26 September 2008
In an article for the New Statesman, John Pilger describes the 'great silence' over the annual British party conferences as politicians and their club of commentators say nothing about a war provoked and waged across the world the responsibility for which lies close at hand.
Britain’s political conference season of 2008 will be remembered as The Great Silence. Politicians have come and gone and their mouths have moved in front of large images of themselves, and they often wave at someone. There has been lots of news about each other. Adam Boulton, the political editor of Sky News, and billed as “the husband of Blair aide Anji Hunter”, has published a book of gossip derived from his “unrivalled access to No 10”. His revelation is that Tony Blair’s mouthpiece told lies. The war criminal himself has been absent, but the former mouthpiece has been signing his own book of gossip, and waving. The club is celebrating itself, including all those, Labour and Tory, who gave the war criminal a standing ovation on his last day in parliament and who have yet to vote on, let alone condemn, Britain’s part in the wanton human, social and physical destruction of an entire nation. Instead, there are happy debates such as, “Can hope win?” and, my favourite, “Can foreign policy be a Labour strength?” As Harold Pinter said of unmentionable crimes: “Nothing ever happened. Even while it was happening, it wasn’t happening. It didn’t matter. It was of no interest.”
The Guardian’s economics editor, Larry Elliott, has written that the Prime Minister “resembles a tragic hero in a Hardy novel: an essentially good man brought down by one error of judgement”. What is this one error of judgement? The bankrolling of two murderous colonial adventures? No. The unprecedented growth of the British arms industry and the sale of weapons to the poorest countries? No. The replacement of manufacturing and public service by an arcane cult serving the ultra-rich? No. The Prime Minister’s “folly” is “postponing the election last year”. This is the March Hare Factor.
Reality can be detected, however, by applying the Orwell Rule and inverting public pronouncements and headlines, such as “Aggressor Russia facing pariah status, US warns”, thereby identifying the correct pariah; or by crossing the invisible boundaries that fix the boundaries of political and media discussion. “When truth is replaced by silence,” said the Soviet dissident Yevgeny Yevtushenko, “the silence is a lie.”
Understanding this silence is critical in a society in which news has become noise. Silence covers the truth that Britain’s political parties have converged and now follow the single-ideology model of the United States. This is different from the political consensus of half a century ago that produced what was known as social democracy. Today’s political union has no principled social democratic premises. Debate has become just another weasel word and principle, like the language of Chaucer, is bygone. That the poor and the state fund the rich is a given, along with the theft of public services, known as privatisation. This was spelt out by Margaret Thatcher but, more importantly, by new Labour’s engineers. In The Blair Revolution: Can New Labour Deliver? Peter Mandelson and Roger Liddle declared Britain’s new “economic strengths” to be its transnational corporations, the “aerospace” industry (weapons) and “the pre-eminence of the City of London”. The rest was to be asset-stripped, including the peculiar British pursuit of selfless public service. Overlaying this was a new social authoritarianism guided by a hypocrisy based on “values”. Mandelson and Liddle demanded “a tough discipline” and a “hardworking majority” and the “proper bringing-up [sic] of children”. And in formally launching his Murdochracy, Blair used “moral” and “morality” 18 times in a speech he gave in Australia as a guest of Rupert Murdoch, who had recently found God.
A “think tank” called Demos exemplified this new order. A founder of Demos, Geoff Mulgan, himself rewarded with a job in one of Blair’s “policy units”, wrote a book called Connexity. “In much of the world today,” he offered, “the most pressing problems on the public agenda are not poverty or material shortage . . . but rather the disorders of freedom: the troubles that result from having too many freedoms that are abused rather than constructively used.” As if celebrating life in another solar system, he wrote: “For the first time ever, most of the world’s most powerful nations do not want to conquer territory.”
That reads, now as it ought to have read then, as dark parody in a world where more than 24,000 children die every day from the effects of poverty and at least a million people lie dead in just one territory conquered by the most powerful nations. However, it serves to remind us of the political “culture” that has so successfully fused traditional liberalism with the lunar branch of western political life and allowed our “too many freedoms” to be taken away as ruthlessly and anonymously as wedding parties in Afghanistan have been obliterated by our bombs.
The product of these organised delusions is rarely acknowledged. The current economic crisis, with its threat to jobs and savings and public services, is the direct consequence of a rampant militarism comparable, in large part, with that of the first half of the last century, when Europe’s most advanced and cultured nation committed genocide. Since the 1990s, America’s military budget has doubled. Like the national debt, it is currently the largest ever. The true figure is not known, because up to 40 per cent is classified “black” – it is hidden. Britain, with a weapons industry second only to the US, has also been militarised. The Iraq invasion has cost $5trn, at least. The 4,500 British troops in Basra almost never leave their base. They are there because the Americans demand it. On 19 September, Robert Gates, the American defence secretary, was in London demanding $20bn from allies like Britain so that the US invasion force in Afghanistan could be increased to 44,000. He said the British force would be increased. It was an order.
In the meantime, an American invasion of Pakistan is under way, secretly authorised by President Bush. The “change” candidate for president, Barack Obama, had already called for an invasion and more aircraft and bombs. The ironies are searing. A Pakistani religious school attacked by American drone missiles, killing 23 people, was set up in the 1980s with CIA backing. It was part of Operation Cyclone, in which the US armed and funded mujahedin groups that became al-Qaeda and the Taliban. The aim was to bring down the Soviet Union. This was achieved; it also brought down the Twin Towers.
On 20 September the inevitable response to the latest invasion came with the bombing of the Marriott Hotel in Islamabad. For me, it is reminiscent of President Nixon’s invasion of Cambodia in 1970, which was planned as a diversion from the coming defeat in Vietnam. The result was the rise to power of Pol Pot’s Khmer Rouge. Today, with Taliban guerrillas closing on Kabul and Nato refusing to conduct serious negotiations, defeat in Afghanistan is also coming.
It is a war of the world. In Latin America, the Bush administration is fomenting incipient military coups in Venezuela, Bolivia, and possibly Paraguay, democracies whose governments have opposed Washington’s historic rapacious intervention in its “backyard”. Washington’s “Plan Colombia” is the model for a mostly unreported assault on Mexico. This is the Merida Initiative, which will allow the United States to fund “the war on drugs and organised crime” in Mexico – a cover, as in Colombia, for militarising its closest neighbour and ensuring its “business stability”. Britain is tied to all these adventures – a British “School of the Americas” is to be built in Wales, where British soldiers will train killers from all corners of the American empire in the name of “global security”.
None of this is as potentially dangerous, or more distorted in permitted public discussion, than the war on Russia. Two years ago, Stephen Cohen, professor of Russian Studies at New York University, wrote a landmark essay in the Nation which has now been reprinted in Britain. He warns of “the gravest threats [posed] by the undeclared Cold War Washington has waged, under both parties, against post-communist Russia during the past 15 years”. He describes a catastrophic “relentless winner-take-all of Russia’s post-1991 weakness”, with two-thirds of the population forced into poverty and life expectancy barely at 59. With most of us in the West unaware, Russia is being encircled by US and Nato bases and missiles in violation of a pledge by the United States not to expand Nato “one inch to the east”. The result, writes Cohen, “is a US-built reverse iron curtain [and] a US denial that Russia has any legitimate national interests outside its own territory, even in ethnically akin former republics such as Ukraine, Belarus and Georgia. [There is even] a presumption that Russia does not have fully sovereignty within its own borders, as expressed by constant US interventions in Moscow’s internal affairs since 1992 . . . the United States is attempting to acquire the nuclear responsibility it could not achieve during the Soviet era.”
This danger has grown rapidly as the American media again presents US-Russian relations as “a duel to the death – perhaps literally”. The liberal Washington Post, says Cohen, “reads like a bygone Pravda on the Potomac”. The same is true in Britain, with the regurgitation of propaganda that Russia was wholly responsible for the war in the Caucasus and must therefore be a “pariah”. Sarah Palin, who may end up US president, says she is ready to attack Russia. The steady beat of this drum has seen Moscow return to its old nuclear alerts. Remember the 1980s, writes Cohen, “when the world faced exceedingly grave Cold War perils, and Mikhail Gorbachev unexpectedly emerged to offer a heretical way out. Is there an American leader today ready to retrieve that missed opportunity?” It is an urgent question that must be asked all over the world by those of us still unafraid to break the lethal silence.
25 September 2008
In covering the proposed $700 billion bailout of Wall Street don't repeat the failed lapdog practices that so damaged our reputations in the rush to war in Iraq and the adoption of the Patriot Act. Don't assume that Congress must act instantly, as so many news stories state as if it was an immutable fact. Don't assume there is a case just because officials say there is.
The coverage of the Paulson plan focuses on the edges, on the details. The focus should be on the premise. And be skeptical of what gullible Congressional leaders, most of them up before the voters in a few weeks, say after being given a closed-door meeting on supposed horrors.
