Monday 27 December 2010
Sunday 26 December 2010
Monday 20 December 2010
Sunday 12 December 2010
Saturday 11 December 2010
Monday 6 December 2010
Sunday 5 December 2010
Saturday 4 December 2010
Friday 3 December 2010
Sunday 28 November 2010
Wednesday 24 November 2010
Tuesday 23 November 2010
Monday 22 November 2010
Saturday 13 November 2010
Monday 8 November 2010
Sunday 7 November 2010
Saturday 16 October 2010
Tuesday 5 October 2010
The 2010 BBC Reith Lectures with Martin Rees....4 parts...
A Magnificent 4 part BBC podcast with Martin Rees.
http://www.bbc.co.uk/podcasts/series/reith
http://www.bbc.co.uk/podcasts/series/reith
Saturday 18 September 2010
Sunday 12 September 2010
Tuesday 7 September 2010
Friday 13 August 2010
Sunday 1 August 2010
Saturday 17 July 2010
Sunday 11 July 2010
Sunday 4 July 2010
Sunday 27 June 2010
Friday 18 June 2010
Monday 7 June 2010
Monday 31 May 2010
Saturday 29 May 2010
Monday 24 May 2010
Saturday 22 May 2010
Chomsky : Manufacturing Consent...17 parts...
Funny, provocative and surprisingly accessible, the classic "Manufacturing Consent" explores the political life and ideas of world-renowned linguist, intellectual and political activist Noam Chomsky. Through a dynamic collage of biography, archival gems, imaginative graphics and outrageous illustrations, Mark Achbar and Peter Wintonick's award-winning documentary highlights Chomsky's probing analysis of mass media and his critique of the forces at work behind the daily news.
Wednesday 19 May 2010
Saturday 15 May 2010
BBC World Service ..Plants of Power....6 part documentry series
http://www.bbc.co.uk/worldservice/sci_tech/features/health/medicinedrugs/plants.shtml
Saturday 8 May 2010
Friday 7 May 2010
Monday 26 April 2010
Monday 19 April 2010
The man who stole your old age.
The man who stole your old age: How Gordon Brown secretly imposed a ruinous tax that has wrecked the retirements of millions
By Alex Brummer
Last updated at 11:10 PM on 16th April 2010
Comments (45) Add to My Stories Gordon Brown's trusted lieutenants gathered round their leader in the plush penthouse suite of the Grosvenor House Hotel on London's Park Lane.
Room service was kept busy and the alcohol flowed as the select handful of politicians and advisers surrounding the then Shadow Chancellor met regularly in the crucial weeks leading up to the General Election of May 1997 to plot the economic future of Britain.
One of the gang, the wealthy Labour MP and businessman Geoffrey Robinson, was picking up the tab but it was Brown who was calling the shots. Meetings like this reflected how he liked to work - in absolute privacy and with the total loyalty of a tightly-knit group of like-minded associates.
Stand and deliver: Gordon Brown is the man who destroyed what was once the world's best pension system
With the likes of the ambitious Ed Balls and the abrasive spin-doctor Charlie Whelan, these were 'blokey' occasions, but between the political gossip and the talk about football, the serious issues they decided on would profoundly affect millions of British companies, investors and workers for years, even generations, to come.
The Brown cabal needed to find ways to raise extra tax revenues for the wide-ranging programme of reforms New Labour planned.
So, on one fateful night in that suite overlooking Hyde Park, they decided that, once in power, they would launch a massive multi-billion-pound raid on a gold-plated, copper-bottomed sector of the British economy - its pension funds.
Up until this point, company pension funds had enjoyed an important tax break on the financial investments they made in order to build up the capital from which employees could be paid when they retired. By long tradition, the funds paid no tax on the dividends they received from those investments.
The view of Brown and his penthouse cronies was that this concession had to stop.
The tens of millions of people who paid into such corporate pension schemes - where employee contributions were, by and large, matched by their employer - were over-privileged, they argued.
Moreover, almost all company pension funds were in surplus - so much so that many employers had cut their contributions - and could easily take the hit of around £5 billion a year.
And, anyway, a buoyant stock market - at the time rising by an average of 15 per cent a year - would mitigate any potential loss.
It sounds like a dull technicality they were planning, one of those impenetrable Budget footnotes that pass most people by and for which the nit-picking, number- crunching Brown would become notorious over the coming years.
But the harsh reality of that decision over pizza and beer 13 years ago is that a generation of hard-working people, who had paid into pension schemes over many years and thought they had secured their futures, face an impoverished and uncertain old age.
Ed Balls (left) and Charlie Whelan (right) were also Brown's trusted lieutenants
Worse still, the decision the Grosvenor gang made that night was kept secret. Those meeting in the penthouse knew that what they proposed was an ideological bombshell.
New Labour had been assiduously reaching out to business and seeking to increase its electoral appeal to the middle class. Abolishing tax credits flew right in the face of this. Brown's inner sanctum therefore resolved to keep their plan strictly to themselves.
The document detailing it was locked away in Robinson's safe.
What Brown and co then implemented was nothing short of highway robbery. It would betray the retirement dreams of millions of ordinary British people.
Back at the start of the 20th century, Britain led the world in pension arrangements, with the first state-run pension scheme to sustain people in their old age after their working lives were over.
But, in parallel, successive governments also recognised the importance of people being self-reliant, too, and offered tax relief to encourage employers to set up private occupational pension schemes and their employees to join them.
Here was one of the greatest social welfare developments of the century, a win-win situation for all involved.
For employers, these company pensions were a way of engendering loyalty among the workforce. For employees, who paid a percentage of their wages into the pot, they were both a form of deferred salary earned through long service and a guarantee for the future.
For governments, the stronger the occupational schemes, the less funding they had to commit directly to state pensions. From an economic point of view, the tens of billions of pounds saved within pension funds could be used as an investment tool to finance the requirements of industry.
There were inevitably wrinkles in the system and things that needed fixing, but, generally speaking, the state of British pensions in the lead-up to the 1997 General Election was healthy. The occupational side was pretty much the envy of the world.
Tory Chancellor Norman Lamont marginally reduced the tax credit the pension funds claimed on dividend payments
Through the good years of rising company profits and rising share prices, the pension funds had prospered, thanks in part to the tax breaks they enjoyed. Inevitably, covetous eyes were cast on this gold mine, first by a Tory chancellor, Norman Lamont.
Desperate to raise revenue in 1993, he marginally reduced the tax credit the pension funds claimed on dividend payments. At the time the measure was little noticed and produced only a mild reaction from the pensions industry. Company pension funds continued in robust health.
But Lamont's mini-raid left the door guarding pension funds slightly ajar - for Brown to come charging through four years later like a bull in a china shop.
The fact is that tinkering with pension calculations is a dangerous activity. The future stability or otherwise of any fund depends on extremely complicated sums about the life expectancy of the scheme's participants. If these turn out to be even slightly out-of-kilter, then there is a danger that the scheme will run out of cash.
But in late 20th-century Britain, a fundamental shift was happening in those basic sums because more and more people were living longer. What's more, that longevity was going up by leaps and bounds rather than in small, slow increments, and there seemed no end to it. A demographic time bomb was ticking away under all pension calculations.
Back in the Fifties, an employee retiring at 65 lived, on average, only another three or four years to draw his or her pension. Now, that period of retirement is more likely to be 20 years or more, and rising indefinitely as scientists - and the pensions industry - realise that there is no notional biological 'maximum age' beyond which the human race cannot go.
In tandem with this soaring life expectancy has been a fall in the birth rate. One hundred years ago, when state pensions were introduced, there were 22 people working for every retired person. By the end of this decade, the ratio will be 2:1. By 2025, the number of over-60s in Britain will pass the number of under-25s for the first time. All this has huge implications for pensions.
No policymaker has a crystal ball but it was obvious in the lead-up to the 1997 general election that pensions were going to be a critical issue in the years ahead. Keeping the sector healthy would be a major challenge.
Occupational pensions, in particular, would have to be an ever more important component of the nation's welfare system for old age, in order to ease the burden on the state.
Those New Labour economic planners in the hotel penthouse must have known all this, and they had a chance to fix it. Inheriting a booming economy that would allow them to put ambitious plans into action, they were in an excellent position to make pensions fit for purpose in the new millennium.
But what followed was a shambles. Arriving at the Treasury as Chancellor of the Exchequer the day after the election, a triumphant Brown took from the box of tricks he and his cabal had concocted his secret plan to rob the pension funds of their tax allowance.
He felt justified in doing so because, as he pointed out, Lamont and the Conservatives had already trimmed the relief in 1993.
Just as importantly, he argued, most company pension funds were hugely in surplus and could well afford to surrender the concession. He flourished a report from a private firm of accountants - commissioned and paid for by the wealthy Robinson out of his own pocket during those Grosvenor House days - which concluded the downside would be minimal.
Civil Service economists urgently set to work to establish if this was true. But as they road-tested the plan and its consequences, they quickly found major holes in it. Four separate papers by the best brains in the Treasury and the Inland Revenue disagreed with Brown's judgment that the raid on the pension funds would cause little or no long-term harm.
All four papers were in no doubt that the value of pension funds would fall. One predicted a drop of up to £75 billion in the overall private pension pot and resultant hardship for the eight million people in such schemes. If the shortfall was to be made up, employers and employees would need to contribute an extra £10 billion a year for the next ten to 15 years.
In the end, those who would suffer most would be those not in a position to top up their pension contributions - namely, the lower-paid. For Labour's core voters, their chances of a comfortable retirement without money worries would be wrecked.
It is not clear whether officials actually advised that the policy be scrapped entirely or just shelved for further investigation, but there is absolutely no doubt that they told Brown he was playing roulette with Britain's world-renowned system of occupational and private pensions.
He ignored them. More than that, he went out of his way to conceal their doubts from public gaze. It would be ten years before the documents were released showing Civil Service objections to the raid on pension dividends - and then only after a two-year campaign under Labour's own Freedom of Information Act forced them out into the open.
But, at the time, all Brown and his gang were concerned about was 'being able to get away with it without anyone complaining', as one observer put it.
They were hooked on the idea that occupational pensions were too generous to corporate Britain. They refused to recognise the obvious truth that if the system was weakened, the burden of pensions would fall back on the state.
It's perhaps not surprising that Brown's plans were hatched and tested in extraordinary secrecy. It's how he works. But what is astonishing is that Blair was among those kept in the dark.
Even when the new prime minister was finally made aware of the pensions proposal, he seems not to have been told the full extent of officials' doubts. Then, when a civil servant warned him that the costs of Brown's plans could be 'enormous' and the consequences 'unsolvable', he took no action.
It was an early sign of the dangers caused by their fractured relationship - of Brown's stubborn determination to do his own thing regardless of Number 10 and of Blair's unwillingness to confront him, even when the livelihoods of millions of people were put at risk.
In his first Budget speech two months after the election, Brown sold the raid on the pension funds as part of a dynamic package to modernise and streamline the corporate tax system and encourage companies to invest in growth.
In reality, it was no such thing. The primary motive - as Robinson, who had been in on those penthouse discussions, was later to confirm in his memoirs - was nothing to do with stimulating the economy. It was to raise extra revenue of £5billion a year for the incoming government to spend without being seen to be raising taxes, pure and simple.
It was a stealth tax. But so clever was the deception that few immediately grasped the significance.
Conservative critics were silenced by the argument that their party had been the first down this particular road - though there was a big difference between reducing tax credits on dividends, as Lamont had done, and abolishing them entirely.
The City and investment community were muted in their response, in part because the implications took a while to absorb, in part because they were unwilling to make an enemy of a new and obviously powerful chancellor.
Robert Maxwell embezzled £400m from the Mirror pension fund
The Press, right and left, was too enthralled with the reforming zeal of the new regime after 18 years of Conservative rule to make a serious issue of such a recherche matter as retirement provision, which was difficult to understand and explain.
Specialists, however, quickly grasped what was going on. The National Association of Pension Funds was horrified and estimated the cost to employers of keeping their pension funds topped up would be at least £50 billion over the next decade.
'Even Robert Maxwell [the tycoon who embezzled the Mirror pension fund] took only £400 million,' it declared sarcastically.
There was an inherent flaw in Brown's strategy - it was predicated on the dangerous belief that the economy would continue to improve and the stock market continue to grow in value.
It made no allowance for the economy hitting choppy waters, let alone a credit crunch, a recession and a collapse in share prices not unlike the Great Crash of 1929.
The insane belief that share prices always rise (because they had in the recent past) contributed to Brown and his sidekicks ignoring Treasury advice in 1997. It was an appalling misjudgment.
Had it not been for that fateful decision in Brown's first Budget, pension funds might well have been able to weather these storms. But the reality was that they were not equipped to absorb the loss of between £5 billion and £6 billion a year in tax-free dividend income.
Nor was this just a straight loss each year but one with serious knock- on effects. In 2005, one leading industry expert I spoke to calculated the cumulative cost over that first Labour decade to the pensions industry at a staggering £100 billion - which would have been sufficient to meet all the challenges of longer life expectancy and a weak stock market.
Well, he would say that, you might think. But, far from being an exaggeration, his figures turned out to be an under-estimate. In January 2009, the Office of National Statistics calculated that the black hole in Britain's occupational schemes had reached an astonishing £194.5 billion.
The thoroughly spurious claims by Brown and those around him that corporate funds were rich enough to take the punishment proved complacent in the extreme. In a mere ten years, New Labour reduced almost a century of secure retirement to rubble.
The 1997 dividend tax-heist turned the nation's previously wealthy private-sector occupational pensions system into a basket case and a headache for almost every company in Britain, including the richest and most profitable, such as oil giant BP.
But worse, by making shares less attractive for pension funds to hold, it also did irreparable damage to the stock market. It tore the underpinnings from investment in shares, diminished returns and decimated the nation's savings.
Brown's ill-conceived policy - implemented against the best advice and without proper consultation - proved a disaster.
It was a far more important factor in the ruination of the nation's pension system than changes in mortality assumptions. Had the dividend tax credit remained intact, the retirement crisis which Britain now faces would never have happened.
That crisis has far-reaching implications and impacts on many fronts, even causing potholes in our roads to be left unfilled and dustbins un-emptied.
Because of shortfalls, masses more cash has had to be pumped into local authority pension schemes. Unlike most public sector pension funds - which are directly paid for by the taxpayer - local authority schemes generally operate on the same basis as private sector plans with the employers and employees making contributions.
They too have been badly hurt by the pensions tax raid and its impact on investment returns.
A quarter of the council tax we pay now goes on pension payments rather than ensuring that the roads are repaired and the rubbish collected.
That crisis also meant that the amount paid out in social security benefits shot up. The collapse in occupational pensions for those on low incomes means the Government is having to shell out more in hardship payments to the elderly through the Pension Credit system.
But the biggest impact is being felt by those who were in final-salary defined-benefit pension schemes in the private sector. These were once the commonest form of pension and the safest, guaranteeing an employee a fixed proportion of his or her final salary at retirement depending on years of service.
The black hole in these schemes is now so large that most companies can no longer afford them.
One by one, these final salary schemes were to be closed - even in Britain's greatest companies. More and more firms are opting for 'money purchase' schemes where an individual builds up a pension pot, the income from which is subject to the vagaries of the stock market.
The depressing statistics speak for themselves. In 1995, before the pensions tax credit was removed, nearly five million people were in open final-salary pension schemes.
