“Fool’s Gold” by Gillian Tett

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So I recently read Gillian Tett’s Fool’s Gold, her account of the “Morgan Mafia” at JP Morgan who “innovated” the credit default swap and the mass marketization thereof.

 

The book is well-written and does a good job of explaining all the financial gizmos and machinations which destroyed our economy once and for all.

 

But in the end Tett does not successfully defend her explicit or implicit theses which are as follows.

 

Her overt claim is that derivatives and securitization are inherently good and useful, constructive and value-creating, and that it was only their abuse by bad apples which caused everything to go wrong.

 

This is on display in her very section titles: Innovation, Perversion, Disaster.

 

More specifically, she claims that the folks at JPMorgan (to whom she had access and who willingly cooperated with her in giving interviews, from Dimon on down to the most obscure cadres; so to a large extent this is JPM’s version of events) did their best to be responsible, accountable, prudent actors, while the bad apples were at most of the other banks.

 

Her implicit claim is that financialization of the economy and the extreme growth and concentration of the finance sector are also good things. (I take it for granted, after all that has happened, that anything written on the subject which isn’t attacking the sector as such has an obligation to defend its existence.)

 

But the evidence of the very history she and JPM lay out contradicts all of this.

 

Tett opens her story with a bunch of drunken frat droogs partying in Boca, reveling in vandalism and mugging one another. This kind of behavior continues throughout the story, unfortunately on more socially destructive levels.

 

It was at this Boca conference in 1994 that the Morgan Mafia, as the swaps team called themselves, zeroed in on the idea of credit default swaps. This was an extension of existing interest rate swaps, and wasn’t a completely new idea, but the JPM crew really made it work. As will be the pattern throughout the tale, they weren’t doing this in response to any social or even “market” need, but proactively thought it up toward the goals of greater rents and attacking regulation.

 

They spent the next few years mucking around (by their standards) with the idea, doing a few big deals. But the real goal was to standardize this method of selling risk. They eventually bundled $10 billion worth of JPM risk on existing corporate loans, securitized it, induced Moody’s to give these securities a AAA rating, and in December 1997 marketed it through an SPV shell company (in order to evade taxes). The model was now complete.

 

When the dotcom bubble crashed, followed by the Enron and Worldcom troubles, nobody took these as evidence that financialization needed to be reined in. On the contrary, CDS were touted as having successfully spread out the risk. Meanwhile, the Fed had embarked upon its easy money policy. So for CDS the lesson and the incentive were clear: They were now to be used to help blow up the mortgage bubble.

 

Ironically, after having “innovated” the CDS instrument, JPM itself never fully committed to mortgage securities. They could never figure out how correlated mortgage defaults might be, and therefore what the real level of risk was. So they only did two big CDS-MBS deals and then backed off. Similarly, in 2005 Dimon wanted to prioritize mortgage securitization. They spent much of the year setting up an “assembly line” structure to compile, bundle, slice, and sell these securities. But no sooner was the mechanism in place than in early 2006 the mortgage market showed signs of stalling. As defaults started racking up in San Francisco, Las Vegas, Miami and elsewhere, JPM held back once again.

 

In the end this conservatism served JPM well. When the crash finally came, it was one of the few banks whose balance sheet wasn’t loaded down with toxic paper, and the only one the government could readily turn to as the “private” face of the corporatist bailouts. Tett attributes this to a longstanding corporate culture which allegedly valued teamwork, loyalty, long-term relationships over the Darwinist “eat what you kill” ethos at other banks. Back in 1933 under Congressional grilling JP Morgan Jr. had assured the world that the bank’s mission was to engage in “first class business…in a first class way”. This became a mantra at the bank.

 

By 2008 this branding, after the neglect of some years, came back to the fore. When Chase Manhattan bought JPM in 2000, although they placed Morgan’s name first in the new combined name “JPMorgan Chase” for this branding purpose, they studiedly dropped the pretentious periods from “J.P. Morgan”, something the JPMers had always taken pride in, just to show who was boss.

 

Now the periods were back with a vengeance. With the whole system on the verge of collapse, the J.P. Morgan brand name was of great value. But any social value connotation of this was a scam. JPM was in disaster capitalist mode, with Dimon scanning the horizon for M&A opportunities among the wounded. First Bear and later WaMu were the two big feasts JPM enjoyed using public backstops to again mitigate their risk.

 

As the whole story shows, JPM’s conservatism was never out of any social responsibility or even a real desire to be “first class”, but only out of self-interest. Nothing in the book can elide the fact that even at relatively conservative JPM most of this “innovation” was not in response to any market request but was gratuitously dreamt up and aggressively marketed to buyers who had originally wanted no such thing. Tett quotes Peter Hancock, the early head of the derivatives team: “The idea that we gave the most emphasis to was using derivatives to manage the risk attached to the loan book of banks”.

 

She goes on:

 

Players…had different motives for wanting to place bets on future asset prices. Some investors liked derivatives because they wanted to control risk, like the wheat farmers who preferred to lock in a profitable price. Others wanted to use them to make high-risk bets in the hope of making windfall profits. The crucial point about derivatives was that they could do two things: help investors reduce risk or create a good deal more risk. Everything depended on how they were used and on the motives and skills of those who traded in them……

It was only many years later that the team realized the full implications of their ideas, known as credit derivatives. As with all derivatives, these tools were to offer a way of controlling risk, but they could also amplify it. It all depended on how they were used. The first of these results was what attracted Hancock and his team to the pursuit. It would be the second feature which would come to dominate business a decade later, eventually leading to a worldwide financial catastrophe.

 

But this is belied by every action of this team. On the contrary, from day one team members were focused on politically leveraging risk insurance toward deregulatory lobbying, in order to further amplify risk and rents. The real motives were never anything more than unproductive rent-seeking and regulation-bashing. As for better managing risk, on the evidence of this book no one ever valued any opportunity to build resiliency into the system, to create slack. On the contrary, every space that risk management opened immediately had further risk crammed into it. Nobody seems to have noticed the fallacy here, that is assuming, as Tett seems to, that anyone ever actually cared about “better” risk management, as opposed to generating the fraudulent simulacrum of it to extract further rents and attack regulation.  

 

Hancock’s real mindset came through more clearly when he decried the “curse of the innovation cycle”, meaning that he lamented that all real financial innovation had long since been completed. He hated what human beings call the proper functioning of an economic sector as it matures, provides its necessary services more efficiently, because then profits go down to their natural mature level. Hancock and his fellow mafioso were out to “innovate” new scams in order to prevent sector maturation and efficiency from prevailing. Similarly Mark Brickell, another Morgan cadre, aptly compared what they were doing to the Manhattan Project. Then there’s the charming Tim Frost, a hard core corporatist ideologue who liked decorating his work space with portraits of “shabby unemployed British miners”. These were a comic centerpiece for his jokes about what happens when returns are bad.

 

In Brickell’s case the intent to wage total war on society was overt, as his incessant Hayekian market fundamentalist proselytization demonstrates. His real passion was deregulation.

 

Brickell took the free-market faith to the extreme. His intellectual heroes, in addition to Hayek, were economists Eugene F. Fama and Merton H. Miller, who developed the Efficient Markets Hypothesis at Chicago University in the 1960s and 1970s, which asserted that market prices were always “right”. They were the only true guide to what anything should be worth. “I am a great believer in the self-healing power of markets”, Brickell often said, with an intense, evangelical glint in his blue eyes. “Markets can correct excess far better than any government. Market discipline is the best discipline there is.”

Peter Hancock shared that view, though he rarely expressed it so forcefully in public. So did most other swaps traders.

 

The International Swaps and derivatives Association (ISDA), the “industry” lobbying group, under Brickell’s personal leadership spread the gospel of voluntary “market discipline”, “the self-healing power of markets”, “rules designed by the industry itself and upheld by voluntary, mutual accord”. “Bankers and their lawyers were better-informed, and they had strong incentives to comply.” The libertarian bullshit was piled high. The quants added the mystique of math, “Value at Risk” (VaR) to the mix.

 

Between the Chicago ideology, the mathematical assurance that risk had been tamed, and of course the bribes, Brickell and his horde accomplished their goals. They first staved off new regulation in the aftermath of the Orange County bankruptcy in 1994, then launched their real lobbying offensive. The dream was to not only get risk off the books so that it didn’t eat up the reserve requirements, but to convince regulators to lower the requirements themselves. They convinced the Fed and the CFTC in 1996. (They actually had a harder time convincing JPM’s own management to loosen internal restrictions.)

 

Led by the Morgan cadres, the deregulatory offensive reached its crescendo at the turn of the millennium with the repeal of Glass-Steagal and, with the CFMA in 2000, the explicit declaration that swaps were not securities and beyond CFTC purview. This happened in an atmosphere of absolute fanaticism over technology, “innovation”, and most of all “growth”. The very fact that none of it had any real-world basis played up the religious aspect of it all.

 

What was the role in all this of derivatives in general and the Morgan mafia in particular? Tett’s own evidence demonstrates that:

 

1. The JPM cadres themselves took the lead in using these innovations as the pretext for deregulation.

 

2. Any “innovation” was quickly put to “abusive” uses.

 

3. That everyone “abused” securities, and that the clear goal of deregulation was to open up space for these abuses, seems to indicate that these uses weren’t really abuses, but rather that the banks entered the deregulated vacuum using CDS and everything else exactly as intended. It seems that, rather than being the only “responsible” player, JPM was unusually conservative.

 

More to the point, they got lucky. In particular, the mortgage problems arose in early 2006 just when JPM was about to take the plunge. If this had been delayed for another year, or if JPM’s strategy had been implemented one year earlier, they’d have been caught out just like the others.

 

So the evidence proves that their intentions were always malevolent, and also doesn’t strongly support the proposition that they “knew” what they were doing much better than everyone else.

