Obama Uses the "S" Word

In a televised interview with House Speaker Nancy Pelosi, president-elect Obama stressed the need to quickly craft an economic recovery plan because "the employment report at the end of this week will be sobering."

The plan to be considered by the new Congress, which will be sworn in tomorrow, is expected to include middle class and small business tax cuts.

A small group of Republicans will continue to oppose any aid not directed at wealthy individuals and large corporations in a histrionic show of newly-discovered indignant fiscal responsibility.

The resultant plan will be a band-aid on a gaping wound. The work of substance is yet to be seen.

Privatized Social Security, Italian Style

Here are a few lessons which can be learned from the Italian experiment with privatized Social Security:

1. The average person does not understand, and is incapable of understanding and accepting, the relationship between higher return and higher risk.

2. The Wall Street bankers and economists apparently do not understand this either, so we ought not to be too hard on the average person for their shortcomings.

3. Higher risk investments are always and everywhere inappropriate choices for a fixed income investment plan with near term payment goals.

4. When the going gets tough, everyone will expect to get bailed out, in shameless geometric proportion to their social standing, influence, and personal income.

5. When it comes to economics the average person will suspend their common sense for as long as is possible.

6. Those in positions of power will promote the suspension of common sense and popular delusions for the sake of confidence. This is why it is called a confidence game.

7. If the fundamentals of an economic plan are 'confusing,' seeming to provide superior returns for extended periods of time with no effort, it is a fraud. (eg. the US dollar.)

8. Whatever pension plans are promoted for the public MUST include all government officials, including the Ministers, Legislators, and Judiciary, to have any hope of success.

9. Whenever the private financiers 'help' the legislators make a troublesome problem disappear the eventual losses are certain to be especially heavy.

10. Despite what this Bloomberg story says the US avoided nothing because of voter outrage; the public and private pension funds are simply being stolen. (See #6 above).

Bloomberg
Italian Pensions Sapped by Private Funds Bush Backed
By Andrew Davis and Alessandra Migliaccio

Jan. 5 (Bloomberg) -- Italy did for retirement financing what President George W. Bush couldn’t do in the U.S.: It privatized part of its social security system. The timing couldn’t have been worse.

The global market meltdown has created losses for those who agreed to shift their contributions from a government severance payment plan to private funds meant to yield higher returns. Anger is rising both at the state, which promoted the change, and money managers such as UniCredit SpA and Arca Previdenza, which stood to profit.

Prime Minister Silvio Berlusconi’s administration is now considering ways to compensate as many as 1.2 million people who made the switch, giving up a fixed return for private plans linked to financial markets. It’s also letting people delay redemptions on retirement funds to avoid losses after Italy’s benchmark stock index fell 50 percent in 2008, destroying 300 billion euros ($423 billion) in wealth.

Italy’s experience shows how difficult it is to solve a problem facing governments from the U.S. to Europe to Japan as populations age and the old system of taxing workers to support retirees becomes unsustainable. Bush failed to persuade Congress to let workers put a portion of their Social Security taxes into privately invested accounts as voter opposition increased.

Standard Plan

For a quarter of a century, employers in Italy have paid about 7 percent of each worker’s annual salary into the severance system, called TFR. Workers received lump-sum payouts whether they retired, were fired or simply changed jobs.

Someone earning 80,000 euros a year would receive more than 200,000 euros in TFR after 35 years on the job and more than 60,000 euros after a decade of work. The fund pays a fixed return that aims to exceed inflation.

The program was a tempting target for a government struggling to meet its pension obligations. Italy spends about 14 percent of gross domestic product on pensions, the most in the European Union. Spain spends 9 percent and the U.K. 7 percent.

Italy has the EU’s lowest birthrate of 1.3 children per woman. By 2050, the country will have fewer than two working-age people for each person over 65, the lowest ratio in the EU, according to Eurostat, the bloc’s statistics agency.

