Pre-empting The Pay Rules

Speaking of czars, the White House's pay czar, Kenneth Feinberg, wants to cut salaries for firms receiving lots of TARP money:

The Obama administration's pay czar is planning to clamp down on compensation at firms receiving large sums of government aid by cutting annual cash salaries for many of the top employees under his authority, according to people familiar with the matter.

Instead of awarding large cash salaries, Kenneth Feinberg is planning to shift a chunk of an employee's annual salary into stock that cannot be accessed for several years, these people said.

This would be a major shift to really cut into take-home pay at places like Bank Of America and Citigroup. Finally they will feel some measure of pain for their roles in crushing the economy... 'scuse me?

Several firms that received large taxpayer bailouts have adjusted executive compensation to trim cash payouts before the Obama administration's pay czar issues new rules. Some fear those rules will go too far, preventing them from attracting the talent they need to remain competitive.

Company officials and lobbyists say Bank of America Corp., Citigroup Inc., GMAC Financial Services Inc. and others are reworking their pay plans to ensure compensation reflects executive performance. They are giving executives more of their compensation in stock and stock options, and spreading pay over a longer period. And they are adopting plans to recapture some pay when bets go bad.

Kenneth Feinberg, the Treasury Department's special master for executive compensation, is expected by next week to announce compensation guidelines for the top 75 earners at the seven firms that received the most taxpayer money. His rules are expected to include some of the same measures companies already have adopted.

I guess acting in advance of the pay rules is tantamount to implementing them, and these new rules are setting the standard for the industry, with even Goldman and JP Morgan employees getting paid more in stock than cash, so it's a win all around, no?

Well... except one-third of Wall Street expects a bigger bonus this year. And it's not clear how bonuses, especially in terms of stock options, would factor into the pay scheme. Believe me, if there's a loophole, the banksters will find a way to exploit it.

Don't Cry For Me Bank Of America Stockholders

My bank's CEO will step down at the end of the year, a fitting end for someone with a role in nearly destroying the world financial markets, as well as nearly toppling his own company after the purchase of Merrill Lynch, with shares down 50% year over year. When someone intimately involved with such bad performance steps down in the real world, they are lucky if no tomatoes hit them on the way out the door. Because this is Wall Street fantasy land, Lewis will collect $53 million dollars.

Ken Lewis doesn't have a golden parachute, but he's all set for a comfortable landing -- unlike his long-suffering shareholders.

The Bank of America (BAC, Fortune 500) chief executive officer said Wednesday he'll step aside at year-end after eight years at the helm. Based on the company's most recent proxy statement, he will have $53 million in pension benefits waiting for him when he leaves.

That should give him about $3.5 million a year in pension payouts for the rest of his life -- at a time when people who bought the stock when he took the reins in 2001 are underwater on their investments.

Although the bank swore off employment contracts and eliminated golden parachutes seven years ago, Lewis can thank a pension plan that dates back decades for his rich retirement rewards.

I'd say that parachute is golden enough, thanks.

I don't want to start railing against pensions, because most people pay into them and earn what they get. But I think a cap slightly below $53 million dollars is probably sufficient. Especially for people like Ken Lewis.

Lifestyles Of The Rich And Famous Insurance CEOs

Matt Kapp has a great piece on the salary structure in the health industry, including the insurance companies. It's really mind-blowing to see these numbers.

With median annual compensation of more than $12.4 million, C.E.O.’s at the big health-care companies make two-thirds more than their counterparts in finance and are the highest paid of any industry. The health-care industry’s total annual profit has grown to an estimated $200 billion, and it doled out nearly $170 million in campaign contributions in 2007 and 2008. It now spends more than any other industry lobbying the federal government—$3.5 billion over the past decade and a record $263 million in the first six months of this year. That’s six lobbyists and nearly half a million dollars for each member of Congress. It’s been a good year on K Street, too [...]

Gambling investors’ money on exotic securities in pursuit of outsize returns may be a dubious profit model, but what could be worse than the health-insurance industry’s core model: screwing sick people to boost margins. President Obama has taken aim at big health-insurance companies and their “record profits.” While it’s true they’ve managed to more than triple their profits over the last eight years, they’ve still only lifted their average margin to percent, enough to place 87th out of 215 industries. But they shouldn’t be complaining about lackluster profits when they’re paying their C.E.O.’s and executives as extravagantly as they are. Dishing out this much scratch, it’s a wonder they’re making any profits at all: Aetna C.E.O. Ronald Williams has helped purge millions of members from the company’s rolls; his total annual compensation in 2008 was $24,300,112. Angela Braly, who has promised that WellPoint “will not sacrifice profitability,” also saw a raise, to $9,844,212. Cigna’s Edward Hanway saw his pay cut in half and still hauled in $12,236,740, but he was forced to manage a major P.R. crisis after the company initially refused to approve a liver transplant for a 17-year-old girl, which it said was “outside the scope of the plan’s coverage.” She died just hours after Cigna changed its mind and decided it would pay for a new liver after all. Despite a 75 percent pay drop in 2008, cutting him down to a humiliating $3,241,042, UnitedHealth Group’s Stephen Hemsley put on a brave face for Congress, assuring legislators: “Our mission at UnitedHealth Group is to help people live healthier lives.” UnitedHealth has been fined tens of millions of dollars for claims-processing violations (i.e., stiffing patients and doctors). Hemsley’s predecessor, William McGuire, resigned amid a stock-options backdating scandal in 2006. He still walked away with nearly half a billion dollars in stock options. Hemsley surrendered $190 million in options himself, but with $744,232,068 left over, he should be fine.

Even C.E.O.’s at “not-for-profit” insurance companies (like most state Blue Cross and Blue Shields) collect multi-million-dollar compensation packages, even as their companies pay little in the way of taxes. Blue Cross of Massachusetts’s C.E.O., Cleve Killingsworth, got a 26 percent raise in 2008, to $3.5 million, and Blue Cross of North Carolina’s C.E.O., Bob Greczyn, pulled down nearly $4 million after a 19 percent raise. Gail Boudreaux left Blue Cross of Illinois in December 2007 with $15.3 million. The not-for-profits can be just as freewheeling with expense accounts. In early September, a state audit found that Blue Cross of North Dakota used premiums to pay for a $238,000 sales managers’ retreat in the Cayman Islands and a $34,814 retirement party for an executive.

It's just as bad for the CEOs of hospital operators, lab companies and drugmakers. But I want to loop back to the insurance industry. Defenders always latch on to that 3.4% profit margin to cry poor for the insurance industry. That is a meaningless statistic. In the first place, 3.4% on one-sixth of the US economy, approximately all the insurance premium pass-throughs, is a staggering number. In the second, those profit margins do not include these pay packages. Salaries and compensation fall into the category of operating expenses.