By 2000, this number had fallen to just over four million and by the end of 2008 to less than a million. In 1997, 90 per cent of private-sector occupational pensions were final salary. A decade later, two-thirds of these had been closed to new members.
Because pensions seem so technical, it can be difficult to appreciate what a switch from one type to another actually means in practical terms. In fact, everything changes if you are moved from a final-salary, or defined-benefit, scheme to a defined contribution one.
The guarantee of a pension based on a fixed percentage of your salary disappears. In essence, the element of risk passes from the employer to the employee. A robust pensions system is replaced by one that is far less durable because payouts largely depend on the performance of the trustees and their advisers as managers of investment funds.
The result is that, however much they have saved for their old age and however responsible they have been, those people unlucky enough to retire during a downturn in financial markets will see their expected pensions substantially reduced.
Back in 1997, Brown was warned unequivocally by Treasury officials that this would happen - that his pensions' raid would encourage firms to end final salary schemes.
But he went ahead regardless-Five years later, the leading audit firm Ernst & Young informed the 2,000 members of its £410 million final-salary pension scheme that it was being closed and they would be transferred into a money-purchase scheme.
This was a first. Until then, there had been lots of cases of final-salary schemes being closed to new members but never for existing ones. Now the Rubicon was crossed. Shortly afterwards the struggling food retailer Iceland revealed similar plans.
I criticised this development in my Daily Mail column, but the trend was unmistakable and unstoppable. In 2005, Rentokil Initial became the first FTSE 100 company to shut its final salary scheme to existing employees.
The next year, Harrods did the same, followed by Debenhams.
By 2008, final-salary schemes were nearly dead as one after another closed. The following year, Barclays bank brought its to an end for its 18,000 members. Staff were told the scheme had moved from a surplus of £200 million to a deficit of £2.2 billion in a year.
BP, the nation's richest company, had boasted one of the UK's best occupational pension plans with a largely non-contributory final-salary plan covering more than 69,000 people.
In June 2009 it revealed that new employees would pay between 5 per cent and 15 per cent of their salaries into a new money-purchase scheme.
In January 2010, Alliance Boots, owners of Boots the Chemist, closed its final-salary pension scheme to some 15,000 employees who had been paying into the plan for decades.
This was despite the fact that the Boots scheme had been one of the first to take defensive action after the Brown tax raid, by reinvesting its portfolio in government stocks to protect itself from future stock-market unpredictability.
The worry about stock-market turbulence, it need hardly be repeated, was one of the main reasons why Brown was counselled against abolishing the dividend tax credit.
For some companies, problematic pension funds became the tail wagging the dog.
Among those struggling with vast legacy deficits were British Airways, British Telecom and the government- owned Royal Mail.
In each of these cases, the pension fund deficit has overshadowed almost everything else these companies do. The £3bn black hole at BA came close to derailing its recent merger with Spain's national carrier Iberia, which insisted that it be hived off into a separate entity where it could not contaminate the merged airline.
The stellar performance of BT, in the new digital age, is constantly overshadowed by the £10bn-plus black hole in its pension fund.
The never-ending rise in postal charges and the constant deterioration of service can partly be attributed to the management's struggle to keep the company's pensions promises.
Far from improving the financial situation of British industry and encouraging new investment, as Brown and his colleagues claimed would happen, plugging the holes in occupational pensions was starting to take priority over all else.
The Grosvenor House gang continued to deny responsibility for this state of affairs.
They maintained that the pressure on pensions was down to the fall in the stock markets and the fact that people were living longer. They also claimed companies were at fault for under-funding their pension schemes.
Everything and everyone was to blame, in other words, except New Labour policy.
But others have no doubt who was the architect of this disaster.
'Irresponsible government', declared economist Ros Altmann, by a man who 'just ignores what he doesn't want to hear, then tries to cover up the consequences and hide it from everybody'.
Gordon Brown decided pension funds were a ripe target and knowingly destroyed what was once one of the great pension systems in the world. Eleven million people with company pensions and a further seven million with personal pensions were affected by the sleight of hand dreamt up in that posh Park Lane penthouse.
Not everyone would suffer, however. Because - as we will see in the next installment - when it came to pensions, the Labour government made sure that one favoured sector of society would be feather-bedded against the downturn, whatever the cost to the rest of us.
• Abridged extract from The Great Pensions Robbery by Alex Brummer
Read more: http://www.dailymail.co.uk/news/article-1266662/The-man-stole-old-age-How-Gordon-Brown-secretly-imposed-ruinous-tax-wrecked-retirements-millions.html#ixzz0laZz2tqN
By Alex Brummer
Last updated at 11:10 PM on 16th April 2010
Comments (45) Add to My Stories Gordon Brown's trusted lieutenants gathered round their leader in the plush penthouse suite of the Grosvenor House Hotel on London's Park Lane.
Room service was kept busy and the alcohol flowed as the select handful of politicians and advisers surrounding the then Shadow Chancellor met regularly in the crucial weeks leading up to the General Election of May 1997 to plot the economic future of Britain.
One of the gang, the wealthy Labour MP and businessman Geoffrey Robinson, was picking up the tab but it was Brown who was calling the shots. Meetings like this reflected how he liked to work - in absolute privacy and with the total loyalty of a tightly-knit group of like-minded associates.
Stand and deliver: Gordon Brown is the man who destroyed what was once the world's best pension system
With the likes of the ambitious Ed Balls and the abrasive spin-doctor Charlie Whelan, these were 'blokey' occasions, but between the political gossip and the talk about football, the serious issues they decided on would profoundly affect millions of British companies, investors and workers for years, even generations, to come.
The Brown cabal needed to find ways to raise extra tax revenues for the wide-ranging programme of reforms New Labour planned.
So, on one fateful night in that suite overlooking Hyde Park, they decided that, once in power, they would launch a massive multi-billion-pound raid on a gold-plated, copper-bottomed sector of the British economy - its pension funds.
Up until this point, company pension funds had enjoyed an important tax break on the financial investments they made in order to build up the capital from which employees could be paid when they retired. By long tradition, the funds paid no tax on the dividends they received from those investments.
The view of Brown and his penthouse cronies was that this concession had to stop.
The tens of millions of people who paid into such corporate pension schemes - where employee contributions were, by and large, matched by their employer - were over-privileged, they argued.
Moreover, almost all company pension funds were in surplus - so much so that many employers had cut their contributions - and could easily take the hit of around £5 billion a year.
And, anyway, a buoyant stock market - at the time rising by an average of 15 per cent a year - would mitigate any potential loss.
It sounds like a dull technicality they were planning, one of those impenetrable Budget footnotes that pass most people by and for which the nit-picking, number- crunching Brown would become notorious over the coming years.
But the harsh reality of that decision over pizza and beer 13 years ago is that a generation of hard-working people, who had paid into pension schemes over many years and thought they had secured their futures, face an impoverished and uncertain old age.
Ed Balls (left) and Charlie Whelan (right) were also Brown's trusted lieutenants
Worse still, the decision the Grosvenor gang made that night was kept secret. Those meeting in the penthouse knew that what they proposed was an ideological bombshell.
New Labour had been assiduously reaching out to business and seeking to increase its electoral appeal to the middle class. Abolishing tax credits flew right in the face of this. Brown's inner sanctum therefore resolved to keep their plan strictly to themselves.
The document detailing it was locked away in Robinson's safe.
What Brown and co then implemented was nothing short of highway robbery. It would betray the retirement dreams of millions of ordinary British people.
Back at the start of the 20th century, Britain led the world in pension arrangements, with the first state-run pension scheme to sustain people in their old age after their working lives were over.
But, in parallel, successive governments also recognised the importance of people being self-reliant, too, and offered tax relief to encourage employers to set up private occupational pension schemes and their employees to join them.
Here was one of the greatest social welfare developments of the century, a win-win situation for all involved.
For employers, these company pensions were a way of engendering loyalty among the workforce. For employees, who paid a percentage of their wages into the pot, they were both a form of deferred salary earned through long service and a guarantee for the future.
For governments, the stronger the occupational schemes, the less funding they had to commit directly to state pensions. From an economic point of view, the tens of billions of pounds saved within pension funds could be used as an investment tool to finance the requirements of industry.
There were inevitably wrinkles in the system and things that needed fixing, but, generally speaking, the state of British pensions in the lead-up to the 1997 General Election was healthy. The occupational side was pretty much the envy of the world.
Tory Chancellor Norman Lamont marginally reduced the tax credit the pension funds claimed on dividend payments
Through the good years of rising company profits and rising share prices, the pension funds had prospered, thanks in part to the tax breaks they enjoyed. Inevitably, covetous eyes were cast on this gold mine, first by a Tory chancellor, Norman Lamont.
Desperate to raise revenue in 1993, he marginally reduced the tax credit the pension funds claimed on dividend payments. At the time the measure was little noticed and produced only a mild reaction from the pensions industry. Company pension funds continued in robust health.
But Lamont's mini-raid left the door guarding pension funds slightly ajar - for Brown to come charging through four years later like a bull in a china shop.
The fact is that tinkering with pension calculations is a dangerous activity. The future stability or otherwise of any fund depends on extremely complicated sums about the life expectancy of the scheme's participants. If these turn out to be even slightly out-of-kilter, then there is a danger that the scheme will run out of cash.
But in late 20th-century Britain, a fundamental shift was happening in those basic sums because more and more people were living longer. What's more, that longevity was going up by leaps and bounds rather than in small, slow increments, and there seemed no end to it. A demographic time bomb was ticking away under all pension calculations.
Back in the Fifties, an employee retiring at 65 lived, on average, only another three or four years to draw his or her pension. Now, that period of retirement is more likely to be 20 years or more, and rising indefinitely as scientists - and the pensions industry - realise that there is no notional biological 'maximum age' beyond which the human race cannot go.
In tandem with this soaring life expectancy has been a fall in the birth rate. One hundred years ago, when state pensions were introduced, there were 22 people working for every retired person. By the end of this decade, the ratio will be 2:1. By 2025, the number of over-60s in Britain will pass the number of under-25s for the first time. All this has huge implications for pensions.
No policymaker has a crystal ball but it was obvious in the lead-up to the 1997 general election that pensions were going to be a critical issue in the years ahead. Keeping the sector healthy would be a major challenge.
Occupational pensions, in particular, would have to be an ever more important component of the nation's welfare system for old age, in order to ease the burden on the state.
Those New Labour economic planners in the hotel penthouse must have known all this, and they had a chance to fix it. Inheriting a booming economy that would allow them to put ambitious plans into action, they were in an excellent position to make pensions fit for purpose in the new millennium.
But what followed was a shambles. Arriving at the Treasury as Chancellor of the Exchequer the day after the election, a triumphant Brown took from the box of tricks he and his cabal had concocted his secret plan to rob the pension funds of their tax allowance.
He felt justified in doing so because, as he pointed out, Lamont and the Conservatives had already trimmed the relief in 1993.
Just as importantly, he argued, most company pension funds were hugely in surplus and could well afford to surrender the concession. He flourished a report from a private firm of accountants - commissioned and paid for by the wealthy Robinson out of his own pocket during those Grosvenor House days - which concluded the downside would be minimal.
Civil Service economists urgently set to work to establish if this was true. But as they road-tested the plan and its consequences, they quickly found major holes in it. Four separate papers by the best brains in the Treasury and the Inland Revenue disagreed with Brown's judgment that the raid on the pension funds would cause little or no long-term harm.
All four papers were in no doubt that the value of pension funds would fall. One predicted a drop of up to £75 billion in the overall private pension pot and resultant hardship for the eight million people in such schemes. If the shortfall was to be made up, employers and employees would need to contribute an extra £10 billion a year for the next ten to 15 years.
In the end, those who would suffer most would be those not in a position to top up their pension contributions - namely, the lower-paid. For Labour's core voters, their chances of a comfortable retirement without money worries would be wrecked.
It is not clear whether officials actually advised that the policy be scrapped entirely or just shelved for further investigation, but there is absolutely no doubt that they told Brown he was playing roulette with Britain's world-renowned system of occupational and private pensions.
He ignored them. More than that, he went out of his way to conceal their doubts from public gaze. It would be ten years before the documents were released showing Civil Service objections to the raid on pension dividends - and then only after a two-year campaign under Labour's own Freedom of Information Act forced them out into the open.
But, at the time, all Brown and his gang were concerned about was 'being able to get away with it without anyone complaining', as one observer put it.
They were hooked on the idea that occupational pensions were too generous to corporate Britain. They refused to recognise the obvious truth that if the system was weakened, the burden of pensions would fall back on the state.
It's perhaps not surprising that Brown's plans were hatched and tested in extraordinary secrecy. It's how he works. But what is astonishing is that Blair was among those kept in the dark.
Even when the new prime minister was finally made aware of the pensions proposal, he seems not to have been told the full extent of officials' doubts. Then, when a civil servant warned him that the costs of Brown's plans could be 'enormous' and the consequences 'unsolvable', he took no action.
It was an early sign of the dangers caused by their fractured relationship - of Brown's stubborn determination to do his own thing regardless of Number 10 and of Blair's unwillingness to confront him, even when the livelihoods of millions of people were put at risk.
In his first Budget speech two months after the election, Brown sold the raid on the pension funds as part of a dynamic package to modernise and streamline the corporate tax system and encourage companies to invest in growth.
In reality, it was no such thing. The primary motive - as Robinson, who had been in on those penthouse discussions, was later to confirm in his memoirs - was nothing to do with stimulating the economy. It was to raise extra revenue of £5billion a year for the incoming government to spend without being seen to be raising taxes, pure and simple.
It was a stealth tax. But so clever was the deception that few immediately grasped the significance.
Conservative critics were silenced by the argument that their party had been the first down this particular road - though there was a big difference between reducing tax credits on dividends, as Lamont had done, and abolishing them entirely.
The City and investment community were muted in their response, in part because the implications took a while to absorb, in part because they were unwilling to make an enemy of a new and obviously powerful chancellor.
Robert Maxwell embezzled £400m from the Mirror pension fund
The Press, right and left, was too enthralled with the reforming zeal of the new regime after 18 years of Conservative rule to make a serious issue of such a recherche matter as retirement provision, which was difficult to understand and explain.
Specialists, however, quickly grasped what was going on. The National Association of Pension Funds was horrified and estimated the cost to employers of keeping their pension funds topped up would be at least £50 billion over the next decade.
'Even Robert Maxwell [the tycoon who embezzled the Mirror pension fund] took only £400 million,' it declared sarcastically.
There was an inherent flaw in Brown's strategy - it was predicated on the dangerous belief that the economy would continue to improve and the stock market continue to grow in value.
It made no allowance for the economy hitting choppy waters, let alone a credit crunch, a recession and a collapse in share prices not unlike the Great Crash of 1929.
The insane belief that share prices always rise (because they had in the recent past) contributed to Brown and his sidekicks ignoring Treasury advice in 1997. It was an appalling misjudgment.
Had it not been for that fateful decision in Brown's first Budget, pension funds might well have been able to weather these storms. But the reality was that they were not equipped to absorb the loss of between £5 billion and £6 billion a year in tax-free dividend income.
Nor was this just a straight loss each year but one with serious knock- on effects. In 2005, one leading industry expert I spoke to calculated the cumulative cost over that first Labour decade to the pensions industry at a staggering £100 billion - which would have been sufficient to meet all the challenges of longer life expectancy and a weak stock market.
