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Secrets and Lies of the Wall Street Bailout January 9, 2013

Posted by rogerhollander in Economic Crisis.
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Roger’s note: One does not have to have a Ph.D. in Economics to understand the words “lies” and “secrets.”  Matt Taibbi is one of the finest journalists writing today, and he painstakingly outlines the fraud perpetuated on the American people by the Republicrat government in collusion with the Wall Street financial institutions.

 

Published on Tuesday, January 8, 2013 by Rolling Stone

The federal rescue of Wall Street didn’t fix the economy – it created a permanent bailout state based on a Ponzi-like confidence scheme. And the worst may be yet to come

by Matt Taibbi

It has been four long winters since the federal government, in the hulking, shaven-skulled, Alien Nation-esque form of then-Treasury Secretary Hank Paulson, committed $700 billion in taxpayer money to rescue Wall Street from its own chicanery and greed. To listen to the bankers and their allies in Washington tell it, you’d think the bailout was the best thing to hit the American economy since the invention of the assembly line. Not only did it prevent another Great Depression, we’ve been told, but the money has all been paid back, and the government even made a profit. No harm, no foul – right?

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(Illustration by Victor Juhasz)

Wrong.

It was all a lie – one of the biggest and most elaborate falsehoods ever sold to the American people. We were told that the taxpayer was stepping in – only temporarily, mind you – to prop up the economy and save the world from financial catastrophe. What we actually ended up doing was the exact opposite: committing American taxpayers to permanent, blind support of an ungovernable, unregulatable, hyperconcentrated new financial system that exacerbates the greed and inequality that caused the crash, and forces Wall Street banks like Goldman Sachs and Citigroup to increase risk rather than reduce it. The result is one of those deals where one wrong decision early on blossoms into a lush nightmare of unintended consequences. We thought we were just letting a friend crash at the house for a few days; we ended up with a family of hillbillies who moved in forever, sleeping nine to a bed and building a meth lab on the front lawn.

How Wall Street Killed Financial Reform

But the most appalling part is the lying. The public has been lied to so shamelessly and so often in the course of the past four years that the failure to tell the truth to the general populace has become a kind of baked-in, official feature of the financial rescue. Money wasn’t the only thing the government gave Wall Street – it also conferred the right to hide the truth from the rest of us. And it was all done in the name of helping regular people and creating jobs. “It is,” says former bailout Inspector General Neil Barofsky, “the ultimate bait-and-switch.”

The bailout deceptions came early, late and in between. There were lies told in the first moments of their inception, and others still being told four years later. The lies, in fact, were the most important mechanisms of the bailout. The only reason investors haven’t run screaming from an obviously corrupt financial marketplace is because the government has gone to such extraordinary lengths to sell the narrative that the problems of 2008 have been fixed. Investors may not actually believe the lie, but they are impressed by how totally committed the government has been, from the very beginning, to selling it.

They Lied to Pass the Bailout

Today what few remember about the bailouts is that we had to approve them. It wasn’t like Paulson could just go out and unilaterally commit trillions of public dollars to rescue Goldman Sachs and Citigroup from their own stupidity and bad management (although the government ended up doing just that, later on). Much as with a declaration of war, a similarly extreme and expensive commitment of public resources, Paulson needed at least a film of congressional approval. And much like the Iraq War resolution, which was only secured after George W. Bush ludicrously warned that Saddam was planning to send drones to spray poison over New York City, the bailouts were pushed through Congress with a series of threats and promises that ranged from the merely ridiculous to the outright deceptive. At one meeting to discuss the original bailout bill – at 11 a.m. on September 18th, 2008 – Paulson actually told members of Congress that $5.5 trillion in wealth would disappear by 2 p.m. that day unless the government took immediate action, and that the world economy would collapse “within 24 hours.”

To be fair, Paulson started out by trying to tell the truth in his own ham-headed, narcissistic way. His first TARP proposal was a three-page absurdity pulled straight from a Beavis and Butt-Head episode – it was basically Paulson saying, “Can you, like, give me some money?” Sen. Sherrod Brown, a Democrat from Ohio, remembers a call with Paulson and Federal Reserve chairman Ben Bernanke. “We need $700 billion,” they told Brown, “and we need it in three days.” What’s more, the plan stipulated, Paulson could spend the money however he pleased, without review “by any court of law or any administrative agency.”

The White House and leaders of both parties actually agreed to this preposterous document, but it died in the House when 95 Democrats lined up against it. For an all-too-rare moment during the Bush administration, something resembling sanity prevailed in Washington.

So Paulson came up with a more convincing lie. On paper, the Emergency Economic Stabilization Act of 2008 was simple: Treasury would buy $700 billion of troubled mortgages from the banks and then modify them to help struggling homeowners. Section 109 of the act, in fact, specifically empowered the Treasury secretary to “facilitate loan modifications to prevent avoidable foreclosures.” With that promise on the table, wary Democrats finally approved the bailout on October 3rd, 2008. “That provision,” says Barofsky, “is what got the bill passed.”

But within days of passage, the Fed and the Treasury unilaterally decided to abandon the planned purchase of toxic assets in favor of direct injections of billions in cash into companies like Goldman and Citigroup. Overnight, Section 109 was unceremoniously ditched, and what was pitched as a bailout of both banks and homeowners instantly became a bank-only operation – marking the first in a long series of moves in which bailout officials either casually ignored or openly defied their own promises with regard to TARP.

Congress was furious. “We’ve been lied to,” fumed Rep. David Scott, a Democrat from Georgia. Rep. Elijah Cummings, a Democrat from Maryland, raged at transparently douchey TARP administrator (and Goldman banker) Neel Kashkari, calling him a “chump” for the banks. And the anger was bipartisan: Republican senators David Vitter of Louisiana and James Inhofe of Oklahoma were so mad about the unilateral changes and lack of oversight that they sponsored a bill in January 2009 to cancel the remaining $350 billion of TARP.

So what did bailout officials do? They put together a proposal full of even bigger deceptions to get it past Congress a second time. That process began almost exactly four years ago – on January 12th and 15th, 2009 – when Larry Summers, the senior economic adviser to President-elect Barack Obama, sent a pair of letters to Congress. The pudgy, stubby­fingered former World Bank economist, who had been forced out as Harvard president for suggesting that women lack a natural aptitude for math and science, begged legislators to reject Vitter’s bill and leave TARP alone.

In the letters, Summers laid out a five-point plan in which the bailout was pitched as a kind of giant populist program to help ordinary Americans. Obama, Summers vowed, would use the money to stimulate bank lending to put people back to work. He even went so far as to say that banks would be denied funding unless they agreed to “increase lending above baseline levels.” He promised that “tough and transparent conditions” would be imposed on bailout recipients, who would not be allowed to use bailout funds toward “enriching shareholders or executives.” As in the original TARP bill, he pledged that bailout money would be used to aid homeowners in foreclosure. And lastly, he promised that the bailouts would be temporary – with a “plan for exit of government intervention” implemented “as quickly as possible.”

The reassurances worked. Once again, TARP survived in Congress – and once again, the bailouts were greenlighted with the aid of Democrats who fell for the old “it’ll help ordinary people” sales pitch. “I feel like they’ve given me a lot of commitment on the housing front,” explained Sen. Mark Begich, a Democrat from Alaska.

But in the end, almost nothing Summers promised actually materialized. A small slice of TARP was earmarked for foreclosure relief, but the resultant aid programs for homeowners turned out to be riddled with problems, for the perfectly logical reason that none of the bailout’s architects gave a shit about them. They were drawn up practically overnight and rushed out the door for purely political reasons – to trick Congress into handing over tons of instant cash for Wall Street, with no strings attached. “Without those assurances, the level of opposition would have remained the same,” says Rep. Raúl Grijalva, a leading progressive who voted against TARP. The promise of housing aid, in particular, turned out to be a “paper tiger.”

HAMP, the signature program to aid poor homeowners, was announced by President Obama on February 18th, 2009. The move inspired CNBC commentator Rick Santelli to go berserk the next day – the infamous viral rant that essentially birthed the Tea Party. Reacting to the news that Obama was planning to use bailout funds to help poor and (presumably) minority homeowners facing foreclosure, Santelli fumed that the president wanted to “subsidize the losers’ mortgages” when he should “reward people that could carry the water, instead of drink the water.” The tirade against “water drinkers” led to the sort of spontaneous nationwide protests one might have expected months before, when we essentially gave a taxpayer-funded blank check to Gamblers Anonymous addicts, the millionaire and billionaire class.

In fact, the amount of money that eventually got spent on homeowner aid now stands as a kind of grotesque joke compared to the Himalayan mountain range of cash that got moved onto the balance sheets of the big banks more or less instantly in the first months of the bailouts. At the start, $50 billion of TARP funds were earmarked for HAMP. In 2010, the size of the program was cut to $30 billion. As of November of last year, a mere $4 billion total has been spent for loan modifications and other homeowner aid.

In short, the bailout program designed to help those lazy, job-averse, “water-drinking” minority homeowners – the one that gave birth to the Tea Party – turns out to have comprised about one percent of total TARP spending. “It’s amazing,” says Paul Kiel, who monitors bailout spending for ProPublica. “It’s probably one of the biggest failures of the Obama administration.”

The failure of HAMP underscores another damning truth – that the Bush-Obama bailout was as purely bipartisan a program as we’ve had. Imagine Obama retaining Don Rumsfeld as defense secretary and still digging for WMDs in the Iraqi desert four years after his election: That’s what it was like when he left Tim Geithner, one of the chief architects of Bush’s bailout, in command of the no-strings­attached rescue four years after Bush left office.

Yet Obama’s HAMP program, as lame as it turned out to be, still stands out as one of the few pre-bailout promises that was even partially fulfilled. Virtually every other promise Summers made in his letters turned out to be total bullshit. And that includes maybe the most important promise of all – the pledge to use the bailout money to put people back to work.

They Lied About Lending

Once TARP passed, the government quickly began loaning out billions to some 500 banks that it deemed “healthy” and “viable.” A few were cash loans, repayable at five percent within the first five years; other deals came due when a bank stock hit a predetermined price. As long as banks held TARP money, they were barred from paying out big cash bonuses to top executives.

But even before Summers promised Congress that banks would be required to increase lending as a condition for receiving bailout funds, officials had already decided not to even ask the banks to use the money to increase lending. In fact, they’d decided not to even ask banks to monitor what they did with the bailout money. Barofsky, the TARP inspector, asked Treasury to include a requirement forcing recipients to explain what they did with the taxpayer money. He was stunned when TARP administrator Kashkari rejected his proposal, telling him lenders would walk away from the program if they had to deal with too many conditions. “The banks won’t participate,” Kashkari said.

Barofsky, a former high-level drug prosecutor who was one of the only bailout officials who didn’t come from Wall Street, didn’t buy that cash-desperate banks would somehow turn down billions in aid. “It was like they were trembling with fear that the banks wouldn’t take the money,” he says. “I never found that terribly convincing.”

In the end, there was no lending requirement attached to any aspect of the bailout, and there never would be. Banks used their hundreds of billions for almost every purpose under the sun – everything, that is, but lending to the homeowners and small businesses and cities they had destroyed. And one of the most disgusting uses they found for all their billions in free government money was to help them earn even more free government money.

To guarantee their soundness, all major banks are required to keep a certain amount of reserve cash at the Fed. In years past, that money didn’t earn interest, for the logical reason that banks shouldn’t get paid to stay solvent. But in 2006 – arguing that banks were losing profits on cash parked at the Fed – regulators agreed to make small interest payments on the money. The move wasn’t set to go into effect until 2011, but when the crash hit, a section was written into TARP that launched the interest payments in October 2008.

In theory, there should never be much money in such reserve accounts, because any halfway-competent bank could make far more money lending the cash out than parking it at the Fed, where it earns a measly quarter of a percent. In August 2008, before the bailout began, there were just $2 billion in excess reserves at the Fed. But by that October, the number had ballooned to $267 billion – and by January 2009, it had grown to $843 billion. That means there was suddenly more money sitting uselessly in Fed accounts than Congress had approved for either the TARP bailout or the much-loathed Obama stimulus. Instead of lending their new cash to struggling homeowners and small businesses, as Summers had promised, the banks were literally sitting on it.