These are the same insurance executives who told Congress this week that denial of insurance claims could be fatal.



It's not hard to make the connection. CEOs take home millions upon millions in take-home pay. They maximize profits and expand their pay packages by paying as little in claims as possible. They admit that this denial of care can lead to fatalities. The dots connect themselves.

When WellPoint CEO Angela Braly was questioned on the immoral practice of denying coverage and dropping customers, she lied so blatantly that even Maria Bartiromo had to correct her. Yes, THAT Maria Bartiromo.

HAINES: I believe you just said very cleverly worded 87 cents of every premium dollar goes to the delivery of healthcare. But in fact why don’t we look at your, the amount of payments you make per dollar you take in. It’s more like 80 cents, is it not? You pay 80 cents in benefits for every dollar. [...]

BARTIROMO: According to your 10k, the number is more like 80 or 81 cents.

BRALY: Yeah I’m citing a Pricewaterhouse Coopers study for the industry overall. 87 cents on the dollar is going to healthcare costs, in the industry–

HAINES: Well there you go again, that’s too cleverly worded. Going to healthcare costs? [...]

BRALY: Relative to other margins in the healthcare industry — biotech’s at 18, pharma’s at 16 — you know really we’re a low cost, low margin provider in the healthcare equation.

The excuses are pitiful, and the game is clear. Insurance companies make money off of studiously ignoring your well-being.

Shadow Government

If you want to know why weakening the Federal Reserve is gaining traction in Congress, take a look at this unbelievable report from Bloomberg:

The Federal Reserve Board has rejected a request by U.S. Treasury Secretary Timothy Geithner for a public review of the central bank’s structure and governance, three people familiar with the matter said.

The Obama administration proposed on June 17 a financial- regulatory overhaul including a “comprehensive review” of the Fed’s “ability to accomplish its existing and proposed functions” and the role of its regional banks. The Fed was to lead the study and enlist the Treasury and “a wide range of external experts.”

Some top central bank officials, after agreeing to the review, saw a potential threat to Fed independence after the Treasury released the proposal, two of the people said. The Obama plan said the Treasury would consider recommendations from the review and “propose any changes to the Fed’s governance and structure.”

Keep in mind that the Fed already has refused to disclose its assets, its balance sheet or its dealings with other banks and investment firms. Now the Treasury Department - the federal agency most directly in charge of the banking sector - asks for a review of the structure of the Fed, just simply how it organizes itself. And the Fed, whose chairman is chosen by the White House, said no.

Simply put, this is a runaway organization. We cannot expect it to be a credible partner on setting bank pay limits, for example, when it is intimately tied to the largest US banks, the CEOs of whom make several orders of magnitude more money than their global counterparts. Obviously those compensation limits will come up short, because a shadowy temple of an organization holds this tremendous, unaccountable power over the financial system.

Paul Krugman may think the Fed is now getting it - perhaps out of fealty to Ben Bernanke - but from where I sit, this is an unelected nation state with the arrogance of a dictator. They need to be brought to heel.

Waxman's Gambit

Henry Waxman's move to ask insurance companies for their records on compensation and perks is as consequential a move as any member of Congress has made in the fight over health care reform, because it has the potential to change the entire narrative around the issue. It's seen as so successful on Capitol Hill, in fact, that Jay Rockefeller is supplementing it.

A U.S. Senate Democrat asked the top 15 health insurers to explain what portion of premiums go to profits versus patient care, putting further pressure on the companies to explain their business practices as Congress considers sweeping health reform legislation.

In letters to the companies on Friday, Sen. John Rockefeller also asked for information about how insurers disclose financial practices to customers [...]

"Too often consumers are not getting a fair deal for what they pay, they are not getting the protections they deserve, and the insurance companies are awash in profit," Rockefeller, chairman of the Senate Commerce, Science and Transportation Committee, said in a statement.

The letters were sent to companies including UnitedHealth Group, Wellpoint and Aetna, the committee said.

Robert Zirkelbach, a spokesman for the health insurance lobby AHIP (America's Health Insurance Plans), dismissed the Rockefeller probe as a way to "shift the focus" to the insurance industry. I think Rockefeller and Waxman would argue that the insurance industry deserves such a focus.

Waxman actually initiated his investigation back in July, right around the time he was negotiating with House Blue Dogs over concessions in his bill in the Energy and Commerce Committee. At the time, he was responding to examples of astroturf (fake grassroots) efforts performed by the insurance companies. Seeing the ferocity of their efforts, Waxman surely assumed that the industry was concerned primarily with protecting profits over being any kind of partner for reform.

Earlier this week, Waxman sent letters requesting detailed financial information including compensation, revenue and profit numbers to 52 insurance companies with annual premiums greater than $2 billion.

But nearly a month earlier, on July 21, Waxman and Investigations Subcommittee Chairman Bart Stupak sent letters to AHIP and Dewey Square Group asking for emails and internal documents about a news report in April that several senior citizens had not written letters to the editor submitted under their names.

Waxman’s committee’s spokeswoman said Waxman was merely trying to gather information critical to the health care debate.

“If we're going to get health costs under control, we need to make sure that our private health insurance dollars are spent as efficiently as possible. That means our premium dollars should be paying hospitals and physicians for providing health care, not wasting resources on administrative bloat,” she said.

The connection between the astroturfing campaigns, which industry is paying millions to lobbyists to conduct, and industry profits is obvious. Those campaigns to weaken the health care reform bill are being carried off using customer premiums.

The results of the Rockefeller and Waxman probes are due right when the House and Senate return from recess. If used skillfully, these reports can weave a narrative - whether industry participates in them or not - of insurance company excess at a time when the system is broken and millions have been denied coverage. And despite the AHIP mouthpiece's claims, this "shifts the debate" to where it ought to be - not on mythical stories and smears about reform, but about the fundamental choice between filling the pockets of an already bloated insurance industry or providing for the general welfare of all Americans. While I'm well aware that insurers are not the only problem with the health care system, they are the one actor that adds nothing of value to the process, and changing their incentives, toward lower cost and better quality instead of how to deny care, will have an impact on the system at large.

The Plaintive Wail Of The Not-Quite-As-Obscenely-Rich

There's a new sub-genre in journalism, tracking the travails and hardships of the not-quite-as-obscenely-rich. Inequality is still at its highest level since the Gilded Age, mind you, and the top 1% still rakes in 35% of all compensation, but selected still-rich individuals lost a little of their fortunes. This is the stuff of front-page news.

Last year, the number of Americans with a net worth of at least $30 million dropped 24 percent, according to CapGemini and Merrill Lynch Wealth Management. Monthly income from stock dividends, which is concentrated among the affluent, has fallen more than 20 percent since last summer, the biggest such decline since the government began keeping records in 1959.