The Administration has scared the markets and some key legislative leaders, but it has not laid out a coherent, specific and compelling need for this enormous proposal, which is the equivalent of a one-time 55 percent income tax surcharge. (Instead the money will be borrowed, so ask from whom and how this much can be raised so quickly if the credit markets are nearly seized up with fear.)
Ask this question -- are the credit markets really about to seize up?
If they are then lots of business owners should be eager to tell how their bank is calling their 90-day revolving loans, rejecting new loans and demanding more cash on deposit. I called businessmen I know yesterday and not one of them reported such problems. Indeed, Citibank offered yesterday to lend me tens of thousands of dollars on my signature at 2.99 percent, well below the nearly 5 percent inflation rate. That offer came after I said no last week to a 4.99 percent loan.
If the problem is toxic mortgages then how come they are still being offered all over the Internet? On the main page AOL generates for me there is an ad for a 1.9% loan (which means you pay that interest rate and the rest of the interest is added to your balance due.) Why oh why or why would taxpayers be bailing out banks that are continuing to sell these toxic loans?
How does the proposal help Joe and Mary Sixpack who can afford their current monthly payment, but not the increased interest rate that has been or soon will take effect? Every day bankers work out loans with customers -- so why are taxpayers being asked to act when banks are largely on strike, refusing to negotiate revised deals with many loan customers?
How about interviewing small landlords who were drawn into these toxic loans. Are banks negotiating with them? If not it means more foreclosures and renters who had nothing to do with this being evicted. Ask why banks are refusing (landlords I spoke to said they are) to negotiate with small landlords.
What steps are being taken to take back bonuses, fees and other compensation from the folks who got rich selling toxic mortgages and illiquid investments that Secretary Paulsen claims are threatening the whole system.
How will adding $700 billion to the national debt ease strains on the credit markets?
As of now we are, as a group, behaving just as we did the last two times the administration sought to rush through a hastily thought out, ill-conceived plan. Why in the world are we being so gullible and naive? whatever happened to the core value of journalism -- check it out?
The questioning on the Sunday talk shows was all softball. ABC, CBS, NBC and Fox, shame on your anchors and roundtable regulars all for engaging in lightweight faux journalism. This passivity, superficiality and gullibility was at its worse Monday night on NBC in the banter between anchor Brian Williams and a CNBC correspondent with its utter lack of skepticism.
It is interesting and depressing to see that as Obama calls for some kind of withdrawal or at least substantial cutbacks of the U.S. occupation of Iraq, at the same time he calls for escalation in Afghanistan. By doing this he hopes to ease the threat of vulnerability to accusations of weakness on "national security" and an un- or anti-American "cut and run" perspective. This has long been a problem for the Democrats, who have a mass populist constituency that would like some transfer of government resources to their pressing civilian needs.
The establishment, including the mainstream media, therefore, keeps the pressure on to assure that the Democrats stay in line and the Democrats often compensate, even overcompensate, to demonstrate their integration into an imperialist worldview and weapons culture. Both Gore and Bush wanted a bigger military budget in 2000 (Nader, who wanted cuts, was marginalized). Both Hillary Clinton and Barack Obama on the campaign trail called for a larger army to meet U.S. "defense" needs. Now Obama wants us to take on a bigger commitment to violence. This will keep the arms cargo ships and planes busy and the bomb factories and plane and missile factories working at full capacity. Of course, those wanting infrastructure improvements and resources will have to wait and "hope" for a better future after our enemies are defeated and full hegemony and stability are established. They need a good dollop of "vision."
The law of conservation of the level of violence thus rests on the structure of power and its reflection in politics. If you want to compete in politics in the militarized America of today you can't scrimp on money for "national security" and you need to display a readiness to exercise a "muscular" foreign policy. If you call for reduced forces in one country, you must urge their increase in another. Keep those muscles in shape and bombs dropping.
One of my favorite quotations from the Vietnam War era was: "I think maybe today we create many Vietcong," spoken by a Vietnamese collaborator and helicopter pilot when answering a question by Master Sergeant Donald Duncan while both were on a plane that had just dropped bombs on a Vietnamese target. The Vietnam War was a murderous capital-intensive war, with millions of tons of bombs dropped on villages deemed supportive of the indigenous enemy, along with napalm, phosphorus, and crop-destroying chemicals. (Napalm and rice-killing chemicals were used exclusively in the South, which we were allegedly "saving" from the North's "aggression.") In any case, this murderous behavior killed vast numbers, but also made any Vietnamese previously harboring doubts about the ongoing struggle extremely hostile to the United States and its local puppets. We had mastered the art of creating enemies.This was based in part on the triumph of technological warfare and its ability to reduce U.S. casualties, while at the same time greatly increasing civilian casualties. U.S. casualties had a political cost—Vietnamese civilian casualties didn't. We didn't count them then and we continue to avoid counting them in Iraq and Afghanistan. These are "unworthy" victims, "unpeople," untermenschen—in Vietnam, "gooks." As Noam Chomsky has pointed out, the number we killed in Indochina isn't even known within the range of millions. But the death machine ran on in part because of this great capacity to replenish enemy forces by the murderous and anti-civilian features of its operations.
The same is true in Iraq and Afghanistan. In Iraq the resistance grew in very close parallel with the U.S. occupation and its policies, which included the familiar heavy use of high-powered death-dealing weapons, numerous raids, and home invasions that involved ruthless treatment of the "sand niggers" and "haji," with many of them carted off to prison based on no serious derogatory information even using occupation standards. The Iraqis would not have liked a foreign occupation in any case, but the U.S. policies of merciless killing, brutal treatment, and racial contempt did a remarkable job of rapidly producing a major and effective resistance.
In Afghanistan we read on an almost daily basis of civilians killed in air raids—most recently 47 were killed at a wedding party. The Serbs kill 40 at Racak in January 1999—all of them probably KLA fighters—and Louise Arbour at the Yugoslav Tribunal gets hysterical with humanistic passion and a war looms in the face of this atrocity. But the USAF kills 47 civilians at one crack in Afghanistan and the world yawns and Obama, if elected, plans to send more troops to help the killers.
The Bush administration has long been criticized for, among other things, its failure to have an exit program for Iraq. It rarely occurred to people who made this criticism that the reason for that lack of an exit program was that the Bush administration didn't intend to exit. They expected to install a client regime, perhaps managed by Chalabi or later Allawi, with whom they would fix a Status of Forces Agreement (SOFA) that would permit "enduring bases" to endure indefinitely. We would negotiate a new oil law that would denationalize and/or open up Iraq's oil to U.S. and perhaps a few other allied oil companies. Thus, from the very beginning of the occupation there were promises of an exit, but always quite vague and conditional on a "stability" that kept diminishing and whose definition always remained in the hands of the occupying power.
The problem of achieving those major objectives has always been awkward, given that the nominal U.S. aim is allegedly liberation and democracy—following the collapse of the more marketable (Wolfowitz) "getting rid of Saddam's WMD" objective. There's also the painful fact that a substantial majority of Iraqis regularly supported an end to the U.S. occupation, many considering it the main source of violence. Of course, some in the West have claimed that there is no occupation —the U.S.-UK troops are there at the invitation of the elected government of Iraq. It is amusing to see how such nonsense can be proclaimed without eliciting loud guffaws—how the mainstream media can treat governments installed by the occupation of a hostile or target government (Cambodia by Vietnam, Afghanistan by the Soviet Union, Lebanon by Syria) as obvious puppets of the occupation, whereas a government installed under a U.S.-UK occupation is declared independent, even while it is managed like any other puppet.
A compelling demonstration of the puppet status of the Maliki government was provided in the Declaration of Principles for Long-Term Relationship of Cooperation and Friendship Between the Republic of Iraq and the United States of America, signed by Bush and Maliki on November 26, 2007. This declaration was agreed on by "two fully sovereign and independent states"—even if one had invaded, occupied, and continues to occupy the other—and it expresses the firm belief of both parties in "non-intervention in internal affairs [and] rejection of the use of violence in resolving disputes." The Principles are said to be "the expression of the will of the Iraqi people," though that people has for years, and by large majorities, called for the exit of U.S. armed forces, a position supported by a majority of the Iraqi Parliament and though the Iraqi people have not been allowed to vote on this set of principles.
"The economic sphere" covered in this declaration stresses "aiding its [Iraq's] transition to a market economy," an objective we know is held by the U.S. establishment and which had been imposed on Iraq by the U.S. proconsul Bremer (in violation of international law), but which we have no reason to believe represents the desires of the "Iraqi people." It calls for integrating Iraq into the international financial system and encouraging foreign investment in Iraq, "especially American investment, to contribute to the reconstruction and rebuilding of Iraq." You may be quite sure it does not call for reparations from the invader and destroyer of so much of Iraqi infrastructure and the bringing to justice of its leaders.
In "the security sphere" the declaration calls for helping Iraq "deter foreign aggression...that violates its sovereignty," six years too late to help Iraq defend its sovereignty against U.S.-UK aggression. It also calls on Iraq to ask the UN Security Council to renew for one more term the occupation rights of the invader of 2003 and for Iraq to begin bilateral negotiations with the invader-occupier to achieve an agreement between these two sovereign governments in the "political, cultural, economic, and security spheres" before July 31, 2008. In short, this is a model set of principles agreed to by a puppet and its master and has nothing whatsoever to do with the "will of the Iraqi people."