Well, he would say that, you might think. But, far from being an exaggeration, his figures turned out to be an under-estimate. In January 2009, the Office of National Statistics calculated that the black hole in Britain's occupational schemes had reached an astonishing £194.5 billion.
The thoroughly spurious claims by Brown and those around him that corporate funds were rich enough to take the punishment proved complacent in the extreme. In a mere ten years, New Labour reduced almost a century of secure retirement to rubble.
The 1997 dividend tax-heist turned the nation's previously wealthy private-sector occupational pensions system into a basket case and a headache for almost every company in Britain, including the richest and most profitable, such as oil giant BP.
But worse, by making shares less attractive for pension funds to hold, it also did irreparable damage to the stock market. It tore the underpinnings from investment in shares, diminished returns and decimated the nation's savings.
Brown's ill-conceived policy - implemented against the best advice and without proper consultation - proved a disaster.
It was a far more important factor in the ruination of the nation's pension system than changes in mortality assumptions. Had the dividend tax credit remained intact, the retirement crisis which Britain now faces would never have happened.
That crisis has far-reaching implications and impacts on many fronts, even causing potholes in our roads to be left unfilled and dustbins un-emptied.
Because of shortfalls, masses more cash has had to be pumped into local authority pension schemes. Unlike most public sector pension funds - which are directly paid for by the taxpayer - local authority schemes generally operate on the same basis as private sector plans with the employers and employees making contributions.
They too have been badly hurt by the pensions tax raid and its impact on investment returns.
A quarter of the council tax we pay now goes on pension payments rather than ensuring that the roads are repaired and the rubbish collected.
That crisis also meant that the amount paid out in social security benefits shot up. The collapse in occupational pensions for those on low incomes means the Government is having to shell out more in hardship payments to the elderly through the Pension Credit system.
But the biggest impact is being felt by those who were in final-salary defined-benefit pension schemes in the private sector. These were once the commonest form of pension and the safest, guaranteeing an employee a fixed proportion of his or her final salary at retirement depending on years of service.
The black hole in these schemes is now so large that most companies can no longer afford them.
One by one, these final salary schemes were to be closed - even in Britain's greatest companies. More and more firms are opting for 'money purchase' schemes where an individual builds up a pension pot, the income from which is subject to the vagaries of the stock market.
The depressing statistics speak for themselves. In 1995, before the pensions tax credit was removed, nearly five million people were in open final-salary pension schemes.
By 2000, this number had fallen to just over four million and by the end of 2008 to less than a million. In 1997, 90 per cent of private-sector occupational pensions were final salary. A decade later, two-thirds of these had been closed to new members.
Because pensions seem so technical, it can be difficult to appreciate what a switch from one type to another actually means in practical terms. In fact, everything changes if you are moved from a final-salary, or defined-benefit, scheme to a defined contribution one.
The guarantee of a pension based on a fixed percentage of your salary disappears. In essence, the element of risk passes from the employer to the employee. A robust pensions system is replaced by one that is far less durable because payouts largely depend on the performance of the trustees and their advisers as managers of investment funds.
The result is that, however much they have saved for their old age and however responsible they have been, those people unlucky enough to retire during a downturn in financial markets will see their expected pensions substantially reduced.
Back in 1997, Brown was warned unequivocally by Treasury officials that this would happen - that his pensions' raid would encourage firms to end final salary schemes.
But he went ahead regardless-Five years later, the leading audit firm Ernst & Young informed the 2,000 members of its £410 million final-salary pension scheme that it was being closed and they would be transferred into a money-purchase scheme.
This was a first. Until then, there had been lots of cases of final-salary schemes being closed to new members but never for existing ones. Now the Rubicon was crossed. Shortly afterwards the struggling food retailer Iceland revealed similar plans.
I criticised this development in my Daily Mail column, but the trend was unmistakable and unstoppable. In 2005, Rentokil Initial became the first FTSE 100 company to shut its final salary scheme to existing employees.
The next year, Harrods did the same, followed by Debenhams.
By 2008, final-salary schemes were nearly dead as one after another closed. The following year, Barclays bank brought its to an end for its 18,000 members. Staff were told the scheme had moved from a surplus of £200 million to a deficit of £2.2 billion in a year.
BP, the nation's richest company, had boasted one of the UK's best occupational pension plans with a largely non-contributory final-salary plan covering more than 69,000 people.
In June 2009 it revealed that new employees would pay between 5 per cent and 15 per cent of their salaries into a new money-purchase scheme.
In January 2010, Alliance Boots, owners of Boots the Chemist, closed its final-salary pension scheme to some 15,000 employees who had been paying into the plan for decades.
This was despite the fact that the Boots scheme had been one of the first to take defensive action after the Brown tax raid, by reinvesting its portfolio in government stocks to protect itself from future stock-market unpredictability.
The worry about stock-market turbulence, it need hardly be repeated, was one of the main reasons why Brown was counselled against abolishing the dividend tax credit.
For some companies, problematic pension funds became the tail wagging the dog.
Among those struggling with vast legacy deficits were British Airways, British Telecom and the government- owned Royal Mail.
In each of these cases, the pension fund deficit has overshadowed almost everything else these companies do. The £3bn black hole at BA came close to derailing its recent merger with Spain's national carrier Iberia, which insisted that it be hived off into a separate entity where it could not contaminate the merged airline.
The stellar performance of BT, in the new digital age, is constantly overshadowed by the £10bn-plus black hole in its pension fund.
The never-ending rise in postal charges and the constant deterioration of service can partly be attributed to the management's struggle to keep the company's pensions promises.
Far from improving the financial situation of British industry and encouraging new investment, as Brown and his colleagues claimed would happen, plugging the holes in occupational pensions was starting to take priority over all else.
The Grosvenor House gang continued to deny responsibility for this state of affairs.
They maintained that the pressure on pensions was down to the fall in the stock markets and the fact that people were living longer. They also claimed companies were at fault for under-funding their pension schemes.
Everything and everyone was to blame, in other words, except New Labour policy.
But others have no doubt who was the architect of this disaster.
'Irresponsible government', declared economist Ros Altmann, by a man who 'just ignores what he doesn't want to hear, then tries to cover up the consequences and hide it from everybody'.
Gordon Brown decided pension funds were a ripe target and knowingly destroyed what was once one of the great pension systems in the world. Eleven million people with company pensions and a further seven million with personal pensions were affected by the sleight of hand dreamt up in that posh Park Lane penthouse.
Not everyone would suffer, however. Because - as we will see in the next installment - when it came to pensions, the Labour government made sure that one favoured sector of society would be feather-bedded against the downturn, whatever the cost to the rest of us.
• Abridged extract from The Great Pensions Robbery by Alex Brummer
Read more: http://www.dailymail.co.uk/news/article-1266662/The-man-stole-old-age-How-Gordon-Brown-secretly-imposed-ruinous-tax-wrecked-retirements-millions.html#ixzz0laZz2tqN
Sunday 18 April 2010
Saturday 17 April 2010
Wednesday 14 April 2010
Webster Tarpley...Standard Tombstone for Empires: Died of Oligarchy 1/03/10
Is the United States now inexorably fated to follow the Soviet Union on the path leading to social breakdown, internal collapse, secessionism, and general chaos? This question is objectively now on the agenda. And not surprisingly, a gaggle of foundation-funded professors and other experts, led by that notorious British reactionary Niall Ferguson, are gloating in Schadenfreude and jubilation that the United States is now irrevocably doomed to imperial implosion, based largely on Paul Kennedy’s dangerous half-truth about imperial overstretch. And not only that: Niall Ferguson appears to be preparing the ground for some kind of massive bear raid against the US dollar emanating from London, some kind of a speculative thunderbolt capable of bringing the US breakdown crisis to a fast-track culmination.
The answer presented here to the question posed in the title is that, while the gravity of the US crisis is undeniable, it would be criminal stupidity to assert that we are dealing with some kind of irresistible cycle of US national decline. Quite the contrary: the historical experience of the New Deal, if properly evaluated, reliably indicates a broad array of economic reform measures which are immediately available to lead the US and the world out of the current crisis. The challenge to all serious American thinkers is to specify the needed components of a general US return to a regulated and dirigistic New Deal economic model, and to make these measures intelligible to the vast majority of the US population, and to agitate effectively for their implementation. (Need we point out that both Obama’s corporatist Democratic Party and the right-wing radical Republican Party are hysterically hostile to the New Deal?) Analysts who imagine that their role is to produce ever more dazzling or bombastic rhetorical invectives against the Wall Street collapse we see all around us are simply irrelevant at this point. Every real intellectual leader needs to have an answer ready for the question, “What is your program for overcoming the current world economic depression? Where are your solutions?” Those who do not deal in such answers can no longer be taken seriously.
Standard Tombstone for Empires: Died of Oligarchy
The notion of imperial overstretch, first coined by Paul Kennedy two decades ago, is now often used to obscure the real causes of decline when the discussion of these might hit too close to home for certain vested interests in today’s world. Reactionary historians have a decided preference for explaining the collapse of the empires of the past based on military defeat and foreign invasion. This allows them to project their own militarism and xenophobia back into the past, and above all allows them to ignore the kinds of destructive socioeconomic changes in the direction of oligarchy, neo-feudalism, and plutocracy, as well as Malthusianism, which can be observed as factors in imperial decline. If they are willing to discuss such factors at all, they prefer to focus on monetary aggregates such as national debt, while giving scant consideration to such really decisive issues as technological progress or retrogression, the state of the industrial base, the standard of living, the situation of the family farm, the productivity of agriculture, and a series of related considerations which we can label real economics as expressed in terms of tangible physical wealth or hard commodity production — as distinct from the paper wealth derived from finance, banking, usury, and speculative bubbles. As we go further back in the past, the specific forms of some of these factors change, but their essence remains remarkably similar.
In other words, empires fall in reality because of internal decay. Such decay is usually a matter of agricultural and industrial decline, technological and scientific stagnation, and the misery and of the broad majority of the population — typically, the crushing of the middle class of farmers and producers. The work of destruction thus accomplished can proceed for a long time. A foreign invasion, catastrophic military defeat, or a financial panic is merely the moment in which the prevailing decadent state of affairs is dramatically revealed and the general complacency of the ruling elite shattered. The barbarian invasions of the fourth and fifth centuries A.D. did not doom the Roman empire by themselves, but unmasked the critical weaknesses which had been building up for centuries.
Neo-Feudalism Corrosive to Great States
The most prevalent cause of imperial decline and collapse is the growth of oligarchy, which in our time has often taken the form of neo-feudalism. In the fall of the Roman Empire, a central role was played by a secular tendency towards hyperinflation during the final phase. Under Diocletian and thereafter, technological innovation was strangled by regulations which forbade changes in the property of any guild – the equivalent of today’s green jobs craze. Trade never fully recovered from the crisis of the third century A.D., and the cities went into decline. As law and order deteriorated, regional powers emerged through civil war and barbarian invasion and became formidable enough to ignore any central authority. Ordinary members of the population had to seek protection under local potentates, soon to be called barons, who offered military defense in exchange for serfdom. Before too long, these arrangements took the form of the manorial system of the dark ages, which went hand in hand with a precipitous collapse of the population in Western Europe and the general decline in the level of civilization.
In the China of the Han Dynasty, similar changes were at work. Large latifundists emerged who were powerful enough to ignore the imperial authority even as they enslaved and otherwise subjugated peasants using issues like debt as powerful weapons. With the fall of the Han, Chinese civilization broke up into several petty states amidst a general decline in the attained level of civilization.
One of the last chances to save Rome from stagnation and decline came perhaps during the era of the Gracchi brothers between 150 and 125 BC, after the victory in the Punic wars against Carthage. This was the point where large-scale gang slavery on agricultural latifundia began to be introduced in places like Sicily. The Gracchi saw that agricultural slavery would destroy the basis of the Roman army, which relied on the independent small farmer or assiduus for its recruits. When the land reform they proposed was defeated by the assassination of both brothers, the gradual decline of the Roman Empire became almost inescapable. A similar point of inflection can be seen in the Han Empire of China in the reforms attempted by Wang Man, who was in power in the first years of the Common Era. When Wang Man’s reforms were frustrated, the Han Empire may well have passed the point of no return. The theme system of the Byzantine Empire and the equal-field system of the Tang dynasty both represented attempts to avoid yet another relapse into conditions which we today would call neo-feudal.
We may be living through a similar decisive phase today. The imperatives of our time are to shut down the zombie banks, to tax speculative transactions with the Tobin tax, to outlaw foreclosures, to nationalize the central banks, to issue 0% government-generated loans for massive infrastructural development, to preserve and expand the social safety net of health, education, and welfare, and to re-establish a coherent and orderly world monetary system devoted to the rapid expansion of world trade. If these reforms cannot be implemented in time, the civilization we see around us may indeed go the way of Rome and the Han.
Critical Role of the Middle Class
Since the first prototype of the modern state emerged under Giangaleazzo Visconti of Milan in the years before 1399, the most productive social layer in modern society and at the same time the basis of the modern state is the middle class. When the middle class is crushed, be it by the robber barons of the Middle Ages or by the private military firms and Wall Street predators of the present era, the entire society is in trouble. The era since about 1970 has been marked by the immiseration of the middle class in the United States, followed by Europe, Japan, and Russia, with the US fall in the overall standard of living amounting to a loss of about two thirds of the level attained under Lyndon B. Johnson. What is left is a super-rich elite of financial derivatives speculators who are the sole beneficiaries of the current system, and the mass of super-exploited wage workers, with very little left of the middle class in between. This social structure of elite and mass is the most essential feature of an empire, and also fulfills Machiavelli’s definition of corruption, which he defined as a wide disparity between the very rich and the very poor.
This phenomenon has gone hand in hand with the systematic demolition of the US industrial base, with declining rates of industrial employment and industrial production per capita. About 7% of the US work force is now in industrial production, down from about 40% at the end of World War II. This is translated into a weakening of the nation-state, especially in regard to logistics. The application of technology to the process of production has stagnated, while the pace of scientific discovery has slowed. The principal innovations of recent years, such as computer based on silicon chips, the human genome, and the laser, are all based on scientific breakthroughs that are traceable back to the 1950s or 1960s.
The grim litany cited by the gravediggers of modern civilization from the USSR to the US today is made up of the slogans of deregulation, privatization, the demonization of government, the demolition of the state sector, free trade, free markets, union busting, market fetishism, the negation of economic rights, and the general race to the bottom. These neo-feudal ideas have been popularized by the monetarist and neoliberal Mount Pelerin Society through the Austrian school of von Hayek and von Mises, appropriately dumbed down to the level of an American MBA by Milton Friedman and his Chicago Boys. Thatcher and Reagan campaigned on these primitive slogans. These reactionary ideas have been popularized by right-wing extremist radio talk show hosts, producing an intellectual current of predatory right-wing anarchism in the society as a whole. These forces are undeterred by Alan Greenspan’s recent confession that his previous Ayn Rand-style devotion to market fetishism as the answer to all policy questions was now in crisis, based on the US-UK banking panic of 2008.
On a world scale, the most important enforcer of these ideas has been the International Monetary Fund (plus associated central banks) with its now-discredited Washington Consensus. The IMF is an institution utterly devoid of success stories. From Bolivia to Poland and Russia, the typical shock therapy of the IMF has destroyed the sovereignty and the economic viability of its victims. There are no exceptions. All around the world today, IMF Diktats are being increasingly rejected in favor of a Beijing Consensus based on mutual advantage, real economic development, and the respect for national sovereignty.
