Thursday, August 4, 2011

From The Mouths Of Banksters: Why The Busts Will Keep Coming

Nothing like the double whammy of re-watching Charles Ferguson's Inside Job (2010 documentary on our most recent financial crisis) and reading Thomas Frank's essay "The Age Of Enron" (Harper's, August 2011) to get the blood boiling. Frank in particular is at pains to suggest - or, to be fair, reveal - how our elected leaders, financial rulers, and complicit press continue to hawk a flawed narrative that goes something along the lines of "We didn't see this coming and we will do better next time". Not merely naive or disingenuous, this argument is a carefully calculated falsehood meant to dupe, obfuscate, and spread the pain. Frank suggests that the stunning collapse of Enron ten years ago - a collapse caused not by uncontrollable outside forces but by a culture of greed and dishonesty supported both within and outside the company - merely set in motion a new reality of continual boom-bust cycles, with spectacular meltdowns sweeping up ever-larger swaths of people in their wake, yet with the central figures fighting back each time against any efforts at regulation or criminal prosecution.

By casting as its enemy the phantom ghoul of regulated markets, Enron and family have successfully managed to sway the national dialogue in their favor, even if the companies themselves have long since fallen from grace. Because while certain investors, shareholders, and CEOs may indeed stand to lose a bit of gold and silver from their pockets in the face of industry-wide regulation, the damage wreaked on the nation as a result of defiant deregulatory practices are easily measured. Consider the man-made "electricity crisis" visited upon California residents in 2000-2001, a series of Enron-sanctioned criminal acts that was only made possible following the deregulatory legislation put forth by then-governor Pete Wilson. Or consider the passing of the Commodity Futures Modernization Act of 2000, federal legislation decreeing over-the-counter derivatives transactions (OTC) off-limits to regulation, neither as "futures" nor as "securities" - in essence, removing derivatives and credit default swaps from federal security oversight and the Commodity Exchange Act of 1936.

What is stunning about these dual pieces of harmful legislation is not simply that the former led to a local energy crisis and resulted in the meltdown of one of the largest companies in the nation, or that the latter directly led to the world economic crisis of 2008. No, what's truly stunning, as Frank highlights, is that Enron itself was used as a positive example by the Federal Reserve as a success story proving the safety of the derivatives market and the dangers of regulation. To wit, the about-to-collapse company was cited by the Fed as "an example of a prominent player in the derivatives market that was successfully 'regulated' by counterparty discipline, without needing bank-like government oversight".

This is not simply a matter of positive spin or industry-think. This is not merely an example of experts "getting it wrong," "miscalculating," or "failing to foresee the future". This is, instead, indicative of a wider culture hostile to regulation and willing to cheat and lie in order to achieve market dominance. With each new financial crisis, the defenders of the threatened deregulatory virgin assume battle gear, deny everything, and demand greater freedom to commit their crimes of greed. With full severance pay and bonuses, of course.

Since pulsing forehead veins and uncontrolled foaming at the mouth are as unpleasant to witnesses as they are to the afflicted, I'll stop there. Allowing these banksters and career criminals to bury themselves with their own words won't change much, but there's something a little cathartic about seeing so much idiocy, self-delusion, and pomposity put down for posterity in one place. Behold the wisdom of our ruling class.



"I believe in God and I believe in free markets."

- Ken Lay, Enron CEO, 2001


"I'm doing God's work. We're very important. We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It's a virtuous cycle".

- Lloyd Blankfein, CEO, Goldman Sachs, whose company was saved by the U.S. Government in 2008, after which Goldman Sachs reported $3 billion in third quarter earnings and readied $16 billion in year-end bonuses (, Nov. 9, 2009)


"Our global franchise and brand have never been stronger, and our record results for the year reflect the continued diversified growth of our businesses."

-Lehman Brothers CEO Dick Fuld, ten months prior to Lehman Brothers filing for Chapter 11 bankruptcy in the largest default in history. Under Fuld's leadership, Lehman continued to underwrite mortgage-backed securities in the face of the growing housing crisis, accumulating an $85 billion portfolio, almost four times the $22.5 billion of shareholder equity Lehman possessed as a buffer against losses. (Bloomberg, Sept. 15, 2008)


"You don’t understand. Dysfunction is good on Wall Street."

