Bailout Spending

A Theme Song for Capitalism

davidswanson — Sun, 04 Oct 2009 19:10:57 -0400

By David Swanson

Michael Moore's movie motivated me to bring this out. Here's a theme song for Capitalism that I wrote at the time of Paulson's Plunder. Here it is sung by Timbrewolf:

And sung by leading Mad As Hell Doctor, Margaret Flowers:

And here is audio by Great Rain: The Day Hank Paulson Lied (Audio)
Original Song by Don McLean
Lyrics by David Swanson
Performed by Great Rain, Vashon Island's "acoustic insurgents," Frank Hein, Greg Parrott, and introducing Hannah Smith on Vocals. Visit their website: http://www.greatrain.com

A long, long time ago...
I can still remember
Seeing houses used to make me smile.
And I knew if I got a loan
That I could call some house my own
And, maybe, we’d be happy for a while.

But the predatory lies and fees
Left me shaking on my knees
Locked out on the doorstep;
I couldn’t take one more step.

I can’t remember if I cried
When we first had to sleep outside,
But something touched me deep inside
The day Hank Paulson lied.

So bye-bye, oh America why?
For jobs, health, and education,
All the wells have run dry.
And friends of Henry Paulson, not a tear in their eye
Singin’, "nothing kills as good as a lie.
Now watch this old democracy die."

Now did you write the Emergency Economic Stabilization Act of 2008?
And is your soul filled up with hate?
My family has no place to go.
Do you believe in trickle down?
Did the speaker buy you a plastic crown?
Where should my children sleep when there's snow?

Well, I know that you’re in love with cash
I saw lobbyists shoving it up your
As soon as you're done playing the fool
Man, can you try to recall the golden rule?

I was a lonely teenage broncin’ buck
With two jobs, a mortgage, and a pickup truck,
But I knew I was out of luck
The day Hank Paulson lied.

I started singin’,
bye-bye, oh America why?
For jobs, health, and education,
All the wells have run dry.
And friends of Henry Paulson, not a tear in their eye
Singin’, "nothing kills as good as a lie.
Now watch this old democracy die."

Now for eight years we’ve been on our own
Living in a Bushville, missing our home,
But that’s not how it used to be.
When the Congress sang for the beauty queen,
Palin jumped into the scene,
And nobody gave a damn for you and me,

Oh, and while the king was looking down,
The Alaskan stole his thorny crown.
The Republic was adjourned;
The Kingdom was returned.
And while wars happen with a spark,
There's lighter fluid in the park,
And we sang dirges in the dark
The day Hank Paulson lied.

We were singing,
bye-bye, oh America why?
For jobs, health, and education,
All the wells have run dry.
And friends of Henry Paulson, not a tear in their eye
Singin’, "nothing kills as good as a lie.
Now watch this old democracy die."

Helter skelter in a summer swelter.
There ain't no bankers in the homeless shelter,
Stock market's high and falling fast.
It landed foul on the grass.
The Congress tried for a forward pass,
The Constitution on the sidelines in a cast.

Now the half-time air was sweet perfume
While the sergeants played a fascist tune.
We all got up to dance,
Oh, but we never got the chance!
`cause the people tried to take the field;
The ninja turtles wouldn't yield.
Do you recall what was revealed
The day Hank Paulson lied?

We started singing,
bye-bye, oh America why?
For jobs, health, and education,
All the wells have run dry.
And friends of Henry Paulson, not a tear in their eye
Singin’, "nothing kills as good as a lie.
Now watch this old democracy die."

Oh, and there we were all in one place,
Pinnned in by cops from outer space
With tasers, guns, and pepper spray.
So come on: Jack be nimble, Jack be quick!
The blood and smoke have made Jack sick,
Cause fire is Dick Cheney's only friend.

Oh, and as I watched him on the stage
My hands were clenched in fists of rage.
No angel born in hell
Could break that Fuhrer’s spell.
And as the flames climbed high into the night
To light the sacrificial rite,
I saw Cheney laughing with delight
The day Hank Paulson lied.

He was singing,
bye-bye, oh America why?
For jobs, health, and education,
All the wells have run dry.
And friends of Henry Paulson, not a tear in their eye
Singin’, "nothing kills as good as a lie.
Now watch this old democracy die."

I met a girl who sang the blues
And I asked her for some happy news,
But she just smiled and turned away.
I went down to the barren shore
Where I’d heard the truth told years before,
But the man there said the truth just didn't pay.

And in the streets: the children screamed,
The lovers cried, and the poets dreamed.
But not a word was spoken;
Democracy was broken.
And the three men this delighted most:
Dubya, Poppy, and Prescott's ghost,
They drove their limos to the coast
The day Hank Paulson lied.

And they were singing,
bye-bye, oh America why?
For jobs, health, and education,
All the wells have run dry.
And friends of Henry Paulson, not a tear in their eye
Singin’, "nothing kills as good as a lie.
Now watch this old democracy die."

They were singing,
bye-bye, oh America why?
For jobs, health, and education,
All the wells have run dry.
And friends of Henry Paulson, not a tear in their eye
Singin’, "nothing kills as good as a lie.
Now watch this old democracy die."