Bill Gates, Warren E. Buffett, the heirs to the Wal-Mart Stores fortune and the founders of Google each lost billions last year, according to Forbes magazine. In one stark example, John McAfee, an entrepreneur who founded the antivirus software company that bears his name, is now worth about $4 million, from a peak of more than $100 million. Mr. McAfee will soon auction off his last big property because he needs cash to pay his bills after having been caught off guard by the simultaneous crash in real estate and stocks.

“I had no clue,” he said, “that there would be this tandem collapse.”

You really have to be kidding me with this. The stock market dropped 40%, so we're talking about paper value, not real but imagined wealth. And none of it was real anyway. That same stock market is now at a 52-week high at today's close, so the first thing to come back in this so-called recovery has been the fortunes of these same lamented rich people. The jobs for everyday Americans, not so much.

The ostensible premise of the article, that lesser yields for the rich may lead to a flattening of income distribution and maybe some relief for the middle and lower classes, is proven wrong by the middle of the article.

Few economists expect the country to return to the relatively flat income distribution of the 1950s and 1960s. Indeed, they say that inequality is likely to remain significantly greater than it was for most of the 20th century. The Obama administration has not proposed completely rewriting the rules for Wall Street or raising the top income-tax rate to anywhere near 70 percent, its level as recently as 1980. Market forces that have increased inequality, like globalization, are also not going away.

No, the real reason for this article is so super-rich people can read about other super-rich people and not feel so bad about poor people dying in the streets because of their hoarded fortunes. For example, here's Mike Bloomberg, of all people, singing a dirge for the poor little rich people.

Billionaire Mayor Michael Bloomberg defended multibillion-dollar pharmaceutical companies and their chief executives on Friday, declaring that they "don't make a lot of money" and shouldn't be scapegoats in the health care debate.

The mayor – and wealthiest person in New York City with a fortune estimated at $16.5 billion – made the comments on his radio show Friday during a discussion about health care.

"You know, last time I checked, pharmaceutical companies don't make a lot of money, their executives don't make a lot of money – not that they couldn't be better," Bloomberg said.

Pharmaceutical CEOs are known to make millions, with generous salaries, stock options and other perks.

This is a guy who bought the Mayoralty in New York for $100 million dollars over two terms, talking about people who routinely make tens of millions of dollars and hold hundreds of millions more in stock options, telling the public that the plebes shouldn't revolt because things are tough all over and those pharmaceutical CEOs are barely scraping by.

Well, tell you what then. As long as CEOs from the insurance and drug industries are basically pikers, they should have no problem adhering to Henry Waxman's request and providing readouts of their salaries and perks, so they can prove to the world once and for all that they're in this for the saving of lives and not the filthy lucre. Surely they'll agree to that.

Maybe they'll even tell the New York Times what a bad year they're having.

Waxman: Show Me The Money

(I have been hired as a blog fellow for Brave New Films and their Sick For Profit campaign, exposing billionaire health insurance CEOs and their profiting off of denying care. Join the campaign on Facebook)

It's a little shocking that the story of health insurance CEO largesse hasn't been told, by and large, by the Congress in the debate over health care reform. The debate has covered public options and "death panels" and Nazi comparisons and cost curves without addressing the fact that for-profit health insurance companies add almost nothing of value to access or quality of care and exist only to skim off the top and keep as much of their premiums as possible. And they rake in giant profits at the same time. Now Henry Waxman, no stranger to Congressional investigations, wants to put a dollar sign on those profits, specifically what money goes where.

Two powerful House Democrats have sent a letter to insurance companies asking them to provide detailed information about their conferences and retreats, executive pay, and other business practices [...]

The Waxman-Stupak letter asks companies to provide, by mid-September, the compensation packages of any employee or officer who made more than $500,000 in any year from 2003 to 2008. It also asks the companies to list all their board members and their compensation.

The congressmen also want information "listing all conferences, retreats or other events held outside company facilities from January 1, 2007, to the present."

In addition, the letter demands more basic information, such as the companies' total revenues, net income, and total dividend payments, as well as premium revenue, sales expenses and profits.

It seems like, especially considering the prominence of the subject of health care over the past few months, this should be public information. Here's the full letter.

We already have a pretty good understanding of the profits of the insurance companies, as well as the rewards of their CEOs, in salary, options, and additional perks. That was the subject of Sick For Profit, which in the first installment exposed Steven Helmsley, the CEO of United Health Group, and his $13.2 million in compensation in 2007, his $6 million dollar home in Minnesota, and his $744 million in unexercised stock options ($127 million of which he exercised in 2009). But Waxman asking for this information puts it into an investigation. And that gives it a different feel. He can use subpoena power. He can haul the CEOs before the committee. He is in the best position to contrast the 47 million people without health insurance, and the 40 million who are underinsured, with these obscene profits.

This could get interesting.

United Health Group Would Like You To Attend A Tea Party

United Health Care is one of the largest health insurers in America, covering 29.5 million individuals and over 70 million including employer-based coverage, according to recent securities filings. They are part of the cartel of insurance companies that hold regional dominance over the individual marketplace and restrict choice for consumers. But they claim to support health care reform. Right there in big bold letters on their own website.

This summer will be a critical time in the debate over how to improve health care in the United States. As the nation’s leading health and wellbeing company, trusted by over 70 million Americans to fund and manage their care, we are actively and constructively engaged in this effort.

UnitedHealth Group has a responsibility to be actively contributing ideas and practical solutions to this debate. As citizens of this nation, we each have a responsibility to remain informed and engaged on a subject so important to us all.

We are pleased that you are here and we encourage you to take advantage of the resources and tools provided on this website to better educate yourself and to make your voice heard.

Thank you in advance for your participation.

Responsibly and actively contributing ideas and solutions. That's the claim. How can that be reconciled with this?

Last week, UnitedHealth Group--the second largest health insurance company in the country--sent out a letter to its employees urging them to call UHG's United for Health Reform Advocacy Hotline to speak with an advocacy specialist about health care reform. The advocacy specialist, according to the letter, is there to help UHG employees write personalized messages to elected officials, and to arm them with talking points to use at local events in order to better oppose the public health insurance option.

TPM has obtained the letter, which you can read here, but a UHG advocacy specialist was not willing to provide TPM with a copy.

However, a source who's insured by UHG--and who also obtained the letter--called the hotline on Tuesday and says the company directed him to an events list hosted by the right wing America's Independent Party, and suggested he attend an anti-health care reform tea party sponsored by religious fundamentalist Dave Daubenmire, scheduled for today outside the office of Blue Dog Rep. Zack Space (D-OH).

Giant insurers like United Health Group see value in enabling right-wing shriek-fests. They'll either derail reform, and keep a status quo that earned the CEO $124.8 million in 2005, or get a workable, sham "reform" without a public option that would essentially funnel government subsidies to their company. They have a good racket going, and they want to keep it.