In the months leading up to the July 31 deadline, there was much activity on the part of the two governments in trying to reach an agreement. This was basically a project of firming up occupation rights by getting Maliki to sign a SOFA that would recognize a U.S. military presence and base rights for a long and indeterminate period, along with a further effort to open up Iraq to foreign oil company occupation. This called for some fancy footwork and propaganda on the part of the two parties and has had its comical features. On Bush's side, he had to show what a gracious person he was and how that tough-bargaining Maliki had forced him to accept an "Iraq timeline"—"a general time horizon for meeting aspirational goals, such as the resumption of Iraqi security control in their cities and provinces and the further reduction of U.S. combat forces from Iraq" (quoted in NYT, July 19, 2008). This actually constitutes a regression from the vague promises of 2003. In fact, "general time horizon" and "aspirational goals" would seem like leg-pulling by a jokester—horizons recede; aspirations are mere hopes, and the aggressor-occupier seems to be laughing at the puppet.
But then Maliki gets tough and drops the "bombshell" that he will seek a more limited accord with the United States that includes a timetable for U.S. withdrawal (Robert Dreyfus, "Maliki Stunner: He Wants US Pullout Timetable," The Dreyfus Report, the Nation, July 7, 2008). But this stunner came long after Maliki had signed the Declaration of Principles and at a time when he was being subjected to harsh internal Iraqi criticism for his puppet-like behavior. It is absolutely standard behavior for puppets to assail their patrons for disrespect and for policy differences, although it is also standard for their reservations to be quietly set aside after the initial spate of publicity. General Nugyen Van Thieu in Vietnam, who like Maliki couldn't have survived for a week without U.S. funding and military protection, often denounced his protectors.
On the oil front, in late June the newspapers featured the announcement of the Iraqi oil minister Mohamad Sharastani that contracts had been drawn up between the Maliki government and five major Western oil companies to develop some of the largest fields in Iraq. No competitive bidding was allowed and the terms announced were very poor by existing international contract standards. The contracts were written with the help of "a group of U.S. advisers led by a small State Department team." This was all in conformity with the Declaration of Principles of November 26, 2007, whereby the "sovereign country" of Iraq would use "especially American investments" in its attempt to recover from the effects of the American aggression. The contracts have not yet been signed and the internal protests are loud, but clearly the fig leaf of WMD and democracy has been stripped away, as an "enduring" occupation and a systematic looting of Iraq's oil are arranged under a non-democratic tool of the occupation.
Edward S. Herman is an economist, author of many books and articles, and a media and social critic.
Iranian President Mahmoud Ahmadinejad on the Threat of U.S. Attack, and International Criticism of Iran’s Human Rights Record
Part 1, with Amy Goodman and Juan Gonzalez.
Nader on Democracy Now! this morning....
Some excellent questions not really being asked on the Hill, even by Mr. Frank. As per usual, the Democrats will cave, having already conceded the terms of the argument, the framework of action, and their institutional rights and responsibilities. To say nothing of their responsibility to their constituencies.
As usual, the plan seems to be: let things fail, pin it on the GOP, gain power. As in Iraq, FISA, you name it.
I don't see Obama doing much of anything, either, except being "bipartisan."
Still doubt that we have a one-party state with two wings? I've been reading a lot in the business press, economists, etc. -- there is very little consensus that this plan, what is known about it, will work. Funny, that. Money for the financial services industry (ie, the rich); nothing for everyone else.
One criticism of the left (such as it is): there is no double standard in Bush's policies. The rich want protection from losses and freedom to profit: a rigged game. It was ever thus.
When, exactly, will the "pitchfork moment" occur?
And finally: will Americans finally grow up and realize that the government, structurally, is unconcerned about their "safety" or well-being? I mean, exactly how much information does a person need before they spit out the pacifier and see things for what they are? I don't mean pro forma rightwing "government is bad -- I use 'governance' now" -- except when we need it for the military, bailouts, to fight evil.... I mean waking up from the American Dream and attempting, finally, to complete the eighteenth century revolutions that launched this country.
Note that, confusions aside (and there are many), most "ordinary" people seem to get the point. The Friedman-worshiping crowd -- a very small percentage -- does not.
Right and left, most non-rich people (and many rich, actually) get the main point, derivatives aside: money buys power in our system, and he who pays the piper calls the tune. A child knows this to be the case; "adults" call it "cynicism."
Side note: Apparently, there's to be a demo on Wall Street today. Worth going to.
Welcome to 21st Century America: The New Brazil -- increasing inequality, decreasing rule of law (for the powerful), a Constitution approaching Soviet-style irrelevance (reads nice de jure; no one pays any attention de facto), with a bloated military junta in control. Except our ruling class is smarter, so we are more Augustan than most dictatorships: we maintain the forms and make sure that the haute bourgeoisie can maintain its lifestyle. If and when they begin to hurt enough to do anything, it may be too late to do anything about it. For now, as per usual, they have thrown in with the ruling class, which throws them some crumbs every so often.
So, it looks like worsening economic straights for most of us, increased militarism abroad and at home, disappearing civil liberties, and the usual ugly imperial implosion. To any reader of history: same old, same old. But this time, we may take the rest of the world down with us: a bankrupt, increasingly isolated superpower is a very dangerous animal. All it has is its armaments to throw around.
Domestically, as things worsen, there is always a toss-up between a left-wing and a right-wing (or, if you like, libertarian or authoritarian) revolution. We are ripe to the point of rotten for a new style of fascism here.
24 September 2008
Congress needs to show some backbone before the federal government pours more money on the financial bonfire started by the arsonists on Wall Street.
1. Congress should hold a series of hearings and invite broad public comment on any proposed bailout. Congress is supposed to be a co-equal branch of our federal government. It needs to stop the stampede to give Bush a $700 billion check. Public hearings should be held to determine what alternatives might exist to the four-page proposal advanced by Treasury Secretary Henry M. Paulson.
2. Whatever is ultimately done, the bailout plan should not be insulated from judicial review. Remember there is a third co-equal branch of government – the judiciary. The judiciary does not need to review each buy-and-sell decision by the Treasury Department, but there should be some boundaries established to the Treasury Department's discretion, and judicial review is needed to ensure that unbridled discretion is not abused.
3. Sunlight is a good disinfectant. The bailout that is ultimately approved must provide for full and timely disclosure of all bailout details. This will discourage conflicts of interest and limit the potential of sweetheart deals.
4. Firms that accept government bailout monies must agree to disclose their transactions and be more honest in their accounting. They should agree to end off-the-books accounting maneuvers, for example.
5. Taxpayers must be protected by having a stake in any recovery. The bailout plan should provide opportunities for taxpayers to recoup funds that are made available to problem financial institutions or to benefit from the financial institutions' rising stock price and increased profitability after being bailed out.
6. The current so-called “regulators” cannot be trusted. The U.S. Government Accountability Office (GAO), "the investigative arm of Congress" and "the congressional watchdog,” must regularly review the bailout. We cannot trust the financial “regulators,” who allowed the slide into financial disaster, to manage the bailout without outside monitoring.
7. It is time to put the federal cop back on the financial services beat. Strong financial regulations and independent regulators are necessary to rebuild trust in our financial institutions and to prevent further squandering of our tax dollars. The Justice Department and the SEC also need to scrutinize the expanding mess with an eye to uncovering corporate crime and misdeeds. Major news outlets are reporting that the FBI is investigating American International Group, Fannie Mae, Freddie Mac, and Lehman Brothers.
8. Cap executive compensation and stop giving the Wall Street gamblers golden parachutes. The CEOs who have created the financial disaster should not be allowed to leave with millions in hand when so many pensioners and small shareholders are seeing their investments evaporate. The taxpayers are bailing out Wall Street so that the financial system continues to function, not to further enrich the CEOs and executives who created this mess.
9. Congress should pass the Financial Consumers' Information and Representation Act, to permit citizens to form a federally-chartered nonprofit membership organization to strengthen consumer representation in government proceedings that concern the financial services industry. As the savings and loan disasters of the 1980s and the Wall Street debacles of the last few years have demonstrated, there is an overriding need for consumers and taxpayers to have the organized means to enhance their influence on financial issues.
10. The repeal of the Glass-Steagall Act, separating traditional banks from investment banks, helped pave the way for the current disaster. It is time to re-regulate the financial sector. The current crisis is also leading to even further conglomeration and concentration in the financial sector. We must revive and apply antitrust principles, so that banking consumers can benefit from competition and taxpayers are less vulnerable to too-big-to-fail institutions, merging with each other to further concentration.
11. Congress should impose a securities and derivatives speculation tax. A tax on financial trading would slow down the churning of stocks and financial instruments, and could raise substantial monies to pay for the bailout.
12. Regulators should impose greater margin requirements, making speculators use more of their own money and diminishing reckless casino capitalism.