 

This is reinforced by JPM’s behavior since the crash. By then the original JPM team was dispersed throughout the sector, but the diaspora rejoined for a collective bout of whining, finger-pointing, CYA and ideological reaffirmation, even cultivating martyr fantasies. The basic line is the same: We’re innocent, derivatives are good, it was just bad apples who abused them. Most still sing the ideological gospel (though Greenspan’s partial recantation has given a few pause).

 

As for JPM itself, it has used the strength it gained from the bailout to go hunting. It’s now the world’s biggest bank in terms of market capitalization. It has used its prime position to follow Goldman Sachs into a more overt corporatist partnership with government. (If Dimon really is gearing up to become Treasury Secretary as some reports say, this would be the public consummation of that process.)

 

The real voice of JPM, most truly in synch with JPM’s actions and the actions of the sector as a whole, remains the fascist Mark Brickell. As the crisis descended he never flinched from triumphalism, self-congratulation, and continued ideological assault.

 

In April 2008, basking in the glow of JPM’s public-enabled fire sale purchase of Bear Stearns, Brickell raved at the ISDA’s annual conference:

 

As Brickell stood at the podium in the ballroom of the Vienna Hilton, history weighed on him. ISDA had gathered in the same city two decades earlier, and Brickell considered that symbolically appropriate. Vienna was the home of the great free-market economist Freidrich von Hayek, Brickell’s hero. “[Twenty years ago] we set out to design a business guided by market discipline because we believed it should be an even better guide to good behavior than regulatory proscription”, he observed. “The credit crunch gives good evidence that market discipline has guided the derivatives business better than regulation has steered housing finance.”

Brickell remained as opposed as ever to the idea that governments should intervene. “Hayek believed that markets would create a rhythm of their own, that they are self-healing. That is something we should all remember and honor today”, he told the audience. “When governments arrive to help, there is always a price to be paid that often takes the form of greater regulation”.

 

Every word of this is an Orwellian window into the black larcenous nihilism of gutter evil. The destruction of the real economy, of millions of jobs, is indeed the “discipline” and the “healing”, most of all the “good behavior”, they want to impose upon us all. JPM and the stronger elements of the sector were entering full disaster capitalist mode.

 

Tett’s book makes clear, in matching words to actions, that not only was there never any good, constructive intention on the part of these operatives, but almost none of them even learned a lesson from or feel remorse over the crisis and all the destruction it has wrought.

 

On the contrary, most of them are geared up for further battle. They fully intend to keep committing the same crimes. I think this book could provide some useful evidence for a future Nuremburg-style tribunal. It’s an important history of how this gangster network conspired against the wealth and social stability and security of the people.

 

One of the few cadres who retained some skepticism during the process was Andrew Feldstein.

 

Back in the days when the JPMorgan team had concocted its derivatives dream, Feldstein had believed deeply in the intellectual arguments behind financial innovation. He was utterly convinced that if tools such as derivatives were implemented in a rational, efficient manner, they would vastly improve the financial system and economy. It was the dream that drove them all.

But after living through the mess of the Chase-JPMorgan merger, Feldstein became cynical. He still believed derivatives had the theoretical potential to make markets function better, but in practice, dysfunctional management and warped incentives for traders and the ratings agencies were badly distorting the CDO market. He understood the ways in which the banks were playing around to garner good ratings and make end runs around the regulatory system, and the situation troubled him. But it also presented a trading opportunity.

 

So – he was an ideological believer, and he still “believed”, yet in doublethink, as he saw how it didn’t work in the real world. But so what; it was also a “trading opportunity”.

 

That can sum up every ideologue of all times.

A Small Step

A few months ago I wrote about how a corrupt, Kafkaesque arbitration system had been set up by the banks to bilk consumers and deny them access to the law. Minnesota had sued the most prominent of these “arbitrators”, the National Arbitration Forum, alleging fraud.

Today I came upon some good news.

 

 

JP Morgan Chase became the first bank to drop its arbitration clause from its credit card contracts, so Chase credit card holders will have the right to go to court to dispute a problem with its credit card decisions.

This decision was part of a settlement of an antitrust lawsuit filed by Minnesota Attorney General Lori Swanson that involved the largest arbitration company, the National Arbitration Forum, in July. The Forum is no longer part of the process of consumer-debt arbitration, but the banks have not yet settled the suit. This move by Chase will likely encourage other banks to do the same thing.

 

The piece goes on to say that BofA, under pressure, has also stopped the practice (although it hasn’t yet settled the suit), and another big arbitration firm, the American Arbitration Association, has stopped participating in consumer debt collection.

 

So that’s one decent piece of news. I’m thankful for it. 🙂

 

This will be a big win for consumers. Companies prevail over consumers in 94 percent of the cases that go into arbitration. The NAF processed 214,000 consumer-debt obligation claims in 2006. It oversees 1,000 attorneys and former judges who handle the cases.

Now that Chase has settled, it’s only a matter of time before the others decide to settle as well. Consumers everywhere may soon have the right to go to court if they have a problem with their credit card company.

Against the People’s Outrage

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“Beware the Result of Outrage” is the title of the NYT’s Andrew Ross Sorkin’s new column, and this could easily be his ideological slogan. Sorkin is an “errand boy, sent by grocers to collect the bill”. He is consistently anti-populist, pro-elite, pro-technocracy, above all pro-trickle down. In this crisis and gathering Depression the people have no right or prerogative to do anything other than meekly await dispensations and crumbs from on high. Anything else would be inelegant, and troublesome for the rich’s peace of mind.

 

 Last spring we saw him delivering AIG’s extortion threat: “we know how to blow up the economy once and for all, so pay us our bonuses or else.” He sees his main job as to try to shout down any sort of anti-elitist, pro-populist developments.

 

Today his targets are a few potentially troublesome amendments spoiling the otherwise clear sailing for the anti-reform project sleazing through Congress under the Orwellian title “Financial Stability Improvement Act”.

 

“Improvement”? You better duck.

 

The “Bair-Miller-Moore” haircut amendment would require all the bigshots, including hitherto sacrosanct secured bondholders, to take a hit if the government has to bail out a bank.

 

In his standard supercilious tone, Sorkin assures us that he appreciates the appeal to childish notions of justice, but that this will actually upset the adults who, darn it, are trying to keep things “stable”!

 

That is a hot-button idea because, for the last year, many critics have asked why bondholders were protected by the government. Again, at a gut level, it seems fair for secured creditors to take a haircut if the taxpayer if going to bail them out.

Again, not so simple in practice. Because of the new risk, banks would find it more expensive to raise money — especially so when they run into problems.

Who wants to lend money to a bank when there is a chance the government is going to come in and take it over, so that even a secured creditor at the top of the food chain is going to lose something?

 

I don’t know about you, but this looks to me like it would reduce the heads-I-win, tails-you-lose status quo. As things are “lenders” (using free Fed money) have all upside and little downside, since they can be confident that if their investments in TBTF entities go bad, the taxpayer will bail them out. Why shouldn’t this moral hazard be eradicated? Even if we agreed with Sorkin’s contempt for the morality and justice aspects of it all, the TBTF put is still just not good capitalist business practice, is it? The amendment as written may have flaws, but in principle it wants to head in the right direction.

 

If a bank, thanks to its reckless practices, is doomed to fail, why should any investor, public or private, be zombifying it? But certainly, if a private investor wants to do that, he should be doing it ONLY because he’s willing to run a big risk looking toward some big reward, NOT because there is no risk because he’s assured the public will make good his losses.

 

So in conjuring bogeymen here Sorkin is really fighting to uphold the lemon socialist paradigm of privatized profits, socialized risk. (You’ll look in vain through these columns to find out how we’re supposed to get rid of these systemic extortionists completely. Sorkin is not saying “Yes, let’s break them up so we won’t have to deal with these threats at all anymore.” He’s saying stay the course, business as usual, and no populist rocking the boat, dammit. Don’t you nasty cavemen go scaring my well-dressed bondholders. Just give us the money.)

 

(He also mentions in passing the Kanjorski amendment, but doesn’t seem to have as much of a problem with that. That’s because it’s a reactionary Trojan horse meant not to extend public power, but gut what little exists. It would allow insolvent banks to sue to prevent FDIC action. As bad as things are today, they can’t do that. Yet.)

 

The worst specter haunting this corporatist Xanadu is the Audit the Fed amendment.

 

Again, when Sorkin gets patronizing:

 

So on its face, the Paul amendment seems well intended. After all, who can argue with a little more sunlight?

 

you know he’s getting ready to whip a peasant.

 

You could have bet that Sorkin’s line here would be the sacred non-political “independence” of the majestic Fed, and he doesn’t disappoint. He does rather oddly cite economic vandal Judd Gregg to propagate this lie:

 

But consider these words of caution from Senator Judd Gregg, Republican of New Hampshire: “Congress has demonstrated time and again its inability to manage the nation’s fiscal policy, illustrated by our staggering national debt in excess of $12 trillion. So how can anyone think that its involvement in monetary policy would be good for the country?”

So any unintended consequences of the amendment — what Senator Gregg calls “a dangerous move by this Congress to pander to the populist anger” — could indeed lead to less independence for the Federal Reserve, and the result ultimately may not be good for the economy.

 

That “so” in there cracks me up. It’s not too much of a non sequitur, is it? The tone is, “such-and-such is true, for as it is written in scripture…….”, and your citation is Judd Gregg??? Talk about a fallacious appeal to authority. You would think a combination of Keynes, Lincoln, and Superman had said so.

 

When we look at how they have to scrape the bottom of the barrel like this since Greenspan’s fall from grace, we can infer the moral bankruptcy of their position, even if we didn’t know that on more substantive grounds. “As Judd Gregg has written…”  (Maybe Sorkin wants to set him up as a magisterial authority looking ahead to the upcoming attempts to completely gut all social spending. We already knew Obama is sweet on the guy.)

 

That has been Fed Chairman Ben Bernanke’s line all along. He does not want the Fed to be a puppet of Congress.

