Sarah Lacy and the Darker Side of Über Corporatism

This is a stunning video, with some serious implications. I urge you to watch it. It involves abusing corporate power to smear and intimidate critics.

It was a bit humorous to watch the talking heads discomfort with some of the implications and statements.  The West coast anchors tend to be more business focused and laid back than their New York based cousins who are more deeply into the Wall Street culture.

I am not familiar with Sarah Lacy's work as a journalist and editor, but as a debater she is on point and brilliant.

I am not completely unfamiliar with the attempted use of power to suppress people's views. Outside of professional circles it is petulant and childish, given to snarky emails, snide backstabbing, and cliquish exclusion. You know, the kinds of things one often finds within University departments, corporate bureaucracies, and the blogosphere. lol.

But too often where serious power and money is involved it is real, it is a threat, and it cannot be tolerated if there is to be any aspiration to a free and open society. And we are fools if we allow such power to grow and its abuse to be tolerated, for the misguided fears for our security, much less some short term easy money.

Nomi Prins: Why the Financial and Political Systems Failed

Nomi Prins calls out the policy error deluxe that has been the topic of so much commentary at Le Café over the past few years.

What is perhaps most striking is that this failure is so bipartisan in a time of contentiousness.   It crosses not only parties but professions, from academics to politicians.

As you know I have featured several articles and videos of hers as she introduces her latest book, All the President's Bankers which is insightful, well-founded and researched, and essential to any understand of what is happening today.

 

As you know I have ascribed this to the credibility trap.   Insiders never speak ill of insiders, if they which to remain a part of the power elite. This is reinforced in the Ivy League and the halls of power.   And so leaders and potential leaders are hopelessly compromised and entangled in a self-serving system of abuse of power and corruption.

It is part of a general failure of moral conscience and leadership in the country.   It has been or is being repeated in England and other countries in Europe.  It is the reason for the long stagnation of the Japanese economy.

 

This is a very brief excerpt.  You may read this insightful commentary in its entirety here.

 

"The recent spike in global political-financial volatility that was temporarily soothed by ECB covered bond buying reveals another crack in the six-year-old throw-money-at-the-banks strategies of politicians and central bankers.

The premise of using banks as credit portals to transport public funds from the government to citizens is as inefficient as it is not happening. The power elite may exude belabored moans about slow growth and rising inequality in speeches and press releases, but they continue to find ways to provide liquidity, sustenance and comfort to financial institutions, not to populations.

The very fact - that without excessive artificial stimulation or the promise of it - more hell breaks loose - is one that government heads neither admit, nor appear to discuss. But the truth is that the global financial system has already failed. Big banks have been propped up, and their capital bases rejuvenated, by various means of external intervention, not their own business models..."

Nomi Prins, Why the Financial and Political Systems Failed, and Why Stability Matters

Related: All The President's Bankers

Anat Admati: Seeing Through the Bankers' New Clothes - The Bullet or the Bribe

"Looking at the world as a whole, the drift for many decades has been not towards anarchy but towards the reimposition of slavery. We may be heading not for general breakdown but for an epoch as horribly stable as the slave empires of antiquity...few people have yet considered the kind of world-view, the kind of beliefs, and the social structure that would probably prevail in a state which was at once unconquerable and in a permanent state of cold war with its neighbors."

George Orwell

The reign of the Banks was reintroduced on the back of, and is sustained by, a major campaign of corruption of the political processes and the public discourse. The decisive moment was the repeal of Glass-Steagall, and the further withdrawal of the watchers on the wall by both political parties who have gone along to get along.

The difference in the analogy offered in this talk is that the monied interests are not some semi-benign doddering old emperor who has fallen victim to the flattery of courtiers and the schemes of conmen.  They are a monstrous construction of reckless pride and greed who will work their schemes until the exhaustion and collapse of their prey.