Ask your representative a few questions: "What should be done to limit banking institutions from investing in high-risk activities? What should be done to ensure banks are meeting proper capital standards given the financial quicksand that has spread as a result of the former Senator Phil Gramm’s deregulation efforts? And, “What is being done to protect small investors?”
P.S. Shareholders also have some work to do. They should have listened when Warren Buffett called securities derivatives a "time bomb" and "financial weapons of mass destruction.” The Wall Street crooks and unscrupulous speculators use and draining of “other people’s money” out of pension funds and mutual funds should motivate painfully passive shareholders to organize to gain greater authority to control the companies they own. Where is the shareholder uprising?
Sunday night meetings in Washington produce startling announcements: In March, there was the Fed's $30- billion backing of Bear Stearns' bad assets, as it was given to JPMorgan Chase; last week we had Lehman Brothers' declaration of bankruptcy; this week it's Goldman Sachs and Morgan Stanley, changing their status to one equivalent to neighborhood banks, with all the emergency capital perks thrown in.
The shifting tides of Wall Street aren't over, and neither are the government bailouts. If Treasury Secretary Henry Paulson's request for a $700 billion bailout is approved, it will bring the total government tab for saving Wall Street from itself to $1.25 trillion.
But, reading the fine print, that huge chunk of cash is just for one-time purchases. If the government buys $700 billion worth of assets whose value goes to zero, we could be on the hook for another bailout round before you know it.
Paulson considers this latest plan, "decisive action to fundamentally and comprehensively address the root cause of our financial system."
But it does no such thing. That's because his persistent focus on illiquid mortgage assets and the "housing correction" is not the bigger problem. It's merely the catalyst that revealed the systemic rot of overleveraged and reckless activities that define our financial system.
Blaming irresponsible lending and borrowing is a slick way of avoiding the deeper need for regulation. If the entire industry (from small lenders through big trading firms) were more transparent and less leveraged, a correction in housing wouldn't have brought down three major investment banks. It wouldn't have triggered the decision of the remaining two to become commercial banks, to gain more access to desperately needed capital through citizens' deposits and the Fed's emergency window.
That Goldman Sachs and Morgan Stanley positioned their request like a plea for regulation is a joke - it was a plea for money.
Yes, we need stricter lending practices instead of the ones that contributed to 5 million homeowners facing defaults or foreclosures. But we also need to restructure Wall Street - not by creating bigger, less-transparent entities, but by generating smaller ones whose risks are clear, as was done in 1933.
Meanwhile, Democrats in Congress want more constraints on Paulson's bailout package. They cite the need for independent oversight of the fund that will purchase the assets, a cap on executive compensation, and more help for borrowers through mortgage-debt reductions.
What's lacking, even from the Democrats' wish list, are demands to overhaul and re-regulate the entire banking industry, and that all financial institutions quantify their real credit losses - at the moment, only commercial banks report their exposures.
The Commodity Futures Modernization Act of 2000, passed late one December session by former Senate Banking Committee chairman Phil Gramm (R-Texas), deregulated the privately traded credit derivatives and swaps market. These derivatives have dangerously intertwined with mortgage-backed securities, and require the creditworthiness of the financial institutions that trade them to remain stable. (AIG is an example of one that didn't, and we know how that turned out.)
Also, the Gramm-Leach-Bliley Act of 1999 - navigated by Gramm and cheerled by former Treasury Secretary Robert Rubin, who served under President Bill Clinton - repealed those 1933 protections and made it possible for investment banks, insurance companies and commercial banks to merge without requiring greater regulation.
Today's mess is a direct result of these two acts.
To steer this ship, Congress has to bone up on finance - if members don't know what CDOs (collateralized debt obligations) and credit derivatives really are, they can't understand the risk they have incurred on behalf of American taxpayers, and they'll be ill-prepared to evaluate Paulson's plan. And Congress must then regulate credit derivatives and the banking industry.
The goliath Bank of America-Merrill Lynch will take months to decipher. Goldman and Morgan's buying up smaller banking players - which they will - will add to the murkiness. None of this stabilizes the system. Instead, it sets it up as a bigger problem to solve later.
If our representatives in Washington are serious about fixing the problems that Wall Street has caused, they will shoot the roots of deregulation, not just the messenger of subprime-lending malpractice, or the toxic waste manufactured by Wall Street.
Congress also shouldn't let Paulson anywhere near the management of the buyout fund - and frankly, shouldn't feel compelled to approve a $700 billion bailout without strong regulatory protections for American citizens. But that requires a deeper understanding of the complicated mortgage and credit markets than Congress seems to have.
Meanwhile, stay tuned for more bank mergers and instability, punctuated by rest periods where Wall Street inhales government money. Or, I should say, our taxpayer money.
23 September 2008
With some bracketed edits by yours truly; badly written and/or edited, but on the money.
By MICHAEL HUDSON
Saturday’s $700 billion junk mortgage bailout is the largest and worst giveaway since a corrupt Congress gave land grants to the railroad barons a century and a half ago. If it goes through, it will shape the coming century by giving finance unprecedented power over debtors – homebuyers, industry, state and local government, and the federal government as well.
But what threatens to be even worse is the government’s move to let the financial sector make even higher, unprecedented gains[.]
by [The Paulson plan allows the financial sector to] work ing its way out of negative equity to “make taxpayers whole” by repaying the government’s bailout by bleeding the economy at large. [A]nticipating congressional capitulation in this license to engage in predatory credit, the latest Sunday evening surprise is that Treasury Secretary Henry Paulson’s own firm, Goldman Sachs, is to become bank holding company picking up the financial wreckage now that the government is covering the bad loans and investment gambles Wall Street has made.
[This is what] Mr. Paulson did not say in his weekend TV interviews, organized as what he hoped would be a series of victory laps. Neither he nor Fed Chairman Ben Bernanke nor any other Wall Street spokesman has acknowledged that the government has helped promote today’s $46 trillion debt bomb. This enormous overhead consists of the [very] product that banks are selling – interest-bearing debt that is being added to real estate, corporate industry and personal income [which is] pric[ing] the U.S. economy out of world markets.
We have heard nothing about how Wall Street lobbyists have succeeded in killing the financial cops on Wall Street – and [have] done the same with the consumer cops on Main Street. There is no public recognition of the fact that more money in tax cuts went to the top 1% than the bottom 80%
So how much credence should we give the newest proposals for the United States to commit economic suicide by turning over the powers of government[,] in effect[,] to Wall Street? When they talk about “making taxpayers whole,” what really is their game?
At first glance it may sound appealing to taxpayers for banks to be told to use their future earnings to pay back the $700 billion dollars in junk mortgages, bad hedge-fund bets and other gambles that the Treasury promised on September 20 to pick up at face value, [with] no loss incurred. To provide a sense of proportion, this money could have funded the next forty or fifty years of Social Security. It could have funded health care for all Americans. It could have made a big step toward rebuilding the nation’s crumbling infrastructure. But that is another story. For now the major question is just how the banks, insurance companies and financial conglomerates are to raise the money to pay off this bailout.
The last time the government let banks earn their way out of negative equity was in 1980. Interest rates to bank customers topped 20 percent, driving down prices for real estate, stocks and bonds so low that the leading U.S. banks saw their net worth wiped out. Their debts to depositors and bondholders exceeded the collateral they held in their reserves to back these deposit obligations. But as soon as Ronald Reagan led the Republicans back into office, the Federal Reserve began to flood the economy with free credit, driving down the interest rates that banks had to pay. They were allowed to act as a monopoly and keep credit-card interest rates high, at 20 percent, and above 30 percent with penalties, thanks to the fact that America’s high post-Vietnam interest rates led state after state to repeal anti-usury laws to keep credit flowing.
So the banks did “earn their way out of debt.” But if you were a taxpayer who needed to use a credit card, you paid through the nose. The banks earned their way out of debt at your expense. And by the way, if you really did pay an income tax, you probably did not own commercial real estate or significant financial assets. The Internal Revenue Service made commercial real estate and a large swath of finance (at least for the wealthiest investors) income-tax free by generating tax credits that could be applied against income across the board. The capital-gains tax was lowered to a fraction of the income tax, leading investors to pay out whatever income their investments generated as interest on loans to buy property they expected to sell at a markup. And with Alan Greenspan appointed the head the Federal Reserve Board in 1987, the age of asset-price inflation had arrived.
Cities and states vied with each other to slash property taxes, replacing them with income and sales taxes that fall mainly on labor and consumers. The upshot is that wealth has polarized to an unprecedented degree. According to statistics collected by the Congressional Budget Office, the wealthiest 1% now own 57% of the nation’s returns to wealth (interest, dividends and capital gains) and the richest 10% own no less than 77%.
With this background in mind, it looks like the Paulson-Bernanke plan for the Wall Street investment banks and other predatory lenders – and insurers such as A.I.G. – to “earn their way out of debt” will be at the economy’s expense. The bailout is to be achieved by letting Wall Street’s post-Glass-Steagall financial conglomerates charge their customers exorbitant financial charges. As Britain’s Conservative Party leader Margaret Thatcher put it in her favorite phrase, TINA: There is no alternative. And as Lady Macbeth said, if the deed is to be done, let it be done fast. After all, it is a once-in-a-lifetime chance for every financial institution in America to cash out with a fortune!