Representative Paul, of course, doesn’t just want oversight of the Federal Reserve, he wants to dismantle it entirely. He has a dog in this fight and it is snarling….

 

Getting serious, Bernanke, Gregg, and their little flunkies like Sorkin want to propagate the ideological fraud that the status quo, in this case the position and policy of the Fed, is normal, rational, moderate, non-politicized, serenely contemplative, and doesn’t fall under democracy’s purview yet somehow is not therefore an affront to democracy.

 

By contrast, Paul and audit supporters are represented as “snarling”, abnormal, irrational, extremist, having a political agenda. Our concerns about transparency and “democracy” are impertinent.

 

But the truth is that the Fed’s easy money policies in general are highly ideological, beholden to Friedman monetarism, and their manifestation over the past year and a half are extreme and radical. The Fed has been simply hemorrhaging money out of a vast fleet of helicopters, steadily expanding the range of recipients even as it ratchets down eligibility and collateral requirements. Even if we ever accepted the notion that the Fed had certain technical duties which should be insulated from politics, by now its activities are not contained within the bounds of any such framework. It has struck vast swathes of new ground. There’s simply no way society can or should accept this as technical administration. If the plumber I tasked to fix my sink starts bulldozing part of my house, I’m damn well going to call him to account.

 

The Fed, as its “baseline”, is a radical, extremist actor. The call to impose full oversight, transparency, and accountability upon it is not a radical departure, but a call to restore reason and moderation.

 

As for the vaunted Fed “independence”, what they mean by this is independence only of democracy. The fact that the Fed is not independent of its member banks; that it listens very carefully to their desires and advocacy; that it sees its great mandate as to maximize profit for these bankers; that it is nothing more or less than the synthetic manifestation of corporatism; this extreme dependence, this extreme politicization, this radical ideological position, constitute what Sorkin and the MSM at large defend as the status quo norm, from which point of view any other idea is to be judged as deviant and smeared with all the traits I described.

 

It’s not Paul’s amendment which “panders” to the people, as Gregg put it. As much as Gregg clearly hates the people and hates democracy, the fact is that in what’s supposed to be a democracy policy is indeed supposed to listen to the people, which is what Paul said his bill wants to do.

 

On the other hand the Fed sees its reason for being as not only to “listen to” the big banks, but indeed to pander to them. Pander like there’s no tomorrow, which given how the clock is running out on debt corporatism, there really isn’t. That’s why they want to steal all they can today.

 

We must be clear in seeing the status quo itself as the radical state of affairs, and its ideology as the radical ideology. The MSM’s sphere of consensus is extremist and predatory, while little of what the people want, what would benefit them instead of a handful of rich criminals, what democracy cries out for, would even appear on the media’s radar as a legitimate subject for debate.

 

We have a rogue mainstream media, serving as stenographer for a rogue government. Together they are functionaries of kleptocracy, and their whole project is simply to keep the loot machine flowing as smoothly as possible. Rumbles of democracy threaten to upset this functioning, so a tool like Sorkin goes out to spread the anti-democratic message. 

Bailout or Disaster Capitalism? The Goldman Testimony

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This past weekend Goldman Sachs took the opportunity to give its own version of the AIG bailout laundering scandal in response to questions from Gretchen Morgenson.

 

The most telling point came at the very end of spokesman Lucas van Praag’s missive, where he closes with a cold, curt dismissal of Morgenson’s question about the legitimacy of $20 billion in GS bonuses under these circumstances. Praag replies, “Finally, there is no linkage between the AIG rescue and compensation. Best/Lucas.” Thank you, that’s that, case closed, end of story, get a life.

 

They’re adamant on this, the core point. This comes from the fanaticism of greed and their knowledge that their greed and their very existence has zero moral or economic basis. They know they are nothing but criminal parasites who add zero value. So to make up for this they conjure up the endemic arrogance and ideological certainty that makes them think they’re just vessels of God, the same arrogance and ideology which caused this crisis in the first place. And that same arrogance and ideology leads them to this rude, obnoxious kissoff, even where presumably they intend to be on their good political behavior. They just can’t help themselves.

 

Certainly GS wants us to think there’s no linkage. They insult our intelligence by telling us they were never bailed out, and that anyway cash isn’t fungible. Goldman wants us to remember only the TARP, which they never needed and paid back thank you very much. They want us to forget, not only this $13 billion AIG-laundered theft, but tens of billions worth of FDIC backing since their bogus change to a “holding company”, god knows how much borrowing through Fed “facilities” (the Fed is still stonewalling the people on this, but these secrets will soon be coming out as well), endless free money thrown down from the Fed’s helicopter, as well as the TBTF premium, and the general oligopoly rent premium.

 

They want us to believe they’re still capitalists, still viable, that they still “earn” legitimate revenues and profits. They pretend they’re still free men. That they aren’t pure zombies of the bailout, just as much as AIG. They’re trying to deny that we the people of America OWN THEM. It’s true, many of the people haven’t yet realized this, but they’ll soon understand.

 

The great collateral call will come. The Great Reckoning.

 

In the meantime, let’s go over these remarks, which encapsulate the Goldman Sachs world view. The party line is simple:

 

1. We never needed for AIG to be bailed out.

 

2. The AIG bailout nevertheless helped everyone so we supported it. As they put it in a formulation evidently important to them since they repeat it verbatim throughout the remarks, “We have consistently stated our belief that a collapse of AIG would have had a very disruptive effect on the financial system and that everyone benefited from the rescue of AIG.”

 

They reiterate versions of these in response to Morgenson’s three questions about the SIGTARP report. They claim they could easily have sold $4.3 billion notional worth of CDOs; that they were hedged through CDS they had bought against an AIG failure, and this protection would have paid off; and that in some mysterious way they would have “managed the risk” on the CDOs upon whose value they had bought CDS from AIG if they couldn’t have sold these to the Maiden Lane slush “vehicle”. They add for good measure that the Maiden Lane sale was simply good citizenship on their part, at the Fed’s request.

 

This sure doesn’t sound right. They didn’t need the bailout, yet they did all this? Why? They have to be either lying about (1), or else were operating in a predatory, disaster capitalist manner fueled by money looted from the public. What other option is there?

 

Here’s an interesting contradiction. On one hand GS makes this false claim: 

 

First, the SIGTARP report does not state that Goldman Sachs was more vulnerable to an AIG failure than the firm contends. It raises three general “what if” scenarios, which our collateral arrangements, risk management and accounting practices took into account.

 

But those aren’t general prospects. They’re very specific.

 

But on the other hand:

 

When the US Government decided that a failure of AIG posed a risk to the stability of the entire financial system, it stepped in to bail out the company. By definition, that meant bailout funds would be used to allow AIG to meet its obligations.

 

Now that’s a “general” assertion. In itself it doesn’t mean anything regarding any specific obligations.

 

So Goldman rejects SIGTARP’s “general”, i.e. specific points, while depicting its specific gift from the Fed in general terms.

 

According to Morgenson’s Sunday column Geithner parroted this line to her.

 

He said the report’s view that the Fed didn’t use its might to get better terms in the rescue was unfair. “This idea that we were unwilling to use leverage to get better terms misses the central reality of the situation — the choice we had was to let A.I.G. default or to prevent default,” he said. “We could not enforce haircuts without causing selective defaults and selective defaults would have brought down the company.”

 

False. They wouldn’t have been defaults if the haircut was voluntary. Isn’t that what their “extend and pretend” is all about?

 

Here’s the nitty gritty of the laundering. According to GS the $12.9 billion breaks down as follows.

 

*There was $2.5 billion AIG was disputing out of a $10 billion collateral call. Of course GS continues to assert that this was an “obligation”, but if AIG was disputing it, why was it Geithner’s right to make that call with the people’s money? Especially since Goldman says they didn’t need it.

 

*The “Maiden Lane III” purchase by the Fed and AIG (using bailout money) of the assets upon which the CDS were written: $5.6 billion. This is the part where GS keeps harping on how it transferred to the government “assets of equivalent value”. But this toxic paper still has only the phony book value nobody ever tested or wanted to test in the market, and Goldman never wanted to either, in spite of all their gung ho language in these remarks.

 

*$4.8 billion to repay a loan to AIG, while Goldman gave back the collateral of “highly marketable US Government Agency securities”. “If AIG hadn’t repaid the loan, we would simply have sold the securities.”

 

Much of this, like the broad assertion that every Goldman position vis AIG was safe, looks bogus. They would have “easily liquidated” $4.3 billion in CDOs? To whom? $4.8 billion in securities (“highly marketable”). To whom? The fact is, the market was seizing up. Nobody wanted to buy this toxic paper at all, nor could anyone borrow the money to do so even if they had wanted since credit was also freezing up. (And, since all the free money from the Fed became available, still nobody wants to buy this junk, even using free money. On their face Goldman’s claims are bogus.)

 

If those $4.8 billion in securities were so marketable, why didn’t GS just sell them? The fact is, Goldman and Geithner clearly agreed that there was no market for this or anything else, so that’s why this laundered bailout had to be arranged. Otherwise they would have just sold the collateral.

 

I guess that was one of the points discussed at the secret government meeting attended by only one private banker, Blankfein.

 

GS foolishly tries to split hairs:

 

On Maiden Lane III – at the time this vehicle was created, the government was already providing backing for all of AIG’s obligations, including those that were transferred to the new vehicle. As the report states in respect of the $5.5 billion of positions not included in Maiden Lane III, “continued Government backing of AIG provided Goldman Sachs with ongoing protection against an AIG default on the remaining $5.5 billion.” It is illogical to argue that we were protected against the $5.5 billion, but not against the $4.3 billion that was included in Maiden Lane III.

 

What kind of nonsense is this? It argues that the government bailout protected ALL of it, whether it was laundered through Maiden Lane or not. 