Wait Until The Masters Of The Universe Hear About This

Interesting if true:

Kenneth Feinberg, the Obama administration's pay czar, said on Sunday he has broad and "binding" authority over executive compensation, including the ability to "claw back" money already paid, and he is weighing how and whether to use that power.

Feinberg told Reuters that Citigroup Inc (C.N) included the contract of energy trader Andrew Hall in submissions due Friday by seven major companies still locked in the federal government's TARP Program.

Feinberg said he hasn't looked at Hall's contract, which reports have said could pay him as much as $100 million this year.

"Whether I have jurisdiction to decide his compensation or not, we will take a look and decide over the next few weeks," Feinberg said after speaking at a public forum in Martha's Vineyard, Massachusetts, part of a newsmaker series hosted by the Martha's Vineyard Times newspaper.

I agree that we have to do something about the problem of rampant income inequality, which is an epidemic that, if unchecked, will absolutely destroy the greater economy. But I'm not sure I find claw-backs like this to be the best method, especially when we've seen banks react to rules on bonuses by turning them into salary. Rather, the best way for government to encourage greater equality is not through after-the-fact takings, which can be scammed anyway, but through large marginal tax rates at the high end. This created massive productivity and prosperity in the 50s and 60s. Doing it through claw-backs feeds this notion that Democrats are illegally taking money out of the pockets of the wealth creators. Why not stop the hoop-jumping and just tax heavily at the top end? Also, you could make banking a much more staid and boring business through regulation and leave the ability to make lots of money to the risk-takers whose risk will actually create middle class jobs.

Compensating

The elephant in the room when it comes to the sinking economy is out-of-control inequality. It strains the social safety net through programs like Social Security which cap contributions at the $100,000 income level, and it cycles money out of the economy instead of circulating it through the broad base of people. Unequal societies rarely reach their economic potential, and often slip into recessions, depressions, and most troubling, social and political unrest. We're talking banana republic stuff. At the root is a compensation structure on Wall Street and for business executives that results from a handpicked board giving the CEO whatever he wants in the belief that they will get the same largesse in return. Yesterday a House panel approved a fix that would give shareholders a role in determining executive compensation.

The approval by the House Financial Services Committee, on a party-line vote of 40 to 28, clears the way for the measure to be considered by the full House later this week, when it is likely to be adopted.

The bill does not set pay limits. Instead, it gives shareholders the right to vote on pay and requires that independent directors from outside of management serve on compensation committees.

The shareholder votes would not be binding on company management.

The measure tries to reduce the potential conflicts of interest involving compensation consultants who play a central role in blessing pay packages. Many of those consultants also provide other services to the companies, putting them in a conflicting role for issuing fairness opinions about pay.

The measure also gives regulators the authority to prohibit inappropriate or risky compensation practices for banks and other regulated financial institutions.

This is weak. Nonbinding votes on CEO pay seem unlikely to have a great effect. And yet, shareholder revolts over the past few years have had an impact on corporate behavior. I believe the bigger fix here is the mandating of independent directors from outside management. How about shareholders chosen by lot? In this day and age of fiber optics, they don't have to live in New York.

The business world will fight this tooth and nail, I expect. But if they stepped back, and saw how their own personal greed not only helped cause this deep recession, but negatively impacted their businesses for years, maybe they would submit to these relatively minor changes.

Not Stupid, Just Secure In Their System

A few days ago, AmericaBlog asked if Goldman Sachs was tone deaf, politically stupid or foolish to boast about high bonuses during a recession. I think the right answer was "they know they can get away with it." Indeed, those record profits from the banks were a feature, not a bug. The government decided to indirectly bail Goldman and other banks out by allowing them to make bushels of money, much of it handed over by the Feds, and essentially recapitalize themselves. It hasn't fully worked, and much of it is illusory, but it's worked enough to give profits for now to a lot of banks, and as a result, compensation shoots up. That's just a byproduct of the decision on how to help the banks out of their mess. That decision itself gets clearer when you look at the revolving door between D.C. and Wall Street, which apparently doesn't stop even if the individual in question helped to fund the Sudan genocide.

As for the political pitfalls of announcing record profits right at the beginning of talks over financial regulatory reform, that doesn't appear to be a great obstacle, either.

Intense lobbying pressure from Wall Street has slowed the progress of a major piece of financial regulatory reform legislation. Financial Services Committee chairman Barney Frank (D-Mass.) informed committee members Monday night that a vote on the creation of the Consumer Financial Product Safety Commission will be pushed back until September.

"We wanted to give consumer groups and their allies time to work with their members, organize and get their message out," said committee spokeswoman Elizabeth Esfahani. "So far in this debate, we've only heard from one side, the banking lobbyists, so we want to give both sides time to be heard."

The setback is a wake-up call for Democrats, said Rep. Brad Miller (D-N.C.), an original sponsor of the measure.

"Now some of those who thought with a conciliatory approach we might get agreement, I think they now know that it's going to be a battle," said Miller.

Further undermining the efforts to create a Consumer Financial Protection Agency, beyond the bank lobbyists, is the chairman of the Federal Reserve Ben Bernanke, who thinks that the Fed can manage that on their own. Of course, the Fed is a quasi-governmental partnership with... those same big banks whose lobbyists want to tear the heart out of the CFPA. I'm not hopeful that the Federal Reserve would somehow become this uber-regulator over those who partially own them.

Brad Miller is sure to not give up on this, nor will Elizabeth Warren, who can be credited with the idea. Her article on the myths of a CFPA is must-reading. But clearly, they have a big set of hurdles, not the least of which is the perspective that the bankers still "own the place" when it comes to cracking down on them in any meaningful way.

Sure, Goldman won't be able to get everything it wants. After haggling over the purchase of government warrants, they paid them off at a solid price for taxpayers. But that's a small price to pay for keeping the regulatory efforts in their direction.

It's Good To Be The King

The loss of 467,000 jobs last month and the loss of practically every single job created this decade aside, at least some employees are back in business.

Business is back on Wall Street. If the good times continue to roll, lofty pay packages may be set for a comeback as well.

Based on analysts' earnings forecasts for 2009, Goldman Sachs Group Inc. is on track to pay out as much as $20 billion this year, or about $700,000 per employee. That would be nearly double the firm's $363,000 average last year, and slightly higher than the $661,000 for the average Goldman employee in fiscal 2007, according to analyst estimates reviewed by The Wall Street Journal.

Well, that was a close one! For a second I thought the banksters would have to SUFFER for the damage they caused blowing a hole in the global economy. Thankfully, that task will fall only to the rest of the population.

