HSBC Management's Criminal Activity Above the Law: Justice for Some

"Now at this time of peril to your class and to your tribunal, when men are ready to attempt by speeches, and by the proposal of new laws, to increase the existing unpopularity of the senate, Caius Verres has been brought to trial as a criminal, a man condemned in the opinion of every one by his life and actions, but acquitted because of the enormousness of his wealth.

I have undertaken this cause as prosecutor with the greatest good wishes and hope on the part of the Roman people, not in order to increase the unpopularity of the senate, but to relieve it from the discredit which I share with it as a member of that class.

For I have brought before you a man, in whose case you have an opportunity by acting justly of retrieving the lost reputation of your judicial proceedings, of regaining your standing with the Roman people, and of giving satisfaction to foreign nations; a man, the embezzler of the public funds, the petty tyrant of Asia and Pamphylia, the thief who deprived the city of its rights, the disgrace and ruin of the province of Sicily.

And if you come to a decision about this man with severity and a proper respect for your oaths, that authority which ought to remain in you will cling to you still; but if that man’s vast riches shall break down the sanctity and honesty of the courts of justice, at least I shall achieve this, that it shall be plain that it was honest judgment that was lacking to the republic...

But now men are on the watch-towers; they see how every one of you behaves himself in respecting justice and observing of the laws. They see that, ever since the passing of the law for restoring the power of the tribunes, only one member of your class, and he, too, a very insignificant one, has been condemned."

Cicero, First Oration Against Verres, 70 B.C.

There is a disturbing trend in the US where corporate executives are able to commit serious crimes such as money laundering and outright theft (does MF Global ring a bell) and escape criminal prosecution and even personal fines by hiding behind the personhood of the corporation and a wall of implausible deniability.

You can fine a corporation, even by levying a very large penalty when judged by individual terms. But that is just a cost of doing business for the company that is absorbed by the system and the shareholders that sustain it.  And in the case of the TBTF banks, they are being supported by an ongoing government subsidy of cheap money from the public.  And the management that actually committed the crimes is allowed to continue on without serious personal penalty.

This is a 'live and let live' attitude amongst the privileged class, a type of professional courtesy. This is the 'CEO Defense' in which managers are paid enormous, outrageous compensation for their skills, but when criminal activity is exposed, they claim to know and do very little for that pay, and in fact claim to be barely involved with the business that they manage. This is not capitalism, this is corporatism, a form of organized crime.

This is the moral hazard of the credibility trap. Because there is little doubt that HSBC management has done things for and with other very important people that makes them truly above the law.

This is the menace of entitlement and privilege. And what is most discouraging is how easily they can turn the righteous anger of the people at this injustice into an attack on the weak, the elderly, the children, the 'other.' And this is our shame, and our own complicity.

As a reminder from history, the privileged Senatorial class did not engage in serious and meaningful reform. And within ten years they saw the rise of powerful men like Julius Caesar and Pompey, who sought in every way to subvert the laws of the Republic and the good of the people in their favor. And in 49 BC Caesar crossed the Rubicon. And most will remember what followed after.

Is the American republic to be nova Roma, the new Rome?

"At that time many will falter, and betray and despise each other. And false prophets will appear and deceive many people. Because of the increase of wickedness, the love of many will grow cold, but those who stand firm to the end will be saved. And the gospel of the kingdom will be preached in the whole world as a testimony to all nations, and then the end will come." Matt 24:10-14

Rolling Stone
Outrageous HSBC Settlement Proves the Drug War is a Joke
By Matt Taibbi
December 13, 3:25 PM ET

...Breuer this week signed off on a settlement deal with the British banking giant HSBC that is the ultimate insult to every ordinary person who's ever had his life altered by a narcotics charge. Despite the fact that HSBC admitted to laundering billions of dollars for Colombian and Mexican drug cartels (among others) and violating a host of important banking laws (from the Bank Secrecy Act to the Trading With the Enemy Act), Breuer and his Justice Department elected not to pursue criminal prosecutions of the bank, opting instead for a "record" financial settlement of $1.9 billion, which as one analyst noted is about five weeks of income for the bank.

Though this was not stated explicitly, the government's rationale in not pursuing criminal prosecutions against the bank was apparently rooted in concerns that putting executives from a "systemically important institution" in jail for drug laundering would threaten the stability of the financial system. The New York Times put it this way:

Federal and state authorities have chosen not to indict HSBC, the London-based bank, on charges of vast and prolonged money laundering, for fear that criminal prosecution would topple the bank and, in the process, endanger the financial system.

It doesn't take a genius to see that the reasoning here is beyond flawed. When you decide not to prosecute bankers for billion-dollar crimes connected to drug-dealing and terrorism (some of HSBC's Saudi and Bangladeshi clients had terrorist ties, according to a Senate investigation), it doesn't protect the banking system, it does exactly the opposite. It terrifies investors and depositors everywhere, leaving them with the clear impression that even the most "reputable" banks may in fact be captured institutions whose senior executives are in the employ of (this can't be repeated often enough) murderers and terrorists...

And not only did they sell out to drug dealers, they sold out cheap. You'll hear bragging this week by the Obama administration that they wrested a record penalty from HSBC, but it's a joke. Some of the penalties involved will literally make you laugh out loud. This is from Breuer's announcement:

As a result of the government's investigation, HSBC has . . . "clawed back" deferred compensation bonuses given to some of its most senior U.S. anti-money laundering and compliance officers, and agreed to partially defer bonus compensation for its most senior officials during the five-year period of the deferred prosecution agreement.

Wow. So the executives who spent a decade laundering billions of dollars will have to partially defer their bonuses during the five-year deferred prosecution agreement? Are you fucking kidding me? That's the punishment? The government's negotiators couldn't hold firm on forcing HSBC officials to completely wait to receive their ill-gotten bonuses? They had to settle on making them "partially" wait? Every honest prosecutor in America has to be puking his guts out at such bargaining tactics...

Read the entire article here.

Lauren Lyster Interviews Dan Ariely on Financial Fraud, Moral Hazard, and the Psychology of a Cheater

I would not necessarily compare the deterrent effects of punishments for a capital crime, which is often a crime of passion, with financial fraud. And beyond some point no matter how severe the punishment may become, the deterrence is not commensurately increased.

The problem is that there is little or no personal penalty these days for even the most egregious forms of financial misbehaviour and fraud. There is a fellowship of mutual corruption at the heart of the money system.

And as some have warned for years, political capture and moral hazard have broken the Anglo-American financial system with profound implications for the real economy. What I find appalling is when so called progressive economists dismiss this important principle for the sake of their models and expediency.

As you know, my theory on the cycles in society is that there is always a minority of people, perhaps ten percent, who are essentially amoral or immoral, whether from sociopathy or some other outlying behavioural tendency.  They are often attracted to positions of power if they have the mind and education for it, and if not, then perhaps to various forms of crime.

But there are times when corruption and callous greed becomes more tolerated, and a larger segment of the population that is not amoral, but is perhaps morally ambivalent or suggestible, joins in on the action and tries to get theirs. And the guilt which they feel often turns into a mean-spirited contempt and anger against their own victims.

"Because of the increase of wickedness, the love of many grows cold."

I found some of the examples of corporate accounting corruption in this discussion to be interesting. I have seen some of it first hand. This sort of corruption distorts markets, undermines the capitalist system of competition, and destroys whole companies and even industries.