Today, excess reserves at the Fed total an astonishing $1.4 trillion.”The money is just doing nothing,” says Nomi Prins, a former Goldman executive who has spent years monitoring the distribution of bailout money.

Nothing, that is, except earning a few crumbs of risk-free interest for the banks. Prins estimates that the annual haul in interest­ on Fed reserves is about $3.6 billion – a relatively tiny subsidy in the scheme of things, but one that, ironically, just about matches the total amount of bailout money spent on aid to homeowners. Put another way, banks are getting paid about as much every year for not lending money as 1 million Americans received for mortgage modifications and other housing aid in the whole of the past four years.

Moreover, instead of using the bailout money as promised – to jump-start the economy – Wall Street used the funds to make the economy more dangerous. From the start, taxpayer money was used to subsidize a string of finance mergers, from the Chase-Bear Stearns deal to the Wells Fargo­Wachovia merger to Bank of America’s acquisition of Merrill Lynch. Aided by bailout funds, being Too Big to Fail was suddenly Too Good to Pass Up.

Other banks found more creative uses for bailout money. In October 2010, Obama signed a new bailout bill creating a program called the Small Business Lending Fund, in which firms with fewer than $10 billion in assets could apply to share in a pool of $4 billion in public money. As it turned out, however, about a third of the 332 companies that took part in the program used at least some of the money to repay their original TARP loans. Small banks that still owed TARP money essentially took out cheaper loans from the government to repay their more expensive TARP loans – a move that conveniently exempted them from the limits on executive bonuses mandated by the bailout. All told, studies show, $2.2 billion of the $4 billion ended up being spent not on small-business loans, but on TARP repayment. “It’s a bit of a shell game,” admitted John Schmidt, chief operating officer of Iowa-based Heartland Financial, which took $81.7 million from the SBLF and used every penny of it to repay TARP.

Using small-business funds to pay down their own debts, parking huge amounts of cash at the Fed in the midst of a stalled economy – it’s all just evidence of what most Americans know instinctively: that the bailouts didn’t result in much new business lending. If anything, the bailouts actually hindered lending, as banks became more like house pets that grow fat and lazy on two guaranteed meals a day than wild animals that have to go out into the jungle and hunt for opportunities in order to eat. The Fed’s own analysis bears this out: In the first three months of the bailout, as taxpayer billions poured in, TARP recipients slowed down lending at a rate more than double that of banks that didn’t receive TARP funds. The biggest drop in lending – 3.1 percent – came from the biggest bailout recipient, Citigroup. A year later, the inspector general for the bailout found that lending among the nine biggest TARP recipients “did not, in fact, increase.” The bailout didn’t flood the banking system with billions in loans for small businesses, as promised. It just flooded the banking system with billions for the banks.

They Lied About the Health of the Banks

The main reason banks didn’t lend out bailout funds is actually pretty simple: Many of them needed the money just to survive. Which leads to another of the bailout’s broken promises – that taxpayer money would only be handed out to “viable” banks.

Soon after TARP passed, Paulson and other officials announced the guidelines for their unilaterally changed bailout plan. Congress had approved $700 billion to buy up toxic mortgages, but $250 billion of the money was now shifted to direct capital injections for banks. (Although Paulson claimed at the time that handing money directly to the banks was a faster way to restore market confidence than lending it to homeowners, he later confessed that he had been contemplating the direct-cash-injection plan even before the vote.) This new let’s-just-fork-over-cash portion of the bailout was called the Capital Purchase Program. Under the CPP, nine of America’s largest banks – including Citi, Wells Fargo, Goldman, Morgan Stanley, Bank of America, State Street and Bank of New York Mellon – received $125 billion, or half of the funds being doled out. Since those nine firms accounted for 75 percent of all assets held in America’s banks – $11 trillion – it made sense they would get the lion’s share of the money. But in announcing the CPP, Paulson and Co. promised that they would only be stuffing cash into “healthy and viable” banks. This, at the core, was the entire justification for the bailout: That the huge infusion of taxpayer cash would not be used to rescue individual banks, but to kick-start the economy as a whole by helping healthy banks start lending again.

This announcement marked the beginning of the legend that certain Wall Street banks only took the bailout money because they were forced to – they didn’t need all those billions, you understand, they just did it for the good of the country. “We did not, at that point, need TARP,” Chase chief Jamie Dimon later claimed, insisting that he only took the money “because we were asked to by the secretary of Treasury.” Goldman chief Lloyd Blankfein similarly claimed that his bank never needed the money, and that he wouldn’t have taken it if he’d known it was “this pregnant with potential for backlash.” A joint statement by Paulson, Bernanke and FDIC chief Sheila Bair praised the nine leading banks as “healthy institutions” that were taking the cash only to “enhance the overall performance of the U.S. economy.”

But right after the bailouts began, soon-to-be Treasury Secretary Tim Geithner admitted to Barofsky, the inspector general, that he and his cohorts had picked the first nine bailout recipients because of their size, without bothering to assess their health and viability. Paulson, meanwhile, later admitted that he had serious concerns about at least one of the nine firms he had publicly pronounced healthy. And in November 2009, Bernanke gave a closed-door interview to the Financial Crisis Inquiry Commission, the body charged with investigating the causes of the economic meltdown, in which he admitted that 12 of the 13 most prominent financial companies in America were on the brink of failure during the time of the initial bailouts.

On the inside, at least, almost everyone connected with the bailout knew that the top banks were in deep trouble. “It became obvious pretty much as soon as I took the job that these companies weren’t really healthy and viable,” says Barofsky, who stepped down as TARP inspector in 2011.

This early episode would prove to be a crucial moment in the history of the bailout. It set the precedent of the government allowing unhealthy banks to not only call themselves healthy, but to get the government to endorse their claims. Projecting an image of soundness was, to the government, more important than disclosing the truth. Officials like Geithner and Paulson seemed to genuinely believe that the market’s fears about corruption in the banking system was a bigger problem than the corruption itself. Time and again, they justified TARP as a move needed to “bolster confidence” in the system – and a key to that effort was keeping the banks’ insolvency a secret. In doing so, they created a bizarre new two-tiered financial market, divided between those who knew the truth about how bad things were and those who did not.

A month or so after the bailout team called the top nine banks “healthy,” it became clear that the biggest recipient, Citigroup, had actually flat-lined on the ER table. Only weeks after Paulson and Co. gave the firm $25 billion in TARP funds, Citi – which was in the midst of posting a quarterly loss of more than $17 billion – came back begging for more. In November 2008, Citi received another $20 billion in cash and more than $300 billion in guarantees.

What’s most amazing about this isn’t that Citi got so much money, but that government-endorsed, fraudulent health ratings magically became part of its bailout. The chief financial regulators – the Fed, the FDIC and the Office of the Comptroller of the Currency – use a ratings system called CAMELS to measure the fitness of institutions. CAMELS stands for Capital, Assets, Management, Earnings, Liquidity and Sensitivity to risk, and it rates firms from one to five, with one being the best and five the crappiest. In the heat of the crisis, just as Citi was receiving the second of what would turn out to be three massive federal bailouts, the bank inexplicably enjoyed a three rating – the financial equivalent of a passing grade. In her book, Bull by the Horns, then-FDIC chief Sheila Bair recounts expressing astonishment to OCC head John Dugan as to why “Citi rated as a CAMELS 3 when it was on the brink of failure.” Dugan essentially answered that “since the government planned on bailing Citi out, the OCC did not plan to change its supervisory rating.” Similarly, the FDIC ended up granting a “systemic risk exception” to Citi, allowing it access to FDIC-bailout help even though the agency knew the bank was on the verge of collapse.

The sweeping impact of these crucial decisions has never been fully appreciated. In the years preceding the bailouts, banks like Citi had been perpetuating a kind of fraud upon the public by pretending to be far healthier than they really were. In some cases, the fraud was outright, as in the case of Lehman Brothers, which was using an arcane accounting trick to book tens of billions of loans as revenues each quarter, making it look like it had more cash than it really did. In other cases, the fraud was more indirect, as in the case of Citi, which in 2007 paid out the third-highest dividend in America – $10.7 billion – despite the fact that it had lost $9.8 billion in the fourth quarter of that year alone. The whole financial sector, in fact, had taken on Ponzi-like characteristics, as many banks were hugely dependent on a continual influx of new money from things like sales of subprime mortgages to cover up massive future liabilities from toxic investments that, sooner or later, were going to come to the surface.

Now, instead of using the bailouts as a clear-the-air moment, the government decided to double down on such fraud, awarding healthy ratings to these failing banks and even twisting its numerical audits and assessments to fit the cooked-up narrative. A major component of the original TARP bailout was a promise to ensure “full and accurate accounting” by conducting regular­ “stress tests” of the bailout recipients. When Geithner announced his stress-test plan in February 2009, a reporter instantly blasted him with an obvious and damning question: Doesn’t the fact that you have to conduct these tests prove that bank regulators, who should already know plenty about banks’ solvency, actually have no idea who is solvent and who isn’t?

The government did wind up conducting regular stress tests of all the major bailout recipients, but the methodology proved to be such an obvious joke that it was even lampooned on Saturday Night Live. (In the skit, Geithner abandons a planned numerical score system because it would unfairly penalize bankers who were “not good at banking.”) In 2009, just after the first round of tests was released, it came out that the Fed had allowed banks to literally rejigger the numbers to make their bottom lines look better. When the Fed found Bank of America had a $50 billion capital hole, for instance, the bank persuaded examiners to cut that number by more than $15 billion because of what it said were “errors made by examiners in the analysis.” Citigroup got its number slashed from $35 billion to $5.5 billion when the bank pleaded with the Fed to give it credit for “pending transactions.”

Such meaningless parodies of oversight continue to this day. Earlier this year, Regions Financial Corp. – a company that had failed to pay back $3.5 billion in TARP loans – passed its stress test. A subsequent analysis by Bloomberg View found that Regions was effectively $525 million in the red. Nonetheless, the bank’s CEO proclaimed that the stress test “demonstrates the strength of our company.” Shortly after the test was concluded, the bank issued $900 million in stock and said it planned on using the cash to pay back some of the money it had borrowed under TARP.

This episode underscores a key feature of the bailout: the government’s decision to use lies as a form of monetary aid. State hands over taxpayer money to functionally insolvent bank; state gives regulatory thumbs up to said bank; bank uses that thumbs up to sell stock; bank pays cash back to state. What’s critical here is not that investors actually buy the Fed’s bullshit accounting – all they have to do is believe the government will backstop Regions either way, healthy or not. “Clearly, the Fed wanted it to attract new investors,” observed Bloomberg, “and those who put fresh capital into Regions this week believe the government won’t let it die.”

Through behavior like this, the government has turned the entire financial system into a kind of vast confidence game – a Ponzi-like scam in which the value of just about everything in the system is inflated because of the widespread belief that the government will step in to prevent losses. Clearly, a government that’s already in debt over its eyes for the next million years does not have enough capital on hand to rescue every Citigroup or Regions Bank in the land should they all go bust tomorrow. But the market is behaving as if Daddy will step in to once again pay the rent the next time any or all of these kids sets the couch on fire and skips out on his security deposit. Just like an actual Ponzi scheme, it works only as long as they don’t have to make good on all the promises they’ve made. They’re building an economy based not on real accounting and real numbers, but on belief. And while the signs of growth and recovery in this new faith-based economy may be fake, one aspect of the bailout has been consistently concrete: the broken promises over executive pay.

They Lied About Bonuses

hat executive bonuses on Wall Street were a political hot potato for the bailout’s architects was obvious from the start. That’s why Summers, in saving the bailout from the ire of Congress, vowed to “limit executive compensation” and devote public money to prevent another financial crisis. And it’s true, TARP did bar recipients from a whole range of exorbitant pay practices, which is one reason the biggest banks, like Goldman Sachs, worked so quickly to repay their TARP loans.

But there were all sorts of ways around the restrictions. Banks could apply to the Fed and other regulators for waivers, which were often approved (one senior FDIC official tells me he recommended denying “golden parachute” payments to Citigroup officials, only to see them approved by superiors). They could get bailouts through programs other than TARP that did not place limits on bonuses. Or they could simply pay bonuses not prohibited under TARP. In one of the worst episodes, the notorious lenders Fannie Mae and Freddie Mac paid out more than $200 million in bonuses­ between 2008 and 2010, even though the firms (a) lost more than $100 billion in 2008 alone, and (b) required nearly $400 billion in federal assistance during the bailout period.