-david swanson, afterdowningstreet.org

TRAILER: Michael Moore's 'Capitalism: A Love Story'

davidswanson — Fri, 21 Aug 2009 09:38:38 -0400

Fantasy Finance and Real Fixes

davidswanson — Fri, 22 May 2009 12:48:16 -0400

By David Swanson

If you're like me you find it at least a bit disturbing that we're giving trillions of dollars to save the economy to the very people who wrecked it, and more disturbing that we're doing so without any solid basis for expecting to get much of it back and without making fundamental changes to prevent a repetition. But if you're like me, you also aren't 100 percent certain how a credit default swap works with a cubed collateralized debt obligation, much less whether such a monstrosity needs to be eliminated or reformed. What to do?

Well, a coalition of concerned citizens called "A New Way Forward" ( http://anewwayforward.org ) is organizing teach-ins everywhere on June 10th ( http://anewwayforward.org/demonstrations ) and if you don't have people who feel up to the role of teachers, or even if you do, there's a terrific video at that website to download, show, and discuss. Just doing this much will make you more confident in discussing the single largest transfer of wealth any of us have seen, and it will connect you with others who share your concerns as well as your hesitations. There is also a wonderful collection of articles and books available on the right hand side of this page: http://anewwayforward.org/blog

A New Way Forward has digested this information and arrived at three proposals:

"NATIONALIZE: Experts agree on the means -- Insolvent banks that are too big to fail must incur a temporary FDIC intervention - no more blank check taxpayer handouts.
REORGANIZE: Current CEOs and board members must be removed and bonuses wiped out. The financial elite must share in the cost of what they have caused.
DECENTRALIZE: Banks must be broken up and sold back to the private market with strong, new regulatory and antitrust rules in place-- new banks, managed by new people. Any bank that's "too big to fail" means that it's too big for a free market to function."

I'm inclined to agree with those general ideas, but I've also just read an excellent new book that takes a broader view and offers broader solutions while calling into doubt the idea that the fixes listed above will be sufficient on their own. I recommend adding to any financial shenanigans reading list "The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity, And What We Can Do About It," by Les Leopold. The introduction to this book ends thus:

"And then there's the subprime-mortgage puzzle. The financial media has all but concluded the crash was caused by risky mortgages taken out by poor people and deadbeats who couldn't afford them, and issued by reckless lenders who should have known better. About $1.3 trillion worth of such mortgages are out there. Of that, about $300 billion are in default or nearly so…. Please, can someone explain how that amount (about 2 percent of household net worth, could devastate the world's financial system? To date, the taxpayer has put up about $2 trillion in bank bailouts and loan guarantees. Why didn't that take care of the problem long ago? Like some perverse modern-day miracle of fishes and loaves, how did $300 billion of bad debt multiply into trillions of dollars in financial toxic waste? Poor people did all that? In this book I go after these questions -- and I hope the answers will tell us a good deal about our economic woes and what to do about them. At the very least, I hope to contribute modestly to our collective financial literacy. In short, if I can understand this crap, so can you."

And you really can and it's really worth doing. The bulk of "The Looting of America" is devoted to the explanation of what's happened. And the root cause turns out not to be deregulation or oversized banks or a lack of accountability for fools and crooks, although all of those things helped. The tragic flaw in the system turns out to be the now-thirty-year-old divergence of productivity and income, the denial of a steady share of our own earnings to working people, the gradual transfer of great sums from the rest of us to a very small group of extremely wealthy people. Of course, such a transfer of wealth might seem offensive, but how could it actually cause the situation in which we needed to transfer another huge pile of wealth to the same people through our government? Well, essentially we created a situation in which investors couldn't find anything in the real economy to invest in anymore. All the real stuff was already invested in. Had someone created a way to invest in new industries, infrastructure, green energy, and mass transit, we might all be smiling about it now. Instead, investors figured out ways to invest in fantasies, to make bad investments look good, and to gamble other people's money on the fate of yet other people's investments without investing in anything real at all.

Credit: http://www.dilbert.com

So, when Leopold comes to his recommendations at the very end of the book, some of them may sound familiar and others harebrained, unless you've read the preceding chapters, in which case they all sound sensible or newly strengthened. The recommendations include (in a list I've created by pulling ideas out of the text):
1-Financial disaster insurance: we should collect premiums (or taxes) from all financial transactions to sure up the real economy against the next collapse of the fantasy one by investing in infrastructure and all the useful real investments that those with too much money on their hands don't always manage to find or create on their own.
2-Without expecting that we can prevent the next bubble and burst, we should attempt to lessen it by establishing a Financial Product Safety Commission that would ban dangerous financial "products" like collateralized debt obligations. Any product too difficult for skilled regulators to comprehend would be banned for that reason alone.
3-Undo the transfer of the wealth from our increased productivity: "If each billionaire inside the casino walked out with 'only' $100 million per person, they would leave $1.52 trillion sitting on the table. If these chips landed in the public coffers, let's say via steeply progressive income and wealth taxes, we could invest $150 billion a year in developing and deploying renewable energy alternatives -- ten times what President Obama called for during his campaign. Or we could provide free tuition for every student at every public college and university -- in perpetuity."
4-Re-unionize. Permit it by passing the Employee Free Choice Act.
5-Cap the salaries at any financial company taking government money at the salary level of the U.S. president ($400,000). Or do that for all companies taking public handouts.
6-Create single-payer health coverage, which would provide a significant stimulus to the economy.
7-Create a maximum wage.
8-Raise the minimum wage.