For Mr. Paulson this means not giving Congress a chance to represent the public interest in designing the terms of this giant bailout. Sec. 8 of the Treasury plan bans any Congressional review, giving him unprecedented power
by: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” Under cover of emergency force majeur conditions, the plan is to take the money and run, preferably without permitting any Congressional debate.
It is bad enough for the government to buy $700 billion of bad bank investments at prices that no private-sector investor has been willing to approach. This itself is an undeserved giveaway to the financial institutions that caused the problem by living recklessly in the short run. But making them – and indeed, helping them – pay back this gift with the aid of favorable tax and deregulatory policies will simply shift the cost off their shoulders onto those of bank depositors, credit-card users, mortgage borrowers and hapless pension-fund contributors to the money managers who have taken most of the current income in the form of commissions, salaries and bonuses to themselves. This will sharply add to the price of doing business in the United States, and specifically to the economy’s debt overhead by the banks making even more predatory loans.
It gets worse. In order for the existing junk mortgages to be “made good,” real estate prices must be raised [even] further above the ability [of] this year’s five million homeowners in arrears and facing default to pay
for. Is this a good thing? Is it good to raise access prices for housing even more, forcing new homebuyers to go further into debt than ever before to gain access to housing? Mr. Paulson has directed the Federal Reserve, Fannie Mae, Freddie Mac and the FHA (Federal Housing Authority) to re-inflate the real estate market. They are to pump nearly a trillion dollars into the mortgage market.
Fiscal policy is also to be brought to bear to turn the real estate market around by pressuring cities and states to “help homeowners pay their mortgage debts” by cutting property taxes. The idea is to leave more revenue available for property owners to pay mortgage bankers. Unfortunately, this will oblige cities to make up these cuts by taxing labor and sales, running deeper into debt than they already are, or cutting back their spending on basic infrastructure, education and public services and continue shortchanging their pension funds. This is the price to be exacted to “protect the taxpayer’s interest” by bailing out irresponsible banks. The solution is to let them make even more money by acting in a yet more predatory way.
This is not industrial capitalism; it is asset stripping. The closest analogy I can think of would be to give the Mafia free reign to start a new crime wave “in the taxpayers’ interest” so as to raise enough money to pay its fines to the Justice Department. Imagine how our world would look like if the economy [in the 1930s] had been turned over to Al Capone as head political capo and to Mafia financial manager Meyer Lansky as Treasury Secretary
in the 1930s, with the pyramid schemer Carlo Ponzi heading the Federal Reserve and bank robber Willie Sutton as Attorney General.
The last thing the economy needs is a new real estate bubble. To prevent it, local property taxes need to be raised, not lowered. But this is not the Treasury’s plan. Instead of representing the national interest, it is representing the banking sector whose profits come from making more and bigger loans. This is just the opposite from what a well-run economy needs to recover its growth and competitive power. It needs debt write-downs to what homeowners can pay.
But Mr. Paulson has made it clear that aid for homeowners is not part of the Treasury’s plan. On Sunday, September 21, he resisted suggestions that his program be amended to include further relief for homeowners facing mortgage foreclosures. Because financial markets remain under severe stress, he claimed, there is an urgent need for Congress to act quickly without adding other measures that could slow down passage. “We need this to be clean and to be quick,” he said in an interview on ABC’s “This Week.” He expressed concern that debate over adding all of those proposals would slow the economy down, delaying the rescue effort that is so urgently needed to get financial markets moving again. "The biggest help we can give the American people right now is to stabilize the financial system," Mr. Paulson said.
If you doubt that this is the government’s ideal plan, just look at what it is rejecting. You hear no talk from Mr. Paulson or Mr. Bernanke about bailing out homeowners by writing down their debts to match their ability to pay. This is what economies have done from time immemorial. Instead, the Republicans – along with their allied Wall Street Democrats – have chosen to bail out investors in junk mortgages presently far exceeding the debtor’s ability to pay, and far in excess of the current (or reasonable) market price. The Treasury and Fed have opted to keep fictitious capital claims alive, forgetting the living debtors saddled with exploding adjustable-rate mortgages (ARMs) and toxic “negative amortization” mortgages that keep adding on the interest (and penalties) to the existing above-market balance.
The question to be asked is just how much will the economy’s debt overhead grow, and what will it cost debtors (a.k.a. “taxpayers”)? And how will the economy look when the dust settles?
Economically [In economic terms,] the act gives a new meaning to the classical concept of circular flow. The traditional textbook meaning has referred to the circulation between producers and consumers, from wage payments by industrial companies to their employees, who use their wages to buy what they produce. This is why Henry Ford famously paid his workers the then-towering $5 a day. This was Say’s law: Income paid for production is finds its counterpart in consumption to maintain equilibrium in a way that enables the economy to keep on growing. The new circular flow runs from the Fed and Treasury to Wall Street in the form of bailouts, and then back to Republicans in Washington in the form of campaign contributions. The money circulates without having to go through the “real” economy of production and consumption at all.
The Treasury Department issued a fact sheet on the proposal on Saturday evening: “Removing troubled assets will begin to restore the strength of our financial system so it can again finance economic growth.” In everyday language the euphemism “removing troubled assets” means buying junk mortgages at way above current market price, as if the banks didn’t know all along that they were junk but hoped to pawn them off on their clients. The problem is that the banks have not been financing growth in the form of tangible capital investment, but have found their quickest profits to lie in a combination of asset stripping and asset-price inflation.
On Sunday a BBC World Service reporter asked me to list three things that the financial sector would like to see. Taking the open-ended question on the highest philosophical plane, I said, first of all, the banks would love to free themselves of all deposit liabilities – simply to keep the money for themselves. That is their objective when they see a client, after all: How much of the client’s earnings and money can
they [we] shift into their own pockets .[?] Second, they would like to see politicians elected directly by the amount of money they could raise, thereby doing away with the actual problem of elections. If politics is going to be privatized, this is the way to do it. Rome’s voting system was organized along these lines. Third, the financial sector prefers not to have to report any data at all or pay any taxes. It has lobbied Congress to block collection of statistics, on the premise that what is not seen will not be taxed. And at present, banks and brokerage houses are still screaming to repeal Sarbanes-Oxley bill calling for full and honest accounting. For financial ideologues this is an equivalent watershed dragon to Rowe vs. Wade, now that they have repealed the Glass-Steagall Act that had separated banks from casinos.
Somewhat taken aback by the rawness of these principles, the reporter asked what outcome was most likely. If Congress does what it is supposed to do, there should be quite a showdown. But how unlikely to be achieved is the above scenario? A few hours earlier on Sunday my friend Eric Janszen of itulip.com sent me a note he had received from a fund manager attesting to the lack of care for clients of financial institutions, giving a flavor of the predatory spirit guiding the bailout’s planners and its beneficiaries:
RAIDS OF INDIVIDUAL ACCOUNTS
This is so important a topic, that it deserves top billing!!! Hidden inside the AIG bailout funding package, surely hastily cobbled together, but carefully enough to include a totally corrupt clause, was a handy dandy clause that permits raids. The conglomerate financial firms are permitted at this point to use private individual brokerage account funds to relieve their own liquidity pressures. This represents unauthorized loans of your stock account assets. So next, if the conglomerate fails, your stock account is part of the bankruptcy process. ...
The actual evidence for legalized stock account raids by the financial firms can be found in recent articles in Financial Times and Wall Street Journal. So this is not a wild claim. The September 14th article on the Wall Street Journal entitled "Wall Street Crisis Hits Stocks" was the first exposure.
The runs on US banks are in progress. See Washington Mutual, where private email messages have been shared by WaMu bank officers. WaMu alone could deplete the entire Federal Deposit Insurance Corp fund for bank deposit coverage. Eventually the FDIC will compete for USGovt federal money for bailouts and nationalizations, which would be funded by the US Govt because they will not let FDIC run dry.
My Kucinich-campaign colleague David Kelley and I agree on how Wall Street’s action plan ideally would work. The Republicans will take the $800 billion of U.S. Treasury securities presently earmarked for the Social Security Administration accounts, and achieve the privatization that Pres. Bush and his backers have been pressing for so hard for the past eight years. Under emergency conditions – today’s 9/21 as the modern analogue to 9/11 just seven years ago
(the well-known natural lifespan of locusts) – will swap these Treasury bonds for junk mortgages, at face value of course. Then, a few months from now (after the new president takes office in February, or perhaps a few days before to achieve the usual political clean slate) the government will tell prospective retirees and workers who have been suffering FICA withholding all these years, “Oops, the government has just lost all your money. Well, that just shows how government planning is the road to serfdom. Next time save yourself by handling your own accounts – or at least choosing whether to consign your forced retirement savings to Lehman Brothers, Bear Stearns or kindred predatory money managers. If only we could have done this a few months ago, there would have been no meltdown and Wall Street would have been doing just fine.”