I knew that Erskine Bowles was on the board of Morgan Stanley, but I did not know that his wife is on the board of JP Morgan. It is an interwoven world of mutual benefits and interconnecting interests at the top.

The current climate amongst the power elite is one of personal entitlement based on rationalization as described by Dr. Ariely, and assumptions of a natural superiority, self-portraying their actions even to the point of benevolence and civic spirit, guiding the poor helpless sub-humans who are incapable of self-governance and perhaps not even worthy of freedom: useless eaters. I call it the Tsar Nicholas complex.

It is a culture of narcissism, self-indulgence, exclusion, and self-reinforcement through separation from the other. The private discussions that were exposed in the recent presidential elections were a brief view into the mindset and groupthink.  Their words betray them.

And it always ends, often badly.

Empire of the Exceptional: The Age of Narcissism

As a reminder, it is not possible to reliably diagnose someone from a distance. Why?  Because our view of them is by its nature self-selective: we see and emphasize things that support our hypothetical view of them and dismiss or minimize other things that do not. This is a recurrent weakness in social sciences to be avoided. I cannot stress this enough.  Extremes are sometimes easier to see, but most individuals are a rather complex mix. 

As the psychologist in the video below points out, most people do not fit into neat categories of anything, but are rather an amalgam of various tendencies that overlap and vary greatly in intensity and influence. Most people tend to be diffused in their interests.   We can find traces of almost everything in our selves, as it is the nature of being human.  The degree of that trait is what matters, and the other traits in our mix, and how we react to them, and use them in our daily lives.

And we might also keep in mind that we go through phases, and try out different aspects of our personality in different settings and situations, especially when we are growing  What our parents or society might approve of or not helps to shape the final person which we may become as an adult. And some people may arrive at self-actualization rather late, or in some sad cases never reach that point, locked in a perpetual adolescence because of some trauma or lack of appropriate growth opportunities at key developmental junctures.

Even though it is difficult to discern in the individual, certain trends can appear on the macro level, whether it be in an historical era or even a broader culture.   They can possess distinctive personalities.  As an example, the Japanese tend to be self-effacing and socially oriented with a heavy set of personal obligations to their family and to groups.

And yet I have met some Japanese businessmen who could pass easily for Donald Trump in terms of egoism and personal preoccupation. But on the whole the trend applies, or had applied when I last looked at it carefully and at first hand.  These things on the macro level do change as well, but slowly, generationally.  And the cultural self-image may significantly lag the actual change.   Look in the mirror and see what you have become, for it may not be as you imagine.

In the past thirty years it seems that Anglo-American culture has grown increasingly narcissistic. I do not know if there are more narcissistic individuals in society now, and perhaps there are not.

But I do think that narcissism is much more widely tolerated, rewarded, and even admired now than it would have been in the period of 1930 to 1950 for example. And that is what makes all the difference. More people feel free to indulge their selfish and egotistical tendencies, and to cultivate them, in order to be fashionable and competitive.

As an aside, I think this also tends to explain the decline of literature and poetry in American culture, and the rise of reality shows and the preoccupation with extravagance. Literature calls us out of ourselves, ex stasis, in order to fill us with knowledge and the creative impulse, while spectacle merely panders, and flows in to fill the empty and undeveloped voids in our being."

This video below uses a fictional Mark Zuckerberg from a recent movie as an example of the narcissist personality. I do not know the real Mark Zuckerberg at all so I cannot say if it is valid. But I do think that the fictional Zuckerberg in the movie is an artistic representation of the modern CEO or Wall Street fund manager, based on those that I have known or read about closely.

This narcissistic tendency in modern business occurred to me last night as I read Super Rich Irony in The New Yorker. Obama is, by historical standards, a moderate Republican who has accepted the pro-Wall Street and corporate money bias created in the Democratic Party by the Clintons.   And yet he is reviled by the modern super rich as if he were a Franklin Delano Roosevelt or Andrew Jackson.

Don't get me wrong, most politicians are by the nature of their calling a bit of a narcissist, some more than others. It takes a big ego to fill a big room, and to stand up and say, I can lead. But some are more than others, given the variability of human psychology and character traits.

Some of these super rich describe Obama as arrogant and narcissistic. I think what many of them really mean is 'uppity.'  Most everyone else is their inferior, especially a mixed race man of a lower class background.   To me he seems more a careerist  and professional (aka cynical) deal maker as politicians go, rather than an active reformer.  He is the typical modern manager ruled by expediency.  

But one of the common traits of the narcissist is projecting their faults on to others.  Since this person does not serve and love me, and I am without fault, perfect, they must have something wrong with them, or be out to get me.

Everyone has an ego.  It certainly takes an ego to write a blog for that matter, although again, some are more obviously so than others. How can one stand up and say, 'this is what I think?' Well, at least blogs are self-selecting; people have to come an read them, as opposed to people who endlessly spam other people with emails of dubious origin.  Do you get that too?  Where do these things come from?  Thank God for Snopes and Google search. 

But I point this out to emphasize that this narcissistic tendency is not something particular to the wealthy, but is a cultural trait, expressed in many ways including an increase in self-absorption and incivility.  Power expresses itself in the assertion of the will over others, and the cultivation of unrestrained personal power, the triumph of their will,  is the lifeblood of the narcissist.  And this is also why they tend to be rather antithetical to democracy.

But it does seem that what marks today's super rich more than anything is their preoccupation with their own natural superiority or chosenness as more than justifying if not dictating their good fortune, and almost demanding displays of their grandiose wealth and power, even if that wealth has been gained by cheating, stealing, and depriving others of their own deserved rights and property.  Certainly Hitler saw himself chosen by history, and he  often sought confirmation of it.  

For those with money, the growth process might be subject to the same warping so often experienced by an exceptionally beautiful woman or an enormously talented athlete.  How can one learn to form genuine friendships and loving relationships when they are constantly viewed through the prism of wealth or good looks or success on the field,  when there are so many willing to indulge your worst impulses?   There is some obvious merit to suffering and adversity, as it is the salt that can preserve the best in us if properly applied, destroying the worst.

It is the excess of the age, probably due to the circumstances of fortunate birth and an early childhood in which the young learned that greed is good, screwing everyone is acceptable business practice, that there is no law but their desires, and that most people are inferiors intended to be used by them.  Often parental approval, acceptance, the most basic love, is made contingent on the buy-in. 

I know people like this. I am sure we all do. A very successful acquaintance from school shared with me the lessons taught to him by his father, which he innocently repeated. He learned them both verbally and contextually.  And most of them were exactly as I described them in the above paragraph.  And so that is what he believed.  Can this explain why some sons of wealth turn out badly?   Life lacks real adversity and the normalizing experiences that make us whole?

I have a sense that the super wealthy as a class are reaching their self-destructive apogee, which as you may recall I suggested would happen in my longer term economic forecast of 2005.  It has quite a bit of historical precedent.  When their hatred of FDR was unsatisfied, they attempted to foment a coup d'etat, which was subsequently covered up.  That was a mistake made in the name of preserving the system, as so many similar errors incurring moral hazard have been made more recently.

Each success emboldens them to do more, ask for more, expect more as their due.  And eventually they go too far, and fall.  That in itself might not be so bad on the individual level, as in the case of Bernie Madoff who certainly deserves his time in jail, but they invariably inflict collateral damage on many good and innocent people in the process.

And that is when their own failing, and if you will, sin, can become ours if we do nothing to stop it and to repair it. Especially in an age in which narcissists and sociopaths,including their enablers, are actively assaulting the public interest and public trust in order to serve their own short term, selfish ends, no matter what the longer term consequences to society as a whole might be.