Another central concern for many worried about our financial fate is the role played by the Federal Reserve, which someone rightly remarked is no more federal than Federal Express. It's a private company running our financial policies and inventing and distributing money. Not only does the Constitution place such powers in Congress, but the Congress is currently not even permitted to know what the Fed is up to. It would be, however, if H.R. 1207, the Federal Reserve Transparency Act of 2009, were to pass the House of Representatives and an unprecedented avalanche of public pressure force the Senate to miraculously go along. The House bill has 179 cosponsors plus one sponsor. That's almost unheard of. No bill has that many cosponsors. It only takes 218 votes to pass. So, if we could get 38 more cosponsors we'd be getting somewhere. Here's a page on which to take action:
http://action.firedoglake.com/page/s/Fed1207

(And, by the way, applause to my congressman Tom Perriello who has signed onto this -- the second thing he's ever done that I applauded.)

There's also a particular regulation that ought to be enforceable and in fact used to be enforced fairly well, that would limit the ability of the non-working class to rip the rest of us off. I'm talking about a ban on usury. There are bills in both houses of congress to limit the interest that creditors can charge. Senator Bernie Sanders' bill (S. 582) would limit interest to 15 percent. Even those who believe we would all perish if billionaires had to fly on the same airplanes as other people and couldn't purchase that third yacht might support the idea of limiting the interest on their own credit cards to 15 percent. Surely the masters of the universe can make a dishonest living at 15 percent the same as at 22 percent or 400 percent, right? Now would be a good time to call your senator and representatives.

How to Take Congress Back from the Banks

Bob Fertik — Thu, 30 Apr 2009 22:00:00 -0400

Bankruptcy "cramdown" reform was defeated in the Senate today, which caused Sen. Dick Durbin to accurately declare, "banks own the place." Glenn Greenwald, Jane Hamsher and Howie Klein explain how. So what do we do about it?

Chris Bowers thinks we must retreat until broader cultural change occurs:

If you want broad progressive change in America, it is essential to look beyond the electoral and legislative realm. Surely we must maintain our efforts on the political front, but the leading edge of progressive change is coming in other areas. Things like the network neutral Internet, increasing immigration, increasing acceptance of the LGBT community, and shifting religious identification are making the country more progressive than any single or combination of political campaigns over the past two decades.

But Scarecrow wants to fight and reminds us we already own the banks:

Are we really that helpless against an industry that has tanked the US economy and whose largest members are de facto wards of the state?

Excuse me, but if the amount of bailout funds, for which we received preferred shares, already provided the largest banks were converted to the equivalent amount of voting stock, the US would virtually own the major banks. Moreover, if the US government reversed or reduced its policy of guaranteeing bank loans, or stopped bailing them out through pass-throughs from AIG, the major banks would face serious problems instead of crowing about how they don't need federal bailouts.

Scarecrow blames President Obama for not exercising the government's ownership rights:

For some unexplained reason, Obama feels he must assure the Wall Street Journal that he doesn't want to intervene in the banking industry, even though the industry has put millions of people out of work, destroyed their economic security and is now crippling efforts to reform them. But grownup Americans get it even if the Republican crazies can't or won't, so just stop apologizing and get on with what needs to be done.

We need a champion, Mr. President. You have leverage and you have a bully pulpit, and the public is rightfully furious at the banks. These are weapons. Use them.

We should definitely push President Obama to use our ownership stake in the banks to pressure them to stop blocking the changes we need to make.

But we should also take aim at the specific way the banks (and every other industry) "own the Senate," as Durbin said.

First, we must prohibit lobbying by any corporation that gets Federal money, whether contracts or TARP. As Jane Hamsher writes,

Let's just be clear on this: money that went to banks through TARP was used to lobby these Senators. TARP recipients simply hid behind lobbying organizations like the MBA and the ABA who did the dirty work of screwing mortgage holders out of badly needed relief to the benefit of the banks, once again.

Second, we need to pass clean elections (public funding) of Congressional races.

Third, we need to restore the Founding Fathers' definition of bribery. As Atrios writes,

the system of legalized bribery we have in this country is so part of how our government runs that unless someone is literally funneling cash into their bank accounts (and sometimes not even then) it's just seen as business as usual.

I would expand the definition bribery so it meaningfully includes any money given to a campaign for legislation.

What America needs more than anything else is a legal definition of "bribery" that reflects the "original intent" of the Founders - paying money to an elected or appointed official to get a special benefit, regardless of whether it goes into his pocket or his campaign. It should not require a freezer full of cash (like William Jefferson) or a fee-for-service list (like Duke Cunningham) to trigger a bribery investigation.