By the way, you really shouldn't miss Matt Taibbi's epic takedown of Goldman Sachs, arguably the most devious actor in this whole mess, in the latest issue of Rolling Stone. They haven't put it on their website yet, but Zero Hedge has a very hard-to-read copy. It's a comprehensive look at Goldman's increasing ubiquity throughout practically all of modern life, and their role in manipulating Wall Street and K Street to get favorable outcomes. Goldman is like the Borg, and the ruling class has been assimilated. Needless to say, Goldman's none too happy about having their agenda exposed. Taibbi responds here. He's one of the only journalists who would dare to write this story, and he should be credited for that.

...Taibbi's article is on the Rolling Stone site. But I agree with those in comments, anything that can be done to support Taibbi's work in this matter ought to be encouraged. Also, he appears to have stumbled upon a very serious issue about Goldman Sachs front-running its clients, which is basically buying a stock before executing a large trade for its clients and taking the profit.

The Inconvenient Truth On Financial Regulations

I cannot say that I am a perfect expert about financial regulation, but I can read critically. And the consensus from those trusted sources appears to be "decent, not great, not a fundamental reshaping of the financial system." Paul Krugman:

Yes, the plan would plug some big holes in regulation. But as described, it wouldn’t end the skewed incentives that made the current crisis inevitable [...]

One thing financial reform must do, then, is bring non-bank banking out of the shadows.

The Obama plan does this by giving the Federal Reserve the power to regulate any large financial institution it deems “systemically important” — that is, able to create havoc if it fails — whether or not that institution is a traditional bank. Such institutions would be required to hold relatively large amounts of capital to cover possible losses, relatively large amounts of cash to cover possible demands from creditors, and so on.

Good stuff. But what about the broader problem of financial excess? [...]

True, the proposed new Consumer Financial Protection Agency would help control abusive lending. And the proposal that lenders be required to hold on to 5 percent of their loans, rather than selling everything off to be repackaged, would provide some incentive to lend responsibly.

But 5 percent isn’t enough to deter much risky lending, given the huge rewards to financial executives who book short-term profits. So what should be done about those rewards?

Tellingly, the administration’s executive summary of its proposals highlights “compensation practices” as a key cause of the crisis, but then fails to say anything about addressing those practices. The long-form version says more, but what it says — “Federal regulators should issue standards and guidelines to better align executive compensation practices of financial firms with long-term shareholder value” — is a description of what should happen, rather than a plan to make it happen.

Steven Pearlstein:

Does anyone seriously think the United States would be reduced to a second-rate economic power if there weren't any CDOs of CDOs, or if the number of credit default swaps on General Electric bonds were limited to the number of outstanding General Electric bonds, or if reasonable leverage limits were put on hedge funds, private-equity funds or structured investment vehicles?

Is there any reason ratings agencies should continue to be paid by the companies that issue securities rather than the investors who buy and trade them?

And is it too much to ask that, in a globalized economy, banks and insurance companies engaged primarily in interstate commerce be required to get federal charters and have federal officials as their primary regulators?

Robert Reich:

The plan doesn't stop stop bankers from making huge, risky bets with other peoples’ money. It does increase capital requirements and oversight, but it doesn't require bankers to take their pay in long-term stock options or warrants, and it doesn't even hint that banks should go back to being partnerships instead of publicly held corporations.

All this means traders still have very incentive to place big and often wildly risky bets as long as the potential winnings are big enough, and top executives have very little incentive to monitor what traders are up to as long as the traders are collecting large commissions on the bets [...]

In short: It's a mere filigree of reform, a sheer gossamer of government. Wall Street must be toasting its good fortune. Unless Congress shows some spine, the great Wall Street meltdown of 2007 and 2008 -- which led to the biggest taxpayer bailout in history, very likely the largest taxpayer losses on record, and the largest investor losses since 1929 -- will repeat itself within a decade, if not sooner.

Ouch.

Of course, you have to feel for the Administration here. Already, their pre-compromised plan has been assailed by lawmakers, mainly out of concern about the centralization of power in the Federal Reserve. I agree to an extent with those Congressmen, in that the Fed is financed by banks and asleep during the last crisis. But there's not much alternative. And surely, consolidating additional regulators and agencies would produce similar wailing. And the lobbyists are ready to gut whatever meager protections exist in this proposal. It seems like the preferred options, the ones with a chance of working, could easily get stuffed by the people that "own the place." And in addition, the regulatory structure matters, but so does the nature of the regulators and their willingness to crack down on bad practices. To wit:

The question with this package is not if it’s well-suited to a world where regulators want to regulate. It’s if it’s well-suited to a world in which they don’t. A world in which growth is quick and greed looks good. A world in which Wall Street seems to be helping Main Street buy, if not houses, then a surprising number of wind turbines. One of the lessons of the past few years is that regulation has to be impartial and disinterested because regulators, and even Fed chairman, get swept up in the cultural manias behind asset bubbles as surely as traders do.

The other issue here, the great unmentionable, is that we actually know, in a sense, how to deal with the perverse incentives of the banks, more concerned with personal financial aggrandizement than the health of their organizations. You can talk about paying for performance and bringing compensation structures on Wall Street in line with those in Silicon Valley. But in the end, there's a really easy way to deal with this problem, which is a legitimate one that expands income inequality and rewards unsustainable risk. Chris Hayes explains.

Bloated CEO salaries aren't exactly new, but why they persist is harder to explain than you might think. Every dollar paid to an executive above his or her actual worth comes from the pockets of the shareholders. And while workers may be too beaten down to fight back, investors aren't exactly a powerless class in America. Why, then, do they allow clubby compensation committees and consultants to pick their pockets?

Part of the problem is the raw difficulty of figuring out how much value a particular CEO adds to a company. There's also a legal structure that attenuates shareholder power. But there's a deeper issue. CEO pay is to corporate governance what farm subsidies are to the federal government: the benefit accrues to a small group (CEOs or big agricultural concerns like Monsanto) while the cost--whether to shareholders or taxpayers--is shared widely [...]

As needed as many of these reforms are, whatever rules are put in place, CEOs will have massive incentives to skirt them. Which is why, finally, much of the solution must be found in the tax code. In 1980, before Ronald Reagan inaugurated the supply-side counterrevolution in taxation, the top rate for individuals was 70 percent. When taxation took 70 cents of every dollar made above a certain amount, there was far less incentive to game the system for giant payouts. By 1988, though, the rate was 28 percent. It has fluctuated between 30 percent and 35 percent under the past two presidents, while capital gains and other wealth taxes have steadily declined.

During the financial services hearing, as Republican after Republican railed against the specter of government bureaucrats micromanaging pay--down to "secretaries and janitors" in the fevered imagination of Illinois Representative Judy Biggert--part of me wondered if perhaps they had a point. Regulating executive compensation might have the same balloon-squeezing effect as bonus caps. And besides, it's easier for executives to game the compensation committee and shareholders than the IRS. So maybe we should let executives make as much as they can wrangle. We just need to make sure we then tax the hell out of them.