Enjoy the read and the video as something to think about.

Narcissistic Personality Disorder
By Mayo Clinic staff

Narcissistic personality disorder is a mental disorder in which people have an inflated sense of their own importance and a deep need for admiration. Those with narcissistic personality disorder believe that they're superior to others and have little regard for other people's feelings. But behind this mask of ultra-confidence lies a fragile self-esteem, vulnerable to the slightest criticism.

Narcissistic personality disorder is one of several types of personality disorders. Personality disorders are conditions in which people have traits that cause them to feel and behave in socially distressing ways, limiting their ability to function in relationships and in other areas of their life, such as work or school.

Narcissistic personality disorder is characterized by dramatic, emotional behavior, which is in the same category as antisocial and borderline personality disorders.

Narcissistic personality disorder symptoms may include:

Believing that you're better than others
Fantasizing about power, success and attractiveness
Exaggerating your achievements or talents
Expecting constant praise and admiration
Believing that you're special and acting accordingly
Failing to recognize other people's emotions and feelings
Expecting others to go along with your ideas and plans
Taking advantage of others
Expressing disdain for those you feel are inferior
Being jealous of others
Believing that others are jealous of you
Trouble keeping healthy relationships
Setting unrealistic goals
Being easily hurt and rejected
Having a fragile self-esteem
Appearing as tough-minded or unemotional

Although some features of narcissistic personality disorder may seem like having confidence or strong self-esteem, it's not the same. Narcissistic personality disorder crosses the border of healthy confidence and self-esteem into thinking so highly of yourself that you put yourself on a pedestal. In contrast, people who have healthy confidence and self-esteem don't value themselves more than they value others.

When you have narcissistic personality disorder, you may come across as conceited, boastful or pretentious. You often monopolize conversations. You may belittle or look down on people you perceive as inferior. You may have a sense of entitlement. And when you don't receive the special treatment to which you feel entitled, you may become very impatient or angry. You may insist on having "the best" of everything — the best car, athletic club, medical care or social circles, for instance.

But underneath all this behavior often lies a fragile self-esteem. You have trouble handling anything that may be perceived as criticism. You may have a sense of secret shame and humiliation. And in order to make yourself feel better, you may react with rage or contempt and efforts to belittle the other person to make yourself appear better.

The Mayo Clinic 

Bill Black On Wall Street Control Frauds and Moral Hazard

Lack of Justice Department and regulatory prosecutions for Wall Street fraud creates incentives for more control frauds and climate of lawlessness.

This Is Moral Hazard

"A quarter of Wall Street executives see wrongdoing as a key to success, according to a survey by whistleblower law firm Labaton Sucharow released on Tuesday."

The financial system has become a culture of white collar crime and control fraud. We all know it by now.

Bad behaviour drives out the good, if the bad behaviour is seen to be a quick route to success amongst the morally weak and ambivalent.

As the former CEO of Citigroup, one of the biggest TBTF banks, observed during the widespread credit derivatives fraud:

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

The government, the regulatory bodies, the media, economists, and the corporate executives bear a heavy responsibility for this.

They will not admit it, and they cannot reform it, because they themselves are caught in the credibility trap.

Right now white collar crime in the financial system is all carrots and no sticks. The problem is obvious.

Don't whine. Don't pout. Don't complain. Do something.

Reuters
Many Wall Street executives says wrongdoing is necessary
By Lauren Tara LaCapra
Jul 10, 2012


(Reuters) - If the ancient Greek philosopher Diogenes were to go out with his lantern in search of an honest man today, a survey of Wall Street executives on workplace conduct suggests he might have to look elsewhere.

A quarter of Wall Street executives see wrongdoing as a key to success, according to a survey by whistleblower law firm Labaton Sucharow released on Tuesday.

In a survey of 500 senior executives in the United States and the UK, 26 percent of respondents said they had observed or had firsthand knowledge of wrongdoing in the workplace, while 24 percent said they believed financial services professionals may need to engage in unethical or illegal conduct to be successful.

Sixteen percent of respondents said they would commit insider trading if they could get away with it, according to Labaton Sucharow. And 30 percent said their compensation plans created pressure to compromise ethical standards or violate the law.

"When misconduct is common and accepted by financial services professionals, the integrity of our entire financial system is at risk," Jordan Thomas, partner and chair of Labaton Sucharow's whistleblower representation practice, said in a statement...

And Bob Diamond Resigns 'Under Pressure'

"And remember, where you have a concentration of power in a few hands, all too frequently men with the mentality of gangsters get control. History has proven that."

John Dalberg Lord Acton

What I hear is that Mr. Bob Diamond's arrogant defiance so outraged Whitehall, and so embarrassed the monied interests,  that the word went down to the Bank of England to show him the door, immediately as an example, in the Old Lady's role of making and breaking the major players in the City.

And for good measure, they encouraged the resignation of his recently promoted heir apparent, Mr. Jerry del Missier.

Mr. Diamond would have been lauded in the States, and offered a settlement and a wristslap, soft pillows and sweet praises by fawning lawmakers and the captive corporate media.

He will still have to appear before the government for questioning on Wednesday. That might be worth watching.

Someone should have cautioned him that the Jamie Dimon model of deriding the regulators and attempting to intimidate the government does not work as well in the UK.

The Tories may not be any more interested in serving the interests of their people, but they do have some measure of pride in their office and self-respect, of decorum, in comparison to Wall Street's bawds in the Congressional corporate campaign contributions bordello.

Coventry Telegraph
Diamond Quits As Barclays Chief
3 July 2012

Barclays chief executive Bob Diamond has resigned with immediate effect in the wake of the rate-rigging scandal.

The American banker, who has faced mounting calls to step down, said: "The external pressure placed on Barclays has reached a level that risks damaging the franchise."

He added: "I am deeply disappointed that the impression created by the events announced last week about what Barclays and its people stand for could not be further from the truth."

The move comes after Barclays was fined £290 million by UK and US regulators for manipulating the Libor, the rate at which banks lend to each other.

Chairman Marcus Agius, who announced his intention to resign over the affair yesterday, will lead the search for a new chief executive immediately, Barclays said. (At Broadmoor Hospital? - Jesse)

Read more here.

"Power corrupts, and absolute power corrupts absolutely."

John Dalberg Lord Acton

Guardian
Bankers and the Neuroscience of Greed
Ian Robertson
2 July 2012


On 11 August 2011, Bob Diamond, chief executive of Barclays, delivered the BBC Today Programme business lecture. In it he declared that "culture" was the critical element in responsible banking, and the best test of it is "how people behave while no one is watching." We now know that banking failed the test and so must ask why, in Sir Mervyn King's words, "excessive compensation", "shoddy treatment of customers", "mis-selling" and "the deceitful manipulation of a key interest rate", flourished in the banking sector. Cognitive neuroscience can point to some answers.

Senior bankers hold enormous power, greater than that of many elected national leaders. Largely unaccountable except to occasional shareholders meetings and often quiescent boards, their power is much less constrained than that of democratically elected leaders. And given that power is one of the most potent brain-changing drugs known to humankind, unconstrained power has enormously distorting effects on behaviour, emotions and thinking.

Holding power changes brains by boosting testosterone, which in turn increases the chemical messenger dopamine in the brain's reward systems. Extraordinary power causes extraordinary brain changes, which in their extreme form manifest themselves in personality distortions, such as those seen in dictators like Muammar Gaddafi.