If you are going to take such a step, you of course say you are doing it to “save” the economy. You even proclaim yourself to be a hero. This is how the nation’s newspaper and TV media responded after news of the bailout of AIG and, more to the point, the Wall Street gamblers and derivatives traders whose gains and losses – that is, the ability of trillions of dollars worth of computer-driven trading gambles – to collect their winnings and avoid losses.
Today’s financial markets are well personified in the classic Hollywood westerns. They typically are about towns taken over and run by a banker (“Wall Street” in miniature), for whom a retinue of outlaws and their gangs work (the boys in the back room). The banker runs the town, usually doing business from its biggest building, the local saloon or casino where most of the action occurs. It has a brothel upstairs (the usual Hollywood simile for Congress). The good-hearted prostitute (sometimes the madam) with a heart of gold usually is the movie’s only honest secondary character (a stand-in for one of the bleeding-heart Congressmen on the finance or mortgage-credit committees lisping well-scripted lines promising that all new legislation will benefit homeowners, not predatory mortgage lenders).
There also is a good-hearted investigative newspaper publisher-journalist. He almost always gets killed and his printing press destroyed. (Today his paper is simply bought out by a conglomerate and merged into the pro-Wall Street mass media.) The banker’s gang appoints the sheriff (on today’s larger scale, the Federal Reserve and Justice Department), and also the mayor (who rarely is seen except to sign papers). The sheriff’s job is the same as in today’s world: to evict debtors from homes and properties on which the land-greedy banker is foreclosing. This is the common theme of westerns, after all: They are all about the great American land grab – situated out West so as to protect the identities of the guilty here in the East on Wall Street.
Attentive readers will notice that I have left [the hero] out of this script
the hero. His role is to fight the banker/land grabber and the gang he has brought into town. Wearing a white hat, he rides into town to clean it up, and in the final showdown shoots the head gunslinger (or perhaps the banker himself, who is done for in any event). This is the [role] position that Mr. Paulson portrays [has given] himself. But what the audience doesn’t see (at first) is that the bullets he is shooting are merely blanks. It is in fact only a movie after all! The showdown is staged! He works for the banker himself! Goldman Sachs turns itself into a big-fish bank and gobbles up all the little fish in a great financial squeeze.
An alien class of financial mock-heroic poseurs has taken over – land grabbers and banksters of various stripes. Almost unnoticed, an invasion of government snatchers, bank snatchers, money snatchers pretending to be Main Street, pretending to be “the economy” and now claiming to need to be rescued – at the cost of saying goodbye to public finance as we have known it, goodbye to Social Security, to peoples’ hope for upward economic mobility.
It looks like Wall Street will receive government support at Main Street’s expense. This is hardly surprising when you look at who the major campaign contributors are – to both parties. Understandably, Mr. Paulson and Mr. Bernanke are trying to muddy the issue for their financial constituency. Hedge fund traders and kindred banksters have metamorphosized into “the financial system to be saved” and hence “the economy” itself. As if it is necessary to save peoples’ savings deposits and bank accounts by rescuing the casino companies with which the banks have merged – the predatory mortgage brokers, the insurance companies with their fraudulent accounting, the crooked asset-management firms, all of which have merged into conglomerates “too large to fail.” If they are too large, simply un-merge them. Restore Glass-Steagall, which worked for 65 years to prevent this kind of problem from erupting.
The most egregious pretense is that the problem is only temporary, not structural. We are merely “freeing up” the market for new loans. This is precisely the opposite of what the classical economists meant by “free markets.” What America has is a bad debt problem, not a “liquidity” problem. There is no “illiquidity” when people refuse to buy a junk mortgage on a property worth only a fraction of the mortgage’s face value. Many of these bad mortgage loans are fraudulent. The Treasury bailout seeks to make $700 billion of fictitious financial claims “real” – that is, way overvalued as compared to their actual worth(lessness).
What is reducing real estate and corporate stocks and bonds to junk is the exponential growth in the economy’s debt overhead. Debts that cannot be paid have little market value at any price. The nation must make a choice: If the government bails out the large financial institutions for having made bad loans – or to be more precise, for not being able to pawn off these bad loans on foreigners or other financial prey in a timely fashion – then the only way in which the government (or other new creditors) can be paid back is by not forgiving the debts owed by strapped homeowners. This would tighten the debt terms on debtors at the bottom of the food chain – those against whom the bank-sponsored new bankruptcy [law] has been aimed. This is why I deplore the government bailout of Fannie Mae and Freddie Mac for the junk mortgages it has been packaging from predatory lenders such as Countrywide Financial, Washington Mutual and other deceptive lenders. The wrong parties have been gifted.
I should add that the solution does not lie simply in creating a new regulatory system, much less a single regulatory agency. After all, it was at Wall Street’s command that the Bush Administration installed deregulators in all the key regulatory positions. This meant that regulations didn’t matter at the Environmental Protection Agency (EPA), at the Fed under Alan Greenspan, at the Securities and Exchange Commission (SEC) under Mr. Cox (after William H. Donaldson resigned when the White House would not let him regulate as much as he thought necessary) or at the Department of Justice under Bush yes-men such as Alberto Gonzales. Politics and people have turned out to be more important than the law. We have seen the Supreme Court scrap the Constitution in the 2000 election – with acquiescence from the Democrats, starting with Mr. Gore’s refusal to contest Florida.
To appoint a single regulator would prevent all other regulators – and law enforcement officers, attorneys general, the SEC and so forth – from enforcing honest financial policies in the event that an incoming president should appoint another Greenspan, Gonzales or other ideological extremist averse to the idea of applying existing regulations and honest laws. Under these conditions “consolidated regulation” would mean a free ride for crooks much like J. Edgar Hoover gave the Mafia under his tenure.
My alternative solutions are as simple as Mr. Paulson’s, but of course are quite different. The public interest does indeed call for maintaining the economy’s basic credit, money-transfer, credit card and depository checking and savings functions. But not under the current venal and predatory management practices. It is this management that has lobbied so hard for deregulation, and whose industry representatives have insisted so strongly to place extremist ideological deregulators into the economy’s major positions. Therefore, the Treasury
only should buy junk mortgages [only] at current market price. The losses should be taken in order to re-even out the wealth pyramid that has become so much steeper under the Greenspan-Bernanke ploys. The banks knew full well that these mortgages lacked underlying value. The price of making use of this borrowing facility is to forfeit all equity stock to the government. The Treasury should prohibit any financial institution that sells or swaps securities to the Fed from paying any dividends to shareholders or stock options and bonuses to managers. It also should give the government priority over other creditors. Otherwise, firms that have negative equity will benefit purely at public expense, using the money to pay dividends, bonuses and exorbitant salaries.
Second, we need to restore the Glass-Steagall separation of commercial banks from risk-taking investment banks, mortgage brokers and other financial-sector flotsam and jetsam. Break up the mergers between banks and casino sell-side financial and real estate institutions. Just the opposite is occurring: On Monday, Sept. 22, the financial universe was transformed by the announcement that Mr. Paulson’s Wall Street firm, Goldman Sachs, was transforming itself into a bank holding company. The casinos are [about] to take over the banking system as big fish eat little fish in the present financial emergency. It looks like new giants are emerging, already larger than the government in terms of the magnitude of the debts they have run up – and certainly in their earning power. Indeed, who is to say that extracting interest from the U.S. economy will not emerge as [a]
the new form of taxation?
Third, re-write the bankruptcy laws to favor debtors once again, not creditors. This means reversing the current bankruptcy code sponsored by lobbies from the credit-card companies. The interests of the five million mortgage debtors faced with foreclosure and expropriation this year should rightly be placed above the interest (literally) of predatory creditors.
Fourth, sharply increase property taxes, shifting them back off labor and sales. We need to return to the classical idea of taxing unearned and unproductive income instead of adding to the price of labor and industry. What has been freed from the tax collector by the shift of taxes off property has not lowered the cost of housing and other real estate, or corporate costs of doing business. The income “freed” has ended up being paid to the banks as interest. The government still has had to raise money – but in the form of taxes that fall on labor’s wages and industry’s profits. So labor and industry now pay twice for what they formerly paid only once. They still pay the same overall amount of taxes, but also pay an equivalent amount of interest. The financial system is crowding out the government.
In the fifth place, we need to start discussing whether we really need a banking system that behaves in the way the present one does. In recent decades banks have made loans mainly to inflate asset prices by loading real estate and industry with interest-bearing debt. What if all banks were to be organized along the lines of savings banks, with 100% reserves
.[?] This is the Chicago Plan from the 1930s (currently revived by the American Monetary Institute, which holds its annual meeting this week in Chicago, by the way). This at least would go back to basics to provide a foundation from which to re-begin to discuss just what kind of credit the economy needs and what would be the best terms on which to structure financial markets.