The Anglo-American system is of course based on the axiom that the ruling elite of society should be represented by the financiers and their retainers. In the case of the former Union of Soviet Socialist Republics, the relevant form of oligarchy was the Soviet nomenklatura, the ruling elite of party, army, KGB, and government. The problems of the Soviet economy can be summed up first of all as a lack of hard and soft infrastructure, which were chronically underfunded because planning targets gave priority to heavy industry and war production. The other problem was that communist ideology ruled out the existence of small and medium industry. These types of startup firms, typically a high-tech company built around a discovery or innovation, proved invaluable in the US experience for transferring the spinoffs of military research and development into the realm of profitable civilian production.
Gorbachev’s perestroika was based on deregulation followed by nomenklatura privatization. Instead of converting the outmoded Gosplan system of central planning down to the last bolt to a system of modern indicative planning along the lines successfully employed in France, Japan (with the MITI), and the Taiwan experience, Gorbachev simply removed all central planning and let the entire system find its own path to the bottom. The suicide of the Soviet bloc came in particular when the Council for Mutual Economic Assistance (CMEA or COMECON) switched from administrative prices to the world market prices determined by Wall Street and City of London speculators.
The 1980s golden youth of this nomenklatura, people like Chubais and the late Yegor Gaidar, became fanatical followers of the IMF model. The results was a highly destructive shock therapy masterminded by Jeffrey Sachs and Anders Aslund during the chaotic Yeltsin era. The results of this criminal exercise in destruction were a decline in industrial production of 56%, and of agricultural production by about one half, combined with the hyperinflation of 1300% in 1994. This uncanny ability to combine depression with hyperinflation is one of the hallmarks of the crackpot and lunatic Austrian and Chicago schools of economic mystification. Russia has been laboriously climbing out of this abyss ever since.
The total deficit of United States infrastructure must now be somewhere between $5 trillion and $10 trillion. The causes of the current economic depression ought to be very clear. They had little to do with government spending per se, and everything to do with the deregulation and privatization. Fannie Mae and Freddie Mac worked fine as long as they were maintained as government institutions. Fannie Mae was however privatized in 1968 as part of the leading edge of the Austrian assault. Hedge funds are by their very nature deregulated, since they escape the scrutiny of the Securities and Exchange Commission. Derivatives were banned between 1936 and 1982, and did not fully emerge from the gray area until 1999. Within less than a decade, the world derivatives bubble had attained $1.5 quadrillion in notional value. These developments opened the door to the single most costly and most characteristic episode of the 2008 banking panic which detonated the current depression — the bankruptcy of the AIG financial products hedge fund based in London. This dubious entity, operating in a British regulatory environment which can only be considered an obscene joke, manage to issue about $3 trillion in credit default swaps — more than the total gross domestic product of France. The US taxpayer has up to now been forced to shell out more than $180 billion for AIG alone, making this case the single most costly bailout operation carried out by the US government so far. If there had been no hedge funds and no derivatives, and no British deregulated environment, these losses could not have occurred. QED: the immediate cause of the banking panic of 2008 can be found in the poisonous fruits of deregulation and privatization. To avoid future depressions and to get out of the present one, it is imperative that the rollback of all deregulation and privatization measures begin immediately.
Obama’s fascist corporate state, typified in the health bill, is the final phase of neo-feudalist development. Here powerful neo-feudal private interests commandeer the apparatus of the state and use it for their own sinister purposes – an exercise FDR branded as the essence of fascism, and which Jane Hamsher of Firedoglake has correctly recognized today.. Obama’s health plan is not a government takeover of the health care system; it is the takeover of the government by the predatory Wall Street insurance companies and Big Pharma, whose interests are kept paramount throughout. The US federal government and the IRS are now dragooned as a debt collection agency for the insurance companies under the unconstitutional individual mandate (an invention of the reactionary Republican Grassley). The regulatory functions of the federal government are perverted to exclude for all time cheaper prescription drugs from Canada, the EU, and Japan, where standards are higher than they are here. Medicare is banned from haggling with Big Pharma to get the prices down. This is the triumph of neo-feudalist predatory interest over the modern state, and it must be rolled back.
The answer presented here to the question posed in the title is that, while the gravity of the US crisis is undeniable, it would be criminal stupidity to assert that we are dealing with some kind of irresistible cycle of US national decline. Quite the contrary: the historical experience of the New Deal, if properly evaluated, reliably indicates a broad array of economic reform measures which are immediately available to lead the US and the world out of the current crisis. The challenge to all serious American thinkers is to specify the needed components of a general US return to a regulated and dirigistic New Deal economic model, and to make these measures intelligible to the vast majority of the US population, and to agitate effectively for their implementation. (Need we point out that both Obama’s corporatist Democratic Party and the right-wing radical Republican Party are hysterically hostile to the New Deal?) Analysts who imagine that their role is to produce ever more dazzling or bombastic rhetorical invectives against the Wall Street collapse we see all around us are simply irrelevant at this point. Every real intellectual leader needs to have an answer ready for the question, “What is your program for overcoming the current world economic depression? Where are your solutions?” Those who do not deal in such answers can no longer be taken seriously.
Standard Tombstone for Empires: Died of Oligarchy
The notion of imperial overstretch, first coined by Paul Kennedy two decades ago, is now often used to obscure the real causes of decline when the discussion of these might hit too close to home for certain vested interests in today’s world. Reactionary historians have a decided preference for explaining the collapse of the empires of the past based on military defeat and foreign invasion. This allows them to project their own militarism and xenophobia back into the past, and above all allows them to ignore the kinds of destructive socioeconomic changes in the direction of oligarchy, neo-feudalism, and plutocracy, as well as Malthusianism, which can be observed as factors in imperial decline. If they are willing to discuss such factors at all, they prefer to focus on monetary aggregates such as national debt, while giving scant consideration to such really decisive issues as technological progress or retrogression, the state of the industrial base, the standard of living, the situation of the family farm, the productivity of agriculture, and a series of related considerations which we can label real economics as expressed in terms of tangible physical wealth or hard commodity production — as distinct from the paper wealth derived from finance, banking, usury, and speculative bubbles. As we go further back in the past, the specific forms of some of these factors change, but their essence remains remarkably similar.
In other words, empires fall in reality because of internal decay. Such decay is usually a matter of agricultural and industrial decline, technological and scientific stagnation, and the misery and of the broad majority of the population — typically, the crushing of the middle class of farmers and producers. The work of destruction thus accomplished can proceed for a long time. A foreign invasion, catastrophic military defeat, or a financial panic is merely the moment in which the prevailing decadent state of affairs is dramatically revealed and the general complacency of the ruling elite shattered. The barbarian invasions of the fourth and fifth centuries A.D. did not doom the Roman empire by themselves, but unmasked the critical weaknesses which had been building up for centuries.
Neo-Feudalism Corrosive to Great States
The most prevalent cause of imperial decline and collapse is the growth of oligarchy, which in our time has often taken the form of neo-feudalism. In the fall of the Roman Empire, a central role was played by a secular tendency towards hyperinflation during the final phase. Under Diocletian and thereafter, technological innovation was strangled by regulations which forbade changes in the property of any guild – the equivalent of today’s green jobs craze. Trade never fully recovered from the crisis of the third century A.D., and the cities went into decline. As law and order deteriorated, regional powers emerged through civil war and barbarian invasion and became formidable enough to ignore any central authority. Ordinary members of the population had to seek protection under local potentates, soon to be called barons, who offered military defense in exchange for serfdom. Before too long, these arrangements took the form of the manorial system of the dark ages, which went hand in hand with a precipitous collapse of the population in Western Europe and the general decline in the level of civilization.
In the China of the Han Dynasty, similar changes were at work. Large latifundists emerged who were powerful enough to ignore the imperial authority even as they enslaved and otherwise subjugated peasants using issues like debt as powerful weapons. With the fall of the Han, Chinese civilization broke up into several petty states amidst a general decline in the attained level of civilization.
One of the last chances to save Rome from stagnation and decline came perhaps during the era of the Gracchi brothers between 150 and 125 BC, after the victory in the Punic wars against Carthage. This was the point where large-scale gang slavery on agricultural latifundia began to be introduced in places like Sicily. The Gracchi saw that agricultural slavery would destroy the basis of the Roman army, which relied on the independent small farmer or assiduus for its recruits. When the land reform they proposed was defeated by the assassination of both brothers, the gradual decline of the Roman Empire became almost inescapable. A similar point of inflection can be seen in the Han Empire of China in the reforms attempted by Wang Man, who was in power in the first years of the Common Era. When Wang Man’s reforms were frustrated, the Han Empire may well have passed the point of no return. The theme system of the Byzantine Empire and the equal-field system of the Tang dynasty both represented attempts to avoid yet another relapse into conditions which we today would call neo-feudal.
We may be living through a similar decisive phase today. The imperatives of our time are to shut down the zombie banks, to tax speculative transactions with the Tobin tax, to outlaw foreclosures, to nationalize the central banks, to issue 0% government-generated loans for massive infrastructural development, to preserve and expand the social safety net of health, education, and welfare, and to re-establish a coherent and orderly world monetary system devoted to the rapid expansion of world trade. If these reforms cannot be implemented in time, the civilization we see around us may indeed go the way of Rome and the Han.
Critical Role of the Middle Class
Since the first prototype of the modern state emerged under Giangaleazzo Visconti of Milan in the years before 1399, the most productive social layer in modern society and at the same time the basis of the modern state is the middle class. When the middle class is crushed, be it by the robber barons of the Middle Ages or by the private military firms and Wall Street predators of the present era, the entire society is in trouble. The era since about 1970 has been marked by the immiseration of the middle class in the United States, followed by Europe, Japan, and Russia, with the US fall in the overall standard of living amounting to a loss of about two thirds of the level attained under Lyndon B. Johnson. What is left is a super-rich elite of financial derivatives speculators who are the sole beneficiaries of the current system, and the mass of super-exploited wage workers, with very little left of the middle class in between. This social structure of elite and mass is the most essential feature of an empire, and also fulfills Machiavelli’s definition of corruption, which he defined as a wide disparity between the very rich and the very poor.
This phenomenon has gone hand in hand with the systematic demolition of the US industrial base, with declining rates of industrial employment and industrial production per capita. About 7% of the US work force is now in industrial production, down from about 40% at the end of World War II. This is translated into a weakening of the nation-state, especially in regard to logistics. The application of technology to the process of production has stagnated, while the pace of scientific discovery has slowed. The principal innovations of recent years, such as computer based on silicon chips, the human genome, and the laser, are all based on scientific breakthroughs that are traceable back to the 1950s or 1960s.
The grim litany cited by the gravediggers of modern civilization from the USSR to the US today is made up of the slogans of deregulation, privatization, the demonization of government, the demolition of the state sector, free trade, free markets, union busting, market fetishism, the negation of economic rights, and the general race to the bottom. These neo-feudal ideas have been popularized by the monetarist and neoliberal Mount Pelerin Society through the Austrian school of von Hayek and von Mises, appropriately dumbed down to the level of an American MBA by Milton Friedman and his Chicago Boys. Thatcher and Reagan campaigned on these primitive slogans. These reactionary ideas have been popularized by right-wing extremist radio talk show hosts, producing an intellectual current of predatory right-wing anarchism in the society as a whole. These forces are undeterred by Alan Greenspan’s recent confession that his previous Ayn Rand-style devotion to market fetishism as the answer to all policy questions was now in crisis, based on the US-UK banking panic of 2008.
On a world scale, the most important enforcer of these ideas has been the International Monetary Fund (plus associated central banks) with its now-discredited Washington Consensus. The IMF is an institution utterly devoid of success stories. From Bolivia to Poland and Russia, the typical shock therapy of the IMF has destroyed the sovereignty and the economic viability of its victims. There are no exceptions. All around the world today, IMF Diktats are being increasingly rejected in favor of a Beijing Consensus based on mutual advantage, real economic development, and the respect for national sovereignty.
The Anglo-American system is of course based on the axiom that the ruling elite of society should be represented by the financiers and their retainers. In the case of the former Union of Soviet Socialist Republics, the relevant form of oligarchy was the Soviet nomenklatura, the ruling elite of party, army, KGB, and government. The problems of the Soviet economy can be summed up first of all as a lack of hard and soft infrastructure, which were chronically underfunded because planning targets gave priority to heavy industry and war production. The other problem was that communist ideology ruled out the existence of small and medium industry. These types of startup firms, typically a high-tech company built around a discovery or innovation, proved invaluable in the US experience for transferring the spinoffs of military research and development into the realm of profitable civilian production.
Gorbachev’s perestroika was based on deregulation followed by nomenklatura privatization. Instead of converting the outmoded Gosplan system of central planning down to the last bolt to a system of modern indicative planning along the lines successfully employed in France, Japan (with the MITI), and the Taiwan experience, Gorbachev simply removed all central planning and let the entire system find its own path to the bottom. The suicide of the Soviet bloc came in particular when the Council for Mutual Economic Assistance (CMEA or COMECON) switched from administrative prices to the world market prices determined by Wall Street and City of London speculators.
The 1980s golden youth of this nomenklatura, people like Chubais and the late Yegor Gaidar, became fanatical followers of the IMF model. The results was a highly destructive shock therapy masterminded by Jeffrey Sachs and Anders Aslund during the chaotic Yeltsin era. The results of this criminal exercise in destruction were a decline in industrial production of 56%, and of agricultural production by about one half, combined with the hyperinflation of 1300% in 1994. This uncanny ability to combine depression with hyperinflation is one of the hallmarks of the crackpot and lunatic Austrian and Chicago schools of economic mystification. Russia has been laboriously climbing out of this abyss ever since.
The total deficit of United States infrastructure must now be somewhere between $5 trillion and $10 trillion. The causes of the current economic depression ought to be very clear. They had little to do with government spending per se, and everything to do with the deregulation and privatization. Fannie Mae and Freddie Mac worked fine as long as they were maintained as government institutions. Fannie Mae was however privatized in 1968 as part of the leading edge of the Austrian assault. Hedge funds are by their very nature deregulated, since they escape the scrutiny of the Securities and Exchange Commission. Derivatives were banned between 1936 and 1982, and did not fully emerge from the gray area until 1999. Within less than a decade, the world derivatives bubble had attained $1.5 quadrillion in notional value. These developments opened the door to the single most costly and most characteristic episode of the 2008 banking panic which detonated the current depression — the bankruptcy of the AIG financial products hedge fund based in London. This dubious entity, operating in a British regulatory environment which can only be considered an obscene joke, manage to issue about $3 trillion in credit default swaps — more than the total gross domestic product of France. The US taxpayer has up to now been forced to shell out more than $180 billion for AIG alone, making this case the single most costly bailout operation carried out by the US government so far. If there had been no hedge funds and no derivatives, and no British deregulated environment, these losses could not have occurred. QED: the immediate cause of the banking panic of 2008 can be found in the poisonous fruits of deregulation and privatization. To avoid future depressions and to get out of the present one, it is imperative that the rollback of all deregulation and privatization measures begin immediately.
