Tuesday, December 8, 2009

Conspiracy In The Halls Of Finance?

by Mort Malkin

Conspiracy In The Halls Of Finance?

The players in the alleged conspiracy are convinced that the intricacies of high finance are far too complicated for the common citizen to understand, and so they ask our full faith and credit. “Just trust us,” they say. The White House Chief Financial Advisor, Lawrence Summers and the Secretary of the Treasury, Tim Geithner tell us the recession is ending. The stock market confirms the good news by flying above 10,000 on the Dow. Goldman Sachs reports a quarterly profit of $3.44 billion. The Chairman of the Federal Reserve, Ben Bernanke, repeats the mantra at the Brookings Institution. The recession is scheduled to end this year, he says, and the actions of The Fed will “maintain the confidence of the financial markets.” President Obama says, “Me, too.”

Yet, average people, both working and unemployed, know the economy is not recovering. Unemployment rates, kept artificially low by statistical trickery, are officially at 10%. The real rate — including those who have given up looking for work, others who have started their own small business, and many who survive on part time work without benefits — are twice the official rate, serious enough to convert a free marketeer into a Marxist. The true state of the economy was obvious even to the New York Times. The paper saw fit to print an article in the financial section just before Thanksgiving, entitled “What if a Recovery Is All in Your Head?”

The White House would have none of the pessimism as told by their own unemployment numbers and forecasts of bank failures. In a silver lining frame of mind, the various spokes-folks say that unemployment may still be at 10% but the runaway acceleration rate has stopped, a sure sign that recovery is just around the corner. Yessir and ma’m.

We don’t know who is calling the signals, or if it’s a grand conspiracy. When Hank Paulson was Secretary of the Treasury in the Bush-Cheney administration, he went to Congress and pleaded for $700 billion to save the banks. Brokerage houses, insurance companies, savings banks, and automobile financial divisions are all banks nowadays. He needed the funds immediately and with no strings attached. That way the banks with toxic assets would not have to account for the money he would give them. To this day they won’t say what they did with the billions. Nor would Treasury say how much was given to whom. It must be hard to keep track of so much money. When Paulson was caught making incessant phone calls to Lloyd Blankfein, the CEO of Goldman Sachs, some assumed the Secretary was holding the investment bank to account. But no, he said he said he was just keeping up with market developments. Not staying informed would have been irresponsible. Of course, he could have read the Wall Street Journal.

Another reality check came in from the FDIC. While Treasury was dispensing TARP (troubled assets relief program) billions to the too-big-to-be-allowed-to-fail investment banks, 94 smaller banks were in the red and had to be taken over by FDIC. As of now, FDIC is almost broke. Sheila Bair, chair of the federal agency, admits that she has only $10.4 billion in reserves for the depositors of the entire nation, and she expects that with 416 banks on her problem list, failures will “continue at a pretty good clip next year.”

If the recession is still with us, we are left with the question of who caused it, who will bring us back to a stable economy, and how it will be done. Money thrown at the investment banks seems to be ending up in the bonuses of the executives of said banks. Should we blame the Wall Street fraternity — Goldman Sachs, Morgan Stanley, JP Morgan et al? Or The Fed, starting with Alan Greenspan and continuing with Ben Bernanke in its money printing policies? Or the Secretaries of the Treasury from Robert Rubin under Clinton, to Henry Paulson under Bush & Cheney, and now Timothy Geithner under Obama with the advice and consent of Lawrence Summers? Or all of the above in an establishment conspiracy?

A hint of the answer to who runs the money works comes from the answer to “Who is the most arrogant and least sensitive to public opinion?” Even Alan Greenspan, at the height of his power as Chairman of The Fed, was enigmatic enough to be misinterpreted as honorable. Not so Lloyd Blankfein. First, he accepts $10 billion in TARP funds. Then after American International Group (AIG) gets $180 billion from TARP, Lloyd claims $12.9 billion of it for credit default swaps he held from the too-big-to-fail giant. Next, Goldman Sachs reports record quarterly profits and, without taking a breath, that it has set aside $16.7 billion in bonuses for its deserving executives. Blankfein’s premonition of public discontent (outrage?) leads to his offering of $500 million to 10,000 small businesses. Hooray for Lloyd in his penurious philanthropy. He actually believes he is worth all the money he is earning as CEO. He is, in his own words, “doing God’s work.”

More evidence for a conspiracy comes from the treatment of the big three automakers. First, Congress grills them, then reluctantly offers $25 billion if they submit plans for changing their ways. GM and Chrysler are given an initial installment of $9.4 billion and $4 billion. A couple of months later a second fix of $16.6 and $5 billion goes to the two carmakers, but the White House asks for the head of GM’s CEO Rick Wagoner. No such demand was made for Chrysler — it was owned by Cerberus Capital Management and could qualify as part of the finance industry.

In contrast to the treatment of the auto industry, the administration acted as obsequiants to the Money Trust of Wall Street. Lawrence Summers appeared on one of the Sunday morning news shows to say the government could not cancel Wall Street bonuses because a contract is a contract. Summers was nowhere to be heard when it came to rescinding some of the labor contracts with GM and Chrysler as part of their government-required restructuring.

The question is like a yo-yo: are the economic fun & games a conspiracy, or do Wall Street and the White House merely have an understanding that the Big Banks will set the rules? We’ll find out when and if financial reform becomes as urgent as health care reform. We the people may not understand credit default swaps, strangle options, and butterfly spreads, but we do know that buying stocks and bonds long term (more than six months) is investment. We know that trading options and derivatives several times a day is gambling. We will be watching if the Gramm Leach Bliley Act of 1999 is repealed and the Glass Steagall Act of 1933 is reinstated. Glass Steagall kept different banking functions — personal savings accounts, business accounts, and stock market investments — in separate institutions. Gramm Leach Bliley canceled such oppressive restrictions and opened the free-for-all doors to imaginative Wall Street. We’ll also be watching if derivatives are regulated and if a sales tax is extracted on every securitized derivative trade. The tax could be even less that the usual 6% sales on furniture, clothing, and other consumer goods. There is a market of somewhere between $44 and 75 billion in collateralized debt obligations (CDOs), credit default swaps, and other such creations. Their total notational value is $596 trillion, too big a number outside of astronomy. We will watch to see if derivatives are regulated at all, as they now are not. The same pertains to hedge funds and private equity funds. Could we hope that all derivatives of more than a couple of steps removed from original stocks and bonds will be forbidden?

Better than just watching, we’ll write, call, and email Senator Chris Dodd and Representative Barney Frank to shepherd these reforms through the Congress. They must ask Tim Geithner to explain all the complexity of the financial markets. Any absurdities that cannot be understood should be outlawed. We don’t need any more Bernie Madoffs. He went only a step beyond outrageous.

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