Any solution does indeed need to be radical. But it can be much less radical than Mr. Paulson’s power grab for his Morgan Stanley firm and the rest of Wall Street in the closing days of the Bush administration just before the Republicans look like losing power. The indicated solution is to reverse predatory finance, not bail it out at permanent taxpayer expense. Government funds are not unlimited. Is it worth wiping out hopes for Social Security and public health care, for renewed national infrastructure spending and industrial restructuring in order to bail out a banking and financial system that has not contributed to economic growth but has weighed it down with reckless debt regardless of the economy’s ability to pay?
Is it right to blame the five million homeowners now in arrears and facing foreclosure, but rewarding the irresponsible bankers and outright fraudulent institutions who have used Enron accounting to make a once-in-a-lifetime rip-off? That is what Mr. Paulson would do in insisting that Congress pass his legislation without taking time to discuss the issue and above all without “assigning blame.” But without such assignation, how do we know where to go from the current mess caused by financial deregulation, repeal of Glass-Steagall, the financial system’s Enron-style accounting and predatory mortgage lending?
Before leaving from his post as Federal Reserve Chairman, Alan Greenspan’s speeches sounded like “Apres moi, le deluge.” We are living in a world whose economic and political pressures are much like those in the interregnum [sic] between Louis XIV and the French Revolution. Where are the revolutionists today?
Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JPMorgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world’s first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich’s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, email@example.com
- Executive Pay: The 9/11 Factor [from 2006]
On Sept. 21, 2001, rescuers dug through the smoldering remains of the World Trade Center. Across town, families buried two firefighters found a week earlier. At Fort Drum, on the edge of New York's Adirondacks, soldiers readied for deployment halfway across the world.
Boards of directors of scores of American companies were also busy that day. They handed out millions of bargain-priced stock options to their top executives.
A Wall Street Journal analysis shows how some companies rushed, amid the post-9/11 stock-market decline, to give executives especially valuable options. The grants set recipients up for millions of dollars in profit if the shares recovered. Here are examples of some grants made in September 2001.
The terrorist attack shut the U.S. stock market for days. When it reopened Sept. 17, stocks skidded more than 14% over five days, in the worst full week for the Dow Jones Industrial Average since Germany invaded France in May 1940. But for recipients of options, the lower their company's stock price when options are awarded the better, since the options grant a right to buy shares at that price for years to come. The grants set recipients up for millions of dollars in profit if the shares recovered.
A Wall Street Journal analysis shows how some companies rushed, amid the post-9/11 stock-market decline, to give executives especially valuable options. A review of Standard & Poor's ExecuComp data for 1,800 leading companies indicates that from Sept. 17, 2001, through the end of the month, 511 top executives at 186 of these companies got stock-option grants. The number who received grants was 2.6 times as many as in the same stretch of September in 2000, and more than twice as many as in the like period in any other year between 1999 and 2003.
Ninety-one companies that didn't regularly grant stock options in September did so in the first two weeks of trading after the terror attack. Their grants were concentrated around Sept. 21, when the market reached its post-attack low. They were worth about $325 million when granted, based on a standard method of valuing stock options.
The 91 companies included such corporate icons as Home Depot Inc., Black & Decker Corp. and UnitedHealth Group Inc. It included two companies directly touched by the tragedy. Merrill Lynch & Co., across the street from the Twin Towers, lost three employees. On Sept. 24, Merrill granted its president options to buy more than 750,000 shares, at a price 15% below the pre-attack level. At Teradyne Inc. in Boston, an employee delayed a business trip until Sept. 11 to attend a son's soccer game and died on American Flight 11. Teradyne that month gave its CEO more than 600,000 options at a price enabling him to buy stock at 24% below its pre-attack level.
At Stryker Corp., a Michigan maker of orthopedic products, onetime stock-option-committee member John Lillard said he didn't regret the decision to award options nine days after the attack. "If you believe the company is going to do well, and here is an external event that is affecting the market and you've made a decision to reward executives, you go ahead with it," Mr. Lillard said. "Life goes on."
There's nothing illegal about granting options after the market plunges. But acting so quickly after a national tragedy drove down stocks shows the eagerness of some companies to increase their executives' potential wealth. These grants also offer important new fodder for an already fractious debate over what constitutes the proper use of options in executive compensation.
Dozens of companies are under investigation for possibly backdating option grants to a day when the stock was lower, a practice that could mean the companies have made false disclosures and perhaps reported financial results incorrectly. Other companies are being investigated on suspicion of timing options grants ahead of good corporate news.
The multiple options grants after 9/11 raise a different question: Did companies take unseemly advantage of a national tragedy?
Some companies say they issued options to capture the new more favorable prices as a way of calming and motivating managers rattled by the terrorist attacks and the ensuing economic fears. Others say their granting of options at that time had nothing to do with the Sept. 11 events. Some say that mid- or late-September meetings of the compensation committees of their corporate boards had been scheduled weeks in advance. Companies note that for all they knew, their stocks might have gone lower still in succeeding weeks.
Stock options were originally designed to align executives' incentives with the goals of shareholders, encouraging recipients to work hard to improve their companies' stock price. When those options are granted at favorable prices, executives get some of their gain free -- that is, they get a chance to buy in an unusual dip below the price many investors have paid.
Black & Decker, the tool maker, wasn't in the habit of giving options to its very top executives in September. Proxy filings, which typically list grants to the companies' five highest-paid executives, indicate Black & Decker hadn't given them options in September since at least 1994. But on Sept. 21, 2001, with the stock down nearly 20% in the wake of the attack, directors granted hundreds of thousands of options to the top five executives and 37 others.
Black & Decker said the grants came about because the board had been worried for months about the departure of some key employees. It thus had decided to defer options grants to top executives, normally given in April, until it could come up with a retention plan, a spokesman said. That it completed this retention program with stock-option grants 10 days after the attack was coincidence, the spokesman said.
Nolan Archibald, Black & Decker's chief executive, received options to buy 200,000 shares. If cashed out today, they would bring him a profit of about $9 million. While most of that is due to the overall performance of the company and its stock, it's about $1.4 million more than it would be if the grant had been based on the stock price just before 9/11.
"It did not bother the board that it was at an advantageous strike price, because that helped the retention aspect," said Black & Decker's spokesman, Roger Young. He called the propitious timing "water under the bridge." The company didn't make Mr. Archibald available for an interview.
In the first days after the attack, with the stock market shut down, American government and business leaders scrambled to reassure investors and soften a blow they knew would come when the market reopened the following Monday. Famed investor Warren Buffett appeared on CBS's "60 Minutes," saying he "won't be selling anything." Vice President Dick Cheney, on NBC's "Meet the Press," urged the financial community not to be disrupted. Companies lined up to invest cash in their own shares, often trumpeting their decisions in patriotic tones.
Minutes after the bell rang Sept. 17 at the New York Stock Exchange, New York Mayor Rudy Giuliani, who'd attended the solemn reopening ceremony, told CNBC, "Everybody should step up to the plate right now and show the strength of the American economy." He added: "We depend on this. A lot of jobs and the future of America and the world rests on what happens here."
The market fell nonetheless. And on that Monday, Home Depot broke with a regular pattern of issuing stock options in February and made a huge grant to its chief executive, Robert Nardelli. The grant permitted Mr. Nardelli, for the next 10 years, to buy one million Home Depot shares at that tumultuous September day's closing price of $36.20 a share. This was 10.7% below the Sept. 10 closing price of $40.55.
The following day, Home Depot gave more grants: 50,000 options to each of four other executives, all of whom had already received options earlier in 2001. With Home Depot shares now trading at about $34, the options are currently out of the money.
In a written statement, Home Depot said its directors "approved a special equity award" on Sept. 17 and 18 "to retain the key executives necessary to drive the transformation of the company."
Mr. Nardelli, however, had come to Home Depot only nine months earlier, at which time he'd been given a mammoth grant of 3.5 million stock options, at a higher exercise price. Two of the other four managers to whom Home Depot gave post-attack retention grants had joined earlier that year, and had received options when they arrived.
Home Depot's compensation committee at the time was led by John L. Clendenin, a former chief executive of BellSouth Corp. He didn't return calls seeking comment. Other members of the board committee at the time declined to comment, didn't return calls or couldn't be reached.
At Merrill Lynch in downtown Manhattan's World Financial Center, many of the thousands of staff members fled during the attack. They were later dispersed to sites in New Jersey, New York and Connecticut while Merrill's damaged offices were rebuilt.
A Sept. 24 grant of 753,770 options to Merrill's E. Stanley O'Neal, then president and chief operating officer, came at $39.80, 15% below the Sept. 10 closing price. Merrill stock now trades at more than $67 a share. Mr. O'Neal's potential profit from the grant is $5 million greater than it would have been had the grant come on Sept. 10.
A Merrill spokesman said the options award was directly tied to Mr. O'Neal's promotion in July 2001, and that records show the September grant date was the first time the board's compensation committee had had an opportunity to meet to approve the one-time grant.
Robert Luciano, who then headed that committee, was emphatic that Merrill hadn't timed its option grants to hit lows in the stock price. Attempting to do so, he said, would undermine the purpose of options: motivating employees to improve a company's performance. "It's a locked-in gain. It makes no sense," Mr. Luciano said. "That's why I think it is unconscionable."