Update 1: David Sirota notes,

Bankruptcy judges currently have this "cramdown" power to renegotiate mortgage terms on vacation homes and investment properties. Vacation homes and investment properties are disproportionately owned by very rich people.

and rightly asks

can someone please ask Democratic proponents of cramdown (who I do genuinely applaud for their courage) why they didn't just make this point over and over again? The bought off whores who voted against this bill were allowed to make this debate into one about whether it is "fair" to let people renegotiate loans they agreed to. That's a shame, because the real question is whether it is "fair" to let judges help rich people keep their vacation homes but not let those same judges help regular people keep their primary residences.

The answer, of course, is "framing." Republicans wage every battle by first identifying a winning frame, then repeating it ad nauseum. Democratic leaders - especially progressives - still haven't learned this essential strategy. Maybe netroots hero Darcy Burner can use her new position at the American Progressive Caucus Policy Foundation to change this?

Update 2: Adam Green highlights the absense of any progressive mobilization for cramdown, and contrasts this with the successful mass mobilization for Net Neutrality.

In rebuttal, Bowers reiterated the need for broad cultural change before political change is possible. But how would cultural change ever result in a successful Senate vote for cramdown? It would have to produce 80 progressive Senators to overcome the unavoidable 20-odd Democratic Corporatists, which is pretty much impossible given the culture of all the Red States. The only way to win these battles is to ban lobbying by contractors, separate Corporatists from their Corporate donors through "clean elections" and redefine bribery as the Founding Fathers intended.

Update 3: Bob Borosage says we need a real grassroots movement to push Obama to the left:

what Obama has been missing has been an independent, obstreporous citizens' movement demanding fundamental reform. Roosevelt had the labor movement, the Townsend Clubs, Huey Long, socialists and communists challenging him from the left. Johnson had the civil rights movement forcing his hand...

The New Deal we remember - Social Security, the Wagner Act, Fair Labor Standards, the SEC and Glass Stegall, progressive taxation - came not in the first 100 days, but as Roosevelt, under pressure from his left, geared up for re-election. The Voting Rights Act surely would not have been passed with Selma, and many other sacrifices transforming public opinion to enable Johnson to act...

The country would be far better served with an angry populist movement that indicts Wall Street but demands greater support for working families and Main Street. But anyone building that movement will have to understand that they might earn respect, but they won't be loved in the White House.

The Great Conflation

Bob Fertik — Fri, 24 Apr 2009 12:49:24 -0400

Atrios nails it as always:

I really do hope that Larry and Timmeh get that turning the machines back on and returning to a world where massive amounts of cheap credit are available regardless of ability to repay is actually a bad idea.

And this idea that banks just need to lend more... to whom? For what?

The whole massive bailout program was sold to the American people on the idea that there was an unprecedented and catastrophic "credit freeze." That was narrowly defined as banks refusing to lend to each other because they didn't believe each other's balance sheets and didn't think they would get their money back. And that problem was described as mestastasizing outward to denial of credit to creditworthy businesses who couldn't get short-term loans to make payroll or ship goods, thus bringing the real economy to a screeching halt.

And for a few months after the collapse of Lehman Brothers last September 16, there was in fact a "credit freeze" that could be measured in terms of LIBOR rates and LIBOR-OIS spreads and other arcane measurements that only Atrios and CalculatedRisk understand (see graphs below from FinancialStability.gov).

But over time that "credit freeze" actually thawed according to those same measures. CalculatedRisk used to update them daily, but now those updates are becoming as rare as Black Swans.

So we no longer have a "credit freeze." What we have instead is a pullback in risky lending to both businesses and consumers who aren't creditworthy enough for lenders who have naturally - and rightly - become more conservative in their lending standards.

So the "credit freeze" is over and we are now in an entirely different "credit pullback." But you'll never hear Tim Geithner, Ben Bernancke, or President Obama say those words. Why? Because of what Atrios says: they want to "turn[] the machines back on and return[] to a world where massive amounts of cheap credit are available regardless of ability to repay."

The deliberate confusion of two entirely different issues - credit freeze and credit pullback - could be called the Great Conflation.

And it's a terrible strategy that needs to stop now or the economic crisis will continue at infinite cost forever.

Update 1: Here's the data. I think the LIBOR x-axis labels are off by a year. The LIBOR-OIS spread shows the "credit freeze" pretty much ended at the start of 2009.

LIBOR Rates

The London Interbank Offered Rate (LIBOR) is an indicative interbank borrowing and lending rate. It provides a measure of the cost of dollar-based credit.

LIBOR-OIS Spreads

Another indicator of funding market pressure is the difference between LIBOR and Overnight Index Swaps (OIS). The difference between these two rates is an indicator of counterparty credit risk and liquidity pressures, with a lower spread suggesting diminished concerns about credit risk.

It's April 15: Time to Pay for War, Killing and Oppression Once Again

dlindorff — Wed, 15 Apr 2009 14:29:00 -0400

By Dave Lindorff

As you’re mailing out that tax return again this year, it’s time to
remember once again how much of your hard-earned bucks are being devoted to destruction, imperialist domination, slaughter and
war, to funding ridiculous programs like the failed anti-missile
system, and also to supporting a massively bureaucratic and overstaffed
military.