One is foolish to expect them to be ruled by self-control and appeals to reason, given the nature of their pathology.  These are the very types that cause people to organize themselves for their protection.  This is the highest responsibility of government: the promotion of justice, and the defense of all people, including the foolish and the weak, for the common good against thieves, conmen, bandit, foreign armies, and domestic predators.

"There are no necessary evils in government. Its evils exist only in its abuses. If it would confine itself to equal protection, and, as Heaven does its rains, shower its favors alike on the high and the low, the rich and the poor, it would be an unqualified blessing."

Andrew Jackson, Veto of the Second Bank of the United States

The Banks and their associated Corporations continue to extract usurious fees, misprice risk, rig markets, and engage in a variety of soft bribery and extortion.  And it will not end well.  I would like to be more optimistic, but it is discouraging to see how easily the financially powerful have co-opted some sincere reform movements into their willing tools, spouting utopian nonsense.  The shepherds have been struck down, by the bullet and the bribe, and the sheep have been scattered.

The Anglo-American financial system is an accident waiting to happen.  And you can be sure that they are expecting, once again, to dip their beaks deeply into the public pockets when they do. 



h/t Bill Moyers



We are surely not the first generation to face this sort of trial, since it is in the very nature of this fallen world, and the burden of every generation to rise to their particular trials and temptations. If anything we may be notable for our weakness, our lack of faithfulness, our foolish pride, a perverted perspective unworthy of our many gifts, and the stubborn hardness of our hearts too often in the name of our just and loving Lord.

"...He prompts you what to say, and then listens to you, and praises you, and encourages you. He bids you mount aloft. He shows you how to become as gods. Then he laughs and jokes with you, and gets intimate with you; he takes your hand, and gets his fingers between yours, and grasps them, and then you are his."

J. H. Newman

Financial Crisis in America: If Only the King Knew!

Signs of Decay

1. Internal corruption
2. Imperial overreach
3. Inability to reform.
   

Harvard Law Review
Incentives and Ideology
By James Kwak
May 20, 2014

“'If only the King knew!', we cried a thousand times from the depths of our abyss.” Cahiers de doléances de Cahors, 1789

In pre-Revolutionary France, common people would often say of their problems, “If only the King knew . . . .” Whatever evils they suffered at the hand of their government must be due to the king’s ministers and officials, for the king himself could not be at fault.

But the king knew exactly what was going on. As Levitin shows, our financial regulators were and remain deeply enmeshed in a complex political environment. At the margin, they have the discretion to do favors for the industry or for specific institutions (such as the OTS backdating a capital infusion by IndyMac to make it seem well capitalized when it actually wasn’t). But major regulatory decisions, such as turning a blind eye to derivatives or bailing out banks, are made by the political system as a whole...

More generally, we can’t blame everything on the bureaucrats. The financial non-regulation that made the 2008 crash possible was the explicit policy of multiple presidential administrations, and some of its most important elements sailed through Congress with bipartisan support. The choice to bail out large banks rather than homeowners was made by the Bush and Obama Administrations.

And Congress passed the Dodd-Frank Act, which largely left in place the regulatory system that had failed so spectacularly, with the Administration lobbying heavily to weaken the most far-reaching reforms. In other words, President Obama knew exactly what was going on — just as President Clinton knew what was going on when he signed the Gramm-Leach-Bliley Act, allowing the consolidation of commercial and investment banking."

Read the entire article in the Harvard Law Review here.

Related:
Credibility Trap: Moyers and Barofsky on Failed Reform and Another Financial Crisis

Credibility Trap: Moyers And Barofsky on Failed Reform and Another Financial Crisis

The Bullet or the Bribe

This is the second part of the Moyers interview with Neil Barofsky.

BILL MOYERS: I thought, at the time, this was an incestuous orgy going on there, between inside players at Washington and inside players at Wall Street. Is that too strong?