The "masters of the universe" who have arisen out of a deregulated world financial system were given unprecedented power that inevitably must have caused major changes to their brains. While power in moderate doses can make people smarter, more strategic in their thinking, bolder and less depressed, in too-large doses it can make them egocentric and un-empathic, greedy for rewards – financial, sexual, interpersonal, material – likely to treat others as objects, and with a dulled perception of risk...

Read the rest here.


AP
Diamond in the rough; Banker Bob falls on sword
By Gregory Katz
Jul. 3, 2012

LONDON (AP) — He was a poster boy for corporate arrogance, telling Parliament last year that the time for bankers to apologize had passed.

Now Bob Diamond is just the latest victim of growing public anger at a British establishment they regard as greedy and ethically challenged. Bankers, politicians and journalists have all felt the full force of the growing disdain at a time of economic troubles.

The hard-driving CEO of Barclays bank resigned Tuesday, buckling under massive media pressure and a few none-too-subtle hints from top politicians that his days at the top should be numbered.

In the few short days since Barclays was fined $453 million for its role in the LIBOR interest rate fixing scandal, Diamond, an American with a stratospheric pay package, came to symbolize everything wrong with international banking...

Read the rest here.

Blaming the Victim and Other Biases and Their Use by the Predator Class To Subvert the Unwary

It is an occasional human fault to get pulled into the habit of 'blaming the victim.'

Most people do not do it regularly, except in the case of some uninformed prejudice or in response to misinformation.

But some people seem to do it more often and sometimes habitually. Why is that?

As we might imagine, nothing can make a certain type of person feel better about themselves than attributing the misfortune of another to foolishness or stupidity. Since a similar misfortune has not happened to them, they must therefore be a superior type of person, and not the ordinary person that they fear they might be who just happened to get lucky.

In my experience this 'distancing' of oneself from the rest of humanity is at the root of much of the bad behaviour that can become institutionalized into the corruption of an organizational structure that eats at the fabric of society.

Sometimes people do engage in serial risky behaviour that leads them into trouble.  It seems as though everyone knows at least one person who gets themselves into a bad situation by acting foolishly and recklessly. Sometimes it is caused by mental illness, alcoholism or some other negative influence. Everyone can think of someone who 'brought it on themselves.' And our imaginations can extend that instance quite easily and broadly.

We can use these few anecdotal examples to blame the victims unjustly on a more general and uninformed level. And we often fall into this bias on the prompting of con men and sociopaths of the predator class who use it to justify their own criminal actions and personal injustice. They are not burdened with empathy for their victims, and even delight in their misfortune. But they must find ways to make their actions more acceptable to society as a whole that normally does have such concerns for equity and justice.

Personal exceptionalism is rooted in pride, and is the antithesis of the old saying, 'There but for the grace of God go I.'

Those MF global customers? They had it coming because they should have known better. Those people who lost money in the stock market? Well, no one MADE them buy those fraudulent paper assets that professionals recommended to them. That family who lost their home to foreclosure because the father was severely injured by sickness or accident? They should have planned better and taken more precautions.

In its extreme example, the subornation of human caring becomes a form of madness, the 'demonization of the other.' That whole group/class/race/nation of people who are being mistreated, brutalized, cheated, starved, and even murdered? It is unfortunate of course, but they are lazy/cheap/stupid/dirty/sneaky/different/subhuman and so they had it coming. But we are not like that so we are doing well and even prospering.

But these are just thoughts from my own direct experience.  Here is a systematic and more thorough analysis that I found to be interesting.

Blaming the victim – why do we do it? For example, are rape victims responsible for what happens to them? Are victims of car crashes or other accidents responsible for what happened to them? These are the kinds of questions we examine as we look at the strange human tendency to blame the victim.

Here is the concept map for the biases discussed in this show:

Download Podcast here.

Source: Blaming the Victim and Other Biases

Attribution Map Quiz

1: Fundamental Attribution Error
•“people do what they do because of the kind of people that they are, not because of the situation they are in”
•“people tend to underestimate external influences when explaining other people’s behavior”

2: Actor/Observer (bias) Difference
•“Whereas we are very likely to find internal causes for other people’s behavior, we tend to look …to the situation to explain our own behavior”
•Example: in a murder trial, the prosecution will call the person a murderer, defense will focus on the difficulty of the person’s life at the time or their childhood, characteristics of the person murdered. “That person drove my client to do what he/she did”

3. Self-serving Attribution (bias): while we tend to take credit for our successes (attribute success to internal causes), we blame our failures on external causes
•I earned an A, my professor gave me a C
•Why? Because it threatens our self esteem to think that failures were caused by something about ourselves
•Example: sports – when a team wins, they attribute it to talent or skill, when they lose, they attribute it to bad luck, poor playing conditions, bad calls from the umpires rather than “I didn’t train hard/study hard enough”, “Our team wasn’t as good”
•It feels bad to attribute our failures to ourselves

4. Optimism bias: “good things are more likely to happen to oneself than to others and bad things are less likely to happen to oneself”
•A kind of “defensive attribution”
•Why do we tend to hold this belief? Because the world is a scary, unpredictable place and that makes us feel anxious. The only way to feel a little better is to believe that it couldn’t happen to me. “I would have acted differently”, “That wouldn’t happen to me because…”I would make different decisions”

5. Belief in a Just World: bad things happen to bad people, “or at least to people who make mistakes, poor choices, etc.” thus, bad things won’t happen to me because I wouldn’t make those mistakes.
•“the belief in a just world keeps anxiety-provoking thoughts about one’s own safety at bay” Aronson, et. al.
•when the world seems chaotic or dangerous, this is anxiety provoking. so we attempt to reassure ourselves by blaming the victim

Taibbi: The Epic Failure of the SEC

"The big thieves hang the little ones."

I cannot argue with what Matt Taibbi says here, having quoted others like Bill Black about the same situation in great detail.

But in fairness to the SEC, this is hardly the case of a single regulator falling into porn-surfing indolence while they wait for another turn through the Wall Street revolving door.

The SEC is just another branch of regulatory incompetence and capture in good company with the CFTC and the FED, which gained even more regulatory powers in the recent 'reforms.' There are a few good regulators but they tend to be isolated and beleaguered.   The sad case of Brooksley Born was a good example of how bad regulatory policy drives out the good. 

This non-specific failure implies that there is much more than an SEC organizational or funding problem, and more likely systemic failure involving misplaced priorities and conflicts of interest that flow down from the Congress and the Administration among others. 

I would like to think that the people are getting a bit tired of handsomely paid and highly comped corporate and political 'leaders' who, when the time comes, don't know anything about anything that is surely within their direct responsibility. There are little to no downsides for failure if you are on the right side of the glass ceiling and a vetted member of the players club, a master of the universe.

And that moral hazard may be the most powerful attraction and incentive to bad behaviour of all. Power attracts the corruptible, without respect to race, gender, or creed.

Rolling Stone
SEC: Taking on Big Firms is 'Tempting,' But We Prefer Whaling on Little Guys
By Matt Taibbi

If you want to see a perfect example of how completely broken our regulatory system is, look no further than a speech that Daniel Gallagher, one of the S.E.C.’s commissioners, recently gave in Denver, Colorado.

It’s a speech whose full lunacy is hard to grasp without some background.