Even worse was the incredible episode in which bailout recipient AIG paid more than $1 million each to 73 employees of AIG Financial Products, the tiny unit widely blamed for having destroyed the insurance giant (and perhaps even triggered the whole crisis) with its reckless issuance of nearly half a trillion dollars in toxic credit-default swaps. The “retention bonuses,” paid after the bailout, went to 11 employees who no longer worked for AIG.

But all of these “exceptions” to the bonus restrictions are far less infuriating, it turns out, than the rule itself. TARP did indeed bar big cash-bonus payouts by firms that still owed money to the government. But those firms were allowed to issue extra compensation to executives in the form of long-term restricted stock. An independent research firm asked to analyze the stock options for The New York Times found that the top five executives at each of the 18 biggest bailout recipients received a total of $142 million in stocks and options. That’s plenty of money all by itself – but thanks in large part to the government’s overt display of support for those firms, the value of those options has soared to $457 million, an average of $4 million per executive.

In other words, we didn’t just allow banks theoretically barred from paying bonuses to pay bonuses. We actually allowed them to pay bigger bonuses than they otherwise could have. Instead of forcing the firms to reward top executives in cash, we allowed them to pay in depressed stock, the value of which we then inflated due to the government’s implicit endorsement of those firms.

All of which leads us to the last and most important deception of the bailouts:

They Lied About the Bailout Being Temporary

The bailout ended up being much bigger than anyone expected, expanded far beyond TARP to include more obscure (and in some cases far larger) programs with names like TALF, TAF, PPIP and TLGP. What’s more, some parts of the bailout were designed to extend far into the future. Companies like AIG, GM and Citigroup, for instance, were given tens of billions of deferred tax assets – allowing them to carry losses from 2008 forward to offset future profits and keep future tax bills down. Official estimates of the bailout’s costs do not include such ongoing giveaways. “This is stuff that’s never going to appear on any report,” says Barofsky.

Citigroup, all by itself, boasts more than $50 billion in deferred tax credits – which is how the firm managed to pay less in taxes in 2011 (it actually received a $144 million credit) than it paid in compensation that year to its since-ousted dingbat CEO, Vikram Pandit (who pocketed $14.9 million). The bailout, in short, enabled the very banks and financial institutions that cratered the global economy to write off the losses from their toxic deals for years to come – further depriving the government of much-needed tax revenues it could have used to help homeowners and small businesses who were screwed over by the banks in the first place.

Even worse, the $700 billion in TARP loans ended up being dwarfed by more than $7.7 trillion in secret emergency lending that the Fed awarded to Wall Street – loans that were only disclosed to the public after Congress forced an extraordinary one-time audit of the Federal Reserve. The extent of this “secret bailout” didn’t come out until November 2011, when Bloomberg Markets, which went to court to win the right to publish the data, detailed how the country’s biggest firms secretly received trillions in near-free money throughout the crisis.

Goldman Sachs, which had made such a big show of being reluctant about accepting $10 billion in TARP money, was quick to cash in on the secret loans being offered by the Fed. By the end of 2008, Goldman had snarfed up $34 billion in federal loans – and it was paying an interest rate of as low as just 0.01 percent for the huge cash infusion. Yet that funding was never disclosed to shareholders or taxpayers, a fact Goldman confirms. “We did not disclose the amount of our participation in the two programs you identify,” says Goldman spokesman Michael Duvally.

Goldman CEO Blankfein later dismissed the importance of the loans, telling the Financial Crisis Inquiry Commission that the bank wasn’t “relying on those mechanisms.” But in his book, Bailout, Barofsky says that Paulson told him that he believed Morgan Stanley was “just days” from collapse before government intervention, while Bernanke later admitted that Goldman would have been the next to fall.

Meanwhile, at the same moment that leading banks were taking trillions in secret loans from the Fed, top officials at those firms were buying up stock in their companies, privy to insider info that was not available to the public at large. Stephen Friedman, a Goldman director who was also chairman of the New York Fed, bought more than $4 million of Goldman stock over a five-week period in December 2008 and January 2009 – years before the extent of the firm’s lifeline from the Fed was made public. Citigroup CEO Vikram Pandit bought nearly $7 million in Citi stock in November 2008, just as his firm was secretly taking out $99.5 billion in Fed loans. Jamie Dimon bought more than $11 million in Chase stock in early 2009, at a time when his firm was receiving as much as $60 billion in secret Fed loans. When asked by Rolling Stone, Chase could not point to any disclosure of the bank’s borrowing from the Fed until more than a year later, when Dimon wrote about it in a letter to shareholders in March 2010.

The stock purchases by America’s top bankers raise serious questions of insider trading. Two former high-ranking financial regulators tell Rolling Stone that the secret loans were likely subject to a 1989 guideline, issued by the Securities and Exchange Commission in the heat of the savings and loan crisis, which said that financial institutions should disclose the “nature, amounts and effects” of any government aid. At the end of 2011, in fact, the SEC sent letters to Citigroup, Chase, Goldman Sachs, Bank of America and Wells Fargo asking them why they hadn’t fully disclosed their secret borrowing. All five megabanks essentially replied, to varying degrees of absurdity, that their massive borrowing from the Fed was not “material,” or that the piecemeal disclosure they had engaged in was adequate. Never mind that the law says investors have to be informed right away if CEOs like Dimon and Pandit decide to give themselves a $10,000 raise. According to the banks, it’s none of your business if those same CEOs are making use of a secret $50 billion charge card from the Fed.

The implications here go far beyond the question of whether Dimon and Co. committed insider trading by buying and selling stock while they had access to material nonpublic information about the bailouts. The broader and more pressing concern is the clear implication that by failing to act, federal regulators­ have tacitly approved the nondisclosure. Instead of trusting the markets to do the right thing when provided with accurate information, the government has instead channeled Jack Nicholson – and decided that the public just can’t handle the truth.

All of this – the willingness to call dying banks healthy, the sham stress tests, the failure to enforce bonus rules, the seeming indifference to public disclosure, not to mention the shocking­ lack of criminal investigations into fraud committed by bailout recipients before the crash – comprised the largest and most valuable bailout of all. Brick by brick, statement by reassuring statement, bailout officials have spent years building the government’s great Implicit Guarantee to the biggest companies on Wall Street: We will be there for you, always, no matter how much you screw up. We will lie for you and let you get away with just about anything. We will make this ongoing bailout a pervasive and permanent part of the financial system. And most important of all, we will publicly commit to this policy, being so obvious about it that the markets will be able to put an exact price tag on the value of our preferential treatment.

The first independent study that attempted to put a numerical value on the Implicit Guarantee popped up about a year after the crash, in September 2009, when Dean Baker and Travis McArthur of the Center for Economic and Policy Research published a paper called “The Value of the ‘Too Big to Fail’ Big Bank Subsidy.” Baker and McArthur found that prior to the last quarter of 2007, just before the start of the crisis, financial firms with $100 billion or more in assets were paying on average about 0.29 percent less to borrow money than smaller firms.

By the second quarter of 2009, however, once the bailouts were in full swing, that spread had widened to 0.78 percent. The conclusion was simple: Lenders were about a half a point more willing to lend to a bank with implied government backing – even a proven-stupid bank – than they were to lend to companies who “must borrow based on their own credit worthiness.” The economists estimated that the lending gap amounted to an annual subsidy of $34 billion a year to the nation’s 18 biggest banks.

Today the borrowing advantage of a big bank remains almost exactly what it was three years ago – about 50 basis points, or half a percent. “These megabanks still receive subsidies in the sense that they can borrow on the capital markets at a discount rate of 50 or 70 points because of the implicit view that these banks are Too Big to Fail,” says Sen. Brown.

Why does the market believe that? Because the officials who administered the bailouts made that point explicitly, over and over again. When Geithner announced the implementation of the stress tests in 2009, for instance, he declared that banks who didn’t have enough money to pass the test could get it from the government. “We’re going to help this process by providing a new program of capital support for those institutions that need it,” Geithner said. The message, says Barofsky, was clear: “If the banks cannot raise capital, we will do it for them.” It was an Implicit Guarantee that the banks would not be allowed to fail – a point that Geithner and other officials repeatedly stressed over the years. “The markets took all those little comments by Geithner as a clue that the government is looking out for them,” says Baker. That psychological signaling, he concludes, is responsible for the crucial half-point borrowing spread.

The inherent advantage of bigger banks – the permanent, ongoing bailout they are still receiving from the government – has led to a host of gruesome consequences. All the big banks have paid back their TARP loans, while more than 300 smaller firms are still struggling to repay their bailout debts. Even worse, the big banks, instead of breaking down into manageable parts and becoming more efficient, have grown even bigger and more unmanageable, making the economy far more concentrated and dangerous than it was before. America’s six largest banks – Bank of America, JP Morgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley – now have a combined 14,420 subsidiaries, making them so big as to be effectively beyond regulation. A recent study by the Kansas City Fed found that it would take 70,000 examiners to inspect such trillion-dollar banks with the same level of attention normally given to a community bank. “The complexity is so overwhelming that no regulator can follow it well enough to regulate the way we need to,” says Sen. Brown, who is drafting a bill to break up the megabanks.

Worst of all, the Implicit Guarantee has led to a dangerous shift in banking behavior. With an apparently endless stream of free or almost-free money available to banks – coupled with a well-founded feeling among bankers that the government will back them up if anything goes wrong – banks have made a dramatic move into riskier and more speculative investments, including everything from high-risk corporate bonds to mortgage­backed securities to payday loans, the sleaziest and most disreputable end of the financial system. In 2011, banks increased their investments in junk-rated companies by 74 percent, and began systematically easing their lending standards in search of more high-yield customers to lend to.

This is a virtual repeat of the financial crisis, in which a wave of greed caused bankers to recklessly chase yield everywhere, to the point where lowering lending standards became the norm. Now the government, with its Implicit Guarantee, is causing exactly the same behavior – meaning the bailouts have brought us right back to where we started. “Government intervention,” says Klaus Schaeck, an expert on bailouts who has served as a World Bank consultant, “has definitely resulted in increased risk.”

And while the economy still mostly sucks overall, there’s never been a better time to be a Too Big to Fail bank. Wells Fargo reported a third-quarter profit of nearly $5 billion last year, while JP Morgan Chase pocketed $5.3 billion – roughly double what both banks earned in the third quarter of 2006, at the height of the mortgage bubble. As the driver of their success, both banks cite strong performance in – you guessed it – the mortgage market.

So what exactly did the bailout accomplish? It built a banking system that discriminates against community banks, makes Too Big to Fail banks even Too Bigger to Failier, increases risk, discourages sound business lending and punishes savings by making it even easier and more profitable to chase high-yield investments than to compete for small depositors. The bailout has also made lying on behalf of our biggest and most corrupt banks the official policy of the United States government. And if any one of those banks fails, it will cause another financial crisis, meaning we’re essentially wedded to that policy for the rest of eternity – or at least until the markets call our bluff, which could happen any minute now.

Other than that, the bailout was a smashing success.

© 2012 Rolling Stone
matt-taibbi

As Rolling Stone’s chief political reporter, Matt Taibbi’s predecessors include the likes of journalistic giants Hunter S. Thompson and P.J. O’Rourke. Taibbi’s 2004 campaign journal Spanking the Donkey cemented his status as an incisive, irreverent, zero-bullshit reporter. His books include Griftopia: A Story of Bankers, Politicians, and the Most Audacious Power Grab in American History, The Great Derangement: A Terrifying True Story of War, Politics, and Religion, Smells Like Dead Elephants: Dispatches from a Rotting Empire.

Is the SEC Covering Up Wall Street Crimes? August 18, 2011

Posted by rogerhollander in Criminal Justice, Economic Crisis.
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Published on Wednesday, August 17, 2011 by Rolling Stone

A whistleblower claims that over the past two decades, the agency has destroyed records of thousands of investigations, whitewashing the files of some of the nation’s worst financial criminals.

  by Matt Taibbi

 

Imagine a world in which a man who is repeatedly investigated for a string of serious crimes, but never prosecuted, has his slate wiped clean every time the cops fail to make a case. No more Lifetime channel specials where the murderer is unveiled after police stumble upon past intrigues in some old file – “Hey, chief, didja know this guy had two wives die falling down the stairs?” No more burglary sprees cracked when some sharp cop sees the same name pop up in one too many witness statements. This is a different world, one far friendlier to lawbreakers, where even the suspicion of wrongdoing gets wiped from the record.