- Stanley O'Neal, CEO, Merrill Lynch. O'Neal stated in July 2007 that "[The subprime problem is] reasonably well contained. There have been no clear signs it's spilling over into other subsets of the bond market, the fixed-income market, and the credit market." Within four months of this statement, Merrill Lynch had lost over $50 billion on mortgage-backed securities and subprime loans, while O'Neal had left the company. O'Neal "squeezed in 20 rounds of golf, including three rounds on three different courses in a single day, as his company was racking up the largest quarterly loss in its 93-year history.....In October, O'Neal announced his "retirement," walking away with a compensation package valued at $161.5 million...."
[Vanity Fair, The Blundering Herd]


"In the last 15 years, I have never walked into a room or been at a dinner party where I did not feel that when people looked at me they thought I was O.K., successful, agile. That might have changed. I feel like people now look at me with a question mark. I’m angry. When you walk around with the reputation for being the most rigorous risk analyzer, assessor, controller and that is trashed, well, you have got to feel bad. This is personal."

- James Cayne, former CEO of Bear Stearns, ruminating on the collapse of Bears Stearns' hedge funds, signalling the start of the global financial crisis. In March 2008, with his company on the brink of bankruptcy, Cayne was involved in a bridge tournament in Detroit. Having once informed an investment-firm chief acquaintance that her 11-year-old son had "a rotten handshake, that kid's going nowhere in life," Cayne later sold his entire stake in the failing company for $61 million dollars. [NYTimes, "Salvaging A Prudent Name"]


"We're on the side of the angels."

- Jeff Skilling, former President, Enron, currently serving a 24-year prison sentence following convictions on multiple federal felony charges.


"Countrywide is a great American story. Countrywide was one of the greatest companies in the history of this country, and probably made more difference to society, to the integrity of our society, than any company in the history of America.”

- Angelo Mozilo, CEO, Countrywide Financial, viewed as single greatest contributor to the subprime mortgage crisis. (“In terms of being unresponsive to what was happening, to sticking it out the longest, and continuing to justify the garbage they were selling, Countrywide was the worst lender,” said Ira Rheingold, executive director of the National Association of Consumer Advocates. “And anytime states tried to pass responsible lending laws, Countrywide was fighting it tooth and nail.”)


"Countries don't go out of business."

- Walter Wriston, First National City / Citibank, early pioneer of the banking industry pursuing credit card business. Also noted, "Capital goes where it's welcome and stays where it's well treated."


"At some point, the disruptive event will be so significant that instead of liquidity filling in, the liquidity will go the other way. I don’t think we’re at that point. When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing."

- Charles Prince, former CEO, Citigroup, July 2007. Four months later, he abruptly retired from the company following massive CDO and MBS-related losses, collecting a $38 million pay package. [naked capitalism, July 2007]


"The Great Depression, like most other periods of severe unemployment, was produced by government management rather than by inherent instability of the private economy."

- famed economist Milton Friedman, 1962, taking a stand against regulatory measures.


"The parties to these kinds of contracts are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies. To date there has been no clear evidence of a need for additional regulation of the institutional OTC derivatives market, and we would submit that proponents of such regulation must bear the burden of demonstrating that need."

- Larry Summers, Secretary of the Treasury (1999-2001), Director of the White House National Economic Council, in remarks during testifying before Congress in July 1998 regarding debate within the Commodity Futures Trading Commission on how to "maintain adequate regulatory safeguards without impairing the ability of the OTC derivatives market to grow". Upon the 1999 removal of the separation between investment and commercial banks via the Gramm-Leach-Billey Act, Summers noted, "With this bill, the American financial system takes a major step forward towards the 20th century".