NEIL BAROFSKY: It's probably not too strong. It's the fact that their ideology matches up. And look, one of the reasons why their ideology matches up is they all come from the same small handful of institutions. And the people I was dealing with on a daily basis came from the same financial institutions that helped cause the financial crisis and were the most generous recipients of bailouts, Goldman Sachs, Bear Sterns, which, of course, had been adopted by J.P. Morgan Chase. Goldman Sachs, Goldman Sachs, it seemed like every time I turned around, I bumped into someone from Goldman Sachs.

Which is not to single them out. But they all bring that ideology with them, when they come to Washington. It's not like somebody hits them in the head with a magic wand and they give back everything that they've learned and believed in their years of Wall Street. And they bring that ideology with them. And even those who don't come from a specific bank, when you surround yourself, create an echo chamber of likeminded people, it's not terribly surprising that the government policy looks a lot like what the Wall Street institutions themselves would have most desired.

And I think the other side effect of that is that people who are outside of that bubble, people who don't have that background, people like myself as a federal prosecutor or Elizabeth Warren, who was the chair of the Congressional Oversight Panel and before that a Harvard professor, that our views, our criticisms, our contrary positions were discounted, mocked, ridiculed, insulted, cursed at, at times. Because there was no-- we didn't have the pedigree in their world to have a meaningful contribution. So what happens is that there's no new ideas that creep in. And you get this very uniform, very non-diverse approach to the problems of finance.

BILL MOYERS: It was puzzling to outsiders like me that you had TARP money being used to concentrate further the size of these banks.

NEIL BAROFSKY: And the granddaddy of all those transactions, Bank of America acquiring Merrill Lynch. And the important thing to remember here is this is not banks gone wild, banks taking the money and saying, "Party time, we're going to consolidate." They did this with the encouragement of the government. And in Bank of America, a little bit with a gun to the head to complete that transaction.

This was the government policy created by the architects, Ben Bernanke who is chair of Federal Reserve, Tim Geithner, who was then the president of the New York Fed before becoming Treasury Secretary, and Hank Paulson. Their solution originally was to further concentrate the industry, to make the too big to fail banks bigger.

The theory was you take a healthier bank and mix it up with a failing bank and you get something somewhere in between, which is better overall for the system. Which may have had some validity in the very, very short term, but has put us on a path, I believe, to being even more dangerous. Because you have institutions now that are just monstrous in size, over $2 trillion in assets by certain measures, close to $4 trillion by other measures. Terrifying. The idea that any of these institutions could ever be allowed to fail is pure fantasy, at this point.

BILL MOYERS: Are you suggesting that we could have another crash?

NEIL BAROFSKY: I think it's inevitable. I mean, I don't think how you can look at all the incentives that were in place going up to 2008 and see that in many ways they've only gotten worse and come to any other conclusion.

BILL MOYERS: What do you mean incentives in place?

NEIL BAROFSKY: So in a normal functioning capitalist utopia, where, you know, most markets are that don't have this too big to fail, this presumption of government bailout if a firm like a Citigroup amasses massive amounts of risk. And in so doing, they keep razor-thin capital to absorb potential losses, which basically means they're just borrowing tons and tons of money.

And not have a lot of their own money at stake, but it's mostly borrowed money. And it is very opaque. It's not very transparent about how they're running their business. You would expect that creditors, people lending them money, counterparties, those on the other sides of their transactions would either stay away or really exact a premium. But the presumption of bailout changes that on its head and actually makes it go in the other direction. So it removes the incentive of the other market participants to impose what's known as market discipline. Because that's ideally in a capitalist society what happens is that the lenders and creditors and counterparties say, "Hey, we're not going to do business with you unless you clean house, slim down, be more transparent."

But when there's a presumption of bailout, that disappears. Because all those other market players can feel safe in the presumption that if anything goes bad at Citigroup, Uncle Sam is going to come in and make their bets whole.