That, it now appears, is exactly how the Securities and Exchange Commission has been treating the Wall Street criminals who cratered the global economy a few years back. For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed. By whitewashing the files of some of the nation’s worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – “18,000 … including Madoff,” as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history.

Under a deal the SEC worked out with the National Archives and Records Administration, all of the agency’s records – “including case files relating to preliminary investigations” – are supposed to be maintained for at least 25 years. But the SEC, using history-altering practices that for once actually deserve the overused and usually hysterical term “Orwellian,” devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation. Amazingly, the wholesale destruction of the cases – known as MUIs, or “Matters Under Inquiry” – was not something done on the sly, in secret. The enforcement division of the SEC even spelled out the procedure in writing, on the commission’s internal website. “After you have closed a MUI that has not become an investigation,” the site advised staffers, “you should dispose of any documents obtained in connection with the MUI.”

Many of the destroyed files involved companies and individuals who would later play prominent roles in the economic meltdown of 2008. Two MUIs involving con artist Bernie Madoff vanished. So did a 2002 inquiry into financial fraud at Lehman Brothers, as well as a 2005 case of insider trading at the same soon-to-be-bankrupt bank. A 2009 preliminary investigation of insider trading by Goldman Sachs was deleted, along with records for at least three cases involving the infamous hedge fund SAC Capital.

The widespread destruction of records was brought to the attention of Congress in July, when an SEC attorney named Darcy Flynn decided to blow the whistle. According to Flynn, who was responsible for helping to manage the commission’s records, the SEC has been destroying records of preliminary investigations since at least 1993. After he alerted NARA to the problem, Flynn reports, senior staff at the SEC scrambled to hide the commission’s improprieties.

As a federally protected whistle-blower, Flynn is not permitted to speak to the press. But in evidence he presented to the SEC’s inspector general and three congressional committees earlier this summer, the 13-year veteran of the agency paints a startling picture of a federal police force that has effectively been conquered by the financial criminals it is charged with investigating. In at least one case, according to Flynn, investigators at the SEC found their desire to bring a case against an influential bank thwarted by senior officials in the enforcement division – whose director turned around and accepted a lucrative job from the very same bank they had been prevented from investigating. In another case, the agency farmed out its inquiry to a private law firm – one hired by the company under investigation. The outside firm, unsurprisingly, concluded that no further investigation of its client was necessary. To complete the bureaucratic laundering process, Flynn says, the SEC dropped the case and destroyed the files.

Much has been made in recent months of the government’s glaring failure to police Wall Street; to date, federal and state prosecutors have yet to put a single senior Wall Street executive behind bars for any of the many well-documented crimes related to the financial crisis. Indeed, Flynn’s accusations dovetail with a recent series of damaging critiques of the SEC made by reporters, watchdog groups and members of Congress, all of which seem to indicate that top federal regulators spend more time lunching, schmoozing and job-interviewing with Wall Street crooks than they do catching them. As one former SEC staffer describes it, the agency is now filled with so many Wall Street hotshots from oft-investigated banks that it has been “infected with the Goldman mindset from within.”

The destruction of records by the SEC, as outlined by Flynn, is something far more than an administrative accident or bureaucratic fuck-up. It’s a symptom of the agency’s terminal brain damage. Somewhere along the line, those at the SEC responsible for policing America’s banks fell and hit their head on a big pile of Wall Street’s money – a blow from which the agency has never recovered. “From what I’ve seen, it looks as if the SEC might have sanctioned some level of case-related document destruction,” says Sen. Chuck Grassley, the ranking Republican on the Senate Judiciary Committee, whose staff has interviewed Flynn. “It doesn’t make sense that an agency responsible for investigations would want to get rid of potential evidence. If these charges are true, the agency needs to explain why it destroyed documents, how many documents it destroyed over what time frame and to what extent its actions were consistent with the law.”

How did officials at the SEC wind up with a faithful veteran employee – a conservative, mid-level attorney described as a highly reluctant whistle-blower – spilling the agency’s most sordid secrets to Congress? In a way, they asked for it.

On May 18th of this year, SEC enforcement director Robert Khuzami sent out a mass e-mail to the agency’s staff with the subject line “Lawyers Behaving Badly.” In it, Khuzami asked his subordinates to report any experiences they might have had where “the behavior of counsel representing clients in… investigations has been questionable.”

Khuzami was asking staffers to recount any stories of outside counsel behaving unethically. But Flynn apparently thought his boss was looking for examples of lawyers “behaving badly” anywhere, including within the SEC. And he had a story to share he’d kept a lid on for years. “Mr. Khuzami may have gotten something more than he expected,” Flynn’s lawyer, a former SEC whistle-blower named Gary Aguirre, later explained to Congress.

Flynn responded to Khuzami with a letter laying out one such example of misbehaving lawyers within the SEC. It involved a case from very early in Flynn’s career, back in 2000, when he was working with a group of investigators who thought they had a “slam-dunk” case against Deutsche Bank, the German financial giant. A few years earlier, Rolf Breuer, the bank’s CEO, had given an interview to Der Spiegel in which he denied that Deutsche was involved in übernahmegespräche – takeover talks – to acquire a rival American firm, Bankers Trust. But the statement was apparently untrue – and it sent the stock of Bankers Trust tumbling, potentially lowering the price for the merger. Flynn and his fellow SEC investigators, suspecting that investors of Bankers Trust had been defrauded, opened a MUI on the case.

A Matter Under Inquiry is just a preliminary sort of look-see – a way for the SEC to check out the multitude of tips it gets about suspicious trades, shady stock scams and false disclosures, and to determine which of the accusations merit a formal investigation. At the MUI stage, an SEC investigator can conduct interviews or ask a bank to send in information voluntarily. Bumping a MUI up to a formal investigation is critical, because it enables investigators to pull out the full law-enforcement ass-kicking measures – subpoenas, depositions, everything short of hot pokers and waterboarding.  In the Deutsche case, Flynn and other SEC investigators got past the MUI stage and used their powers to collect sworn testimony and documents indicating that plenty of übernahmegespräche indeed had been going on when Breuer spoke to Der Spiegel. Based on the evidence, they sent an “Action Memorandum” to senior SEC staff, formally recommending that the agency press forward and file suit against Deutsche.

Breuer responded to the threat as big banks like Deutsche often do: He hired a former SEC enforcement director to lobby the agency to back off. The ex-insider, Gary Lynch, launched a creative and inspired defense, producing a linguistic expert who argued that übernahmegespräche only means “advanced stage of discussions.” Nevertheless, the request to proceed with the case was approved by several levels of the SEC’s staff. All that was needed to move forward was a thumbs-up from the director of enforcement at the time, Richard Walker.

But then a curious thing happened. On July 10th, 2001, Flynn and the other investigators were informed that Walker was mysteriously recusing himself from the Deutsche case. Two weeks later, on July 23rd, the enforcement division sent a letter to Deutsche that read, “Inquiry in the above-captioned matter has been terminated.” The bank was in the clear; the SEC was dropping its fraud investigation. In contradiction to the agency’s usual practice, it provided no explanation for its decision to close the case.

On October 1st of that year, the mystery was solved: Dick Walker was named general counsel of Deutsche. Less than 10 weeks after the SEC shut down its investigation of the bank, the agency’s director of enforcement was handed a cushy, high-priced job at Deutsche.

Deutsche’s influence in the case didn’t stop there. A few years later, in 2004, Walker hired none other than Robert Khuzami, a young federal prosecutor, to join him at Deutsche. The two would remain at the bank until February 2009, when Khuzami joined the SEC as Flynn’s new boss in the enforcement division. When Flynn sent his letter to Khuzami complaining about misbehavior by Walker, he was calling out Khuzami’s own mentor.

The circular nature of the case illustrates the revolving-door dynamic that has become pervasive at the SEC. A recent study by the Project on Government Oversight found that over the past five years, former SEC personnel filed 789 notices disclosing their intent to represent outside companies before the agency – sometimes within days of their having left the SEC. More than half of the disclosures came from the agency’s enforcement division, who went to bat for the financial industry four times more often than ex-staffers from other wings of the SEC.

Even a cursory glance at a list of the agency’s most recent enforcement directors makes it clear that the SEC’s top policemen almost always wind up jumping straight to jobs representing the banks they were supposed to regulate. Lynch, who represented Deutsche in the Flynn case, served as the agency’s enforcement chief from 1985 to 1989, before moving to the firm of Davis Polk, which boasts many top Wall Street clients. He was succeeded by William McLucas, who left the SEC in 1998 to work for WilmerHale, a Wall Street defense firm so notorious for snatching up top agency veterans that it is sometimes referred to as “SEC West.” McLucas was followed by Dick Walker, who defected to Deutsche in 2001, and he was in turn followed by Stephen Cutler, who now serves as general counsel for JP Morgan Chase. Next came Linda Chatman Thomsen, who stepped down to join Davis Polk, only to be succeeded in 2009 by Khuzami, Walker’s former protégé at Deutsche Bank.

This merry-go-round of current and former enforcement directors has repeatedly led to accusations of improprieties. In 2008, in a case cited by the SEC inspector general, Thomsen went out of her way to pass along valuable information to Cutler, the former enforcement director who had gone to work for JP Morgan. According to the inspector general, Thomsen signaled Cutler that the SEC was unlikely to take action that would hamper JP Morgan’s move to buy up Bear Stearns. In another case, the inspector general found, an assistant director of enforcement was instrumental in slowing down an investigation into the $7 billion Ponzi scheme allegedly run by Texas con artist R. Allen Stanford – and then left the SEC to work for Stanford, despite explicitly being denied permission to do so by the agency’s ethics office. “Every lawyer in Texas and beyond is going to get rich on this case, OK?” the official later explained. “I hated being on the sidelines.”

Small wonder, then, that SEC staffers often have trouble getting their bosses to approve full-blown investigations against even the most blatant financial criminals. For a fledgling MUI to become a formal investigation, it has to make the treacherous leap from the lower rungs of career-level staffers like Flynn all the way up to the revolving-door level at the top, where senior management is composed largely of high-priced appointees from the private sector who have strong social and professional ties to the very banks they are charged with regulating. And if senior management didn’t approve an investigation, the documents often wound up being destroyed – as Flynn would later discover.

After the Deutsche fiasco over Bankers Trust, Flynn continued to work at the SEC for four more years. He briefly left the agency to dabble in real estate, then returned in 2008 to serve as an attorney in the enforcement division. In January 2010, he accepted new responsibilities that included helping to manage the disposition of records for the division – and it was then he first became aware of the agency’s possibly unlawful destruction of MUI records.

Flynn discovered a directive on the enforcement division’s internal website ordering staff to destroy “any records obtained in connection” with closed MUIs. The directive appeared to violate federal law, which gives responsibility for maintaining and destroying all records to the National Archives and Records Administration. Over a decade earlier, in fact, the SEC had struck a deal with NARA stipulating that investigative records were to be maintained for 25 years – and that if any files were to be destroyed after that, the shredding was to be done by NARA, not the SEC.

But Flynn soon learned that the records for thousands of preliminary investigations no longer existed. In his letter to Congress, Flynn estimates that the practice of destroying MUIs had begun as early as 1993, and has resulted in at least 9,000 case files being destroyed. For all the thousands of tips that had come in to the SEC, and the thousands of interviews that had been conducted by the agency’s staff, all that remained were a few perfunctory lines for each case. The mountains of evidence gathered were no longer in existence.