It’s by now been well-established that the S.E.C.’s performance in policing Wall Street before, after, and during the crash has been comically inept. It would be putting it generously to say that the top cop on the financial services beat has demonstrated particular incompetence with regard to investigations of high-profile targets at powerhouse banks and financial companies. A less generous interpretation would be that the agency is simply too afraid, too unwilling, or too corrupt to take on the really dangerous animals in this particular jungle. 

The S.E.C.’s failure to make even one case against a high-ranking executive involved in the mass frauds leading to the 2008 crash – compare this to the comparatively much smaller and less serious S&L crisis twenty years earlier, when the government made 1,100 criminal cases and sent 800 bank officials to jail – became so conspicuous that by the end of last year, the “No prosecutions of top figures” idea became an accepted meme in mainstream news media coverage of the economic crisis.

The S.E.C. in recent years has failed in almost every possible way a regulator can fail to police powerful criminals. Failure #1 was that it repeatedly fell down on the job even when alerted to problems at big companies well ahead of time by insiders. Six months before Lehman Brothers collapsed, setting off a chain reaction of losses that crippled the world economy, one of Lehman’s attorneys, Oliver Budde, contacted the S.E.C. to warn them that there were problems with the company’s accounting; the agency blew him off. There were similar brush-offs of insiders with compelling information in cases involving Moody’s, Chase, and both of the major Ponzi scheme scandals, i.e. the Bernie Madoff and Allen Stanford cases.

Read the rest here.

Gold Daily and Silver Weekly Charts - Bear Raid Marks First Notice Day For Comex Silver

The silver shorts have their backs up against the wall. And that makes them dangerous.

Intraday commentary here.

It looks like there will not be a criminal case in the MF Global theft of customer funds, but they could face a fine of up to $140,000.  

The viral moral hazard unleashed by TARP continues to multiply and reverberate through US financial markets to their detriment.   It has a marked dampening effect on market participants, and encourages unethical behaviour and a spirit of lawlessness.  In that sense MF Global is just one symptom among many of a major set of policy errors committed by the Fed, the Congress, and the last two administrations at least. 

"In economic theory, moral hazard is a tendency to take undue risks because the costs are not borne by the party taking the risk. The term defines a situation where the behavior of one party may change to the detriment of another after a transaction has taken place...Economists explain moral hazard as a special case of information asymmetry, a situation in which one party in a transaction has more information than another. In particular, moral hazard may occur if a party that is insulated from risk has more information about its actions and intentions than the party paying for the negative consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information."

From a practical standpoint, I guess this clears the way for Corzine to be the next Treasury Secretary, a fitting replacement for Geithner the amoral technocrat.

Hide your women, children, IRA's and 401k's.   The economic hitmen are coming to town.

General Motors Wants to Get Back into Financing to Increase Its Profits

Bloomberg reports that GM Considers Buying back GMAC

Or starting a new unit.

Having its own financing unit will 'increase its profitabiltiy.'

"As a dog returns to his vomit, so a fool doth repeat his folly." Proverbs 26:11

Unless of course you get to keep the gains, and a greater fool, the public, assumes your losses.

It's good to be the King, but cheaper to lease one.

AP
GM wants to re-enter auto financing
Tom Krisher
Tuesday May 11, 2010

DETROIT (AP) -- General Motors Co. executives want their own auto-financing arm so they can offer more competitive lease and loan deals, according to a person briefed on their plans.

The executives want to buy back the auto financing business from the former GMAC Financial Services or start their own operations, said the person, who asked not to be identified because the plans have not been made public.

A top GM executive has told dealers about the plans, the person said.

GM sold a 51 percent stake in GMAC Financial Services in 2006 when it was starved for cash. The new owners, led by private equity firm Cerberus Capital Management LP, ran into trouble in 2008 with bad mortgage loans and had to be bailed out by the federal government, which now owns 56 percent of the company.

Earlier this month, GMAC changed its name to Ally Financial.

GM dealers say that since GMAC is responsible for making its bottom line look good, it is less likely to lose money by offering to finance sweet lease deals or zero-percent financing. A GM-owned auto financing business would be more likely to "take a bullet" for the company to sell more cars and trucks, the person said.

Competitors, such as Ford Motor Co. or Toyota Motor Corp., control their own financing arms.

GM spokesman Tom Wilkinson said Tuesday that the company would not comment on speculation....

Fed Vice-Chairman Kohn to Retire

I do not think this is anything like a 'principled resignation' from the Fed which we had seen when Larry Meyer and Jerry Jordan resigned. Meyer was a noted inflation hawk, and Jordan was probably the closest thing to an Austrian economist at the Fed. These resignations occurred in 2002, just before Greenspan began to spear-head the monetary reflation that led to the housing bubble and this latest financial crisis.

After all, Don Kohn has been at the Fed since 1970, although he only joined the Board of Governors in 2002. He is certainly in line for retirement.

As you may recall, Mr. Jordan has occasionally raised his voice in outrage at some of the dicier Fed dealings since then, such as the trading in Goldman stock by the Chairman of the NY Fed, Turbo Timmy's boss, while they were in the process of providing them billions of dollars in public assistance.

By October 26, 2009, Mr. Friedman’s paper profits on the shady trade were $5.4 million, reported Bloomberg News. “It’s an outrage,” said Jerry Jordan, former president of the Cleveland Fed. “He needed to either resign from the Fed board or from Goldman and proceed to sell his stock.” Bloomberg News comments: “suspicions that the fix was in for Goldman Sachs have been fanned by the firm’s political connections.”Wall Street Bailout: History's Largest Theft? - Oct. 28, 2009

Don Kohn has always struck me as more of a 'company man,' coming from the Alan Blinder school of Public Service:

"The last duty of a central banker is to tell the truth to the public."

He tended to pander to Wall Street, and was among the first to attempt to try and take moral hazard off the table as a consideration in bailing out the big banks. Citizen Kohn

It will be interesting to see what kind of a truthteller Mr. Obama will nominate to take his place. Christina Romer's name has been mentioned. Janet Yellen is being groomed for something. With Kohn's departure, Ben remains the only macro-economist, with the remainder of the Governors from the banking profession. This certainly seems to disqualify Mr. Geithner, who is neither economist nor commercial banker, but a kind of bureaucrat.

If it is Timmy, I may not be able to hold down solid food for a few days. I wonder if Larry Summers would take second place. If so, watch your back Ben. If not any of them, then a Chicago crony would be likely. Rahm? Yikes!

A more obscure economist perhaps? Obama is said to be looking for an inflation 'dove.' Brad DeLong has previously stated on his blog that Alan Greenspan never made a policy decision which which he disagreed. Krugman carries more weight, and is also a dove, and certainly his own man.

It is a shame that Robert Reich has no place in this Democratic Administration. He would have been a better Treasury Secretary than Timmy, but again, perhaps less pliable for the banks. My own choice for Governor at least would be a maverick like Janet Tavakoli or Yves Smith. It would be nice to have someone on the board who understands the more innovative aspects of the financial markets from a practical perspective. And of course the meetings would probably be much more interesting given their willingness and ability to ask the right questions.

And we can only wonder what new financial patent medicines wrapped in black boxes that Zimbabwe Ben may have in his cabinet of curiousities.

Reuters
Fed Vice Chairman Kohn to leave in late June
By Mark Felsenthal
March 1, 2010

WASHINGTON, March 1 (Reuters) - Federal Reserve Vice Chairman Donald Kohn, a 40-year veteran of the U.S. central bank, will step down in late June, giving President Barack Obama a chance to reshape the institution.