Even with the current US budget predicted to hit a record $3.5
trillion, thanks to a whopping $800 billion, two-year economic stimulus
package, and with several hundred billion being poured into a group of
banks and the bottomless pit called AIG, the $800 billion budgeted for the military to date
(a figure that includes an $85 billion “supplemental” request for the
wars in Iraq and Afghanistan) represents 22% of total US spending.

That means that more than one in every five of the dollars you are paying to the IRS will be going to the Pentagon.

For a typical family of four with taxable income of $60,000 and a
tax bill of $8201.00, that would mean a “war tax” of $1804.00. For a
wealthier two-income family of four with a taxable income of
$100,000.00, with a tax bill of $17681.00, that would mean a “war tax”
of $3890.00.

Of course, it’s never that simple. Actually, the government’s tax
collections this year, because of the deepening recession which has
been with us since December 2007, means that tax collections will be
way down, not to mention the cuts that were part of the above-mentioned
stimulus package. That is to say, tax revenues this year could be below
$2.4 trillion, meaning the government will have to borrow at least $1
trillion to pay its bills.

At least a fifth of that debt, or $200 billion, will be for war and
general military spending, and it will have to be paid off at interest
rates that mean by the time that debt is retired, it will have cost us
perhaps triple that amount, or $600 billion.

In fiscal 2008, the government spent $408 billion just on interest
on the national debt. At least one quarter of that amount, or $102
billion, was for military-related debt. While this might be a little
low, since our military budgets and military debt are rising year after
year, what that tells us is that we’re also spending perhaps an extra
$40-50 billion a year of our collective tax bill on interest on war
debt. That works out to another 15% of your taxes for war.

So make that $60,000-income family’s war tax $2075.00, while the $100,000-income family’s war tax goes to $4474.00.

The reporting on America’s military budget in the mainstream
corporate media (some of which is actually owned, like NBC, by
conglomerates that are themselves beneficiaries of military spending,
and all of which are beneficiaries of considerable ad revenue from
military contractors and from the Pentagon itself), has been atrocious,
with a lot of talk about “cuts” in pointless hugely expensive weapons
systems like the F-22 Raptor, a fighter jet designed to combat an
advanced enemy that simply doesn’t exist. The truth is that the
proposed 2009 military budget put out by the Obama administration is
the largest in history in actual dollars, continuing the trend of the
last 11 years in which each year’s military budget has been larger than
the prior year’s. It is also the largest military budget, after
adjusting for inflation, since WWII.

If that disgusts you, consider what just 25% of that budget, or
about $175 billion—the amount that House Finance Committee Chair Barney
Frank (D-MA) has proposed cutting—could do, if spent on things this
country needs, instead of on killing and preparing to kill. Total
federal spending on education for 2009: $46 billion. Total spending on
welfare for families with dependent children for 2009: $60 billion.
Total federal spending on unemployment compensation for 2009: $43
billion. Total federal transportation spending in 2009: $84 billion.
Looked at another way, cutting the military budget by 25% (which is
really a modest amount, considering that the US is spending as much on
its military machine as the rest of the entire world combined!), would
allow the government to increase all those other budgets by 50% and
still have $58 billion left over for other useful spending goals like
the environment, energy and medical research, etc.

Just a thought for tax day.

It doesn’t have to be this way.

The late folksinger/songwriter Tim Hardin had it right long ago.

___________________
DAVE LINDORFF is a Philadelphia-based journalist. His latest book
is “The Case for Impeachment” (St. Martin’s Press, 2006). His work is
available at www.thiscantbehappening.net

Teabag THIS

davidswanson — Sun, 12 Apr 2009 03:40:11 -0400

Flyers to take to teabag rallies:

Large jpg. PDF. Word. Old Word.

History Lesson: And These Are the People We Expect to Fix Things Now?

dlindorff — Fri, 27 Mar 2009 13:03:54 -0400

By Dave Lindorff

George Santayana once famously said, “Those who cannot learn from
history are doomed to repeat it.” But what about those who don’t just
ignore history, but who hire and take counsel from those who committed
historic follies in the past?

Back in November 1999, Congress passed legislation pushed by then
Sen. Phil Gramm (R-TX), rescinding the Depression-era Glass-Steagall
Act. The measure, backed by the Clinton administration, and
overwhelmingly passed by the Senate (90-8) and the House (362-57),
opened the way for banks to merge with investment banks and insurance
companies, and led directly to the current financial cataclysm.

A report on that Congressional action written by reporter Stephen
Labaton and published in the New York Times on Nov. 5, 1999 under the
headline “Congress Passes Wide-Ranging Bill Easing Bank Laws,” includes some remarkable quotes from key players in that sellout to the financial sector.

Here’s Larry Summers, a chief architect of the current financial
industry multi-trillion-dollar bailout giveaway being orchestrated by
the Obama administration, where he serves as director of President
Obama’s National Economic Council:

''Today Congress voted to update the rules that have governed
financial services since the Great Depression and replace them with a
system for the 21st century. This historic legislation will better
enable American companies to compete in the new economy.''