Corporate boards hold the power on executive compensation, and that's become an old boys network. The way the federal government can manage inequality is through the tax code.

That has an odd ring to post-Reagan ears, doesn't it?

Green Weeds

The Treasury Department will allow ten banks to repay their TARP money, for a total of $68 billion dollars. I don't have an enormous problem with it, especially considering that the right is whining about socialism and this is more money that the government has given Chrysler or GM combined. But I also agree with Simon Johnson:

The money allows the strongest banks to return federal aid provided at the peak of the fall financial crisis, but few banks have expressed eagerness for the government to end the other forms of support, creating concern that these programs will be habit-forming and more difficult to terminate.

As a result, independent experts warn that the government's relationship with the industry is entering a precarious new phase. As with mortgage giants Fannie Mae and Freddie Mac, the government will no longer share in the banks' profits, but it still stands ready to absorb losses.

"It's good from an individual investor point of view, it's great for the banks, but from a system point of view it's very dangerous," said Simon Johnson, a Massachusetts Institute of Technology professor and former chief economist at the International Monetary Fund.

Banks have been able to raise plenty of capital on the open market, but they still obviously need government support in the form of quick and easy lending and Federal Reserve programs. They want out of TARP to avoid executive compensation rules, period.

So now we have this situation where everyone makes the happy talk about the banks, but unemployment has far outstripped expectations, to the extent that the President and his team came out and repackaged the stimulus yesterday, promising to get money out this summer at a faster pace, saying that they will create or save 600,000 jobs in the next 100 days. Of course, conservatives want to forget the stimulus entirely because they think things are going so well (but NOT because of Obama, you understand... it's a tough needle to thread).

Here on Planet Earth, what we're starting to see is the groundwork for a jobless recovery.

Although the pace of layoffs appears to be subsiding and the overall economy is showing hints of stabilization, most forecasters expect unemployment to continue to increase in coming months and to recede only gradually as recovery takes hold. In this Economic Letter, we evaluate this projection using data on three labor market indicators: worker flows into and out of unemployment; involuntary part-time employment; and temporary layoffs. We pay particular attention to how these indicators compare with data from previous episodes of recession and recovery. Our analysis generally supports projections that labor market weakness will persist, but our findings offer a basis for even greater pessimism about the outlook for the labor market. Specifically, we suggest that the relatively low level of temporary layoffs and high level of involuntary part-time workers make a jobless recovery similar to the one experienced in 1992 a plausible scenario.

And even that recovery is threatened by the next wave of foreclosures caused by mortgage rate recasts and unemployment, and while the banks have successfully blocked any reform of the system, they may live to regret that choice. Because in truth, the economy remains at the brink:

We have both spent large chunks of our lives working on Wall Street, absorbing its ethic and mores. We’re concerned that nothing has really been fixed. We’re doubly concerned that people appear to feel the worst of the storm is over — and in this, they are aided and abetted by a hugely popular and charismatic president and by the fact that the Dow has increased by 35 percent or so since Mr. Obama started to lay out his economic plans in March. [...]

Six months ago, nobody believed that our banking system was well designed, functioning smoothly or properly regulated — so why then are we so desperately anxious to restore that model as the status quo? Nearly every new program emanating these days from the Treasury Department — the Term Asset-Backed Securities Loan Facility, the Public Private Investment Program, the “stress tests” of major banks — appears to have been designed to either paper over or to prop up a system that has clearly failed.

Instead of hauling out the new drywall to cover up the existing studs, let’s seriously consider ripping down the entire structure, dynamiting the foundation and building a new system that rewards taking prudent risks, allocates capital where it is needed, allows all investors to get accurate and timely financial information and increases value to shareholders and creditors.

At the very least, we should rerun the stress tests with the new adverse scenario. And if banks want out from federal government restrictions on pay they need to stop using federal funds in lending programs. We cannot roll back the clock to the go-go 90s and expect everyone to pick up their roles again. That would be a disaster.

A Quiet Push On Regulation

There are two arguments about why the regulators and the government missed the financial crisis. One, that the regulations were gutted by corporate interests in both parties; two, that the regulators had all the oversight abilities they needed but simply looked the other way. Really it's a combination of both. Legislation like the Commodity Futures Modernization Act, and to an extent Gramm-Leach Bliley, did remove some of the regulations over the banks, certainly the SEC under Chris Cox and the Bush Administration actively resisted enforcement of any kind. So while I do believe we need a regulatory overhaul, simply enforcing the law with existing tools would improve our ability to manage the financial industry and the risk to the greater economy.

Therefore I'm excited to see, for example, Sheila Bair at the FDIC taking on Citigroup.

The Federal Deposit Insurance Corp. is pushing for a shake-up of Citigroup Inc.'s top management, imperiling Chief Executive Vikram Pandit, people familiar with the matter said.

The FDIC, under Chairman Sheila Bair, also recently pressed a fellow regulator to lower the government's confidential ranking of Citi's health -- a change that would let regulators control the firm more tightly.

The FDIC's willingness to take an increasingly tough position toward one of the nation's largest and most troubled financial institutions is setting up a bitter clash between regulators -- some of whom disagree with the FDIC's position.

It's completely within the purview of the FDIC to regulate Citi, and just this threat is enough to keep them and other banks more in line. Meanwhile, with respect to new regulations, the Obama Administration is floating an executive rule to appoint a Special Master for Compensation that would enforce laws passed during TARP:

The Obama administration plans to appoint a "Special Master for Compensation" to ensure that companies receiving federal bailout funds are abiding by executive-pay guidelines, according to people familiar with the matter.

The administration is expected to name Kenneth Feinberg, who oversaw the federal government's compensation fund for victims of the Sept. 11, 2001, terrorist attacks, to act as a pay czar for the Treasury Department, these people said.

Mr. Feinberg's appointment could be announced as early as next week, when the administration is expected to release executive-compensation guidelines for firms receiving aid from the $700 billion Troubled Asset Relief Program. Those companies, which include banks, insurers and auto makers, are subject to a host of compensation restrictions imposed by the Bush and Obama administrations and by Congress.

Wall Street has been anxiously awaiting more details on how the rules will be applied. "The law is confusing and a bit ambiguous, and so we're looking for certainty as to how to structure pay incentives," said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a trade association.

There's an excellent debate to be had over future regulations. But I think that we would be served perfectly just by making sure the laws on the books are enforced.

More From Populist Obama

I don't know if it's residual anger over the bondholder revolt or what, but the President does seem to be formulating some legitimate steps to regulate the financial industry. First off, he wants to deal with derivatives:

In its first detailed effort to overhaul financial regulations, the Obama administration on Wednesday sought new authority over the complex financial instruments, known as derivatives, that were a major cause of the financial crisis and have gone largely unregulated for decades.