In a letter to Obama released on Monday, Kohn, who has served as the Fed's No. 2 since June 2006, said he will depart when his current term as vice chairman expires on June 23.

"The Federal Reserve and the country owe a tremendous debt of gratitude to Don Kohn for his invaluable contributions over 40 years of public service," Fed Chairman Ben Bernanke said in a statement.

Kohn, 67, began his career at the Kansas City Federal Reserve Bank in 1970 and rose through the ranks to become one of the more influential vice chairmen in the central bank's history.

He has served on the Fed's Board of Governors since August 2002.

His departure would leave three seats vacant on the normally seven-person Fed board in Washington, giving Obama broad latitude to shape the Fed at a time lawmakers are considering lessening its power after the most damaging financial crisis in generations.

Members of the Fed board are nominated by the president, but subject to confirmation by the U.S. Senate.

Among possible replacements, the president may be considering Christina Romer, a prominent economist who currently heads the White House Council of Economic Advisers.

Another possibility might be Fed Governor Daniel Tarullo, a lawyer and expert on banking regulation appointed by Obama, who could shepherd the bank into a greater focus on financial oversight and consumer protections. (Editing by Chizu Nomiyama)

Big Banks Demand Cash Payments "Off the Books" from Homeowners to Avoid Foreclosure

"The Hobbs Act defines extortion as the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right. 18 U.S.C. S 1951."

Interesting story in which Citi and J.P. Morgan among second lien holders are demanding cash payments "off the books" from homeowners in order to allow a short sale to proceed in lieu of a foreclosure, a total loss and a black mark on their credit record.

Was my characterization of the big Wall Street banks as 'sociopathic' a bit harsh as a reader asked?

No, more likely understated. Remember, this is not some small local lender facing a loss and trying to get something out of it for their trouble. These are the TARP-sucking, discount window-feeding, bonus paying, fraudulent flim-flam 29.9% interest-charging pigmen who are demanding a pound of flesh from the down and out and the dispossessed as a consequence of their own reckless lending practices.

Change you can believe in.

The banks must be restrained, and the financial system reformed, and the economy brought back into balance, before there can be a sustained recovery.

CNBC
Big Banks Accused of Short Sales Fraud
January 15, 2010, 12:55 pm EST

Just as regulators, lawmakers and all forms of financial oversight boards are talking about new regulations to guard against mortgage fraud and another mortgage meltdown, there appears to be yet a new mortgage fraud out there today, allegedly perpetuated by agents of, yes, the big banks.

I was first alerted to this by Jeremy Brandt, the CEO of several companies that bring short sale agents, investors and sellers together.

His companies include 1800CashOffer, HomeFlux.com and FastHomeOffer.com. Brandt has a huge network of short sale real estate agents, and over the past several months he's been receiving all kinds of questions and complaints about trouble with second lien holders.

As we all know, during the housing boom, millions of Americans pulled cash out of their homes in the form of home equity loans and lines of credit. They also used "piggy back" loans in order to get even lower interest rates on their primary mortgages. Now, many of the borrowers in trouble, and many who are so far underwater on their loans that they don't qualify for any refi or modification, are choosing short sales as a way out. (Short sales are when the lender allows the home to be sold for less than the value of the loan). About 12 percent of all home sales by the end of 2009 were short sales, according to the National Association of Realtors.

In order for a short sale with two loans to happen, the second lien holder has to drop the lien.

If they don't, and there's no short sale, the home goes to foreclosure and the first lien holder gets the house because second liens are subordinated debt to the primary loan.

In short, the second lien holder gets nothing. In order to get the second lien holder to drop the lien, the first lien holder generally negotiates some partial payment to the second lien holder. The second lien holder doesn't have to agree, but more and more are doing so.

That's all legal.

But here's what's not legal and what's apparently happening quite often recently. Since many second lien holders are getting very little, they are now allegedly requesting money on the side from either real estate agents or the buyers in the short sale. When I say "on the side," I mean in cash, off the HUD settlement statements, so the first lien holder doesn't see it.

"They are pretty clear and pretty upfront about the fact that if the first lender knows they are getting paid, the first lender will kill the short sale," says Brandt. "So these second lenders are asking for the payments off the closing documents, off the HUD statement, usually in a cashiers check prior to closing. Once they receive that payment, they will allow the short sale to go through, which according to RESPA laws and the lawyers that we have spoken to on the topic is not legal."

(RESPA is the Real Estate Settlement Procedures Act, the 2008 law requiring that consumers receive disclosures at various times in the transaction. It outlaws kickbacks that increase the cost of settlement services. RESPA is a HUD consumer protection statute designed to help homebuyers be better shoppers in the home buying process, and is enforced by HUD. Read more about it here.).

I told RESPA specialist Brian Sullivan over at HUD about all this and he replied, "That's a red flag!"

Clearly illegal.

Brandt told me he's heard from at least 200 agents that they've had these requests made by representatives of Citi Mortgage, JP Morgan Chase, Bank of America and other large banks.

Most agents wouldn't go on the record with me, for fear of retribution by the banks with whom they have to work every day. But one agent, Kayte Gentry, of Keller Williams Integrity First Realty, was brave enough to blow the whistle.

"I think it's wrong, and I think somebody needs to hold them accountable, and every time I lose a house in foreclosure because of this, it hurts my client," says Gentry matter-of-factly. "Aside from being illegal and a violation of RESPA, it's immoral and truly it's just sad for the client that it's hurting."

Gentry says she has had the requests made three times and claims she lost one sale because of it.

"The big banks that have recently made this request, specifically payments outside of the closing statement have been Citi Mortgage and JP Morgan Chase."

Read the rest here...

Ding, Ding, Ding, Ding.... For the Market and the Democrats

Sometimes they do ring a bell.

Hard to believe that after one of the greatest credit crises in history, Wall Street and the punters went back to their old ways of chasing beta with hot (taxpayer) money.

As ZeroHedge so insightfully observed:

"Sentiment Trader demonstrates how bullish speculative mania as measured by option activity is now at a decade, if not all time, high. With moral hazard having become the only game in town, everyone believes their investments are implicitly guaranteed by the government..."

Paul Krugman, stalwart Democratic liberal economist, took Obama to task recently for his lack of stomach to change and reform the financial system in his column Reform or Bust

"What’s wrong with financial-industry compensation? In a nutshell, bank executives are lavishly rewarded if they deliver big short-term profits — but aren’t correspondingly punished if they later suffer even bigger losses. This encourages excessive risk-taking: some of the men most responsible for the current crisis walked away immensely rich from the bonuses they earned in the good years, even though the high-risk strategies that led to those bonuses eventually decimated their companies, taking down a large part of the financial system in the process...

I was startled last week when Mr. Obama, in an interview with Bloomberg News, questioned the case for limiting financial-sector pay: “Why is it,” he asked, “that we’re going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or N.F.L. football players?”

That’s an astonishing remark — and not just because the National Football League does, in fact, have pay caps. Tech firms don’t crash the whole world’s operating system when they go bankrupt; quarterbacks who make too many risky passes don’t have to be rescued with hundred-billion-dollar bailouts. Banking is a special case — and the president is surely smart enough to know that."

Paul has not yet been able to express the growing concern that many of Obama's top advisors and key staff managers are hopelessly conflicted, if not corrupted, in dealing with Wall Street.; The question can be asked, "if Obama is that smart, why is he acting so slowly, clumsily, ineffectively, timidly?"