And here’s what Sen. Charles Schumer (D-NY), awash in Financial
industry campaign donations but currently in high dudgeon over the Wall
Street’s bonus payments to executives, speaking about the ’99 measure
eliminating Glass-Steagall:

''If we don't pass this bill, we could find London or Frankfurt
or years down the road Shanghai becoming the financial capital of the
world. 'There are many reasons for this bill, but first and foremost is
to ensure that U.S. financial firms remain competitive.”

The article quotes the Clinton administration and Summers’ Treasury
Department as predicting that revoking Glass-Steagall and permitting
banks to expand into investment banking and insurance would save
consumers “$18 billion a year” through economies of scale—a figure that
seems rather quaint as taxpayers now pony up trillions of dollars to
rescue those same institutions. (The article notes that critics of
deregulation argued that even those paltry savings, probably
overstated, would flow to financial sector investors, not to consumers.)

The old Times clip (brought to my attention by alert
veteran radical writer and activist Bert Schultz of Philadelphia), does
highlight a couple of prophetic heroes, too.

Sen. Byron Dorgan (D-ND), one of seven Senate Democrats who voted against revoking Glass-Steagall, said:

“I think we will look back in 10 years' time and say we should not
have done this but we did because we forgot the lessons of the past,
and that that which is true in the 1930's is true in 2010. I wasn't
around during the 1930's or the debate over Glass-Steagall. But I was
here in the early 1980's when it was decided to allow the expansion of
savings and loans. We have now decided in the name of modernization to
forget the lessons of the past, of safety and of soundness.''

And then there’s the late Sen. Paul Wellstone (D-MN), who died in a
tragic and still unexplained plane crash during his campaign for re-election in 2002. Congress, he
said, seemed:

“…determined to unlearn the lessons from our past mistakes.
Scores of banks failed in the Great Depression as a result of unsound
banking practices, and their failure only deepened the crisis.
Glass-Steagall was intended to protect our financial system by
insulating commercial banking from other forms of risk. It was one of
several stabilizers designed to keep a similar tragedy from recurring.
Now Congress is about to repeal that economic stabilizer without
putting any comparable safeguard in its place.''

For the record, also voting against Glass-Steagall repeal in the
Senate were lone Republican Richard Shelby of Alabama, and six other
Democrats: Barbara Boxer (CA), Richard Bryan (NV), Russ Feingold (WI),
Tom Harkin (IA), and Barbara Mikulski (MD). 51 Democrats, 5 Republicans
and 1 independent voted against the measure in the House.

Treasury Secretary Tim Geithner, a key player in the current bailout
scheme, isn’t mentioned in the Times article about Glass-Steagall, but
at the time was a protégé of Summers, working as undersecretary of the
treasury for international affairs.

While they are thankfully well out of the loop in the current
scramble in Washington to both reverse the economic collapse
and try and help financial companies and financiers profit from it,
it’s worth reading too in this 10-year-old clip what Phil Gram and then
Sen. Bob Kerrey (D-NE and now embattled president of the New School in
New York City) had to say about ending Glass-Steagall.

Sen. Gramm:

'The world changes, and we have to change with it. We have a new
century coming, and we have an opportunity to dominate that century the
same way we dominated this century. Glass-Steagall, in the midst of the
Great Depression, came at a time when the thinking was that the
government was the answer. In this era of economic prosperity, we have
decided that freedom is the answer.''

And then Sen. Kerrey, with a line that should probably be etched someday on his tombstone as his most memorable line:

“The concerns that we will have a meltdown like 1929 are dramatically overblown.”
__________________
DAVE LINDORFF is a Philadelphia-based journalist. His latest book
is “The Case for Impeachment” (St. Martin’s Press, 2006). His work is
available at www.thiscantbehappening.net

How to End Blackmail by AIG Traders

Bob Fertik — Wed, 18 Mar 2009 10:55:49 -0400

We now know AIG traders got their bonuses through blackmail - even CEO Edward Liddy admits it in today's Pentagon Post. The message from the traders is crystal clear: pay us handsomely or we will screw you royally.

Although we have wound down more than $1 trillion [of nearly $3 trillion] in the portfolio of the AIG Financial Products unit that is at the root of the company's troubles, there remains substantial risk in that portfolio. The financial downside for taxpayers is potentially very large, and that's why we're winding down this business.

To prevent undue risk exposure in the meantime, AIG has made a set of retention payments to employees based on a compensation system that prior management put in place.

For the sake of argument, let's stipulate that "the financial downside for taxpayers is potentially very large" since $1.6 trillion in derivatives still need to be wound down. But here's the question: why are we depending on AIG to do it?

Presumably the derivatives in the AIG portfolio have identifiable counterparties. Presumably those counterparties are large financial institutions, just like the counterparties identified by AIG last week. Is it not a safe bet that those large financial institutions are also recipients of taxpayer bailout money through TARP or similar European programs?

If that's the case, we have Taxpayers on one side of these derivatives, and Taxpayers on the other side too.

If that's the case, why don't we just let Taxpayers - via the Treasury Department - unwind the derivatives?

Based on the WSJ article below, the ultimate beneficiaries of AIG payouts are Hedge Funds. To save taxpayers, should the Treasury nationalize those Hedge Funds?

WSJ describes some of AIG's losses:

Some of the billions of dollars that the U.S. government paid to bail out American International Group Inc. stand to benefit hedge funds that bet on a falling housing market, according to people familiar with the matter and documents reviewed by The Wall Street Journal.