Pensions Cut

Previous governments adopted measures to lower pension payouts and force workers to retire later. Benefits will drop to as little as 30 percent of a worker’s final salary from about 75 percent now, creating an incentive for Italians to seek higher returns by moving severance funds into a complementary plan.

Gaetano Turchetta, a Rome office manager, made the irreversible move to a private plan after a union representative boasted of the potential for 20 percent annual returns. The 43- year-old father of three now says he would sign with “two hands and two feet” if he could switch back.

“What do I want from the government?” he said. “Just not to become a burden on my kids.”

The TFR plan was meant to dent Italy’s risk-averse culture and lure more people to investment funds, said Biagio Masi, head of Banca Sella SpA’s insurance unit, who called the shift a “world-shattering change in mentality.” (Government as debt dealer for the bankers - Jesse)

Low Investment Rate

Eight percent of Italians invested in stocks in 2008, half the level of 2002, according to an Oct. 30 report commissioned by Acri, the country’s savings bank association. About 80 percent favored keeping their savings in the bank and 25 percent have a private pension or life insurance, the report said.

Money managers such as UniCredit, Italy’s largest bank, and Arca Previdenza, the biggest pension fund manager, lobbied customers to make the change, seeing it as an opportunity to kick-start a moribund fund management industry. (Fee Seeking - Jesse)

Funds under management in Italy have shrunk by a quarter in the past seven years, according to the Bank of Italy. The value of pension funds is equal to about 3 percent of GDP, compared with more than 90 percent in the U.S.

Even with full-page newspaper ads, billboards and telephone hotlines spurring Italians to switch, only 1.2 million people, or 10 percent of the eligible private-sector workers, chose to give up the TFR for private plans before the June 2007 deadline, according to fund regulator Covip. Italian lawmakers approved the reform at the end of 2006. It was part of the 2007 budget proposed by former Prime Minister Romano Prodi’s government.

Caveat Emptor - Buyer Beware - In Times of General Corruption

Here are some excerpts from the Op-Ed piece by Michael Lewis and David Einhorn that appeared in the NY Times on Saturday.

It is a portrait of government in partnership with a corrupt financial system, in a remarkably cynical and materialistic age, generally ignored by a frightened and complacent people.

And where was the outrage? Where was the rest of the world? Turning a blind eye to the corruption and enjoying the returns. Like many of Madoff's enablers and investors they thought they were insiders, the smart ones, and saw only the gains, ignoring the rest, and the eventual outcome.

This is not an historical review, as the problems still remain, a little exhausted, but largely uncorrected. No confessions of guilt, just denials, excuses, diversions and coverups.

Caveat Emptor. Buyer beware.


NY Times
The End of the Financial World as We Know It
By MICHAEL LEWIS and DAVID EINHORN
January 3, 2009

AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street...

Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness...

Our financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense...

Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest...

Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become. Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors.

The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.

It's not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it...

In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival...

A New Year's Resolution on US Financial Markets from the Incoming Administration

These are strong, almost startling words from Bart Chilton, part of Obama's incoming administration, currently on the CFTC.

The message is good and to the point. The illustration of the performance of the regulators over the past ten (not eight) years is remarkable, an indictment of the existing Federal regulatory system as a whole.

Actions will speak louder than words. We will all look forward to seeing what happens in Washington over the next few months, and in particular, what is done by the CFTC and the SEC in reforming US financial markets.

Washington
Time to restore mission of regulators
By Bart Chilton
January 1, 2009

In the building that currently houses the president-elect's transition team, there used to be an imposing bronze plaque with the visage of the Securities and Exchange Commission's redoubtable third chairman, William O. Douglas. It was emblazoned with the inspiring legend, "We are the Investor's Advocate."

For many decades, the SEC enjoyed the reputation of living up to the noble standard of public service. The plaque no longer graces the entryway of the SEC's new quarters, and with the recent revelations of failure to detect and prosecute incidents of egregious securities fraud and abuse, both internally and externally, the agency's reputation has been severely tarnished.