The answer gets to the heart of the proposition put forward by Richard Nixon, "People have got to know whether or not their president is a crook."

So which is it to be: ineffective blowhard or corrupt politician? The jury is still out, and there is time for change. But the window is closing.

Robert Reich on Moral Hazard and Obama's Failure

Robert Reich is a top Democrat, former Secretary of Labor under Bill Clinton, and a member of the Obama transition team.

In his recent blog he excoriates the Obama financial team's actions. And in doing so he echoes the things that have been said here, which we will take as some measure of validation from an intelligent public figure and top representative of the party in power.

Surely Obama must see that his Administration is a failure, beginning with his failure to maintain the promise of change, and address the need to reform the financial system.

Do something, Barack. Get a backbone, and do something for the country, and let the special interests, and the cronies of your cronies, be damned.

Start telling it like it is. Make this historic moment memorable, and not a shame.


The Continuing Disaster of Wall Street, One Year Later
Robert Reich
September 13, 2009

As he attempted to do with health care reform last week, the President is trying to breathe new life into financial reform. He's using the anniversary of the death of Lehman Brothers and the near-death experience of the rest of the Street, culminating with a $600 billion taxpayer financed bailout, to summon the political will for change. Yet the prospects seem dubious. As with health care reform, he has stood on the sidelines for months and allowed vested interests to frame the debate. Nor has he come up with a sufficiently bold or coherent set of reforms likely to change the way the Street does business, even if enacted.

Let's be clear: The Street today is up to the same tricks it was playing before its near-death experience. Derivatives, derivatives of derivatives, fancy-dance trading schemes, high-risk bets. “Our model really never changed, we’ve said very consistently that our business model remained the same,” says Goldman Sach's chief financial officer.

The only difference now is that the Street's biggest banks know for sure they'll be bailed out by the federal government if their bets turn sour -- which means even bigger bets and bigger bucks.

Meanwhile, the banks' gigantic pile of non-performing loans is also growing bigger, as more and more jobless Americans can't pay their mortgages, credit card bills, and car loans. So forget any new lending to Main Street. Small businesses still can't get loans. Even credit-worthy borrowers are having a hard time getting new mortgages.

The mega-bailout of Wall Street accomplished little. The only big winners have been top bank executives and traders, whose pay packages are once again in the stratosphere. Banks have been so eager to lure and keep top deal makers and traders they've even revived the practice of offering ironclad, multimillion-dollar payments – guaranteed no matter how the employee performs. Goldman Sachs is on course to hand out bonuses that could rival its record pre-meltdown paydays. In the second quarter this year it posted its fattest quarterly profit in its 140-year history, and earmarked $11.4 billion to compensate its happy campers. Which translates into about $770,000 per Goldman employee on average, just about what they earned at height of boom. Of course, top executives and traders will pocket much more.

Every other big bank feels it has to match Goldman's pay packages if it wants to hold on to its "talent." Citigroup, still on life-support courtesy of $45 billion from American taxpayers, has told the White House it needs to pay its twenty-five top executives an average of $10 million each this year, and award its best trader $100 million.

A few banks like Goldman have officially repaid their TARP money but look more closely and you'll find that every one of them is still on the public dole. Goldman won't repay taxpayers the $13 billion it never would have collected from AIG had we not kept AIG alive. (In one of the most blatant conflicts of interest in all of American history, Goldman CEO Lloyd Blankfein attended the closed-door meeting last fall where then Treasury Secretary Hank Paulson, who was formerly Goldman's CEO, and Tim Geithner, then at the New York Fed, made the decision to bail out AIG.) Meanwhile, Goldman is still depending on $28 billion in outstanding debt issued cheaply with the backing of the Federal Deposit Insurance Corporation. Which means you and I are still indirectly funding Goldman's high-risk operations.

So will the President succeed on financial reform? I wish I could be optimistic. His milktoast list of proposed reforms is inadequate to the task, even if adopted. The Street's behavior since its bailout should be proof enough that halfway measures won't do. The basic function of commercial banking in our economic system -- linking savers to borrowers -- should never have been confused with the casino-like function of investment banking. Securitization, whereby loans are turned into securities traded around the world, has made lenders unaccountable for the risks they take on. The Glass-Steagall Act should be resurrected. Pension and 401 (k) plans, meanwhile, should never have been allowed to subject their beneficiaries to the risks that Wall Street gamblers routinely run. Put simply, the Street has been given too many opportunities to play too many games with other peoples' money.

But, like the health care industry, Wall Street has platoons of lobbyists and an almost unlimited war chest to protect its interests and prevent change. And with the Dow Jones Industrial Average trending upward again -- and the public's and the media's attention focused elsewhere, especially on health care -- it will be difficult to summon the same sense of urgency financial reform commanded six months ago.

Yet without substantial reform, the nation and the world will almost certainly be plunged into the same crisis or worse at some point in the not-too-distant future. Wall Street's major banks are already en route to their old, dangerous ways -- now made more dangerous by their sure knowledge that they are too big to fail.

Moral Hazard and Economic Donkeys

"It's almost as if the biggest credit bubble in history never occurred. Investors are increasingly convinced that a sustainable global recovery is emerging out of the wreckage. All praise to the central bankers for saving the world! I'm waiting till someone writes about the return of the Great Moderation and suggests Ben Bernanke is the new Maestro. Then I'll know the lunatics have taken over the madhouse...yet again." Albert Edwards, Société Générale

What Simon Johnson is describing in this essay attached below is moral hazard, the corruption of the capitalist system introduced by a Fed (the Economic Donkeys) that recklessly exercises a function as 'lender of last resort,' in conjunction with a political environment (less sophisticated Economic Donkeys) that can be politely described as being driven by 'regulatory capture' rather than the less euphemistic 'rampant corruption.'

Moral hazard is not a popular topic, on the left or on the right. When moral hazard was mentioned as a consideration in the bank bailouts proposed by then Treasury Secretary Hank Paulson, a popular liberal economist bombastically expounding with a blog (PLEBEWAG) went into a hissy fit of self-righteous indignation, condemning those who even think about things like 'moral hazard' as fundamentalist ethical Luddites.

The problem is that moral hazard is an ethical consideration, a restraint on the tools available for centralized financial engineering. This aversion to restraint is characteristic of neither the moderate right nor the left per se, but it does distinguish the statists from those who favor the individuals and 'market-based capitalism.'

What can one think about these things, when so many economists can get it so wrong, for so long, with such passionate intensity, and remain largely unapologetic and unchanged themselves, swearing allegiance to the power of financial engineering with just a little more power and purview? Hence the proposal to centralize regulation in the Fed, surely one of the most bizarre suggestions after a crisis caused by the Fed that one can imagine.

It is all part of the momentum of the status quo, those who enable a system at least in part because they believe it in as a first principle, benefit from it, even if they are not direct participants, or may only wish to be beneficiaries of the greater power and prestige of the State.

It is an essay worth reading. Here is a relevant excerpt.

Until the Banks are restrained, and the financial system reformed, and balance restored to the economy, there can be no sustained economic recovery.

Or anything resembling a return to the moral high ground or social justice.

"The real problem with our financial system is that our economic and political system work together to encourage excessive risk, and this risk in turn leads to cycles of prosperity and collapse. In 1998, a much smaller Lehman Brothers was placed in financial peril by the aftermath of the Asian financial crisis and failure of Long Term Capital Management, a major hedge fund. The Federal Reserve responded by lowering interest rates and other central banks followed suit. This reduced the cost of obtaining funds, effectively bailing out Lehman and other institutions in trouble.