To read through the list of dead and buried cases that Flynn submitted to Congress is like looking through an infrared camera at a haunted house of the financial crisis, with the ghosts of missed prosecutions flashing back and forth across the screen. A snippet of the list:

PARTY MUI # OPENED/CLOSED ISSUE
Goldman Sachs MLA-01909 6/99 – 4/00 Market Manipulation
Deutsche Bank MHO-09356 11/01 – 7/02 Insider Trading
Deutsche Bank MHO-09432 2/02 – 8/02 Market Manipulation
Lehman Brothers MNY-07013 3/02 – 7/02 Financial Fraud
Goldman Sachs MNY-08198 11/09 – 12/09 Insider Trading

One MUI – case MNY-08145 – involved allegations of insider trading at AIG on September 15th, 2008, right in the miaud,ddle of the insurance giant’s collapse. In that case, an AIG employee named Jacqueline Millan reported irregularities in the trading of AIG stock to her superiors, only to find herself fired. Incredibly, instead of looking into the matter itself, the SEC agreed to accept “an internal investigation by outside counsel or AIG.” The last note in the file indicates that “the staff plans to speak with the outside attorneys on Monday, August 24th [2009], when they will share their findings with us.” The fact that the SEC trusted AIG’s lawyers to investigate the matter shows the basic bassackwardness of the agency’s approach to these crash-era investigations. The SEC formally closed the case on October 1st, 2009.

The episode with AIG highlights yet another obstacle that MUIs experience on the road to becoming formal investigations. During the past decade, the SEC routinely began allowing financial firms to investigate themselves. Imagine the LAPD politely asking a gang of Crips and their lawyers to issue a report on whether or not a drive-by shooting by the Crips should be brought before a grand jury – that’s basically how the SEC now handles many preliminary investigations against Wall Street targets.

The evolution toward this self-policing model began in 2001, when a shipping and food-service conglomerate called Seaboard aggressively investigated an isolated case of accounting fraud at one of its subsidiaries. Seaboard fired the guilty parties and made sweeping changes to its internal practices – and the SEC was so impressed that it instituted a new policy of giving “credit” to companies that police themselves. In practice, that means the agency simply steps aside and allows companies to slap themselves on the wrists. In the case against Seaboard, for instance, the SEC rewarded the firm by issuing no fines against it.

According to Lynn Turner, a former chief accountant at the SEC, the Seaboard case also prompted the SEC to begin permitting companies to hire their own counsel to conduct their own inquiries. At first, he says, the process worked fairly well. But then President Bush appointed the notoriously industry-friendly Christopher Cox to head up the SEC, and the “outside investigations” turned into whitewash jobs. “The investigations nowadays are probably not worth the money you spend on them,” Turner says.

Harry Markopolos, a certified fraud examiner best known for sounding a famously unheeded warning about Bernie Madoff way back in 2000, says the SEC’s practice of asking suspects to investigate themselves is absurd. In a serious investigation, he says, “the last person you want to trust is the person being accused or their lawyer.” The practice helped Madoff escape for years. “The SEC took Bernie’s word for everything,” Markopolos says.

At the SEC, having realized that the agency was destroying documents, Flynn became concerned that he was overseeing an illegal policy. So in the summer of last year, he reached out to NARA, asking them for guidance on the issue.

That request sparked a worried response from Paul Wester, NARA’s director of modern records. On July 29th, 2010, Wester sent a letter to Barry Walters, who oversees document requests for the SEC. “We recently learned from Darcy Flynn… that for the past 17 years the SEC has been destroying closed Matters Under Inquiry files,” Wester wrote. “If you confirm that federal records have been destroyed improperly, please ensure that no further such disposals take place and provide us with a written report within 30 days.”

Wester copied the letter to Adam Storch, a former Goldman Sachs executive who less than a year earlier had been appointed as managing executive of the SEC’s enforcement division. Storch’s appointment was not without controversy. “I’m not sure what’s scarier,” Daniel Indiviglio of The Atlantic observed, “that this guy worked at an investment bank that many believe has questionable ethics and too cozy a Washington connection, or that he’s just 29.” In any case, Storch reacted to the NARA letter the way the SEC often does – by circling the wagons and straining to find a way to blow off the problem without admitting anything.

Last August, as the clock wound down on NARA’s 30-day deadline, Storch and two top SEC lawyers held a meeting with Flynn to discuss how to respond. Flynn’s notes from the meeting, which he passed along to Congress, show the SEC staff wondering aloud if admitting the truth to NARA might be a bad idea, given the fact that there might be criminal liability.

“We could say that we do not believe there has been disposal inconsistent with the schedule,” Flynn quotes Ken Hall, an assistant chief counsel for the SEC, as saying.

“There are implications to admit what was destroyed,” Storch chimed in. It would be “not wise for me to take on the exposure voluntarily. If this leads to something, what rings in my ear is that Barry [Walters, the SEC documents officer] said: This is serious, could lead to criminal liability.”

When the subject of how many files were destroyed came up, Storch answered: “18,000 MUIs destroyed, including Madoff.”

Four days later, the SEC responded to NARA with a hilariously convoluted nondenial denial. “The Division is not aware of any specific instances of the destruction of records from any other MUI,” the letter states. “But we cannot say with certainty that no such documents have been destroyed over the past 17 years.” The letter goes on to add that “the Division has taken steps… to ensure that no MUI records are destroyed while we review this issue.”

Translation: Hey, maybe records were destroyed, maybe they weren’t. But if we did destroy records, we promise not to do it again – for now.

The SEC’s unwillingness to admit the extent of the wrong doing left Flynn in a precarious position. The agency has a remarkably bad record when it comes to dealing with whistle-blowers. Back in 2005, when Flynn’s attorney, Gary Aguirre, tried to pursue an insider-trading case against Pequot Capital that involved John Mack, the future CEO of Morgan Stanley, he was fired by phone while on vacation. Two Senate committees later determined that Aguirre, who has since opened a private practice representing whistle-blowers, was dismissed improperly as part of a “process of reprisal” by the SEC. Two whistle-blowers in the Stanford case, Julie Preuitt and Joel Sauer, also experienced retaliation – including reprimands and demotions – after raising concerns about superficial investigations. “There’s no mechanism to raise these issues at the SEC,” says another former whistle-blower. Contacting the agency’s inspector general, he adds, is considered “the nuclear option” – a move “well-known to be a career-killer.”

In Flynn’s case, both he and Aguirre tried to keep the matter in-house, appealing to SEC chairman Mary Schapiro with a promise not to go outside the agency if she would grant Flynn protection against reprisal. When no such offer was forthcoming, Flynn went to the agency’s inspector general before sending a detailed letter about the wrongdoing to three congressional committees.

One of the offices Flynn contacted was that of Sen. Grassley, who was in the midst of his own battle with the SEC. Frustrated with the agency’s failure to punish major players on Wall Street, the Iowa Republican had begun an investigation into how the SEC follows up on outside complaints. Specifically, he wrote a letter to FINRA, another regulatory agency, to ask how many complaints it had referred to the SEC about SAC Capital, the hedge fund run by reptilian billionaire short-seller Stevie Cohen.

SAC has long been accused of a variety of improprieties, from insider trading to harassment. But no charge in recent Wall Street history is crazier than an episode involving a SAC executive named Ping Jiang, who was accused in 2006 of enacting a torturous hazing program. According to a civil lawsuit that was later dropped, Jiang allegedly forced a new trader named Andrew Tong to take female hormones, come to work wearing a dress and lipstick, have “foreign objects” inserted in his rectum, and allow Jiang to urinate in his mouth. (I’m not making this up.)

Grassley learned that over the past decade, FINRA had referred 19 complaints about suspicious trades at SAC to federal regulators. Curious to see how many of those referrals had been looked into, Grassley wrote the SEC on May 24th, asking for evidence that the agency had properly investigated the cases.

Two weeks later, on June 9th, Khuzami sent Grassley a surprisingly brusque answer: “We generally do not comment on the status of investigations or related referrals, and, in turn, are not providing information concerning the specific FINRA referrals you identified.” Translation: We’re not giving you the records, so blow us.

Grassley later found out from FINRA that it had actually referred 65 cases about SAC to the SEC, making the lack of serious investigations even more inexplicable. Angered by Khuzami’s response, he sent the SEC another letter on June 15th demanding an explanation, but no answer has been forthcoming.

In the interim, Grassley’s office was contacted by Flynn, who explained that among the missing MUIs he had uncovered were at least three involving SAC – one in 2006, one in 2007 and one in 2010, involving charges of insider trading and currency manipulation. All three cases were closed by the SEC, and the records apparently destroyed.

On August 17th, Grassley sent a letter to the SEC about the Flynn allegations, demanding to know if it was indeed true that the SEC had destroyed records. He also asked if the agency’s failure to produce evidence of investigations into SAC Capital were related to the missing MUIs.

The SEC’s inspector general is investigating the destroyed MUIs and plans to issue a report. NARA is also seeking answers. “We’ve asked the SEC to look into the matter and we’re awaiting their response,” says Laurence Brewer, a records officer for NARA. For its part, the SEC is trying to explain away the illegality of its actions through a semantic trick. John Nester, the agency’s spokesman, acknowledges that “documents related to MUIs” have been destroyed. “I don’t have any reason to believe that it hasn’t always been the policy,” he says. But Nester suggests that such documents do not “meet the federal definition of a record,” and therefore don’t have to be preserved under federal law.

But even if SEC officials manage to dodge criminal charges, it won’t change what happened: The nation’s top financial police destroyed more than a decade’s worth of intelligence they had gathered on some of Wall Street’s most egregious offenders. “The SEC not keeping the MUIs – you can see why this would be bad,” says Markopolos, the fraud examiner famous for breaking the Madoff case. “The reason you would want to keep them is to build a pattern. That way, if you get five MUIs over a period of 20 years on something similar involving the same company, you should be able to connect five dots and say, ‘You know, I’ve had five MUIs – they’re probably doing something. Let’s go tear the place apart.'” Destroy the MUIs, and Wall Street banks can commit the exact same crime over and over, without anyone ever knowing.

Regulation isn’t a panacea. The SEC could have placed federal agents on every corner of lower Manhattan throughout the past decade, and it might not have put a dent in the massive wave of corruption and fraud that left the economy in flames three years ago. And even if SEC staffers from top to bottom had been fully committed to rooting out financial corruption, the agency would still have been seriously hampered by a lack of resources that often forces it to abandon promising cases due to a shortage of manpower. “It’s always a triage,” is how one SEC veteran puts it. “And it’s worse now.”

But we’re equally in the dark about another hypothetical. Forget about what might have been if the SEC had followed up in earnest on all of those lost MUIs. What if even a handful of them had turned into real cases? How many investors might have been saved from crushing losses if Lehman Brothers had been forced to reveal its shady accounting way back in 2002? Might the need for taxpayer bailouts have been lessened had fraud cases against Citigroup and Bank of America been pursued in 2005 and 2007? And would the U.S. government have doubled down on its bailout of AIG if it had known that some of the firm’s executives were suspected of insider trading in September 2008?

It goes without saying that no ordinary law-enforcement agency would willingly destroy its own evidence. In fact, when it comes to  garden-variety crooks, more and more police agencies are catching criminals with the aid of large and well-maintained databases. “Street-level law enforcement is increasingly data-driven,” says Bill Laufer, a criminology professor at the University of Pennsylvania. “For a host of reasons, though, we are starved for good data on both white-collar and corporate crime. So the idea that we would take the little data we do have and shred it, without a legal requirement to do so, calls for a very creative explanation.”

We’ll never know what the impact of those destroyed cases might have been; we’ll never know if those cases were closed for good reasons or bad. We’ll never know exactly who got away with what, because federal regulators have weighted down a huge sack of Wall Street’s dirty laundry and dumped it in a lake, never to be seen again.

Editor’s Note: The online version of this article has been amended from the print version to reflect that the SEC’s case against Deutsche Bank proceeded beyond a Matter of Inquiry to a full-blown investigation.

© 2011 Rolling Stone

Iceland’s On-going Revolution August 6, 2011

Posted by rogerhollander in Europe, Oregon, Revolution.
Tags: , , , , , , , , , ,
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Democracy 2.0: Iceland crowdsources new constitution

by Jérôme E. Roos on June 11, 2011

Post image for Democracy 2.0: Iceland crowdsources new constitutionIn
just three years, Iceland went from collapse to revolution and back to
growth. What can Spain and Greece learn from the Icelandic experience
and its embrace of direct democracy?

Just two or three years after its economy and government collapsed, Iceland is bouncing back with remarkable strength. This week, the small island nation earned praise
from foreign investors despite allowing its banks to collapse and
refusing to pay back some of its debt — belying the dominant idea among
Europe’s ruling class that bank failures and defaults necessarily engender disastrous economic consequences.