 

The “assets of equivalent value” lie is really a kind of tautology or fallacy. A tells B something is worth x, B agrees and buys it at that price using C’s money. Then when C protests, A and B each cite the testimony of the other as proof that the thing really is worth x. Needless to say, this is not proof or even evidence of real value. On the contrary, it’s strong evidence of fraud.

 

Goldman even repeatedly claims the “assets” have “increased in value”. Again, this is the same old phony notional value which was never tested and never could be tested. No one’s been able to actually sell any of it, which is the only test. The moment the market really tried to discover these prices, everything crashed. That’s how we got here. Now, just as Goldman continues to commit the same old crimes, it keeps peddling the same old lies.

 

Throughout, we have the assertion that all other securities were maintaining value even if AIG went down, such that the rest of Goldman’s hedging and collateral would remain intact. So then why did they mark down $10 billion on those securities and make that collateral call?

 

The SIGTARP report states that an AIG collapse “might” have made it difficult for us to collect on the credit protection – not that it would. That is an important distinction. We believe, in contrast, that the vast majority if not all of the financial institutions providing us with credit protection would have continued to perform, and thus that the protection would have been effective.

 

This, and several other remarks, is saying that not just Goldman but everyone else as well would have come through an AIG collapse intact.

 

Then what’s the basis of Party Line (2) “the AIG bailout benefited everyone”? Is this merely disaster capitalism? “Never let a good crisis go to waste”?

 

In fact we can infer from Goldman’s comments a third element to the Party Line:

 

(3) Our other counterparties didn’t need the AIG bailout either.

 

Isn’t this tantamount to saying the entire bailout was unnecessary? And then it would follow that everything GS proactively did – taking the TARP money, changing to a bank holding company, etc. – was under false pretenses, fraudulent. (Where it comes to those aggressive actions you can’t argue, the way I assume they do where it comes to the AIG payout, that fiduciary duty to shareholders forbade them to do otherwise. You have no duty to aggressively push the envelope of political and legal crime.)

 

So according to Goldman Sach’s own testimony, there was never any need for the bailout. We can reassess their mantra:

 

We have consistently stated our belief that a collapse of AIG would have had a very disruptive effect on the financial system and that everyone benefited from the rescue of AIG.

 

According to (1), disruptive but not fatal. Everyone could have soldiered on if we had allowed the free market to function.

 

So then what was this sector-wide “benefit”? It was simply disaster capitalism, a massive looting expedition. It was the biggest corporatist crime yet. We now have, if it wasn’t clear before, a de jure kleptocracy, a criminal government.

 

With this testimony: “The bailout was never necessary, for us or for Wall Street as a whole, but we did find it very beneficial”, Goldman itself has attested to the fact.

Some Thoughts on What We’re Up Against

 

Our basic situation is that the political system and the MSM have been corrupted and captured by a domestic enemy, entrenched corporations, led by the banks.

 

What is the food these things live on? What do they need to survive? Corporations, including media outlets, must attain profitable revenue. Politicians need votes, and in the broader sense government needs the tacit support of a significant proportion of the populace.

 

But it’s equally true that politicians need revenue in the form of campaign contributions, while corporations need the vote of the marketplace and the tacit support or negligent tolerance of the people. The MSM especially depends upon the people’s trust.

 

So in principle the government and the corporate world need large money flows (a rapid “velocity of money”), the active acquiescence of enough of the people, and enough inertia on the part of the rest, such that any active attempt by the people to reclaim their country cannot gain enough traction to cause the oppressive bulge to “break through to its opposite”, as Alinsky would say.

 

The major refinement in the system from the corporate point of view is that once the government becomes its tool, corporate feudalism can absolve itself of any responsibility for seeking any kind of marketplace vote whatsoever. It can instead lobby government to serve as its hired goon, rigging the system so that the revenue automatically flows regardless of anyone’s consent while only at election time does anyone need to seek any kind of vote. The health racket bailout bill is a prime example. Thanks to rising costs and incipient depression, it will no longer be possible for large numbers of people to afford private health insurance. The solution? An Orwellian “reform” bill which will not restrain costs but will use government force to mandate that every cent available be squeezed out of the people for the benefit of the rackets.

 

(Meanwhile corporations extend their power to buy elections, while the electoral system is rigged to prevent grassroots organization and bottom up activism from having any effect. Everything is coordinated from the top down so that even what looks like a people’s action, like the Obama campaign grassroots, is little more than an Astroturf.

 

Here unfortunately the Constitution itself was poorly designed. The electoral college and the Senate itself were anti-democratic in principle and didn’t need much distortion from their inception to become the radically anti-public institutions and mechanisms they are today.

 

So here we need a revisionist political line but also, eventually, the change the Constitution.)

 

The result of corporatism is to render aggressively antisocial and purely parasitic and destructive corporate activities prosperous. I said earlier that if the public can be divided into active, willing consumers, the inertial mass, and the resistance, then corporate revenue and existence depend upon maintaining a preponderance of the first two groups to outweigh the third.

 

But as corporate activity is revealed to be purely destructive, as in the case of Walmartization, or parasitic, like the health insurance racket, or both, as in the case of speculative casino banking, the window of public participation moves in an anti-corporate direction. The pool of gung ho consumers shrinks, while the inertial mass has a gradual shift in its inertia away from toleration of the corporate parasite, while the activist portion gets bigger, stronger, calls out in a louder, more clear voice. (This process is reinforced by the deteriorating economic position of more and more people. As consumers they undergo “demand destruction” as it’s called among oil wonks.)

 

As this process develops, the corporations need more aggressive government action to extract and convey revenue, and to enforce through intimidation and violence the people’s “consent” to the corporate order.

 

(Only the MSM seems to still need the direct support of the people for its revenue, though here too the system is trying to figure out a way to prop them up as a public utility. Needless to say, activists must oppose this. There can only be one reason the corporate system would want to use public revenue to support the media, and it ain’t because they’ll stop being pro-corporate.) 

 

Deregulation, fire sale privatization, sweetheart government contracting, the bank bailouts, pro-monopoly Orwellian “regulation” in agriculture, the looming health insurance stickup and bailout in the form of mandates, are all examples of the loot conveyance.

 

The assault on civil liberties, the militarization of the police, the hijacking of the law, the Catch-22 legal offensive to deny the people access to the law itself, are examples of enforced consent.

 

The Global War on Terror, the security- and prison-industrial complexes, the rise of corporatized fascist militias like Blackwater, are examples of both.

 

So getting back to my original question, what’s the weak point in all of this? The most direct but expensive line of attack is to try to run pro-public candidates against the existing corrupt politicians, or to try to get laws changed directly through initiative and referendum. In many states the system is rigged against this.

 

The MSM is the most institutionally cowardly. Part of how they were corrupted has been the success of the preposterous “liberal media” propaganda campaign. It was always ridiculous to call this corporate, pro-war media “liberal”, but the Right plugged away at it, and the MSM caved in. By now they’re scared of their own shadows and strive among themselves to appease even the most scabrous, fascist Fox News phantoms.

 

So in principle it should be possible to achieve the same effect but in the opposite direction using the same aggressive tactics. We’ve seen (infrequent) examples of how the media can be embarrassed by activist attacks, like where it was accused of appeasing climate change deniers. So if the same anti-media attack, the MSM as a lying corporate stooge, was kept up as a constant rhythmic element of our general communication, it may force another shift with the wind by this craven pack of stenographers. (Especially since no amount of whoring on their part seems able to resuscitate their ad revenues. So their corporatist propaganda has not earned them the return they expected. It’s definitely not going to save them.)

 

Finally we have the corporations themselves. Some may be vulnerable to focused PR assaults, protests, calls for boycotts. We also need, as an absolute socioeconomic and political imperative, a revitalized union movement.

 

But the most obvious and vulnerable aspect of the corporate system is the complete dependence on large, fast money flow itself. The system needs this active consumer mass which it has nevertheless systematically impoverished and politically antagonized.

 

So it seems that the clearest route of attack is to organize anti-consumer, anti-debt tactics and campaigns.

Krugman Tries to Defend Himself

Paul Krugman has fretted a lot about the likelihood that the Obama administration would undertake government action which was insufficient and half-assed but which at the same time could be represented by the Republicans as massively obtrusive. Then, when the measures inevitably failed, government action in itself, rather than Obama’s incompetence, would be discredited.

 

So far this looks to be the likely outcome. The stimulus was way too small and not rationally planned, so it couldn’t accomplish much beyond phony palliatives like Cash for Clunkers. 

 

(It was also a case study in Democrats’ monumental political incompetence. Most of the top beneficiaries were Republican districts! These idiots can’t even get to-the-victors-go-the-spoils right!)

 

But already, at least in Obama’s mind, the very word stimulus is mud. A second, bigger stimulus? No – “deficit reduction”. The utter pusillanimity, and apparent stupidity, of this “president” is manifest. (Of course the MSM, criminally antisocial as always, has happily taken up the deficit terrorist cheer.)

 

[That’s also clearly the plan with health care. By passing with great fanfare something called a “public option” which is really not a public plan at all, they intend to discredit government involvement in health care once and for all. It’s a Republican bill.]

 

So Krugman is dead on about Obama’s fiscal policy.

 

But he has a problem in that he also supported the bailouts. As the absolute failure of these even according to their original premise becomes clear, Krugman has to scramble to somehow reframe the truth along the same lines as the rest of government policy.

 

So he has to argue, paraphrasing some Germans of some decades back, that there was a “good” bailout concept which was hijacked and distorted toward bad ends.

 

Somehow, in ways that seem too subtle for many of us to comprehend, the bailout was in principle a virtuous policy. It could have and should have been something far more than just a gift of stolen public money to some rich thieves. But through a combination of bad faith, weakness, and incompetence the good bailout was overcome by the bad bailout, and now we’re stuck with it.

 

To maintain his position of eminent dissenter within the system, Krugman has to acknowledge that Goldman Sachs is “bad for America”, yet still claim that the bailout was the right thing to do, and that we must now simply submit to living under their thumb.