Obama’s fascist corporate state, typified in the health bill, is the final phase of neo-feudalist development. Here powerful neo-feudal private interests commandeer the apparatus of the state and use it for their own sinister purposes – an exercise FDR branded as the essence of fascism, and which Jane Hamsher of Firedoglake has correctly recognized today.. Obama’s health plan is not a government takeover of the health care system; it is the takeover of the government by the predatory Wall Street insurance companies and Big Pharma, whose interests are kept paramount throughout. The US federal government and the IRS are now dragooned as a debt collection agency for the insurance companies under the unconstitutional individual mandate (an invention of the reactionary Republican Grassley). The regulatory functions of the federal government are perverted to exclude for all time cheaper prescription drugs from Canada, the EU, and Japan, where standards are higher than they are here. Medicare is banned from haggling with Big Pharma to get the prices down. This is the triumph of neo-feudalist predatory interest over the modern state, and it must be rolled back.
Tuesday 13 April 2010
Sunday 21 March 2010
Saturday 13 March 2010
Thursday 11 March 2010
Sunday 7 March 2010
Saturday 27 February 2010
Friday 26 February 2010
More revelations ...the `Squid`...Goldman Sachs...
On January 21st, Lloyd Blankfein left a peculiar voicemail message on the work phones of his employees at Goldman Sachs. Fast becoming America's pre-eminent Marvel Comics supervillain, the CEO used the call to deploy his secret weapon: a pair of giant, nuclear-powered testicles. In his message, Blankfein addressed his plan to pay out gigantic year-end bonuses amid widespread controversy over Goldman's role in precipitating the global financial crisis.
The bank had already set aside a tidy $16.2 billion for salaries and bonuses — meaning that Goldman employees were each set to take home an average of $498,246, a number roughly commensurate with what they received during the bubble years. Still, the troops were worried: There were rumors that Dr. Ballsachs, bowing to political pressure, might be forced to scale the number back. After all, the country was broke, 14.8 million Americans were stranded on the unemployment line, and Barack Obama and the Democrats were trying to recover the populist high ground after their bitch-whipping in Massachusetts by calling for a "bailout tax" on banks. Maybe this wasn't the right time for Goldman to be throwing its annual Roman bonus orgy.
Not to worry, Blankfein reassured employees. "In a year that proved to have no shortage of story lines," he said, "I believe very strongly that performance is the ultimate narrative."
Translation: We made a shitload of money last year because we're so amazing at our jobs, so fuck all those people who want us to reduce our bonuses.
Goldman wasn't alone. The nation's six largest banks — all committed to this balls-out, I drink your milkshake! strategy of flagrantly gorging themselves as America goes hungry — set aside a whopping $140 billion for executive compensation last year, a sum only slightly less than the $164 billion they paid themselves in the pre-crash year of 2007. In a gesture of self-sacrifice, Blankfein himself took a humiliatingly low bonus of $9 million, less than the 2009 pay of elephantine New York Knicks washout Eddy Curry. But in reality, not much had changed. "What is the state of our moral being when Lloyd Blankfein taking a $9 million bonus is viewed as this great act of contrition, when every penny of it was a direct transfer from the taxpayer?" asks Eliot Spitzer, who tried to hold Wall Street accountable during his own ill-fated stint as governor of New York.
Beyond a few such bleats of outrage, however, the huge payout was met, by and large, with a collective sigh of resignation. Because beneath America's populist veneer, on a more subtle strata of the national psyche, there remains a strong temptation to not really give a shit. The rich, after all, have always made way too much money; what's the difference if some fat cat in New York pockets $20 million instead of $10 million?
The only reason such apathy exists, however, is because there's still a widespread misunderstanding of how exactly Wall Street "earns" its money, with emphasis on the quotation marks around "earns." The question everyone should be asking, as one bailout recipient after another posts massive profits — Goldman reported $13.4 billion in profits last year, after paying out that $16.2 billion in bonuses and compensation — is this: In an economy as horrible as ours, with every factory town between New York and Los Angeles looking like those hollowed-out ghost ships we see on History Channel documentaries like Shipwrecks of the Great Lakes, where in the hell did Wall Street's eye-popping profits come from, exactly? Did Goldman go from bailout city to $13.4 billion in the black because, as Blankfein suggests, its "performance" was just that awesome? A year and a half after they were minutes away from bankruptcy, how are these assholes not only back on their feet again, but hauling in bonuses at the same rate they were during the bubble?
The answer to that question is basically twofold: They raped the taxpayer, and they raped their clients.
The bottom line is that banks like Goldman have learned absolutely nothing from the global economic meltdown. In fact, they're back conniving and playing speculative long shots in force — only this time with the full financial support of the U.S. government. In the process, they're rapidly re-creating the conditions for another crash, with the same actors once again playing the same crazy games of financial chicken with the same toxic assets as before.
That's why this bonus business isn't merely a matter of getting upset about whether or not Lloyd Blankfein buys himself one tropical island or two on his next birthday. The reality is that the post-bailout era in which Goldman thrived has turned out to be a chaotic frenzy of high-stakes con-artistry, with taxpayers and clients bilked out of billions using a dizzying array of old-school hustles that, but for their ponderous complexity, would have fit well in slick grifter movies like The Sting and Matchstick Men. There's even a term in con-man lingo for what some of the banks are doing right now, with all their cosmetic gestures of scaling back bonuses and giving to charities. In the grifter world, calming down a mark so he doesn't call the cops is known as the "Cool Off."
To appreciate how all of these (sometimes brilliant) schemes work is to understand the difference between earning money and taking scores, and to realize that the profits these banks are posting don't so much represent national growth and recovery, but something closer to the losses one would report after a theft or a car crash. Many Americans instinctively understand this to be true — but, much like when your wife does it with your 300-pound plumber in the kids' playroom, knowing it and actually watching the whole scene from start to finish are two very different things. In that spirit, a brief history of the best 18 months of grifting this country has ever seen:
CON #1 THE SWOOP AND SQUAT
By now, most people who have followed the financial crisis know that the bailout of AIG was actually a bailout of AIG's "counterparties" — the big banks like Goldman to whom the insurance giant owed billions when it went belly up.
What is less understood is that the bailout of AIG counter-parties like Goldman and Société Générale, a French bank, actually began before the collapse of AIG, before the Federal Reserve paid them so much as a dollar. Nor is it understood that these counterparties actually accelerated the wreck of AIG in what was, ironically, something very like the old insurance scam known as "Swoop and Squat," in which a target car is trapped between two perpetrator vehicles and wrecked, with the mark in the game being the target's insurance company — in this case, the government.
This may sound far-fetched, but the financial crisis of 2008 was very much caused by a perverse series of legal incentives that often made failed investments worth more than thriving ones. Our economy was like a town where everyone has juicy insurance policies on their neighbors' cars and houses. In such a town, the driving will be suspiciously bad, and there will be a lot of fires.
AIG was the ultimate example of this dynamic. At the height of the housing boom, Goldman was selling billions in bundled mortgage-backed securities — often toxic crap of the no-money-down, no-identification-needed variety of home loan — to various institutional suckers like pensions and insurance companies, who frequently thought they were buying investment-grade instruments. At the same time, in a glaring example of the perverse incentives that existed and still exist, Goldman was also betting against those same sorts of securities — a practice that one government investigator compared to "selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars."
Goldman often "insured" some of this garbage with AIG, using a virtually unregulated form of pseudo-insurance called credit-default swaps. Thanks in large part to deregulation pushed by Bob Rubin, former chairman of Goldman, and Treasury secretary under Bill Clinton, AIG wasn't required to actually have the capital to pay off the deals. As a result, banks like Goldman bought more than $440 billion worth of this bogus insurance from AIG, a huge blind bet that the taxpayer ended up having to eat.
Thus, when the housing bubble went crazy, Goldman made money coming and going. They made money selling the crap mortgages, and they made money by collecting on the bogus insurance from AIG when the crap mortgages flopped.
Still, the trick for Goldman was: how to collect the insurance money. As AIG headed into a tailspin that fateful summer of 2008, it looked like the beleaguered firm wasn't going to have the money to pay off the bogus insurance. So Goldman and other banks began demanding that AIG provide them with cash collateral. In the 15 months leading up to the collapse of AIG, Goldman received $5.9 billion in collateral. Société Générale, a bank holding lots of mortgage-backed crap originally underwritten by Goldman, received $5.5 billion. These collateral demands squeezing AIG from two sides were the "Swoop and Squat" that ultimately crashed the firm. "It put the company into a liquidity crisis," says Eric Dinallo, who was intimately involved in the AIG bailout as head of the New York State Insurance Department.
It was a brilliant move. When a company like AIG is about to die, it isn't supposed to hand over big hunks of assets to a single creditor like Goldman; it's supposed to equitably distribute whatever assets it has left among all its creditors. Had AIG gone bankrupt, Goldman would have likely lost much of the $5.9 billion that it pocketed as collateral. "Any bankruptcy court that saw those collateral payments would have declined that transaction as a fraudulent conveyance," says Barry Ritholtz, the author of Bailout Nation. Instead, Goldman and the other counterparties got their money out in advance — putting a torch to what was left of AIG. Fans of the movie Goodfellas will recall Henry Hill and Tommy DeVito taking the same approach to the Bamboo Lounge nightclub they'd been gouging. Roll the Ray Liotta narration: "Finally, when there's nothing left, when you can't borrow another buck . . . you bust the joint out. You light a match."
And why not? After all, according to the terms of the bailout deal struck when AIG was taken over by the state in September 2008, Goldman was paid 100 cents on the dollar on an additional $12.9 billion it was owed by AIG — again, money it almost certainly would not have seen a fraction of had AIG proceeded to a normal bankruptcy. Along with the collateral it pocketed, that's $19 billion in pure cash that Goldman would not have "earned" without massive state intervention. How's that $13.4 billion in 2009 profits looking now? And that doesn't even include the direct bailouts of Goldman Sachs and other big banks, which began in earnest after the collapse of AIG.
CON #2 THE DOLLAR STORE
In the usual "DollarStore" or "Big Store" scam — popularized in movies like The Sting — a huge cast of con artists is hired to create a whole fake environment into which the unsuspecting mark walks and gets robbed over and over again. A warehouse is converted into a makeshift casino or off-track betting parlor, the fool walks in with money, leaves without it.
The two key elements to the Dollar Store scam are the whiz-bang theatrical redecorating job and the fact that everyone is in on it except the mark. In this case, a pair of investment banks were dressed up to look like commercial banks overnight, and it was the taxpayer who walked in and lost his shirt, confused by the appearance of what looked like real Federal Reserve officials minding the store.
Less than a week after the AIG bailout, Goldman and another investment bank, Morgan Stanley, applied for, and received, federal permission to become bank holding companies — a move that would make them eligible for much greater federal support. The stock prices of both firms were cratering, and there was talk that either or both might go the way of Lehman Brothers, another once-mighty investment bank that just a week earlier had disappeared from the face of the earth under the weight of its toxic assets. By law, a five-day waiting period was required for such a conversion — but the two banks got them overnight, with final approval actually coming only five days after the AIG bailout.
Why did they need those federal bank charters? This question is the key to understanding the entire bailout era — because this Dollar Store scam was the big one. Institutions that were, in reality, high-risk gambling houses were allowed to masquerade as conservative commercial banks. As a result of this new designation, they were given access to a virtually endless tap of "free money" by unsuspecting taxpayers. The $10 billion that Goldman received under the better-known TARP bailout was chump change in comparison to the smorgasbord of direct and indirect aid it qualified for as a commercial bank.
When Goldman Sachs and Morgan Stanley got their federal bank charters, they joined Bank of America, Citigroup, J.P. Morgan Chase and the other banking titans who could go to the Fed and borrow massive amounts of money at interest rates that, thanks to the aggressive rate-cutting policies of Fed chief Ben Bernanke during the crisis, soon sank to zero percent. The ability to go to the Fed and borrow big at next to no interest was what saved Goldman, Morgan Stanley and other banks from death in the fall of 2008. "They had no other way to raise capital at that moment, meaning they were on the brink of insolvency," says Nomi Prins, a former managing director at Goldman Sachs. "The Fed was the only shot."
In fact, the Fed became not just a source of emergency borrowing that enabled Goldman and Morgan Stanley to stave off disaster — it became a source of long-term guaranteed income. Borrowing at zero percent interest, banks like Goldman now had virtually infinite ways to make money. In one of the most common maneuvers, they simply took the money they borrowed from the government at zero percent and lent it back to the government by buying Treasury bills that paid interest of three or four percent. It was basically a license to print money — no different than attaching an ATM to the side of the Federal Reserve.
"You're borrowing at zero, putting it out there at two or three percent, with hundreds of billions of dollars — man, you can make a lot of money that way," says the manager of one prominent hedge fund. "It's free money." Which goes a long way to explaining Goldman's enormous profits last year. But all that free money was amplified by another scam:
CON #3 THE PIG IN THE POKE
At one point or another, pretty much everyone who takes drugs has been burned by this one, also known as the "Rocks in the Box" scam or, in its more elaborate variations, the "Jamaican Switch." Someone sells you what looks like an eightball of coke in a baggie, you get home and, you dumbass, it's baby powder.
The scam's name comes from the Middle Ages, when some fool would be sold a bound and gagged pig that he would see being put into a bag; he'd miss the switch, then get home and find a tied-up cat in there instead. Hence the expression "Don't let the cat out of the bag."
The "Pig in the Poke" scam is another key to the entire bailout era. After the crash of the housing bubble — the largest asset bubble in history — the economy was suddenly flooded with securities backed by failing or near-failing home loans. In the cleanup phase after that bubble burst, the whole game was to get taxpayers, clients and shareholders to buy these worthless cats, but at pig prices.
One of the first times we saw the scam appear was in September 2008, right around the time that AIG was imploding. That was when the Fed changed some of its collateral rules, meaning banks that could once borrow only against sound collateral, like Treasury bills or AAA-rated corporate bonds, could now borrow against pretty much anything — including some of the mortgage-backed sewage that got us into this mess in the first place. In other words, banks that once had to show a real pig to borrow from the Fed could now show up with a cat and get pig money. "All of a sudden, banks were allowed to post absolute shit to the Fed's balance sheet," says the manager of the prominent hedge fund.
The Fed spelled it out on September 14th, 2008, when it changed the collateral rules for one of its first bailout facilities — the Primary Dealer Credit Facility, or PDCF. The Fed's own write-up described the changes: "With the Fed's action, all the kinds of collateral then in use . . . including non-investment-grade securities and equities . . . became eligible for pledge in the PDCF."
Translation: We now accept cats.
The Pig in the Poke also came into play in April of last year, when Congress pushed a little-known agency called the Financial Accounting Standards Board, or FASB, to change the so-called "mark-to-market" accounting rules. Until this rule change, banks had to assign a real-market price to all of their assets. If they had a balance sheet full of securities they had bought at $3 that were now only worth $1, they had to figure their year-end accounting using that $1 value. In other words, if you were the dope who bought a cat instead of a pig, you couldn't invite your shareholders to a slate of pork dinners come year-end accounting time.
But last April, FASB changed all that. From now on, it announced, banks could avoid reporting losses on some of their crappy cat investments simply by declaring that they would "more likely than not" hold on to them until they recovered their pig value. In short, the banks didn't even have to actually hold on to the toxic shit they owned — they just had to sort of promise to hold on to it.
That's why the "profit" numbers of a lot of these banks are really a joke. In many cases, we have absolutely no idea how many cats are in their proverbial bag. What they call "profits" might really be profits, only minus undeclared millions or billions in losses.