Now,
in an historically unprecedented move, the government has decided to
draft a new constitution with the online input of its citizens —
essentially crowdsourcing
the creation of Iceland’s real democracy. Rather than just involving
voters at the end of the process through a referendum, the Icelanders
have an opportunity, through social media, to be directly involved in
the writing process. It’s the ultimate affirmation of participatory
democracy. It’s Democracy 2.0.

How did Iceland get from there to here? And what are the lessons for Europe’s troubled periphery?

Back in 2009, months after the greatest banking collapse in economic history, the people of Iceland took to the streets en masse to
denounce the reckless bankers who had caused the crisis and the
clueless politicians who had allowed it to develop. Quietly, as the
world was busy watching the inauguration of President Obama, the people
of Iceland overthrew their government and demanded a referendum on the country’s debt.

In
the referendum, the Icelanders decided not to repay foreign creditors —
Great Britain and the Netherlands — who had so foolishly deposited
their savings in one of the world’s most over-leveraged banks, Icesave.
In fact, the President had already vetoed
the deal, so the referendum was largely symbolic, but still, the
outcome of the vote (93 percent against repayment) was a watershed in
the epic battle between people power and foreign financial interests.

Yet
what’s really interesting about the Icelandic case is not just the
referendum, but the fact that the consequences of the outcome were far
from being as disastrous
as Europe’s self-proclaimed economic ‘experts’ had predicted. In fact,
within just two years of the collapse of its government, Iceland is
bouncing back rapidly, and is actually being rewarded for it by foreign
investors. As the Wall Street Journal reported yesterday:

Iceland’s
first international bond offering since its spectacular economic and
banking collapse late in 2008 has been snapped up by investors. The
five-year $1 billion deal, yielding just under 5%, is a milestone in
rebuilding confidence internationally and follows a turnaround in the
economy, forecast to grow 2.25% this year.

So it’s no surprise that Iceland became a rallying point for the ‘indignados
in Spain during the mass protests that broke out there last month.
Spanish demonstrators could be seen carrying placards reading “Iceland
is my goal” and “I think of Iceland.” The Icelandic model has also come
to inspire the indignant protest movement in Greece, which is rapidly picking up steam. So what are Iceland’s main lessons for Europe’s troubled periphery?

First of all, make sure to read this excellent piece
by Robert Wade, my former Professor at the London School of Economics,
to understand how Iceland’s mistakes in the lead-up to the crisis were
just an extreme version of what we did on the continent: capital account
liberalization combined with financial deregulation and unprecedented
political disinterest in the face of an epic bubble blowing up right in
front of our eyes.

Wade helps us understand what not to do. But perhaps at this stage, it’s more interesting to find out what we should do. In
this respect, one overwhelming lesson jumps out: while letting banks
collapse and refusing to pay back foreign lenders certainly has negative
consequences in the short run, those consequences are born largely by
the reckless bankers who instigated the crisis in the first place.

Instead
of socializing the losses of the banks, making ordinary people pay for a
crisis they never caused, the Icelandic model forced the bankers to pay
for their own stupidity. During the Icelandic crisis, all three of the
country’s largest banks collapsed. The government didn’t save them.

Secondly, Iceland actually went after
those responsible — both to enact justice and to set a precedent that
this type of reckless speculation on the livelihoods of real people will
simply not be tolerated in the future. Key figures in the banking
sector have been arrested and a former prime minister has been formally charged. Treating reckless speculation as a crime is a crucial first step towards real democracy.

Thirdly, Iceland did what no one is supposed to be doing according to neoliberal dogma: just like Malaysia did — to the dismay of the IMF — during the East-Asian crisis of 1997-’98, the Icelandic government instituted capital controls
to stem the outflow of hot money from the country in the wake of its
banking collapse. The EU should have done the same (and can still do the
same) to stem the outflow of capital from the periphery.

Fourthly, and this is obviously the most crucial lesson of all, the people of Iceland managed to sever the neoliberal straitjacket
that had kept their politicians enthralled to the interests of the
financial sector for so long. Through mass mobilization, the people
toppled the government and instituted a radically new form of political
participation. The crowdsourcing of the constitution is the most
powerful symbol this new, real democracy.

As a result, the Icelandic people are now slowly but surely beginning to recover
from the worst ever economic collapse of any country during
peacetime. By contrast, countries like Greece, Spain, Ireland and
Portugal are still struggling — and likely to remain mired in deep
recession, if not outright depression, for years to come.

Untold suffering and hardship
will fall on millions of people as the ECB, IMF and Germany continue to
expect full repayment while imposing draconian (and ultimately
counterproductive) austerity measures. A lost generation
will flee these countries in a desperate search for opportunity.
Countless lives, businesses, families and dreams will be destroyed. And
for what? A handful of bankers who refuse to take a haircut?

What Iceland teaches us is that it need not be that way. The Atlantic currents and Arab winds have already reached
the European periphery. It’s just a matter of time before the first
government on the continent will be toppled by its people. Democracy 2.0
is on its way. No one can stop it now.

Deena Stryker, www.opednews.com, August 1, 2011 <!–

–>An Italian radio program’s st0ry about Iceland’s on-going revolution is a
stunning example of how little our media tells us about the rest of the world.
Americans may remember that at the start of the 2008 financial crisis, Iceland
literally went bankrupt.  The reasons were mentioned only in passing, and since
then, this little-known member of the European Union fell back into
oblivion.

As one European country after another fails or risks failing, imperiling the
Euro, with repercussions for the entire world, the last thing the powers that be
want is for Iceland to become an example. Here’s why:

Five years of a pure neo-liberal regime had made Iceland, (population 320
thousand, no army), one of the richest countries in the world. In 2003 all the
country’s banks were privatized, and in an effort to attract foreign investors,
they offered on-line banking whose minimal costs allowed them to offer
relatively high rates of return. The accounts, called IceSave, attracted many
English and Dutch small investors.  But as investments grew, so did the banks’
foreign debt.  In 2003 Iceland’s debt was equal to 200 times its GNP, but in
2007, it was 900 percent.  The 2008 world financial crisis was the coup de
grace. The three main Icelandic banks, Landbanki, Kapthing and Glitnir, went
belly up and were nationalized, while the Kroner lost 85% of its value with
respect to the Euro.  At the end of the year Iceland declared bankruptcy.

Contrary to what could be expected, the crisis resulted in Icelanders
recovering their sovereign rights, through a process of direct participatory
democracy that eventually led to a new Constitution.  But only after much
pain.

Geir Haarde, the Prime Minister of a Social Democratic coalition government,
negotiated a two million one hundred thousand dollar loan, to which the Nordic
countries added another two and a half million. But the foreign financial
community pressured Iceland to impose drastic measures.  The FMI and the
European Union wanted to take over its debt, claiming this was the only way for
the country to pay back Holland and Great Britain, who had promised to reimburse
their citizens.

Protests and riots continued, eventually forcing the government to resign.
Elections were brought forward to April 2009, resulting in a left-wing coalition
which condemned the neoliberal economic system, but immediately gave in to its
demands that Iceland pay off a total of three and a half million Euros.  This
required each Icelandic citizen to pay 100 Euros a month (or about $130) for
fifteen years, at 5.5% interest, to pay off a debt incurred by private parties
vis a vis other private parties. It was the straw that broke the reindeer’s
back.

What happened next was extraordinary. The belief that citizens had to pay for
the mistakes of a financial monopoly, that an entire nation must be taxed to pay
off private debts was shattered, transforming the relationship between citizens
and their political institutions and eventually driving Iceland’s leaders to the
side of their constituents. The Head of State, Olafur Ragnar Grimsson, refused
to ratify the law that would have made Iceland’s citizens responsible for its
bankers’ debts, and accepted calls for a referendum.

Of course the international community only increased the pressure on Iceland.
Great Britain and Holland threatened dire reprisals that would isolate the
country.  As Icelanders went to vote, foreign bankers threatened to block any
aid from the IMF.  The British government threatened to freeze Icelander savings
and checking accounts. As Grimsson said: “We were told that if we refused the
international community’s conditions, we would become the Cuba of the North.
But if we had accepted, we would have become the Haiti of the North.” (How many
times have I written that when Cubans see the dire state of their neighbor,
Haiti, they count themselves lucky.)

In the March 2010 referendum, 93% voted against repayment of the debt.  The
IMF immediately froze its loan.  But the revolution (though not televised in the
United States), would not be intimidated. With the support of a furious
citizenry, the government launched civil and penal investigations into those
responsible for the financial crisis.  Interpol put out an international arrest
warrant for the ex-president of Kaupthing, Sigurdur Einarsson, as the other
bankers implicated in the crash fled the country.

But Icelanders didn’t stop there: they decided to draft a new constitution
that would free the country from the exaggerated power of international finance
and virtual money.  (The one in use had been written when Iceland gained its
independence from Denmark, in 1918, the only difference with the Danish
constitution being that the word ‘president’ replaced the word ‘king’.)

To write the new constitution, the people of Iceland elected twenty-five
citizens from among 522 adults not belonging to any political party but
recommended by at least thirty citizens. This document was not the work of a
handful of politicians, but was written on the internet. The constituent’s
meetings are streamed on-line, and citizens can send their comments and
suggestions, witnessing the document as it takes shape. The constitution that
eventually emerges from this participatory democratic process will be submitted
to parliament for approval after the next elections.

Some readers will remember that Iceland’s ninth century agrarian collapse was
featured in Jared Diamond’s book by the same name. Today, that country is
recovering from its financial collapse in ways just the opposite of those
generally considered unavoidable, as confirmed yesterday by the new head of the
IMF, Christine Lagarde to Fareed Zakaria. The people of Greece have been told
that the privatization of their public sector is the only solution.  And those
of Italy, Spain and Portugal are facing the same threat.

They should look to Iceland. Refusing to bow to foreign interests, that small
country stated loud and clear that the people are sovereign.

That’s why it is not in the news anymore.

Originally posted to Deena Stryker on Mon
Aug 01, 2011 at 08:47 AM PDT.

Too Big to Jail May 24, 2011

Posted by rogerhollander in Criminal Justice, Economic Crisis.
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 Goldman Sach’s Lloyd Blankfein

Published on Tuesday, May 24, 2011 by CommonDreams.org

  by  Danny Schechter

This week the financial crisis finally went prime time in the form of a big budget HBO docudrama called “Too Big To Fail.”Goldman Sach’s Lloyd Blankfein. (File)

It was a well-acted docudrama focused on the BIG men and some women in the banks and in government who tried to put Humpty Dumpty back together again up on that wall to prevent a total economic collapse when panic dried up credit and financial institutions faced failure.

Based on the work of a New York Times reporter, it offered a skillfully-made but conventional narrative which, like most TV shows, showcase events but miss their deeper context and background.

We heard all the explanations, save one.

There was greed, ambition, ego and money lust. There were personal rivalries and ideological battles, parochial agendas and narrow self-interest. There was panic on THE Street and in the halls of mighty institutions. In many ways, the program recycled and made an official narrative compelling viewing. In the end, everyone was to blame so no one was to blame.

But… what was missing was any notion of intentionality and premeditation, almost no mention of systemic fraud and CRIME, that one word that sums up what really happened for those millions of Americans who have lost jobs and homes. We never saw victims or felt their pain and bewilderment. We were never shown how a shadow banking system emerged or how the finance industry worked with their counterparts in finance and insurance to transfer wealth from the poor and middle class to the superrich,

When I was but a precocious lad, my elementary school encouraged students to take out a savings account at the nearby Dime Bank in the Bronx. We were each given a bankbook and taught to put in $.50 a week to show us how to build wealth by being thrifty. It was with a sense of pride that I watched my balance grow.

It may have been peanuts in the scheme of things, but to me, at the time, it was the way to plan for the future.

At the same time, in those year I watched TV shows glamorize the bank robbing antics of a man named Willie Sutton who also staged jail breaks wearing masks and costumes. When he was asked why he robbed banks, he responded famously, “That’s where the money is.”

And it still is, except in our era, it is the banks that are robbing us.

That’s because what’s now called the “financial Services sector” has gone from about 30 percent of our economy to over 60 percent. Through a process called financialization, they have transformed how all business is done.

Making money from money soon began to surpass making money from making things. What we were never warned about was the danger of getting too deeply in debt, or how the economy was shifting from production to consumption.

Private equity, credit swaps, derivative deals and collateralized debt obligations soon drove the economy. Markets became captives of high performance trading by powerful computers.

