontory is planning to pay Schapiro, or exactly what she’ll be doing. Curiously, the firm says she’ll be doing something called “risk management,” which is a strange job for Schapiro, since in her previous positions at the Commodities Futures Trading Commission and the Financial Industry Regulatory Authority, she never saw any risk in the malignant cancerous growth of derivatives investments that made bankers wealthy before they blew up the economy.

While her duties may be nebulous, her new employer was kind enough to leave her time for another part-time job, serving on the board of directors of General Electric, which pays no taxes but compensates its board members about $250,00 year.

Asked about the revolving door aspect of her departure, Schapiro told the Wall Street Journal, “In my case, there’s no revolving door, I’m not going back to government.”

Now don’t you feel better?

Schapiro should fit right in at Promontory, which was founded by Eugene Ludwig, right after his tenure as head of the Office of the Comptroller of the Currency.

As a federal regulator, Ludwig specialized in blocking states from enforcing their own predatory lending laws against big banks on grounds that they were preempted by the OCC. Meanwhile the OCC was way too cozy with the bankers and saw no problems as its charges. In 2000, he left government to found Promontory, which has consistently worked for the too big to fail banks Ludwig once was in charge of regulating.

Earlier this year, one of Ludwig’s remaining colleagues at OCC, Julie Williams, former deputy controller and chief counsel of the OCC, also joined her former boss at Promontory.

Also headed for the exit this month is Lanny Breuer, the head of the Justice Department’s Criminal Division; he co-chaired one of the Obama administration’s faux task forces that boldly promised to get to the bottom of who was responsible for the financial collapse before tiptoeing quietly off into the bureaucratic ether without any resources to do its work. Breuer resigned a day after he was the target of a devastating Frontline documentary that focused on the administration’s failures to hold the big bankers accountable.

Breuer went back to his previous employer, the white-shoe D.C. law firm, Covington & Burling, which represents, you guessed it, the very big banks Breuer and his task force supposed to be investigating. Breuer leaves behind another heavy hitting Covington & Burling alumni – the U.S. attorney general, Eric Holder.

Schapiro and Breuer’s moves are a stark reminder that the real action in Washington is not in the debate between the Republicans and Democrats that we see on television every day, it’s in the never-ending battle, mostly out of public view, by the members of the Money Party to protect their interests against the rest of us, who don’t belong.

Financial Crisis / Martin Column / Revolving door - 04/10/2013

Post-election, President Obama's populism goes missing

When it comes to reviving the middle class and reducing the country’s widening income gap, President Obama in his second term has so far offered little more than a classic bait and switch from the strong promises he made during his successful reelection campaign.

While the president has provided leadership on issues that don’t challenge the economic status quo, like immigration reform and same-sex marriage, his administration is still not bucking the bankers and the austerity hucksters peddling their scams.

Meanwhile, the president pleads for patience, based on the discredited theory that if we just hold out a little longer, the recovery that’s humming along for the 1 percent will trickle down to the rest of us.

When Republicans floated that myth during the Reagan administration, Democratic officials howled. Now they fall in line, with a barely a peep as issues of longtime unemployment, falling incomes, the growth of lousy, low-income jobs and rising health care costs ? without any proposals to address them, at the same time his administration pursues a massive secret Pacific trade deal that dwarfs NAFTA – which was a disaster for jobs in the U.S.

In his inaugural address, the president proclaimed “an economic recovery has begun” and left it at that.

Back in December 2011, the president was warming up the populist theme he would use to batter his opponent, Mitt Romney, as an out-of-touch plutocrat. In Osawatamie, Kansas the president said: “I am here to say the [the supply siders] are wrong. I’m here in Kansas to reaffirm my deep conviction that we’re greater together than we are on our own. I believe that this country succeeds when everyone gets a fair shot, when everyone does their fair share, when everyone plays by the same rules.”

When it came to the economy, Obama blew Romney away. In a Bloomberg poll, respondents were asked who they thought did a better job laying out a vision for the country’s economic future: President Obama beat Romney by 10 points.

But where are the policies that would give that vision even a fighting chance of becoming reality? Since his reelection, the president has pivoted sharply away from the populism that got him elected towards cuts that hurt the very people he said government should protect.

On a recent visit to family in Detroit, I was struck again by the painful gap between the president’s rhetoric and his actions, and the stark contrast between the recovery for the banks and corporate profits and the stock market while ordinary people continue to suffer.

Detroit was hit hard by the 2008 financial collapse, and though the Obama administration helped engineer the bailout of General Motors, the city is still struggling under the weight of years of economic decline and bad politics. Home prices have fallen 35 percent over the past three years. That the unemployment rate has dropped from a post collapse high of 16 percent in September 2009 to 10.6 percent in January, still high above the national rate of 7.9 percent, offers only small comfort.

The city, the seventh-largest in the country in 1990 with more than 1 million people, is now 18th largest, with 700,000 people, and officials have closed schools and laid off teachers. While some auto jobs have returned, they pay half of what they used to, along with scaled-back benefits.

Now the city’s residents are caught in a feud between Michigan’s Republican state government and their own Democratic politicians. While Detroit’s situation may be worse than other old urban areas, the others are not far behind.

Detroit has been particularly hard hit by absorbing the costs of bank “walkaways” – bank-owned properties that the bankers have either decided not to pay taxes on or have abandoned before foreclosure is complete. Officials estimate the cost to the city of Detroit this year at $118 million.

That’s just another example of the costs of bankers‘ irresponsible behavior getting passed on to taxpayers, in this case, the remaining residents of Detroit.

When the bankers triggered a nationwide economic collapse, the federal government stepped in to rescue them with all the resources it could muster – no questions asked. But as Detroit and the nation’s other cities have continued to struggle, there’s not even a decent debate about options to help them.

Of course Detroit’s auto workers are not alone. The majority of jobs created during the “recovery” have been low paying.

Also ignored is the plight of the millions of long-term unemployed. Four million Americans have been unemployed more than a year. That’s 30 percent of all unemployed people – triple the 10 percent before the financial collapse.

But you won’t hear the president or any of the rest of our political leaders say much about those four million people – more than the population of of Los Angeles. They’ve been tossed aside, along with the rhetoric that proved so useful just a few months ago.

Income inequality / Jobs crisis / Martin Column / President Barack Obama - 04/02/2013