The documents show how Wall Street banks were middlemen in trades with hedge funds and AIG that left the giant insurer holding the bag on billions of dollars of assets tied to souring mortgages. AIG has put in escrow some money for at least one major bank, Deutsche Bank AG, whose hedge-fund clients made bets against the housing market, according to a person familiar with the matter. The money will be released to the bank if mortgage defaults rise above a certain level.

In essence, while the U.S. government is busy trying to prop up the housing market -- by trying to limit foreclosures, among other things -- it is simultaneously putting up cash that could be used to pay off investors who bet housing prices would tumble and many mortgage holders would default.

It's unclear how much government money might eventually flow to hedge-fund investors. Overall, the government has committed up to $173.3 billion to bail out AIG. Of that amount, AIG's housing-related bets have cost U.S. taxpayers some $52 billion.

The investment strategies involved are perfectly legal maneuvers. Still, the losses show how AIG strayed from its core business: selling standard insurance policies to businesses and individuals to protect against everything from fires to lawsuits. "AIG's financial-products division went heavily into the business of speculation, and its gambling debts are what taxpayers are paying off right now," said Martin Weiss of Weiss Research, an investment consultant in Jupiter, Fla.

An AIG spokeswoman declined to comment, as did a spokesman for the Federal Reserve Bank of New York.

The transactions worked like this: Investment banks such as Goldman Sachs Group Inc. and Deutsche Bank sold financial instruments to hedge funds letting them bet that mortgage defaults would rise. These instruments were credit default swaps, a form of insurance that pays out in the event of a debt default.

It is not known which hedge funds made those bets with specific banks. However, several large funds made big, ultimately profitable, wagers that mortgage defaults would increase.

Many of the assets AIG insured were tied to subprime mortgages. The deterioration of those high-risk mortgages, along with AIG's own financial woes, forced the insurer to put up billions of dollars in collateral, mostly to the banks that were its trading partners. AIG sold protection on securities backed by physical assets, as well as on positions almost entirely backed by other financial bets.

Some of the U.S.-government exposure traces back to the hedge funds that spotted problems in the U.S. housing market in 2005. They wanted to "sell short" -- or bet against -- securities backed by mortgages to questionable borrowers. These hedge funds entered into trades with investment banks. The banks then used a complex set of financial maneuvers to pass on some of the risk of those trades to AIG and other insurers.

The transactions meant that AIG was wagering that the U.S. housing market would remain robust. With housing markets now in free fall, the hedge funds stand to collect money from their bank counterparties. AIG is, in turn, compensating the banks.

The banks that had sold credit default swaps to the hedge funds wanted to turn around and hedge their own risks. But finding that protection wasn't easy.

So at Deutsche, the German bank's securities arm created a handful of offshore companies known as collateralized debt obligations, or CDOs. These companies carried a series of exotic names, according to securities filings, mostly based around the moniker "START," short for STAtic ResidenTial CDO. They allowed Deutsche to neutralize its exposure to the hedge funds' bets by buying swaps from START on the same securities its clients were betting against.

START held assets from a hit parade of lenders closely linked to the subprime crisis, including Bear Stearns, Countrywide Financial and New Century Financial, according to documents reviewed by the Journal.

In 2005, Deutsche found a willing taker for a chunk of the mortgage risks held by START: AIG Financial Products. The derivatives arm of AIG agreed to pay out up to $1 billion under two of the START vehicles, if underlying assets deteriorated or the insurer's own credit rating fell below a certain threshold. AIG stood to earn a fraction of a penny each year for every dollar of protection it sold, according to securities filings, meaning it made less than $10 million annually on the $1 billion in insurance.

Up until AIG exited the market in 2006, "AIG was by far the single largest ultimate taker of risk in the [subprime mortgage] CDO space," says a senior investment banker whose firm bought credit protection from the insurer.

Last fall, after AIG's credit rating was cut, the insurer paid roughly $800 million to START, according to two people familiar with the matter. Much of the money is being held in escrow and will be used to pay off Deutsche's swap contracts if mortgage defaults in the portfolio rise above a certain level. Some of that money could go through Deutsche to its hedge-fund clients.

If the housing market improves, AIG could recover some or much of the cash it transferred to START. But that outcome won't be known for years. The portions of START to which AIG is exposed were originally rated triple-A by Standard & Poor's. They've since been downgraded to "junk" status by the ratings firm.

The START CDOs share some similarities with mortgage pools created by Goldman named "Abacus" and also insured by AIG Financial Products, according to people familiar with the matter.

These pools were made up of credit-default swaps tied to individual mortgage securities. AIG had to post collateral to Goldman when the assets dropped in value. Some of this money, too, could go to hedge-fund clients of Goldman.

From mid-September to the end of last year, AIG and the government paid $5.4 billion to Deutsche and $8.1 billion to Goldman under credit default swap contracts the insurer had written.

A spokesman for the German bank said, "Our exposure to AIG was well-collateralized and hedged." A Goldman spokesman also said his firm's exposure was collateralized and hedged.