"They're hiding all this stuff from their shareholders," says Ritholtz, who was disgusted that the banks lobbied for the rule changes. "Now, suddenly banks that were happy to mark to market on the way up don't have to mark to market on the way down."
CON #4 THE RUMANIAN BOX
One of the great innovations of Victor Lustig, the legendary Depression-era con man who wrote the famous "Ten Commandments for Con Men," was a thing called the "Rumanian Box." This was a little machine that a mark would put a blank piece of paper into, only to see real currency come out the other side. The brilliant Lustig sold this Rumanian Box over and over again for vast sums — but he's been outdone by the modern barons of Wall Street, who managed to get themselves a real Rumanian Box.
How they accomplished this is a story that by itself highlights the challenge of placing this era in any kind of historical context of known financial crime. What the banks did was something that was never — and never could have been — thought of before. They took so much money from the government, and then did so little with it, that the state was forced to start printing new cash to throw at them. Even the great Lustig in his wildest, horniest dreams could never have dreamed up this one.
The setup: By early 2009, the banks had already replenished themselves with billions if not trillions in bailout money. It wasn't just the $700 billion in TARP cash, the free money provided by the Fed, and the untold losses obscured by accounting tricks. Another new rule allowed banks to collect interest on the cash they were required by law to keep in reserve accounts at the Fed — meaning the state was now compensating the banks simply for guaranteeing their own solvency. And a new federal operation called the Temporary Liquidity Guarantee Program let insolvent and near-insolvent banks dispense with their deservedly ruined credit profiles and borrow on a clean slate, with FDIC backing. Goldman borrowed $29 billion on the government's good name, J.P. Morgan Chase $38 billion, and Bank of America $44 billion. "TLGP," says Prins, the former Goldman manager, "was a big one."
Collectively, all this largesse was worth trillions. The idea behind the flood of money, from the government's standpoint, was to spark a national recovery: We refill the banks' balance sheets, and they, in turn, start to lend money again, recharging the economy and producing jobs. "The banks were fast approaching insolvency," says Rep. Paul Kanjorski, a vocal critic of Wall Street who nevertheless defends the initial decision to bail out the banks. "It was vitally important that we recapitalize these institutions."
But here's the thing. Despite all these trillions in government rescues, despite the Fed slashing interest rates down to nothing and showering the banks with mountains of guarantees, Goldman and its friends had still not jump-started lending again by the first quarter of 2009. That's where those nuclear-powered balls of Lloyd Blankfein came into play, as Goldman and other banks basically threatened to pick up their bailout billions and go home if the government didn't fork over more cash — a lot more. "Even if the Fed could make interest rates negative, that wouldn't necessarily help," warned Goldman's chief domestic economist, Jan Hatzius. "We're in a deep recession mainly because the private sector, for a variety of reasons, has decided to save a lot more."
Translation: You can lower interest rates all you want, but we're still not fucking lending the bailout money to anyone in this economy. Until the government agreed to hand over even more goodies, the banks opted to join the rest of the "private sector" and "save" the taxpayer aid they had received — in the form of bonuses and compensation.
The ploy worked. In March of last year, the Fed sharply expanded a radical new program called quantitative easing, which effectively operated as a real-live Rumanian Box. The government put stacks of paper in one side, and out came $1.2 trillion "real" dollars.
The government used some of that freshly printed money to prop itself up by purchasing Treasury bonds — a desperation move, since Washington's demand for cash was so great post-Clusterfuck '08 that even the Chinese couldn't buy U.S. debt fast enough to keep America afloat. But the Fed used most of the new cash to buy mortgage-backed securities in an effort to spur home lending — instantly creating a massive market for major banks.
And what did the banks do with the proceeds? Among other things, they bought Treasury bonds, essentially lending the money back to the government, at interest. The money that came out of the magic Rumanian Box went from the government back to the government, with Wall Street stepping into the circle just long enough to get paid. And once quantitative easing ends, as it is scheduled to do in March, the flow of money for home loans will once again grind to a halt. The Mortgage Bankers Association expects the number of new residential mortgages to plunge by 40 percent this year.
CON #5 THE BIG MITT
All of that Rumanian box paper was made even more valuable by running it through the next stage of the grift. Michael Masters, one of the country's leading experts on commodities trading, compares this part of the scam to the poker game in the Bill Murray comedy Stripes. "It's like that scene where John Candy leans over to the guy who's new at poker and says, 'Let me see your cards,' then starts giving him advice," Masters says. "He looks at the hand, and the guy has bad cards, and he's like, 'Bluff me, come on! If it were me, I'd bet everything!' That's what it's like. It's like they're looking at your cards as they give you advice."
In more ways than one can count, the economy in the bailout era turned into a "Big Mitt," the con man's name for a rigged poker game. Everybody was indeed looking at everyone else's cards, in many cases with state sanction. Only taxpayers and clients were left out of the loop.
At the same time the Fed and the Treasury were making massive, earthshaking moves like quantitative easing and TARP, they were also consulting regularly with private advisory boards that include every major player on Wall Street. The Treasury Borrowing Advisory Committee has a J.P. Morgan executive as its chairman and a Goldman executive as its vice chairman, while the board advising the Fed includes bankers from Capital One and Bank of New York Mellon. That means that, in addition to getting great gobs of free money, the banks were also getting clear signals about when they were getting that money, making it possible to position themselves to make the appropriate investments.
One of the best examples of the banks blatantly gambling, and winning, on government moves was the Public-Private Investment Program, or PPIP. In this bizarre scheme cooked up by goofball-geek Treasury Secretary Tim Geithner, the government loaned money to hedge funds and other private investors to buy up the absolutely most toxic horseshit on the market — the same kind of high-risk, high-yield mortgages that were most responsible for triggering the financial chain reaction in the fall of 2008. These satanic deals were the basic currency of the bubble: Jobless dope fiends bought houses with no money down, and the big banks wrapped those mortgages into securities and then sold them off to pensions and other suckers as investment-grade deals. The whole point of the PPIP was to get private investors to relieve the banks of these dangerous assets before they hurt any more innocent bystanders.
But what did the banks do instead, once they got wind of the PPIP? They started buying that worthless crap again, presumably to sell back to the government at inflated prices! In the third quarter of last year, Goldman, Morgan Stanley, Citigroup and Bank of America combined to add $3.36 billion of exactly this horseshit to their balance sheets.
This brazen decision to gouge the taxpayer startled even hardened market observers. According to Michael Schlachter of the investment firm Wilshire Associates, it was "absolutely ridiculous" that the banks that were supposed to be reducing their exposure to these volatile instruments were instead loading up on them in order to make a quick buck. "Some of them created this mess," he said, "and they are making a killing undoing it."
CON #6 THE WIRE
Here's the thing about our current economy. When Goldman and Morgan Stanley transformed overnight from investment banks into commercial banks, we were told this would mean a new era of "significantly tighter regulations and much closer supervision by bank examiners," as The New York Times put it the very next day. In reality, however, the conversion of Goldman and Morgan Stanley simply completed the dangerous concentration of power and wealth that began in 1999, when Congress repealed the Glass-Steagall Act — the Depression-era law that had prevented the merger of insurance firms, commercial banks and investment houses. Wall Street and the government became one giant dope house, where a few major players share valuable information between conflicted departments the way junkies share needles.
One of the most common practices is a thing called front-running, which is really no different from the old "Wire" con, another scam popularized in The Sting. But instead of intercepting a telegraph wire in order to bet on racetrack results ahead of the crowd, what Wall Street does is make bets ahead of valuable information they obtain in the course of everyday business.
Say you're working for the commodities desk of a big investment bank, and a major client — a pension fund, perhaps — calls you up and asks you to buy a billion dollars of oil futures for them. Once you place that huge order, the price of those futures is almost guaranteed to go up. If the guy in charge of asset management a few desks down from you somehow finds out about that, he can make a fortune for the bank by betting ahead of that client of yours. The deal would be instantaneous and undetectable, and it would offer huge profits. Your own client would lose money, of course — he'd end up paying a higher price for the oil futures he ordered, because you would have driven up the price. But that doesn't keep banks from screwing their own customers in this very way.
The scam is so blatant that Goldman Sachs actually warns its clients that something along these lines might happen to them. In the disclosure section at the back of a research paper the bank issued on January 15th, Goldman advises clients to buy some dubious high-yield bonds while admitting that the bank itself may bet against those same shitty bonds. "Our salespeople, traders and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research," the disclosure reads. "Our asset-management area, our proprietary-trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research."
Banks like Goldman admit this stuff openly, despite the fact that there are securities laws that require banks to engage in "fair dealing with customers" and prohibit analysts from issuing opinions that are at odds with what they really think. And yet here they are, saying flat-out that they may be issuing an opinion at odds with what they really think.
To help them screw their own clients, the major investment banks employ high-speed computer programs that can glimpse orders from investors before the deals are processed and then make trades on behalf of the banks at speeds of fractions of a second. None of them will admit it, but everybody knows what this computerized trading — known as "flash trading" — really is. "Flash trading is nothing more than computerized front-running," says the prominent hedge-fund manager. The SEC voted to ban flash trading in September, but five months later it has yet to issue a regulation to put a stop to the practice.
Over the summer, Goldman suffered an embarrassment on that score when one of its employees, a Russian named Sergey Aleynikov, allegedly stole the bank's computerized trading code. In a court proceeding after Aleynikov's arrest, Assistant U.S. Attorney Joseph Facciponti reported that "the bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways."
Six months after a federal prosecutor admitted in open court that the Goldman trading program could be used to unfairly manipulate markets, the bank released its annual numbers. Among the notable details was the fact that a staggering 76 percent of its revenue came from trading, both for its clients and for its own account. "That is much, much higher than any other bank," says Prins, the former Goldman managing director. "If I were a client and I saw that they were making this much money from trading, I would question how badly I was getting screwed."
Why big institutional investors like pension funds continually come to Wall Street to get raped is the million-dollar question that many experienced observers puzzle over. Goldman's own explanation for this phenomenon is comedy of the highest order. In testimony before a government panel in January, Blankfein was confronted about his firm's practice of betting against the same sorts of investments it sells to clients. His response: "These are the professional investors who want this exposure."
In other words, our clients are big boys, so screw 'em if they're dumb enough to take the sucker bets I'm offering.
CON #7 THE RELOAD
Not many con men are good enough or brazen enough to con the same victim twice in a row, but the few who try have a name for this excellent sport: reloading. The usual way to reload on a repeat victim (called an "addict" in grifter parlance) is to rope him into trying to get back the money he just lost. This is exactly what started to happen late last year.
It's important to remember that the housing bubble itself was a classic confidence game — the Ponzi scheme. The Ponzi scheme is any scam in which old investors must be continually paid off with money from new investors to keep up what appear to be high rates of investment return. Residential housing was never as valuable as it seemed during the bubble; the soaring home values were instead a reflection of a continual upward rush of new investors in mortgage-backed securities, a rush that finally collapsed in 2008.
But by the end of 2009, the unimaginable was happening: The bubble was re-inflating. A bailout policy that was designed to help us get out from under the bursting of the largest asset bubble in history inadvertently produced exactly the opposite result, as all that government-fueled capital suddenly began flowing into the most dangerous and destructive investments all over again. Wall Street was going for the reload.
A lot of this was the government's own fault, of course. By slashing interest rates to zero and flooding the market with money, the Fed was replicating the historic mistake that Alan Greenspan had made not once, but twice, before the tech bubble in the early 1990s and before the housing bubble in the early 2000s. By making sure that traditionally safe investments like CDs and savings accounts earned basically nothing, thanks to rock-bottom interest rates, investors were forced to go elsewhere to search for moneymaking opportunities.
Now we're in the same situation all over again, only far worse. Wall Street is flooded with government money, and interest rates that are not just low but flat are pushing investors to seek out more "creative" opportunities. (It's "Greenspan times 10," jokes one hedge-fund trader.) Some of that money could be put to use on Main Street, of course, backing the efforts of investment-worthy entrepreneurs. But that's not what our modern Wall Street is built to do. "They don't seem to want to lend to small and medium-sized business," says Rep. Brad Sherman, who serves on the House Financial Services Committee. "What they want to invest in is marketable securities. And the definition of small and medium-sized businesses, for the most part, is that they don't have marketable securities. They have bank loans."
In other words, unless you're dealing with the stock of a major, publicly traded company, or a giant pile of home mortgages, or the bonds of a large corporation, or a foreign currency, or oil futures, or some country's debt, or anything else that can be rapidly traded back and forth in huge numbers, factory-style, by big banks, you're not really on Wall Street's radar.
So with small business out of the picture, and the safe stuff not worth looking at thanks to the Fed's low interest rates, where did Wall Street go? Right back into the shit that got us here.
One trader, who asked not to be identified, recounts a story of what happened with his hedge fund this past fall. His firm wanted to short — that is, bet against — all the crap toxic bonds that were suddenly in vogue again. The fund's analysts had examined the fundamentals of these instruments and concluded that they were absolutely not good investments.
So they took a short position. One month passed, and they lost money. Another month passed — same thing. Finally, the trader just shrugged and decided to change course and buy.
"I said, 'Fuck it, let's make some money,'" he recalls. "I absolutely did not believe in the fundamentals of any of this stuff. However, I can get on the bandwagon, just so long as I know when to jump out of the car before it goes off the damn cliff!"
This is the very definition of bubble economics — betting on crowd behavior instead of on fundamentals. It's old investors betting on the arrival of new ones, with the value of the underlying thing itself being irrelevant. And this behavior is being driven, no surprise, by the biggest firms on Wall Street.
The research report published by Goldman Sachs on January 15th underlines this sort of thinking. Goldman issued a strong recommendation to buy exactly the sort of high-yield toxic crap our hedge-fund guy was, by then, driving rapidly toward the cliff. "Summarizing our views," the bank wrote, "we expect robust flows . . . to dominate fundamentals." In other words: This stuff is crap, but everyone's buying it in an awfully robust way, so you should too. Just like tech stocks in 1999, and mortgage-backed securities in 2006.
To sum up, this is what Lloyd Blankfein meant by "performance": Take massive sums of money from the government, sit on it until the government starts printing trillions of dollars in a desperate attempt to restart the economy, buy even more toxic assets to sell back to the government at inflated prices — and then, when all else fails, start driving us all toward the cliff again with a frank and open endorsement of bubble economics. I mean, shit — who wouldn't deserve billions in bonuses for doing all that?
Con artists have a word for the inability of their victims to accept that they've been scammed. They call it the "True Believer Syndrome." That's sort of where we are, in a state of nagging disbelief about the real problem on Wall Street. It isn't so much that we have inadequate rules or incompetent regulators, although both of these things are certainly true. The real problem is that it doesn't matter what regulations are in place if the people running the economy are rip-off artists. The system assumes a certain minimum level of ethical behavior and civic instinct over and above what is spelled out by the regulations. If those ethics are absent — well, this thing isn't going to work, no matter what we do. Sure, mugging old ladies is against the law, but it's also easy. To prevent it, we depend, for the most part, not on cops but on people making the conscious decision not to do it.
That's why the biggest gift the bankers got in the bailout was not fiscal but psychological. "The most valuable part of the bailout," says Rep. Sherman, "was the implicit guarantee that they're Too Big to Fail." Instead of liquidating and prosecuting the insolvent institutions that took us all down with them in a giant Ponzi scheme, we have showered them with money and guarantees and all sorts of other enabling gestures. And what should really freak everyone out is the fact that Wall Street immediately started skimming off its own rescue money. If the bailouts validated anew the crooked psychology of the bubble, the recent profit and bonus numbers show that the same psychology is back, thriving, and looking for new disasters to create. "It's evidence," says Rep. Kanjorski, "that they still don't get it."