Then you have the very real incentive for the executives at that institution to then pile on risk. Because they know that if the bets go well in the short term, they get paid. And they get paid very richly. But if it blows up and the risks go bad, no worry, the taxpayer's going to be on the other side of that bill.

That's what happened to Fannie Mae and Freddie Mac, before they collapsed. That's what happened to our biggest banks and global banks before they collapsed. And if you maintain that system, it is foolhardy to think that those incentives and pressures are not once again going to carry the day.

BILL MOYERS: At a conference a week or so ago, here in New York, you said playing ball for Wall Street has become a normal way of life, despite the panic of 2008. What does it mean, "playing ball for Wall Street"?

NEIL BAROFSKY: Well, what I saw when I was in Washington was this real pressure on myself, on other regulators to essentially keep their tone down. And I was told point blank by Assistant Secretary of the Treasury that, this is about in 2010.

And he said to me, he said, "Neil, you're a smart guy. You're a young guy. You're a talented guy. You got your whole future in front of you. You've got a young family that's starting out. But you're doing yourself real harm.” And the reason why you're doing yourself real harm is the harsh tone that I had towards the government as well as to Wall Street, based on what I was seeing down in Washington. And he told me that if I wanted to get a job out on the Street afterwards, it was going to really be hard for me.

BILL MOYERS: You mean on Wall Street?

NEIL BAROFSKY: Yes. And I explained to him that I wasn't really interested in that. And he said, "Well, maybe a judgeship. Maybe an appointment from the Obama administration for a federal judgeship." And I said, "Well, again, that would be great. But I don't really think that's going to happen with my criticisms." And he said it didn't have to be that way. "If all you do is soften your tone, be a little bit more upbeat, all this stuff can happen for you."

And that's what I meant by playing ball. I was essentially told, play ball, soften your tone, and all of these good things can happen to you. But if you stay harsh that was going to cause me real harm in those words.

BILL MOYERS: What made you able to say no to the temptation?

NEIL BAROFSKY: Well, I think part of it is the only job I ever wanted was to be a federal prosecutor.

BILL MOYERS: Send bad guys to jail?

NEIL BAROFSKY: It doesn't get much better than that. Really interesting, complicated work, and wear the white hat. So I didn't have those incentives that I think that were presented. And I think, look, you know, being trained in the U.S. Attorney’s Office for the Southern District of New York, I was trained to be a government employee and to take my oath of office very seriously.

But I wasn't really interested in their reindeer games. And I felt a real obligation and sense of duty to fulfill the oath that I took in Secretary Paulson's office on December 15th, 2008 to do the job that I was sent down there to do. But I wasn't really tempted with a big job on Wall Street. And frankly, if it meant getting a judgeship, compromising the job that I needed to do and was supposed to do, it just wasn't interesting to me.

But look, let me be very clear. I also have the fallback of I was a trial lawyer. I prosecuted a lot of big cases. And I knew that whatever happened, I could always go back and get a good job in New York, working at a law firm or doing legal work. So it gave me a degree of financial freedom even though I basically spent most of my career as a government employee and I didn’t have money. I didn't necessarily need to please anyone to be able to go back and still be able to feed my family.

BILL MOYERS: What happens to a political society, to a democracy, when we stifle or bribe or shoot the sheriff?

NEIL BAROFSKY: When I had my incident with the assistant secretary that my deputy, who had come down from-- who's another former federal prosecutor, who did narcotics work, said to me, Kevin Puvalowski. And he said to me, "Neil, you were just offered the bullet or the bribe, the gold or the lead."

And what he was referring to was a society just like that, which was Colombia, back in the day when Pablo Escobar and the drug kingpins really controlled society. And what he was referring to is that basically to corrupt society Escobar would go to a magistrate or a police officer, police chief, a politician, and say, "You have two choices. You can either take this giant pile of money and do my bidding. Or you can get the lead, a bullet in your head."