Who's Calling the Shots Now: The Death of American Empire

dlindorff — Tue, 17 Mar 2009 15:59:11 -0400

By Dave Lindorff

It may not be obvious today, and certainly it’s not how the corporate media reported it, but future historians are likely to look back at March 13, 2009 as the day that American imperialism began it’s inexorable decline. That’s the day that Chinese Premier Wen Jiabao announced that his country was “worried” about its holdings of over $1 trillion in US treasury securities, and warned that he wanted the US to assure China that it would maintain its good credit and “honor its promises” and “maintain the safety of China’s assets.”

There is no way that the US can accommodate Premier Wen and still finance and operate a global military system with over 1000 overseas bases, massive aircraft carrier battle groups, and with hundreds of thousands of men and women armed to the teeth with the latest high-tech military hardware, not to mention fight endless wars on the far side of the globe.

What China is doing is pulling the rug out from under America’s six decades of global military dominance. It is no coincidence that the weekend before Wen’s statement, Chinese naval vessels aggressively harassed a US intelligence ship, the Impeccable, that was operating in the South China Sea.

The implied threat in Wen’s seemingly mild comment was that if the US doesn’t trim its deficit spending dramatically, and get its economic house in order—which means dramatically reducing the American standard of living, and reducing wasteful spending of its military, China will simply cut back on its funding of the US deficit, in the form of buying US Treasury issues, an act which would cause the collapse of the US dollar and what’s left of the US economy.

Now this decline of the US as an economic and military power is not going to be an overnight thing, because China needs to keep selling manufactured goods to the US market—the largest in the world—and in order to do that, it needs to keep recycling dollars spent on Chinese goods back into the US, which to date has meant buying US debt issues.

But there are other ways to recycle dollars back to the US, most notably by investing in actual US assets. To date, China has done this cautiously, in part to avoid arousing political concern in the US. Typically China, when it has purchased shares of US companies, has done so by buying small minority stakes, as it did in the case of the Blackstone Group, a private equity investment firm. But if China were to decide to stop funding America’s massive deficit, this could change. It could decide to just let the dollar slide, and take advantage of the slumping value of US assets to start buying the US up on the cheap.

There is already talk of Chinese auto companies buying up General Motors and Chrysler, and why not? They could have those companies, not to mention most of the national banks, for a song now. But China wouldn’t have to limit itself—nor would it—to buying up dying companies. It could also buy entities like General Electric, Boeing and IBM, or it could buy agricultural assets and mines—or oil companies and oil reserves.

In fact, China has been using its vast trade-surplus-fueled currency reserves of dollars and Euros to lock up at cheap prices on long forward contracts for oil and other critical commodities. This is just the beginning. (It would be ironic and incredibly foolish if the US, which has spent several hundred billion dollars in borrowed money, and as much as $3 trillion if interest costs are factored in, on conquering and controlling Iraq, really did so to gain control of oil, since China has accomplished the same thing peacefully for a small fraction of that cost, by just buying forward supply contracts.)

It is likely that India, whose economy is doing even better than China these days, will do much the same thing.

The end result will be a vast permanent weakening of America, as its economy becomes increasingly subservient to the interests of its new owners.

There is a delicious irony here, since the US, for decades, has done precisely this kind of thing around the world to developing nations, buying up their industries and their resources, and manipulating and controlling their political systems, to its own advantage, always with the backing, or threatened use, of America’s powerful military. Now the once-might US (remember Dick Cheney’s “world’s lone superpower” and George H.W. Bush’s “New World Order”?) is reduced to pleading with China to leave its warships alone, and to shamelessly begging, as Hillary Clinton did in one of her first public statements as secretary of state, for China to “keep buying” US Treasuries.

From the point of view of the majority of the world’s people, who have lived for too long under the American jackboot, this is all a good thing. But forcing the new “Rome” to retreat back within its own borders will also be good for us Americans, who have had to pay for all those military adventures in the name of empire and corporate profits over the years with our blood and taxes.

The problem, for us, however, is that all this military and economic comeuppance will also be accompanied by a dose of reality about our own real living standard. As long as China, India and the oil-producing states were willing to just keep buying American government securities to finance our multi-generational spending binge, it was possible for the US government to keep us citizens all fat and happy by creating a series of bubble economies, pushing up our salaries and the value of our homes to absurd levels, while interest rates remained comfortably low and the US dollar, as the world’s reserve currency, remained strong enough for us to continue to buy goods, the production of which was increasingly being moved overseas.

Suddenly, however, in one brief speech, Chinese Premier Wen has made it clear that the US is no longer calling the shots. Nobody’s saying it out loud here in America, but behind the scenes, it’s clear that increasingly US economic policy is going henceforth to be dictated by governments in places like Bejing, Tokyo, New Delhi and Brazilia. Those same places will also increasingly be telling us where and even if we can use our once mighty military forces.

Given our post-WWII history, that can’t be a bad thing.
_______________________
DAVE LINDORFF is a Philadelphia-based journalist. He spent five years reporting on China and Hong Kong for Business Week magazine in the 1990s and is author, most recently, of “The Case for Impeachment” (St. Martin’s Press, 2006 and now available in paperback). His work is available at www.thiscantbehappening.net