Of the grant to Mr. O'Neal in September 2001, Mr. Luciano said, "I don't think we timed it to coincide with the tragedy. Gamesmanship like that gives a bad look to the whole process. I just don't tolerate it."
The Merrill spokesman said Mr. O'Neal, now CEO and chairman, wasn't involved in the decision to award the grant that day. "We had dead employees and people spread out over three states," said the spokesman, Jason Wright. "The last thing he was thinking about was getting paid. He had other things to do."
Mr. Wright said that Mr. O'Neal had a strong sense that Merrill's stock would fall further following the grant, as the company was poised to undergo a major restructuring. "If anything, he thought, 'Thanks a lot, guys,' " for options that would soon be under water. As it happened, Merrill shares rose steadily in the months following the grant, but then slid in 2002.
The terror attack was rough on many financial-services firms. Mutual-fund provider T. Rowe Price saw its stock fall 27% in the week trading resumed. On Sept. 21, the stock's low for the year, the firm gave stock options to two senior officers. That included 160,000, adjusted for stock splits, to James A.C. Kennedy, who is slated to become president later this year or early next year.
T. Rowe Price Chairman and President George Roche said after checking meeting minutes that the option grants were approved at a morning conference on Sept. 21. Mr. Roche said the company doesn't try to time its options grants to price fluctuations and wasn't trying to hit a low with its 2001 grant. He said there would be little point in doing so because "you didn't know that there wasn't going to be a second round of attacks" that would further depress the stock. The grants "had nothing to do with 9/11," Mr. Roche said, adding that the firm customarily awards options in the second half of the year.
Richard L. Menschel, who headed the T. Rowe Price executive compensation committee in September 2001, said he vaguely recalled option grants to some senior executives that month at "what seemed to me a particularly attractive price." Mr. Menschel, a former Goldman Sachs executive, declined to comment on whether he thought that was appropriate.
In any case, the mutual-fund firm's Mr. Kennedy said he didn't think companies that gave stock options to executives at the time were capitalizing on the tragedy. He likened the grants to him and others to decisions by individual investors to buy stocks. "People who have faith in humanity and believe that the world is not coming to an end, are they taking advantage? No, they are stepping up." It was an "ugly time and a lot of people panicked," Mr. Kennedy said. This was a chance "to get up there and swing the bat."
Some of the post-9/11 grants were extraordinarily well-timed, hitting the exact low for the period. At least six of the companies that granted options dated after the attack are under investigation in the wider options-timing probe. That raises the question of whether some grants that appear to have been granted in the post-attack period were actually made later, then backdated.
UnitedHealth, which granted stock options dated shortly after the terror attack, also faces investigations of its other options practices by the Securities and Exchange Commission and federal prosecutors. The former CEO of one UnitedHealth unit, R. Channing Wheeler, received option grants dated on quarterly lows for four straight years, 1999 through 2002. In September 2001, UnitedHealth gave Mr. Wheeler 96,000 options, adjusted for later stock splits, priced at the managed-care company's post-9/11 quarterly low. UnitedHealth declined to comment and Mr. Wheeler didn't return calls.
On UnitedHealth's compensation committee in September 2001 were New York investor William Spears, Columbia University nursing dean Mary Mundinger and former New Jersey Gov. Thomas Kean -- later head of the federal commission that investigated Sept. 11 intelligence failures. Mr. Kean and Ms. Mundinger didn't return calls, while Mr. Spears declined to comment.
Among many U.S. companies that offered charitable aid, as the nation reeled in the days after the attack, was Apollo Group Inc., a for-profit education provider that runs the University of Phoenix. "The employees of Apollo offer their condolences and concern to the victims, their families and the rescue teams affected by this unthinkable tragedy," said John Sperling, chairman, in announcing on Sept. 18 that Apollo would donate $1 million to the Twin Towers Fund.
Three days later, Apollo's board granted Mr. Sperling and four other top executives a total of 536,000 stock options. They also received options to buy 513,000 shares of an Apollo subsidiary, which later were converted to parent-company options. The price at which the Apollo options could be exercised was the stock's lowest close in the 2001 second half. By the end of the year, the stock was 29% higher. Mr. Sperling currently is sitting on a paper profit of about $12 million from his post-9/11 options. He hasn't yet exercised any, according to regulatory filings.
"I would agree that it was fortuitous timing for the receiver of the grant," said John R. Norton III, a member of the Apollo board's compensation committee. But, he said, "there's nothing illegal about issuing an option when the stock is at a low point," adding that in any case there's no way of knowing what a stock will do over the next 60 or 90 days.
Mr. Norton continued: "I know what you're getting at -- that right after the World Trade Center, when the world went to hell, we issued stock options on the low that enriched people in a manner that could be suspect. That's not true. I don't know why we issued those at that particular time."
Apollo is also among the companies under federal investigation for the possibility of options timing problems. Apollo said it believes it has complied with all applicable laws and done no backdating. But it said the company and Mr. Sperling would have no comment on the September 2001 options until its own review of its practices is complete.
Todd Nelson, who was Apollo's chief executive in September 2001, cashed in most of his options from that month for a profit of more than $14.4 million. He didn't return calls seeking comment.
Some companies that granted options at post-attack lows favorable to their executives said the moves were necessary to retain rattled employees. "We did it because people were shaken and we wanted to give them some incentives to stay focused," said David Strohm, a director of Internet Security Systems Inc., which gave several executives options dated Sept. 28. "We really wanted to say to people: 'We believe in the company, you have a great opportunity.' " The grants enabled the executives to buy stock in the Atlanta company for $9.11 a share, which proved to be the lowest closing price in its history.
In some cases, executives appear to have been instrumental in picking their own post-9/11 grant dates.
At Teradyne, Chairman and CEO George Chamillard received 602,589 options on Sept. 24, 2001, after the terror attack and business woes had driven Teradyne's stock price down by nearly one-fourth. That was four times the number he received the prior year. A spokesman for the maker of electronic test equipment said the grants followed the company's normal process: The chairman calls compensation-committee members and suggests it would be a good time to issue stock options. If the committee agrees, it approves them.
In a later securities filing, Teradyne said part of Mr. Chamillard's grant was a one-time award of 300,000 options "in recognition of his additional responsibilities as Chairman since May 2000."
The head of the Teradyne board's stock-option committee at the time, Patricia S. Wolpert, declined to comment. Other committee members either didn't return calls or couldn't be reached.
Teradyne spokesman Tom Newman said that at the time of the attack, the company was in distress. It had begun layoffs just hours before the first plane hit the WTC north tower, had cut the pay of higher-paid staffers, and had promised remaining employees they would soon be getting a special options grant. He said it made sense to give Mr. Chamillard and other top officers their annual grants at the same time it doled out the special awards to rank-and-file employees, adding that the timing had nothing to do with Sept. 11.
In hindsight, Mr. Newman said, "maybe we should have done something separately ... and delayed" the large grant to Mr. Chamillard. The prior year, Teradyne had awarded options to top officers in late October. Mr. Chamillard still holds his post-9/11 options, which show no current paper profit because Teradyne's stock is about half the price at which they were awarded.
The spokesman said Mr. Chamillard wouldn't be available for an interview because "I don't want to put him in the position of answering how does he feel about potentially benefiting from the 9/11 tragedy."
At Stryker, in Kalamazoo, Mich., post-9/11 stock-option grants to several executives appear to have been initiated by the chairman and CEO at the time, John W. Brown. They were dated Sept. 20, 2001, at the bottom of a sharp "V" pattern in the share price.
Mr. Brown would "periodically tell us if he thought the stock was attractive," and then the board would decide whether to award options, said Mr. Lillard, the former member of Stryker's stock-option committee. "We didn't just sit down after Sept. 11th and say, 'Gee, how can we take advantage of this?' " Mr. Lillard said. Besides, he added, no one could have known whether the stock would rebound immediately or continue to slide.
Mr. Brown said that for the past 10 to 12 years, the company, to compensate for a relatively small number of options given to executives, has tried to "pick what we think would be the low point of the year. That's what we're gunning for."
Stryker's option grant came on the lowest closing stock price for the second half of the calendar year. Mr. Brown said he believes that he called both members of the stock-option committee on Sept. 20 to recommend they choose that day to grant options. He added that he couldn't remember a time when the board didn't follow his advice.
Mr. Brown said that while he didn't remember the details of the 2001 grant, "that was the year of 9/11. I'm sure that the market hammered us and that was the reason I was doing it at that time."
Mr. Brown, still chairman but no longer CEO, said he could understand how it might strike some as unseemly to give executives stock options so soon after a catastrophe. "That would be a legitimate point, I suppose," he said.
He added that in retrospect, he probably wouldn't have advised that the grant be given. Today, Mr. Brown said, Stryker gives its grants during a relatively narrow period in the spring.
Mr. Brown said he hasn't exercised any of the September 2001 options. If he did so today, he'd make a profit of about $2 million.