And Kevin was joking that I just received the Washington white collar equivalent of the gold or the lead. And it was funny, at the time, but that's kind of what happens in a society where the rewards and incentives are, again, nobody's getting shot in the head thank goodness. But it's a breakdown of the system.

And in some ways, it creates this false illusion that there are people out there looking out for the interest of taxpayers, the checks and balances that are built into the system are operational, when in fact they're not. And what you're going to see and what we are seeing is it'll be a breakdown of those governmental institutions. And you'll see governments that continue to have policies that feed the interests of -- and I don't want to get clichéd, but the one percent or the .1 percent -- to the detriment of everyone else.

BILL MOYERS: You make it clear in the book that the Obama administration fought against cutting down the size of these banks. And yet, in the second debate with Mitt Romney the president said, "We passed the toughest Wall Street reform since the Great Depression." As I hear you, it wasn't all that tough.

NEIL BAROFSKY: Well, that's a literally true statement. Because when you think of-- but it's a very low bar to clear. I mean, all of the regulatory reform since the Great Depression has been peeling back on those regulations. With really the big death knell happening in the end of the Clinton administration with, you know, a couple of bills, one that removed the last vestiges of the separation between commercial and investment banks.

BILL MOYERS: Glass-Steagall Act?

NEIL BAROFSKY: Glass-Steagall.

BILL MOYERS: It took down the wall between those two?

NEIL BAROFSKY: The last part of it. And then the second part by passing a bill that made it, essentially made derivatives out of bounds for regulation. So saying that it's the toughest is literally true. The problem is it hasn't been tough enough in where it most matters.

And again, you don't really have to take my word for it. You just look what the market has done. Based on the presumption of bailout, the banks get higher ratings from the credit rating agencies which means they can borrow money for less, because their debt is viewed by the credit rating agencies as being less risky. And they get these higher ratings on explicit presumption that the government will bail them out and make good on their debt.

So it didn't deliver the goods where it matters the most. Again, not saying that it doesn't have some good positive things for our system and for people. But it didn't deliver the most important thing that we need if we want to address the causes of the last crisis and help prevent the next one.

BILL MOYERS: What will it take to prevent the next one?

NEIL BAROFSKY: Got to break them up. I mean, it is not a simple thing to accomplish, necessarily. But it's a very simple solution. And what you see, I think, kind of amazingly, is how many more people have come to this view over the last year or so. It used to be a lonely perch that we sat on. Former special inspector generals, a couple of academics.

But now you have people like Sandy Weill, the architect of Citigroup. And sure, too little too late, after he made all of his money off creating these Frankenstein monsters. But even he now recognizes that we have to break up the banks. You have senior officials at the Federal Reserve recently coming out in favor of this. The vice chair of the FDIC, a very strong advocate for breaking up the banks. And you hear it a lot more in members of Congress-- that are supporting this notion. So to me, on the one hand, it's absolutely essential. If we really want to get to the point where we don't have to bailout a bank, we have to make it so that no bank is so systemically significant and large that its failure could bring down the system.

BILL MOYERS: Are they up to their old tricks?

NEIL BAROFSKY: The banks? Sure. I mean, you know, so we had this regulatory reform of Dodd-Frank in 2010, which, you know, left them intact and inside. But it had all of these rules and all of these regulations that needed to follow. And right now it is hand to hand, trench warfare, combat with those lobbyists spending all that money on campaign contributions, on, you know, flooding the decision makers and the regulators with comment letters and endless meetings.

And pressuring members of Congress to put pressure on the regulators, to water down the rules, to basically get as much back to the good old days where they would have free reign to print money, take advantage of their too big to fail status, bully and push out the little guys, take advantage of consumers. And that's what all of these efforts area about are to preserve these very, very core profit streams that they had before.

And that's right now is where the battle is being waged. Not on TV, you know, not necessarily out in front, but behind the scenes where the next set of rules are being forged on what they're going to be able to do and how they're going to be able to do it...