 

He sees this as the key to maintaining any kind of credibility at all for the government, as well as the credibility of his own place in history.

 

While I take it no one cares much about the latter, we have to look for signs that he may be right about the government. It’s unfortunate, but it looks like the opportunity for constructive fiscal policy is lost. Not because of Republican bleating, but because of Obama’s cowardice. (While he may be a corporatist at heart, he’s also a politician who wants reelection. It’s very clear by now that his best hope is real populism. But that he can’t see this, or seeing it is too timid to go ahead with it, is simply a bedrock character flaw. He’s a decadent coward.) 

 

So the people’s best hope is that the people reject the corporatist government. To the extent that we see signs of this, these may be our own green shoots.

 

The new SIGTARP revelations about the corruption and fecklessness of how the bailout was conducted are having salutary effects. A week ago it looked like Ron Paul’s Audit the Fed bill was dead for another year. But the expose of the Fed’s criminal actions in the AIG money laundering scheme has given it new life.

 

This had to be passed out of committee over the resistance of head banker waterboy Barney Frank, and it may still be defeated one way or another, but I’d call its progress so far a green shoot.

 

This is what scares Krugman, and what animates today’s jeremiad:

 

Earlier this week, the inspector general for the Troubled Asset Relief Program, a k a, the bank bailout fund, released his report on the 2008 rescue of the American International Group, the insurer. The gist of the report is that government officials made no serious attempt to extract concessions from bankers, even though these bankers received huge benefits from the rescue. And more than money was lost. By making what was in effect a multibillion-dollar gift to Wall Street, policy makers undermined their own credibility — and put the broader economy at risk.

For the A.I.G. rescue was part of a pattern: Throughout the financial crisis key officials — most notably Timothy Geithner, who was president of the New York Fed in 2008 and is now Treasury secretary — have shied away from doing anything that might rattle Wall Street. And the bitter paradox is that this play-it-safe approach has ended up undermining prospects for economic recovery. For the job of fixing the broken economy is far from done — yet finishing the job has become nearly impossible now that the public has lost faith in the government’s efforts, viewing them as little more than handouts to the people who got us into this mess.

 

(My emphasis.)

 

He explains, with some hesitancy, why the whole mess was “probably” necessary.

 

So why protect bankers from the consequences of their errors? Well, by the time A.I.G.’s hollowness became apparent, the world financial system was on the edge of collapse and officials judged — probably correctly — that letting A.I.G. go bankrupt would push the financial system over that edge. So A.I.G. was effectively nationalized; its promises became taxpayer liabilities.

 

He goes on to explain how the negotiation should have been conducted. But I agree with the critics who have pointed out that once the administration and the Fed were committed to shoveling as much taxpayer money as possible as quickly as possible to these crooks, it would have been to say the least inconsistent for the Fed to have played the hardass on any particular point. Goldman’s refusal to make any concession was in the spirit of the thing. They correctly calculated that Geithner’s haircut request was a joke.

 

Of course, this is what Krugman and other “dissenting supporters” of the bailout have to deny. They have to stick with the lie that bailing out AIG in the first place made sense and wasn’t a plunder excursion, but that it only went bad in the details.

 

So officials could have called on bankers to offer a better deal, for their own sake, and simultaneously threatened to name and shame those who balked. It was their choice not to do that, just as it was their choice not to push for more control over bailed-out banks in early 2009.

And, as I said, these seemingly safe choices have now placed the economy in grave danger.

For the economy is still in deep trouble and needs much more government help. Unemployment is in double-digits; we desperately need more government spending on job creation. Banks are still weak, and credit is still tight; we desperately need more government aid to the financial sector. But try to talk to an ordinary voter about this, and the response you’re likely to get is: “No way. All they’ll do is hand out more money to Wall Street.”

So here’s the real tragedy of the botched bailout: Government officials, perhaps influenced by spending too much time with bankers, forgot that if you want to govern effectively you have retain the trust of the people. And by treating the financial industry — which got us into this mess in the first place — with kid gloves, they have squandered that trust.

 

Yes, these benighted “ordinary voters” keep getting it wrong, don’t they?

 

Like I said, I agree with him on the stimulus. But the prospects for stimulus are among the victims of the bailout in itself, not of some illegitimate hijacking of what was originally a legitimate policy. (And certainly not of public misconceptions of the matter. Here, as in more and more instances, the public was way out ahead of the establishment elites. On the bailout, the public was right and guys like Krugman were wrong.)

 

The bailout was never legitimate. It was never anything other than disaster capitalism. If Krugman ever believed the lies Paulson was peddling, or if on account of his acculturation he simply forces himself to believe in the basic soundness of the policy, that’s his misconception, not the public’s.

Bank Roundup 11/18

1. So how have things been on the regulation front? Any signs of life?

 

Ed Yingling of the American Bankers Association says he hates it, so that’s one good thing we can say about Christopher Dodd’s bank reform proposal.

 

In most ways it looks in theory to be a moderate improvement over Barney Frank’s corrupt mess in the House. It would have a passable CFPA, derivatives clearinghouses, would try to drag some of the shadow banking into the regulatory light (like hedge funds with $100 million or more in assets).

 

Its most disruptive departure would be to strip the Fed and FDIC of resolution authority and repose all such authority in a new agency which would also subsume the OCC and OTS. This would have separate divisions for big and small banks.

 

But it still wouldn’t break up the Too Big To Fail entities. Since that’s an absolute necessity, and a baseline measure for whether we have real reform or not, the proposal fails right there. It would still leave us under the thumb of gangsters.

 

There’s no reason to believe any “resolution authority” would ever be responsibly exercised anyway. In the crisis, under political and disaster capitalist pressure, if it’s possible for resolvers to throw the plan out the window and just repeat the bailout, that’s what they’ll do.

 

The very fact that the systemic risk entities are being allowed to continue to exist at all proves that this government will always do everything it can for their benefit. It proves that all regulation proposals are lies.

 

The same goes for all the lesser measures Dodd proposes. Just as in the House, these will be chipped away in committee, and predatory amendments will be added. In the end an anti-reform pro-racketeer bill will be passed.

 

If you doubt that, then why do you think even as we speak they’re rolling back existing regulation? (See below for more on accounting standards.)

 

There is the Kanjorski proposal to reinstate a version of Glass-Steagall floating around. This at least purports to wind down TBTF.

 

But in itself it too misses the real problem of systemic protection rackets, which is not just size but the interconnections of their socially worthless but very destructive bets. (There’s lately been some controversy over the term Too Big to Fail. I always recognized that “Big” encompasses not just size but interconnection, and that interconnection can be a clear and present systemic danger even where the firms are not-so-big, like Bear. So that’s how I’ve always used the term and will continue to use it. As for any alleged political risk that somehow the people won’t “get it” in the case of an entity not quite as big as, say, BofA, I’m not worried about it. These are all pretty damned big by any common sense measure.)

 

As Yves Smith put it:

 

So that is why the Kanjorski approach, despite the tough talk and possible disruption, is actually a win for the industry, even if a somewhat extreme version (remarkably) were to pass. It means no one is on the trail of the draconian measures needed to contain the risks the industry poses to the public at large.

The only viable solution to the misbranded TBTF problem is to require systemically important firms (one in the OTC debt businesses, which thanks to the development of “market based credit” is now essential to modern capitalism) to exit all activities that are not socially essential and therefore deserving of government support (pure fee businesses that pose no risk to the taxpayer would be allowed). The permitted activities are regulated intrusively, with tough rules on capital requirements, and product scope (new products would be subject to approval to make sure they were socially productive, that the regulators understood them, and they did not result in increased risk to taxpayers). In other words, an effective solution requires more extensive dismemberment than anyone plans right now, and still requires heavy regulation of the crucial bits that will inevitably be taxpayer backstopped.

 

For a more typical example of how this “regulation” is supposed to work, let’s look at the proposed Perlmutter amendment to the House reform bill. “Strongly supported by banks”, this amendment would give the proposed systemic risk council the power to order the FASB and SEC to suspend or change accounting rules. You know it’s got to be bad when even the US Chamber of Commerce opposes it.

 

The FASB has already been a political whipping boy this year, as the same Kanjorski bullied it into dropping the imperfect but closer-to-reality-based mark-to-market accounting standard. But now even Paul Volcker, also an enemy of mark-to-market, but a proponent of international accounting standards, is an outspoken opponent of the Perlmutter amendment, which would bring chaos as it tosses standards formally and completely into the bloody arena.

 

A basic element of ugly harmony throughout the crisis, from both banks and politicians, has been hostility toward reality-based accounting. The reason for this is clear. The banks are all insolvent, and the only way they can pretend to be capitalistically viable rather than corporatist parasites is through massive accounting fraud. This massive fraud is now enshrined government policy, and on every front the corrupt political lackeys of Wall Street are seeking to extend it.

 

 

2. One place where the accounting wilderness has crept back is in the realm of commercial real estate.

 

The banks have perhaps around $1.8 trillion in CRE loans on their books, but since this hasn’t been marked to market no one has any idea what it could really be worth. The potemkin stress tests didn’t even pretend to deal with this.

 

Over the next several years $500 billion in loans per year are set to mature. These loans are likely to be under extreme pressure from debt deflation. Declining property cash flows, construction depressed on account of the credit crunch, depreciation in the value of the collateral underpinning these loans, all portend defaults, perhaps enough to trigger the next crash.

 

Through the TALF the Fed is backstopping many of these loans, and meanwhile the order of the day is extend and pretend: give extensions on loans you think or know will default. More phony accounting, hoping to play for time while praying for a miracle.

 

So what this means is the Fed is propping up the simulacrum of a continuing CRE loan market. But when the Fed withdraws this support, or when it’s just not enough, lending will stop, everyone will then value all this paper at zero, and again the banks will be forced into insolvency check.