More to the point, the fact that we haven't done much of anything to change the rules and behavior of Wall Street shows that we still don't get it. Instituting a bailout policy that stressed recapitalizing bad banks was like the addict coming back to the con man to get his lost money back. Ask yourself how well that ever works out. And then get ready for the reload.
[From Rolling Stone, Issue 1099 — March 4, 2010]
The bank had already set aside a tidy $16.2 billion for salaries and bonuses — meaning that Goldman employees were each set to take home an average of $498,246, a number roughly commensurate with what they received during the bubble years. Still, the troops were worried: There were rumors that Dr. Ballsachs, bowing to political pressure, might be forced to scale the number back. After all, the country was broke, 14.8 million Americans were stranded on the unemployment line, and Barack Obama and the Democrats were trying to recover the populist high ground after their bitch-whipping in Massachusetts by calling for a "bailout tax" on banks. Maybe this wasn't the right time for Goldman to be throwing its annual Roman bonus orgy.
Not to worry, Blankfein reassured employees. "In a year that proved to have no shortage of story lines," he said, "I believe very strongly that performance is the ultimate narrative."
Translation: We made a shitload of money last year because we're so amazing at our jobs, so fuck all those people who want us to reduce our bonuses.
Goldman wasn't alone. The nation's six largest banks — all committed to this balls-out, I drink your milkshake! strategy of flagrantly gorging themselves as America goes hungry — set aside a whopping $140 billion for executive compensation last year, a sum only slightly less than the $164 billion they paid themselves in the pre-crash year of 2007. In a gesture of self-sacrifice, Blankfein himself took a humiliatingly low bonus of $9 million, less than the 2009 pay of elephantine New York Knicks washout Eddy Curry. But in reality, not much had changed. "What is the state of our moral being when Lloyd Blankfein taking a $9 million bonus is viewed as this great act of contrition, when every penny of it was a direct transfer from the taxpayer?" asks Eliot Spitzer, who tried to hold Wall Street accountable during his own ill-fated stint as governor of New York.
Beyond a few such bleats of outrage, however, the huge payout was met, by and large, with a collective sigh of resignation. Because beneath America's populist veneer, on a more subtle strata of the national psyche, there remains a strong temptation to not really give a shit. The rich, after all, have always made way too much money; what's the difference if some fat cat in New York pockets $20 million instead of $10 million?
The only reason such apathy exists, however, is because there's still a widespread misunderstanding of how exactly Wall Street "earns" its money, with emphasis on the quotation marks around "earns." The question everyone should be asking, as one bailout recipient after another posts massive profits — Goldman reported $13.4 billion in profits last year, after paying out that $16.2 billion in bonuses and compensation — is this: In an economy as horrible as ours, with every factory town between New York and Los Angeles looking like those hollowed-out ghost ships we see on History Channel documentaries like Shipwrecks of the Great Lakes, where in the hell did Wall Street's eye-popping profits come from, exactly? Did Goldman go from bailout city to $13.4 billion in the black because, as Blankfein suggests, its "performance" was just that awesome? A year and a half after they were minutes away from bankruptcy, how are these assholes not only back on their feet again, but hauling in bonuses at the same rate they were during the bubble?
The answer to that question is basically twofold: They raped the taxpayer, and they raped their clients.
The bottom line is that banks like Goldman have learned absolutely nothing from the global economic meltdown. In fact, they're back conniving and playing speculative long shots in force — only this time with the full financial support of the U.S. government. In the process, they're rapidly re-creating the conditions for another crash, with the same actors once again playing the same crazy games of financial chicken with the same toxic assets as before.
That's why this bonus business isn't merely a matter of getting upset about whether or not Lloyd Blankfein buys himself one tropical island or two on his next birthday. The reality is that the post-bailout era in which Goldman thrived has turned out to be a chaotic frenzy of high-stakes con-artistry, with taxpayers and clients bilked out of billions using a dizzying array of old-school hustles that, but for their ponderous complexity, would have fit well in slick grifter movies like The Sting and Matchstick Men. There's even a term in con-man lingo for what some of the banks are doing right now, with all their cosmetic gestures of scaling back bonuses and giving to charities. In the grifter world, calming down a mark so he doesn't call the cops is known as the "Cool Off."
To appreciate how all of these (sometimes brilliant) schemes work is to understand the difference between earning money and taking scores, and to realize that the profits these banks are posting don't so much represent national growth and recovery, but something closer to the losses one would report after a theft or a car crash. Many Americans instinctively understand this to be true — but, much like when your wife does it with your 300-pound plumber in the kids' playroom, knowing it and actually watching the whole scene from start to finish are two very different things. In that spirit, a brief history of the best 18 months of grifting this country has ever seen:
CON #1 THE SWOOP AND SQUAT
By now, most people who have followed the financial crisis know that the bailout of AIG was actually a bailout of AIG's "counterparties" — the big banks like Goldman to whom the insurance giant owed billions when it went belly up.
What is less understood is that the bailout of AIG counter-parties like Goldman and Société Générale, a French bank, actually began before the collapse of AIG, before the Federal Reserve paid them so much as a dollar. Nor is it understood that these counterparties actually accelerated the wreck of AIG in what was, ironically, something very like the old insurance scam known as "Swoop and Squat," in which a target car is trapped between two perpetrator vehicles and wrecked, with the mark in the game being the target's insurance company — in this case, the government.
This may sound far-fetched, but the financial crisis of 2008 was very much caused by a perverse series of legal incentives that often made failed investments worth more than thriving ones. Our economy was like a town where everyone has juicy insurance policies on their neighbors' cars and houses. In such a town, the driving will be suspiciously bad, and there will be a lot of fires.
AIG was the ultimate example of this dynamic. At the height of the housing boom, Goldman was selling billions in bundled mortgage-backed securities — often toxic crap of the no-money-down, no-identification-needed variety of home loan — to various institutional suckers like pensions and insurance companies, who frequently thought they were buying investment-grade instruments. At the same time, in a glaring example of the perverse incentives that existed and still exist, Goldman was also betting against those same sorts of securities — a practice that one government investigator compared to "selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars."
Goldman often "insured" some of this garbage with AIG, using a virtually unregulated form of pseudo-insurance called credit-default swaps. Thanks in large part to deregulation pushed by Bob Rubin, former chairman of Goldman, and Treasury secretary under Bill Clinton, AIG wasn't required to actually have the capital to pay off the deals. As a result, banks like Goldman bought more than $440 billion worth of this bogus insurance from AIG, a huge blind bet that the taxpayer ended up having to eat.
Thus, when the housing bubble went crazy, Goldman made money coming and going. They made money selling the crap mortgages, and they made money by collecting on the bogus insurance from AIG when the crap mortgages flopped.
Still, the trick for Goldman was: how to collect the insurance money. As AIG headed into a tailspin that fateful summer of 2008, it looked like the beleaguered firm wasn't going to have the money to pay off the bogus insurance. So Goldman and other banks began demanding that AIG provide them with cash collateral. In the 15 months leading up to the collapse of AIG, Goldman received $5.9 billion in collateral. Société Générale, a bank holding lots of mortgage-backed crap originally underwritten by Goldman, received $5.5 billion. These collateral demands squeezing AIG from two sides were the "Swoop and Squat" that ultimately crashed the firm. "It put the company into a liquidity crisis," says Eric Dinallo, who was intimately involved in the AIG bailout as head of the New York State Insurance Department.
It was a brilliant move. When a company like AIG is about to die, it isn't supposed to hand over big hunks of assets to a single creditor like Goldman; it's supposed to equitably distribute whatever assets it has left among all its creditors. Had AIG gone bankrupt, Goldman would have likely lost much of the $5.9 billion that it pocketed as collateral. "Any bankruptcy court that saw those collateral payments would have declined that transaction as a fraudulent conveyance," says Barry Ritholtz, the author of Bailout Nation. Instead, Goldman and the other counterparties got their money out in advance — putting a torch to what was left of AIG. Fans of the movie Goodfellas will recall Henry Hill and Tommy DeVito taking the same approach to the Bamboo Lounge nightclub they'd been gouging. Roll the Ray Liotta narration: "Finally, when there's nothing left, when you can't borrow another buck . . . you bust the joint out. You light a match."
And why not? After all, according to the terms of the bailout deal struck when AIG was taken over by the state in September 2008, Goldman was paid 100 cents on the dollar on an additional $12.9 billion it was owed by AIG — again, money it almost certainly would not have seen a fraction of had AIG proceeded to a normal bankruptcy. Along with the collateral it pocketed, that's $19 billion in pure cash that Goldman would not have "earned" without massive state intervention. How's that $13.4 billion in 2009 profits looking now? And that doesn't even include the direct bailouts of Goldman Sachs and other big banks, which began in earnest after the collapse of AIG.
CON #2 THE DOLLAR STORE
In the usual "DollarStore" or "Big Store" scam — popularized in movies like The Sting — a huge cast of con artists is hired to create a whole fake environment into which the unsuspecting mark walks and gets robbed over and over again. A warehouse is converted into a makeshift casino or off-track betting parlor, the fool walks in with money, leaves without it.
The two key elements to the Dollar Store scam are the whiz-bang theatrical redecorating job and the fact that everyone is in on it except the mark. In this case, a pair of investment banks were dressed up to look like commercial banks overnight, and it was the taxpayer who walked in and lost his shirt, confused by the appearance of what looked like real Federal Reserve officials minding the store.
Less than a week after the AIG bailout, Goldman and another investment bank, Morgan Stanley, applied for, and received, federal permission to become bank holding companies — a move that would make them eligible for much greater federal support. The stock prices of both firms were cratering, and there was talk that either or both might go the way of Lehman Brothers, another once-mighty investment bank that just a week earlier had disappeared from the face of the earth under the weight of its toxic assets. By law, a five-day waiting period was required for such a conversion — but the two banks got them overnight, with final approval actually coming only five days after the AIG bailout.
Why did they need those federal bank charters? This question is the key to understanding the entire bailout era — because this Dollar Store scam was the big one. Institutions that were, in reality, high-risk gambling houses were allowed to masquerade as conservative commercial banks. As a result of this new designation, they were given access to a virtually endless tap of "free money" by unsuspecting taxpayers. The $10 billion that Goldman received under the better-known TARP bailout was chump change in comparison to the smorgasbord of direct and indirect aid it qualified for as a commercial bank.
When Goldman Sachs and Morgan Stanley got their federal bank charters, they joined Bank of America, Citigroup, J.P. Morgan Chase and the other banking titans who could go to the Fed and borrow massive amounts of money at interest rates that, thanks to the aggressive rate-cutting policies of Fed chief Ben Bernanke during the crisis, soon sank to zero percent. The ability to go to the Fed and borrow big at next to no interest was what saved Goldman, Morgan Stanley and other banks from death in the fall of 2008. "They had no other way to raise capital at that moment, meaning they were on the brink of insolvency," says Nomi Prins, a former managing director at Goldman Sachs. "The Fed was the only shot."
In fact, the Fed became not just a source of emergency borrowing that enabled Goldman and Morgan Stanley to stave off disaster — it became a source of long-term guaranteed income. Borrowing at zero percent interest, banks like Goldman now had virtually infinite ways to make money. In one of the most common maneuvers, they simply took the money they borrowed from the government at zero percent and lent it back to the government by buying Treasury bills that paid interest of three or four percent. It was basically a license to print money — no different than attaching an ATM to the side of the Federal Reserve.
"You're borrowing at zero, putting it out there at two or three percent, with hundreds of billions of dollars — man, you can make a lot of money that way," says the manager of one prominent hedge fund. "It's free money." Which goes a long way to explaining Goldman's enormous profits last year. But all that free money was amplified by another scam:
CON #3 THE PIG IN THE POKE
At one point or another, pretty much everyone who takes drugs has been burned by this one, also known as the "Rocks in the Box" scam or, in its more elaborate variations, the "Jamaican Switch." Someone sells you what looks like an eightball of coke in a baggie, you get home and, you dumbass, it's baby powder.
The scam's name comes from the Middle Ages, when some fool would be sold a bound and gagged pig that he would see being put into a bag; he'd miss the switch, then get home and find a tied-up cat in there instead. Hence the expression "Don't let the cat out of the bag."
The "Pig in the Poke" scam is another key to the entire bailout era. After the crash of the housing bubble — the largest asset bubble in history — the economy was suddenly flooded with securities backed by failing or near-failing home loans. In the cleanup phase after that bubble burst, the whole game was to get taxpayers, clients and shareholders to buy these worthless cats, but at pig prices.
One of the first times we saw the scam appear was in September 2008, right around the time that AIG was imploding. That was when the Fed changed some of its collateral rules, meaning banks that could once borrow only against sound collateral, like Treasury bills or AAA-rated corporate bonds, could now borrow against pretty much anything — including some of the mortgage-backed sewage that got us into this mess in the first place. In other words, banks that once had to show a real pig to borrow from the Fed could now show up with a cat and get pig money. "All of a sudden, banks were allowed to post absolute shit to the Fed's balance sheet," says the manager of the prominent hedge fund.
The Fed spelled it out on September 14th, 2008, when it changed the collateral rules for one of its first bailout facilities — the Primary Dealer Credit Facility, or PDCF. The Fed's own write-up described the changes: "With the Fed's action, all the kinds of collateral then in use . . . including non-investment-grade securities and equities . . . became eligible for pledge in the PDCF."
Translation: We now accept cats.
The Pig in the Poke also came into play in April of last year, when Congress pushed a little-known agency called the Financial Accounting Standards Board, or FASB, to change the so-called "mark-to-market" accounting rules. Until this rule change, banks had to assign a real-market price to all of their assets. If they had a balance sheet full of securities they had bought at $3 that were now only worth $1, they had to figure their year-end accounting using that $1 value. In other words, if you were the dope who bought a cat instead of a pig, you couldn't invite your shareholders to a slate of pork dinners come year-end accounting time.
But last April, FASB changed all that. From now on, it announced, banks could avoid reporting losses on some of their crappy cat investments simply by declaring that they would "more likely than not" hold on to them until they recovered their pig value. In short, the banks didn't even have to actually hold on to the toxic shit they owned — they just had to sort of promise to hold on to it.
That's why the "profit" numbers of a lot of these banks are really a joke. In many cases, we have absolutely no idea how many cats are in their proverbial bag. What they call "profits" might really be profits, only minus undeclared millions or billions in losses.
"They're hiding all this stuff from their shareholders," says Ritholtz, who was disgusted that the banks lobbied for the rule changes. "Now, suddenly banks that were happy to mark to market on the way up don't have to mark to market on the way down."
CON #4 THE RUMANIAN BOX
One of the great innovations of Victor Lustig, the legendary Depression-era con man who wrote the famous "Ten Commandments for Con Men," was a thing called the "Rumanian Box." This was a little machine that a mark would put a blank piece of paper into, only to see real currency come out the other side. The brilliant Lustig sold this Rumanian Box over and over again for vast sums — but he's been outdone by the modern barons of Wall Street, who managed to get themselves a real Rumanian Box.