When Wall Street became the defacto capital of the country, the bankers accrued more power than the politicians who they bought up with impunity. Their lobbying power deregulated the economy and decriminalized their activities. They killed many of the reforms enacted during the New Deal designed to protect the public. They built a shadow (and shadowy) banking system beyond the reach of the law.

And now, here we are, in 2011, five years after the meltdown of 2007, four years after the crash of 2008 and the passage of the TARP bailout that pumped money into their treasuries at taxpayer expense. Since then, there has been a steady parade of scandals and the disclosures that have come out since. Every week, more banks close and or consolidate and run into problems with regulators.

Take “my” old bank in the Bronx. It has been through as many changes as I have been. A website on bank histories runs it down:

Dime Savings Bank of New York, The
04/12/1859 NYS Chartered Dime Savings Bank of Brooklyn
09/10/1930 Acquire By Merger Navy Savings Bank
06/30/1970 Name Change To Dime Savings Bank of New York, The
09/30/1979 Acquire By Merger Mechanics Exchange Savings Bank
07/01/1980 Acquire By Merger First Federal S & L Assoc. of Port Washington
08/01/1981 Acquire By Merger Union Savings Bank of New York
06/23/1983 Convert Federal Dime Savings Bank of NY, FSB
01/07/2002 Purchased By Washington Mutual Inc.
01/07/2002 Name Change To Washington Mutual Bank

And then, of course, some years later, Washington Mutual itself, went bust and was bought up for a song by JP Morgan Chase. Here are some of the latest headlines about the bank now known as WAMU:

WaMu agrees on post-bankruptcy control — report‎ – Reuters
WaMu, Shareholders, Biggest Creditors Said to Settle …‎ – Bloomberg
WaMu shareholders are offered $25M-plus to drop claims

On the day I wrote this commentary, the New York Times reported:

“The nation’s biggest banks and mortgage lenders have steadily amassed real estate empires, acquiring a glut of foreclosed homes that threatens to deepen the housing slump and create a further drag on the economic recovery.

All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac.”

And to whom does the Times turn for expertise on the subject, but a key former operative at Washington Mutual who was with the bank in the go-go era of shoveling out subprime mortgages? Now, he gives advice on risk management:

“These shops are under siege; it’s just a tsunami of stuff coming in,” said Taj Bindra, who oversaw Washington Mutual’s servicing unit from 2004 to 2006 and now advises financial institutions on risk management. “Lenders have a strong incentive to clear out inventory in a controlled and timely manner, but if you had problems on the front end of the foreclosure process, it should be no surprise you are having problems on the back end.”

What were people’s homes are now “inventory” to be stockpiled even though it has a negative cumulative effect on economic recovery of the housing market.

The banks that are increasingly despised and blamed for their role in engineering the financial disaster, are now trying to play nice to change their negative image.

Explains the Times:

“Conscious of their image, many lenders have recently started telling real estate agents to be more lenient to renters who happen to live in a foreclosed home and give them extra time to move out before changing the locks.

“Wells Fargo has sent me back knocking on doors two or three times, offering to give renters money if they cooperate with us,” said Claude A. Worrell, a longtime real estate agent from Minneapolis who specializes in selling bank-owned property. “It’s a lot different than it used to be.”

So, they are still foreclosing, but with a smile. Is it a ‘lot different than it used to be’?
Just last month, Huffington Post reported:

“Top executives at Washington Mutual actively boosted sales of high-risk, toxic mortgages in the two years prior to the bank’s collapse in 2008, according to emails published in a wide-ranging Senate report that contradicts previous public testimony about the meltdown.

The voluminous, 639-page report on the financial crisis from the Senate Permanent Subcommittee on Investigations singles out Washington Mutual for its decision to champion its subprime lending business, even as executives privately acknowledged that a housing bubble was about to burst.”

The truth is that most of the bigger banks have emerged from the financial crisis stronger than ever, with executives cashing in with higher salaries and bigger bonuses. That old saying about criminals who “laughed all the way to the bank” has to be revised because in this case they never left the bank.

More shocking has been the largely passive response by our government and prosecutors. At last, the Attorney General of New York is said to be investigating but none of the big bankers have yet gone to jail or suffered for the scams and frauds they committed. Most of the State officials who vowed to after the banks in the absence of aggressive federal actions have backed down.

So what can “we the people” do? We can do nothing and watch more of what’s left of our wealth vanish, or we can join others in demanding a “jailout,” not a bailout.

A well-known international banker was just arrested for a high profile alleged sex crime but not one of possibly thousands have been prosecuted for well documented financial crimes.

Where are the political leaders and activist groups willing to “fight the power” and demand accountability and transparency on Wall Street?

Why are so many us banking on a financial recovery to bring back jobs and a modicum of justice created by the very people and institutions responsible for the crisis?

And why didn’t I learn about these dangers when I first discovered the wonderful world of banking? Isn’t that what schools are for?

<!–

–>

Danny Schechter

Mediachannel’s News Dissector Danny Schechter investigates the origins of the economic crisis in his book Plunder: Investigating Our Economic Calamity and the Subprime Scandal (Cosimo Books via Amazon). Comments to dissector@mediachannel.org

A New Wall Street Investigation: Is the Hammer Finally Coming May 20, 2011

Posted by rogerhollander in Criminal Justice, Economic Crisis.
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POSTED: May 18, 11:16 AM ET |
By Matt Taibbi, Rolling Stone

<!– –>
<!–
–>

Eric Schneiderman speaks to supporters on election night
at the Sheraton New York November 2, 2010 in New York City.
Michael Nagle/Getty Images

<!–Mail–>
Got a chance to meet Josh Rosner (co-author, with Times
reporter Gretchen Morgenson, of the new book Reckless Endangerment)
last night during an appearance on Eliot Spitzer’s In the Arena. We were brought in to talk about
the new investigation of the banks that apparently is being launched by New York
State Attorney General Eric Schneiderman, which looks like it might be the first
for-real attempt at a prosecution of the systemic corruption that led to the
financial crisis.

Schneiderman’s probe, news of which came out yesterday in
this piece by Morgenson, reportedly targets the banks’ mortgage securitization process
during the bubble years. Morgenson reported that Schneiderman is focused on at
least three companies: Morgan Stanley, Bank of America, and old friend Goldman,
Sachs.

This investigation has the potential to be a Mother of All Nightmares
situation for the banks for a couple of reasons. For one thing, the decision to
go after the securitization process is a total prosecutorial bullseye. This is
the ugly heart of the wide-scale fraud scheme of the bubble era. Again, the
business model during this time was a giant bait-and-switch scam. Sleazy lenders
like Countrywide and New Century first created huge masses of bad loans,
committing every conceivable kind of fraud to get people into loans (from
doctoring income statements with white-out to phonying FICO scores to
engineering fake appraisals). They then moved the bad loans quickly to the big
banks, which pooled them and chopped them up (this is the “securitization”
process), sprinkled hocus-pocus math on them, and them sold them to suckers
around the world as AAA-rated securities.

The questions Schneiderman will seek to answer are these: did the banks
securitize loans they knew were fraudulent, throwing the rotten mortgages into
the stew before serving them to customers? Did they also commit insurance fraud
by duping the bond insurers (known as “monoline” insurers) into thinking the
mortgages were not as risky as they really were? And did they participate in the
fraud scheme on a more basic level by lending huge amounts of money to the
Countrywides of the world, knowing that they in turn would immediately use that
money to create the bad loans? In other words, did the banks finance
the fraud in addition to brokering it?

The reason this is such a potentially deadly investigation for the banks is
that they seemed to be so close to getting away scot free. There is another
investigation into the banks’ mortgage abuses by the states’ Attorneys General,
led by Iowa AG Tom Miller, that was rumored to be headed toward a settlement,
despite the fact that nothing like a complete investigation has been done. The
expectation for some time has been that the banks would eventually have to pay a
significant, but eminently survivable, settlement for abuses during the bubble
era. Although the Miller probe was focused on practices like robo-signing and
other such documentation abuses, it could theoretically have covered
securitization as well.

But if the AGs were to sign off on a friendly global settlement for mortgage
abuses prematurely, it would be like a DA offering a millionaire murderer a
2-year plea bargain before the cops even had a chance to interview all the
eyewitnesses. It would be a blatantly political arrangement. Such a desire to
get some kind of deal done and sweep the mortgage mess under the rug once and
for all seems almost universal among high-ranking politicians, and particularly
in the Obama administration, which has acted throughout like it wants more than
anything to simply get all of this over with and put in the past.

Schneiderman’s investigation throws a monkey wrench into all of this. The
banks cannot enter into a settlement with 49 states. They need all 50 at the
table. But if Schneiderman breaks ranks and goes off on an end-run investigation
that plunges right into the rotten core of the fraud era, then the whole pipe
dream of an easy settlement vanishes in an instant. This is particularly true
since Schneiderman is the most important AG, being from the state of New York,
where most of the crime was probably committed.

The amount of money investors lost in this fraud scheme is probably gigantic.
The ill-gotten money the banks made off that same fraud is probably similarly
huge. And the damage to society, in the form of mass foreclosures and other
losses, is incalculable. If the banks end up being found liable for all of these
offenses, they could face truly crippling fines and penalties. This goes far
beyond the question of whether one bank like Goldman defrauded a client or two
or lied to investigators. This probe could be asking whether the banks’ entire
revenue model during the crisis years was based on fraud.

Everything I’ve heard so far indicates that Schneiderman’s
investigation is not a publicity stunt and is an in-earnest attempt to get to
the bottom of things. Which is cool. As Terrell Owens would say, Getcha Popcorn
Ready
!

Subprime Prosecution Stops Foreclosures But Lets Goldman Sachs Off Hook May 12, 2009

Posted by rogerhollander in Criminal Justice, Economic Crisis, Housing/Homelessness.
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(Roger’s note: read this then tell me why the Bailout funds could not be used to help homeowners pay subprime mortgages so that the Attorney General could pursue criminal charges against Goldman Sachs for the sake of justice and future deterrence; instead of letting Goldman Sachs get away with breaking the law with impunity and buy their way out with the taxpayers dollars.  I am guessing that the Massachusetts AG is taking her cue from Barack Obama and his AG, Eric Holder, who would rather “reconcile” and “look forward” rather than comply with their oaths of office to defend and uphold the U.S. Constitution.)

Ryan Grim, www.huffingtonpost.com, May 12, 2009

Massachusetts Attorney General Martha Coakley won a victory against the Goldman Sachs Group Monday, forcing the financial firm to cut a $10 million check to the state and pony up $50 million to help around 700 homeowners pay subprime mortgages.

“Goldman Sachs is pleased to have resolved this matter,” says Michael DuVally, a Goldman spokesman, declining to comment further.

They were also pleased, no doubt, by the terms in the settlement that allowed Goldman to avoid admitting any wrongdoing. Letting Goldman off excuses what could have been criminal behavior, but it also brings relief to hundreds of homeowners and offers a roadmap to some sort of law-enforcement-driven solution where lawmakers have come up short.

Massachusetts Congressman Barney Frank, chairman of the House Financial Services Committee, said he wouldn’t “second guess” Coakley’s decision to settle short of criminal convictions. “I don’t know what other avenues she had available, but I will say this: Getting significant relief for 700 people is very important, both for them and for the economy. Now, that’s a legitimate consideration in getting it done more quickly than waiting for a couple years to go through the criminal procedure,” he tells the Huffington Post.

Rep. Bill Delahunt was a Massachusetts District Attorney for 23 years. He said balancing immediate justice for victims with bringing the white-collar criminals to justice can be difficult.

“You almost have to judge those on an ad hoc basis. There’s no formula,” he says in general, adding that he didn’t know enough about Coakley’s investigation to comment on her specific course of action.

“Clearly, there’s a preference to pursue them criminally because I think that creates deterrence,” he says. “You know, it’s difficult to deter a kid who’s going to rob a 7-11 store for 25 bucks but for people who are purportedly educated, or at least sophisticated, who defraud others, they’re more susceptible to being deterred.”

But the most sophisticated they are, the more they can drag out a prosecution. By the time they’re found guilty, half the victims may be out on the street, their homes foreclosed.

“It’s not always a perfect world and you can’t always secure the perfect justice,” says Delahunt. “It would appear that our attorney general did some good work that resulted in a very significant sum of money for redress by their behavior.”