 

We are in end game. The government will certainly keep trying to help its bank king escape check, but it can’t do it forever. One day, inevitably, it will be checkmate.

 

 

3. Meanwhile, there seems never to be any lack of just plain bad behavior. These people are not only evil, they are petty and mean.

 

*Obama’s “good people” have certainly shown their good will in rushing to jack up credit card rates before a new regulatory restriction prevails next year. (Dodd has also proposed legislation to move up this date.) The most notorious is Citi slamming some of its best customers with a 29.99% rate. But according to a Fed survey 50% of banks are raising rates and lowering credit lines for good customers. It’s a combination of squeezing the cash cow and punishment for the Congress daring to pass a mildly reformist bill.

 

(Citi issued a statement blaming the people and regulators.)

 

According to the Pew Charitable Trusts the twelve largest banks, who issue 80% of credit cards, are still using “unfair or deceptive”, and often illegal, lending tactics.

 

All of this is going on while their bank vaults are full of free Fed money.

 

[For anyone who still has questions about the health care rackets, how they’ll confront legislation, and therefore how legitimate the bill there is going to be, see the same behavior on the part of Big Drug.]

 

*The Jefferson County scam has given us some insight into the character of JPMorgan. JPM, with the connivance of the standard corrupt local yahoos, swindled the county into bonding a $3.2 billion sewer project with a package of interest rate swaps which are now worthless. (Sewage indeed.)

 

(This was such an all-day sucker that other sharks were circling, and JPM paid them off to go away: $3 million to Goldman, 1.4 to Rice Financial.)

 

The county is now suing JPM, which says the claims are “meritless”. But they already settled a federal suit for $700 million. Under that deal they paid the county $50 million and wrote off $650 million in “fees”. But the county still says it can’t service the debt JPM’s scam saddled them with, and they’re demanding more support.

 

*We may learn more this week about the BofA/Merrill deal as two board members and a former executive are scheduled to testify before the House Oversight Committee.

 

Former general counsel Timothy Mayopoulos claims he was summarily fired in 12/08 when he informed BofA brass that there existed no material adverse change which would legally justify BofA’s pulling out of the Merrill deal. Meanwhile, one of the board members, Charles Gifford, is caught trashing the deal in an email: “Unfortunately it’s screw the shareholders!!”

 

It’s not yet clear what all of this means, but the picture which has been emerging is of a rotten deal pushed by the Bush administration, agreed to by the incompetent BofA “leadership” (especially the moronic Ken Lewis), who then got cold feet, especially when they realized what a garbage barge Merrill really was (they couldn’t be bothered to do due diligence earlier; Paulson stampeded them, but they were stupid enough to be stampeded).

 

They were especially upset to see how Merrill went happily whistling along handing out billions in bonuses. They wanted out of the deal, and what happened…..? That’s what we’re eventually going to find out. Supposedly Paulson used a combination of threats and rewards to rope Lewis back in.

 

We are already 100% sure of one thing. Whatever went down, it was massive theft from the taxpayers.

 

*We can’t finish without some news from the incorrigible pricks at AIG. In his latest antic, placeholder dreg CEO Robert Benmosche (last seen beginning his tenure with a vacation), frustrated at how he doesn’t get to go parading around as king of the world like Lloyd Blankfein, and how everyone doesn’t just hate him and his company but considers him a contemptible little worm, and AIG a smelly little rathole, has been threatening to quit if the government doesn’t stop dissing him.

 

Apparently the last straw was Feinberg’s decree on executive pay for his special children who haven’t paid back the TARP, remedial dunces like AIG and its head dunce Benmosche. (What kind of loser is this guy that he can’t get a better job than that? Clearly he’s not very high on the “talent” list. He quits here and he might as well go hang out with Dick Fuld.)

 

Well, there’s no point in much analysis here. AIG is the dreg of dregs (maybe along with GMAC). I wouldn’t pay the whole lot of them a plug nickel, let alone the hundreds of billions which two administrations have looted from us on their behalf.

Regulation: Fed Up

As Congress debates an alleged attempt* at renewed regulation of the finance sector, one of the main issues is the proper scope of Fed authority.

 

[*Let’s never forget, short of breaking up the Too Big To Fails it’s all kabuki. All the debate over resolution authority is moonshine at best, disaster capitalism at worst, since none of the on-the-table proposals contemplate anything more than “resolving” TBTF entities when they again start to collapse. None seek to break them all up preemptively.

 

For that proposal we have to go to Bernie Sanders.]

 

It’s quite a fracas, with the Fed wanting to preserve and expand its powers; the administration and Frank dithering on distributing power between the Fed, the FDIC, some new “council”, and a newly merged OCC and OTS, but always wanting to maintain broad Fed power; and Dodd actually wanting to strip some Fed power and repose it in the OCC/OTS entity.

 

But in assessing all this we should always remain crystal clear that the Fed is not a regulator and does not see itself as one. It seeks regulatory authority only to put that range of authority on ice and open up a free fire zone for the banks, with whom it culturally identifies, and with whose personnel its personnel personally identify.

 

It’s a quasi-public entity only for legal and constitutional arbitrage purposes. Thus it argues its “public” status when convenient to shield it from various kinds of lawsuits and other accountability. But in its own mind it’s a private bank and the orchestrator of anti-public bank feudalism.

 

For a case study in all this, we have the new SIGTARP report (linked here) on the AIG swap contract resolutions.

 

This is the notorious incident where the Bush administration, having already bailed out the banks in numerous ways, laundered yet another bailout through AIG via the mechanism of paying off AIG-written CDSs at par.

 

The gamblers not only had their losses covered but here their losing bets were actually paid off as winners.

 

We’ve always known this was a corrupt act of theft from the people, organized by Tim Geithner at Goldman Sach’s behest, but thanks to the excellent Neil Barofsky and his investigation we have new details and analysis.

 

Geithner was supposed to conduct a negotiation with the AIG swapholders on behalf of the taxpayers whose money had bailed out AIG as well as many of those same counterparties. Barofsky found that the Swiss UBS volunteered to accept 98 cents on the dollar. But when Goldman and the French dug in and demanded a full payout, Geithner caved in. GS, acting as ringleader, was confident after the first AIG bailout that the government (it’s taxpayer money so I’m using “Fed” and “government” as synonyms) would bail everybody out across the board, and this was the line they followed.

 

Barofsky found that the Fed “refused to use its considerable leverage”. (He also correctly gets to the heart of the fact that actions are everything, conscious motive nothing: Geithner and the Fed cadres may deny it, but “irrespective of their  stated intent…tens of billions of government money was funneled inexorably and directly to AIG’s counterparties”. That’s a capital crime by its existential fact, and nothing can mitigate it.)

 

The report lays out the Fed’s attitudes as being these:

 

1. It saw itself not as a regulator, but as an AIG creditor. (And a creditor which didn’t care about its “own”, i.e. the taxpayers’, interests.) So it never talked in terms of “we bailed you out, now you need to make concession”, but rather of “AIG owes us all money, and I’m voluntarily not caring about what it owes me, so let’s see if anyone else is willing to make a voluntary concession”.

 

So even when UBS was willing to concede, when GS refused, the game was over from Geithner’s point of view. All he could do was ask them, and they said No.

 

2. The Fed decided it couldn’t treat foreign banks differently from domestic ones, so it coordinated with French regulator Commission Bancaire in handling the disposition of two French banks involved in the deal.

 

The French simply joined Goldman in putting up a solid front vs. anything short of a complete laundry delivery. Altogether 7 of the 8 banks involved refused concessions.

 

If Geithner had been negotiating on behalf of the people, he would’ve seized the opportunity for divide and conquer. Once UBS went first, they should’ve become the belle of the ball, implicitly first in line, which would’ve put pressure on the others to concede as well. (Needless to say, 98 on the dollar was absurdly high as well and should’ve been just the start of one heckuva massive haircut for these hippies.)

 

But this wasn’t possible, since:

 

3. Geithner believed on ideological grounds that his responsibility was to the “sanctity of contracts”. Never mind that (1) CDS as written by AIG were basically a scam, and the government has no responsibility to make whole the rich victims of scams, (2) in this case the “victims” were really co-conspirators, since CDS was a key part of the big bubble they were all blowing as hard as they could, (3) Geithner and the Fed’s first responsibility, their first contract overriding all others, was with the American people.

 

But as George Washington puts it:

 

Apparently, while Geithner was concerned with the sanctity of the CDS contracts (which – I would argue – were all based on fraudulent representations concerning how safe an investment they were), he didn’t care very much about the sanctity of the agreement of a government to do what is best for its people.

But actually, the New York Fed isn’t a government agency. The Fed itself maintains that:

While the Fed’s Washington-based Board of Governors is a federal agency subject to the Freedom of Information Act and other government rules, the New York Fed and other regional banks maintain they are separate institutions, owned by their member banks, and not subject to federal restrictions.
So really Geithner – as head of the private bank-owned and managed New York Fed – was simply serving his constituency: the giant New York money center banks. Geithner’s constituency never was the American public.

The giant banks were the creditors of the giant banks. Like two sock puppets putting on a big show of good cop / bad cop show, the New York Fed pretended that it was negotiating hard, but ended up making sure that the boys got their full cut.

 

After having been bailed out once already, Goldman turned around and said it would be illegal for the government to expect them not to demand a full bailout on their CDS position. It would be illegal for the Fed to say in effect “You should make concessions outside of bankruptcy court, because otherwise we’re not going to do anything, you’ll have to go into court with a bankrupt AIG and end up with little or nothing”.

 

(Of course, we never should’ve bailed out AIG in the first place. I would’ve let them collapse and blamed any reverberations on Goldman. Legally and politically.)

 

The Goldman argument was the argument Geithner wanted to hear anyway. As GS correctly assessed, Geithner and the Fed were absolutely committed to the bailout, every cent they could loot.