How they accomplished this is a story that by itself highlights the challenge of placing this era in any kind of historical context of known financial crime. What the banks did was something that was never — and never could have been — thought of before. They took so much money from the government, and then did so little with it, that the state was forced to start printing new cash to throw at them. Even the great Lustig in his wildest, horniest dreams could never have dreamed up this one.
The setup: By early 2009, the banks had already replenished themselves with billions if not trillions in bailout money. It wasn't just the $700 billion in TARP cash, the free money provided by the Fed, and the untold losses obscured by accounting tricks. Another new rule allowed banks to collect interest on the cash they were required by law to keep in reserve accounts at the Fed — meaning the state was now compensating the banks simply for guaranteeing their own solvency. And a new federal operation called the Temporary Liquidity Guarantee Program let insolvent and near-insolvent banks dispense with their deservedly ruined credit profiles and borrow on a clean slate, with FDIC backing. Goldman borrowed $29 billion on the government's good name, J.P. Morgan Chase $38 billion, and Bank of America $44 billion. "TLGP," says Prins, the former Goldman manager, "was a big one."
Collectively, all this largesse was worth trillions. The idea behind the flood of money, from the government's standpoint, was to spark a national recovery: We refill the banks' balance sheets, and they, in turn, start to lend money again, recharging the economy and producing jobs. "The banks were fast approaching insolvency," says Rep. Paul Kanjorski, a vocal critic of Wall Street who nevertheless defends the initial decision to bail out the banks. "It was vitally important that we recapitalize these institutions."
But here's the thing. Despite all these trillions in government rescues, despite the Fed slashing interest rates down to nothing and showering the banks with mountains of guarantees, Goldman and its friends had still not jump-started lending again by the first quarter of 2009. That's where those nuclear-powered balls of Lloyd Blankfein came into play, as Goldman and other banks basically threatened to pick up their bailout billions and go home if the government didn't fork over more cash — a lot more. "Even if the Fed could make interest rates negative, that wouldn't necessarily help," warned Goldman's chief domestic economist, Jan Hatzius. "We're in a deep recession mainly because the private sector, for a variety of reasons, has decided to save a lot more."
Translation: You can lower interest rates all you want, but we're still not fucking lending the bailout money to anyone in this economy. Until the government agreed to hand over even more goodies, the banks opted to join the rest of the "private sector" and "save" the taxpayer aid they had received — in the form of bonuses and compensation.
The ploy worked. In March of last year, the Fed sharply expanded a radical new program called quantitative easing, which effectively operated as a real-live Rumanian Box. The government put stacks of paper in one side, and out came $1.2 trillion "real" dollars.
The government used some of that freshly printed money to prop itself up by purchasing Treasury bonds — a desperation move, since Washington's demand for cash was so great post-Clusterfuck '08 that even the Chinese couldn't buy U.S. debt fast enough to keep America afloat. But the Fed used most of the new cash to buy mortgage-backed securities in an effort to spur home lending — instantly creating a massive market for major banks.
And what did the banks do with the proceeds? Among other things, they bought Treasury bonds, essentially lending the money back to the government, at interest. The money that came out of the magic Rumanian Box went from the government back to the government, with Wall Street stepping into the circle just long enough to get paid. And once quantitative easing ends, as it is scheduled to do in March, the flow of money for home loans will once again grind to a halt. The Mortgage Bankers Association expects the number of new residential mortgages to plunge by 40 percent this year.
CON #5 THE BIG MITT
All of that Rumanian box paper was made even more valuable by running it through the next stage of the grift. Michael Masters, one of the country's leading experts on commodities trading, compares this part of the scam to the poker game in the Bill Murray comedy Stripes. "It's like that scene where John Candy leans over to the guy who's new at poker and says, 'Let me see your cards,' then starts giving him advice," Masters says. "He looks at the hand, and the guy has bad cards, and he's like, 'Bluff me, come on! If it were me, I'd bet everything!' That's what it's like. It's like they're looking at your cards as they give you advice."
In more ways than one can count, the economy in the bailout era turned into a "Big Mitt," the con man's name for a rigged poker game. Everybody was indeed looking at everyone else's cards, in many cases with state sanction. Only taxpayers and clients were left out of the loop.
At the same time the Fed and the Treasury were making massive, earthshaking moves like quantitative easing and TARP, they were also consulting regularly with private advisory boards that include every major player on Wall Street. The Treasury Borrowing Advisory Committee has a J.P. Morgan executive as its chairman and a Goldman executive as its vice chairman, while the board advising the Fed includes bankers from Capital One and Bank of New York Mellon. That means that, in addition to getting great gobs of free money, the banks were also getting clear signals about when they were getting that money, making it possible to position themselves to make the appropriate investments.
One of the best examples of the banks blatantly gambling, and winning, on government moves was the Public-Private Investment Program, or PPIP. In this bizarre scheme cooked up by goofball-geek Treasury Secretary Tim Geithner, the government loaned money to hedge funds and other private investors to buy up the absolutely most toxic horseshit on the market — the same kind of high-risk, high-yield mortgages that were most responsible for triggering the financial chain reaction in the fall of 2008. These satanic deals were the basic currency of the bubble: Jobless dope fiends bought houses with no money down, and the big banks wrapped those mortgages into securities and then sold them off to pensions and other suckers as investment-grade deals. The whole point of the PPIP was to get private investors to relieve the banks of these dangerous assets before they hurt any more innocent bystanders.
But what did the banks do instead, once they got wind of the PPIP? They started buying that worthless crap again, presumably to sell back to the government at inflated prices! In the third quarter of last year, Goldman, Morgan Stanley, Citigroup and Bank of America combined to add $3.36 billion of exactly this horseshit to their balance sheets.
This brazen decision to gouge the taxpayer startled even hardened market observers. According to Michael Schlachter of the investment firm Wilshire Associates, it was "absolutely ridiculous" that the banks that were supposed to be reducing their exposure to these volatile instruments were instead loading up on them in order to make a quick buck. "Some of them created this mess," he said, "and they are making a killing undoing it."
CON #6 THE WIRE
Here's the thing about our current economy. When Goldman and Morgan Stanley transformed overnight from investment banks into commercial banks, we were told this would mean a new era of "significantly tighter regulations and much closer supervision by bank examiners," as The New York Times put it the very next day. In reality, however, the conversion of Goldman and Morgan Stanley simply completed the dangerous concentration of power and wealth that began in 1999, when Congress repealed the Glass-Steagall Act — the Depression-era law that had prevented the merger of insurance firms, commercial banks and investment houses. Wall Street and the government became one giant dope house, where a few major players share valuable information between conflicted departments the way junkies share needles.
One of the most common practices is a thing called front-running, which is really no different from the old "Wire" con, another scam popularized in The Sting. But instead of intercepting a telegraph wire in order to bet on racetrack results ahead of the crowd, what Wall Street does is make bets ahead of valuable information they obtain in the course of everyday business.
Say you're working for the commodities desk of a big investment bank, and a major client — a pension fund, perhaps — calls you up and asks you to buy a billion dollars of oil futures for them. Once you place that huge order, the price of those futures is almost guaranteed to go up. If the guy in charge of asset management a few desks down from you somehow finds out about that, he can make a fortune for the bank by betting ahead of that client of yours. The deal would be instantaneous and undetectable, and it would offer huge profits. Your own client would lose money, of course — he'd end up paying a higher price for the oil futures he ordered, because you would have driven up the price. But that doesn't keep banks from screwing their own customers in this very way.
The scam is so blatant that Goldman Sachs actually warns its clients that something along these lines might happen to them. In the disclosure section at the back of a research paper the bank issued on January 15th, Goldman advises clients to buy some dubious high-yield bonds while admitting that the bank itself may bet against those same shitty bonds. "Our salespeople, traders and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research," the disclosure reads. "Our asset-management area, our proprietary-trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research."
Banks like Goldman admit this stuff openly, despite the fact that there are securities laws that require banks to engage in "fair dealing with customers" and prohibit analysts from issuing opinions that are at odds with what they really think. And yet here they are, saying flat-out that they may be issuing an opinion at odds with what they really think.
To help them screw their own clients, the major investment banks employ high-speed computer programs that can glimpse orders from investors before the deals are processed and then make trades on behalf of the banks at speeds of fractions of a second. None of them will admit it, but everybody knows what this computerized trading — known as "flash trading" — really is. "Flash trading is nothing more than computerized front-running," says the prominent hedge-fund manager. The SEC voted to ban flash trading in September, but five months later it has yet to issue a regulation to put a stop to the practice.
Over the summer, Goldman suffered an embarrassment on that score when one of its employees, a Russian named Sergey Aleynikov, allegedly stole the bank's computerized trading code. In a court proceeding after Aleynikov's arrest, Assistant U.S. Attorney Joseph Facciponti reported that "the bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways."
Six months after a federal prosecutor admitted in open court that the Goldman trading program could be used to unfairly manipulate markets, the bank released its annual numbers. Among the notable details was the fact that a staggering 76 percent of its revenue came from trading, both for its clients and for its own account. "That is much, much higher than any other bank," says Prins, the former Goldman managing director. "If I were a client and I saw that they were making this much money from trading, I would question how badly I was getting screwed."
Why big institutional investors like pension funds continually come to Wall Street to get raped is the million-dollar question that many experienced observers puzzle over. Goldman's own explanation for this phenomenon is comedy of the highest order. In testimony before a government panel in January, Blankfein was confronted about his firm's practice of betting against the same sorts of investments it sells to clients. His response: "These are the professional investors who want this exposure."
In other words, our clients are big boys, so screw 'em if they're dumb enough to take the sucker bets I'm offering.
CON #7 THE RELOAD
Not many con men are good enough or brazen enough to con the same victim twice in a row, but the few who try have a name for this excellent sport: reloading. The usual way to reload on a repeat victim (called an "addict" in grifter parlance) is to rope him into trying to get back the money he just lost. This is exactly what started to happen late last year.
It's important to remember that the housing bubble itself was a classic confidence game — the Ponzi scheme. The Ponzi scheme is any scam in which old investors must be continually paid off with money from new investors to keep up what appear to be high rates of investment return. Residential housing was never as valuable as it seemed during the bubble; the soaring home values were instead a reflection of a continual upward rush of new investors in mortgage-backed securities, a rush that finally collapsed in 2008.
But by the end of 2009, the unimaginable was happening: The bubble was re-inflating. A bailout policy that was designed to help us get out from under the bursting of the largest asset bubble in history inadvertently produced exactly the opposite result, as all that government-fueled capital suddenly began flowing into the most dangerous and destructive investments all over again. Wall Street was going for the reload.
A lot of this was the government's own fault, of course. By slashing interest rates to zero and flooding the market with money, the Fed was replicating the historic mistake that Alan Greenspan had made not once, but twice, before the tech bubble in the early 1990s and before the housing bubble in the early 2000s. By making sure that traditionally safe investments like CDs and savings accounts earned basically nothing, thanks to rock-bottom interest rates, investors were forced to go elsewhere to search for moneymaking opportunities.
Now we're in the same situation all over again, only far worse. Wall Street is flooded with government money, and interest rates that are not just low but flat are pushing investors to seek out more "creative" opportunities. (It's "Greenspan times 10," jokes one hedge-fund trader.) Some of that money could be put to use on Main Street, of course, backing the efforts of investment-worthy entrepreneurs. But that's not what our modern Wall Street is built to do. "They don't seem to want to lend to small and medium-sized business," says Rep. Brad Sherman, who serves on the House Financial Services Committee. "What they want to invest in is marketable securities. And the definition of small and medium-sized businesses, for the most part, is that they don't have marketable securities. They have bank loans."
In other words, unless you're dealing with the stock of a major, publicly traded company, or a giant pile of home mortgages, or the bonds of a large corporation, or a foreign currency, or oil futures, or some country's debt, or anything else that can be rapidly traded back and forth in huge numbers, factory-style, by big banks, you're not really on Wall Street's radar.
So with small business out of the picture, and the safe stuff not worth looking at thanks to the Fed's low interest rates, where did Wall Street go? Right back into the shit that got us here.
One trader, who asked not to be identified, recounts a story of what happened with his hedge fund this past fall. His firm wanted to short — that is, bet against — all the crap toxic bonds that were suddenly in vogue again. The fund's analysts had examined the fundamentals of these instruments and concluded that they were absolutely not good investments.
So they took a short position. One month passed, and they lost money. Another month passed — same thing. Finally, the trader just shrugged and decided to change course and buy.
"I said, 'Fuck it, let's make some money,'" he recalls. "I absolutely did not believe in the fundamentals of any of this stuff. However, I can get on the bandwagon, just so long as I know when to jump out of the car before it goes off the damn cliff!"
This is the very definition of bubble economics — betting on crowd behavior instead of on fundamentals. It's old investors betting on the arrival of new ones, with the value of the underlying thing itself being irrelevant. And this behavior is being driven, no surprise, by the biggest firms on Wall Street.
The research report published by Goldman Sachs on January 15th underlines this sort of thinking. Goldman issued a strong recommendation to buy exactly the sort of high-yield toxic crap our hedge-fund guy was, by then, driving rapidly toward the cliff. "Summarizing our views," the bank wrote, "we expect robust flows . . . to dominate fundamentals." In other words: This stuff is crap, but everyone's buying it in an awfully robust way, so you should too. Just like tech stocks in 1999, and mortgage-backed securities in 2006.
To sum up, this is what Lloyd Blankfein meant by "performance": Take massive sums of money from the government, sit on it until the government starts printing trillions of dollars in a desperate attempt to restart the economy, buy even more toxic assets to sell back to the government at inflated prices — and then, when all else fails, start driving us all toward the cliff again with a frank and open endorsement of bubble economics. I mean, shit — who wouldn't deserve billions in bonuses for doing all that?
Con artists have a word for the inability of their victims to accept that they've been scammed. They call it the "True Believer Syndrome." That's sort of where we are, in a state of nagging disbelief about the real problem on Wall Street. It isn't so much that we have inadequate rules or incompetent regulators, although both of these things are certainly true. The real problem is that it doesn't matter what regulations are in place if the people running the economy are rip-off artists. The system assumes a certain minimum level of ethical behavior and civic instinct over and above what is spelled out by the regulations. If those ethics are absent — well, this thing isn't going to work, no matter what we do. Sure, mugging old ladies is against the law, but it's also easy. To prevent it, we depend, for the most part, not on cops but on people making the conscious decision not to do it.
That's why the biggest gift the bankers got in the bailout was not fiscal but psychological. "The most valuable part of the bailout," says Rep. Sherman, "was the implicit guarantee that they're Too Big to Fail." Instead of liquidating and prosecuting the insolvent institutions that took us all down with them in a giant Ponzi scheme, we have showered them with money and guarantees and all sorts of other enabling gestures. And what should really freak everyone out is the fact that Wall Street immediately started skimming off its own rescue money. If the bailouts validated anew the crooked psychology of the bubble, the recent profit and bonus numbers show that the same psychology is back, thriving, and looking for new disasters to create. "It's evidence," says Rep. Kanjorski, "that they still don't get it."
More to the point, the fact that we haven't done much of anything to change the rules and behavior of Wall Street shows that we still don't get it. Instituting a bailout policy that stressed recapitalizing bad banks was like the addict coming back to the con man to get his lost money back. Ask yourself how well that ever works out. And then get ready for the reload.
[From Rolling Stone, Issue 1099 — March 4, 2010]
Subscribe to:
Posts (Atom)