As markets have grown to recognize how quick the Federal Reserve is to bail out institutions (and executives) in trouble, they naturally respond. In the 1990s, people talked about the “Greenspan Put” a term which derisively suggests that it is always safe to invest in risky assets, because the Federal Reserve is ready to bail out investors (a put is effectively a promise to buy an asset at a fixed price if you are unable to sell it to someone else at a higher price – this is a way to lock-in profits or limit losses on investments). However, in months following the collapse of Lehman, we learned that the “Bernanke Put” is even more valuable since Chairman Bernanke, alongside the Bank of England, the European Central Bank, and central banks in much of the rest of the world, is prepared to take drastic measures to prevent asset prices from falling when there are risks of global collapse.

This policy of responding to the aftermath of bubbles, rather than addressing them before they get going, through tighter regulation, has become the mantra of most central banks. It is usually combined with fiscal policy stimulus and other measures to support the economy. Each time banks fail, by bailing the system out again, we teach our finance sector a lesson: you can safely take too much risk because, when you lose, the taxpayer will pick up the bill. We also send a simple message to creditors: it is safe to lend to Goldman Sachs, or Barclays Bank, because taxpayers and our nations’ savers are standing by to cover your losses. Rational bank executives and creditors respond as any person would: creditors lend to banks at low interest rates, and our banks gamble heavily hoping to make large profits. Such a system is destined to fail, but the party can run for a long time."

Economic Donkeys by Simon Johnson and Peter Boone

Five Reasons for the Recent Surge in Gold

1. Seasonality



2. Continuing Risks in the Financial System



3. Moral Hazard: Tipping Point In Confidence From Over a Decade of Monetary and Regulatory Policy Errors






4. Blowback from Banking Frauds on the Rest of World



5. A Failure in Political Leadership to Deliver Essential Reforms

Citizen Kohn

US equity markets just had the largest two day rally in the last four years. The trigger for this rally, besides the happy coincidence of a surfeit of hot money, lots of short sellers, and end of month motivation was an interesting speech by the Federal Reserve vice-chairman Don Kohn to the Council on Foreign Relations this morning.

As you may recall, Mr. Kohn is the second most powerful member of the board, and only he and the chairman, Mr. Bernanke, are allowed to make speeches that may signal changes in Fed policy. What you may not know is that he is also the consummate Fed long term insider:

Dr. Kohn is a veteran of the Federal Reserve System. Before becoming a member of the Board, he served on its staff as Adviser to the Board for Monetary Policy (2001-02), Secretary of the Federal Open Market Committee (1987-2002), Director of the Division of Monetary Affairs (1987-2001), and Deputy Staff Director for Monetary and Financial Policy (1983-87). He also held several positions in the Board's Division of Research and Statistics: Associate Director (1981-83), Chief of Capital Markets (1978-81), and Economist (1975-78). Dr. Kohn began his career as a Financial Economist at the Federal Reserve Bank of Kansas City (1970-75).

There is a consensus among informed observers that Vice Chair Kohn signaled, contrary to the pronouncements of several lesser Fed lights in recent days, a fresh persuasion of the Fed to cut the Fed Funds rate this December 11, because of a deterioration in the capital markets and the real economy.

Is that all there is? A likely 25 basis point cut in the target Fed funds rate in December triggers one of the most powerful rallies in US equities this decade? Is a simple 25 basis point cut good for all that?

Well, we don't think as naively and simply as all that. Its the end of month, there was about a solid two days of float on short side at daily volumes, and the Fed and Treasury have been spooning out liquidity like K Street lobbyists handing out donations during election season.

Still, this is an exceptionally powerful rally. There has been no real 'good news' excepting a tsunami of excess dollars may be coming back at us from overseas, as witnessed by Abu Dhabi doing something more useful with their dollar reserves than letting them depreciate.

No. Its got to be more than that. So we did the unlikely thing among most investors and financial pundits these days, and in addition to sound bytes and commentary from the Babel-Babes of Bubblevision, we looked for a copy of the text of Mr. Kohn's speech, and actually read it.

Here to us seems to be a somewhat overlooked portion of his speech, in terms of what commentary we have seen so far. From the text of his speech:

Moral Hazard

Central banks seek to promote financial stability while avoiding the creation of moral hazard. People should bear the consequences of their decisions about lending, borrowing, and managing their portfolios, both when those decisions turn out to be wise and when they turn out to be ill advised. At the same time, however, in my view, when the decisions do go poorly, innocent bystanders should not have to bear the cost.

In general, I think those dual objectives--promoting financial stability and avoiding the creation of moral hazard--are best reconciled by central banks' focusing on the macroeconomic objectives of price stability and maximum employment. Asset prices will eventually find levels consistent with the economy producing at its potential, consumer prices remaining stable, and interest rates reflecting productivity and thrift.

Such a strategy would not forestall the correction of asset prices that are out of line with fundamentals or prevent investors from sustaining significant losses. Losses were evident early in this decade in the case of many high-tech stocks, and they are in store for houses purchased at unsustainable prices and for mortgages made on the assumption that house prices would rise indefinitely.

To be sure, lowering interest rates to keep the economy on an even keel when adverse financial market developments occur will reduce the penalty incurred by some people who exercised poor judgment. But these people are still bearing the costs of their decisions and we should not hold the economy hostage to teach a small segment of the population a lesson."

THAT was the heart of the signal, the change in policy that Mr. Kohn was embracing on behalf of the Fed. Moral hazard is not an issue when bailing out the banks of Wall Street, for the simple reason that innocent bystanders might be harmed in the process. A noble sentiment indeed. The banks, however repugnant, depraved, and venal they might become, are just too big to fail.

"But these people are still bearing the costs of their decisions..."

What costs? We won't go into a lengthy diatribe on the huge numbers of insiders who are most assuredly NOT being hurt one little bit in this wild West sideshow of a financial market, light on regulation and long on collusion. In fact we are absolutely appalled at what Wall Street has become. And we are sure that, given a little input from some of the innocent public on the chat boards we frequent, suitable punishments for that small segment of the population which harms us can easily be devised without holding the entire economy hostage.

What Mr. Kohn seems to be proposing is that, once again, as Mr. Greenspan before him so often concluded, the risk and penalties to be sustained by malinvestment and corruption are best handled by spreading them out from the few to the many, from the insiders to the public, from those who produce nothing to the broader public, which struggles to just keep going forward as best they can, in one of the great transfers of wealth in modern history.

Won't work you say? Well, of course it won't work!

The punch line, and what so few realize, is that the bankers are not trying to fix anything. The fixes were put in place after the Crash of 1929 and the Great Depression. Fixes, such as the Glass-Steagall Act. They are just trying to prolong the games as it is, which the Wall Street banking community paid good money to get, spending hundreds of millions of dollars in lobbying money to create over the period of almost twenty years.

Frontline: The Wall Street Fix - The Long Demise of Glass-Steagall

A relatively small percentage of the population can twist and corrupt the financial system, destroying the lives of hundreds of thousands of their fellow citizens, because its profitable, and because they simply do not care about the damage they do to others. The dirty little secret is that capitalism, like any other form of social structure, requires policing, regulation, laws, and enforcement to prevent the predations of sociopaths and con men, no matter what weapons they may choose to employ.

Text of Vice-chairman Kohn's Address to the Council on Foreign Relations Nov. 28, 2007