 

They really come off like the Keystone Kops:

 

The report also shed new light on the effect the rating agencies had on the way the Fed handled the A.I.G. emergency. The company’s run-on-the-bank disaster began with a major credit downgrade in September; the Fed quickly responded with an $85 billion loan.

But because the Fed moved so quickly, it recycled a set of lending terms that had previously been devised for A.I.G. by lenders in the private sector. The interest rate was too high, given A.I.G.’s distress, and so the loan that was supposed to rescue the insurer ended up putting it at risk of a second credit downgrade. That, in turn, could have set off a second run-on-the-bank episode.

The Fed got caught in a no-win situation, the report said. While it might have been able to win concessions by threatening to withdraw support from A.I.G., it also ran the risk that the credit agencies would take the threat too seriously and impose another catastrophic downgrade.

 

So the lesson of this sorry mess of a tale is something we should apply to our current situation. Barosky draws the right conclusion:

 

Mr. Barofsky said the facts also undermined the Fed’s arguments that banking secrecy was an essential part of bank stability.

“The default position, whenever government funds are deployed in a crisis to support markets or institutions, should be that the public is entitled to know what is being done with government funds,” he said.

 

The Fed is not a regulator and it never can be. By its very nature it wants to maximize finance sector private profit, and sees America simply as a cash cow. As Barofsky says, the Fed hates democracy, hates transparency, hates accountability. It is simply a rogue organization.

 

So whenever we assess any reform proposal, in addition to the minimum criterion that it breaks up the Too Big To Fails, we should also measure it according to the measure:

 

*Does it consider the Fed to be a viable regulator?

 

*Does it maintain existing Fed “authority”?

 

*Does it seek to add to that authority?

 

If the answers to these are Yes (and only Dodd’s proposal even gingerly suggests maybe the answer should be No), then it’s not real reform, but just another lie in the same tired good cop bad cop routine George referred to above.   

Extortion

“It would be a shame if any unintended consequences should befall you.”

 

The NYT’s op-ed page has a short piece by BusinessInsider’s John Carney once again laying out the standard threats and explaining how the people’s attempts to defend themselves against these gangsters are being punished. (I guess the Times thought it would be unseemly for their own editors to carry the water the way their business page regularly does, so they outsourced the blackmailing.)

 

Throughout Carney uses the term “unintended consequences” to describe the kneecapping tactics of the banksters.

 

He refers to Christopher Dodd’s proposal to move up the effective date for the credit card reform legislation enacted earlier this year.

 

Let’s start with the credit card rate freeze. The rising rates charged by issuing banks that inspired Mr. Dodd’s legislation are themselves the unintended consequence of an earlier attempt to assist the consumer. Back in May, Congress passed a law requiring banks to give customers a 45-day notification before raising rates. To give banks time to adjust to the new rules, Congress decided not to put that provision into effect until February.

So what happened next? Banks rushed to raise rates before the law takes effect. Many customers who may not have had their rates raised until 2010 — or perhaps not at all, if the economy continues to improve — found themselves paying higher rates even though they had not missed any payments. How could Mr. Dodd and his fellow lawmakers not realize that banks would pre-emptively raise rates?

 

So this wasn’t simple greed rushing to gobble up whatever crumbs it could before the floor got mopped. No, Congress forced them to do it. They had no choice.

 

So I guess if I tell a thief I’m going to have him arrested and he kills me, it’s my own fault. I made him do it.

 

And then here’s what’s always the underlying threat.

 

Mr. Dodd’s new proposal may also wind up dealing a serious blow to consumers — and the economy. If banks find themselves unable to raise rates, many will limit their risk by severely restricting consumer credit. Many people will find their credit cards canceled, and new customers will be turned away. This will come on top of an already tight consumer credit market: banks sent out 2.1 billion direct-mail credit card solicitations in the third quarter of 2006, according to the research firm Mintel; this year in the same quarter, they sent out 391 million. A further contraction in consumer credit could devastate our nascent recovery.

 

We know we don’t need these big banks for any real function, but as long as they’ve corrupted the government they’re going to get policy based on the ideology that we do need them. For as long as that condition holds they’ll be able to make these threats, and government and the media will cringe.

 

It’s just like when the infinitely obnoxious AIG (with an assist from the NYT’s Sorkin) threatened that unless its thugs got their bonuses, they’d refuse to clean up their CDS mess, and even take their knowledge of explosives elsewhere to use it as a weapon against the people.

 

Nice recovery you got going there. Shame if anything happened to it.

 

(Sometimes when I say I’d make a clean sweep of all these criminals people ask me what I’d charge them with. Well, they’re all guilty of extortion, fraud, and insider trading, for starters. So those would be my fallback equivalent of disorderly persons offenses while we got the real testimony.

 

Of course, as the Bear Stearns prosecutorial fumble shows, the law isn’t well set up to deal with crimes of these magnitude. Of course, that’s in large part because the law itself has long since been hijacked. So if the people really want their country back they’re going to have to be willing to be more intrepid than that kind of prosecution. At Nuremburg they had to create a new way.)

 

 

 

[I do agree with Carney on the housebuyer tax credit, though not for the same reasons. While we need stimulus, lots of it, and the right tax credits can be part of the mix, the whole package should be rationally planned, toward general socioeconomic reform.

 

But what are Obama’s two signature policies? Cash for Clunkers and this housing tax credit. Neither serves a rational or constructive purpose. Both are economically regressive (driving up prices for renters and used car buyers). Both are intended only to reflate the bubble and prop up zombie structures.

 

More broadly, since it’s the social engineering project of suburban sprawl and rendering the whole socioeconomy car-centric and enslaved to the car which got us into this whole energy and economic mess, it’s that model we need to move away from. So both of these policies are deeply reactionary.] 

Morality Play

The Nation‘s Katrina Vanden Heuvel recently took part in a formal debate arguing against the resolution, “Good Riddance to the Mainstream Media”.

 

Her opening statement (part of a winning effort) describes the much-tarnished but still needed qualifications of the MSM; how it is the only vehicle for consistent investigative reportage, for confronting power, exposing corruption, filing transparency lawsuits, and how the collapse of regional newspapers correlates with signs of civic degradation like lower voter turnouts. While the MSM is fatally flawed and economically unsustainable, it’s still the only thing partially fulfilling those roles. So until we can develop a replacement, we have to lament the financial decline of the MSM just as much as we deplore its ideological sellout.

 

The economic deterioration of the business is certainly dire. According to reports, as of September weekday sales of print newspapers were down 10% over the previous year’s already depleted number. Ad revenue was down 28% percent from 2008, which was itself down 16.6% from the previous year. Beleaguered papers like the San Francisco Chronicle, Dallas Morning news, NY Post, Boston Globe, and USA Today were down as much as 25.8%. The NYT’s weekday circulation went below one million for the first time since the 80s. Truly, “the two-decade erosion in newspaper circulation is looking more like an avalanche”.

 

In a vicious circle, as they cut back on content to save money, they lose more readers. (I can offer the personal anecdote that I stopped getting the Newark Star-Ledger (down 22.7%) for that reason. The old regional and local news value wasn’t there anymore. It was becoming more like an AP wire with a few New Jersey stories tacked on. Not to mention more and more frequent delivery SNAFUs.)

 

Vanden Heuvel mentions this in her statement:

 

[W]e’ve chronicled the msm’s corporate consolidation which –through the gutting of newsrooms in quest for ever higher profit margins–contributed to the journalistic crisis we confront today.

 

I would go further and say that the ideological capture I mentioned above is not only driven by this consolidation but contributes to the erosion of the audience, as the people increasingly realize how the MSM is only the flunkey of the power elites and tells only the story according to those elites.

 

Today’s (11/11) NYT business page has a bizarre specimen: “Under attack, Fed chairman studies politics”, by Edmund Andrews (of personal financial disaster fame). 

 

You have to see the fun in something like this to leaven the rage.

 

For months, he had warned — without anyone on Capitol Hill appearing to listen — that a seemingly innocuous bill to let Congress “audit” the Fed would gravely threaten the central bank’s independence.

 

Uh oh, there’s ominous foreshadowing. “Seemingly innocuous”; if only they’d listen to our brave, lonely hero’s warnings…

 

Voters had become suspicious and unnerved by the Fed because of its trillion-dollar efforts to bail out the financial system, Mr. Frank warned. If the Fed really wanted to survive the disgruntlement in both parties, he continued, Mr. Bernanke would have to step back and let him devise a compromise.

Reluctantly, the Fed chairman agreed to reduce his own visibility on the issue and let Mr. Frank take the lead.

 

Maybe it wasn’t literally a smoke-filled room (they’re all quite PC about that nowadays). But it’s still the age-old struggle of the wise mandarins against the stupid, insolent poltroons. The people get especially obnoxious when they become “voters” in a “democracy”. Kissinger would sympathize.

 

On one front, the Fed faces populist anger from both left-wing Democrats and right-wing Republicans about its power and secrecy.

 

Right. None of the criticism of the unaccountable, reckless, scofflaw Fed (from the Left, at least) is based on policy and democracy concerns. Gosh darn that soiled rag-wearing “populism”.

 

Mindful that Democrats now control the White House and Congress, Mr. Bernanke put up virtually no opposition to President Obama’s proposal for a new consumer agency that would take over the Fed’s authority over consumer lending issues. Similarly, he avoided a bruising turf battle by agreeing that the Fed would share responsibility with other regulators to monitor systemic financial risk.

 

This is a lie. The Fed has aggressively sought to protect and extend its turf throughout.

 

And if Bernanke didn’t know all along that Obama and Frank had his back on gutting the CFPA, so that he should just keep his mouth shut and let them handle the politics, he really is a political idiot in need of guidance.

 

Andrews goes on to describe how Bernanke protested against the Audit the Fed bill in “apocalyptic terms”, how critical Fed secrecy and autocracy are to the continued existence of civilization. It’s all the same terrorist language which has become all too familiar to us.