Frank agrees. “I can’t tell exactly what the considerations were, but I’m inclined to think the value of getting immediate relief for 700 people and saving their homes, yeah, I’d trade off a little for that,” he says.

Goldman Sachs was not accused of originating the subprime loans in question, but rather investigated for facilitating the process by buying them and bundling them into securities without regard to whether the borrowers would be able to pay them back — or whether the borrowers or originators had followed reasonable lending practices or filed the appropriate paperwork.

“We will continue to investigate the deceptive marketing of unfair loans and the companies that facilitated the sale of those loans to consumers in the Commonwealth,” Coakley said in a statement. (Coakley’s press office did not return a call.)

The state attorney general’s office has previously pulled in more than $75 million from settlements with UBS, Morgan Stanley, Citibank, and Merrill Lynch, all related to the financial crisis.

But the U.S. attorney general would have a hard time making a similar case nationally. Coakely relied on stricter rules on subprime lenders who make “unfair” loans under state law.

Congressional Democrats hope to give the federal government the power some states now have. Last week, the House passed anti-predatory lending legislation that Coakley helped Frank’s committee draft.

“What we do in our bill is to go beyond any set of state laws,” says Frank, citing a requirement that five percent of the loan portfolio be kept by the company that originates the loan. Having that amount of skin in the game, he hopes, will persuade a lender to take a loan seriously.

The bill is now, like much else, stalled in the Senate.

Banking Committee Chairman Chris Dodd (D-Conn.) says that subprime lending reform is a lesser priority because the credit freeze has inadvertently dried up the business.

“That’s true right now but we cannot count on that being true forever,” says Frank. “You couldn’t count on getting a non-predatory loan a little while ago and it is true that the freeze has helped some. That’s true in some other areas as well. There aren’t a lot of credit default swaps being written.”

But, says Frank, the financial industry won’t have forgotten how to write a bad loan once the market thaws.

“It is important to get laws on the books, because this de facto moratorium isn’t going to last forever,” he says.

Ryan Grim is the author of the forthcoming book This Is Your Country On Drugs: The Secret History of Getting High in America

Why We Should Banish Larry Summers From Public Life April 20, 2009

Posted by rogerhollander in Economic Crisis.
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by Naomi Klein

I vote to banish Larry Summers. Not from the planet. That wouldn’t be nice. Just from public life.

The criticisms of President Obama’s chief economic adviser are well known. He’s too close to Wall Street. And he’s a frightful bully, of both people and countries. Still, we’re told we shouldn’t care about such minor infractions. Why? Because Summers is brilliant, and the world needs his big brain.

And this brings us to a central and often overlooked cause of the global financial crisis: Brain Bubbles. This is the process wherein the intelligence of an inarguably intelligent person is inflated and valued beyond all reason, creating a dangerous accumulation of unhedged risk. Larry Summers is the biggest Brain Bubble we’ve got.

Brain Bubbles start with an innocuous “whiz kid” moniker in undergrad, which later escalates to “wunderkind.” Next comes the requisite foray as an economic adviser to a small crisis-wracked country, where the kid is declared a “savior.” By 30, our Bubble Boy is tenured and officially a “genius.” By 40, he’s a “guru,” by 50 an “oracle.” After a few drinks: “messiah.”

The superhuman powers bestowed upon these men — and yes, they are all men — shield them from the scrutiny that might have prevented the current crisis. Alan Greenspan’s Brain Bubble allowed him to put the economy at great risk: When he made no sense, people assumed that it was their own fault. Brain Bubbles also formed the key argument Greenspan and Summers used to explain why lawmakers couldn’t regulate the derivatives market: The wizards on Wall Street were too brilliant, their models too complex, for mere mortals to understand.

Back in 1991, Summers argued that the subject of economics was no longer up for debate: The answers had all been found by men like him. “The laws of economics are like the laws of engineering,” he said. “One set of laws works everywhere.” Summers subsequently laid out those laws as the three “-ations”: privatization, stabilization and liberalization. Some “kinds of ideas,” he explained a few years later in a PBS interview, have already become too “passé” for discussion. Like “the idea that a huge spending program is the way to stimulate the economy.”

And that’s the problem with Larry. For all his appeals to absolute truths, he has been spectacularly wrong again and again. He was wrong about not regulating derivatives. Wrong when he helped kill Depression-era banking laws, turning banks into too-big-to-fail welfare monsters. And as he helps devise ever more complex tricks and spends ever more taxpayer dollars to keep the financial casino running, he remains wrong today.

Word is that Summers’s current post may be a pit stop on the way to the big prize, Federal Reserve chairman. That means he could actually make “maestro.”

Mr. President, please: Pop this bubble before it’s too late.

This column first appeared in The Washington Post.

Naomi Klein is an award-winning journalist and syndicated columnist and the author of the international and New York Times bestseller The Shock Doctrine: The Rise of Disaster Capitalism, now out in paperback. Her earlier books include the international best-seller, No Logo: Taking Aim at the Brand Bullies; and the collection Fences and Windows: Dispatches from the Front Lines of the Globalization Debate (2002). To read all her latest writing visit www.naomiklein.org

Where’s the Outrage Over Workers Getting the Shaft? March 31, 2009

Posted by rogerhollander in Labor.
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By Marie Cocco

www.truthdig.com, Posted on Mar 30, 2009

    No cable television rants. No congressional hearing staged to publicly whip those responsible for so transparent a betrayal. Not a pitchfork in sight.

    You would be hard-pressed to know that American workers suffered a cruel defeat last week when Pennsylvania Sen. Arlen Specter—the lone Republican to have once supported a measure that would make it easier for workers to form unions and more likely that employers would negotiate in good faith—effectively killed the effort for this year.

    A Specter vote for the proposed Employee Free Choice Act, organized labor’s top legislative goal, was needed to break the expected filibuster by his fellow Republicans.

    The immediate cause of his flip-flop was a primary challenge that Specter is expected to face from former Rep. Pat Toomey, a card-carrying member of the vast right-wing conglomerate. Toomey, who came within a breath of toppling Specter in the 2004 primary, is president of the Club for Growth, an organization of conservatives that has as its guiding principle a fealty to pretty much every economic precept that has gotten us where we are today.

    The club’s view of sound economics is to make permanent the Bush tax cuts, which drain $2.2 trillion from the treasury over a decade and which, according to the nonpartisan Tax Policy Center, bestow the largest benefits on the top one-tenth of 1 percent of households—those with incomes of $3 million or more. The club also wants to permanently repeal the estate tax. This year, the Tax Policy Center found, about two-thirds of this tax will be paid by about 700 estates. The inheritors of these estates represent 0.03 percent of all anticipated heirs in 2009.

    Indirectly but indisputably, Toomey and the ideological brain trust that has given us such skewed policies have also managed to kill the most significant chance American workers had to push back against decades of job losses, benefit cuts and stagnant wages.

    But neither Toomey nor Specter did this alone. Business made defeat of the pro-union measure its top priority. It argued, deceptively, that it was ardently in favor of workers maintaining the right to vote for or against unions in secret-ballot elections when, in truth, such elections under current law are called not by workers but by employers who refuse to accept initial results of card check-offs that favor unionization. 

    Nonetheless, the economic downturn swiftly shredded the cloak of rhetoric about democracy. Business reverted to arguing that allowing workers to bargain for decent wages and benefits is a cost they should not bear. Even Specter took up this cant, arguing against “adding a burden” to business at the wrong time.

    So here is the essence of it: Largely unencumbered by unions, which now represent only about 7 percent of private-sector workers, American businesses have shipped jobs overseas, unilaterally cut benefits, kept wages stagnant or falling for most of the decade and laid off millions. The doctrine of nonintervention in the marketplace that is now the central argument against the proposed Employee Free Choice Act is the very same dogma that led us into the current financial crisis and the worst recession in at least three decades.

    Workers who did nothing to create the current economic crisis must now be kept powerless lest they create some future economic crisis we cannot yet imagine.

    The public—Pennsylvanians among them—voted against this sort of illogic just four short months ago. The AFL-CIO spent $250 million in last year’s elections on behalf of Barack Obama and many other Democrats it believed would be sympathetic to labor. But Obama, who endorsed the free choice act as a candidate, began obscuring his position almost as soon as he took office. And though Specter’s about-face is the most visible backstabbing, a handful of Senate Democrats worried about their own re-elections also were uncertain in their support and almost hostile in their public statements. It is unclear whether the measure would have passed the Senate even if Specter had voted to break his party’s filibuster and allowed a vote.

    American workers do not need friends whose subservience to the politics of self-preservation makes them indistinguishable from enemies. Remember this the next time these same so-called leaders join the frenzy over an irresponsibly greedy corporate culture—and then act decisively to keep it in place.

    Marie Cocco’s e-mail address is mariecocco(at)washpost.com.

© 2009, Washington Post Writers Group

Double Dipping March 18, 2009

Posted by rogerhollander in Economic Crisis.
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Posted March 18, 2009 by Cats r Flyfishn

www.pennsylvaniaforchange.wordpress.com

The nation is outraged at the insane bonuses given to AIG executives.  Yes, this is robbing the taxpayer.  There’s another part to this story.  It seems that the AIG failure is providing a second round of taxpayer money to the banks that caused this financial crisis.  According to an article in Slate, after they already received a payoff last year and now they want more.

…we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman’s collapse, they feared a systemic failure could be triggered by AIG’s inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG’s trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.

The bonuses are a way to distract the public while the real theft of our treasury is taking place, again.  Ah, laizze-faire economics as brought to you by Congress and the former Republican President, George W. Bush.

Read the complete Slate article here

Never trust your money with Republicans.  They will line their pockets first, tell you that they lost your money, then ask for more and then blame you for the losses.

Citigroup as the “Grim Reaper” December 10, 2008

Posted by rogerhollander in Economic Crisis.
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Raymond J. Learsy

www.huffingtonpost.com , December 10, 208

Brava Citigroup! From a broken institution you talked your compliant Wall Street buddies operating out of Washington to save your behind. Getting the Federal Deposit Insurance Corporation to provide protection against potentially debilitating losses from over $300 billion in toxic loans and securities which will now remain on Citigroup balance sheets as prime assets. Further the Federal Reserve stands ready to backup other residual risks in Citigroup’s asset pool of non recourse loans. And in addition the Treasury will be investing $20 billion in Citigroup from the TARP. Understand all of this? Just in case you don’t, the bottom line is that our government (read: taxpayers) put $300 to $400 billion on the line without which Citigroup would have in all probability been “bye-bye”.

Chastened and thankful? Give us a break. Charlie Gasparino in a “Citi’s Gossip Game” segment on CNBC yesterday reported that their Chief Finanacial Officer Gary Crittenden has been buttonholing anyone who would listen, bad mouthing Citigroups competitors such as Bank of America and JP Morgan Chase in order to boost Citigroup shares by putting down Citigroup’s competitors. Is that why we needed to save Citigroup?

And putting down JP Morgan Chase? An institution that has responded to the TARP assistance by announcing a policy that it will work with 400,000 homeowners to modify $70 billion in mortgages and loans, loans that have many homeowners scrambling to make payments they can no longer afford. Further it will stop foreclosures even in the most extreme cases for 90 days and has hired 300 mortgage counselors to help distressed homeowners. Speak of an example of civic responsibility.

What has Citigroup done in contrast? The Wall Street Journal reported on Friday that Citigroup is the lone holdout in a bank consortium comprised of Bank of America, Deutsche Bank, Eurohypo, Goldman Sachs and Wachovia who have all agreed to a nine month extension for debt laden General Growth Properties. GGP is the country’s second largest mall operator with over 200 malls in communities around the nation and with tens of thousands of jobs both directly and indirectly that could be impacted. Citigroup’s position would trigger a default in turn triggering cross defaults on other General Growth debt forcing the company to file for bankruptcy. A step that would not only effect General Growth, its employees and the communities wherein it operates, but would exacerbate, in a dramatically negative way, the commercial real estate market throughout the country. A Reuters article warns “Results of the negotiations [with General Growth Properties] are being closely watched in the $750 billion commercial mortgage backed securities market.”

In an earlier post, I ended by paraphrasing Lenin, “Wall Street will sell us the rope to hang American Capitalism.”

And in Citigroup we have created the perfect “Grim Reaper”.

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