These types of disclosures make us as public servants ask some fundamental questions: Why are we here? The Founding Fathers had the answer: We are employed to protect the common wealth and serve the public good. We are not here to serve amorphous philosophical, economic or ideological concepts such as "financial markets" or "economies."

Our task is to serve the public -- those people in the hinterlands, many of whom have recently lost 30 percent or more of their retirement funds and/or home values and who now face losing their jobs. Our "client," our "constituent," is the American consumer and worker, the businessman or woman who generates and uses the products and services that comprise our "markets" and our "economy." If we fail to protect, first and foremost, these individual Americans, we cannot succeed in assuring the strength of our economy, nor in protecting the integrity of our financial market system.

Do we need to have statutes and regulations in place to ensure reliability of the marketplace? Of course we do, but over the past decade "the marketplace" has been exalted to a position perceived as virtually omnipotent and omniscient, while consumer protections have been generally neglected. The consequence lies scattered around us.

By veering too sharply to the right and letting go of the regulatory reins, we provided neither the market nor the consumer a great service. Rather we harmed both, and have a long hike to escape the resulting global economic meltdown. We must be careful not to over-correct -- not to go so far in the other direction that we stifle innovation and market growth. But it is clearly time for federal financial regulators to re-evaluate our current statutes and regulations, and to put "common sense rules of the road," as the president-elect has suggested, in place to protect consumers and bring our economy back into balance.

The SEC isn't the only federal financial regulator to have failed in serving the public. The Treasury Department appears to have lost its way as well, when a $700 billion bailout package, purportedly written to ensure against unconscionable executive compensation was, within weeks after passage, found to have a loophole allowing such compensation.

Federal banking regulators seem to be off course, permitting casino-like buying and selling of trillions of dollars worth of virtually worthless transactions. When gasoline topped $4 a gallon, the Commodity Futures Trading Commission dropped the ball, unable to oversee speculation's uneconomic role in the U.S. commodities markets.

In decades past, the CFTC has been charged with being too tied to the industry, too closely aligned with the regulated, and overly concerned with protecting "markets" rather than consumers. We've made good progress, and there are very fine people in all of these agencies and departments, but we too can and must do much better.

I have advocated a comprehensive legislative reform of the laws governing over-the-counter trading, and requested that authority over these critically important markets be vested in the Commodity Futures Trading Commission. The CFTC, a small agency in comparison to the SEC, has exclusive jurisdiction over risk-management markets in the United States, and has in recent years carved several significant notches in its enforcement belt.

At any one time, this small agency, with one-tenth the enforcement staff of the SEC, is investigating or prosecuting anywhere between 750 and 1,000 individuals or entities for violations of the Commodity Exchange Act. The agency has, just in the past year, tagged bad actors with more than $630 million in fines and settlements, in actions involving fraud, manipulation and other misconduct. Not a bad record for a small agency operating on a shoestring budget -- and we'd be able to do even more if given the authority.

With the collapse of the economy, the transition of government already under way with the new Obama administration, and the appointment of an excellent new federal financial regulatory team, it will soon be time to implement this new legislation, and similar consumer protection initiatives.

Also, we need to restore the clarity of our own mission in government: that we are here to assure financial opportunity and market fairness to the public. We need to regain the public trust.

With a shared vision of our mission and much needed reforms, our duties and responsibilities will flow clearly. Chief among these duties is a strong and aggressive enforcement arm. Markets must be free from fraud and manipulation for them to operate as they should -- for all Americans. This baseline approach to enforcement protects consumers and allows for open and free markets that are able to grow and innovate.

Investor's Advocate: A good legend, apparently forgotten. All federal financial regulators should use a new door sign: Consumers First. Everything else will follow.

Bart Chilton is a commissioner on the Commodity Futures Trading Commission, a Democrat, and a member of the Obama transition team.