The administration asked Congress to move quickly on legislation that would allow federal oversight of many kinds of exotic instruments, including credit-default swaps, the insurance contracts that caused the near-collapse of the American International Group.

The Treasury secretary, Timothy F. Geithner, said the measure should require swaps and other types of derivatives to be traded on exchanges or clearinghouses and backed by capital reserves, much like the capital cushions that banks must set aside in case a borrower defaults on a loan. Taken together, the rules would probably make it more expensive for issuers, dealers and buyers alike to participate in the derivatives markets.

As it is now, there are $70 trillion dollars exposed in the derivatives market, more than all the money in the world. Without the need to back up the exchange with capital ratios, these things happen. Traditionally, regulations like this hold for a few years until the Big Money Boyz figure out a way to get around them. But this would essentially stop dead the shadow banking system, a major element of the crisis.

And then we have the Big Kahuna: CEO compensation, and a real effort to limit executive pay:

Obama Administration officials are contemplating a major overhaul of the compensation practices in the financial services industry, moving beyond banks to include more loosely regulated hedge funds and private equity firms.

Federal policymakers have been discussing ways to ensure that pay is more closely linked to performance.

Among the ideas under consideration are incorporating compensation as a “safety and soundness” concern on official bank examinations as well as expanding the existing regulatory powers of the Securities and Exchange Commission and Federal Reserve to obtain more information.

Obviously the issue with regulation is who the regulators are. We had plenty of regulations on the books that could have mitigated the financial crisis, but the regulators looked the other way. I mean, the NY Fed apparently knew about the AIG bonuses when Tim Geithner was at the helm. So while I appreciate the attempt, I have to see some teeth out of the oversight before I believe it will solve the problem.

The Lessons Of Chrysler

The bankruptcy judge in the Chrysler case basically told the hedge fund babies to quit their bitchin'.

The judge overseeing the bankruptcy of Chrysler on Tuesday took a significant step toward allowing the sale of most of the automaker to Fiat, approving the bidding procedures advocated by the company and backed by the Obama administration.

The decision by the federal bankruptcy judge, Arthur J. Gonzalez, is a setback for a group of Chrysler creditors who have argued that liquidation of the company or some other transaction could yield greater value. These lenders, primarily investment firms, have said that the plan for the Fiat transaction ran afoul of bankruptcy law and would chill efforts by others to produce competing, potentially higher bids.

But Judge Gonzalez disagreed, saying, “The court concludes that the bidding procedures are appropriate and necessary.” [...]

Judge Gonzalez earlier ordered the disclosure of identities of the Chrysler creditors, who had said making them public could lead to retaliation. A lawyer representing them claimed that the creditors had been harassed, and some had even received death threats.

Judge Gonzalez, said that their lawyers had not presented enough evidence of risk and gave the creditors until Wednesday morning to reveal their identities. The primary evidence cited by their lawyers was a set of anonymous comments on The Washington Post Web site.

These "death threats" that keep popping up every time a big-time financial company gets challenged never made sense to me. Now that I see they come from random Internet commenters named "jerkhoff" and it all becomes clear - they use whatever they can find to gather sympathy and chill dissent.

Meanwhile, as the deal moves forward, a couple lessons from how Chrysler dealt with its insolvency can be gleaned. First of all, Chrysler's road to profitability comes from importing the technology and management, not outsourcing the labor.

This big story was so easily missed because it runs against one of the main myths that our elites have cultivated about the US economy: that the country has a "comparative advantage" in highly skilled labor. In this story, the United States will continue to lose manufacturing and other "less-skilled" jobs as its economy becomes more concentrated in highly skilled sectors.

While this story of the US becoming a high skills center in the world economy may have been comforting to the elites, and was widely promoted by economists and the news media, there was never much truth to it. Highly skilled professionals did well in recent decades not because they succeeded in international competition, but rather because they were largely sheltered from it [...]

The end result of this protectionism for those at the top is a bloated overpaid sector of top managers, which is what we saw at Chrysler. If we compare wages for assembly-line workers in Europe and the United States, there would not be much difference between the pay of UAW members and their counterparts in Europe. However, there would be a very large difference between the multi-million dollar pay packages of the top executives at the US companies and their European counterparts. The pay gaps persist among the more highly paid engineers and management personnel.

Therefore, it was only logical that a bailout of Chrysler would seek to take advantage of the lower cost management and design skills available at a European car company like Fiat. In Chrysler, as in other companies, the high pay packages for these people are like an anchor dragging them down in international competition. If the US is to be competitive in the 21st century, we must either bring the pay of those at the top back down to earth or we should look to follow the lead of Chrysler and contract out for these services.

If only the bank executives competed on a level playing field with top talent abroad, most of whom get less in compensation and bonuses. And if only this perspective on restructuring and reducing in size were applied to the banks as well.

In return for its major loans to floundering auto companies too big and strategic to be allowed to go under, the Treasury opted for a structured bankruptcy, converting its loans to shares, ousting top executives, shrinking the companies. In return for its mega-loans to floundering banks that were also too big and strategic to fail, the Treasury has not opted for structured bankruptcy, has not converted its loans into shares, has not forced out top executives, has not moved to make banks smaller (save in its proposal to limit leverage). Indeed, its bailout of AIG rewarded bondholders such as Goldman Sachs to the detriment of everyone else.

Why the difference? Why compel the restructuring of one crucial industry and leave another, whose mismanagement all but brought down the world economy, basically untouched? Could it be that the leaders and folkways of American banking are familiar to the men who run the Treasury, while the leaders and folkways of the American auto industry are not -- meaning that they can assess Detroit more dispassionately than they can Wall Street? In short, where is the Treasury's Ron Bloom for banking?

If the Chrysler bailout turns out properly, maybe the Administration could take the hint.

Your Free Market At Work

2008 was a mixed year for corporate America. On the one hand, everybody lost money and almost crashed the global economy. On the other hand, some CEOs got PAAAAAID!!

More U.S. chief executives got pay raises than had their pay cut in 2008, a year when billions in taxpayer dollars went to prop up struggling companies and millions of workers lost jobs, according to an AFL-CIO survey released on Tuesday [...]

The executive pay study of major companies by the AFL-CIO, the country's largest labor federation, calculated compensation that included stock options granted to CEOs but not yet vested.

Some governance experts favor this method, which is intended to take into account the intent of corporate boards.

Using that methodology, Citigroup Inc CEO Vikram Pandit made $38 million in 2008, compared with the roughly $11 million reported in the company's compensation section in U.S. Securities and Exchange Commission filings.

Citigroup collected $45 billion in government bailout funds in 2008.