 

Directly contradicting what he said in the previous paragraph, Andrews also writes about how the “steely” Fed fought fiercely for its “role as undisputed overseer of financial institutions deemed ‘too big to fail'”.

 

In other words, in spite of himself Bernanke confirmed the need for the auditing bill. And for Frank to take him under his political tutelage.

 

What Mr. Bernanke insisted on, and what Mr. Frank vowed to prevent, was Congressional interference in Fed deliberations over monetary policy.

But whenever discussion got more specific, Fed officials insisted that monetary policy extended to many if not most of the Fed’s emergency credit programs.

Mr. Frank said he would “wall off” deliberations on basic monetary policy, and delay the release of information about the Fed’s financial operations to prevent traders from capitalizing on its moves.

Exactly what that means in practice remains unclear. Mr. Paul says he is delighted that his bill has gotten so far. But details matter, and Fed officials say they are quietly confident details will break their way.

 

It’s very clear what this means. They’re going to keep the Fed/Wall Street casino party going. With this puff piece Andrews is doing his part in the eternal struggle against the people’s rights and well-being.

 

Even where they weren’t self-selected ideologues in the first place, most business journalists are by now, pretty much of necessity, cheerleaders for the growth ideology, market fundamentalism, corporatist politics. The coverage becomes ever more corporate friendly, told from the point of view of the rich, right down to the most petty details and annoyances of their lives. The economy is represented as a bundle of metrics, leading indicators like “growth” and the various exchanges, which mostly measure how well antisocial parasites are collecting rents. Everyone in government, business, and MSM agrees, this is “the” economy.

 

Meanwhile the real economic measures which don’t look good (and have not since the 90s) are relegated to the ghetto of “lagging indicators”. This term still reflects the thousand-times-refuted-but-never-relinquished trickle down ideology.

 

When the lagging jobs indicator becomes too disastrous to dismiss, as it now has, with real unemployment at 17.5% and even the rigged anodyne U3 number over 10% (both of these at their highest in close to thirty years), the nabobs of positivity are left helpless. They can only gawk and stutter about how somehow the administration and Wall Street will figure out something.

 

So the MSM has been doing its best with the increasingly crappy material corporate fundamentalism hands them, and does the gratitude at least come through in the advertising rates? As I mentioned earlier, these continue to decline. Even where advertising volume is creeping back up, it’s mostly according to a cheaper ad run strategy, so MSM ad revenues are still moribund. How’s that “trickling down” for ya?

 

So all the MSM’s prostitution has availed them little. As they say, “the revolution devours its own children”.

 

What went wrong? Weren’t they serviceable villains enough?

 

Perhaps it’s not just the advertising model. Perhaps there’s a hopeful sign here. Perhaps the people are finally starting to see through this charade. Perhaps they’re coming to realize that the MSM is not telling our story, but the story of those who affilict us, and for those who afflict us, and telling it against us, in order to further hurt us.

 

Recently the NYT’s David Carr, one of Vanden Heuvel’s teammates at the debate, wrote of the malaise of the business press.

 

He discusses how, with the green shoots allegedly sprouting all over the place, the attitudes are getting bullish again. But what does this mean for the business press itself?

 

So you might expect the business press to be striking up the band and restocking the cigar cabinet. Instead, Forbes, a magazine that sells a beau idéal of capitalism, announced last week that it was cutting a quarter of its already decimated staff. The Wall Street Journal’s Boston bureau — historically a hothouse of game-changing business coverage — is being closed.

Fortune magazine had already cut back to 18 issues a year from 25 and this week will be whacking anew at staff along with other Time Inc. magazines. BusinessWeek was sold for parts to Bloomberg a few weeks ago.

So, while the business of business may be back, the business of covering it with heroic narratives and upbeat glossy spreads most certainly is not. And probably never will be.

 

Carr mentions the usual suspects, advertising, the shrinking pains of cost cutting and so on. But he ponders whether the fundamental premise has lost its mojo.

 

But it isn’t just that Cadillacs aren’t selling like they used to. It’s also that the people who made them, bought them and drove them seem far more mortal and less interesting than they did just a few years ago.

Business magazines used to relish explaining all the complex new financial instruments that Wall Street was using to pile up profits. But now it has become clear that the titans who were wielding those obscure tools had no idea what they were doing — even less an idea than the journalists in some cases.

And the fact that they needed billions and billions in taxpayer money to bail them out has left the former Masters of the Universe with all the social cachet of welfare recipients. In fact, people on welfare seem more deserving now that some of the rescued have come roaring back just in time for year-end bonuses.

 

They don’t make ’em like they used to. If this media too has to be star-driven, like all American media, they’re facing a real problem now that Americans are finally starting to wise up.

 

It was always stupid to idolize businessmen as if they were celebrity entertainers, but as long as Americans believed they were all getting richer, and believed in the Randian myth of the rugged, self-reliant capitalist, such idolatry could provide the basis for a wide press circulation. If that readership is now evaporating as fast as it should be, this most corporate of media may be in trouble.

 

It’s not that the public has lost its appetite for stories about handsome men in three-piece suits who clink whiskey glasses at the end of a long, not-so-hard day while talking smack about their female co-workers. But “Mad Men” pretty much sates that need. The businessman as Colossus is by now a nostalgic impulse…

But if the consequences are removed from the equation and the feds are there to cushion any downside, riding the upside seems less magical. Writers and editors who cover business now know that the jig is up, that those bespoke suits are put on one leg at a time by men that seem far less Olympian than they once did….

Business coverage has been, at its heart, aspirational, a brand promise that suggests that if you clip the right articles, internalize the right rhetoric, then you too will end up as one of the shiny, happy people striding boldly across the pages of magazines with names like Fortune, Money, Fast Company and Wired. But nobody is going to read, let alone aspire to, magazines called Middled, Outsourced, Left Behind and Clobbered. It’s as if American business has lost custody of its own story….

But people could be forgiven for not believing in business, or business news, the way they used to.

If a recovery is under way, most Average Joes are not buying in or benefiting so far. On Friday, the Commerce Department said consumer spending actually dropped in September, the first time it had gone down in five months, and the Dow buckled 2.5 percent at the end of trading last week. Consumers clearly lack confidence in the recovery, and, by extension, the people who are supposed to make it happen. And doubt doesn’t sell magazines.

 

In The Joyful Science Nietzsche made an interesting remark on the rise of socialism. He knew little about economics or politics (and cared less) but thought he could descry a spiritual and aesthetic factor.

 

Soldiers and leaders still have far better relationships with each other than workers and employers. So far at least, culture that rests on a military basis still towers above all so-called industrial culture: the latter in its present shape is altogether the most vulgar form of existence yet. Here one is at the mercy of brute need; one has to live and has to sell oneself, but one despises those who exploit this need and buy the worker. Oddly, submission to powerful, frightening, even terrible persons, like tyrants and generals, is not experienced as nearly so painful as is this submission to unknown and uninteresting persons, which is what all the luminaries of industry are.

What the workers see in the employer is usually only a cunning, bloodsucking dog of a man who speculates on all misery; and the employer’s name, shape, manner, and reputation are a matter of complete indifference to them. The manufacturers and entrepreneurs of business have been too deficient in all those forms and signs of nobility that alone make a person interesting. If the nobility of birth showed in their eyes and gestures, there might not be any socialism of the masses. For at bottom the masses are willing to submit to slavery of any kind, if only the higher-ups constantly legitimize themselves as higher, as born to command – by having noble manners. The most common man feels that nobility cannot be improvised and that one has to honor in it the fruit of long periods of time.

But the lack of higher manners and the notorious vulgarity of manufacturers with their ruddy, fat hands give him the idea that it is only accident and luck that have elevated one person above another. Well then, he reasons: let us try accident and luck! Let us throw the dice! And thus socialism is born.

 

While that may fall short of Marxian rigor, I think there is some truth to it. The people have always sought to find ways to idolize and romanticize their socioeconomic “betters”, if only to rationalize their own failure to rise up and assert themselves. But if the faltering business press is a different kind of leading indicator, perhaps this idolatry is no longer tenable, and a different sort of rational process is commencing.

 

Arendt, in Origins of Totalitarianism, described an interesting historical moment similar to our own.

 

The historian is in most such cases confronted with a very complex historical situation where he is almost at liberty, and that means at a loss, to isolate one factor as “the spirit of the time”. There are, however, a few helpful general rules. Foremost among them for our purpose is Tocqueville’s great discovery (in L’Ancien Regime et la Revolution) of the motives for the violent hatred felt by the French masses for the aristocracy at the outbreak of the Revolution – an outbreak which stimulated Burke to remark that the revolution was more concerned with “the condition of a gentleman” than with the institution of a king.

According to Tocqueville, the French people hated aristocrats about to lose their power more than it had ever hated them before, precisely because their rapid loss of real power was not accompanied by any appreciable decline in their fortunes. As long as the aristocracy held vast powers of jurisdiction, they were not only tolerated but respected. When noblemen lost their privileges, among others the privilege to exploit and oppress, the people felt them to be parasites, without any real function in the rule of the country. In other words, neither oppression nor exploitation as such is ever the main cause for resentment; wealth without visible function is much more intolerable because nobody can understand why it should be tolerated.

 

Substitute the lost belief in the economic and social function of Wall Street and the rackets, which we now know to be 100% fraudulent, destructive, and parasitic, for the lost political prerogatives of the Ancien Regime, and we have the same dynamic. Tremendous, and utterly worthless, and purely malevolent, wealth concentration.

 

Lucretius felt the change of the world in his time, the great republic riding to the height

Whence every road leads downward; Plato in his time watched Athens

Dance the down path. The future is a misted landscape, no man sees clearly, but at cyclic turns

There is a change felt in the rhythm of events, as when an exhausted horse

Falters and recovers, then the rhythm of the running hoofbeats is changed: he will run miles yet,

But he must fall….

 

Robinson Jeffers, Prescription of Painful Ends