"When it comes to CEO pay, many companies continue to hew to the fiction of pay for performance," said Daniel Pedrotty, director of the AFL-CIO's Office of Investment.

I like how the article characterizes the AFL-CIO's methodology as if it's novel. They calculated CEO compensation based on their total compensation. What's the mystery here?

As I said before, ultimately CEO compensation is hard to stop with caps or bonus limits because money, like water, can flow around a rock. Adding marginal tax brackets and significantly taxing the highest ends of total compensation would have a greater impact. But the big story here is the complete disconnect between pay and performance. Wall Street talks sweetly about capitalism as long as they don't have to play by its rules.

Banksters Getting Money From Everyone

Cue the world's tiniest violin for the poor souls who just can't cut it for under $1 million a year on Wall Street.

There is an air of exodus on Wall Street — and not just among those being fired. As Washington cracks down on compensation and tightens regulation of banks, a brain drain is occurring at some of the biggest ones. They are some of the same banks blamed for setting off the worst downturn since the Depression.

Top bankers have been leaving Goldman Sachs, Morgan Stanley, Citigroup and others in rising numbers to join banks that do not face tighter regulation, including foreign banks, or start-up companies eager to build themselves into tomorrow’s financial powerhouses. Others are leaving because of culture clashes at merging companies, like Bank of America and Merrill Lynch, and still others are simply retiring early.

Yes, I'm awfully choked up about the assholes driven out of the big Wall Street firms.

To the Times' credit, they go on to explain how this is a good thing, because it shrinks the size of the bigger banks and spreads the risk-taking. To their detriment, they fail to explain that the most likely reason for executives darting from the biggest banks is that they are insolvent. Sure, they're playing accounting games to keep up appearances, at the same time trying to raise billions in private money from investors. Simon Johnson explains all this.

How can the large banks persuade potential shareholders to put large amounts of new capital with them, given that their systems just failed massively, these systems have not been substantially changed, and - while there has been a bailout for insiders and creditors - shareholders were largely wiped out from mid 2007-end 2008?

It could, of course, be the case that shareholders see great upside. Anything that has fallen greatly may see some rebound. The large banks have demonstrated their political muscle, so that should help with other forms of government protection and “rents” (economics jargon for easy money from business that others aren’t allowed into). In the early stages of a recovery, perhaps the banks will be more generous to their shareholders; it could be that the excessive tunneling is a feature of a mad boom, and we seem some distance from having another of those.

But probably we are looking at a deeper market failure. Big money managers - including mutual funds, pension funds and insurance companies -have arguably failed in their fiduciary duty to ensure that major financial companies are run properly and in the interest of shareholders. These money managers have great resources, many years of experience, and real power vis-a-vis the companies. Why didn’t they push for stronger risk management? Why are they so eager to hand over our money again? Where exactly was or is their due diligence?

We're coming to a reckoning between the banksters and the regulators trying to rein them in. Shareholders really ought to know the risks at this point, and I weep little for them if they want to finance Goldman Sachs. What we cannot allow are the same people sucking the Treasury dry to then fleece their customers.

The committee overseeing federal banking-bailout programs is investigating the lending practices of institutions that received public funds, following a rash of complaints about increases in interest rates and fees.

Since the Troubled Asset Relief Program was launched last October, banks bolstered by capital infusions have boosted charges on a wide range of routine transactions, hiked rates on credit cards and continued making loans criticized as predatory by consumer advocates. The TARP funds are intended to open lending spigots and make it easier for people to borrow money.

Let me try to put this all together. The banks took billions from the government. They're offering stock sales to get billions from investors to pay some of the TARP money back (but they're balking at the interest rates the government is demanding). And they're bilking their customers for even more money.

No wonder they show good earnings.

The Lesson

I don't know that I have much to say about the dysfunction in the Obama economic team that wouldn't just be a rewrite of Glenn Greenwald's piece, but it may be worth it to just disseminate the information. Here's the story so far:

Banks lost a ton of money by making terrible bets based on fanciful notions that housing prices would go up 20% year over year approximately forever. All the while the executives sat on each other's boards and handed out giant bonuses and compensation packages to each other while the financial sector grew essentially out of control. In the process, they used their money and power to effectively buy Capitol Hill and make sure their portion of the economy could keep growing, whether through usurious interest rates, a total lack of oversight (including by some of the same people now charged with overseeing the banks) or just massive wealth transfers. When everything came crashing down, the very last thing these banking interests wanted to do was admit defeat or give back any of their money and power. At the same time, the entire country was furious at them. So they set to work bribing who they knew would be top officials in the next government, people like Larry Summers, who honestly didn't even need to be bribed. And every time Congress or the executive branch threatened to end their party and put limits on their power, they found in Summers and other officials a willing partner in subverting the rules that would make them give back their bonuses and excessive compensation, which by the way the taxpayer is funding. We, the taxpayers, are told that this is necessary to ensure financial sector participation in the program to rid the banks of all of their bad assets at a potentially massive taxpayer expense. However, left unsaid is the fact that the same banks are planning to game the system by passing the same bad assets back and forth among each other at high prices, and using tricky accounting tactics to pretend that the assets on their books have value.

I think we can go to Greenwald now:

Rubin, Summers and Greenspan succeeded in inducing Congress -- funded, of course, by these same financial firms -- to enact legislation blocking the CFTC from regulating these derivative markets. More amazingly still, the CFTC, headed back then by Born, is now headed by Obama appointee Gary Gensler, a former Goldman Sachs executive (naturally) who was as instrumental as anyone in blocking any regulations of those derivative markets (and then enriched himself by feeding on those unregulated markets).

Just think about how this works. People like Rubin, Summers and Gensler shuffle back and forth from the public to the private sector and back again, repeatedly switching places with their GOP counterparts in this endless public/private sector looting. When in government, they ensure that the laws and regulations are written to redound directly to the benefit of a handful of Wall St. firms, literally abolishing all safeguards and allowing them to pillage and steal. Then, when out of government, they return to those very firms and collect millions upon millions of dollars, profits made possible by the laws and regulations they implemented when in government. Then, when their party returns to power, they return back to government, where they continue to use their influence to ensure that the oligarchical circle that rewards them so massively is protected and advanced. This corruption is so tawdry and transparent -- and it has fueled and continues to fuel a fraud so enormous and destructive as to be unprecedented in both size and audacity -- that it is mystifying that it is not provoking more mass public rage.

At the same time, the exact same banks which the government has propped up to the tune of trillions of dollars will not lift a finger to help out industries that produce tangible goods, further crumbling them and increasing the financial sector share of the economy.

And the lesson we have to learn here is that the financial sector bought government and has thus far gotten what they paid for.

I think I'll watch some basketball. Go Villanova! Your government is in control. You are free... to do as we tell you...