"....Apologists for the financial industry talk of rational actors pursuing their interests in ways that may have been greedy but never veered into illegal or unethical behavior. After all, many executives, such as Dick Fuld, of Lehman Brothers, who believed in profit-making instruments like collateralized debt obligations and credit-default swaps, wound up losing their jobs and their companies. Doesn’t that prove their good faith? [Charles] Ferguson will have none of it. He uses interviews and historical information to suggest that many of the transactions weren’t rational at all. They may have been profitable in the short term, but they were destructive to the companies the executives worked for, and he demonstrates that anyone with common sense and a skeptical view of unregulated financial markets could have seen the dangers coming. None of the senior public officials with an ideological commitment to deregulation, like Alan Greenspan, Hank Paulson, and Ben Bernanke, and none of the investment-bank executives who made hundreds of millions from the C.D.O. boom were willing to speak to Ferguson on camera. So he brings forth the savants who warned of the impending crisis early on: Nouriel Roubini, of New York University, whose musical Persian-Israeli-Turkish-accented English is delightful; and Raghuram Rajan, now of the University of Chicago, who, in 2005, while serving as the chief economist of the International Monetary Fund, delivered a paper warning of the disaster to come in front of an audience that included Alan Greenspan and Larry Summers, and was ignored or criticized for his efforts. Roubini and Rajan, awed by the size of the crisis they were unable to prevent, are now sombre models of contained ego and radiant pride.

Nothing like the same could be said of the academic economists, including Glenn Hubbard and Frederic Mishkin, of Columbia Business School, and Martin Feldstein and John Campbell, of Harvard, who hem and haw and evade the simplest questions about conflict of interest or bad advice. Ferguson, interviewing them from behind the camera (Matt Damon narrates the film), questions them with increasing exasperation, and, one after another, the academics disgrace themselves. Ferguson finds a hero in none other than Eliot Spitzer, who prosecuted fraud in the financial industry in 2002. Five years ago, expensive evenings with hookers and drugs were part of the exhilarated Manhattan madness of the investment-banking life. The underlings who procured such services—hiding the costs in phony expense chits—could now be flipped and forced to testify against their bosses, who may be guilty of much more consequential malfeasance. With perfect tact, Spitzer says that he might not be the most appropriate person to suggest such a course for prosecutors. But he suggests it nonetheless...."

- David Denby, "Hearing Things," review of Charles Ferguson's Inside Job, The New Yorker, October 2010


"The symbol of all relationships among such men, the moral symbol of respect for human beings, is the trader. We, who live by values, not by loot are traders, both in manner and spirit. A trader is a man who earns what he gets and does not give or take the undeserved. A trader does not ask to be paid for his failures, nor does he ask to be loved for his flaws. A trader does not squander his body as fodder, or his soul as alms. Just as he does not give his work except in trade for material values, so he does not give the values of his spirit—his love, his friendship, his esteem—except in payment and in trade for human virtue, in payment for his own selfish pleasure, which he receives from men he can respect. The mystic parasites who have, throughout the ages, reviled the trader and held him in contempt, while honoring the beggars and the looters, have known the secret motive of the sneers: a trader is the entity they dread—a man of justice."

- Ayn Rand, Atlas Shrugged, 1957, encomium to the virtues of the money trader.

Monday, August 1, 2011

Books, 420 Characters (July Round-Up)

The month of July passed with several mini-book reviews not being uploaded to the blog. That doesn't mean I haven't been reading, though - in fact, it was a pretty good month.


Frank Dikotter, Mao’s Great Famine; The History Of China’s Most Devastating Catastrophe, 1958-1962

Mao’s Great Leap Forward is less familiar than the Holocaust or Great Purge, yet as Dikotter insists, Mao was clearly as evil as Hitler or Stalin. The starvation was not accidental, but deliberate, like a death camp. This grim book details how one ruler murdered 45 million citizens in the name of progress. Anybody interested in the dangers of collectivist thinking should put down Ayn Rand and pick up this account.

Tristan Garcia, Hate: A Romance

French fiction often incorporates politics without seeming didactic, unlike similar attempts by American authors, which maybe says something about the cultural benefits of not consigning politics to the sidelines, or maybe just highlights American tendencies towards didacticism. A philosophical novel of AIDS in Paris, the 1990s, shifting sands on the intellectual beach, and good plain love and hate.

Randall Jarrell, Pictures From An Institution

Sole novel from a poet whose own work often seemed uneasy with the modern world – but less a novel than a brilliant, sustained parade of epigrams. A thinly disguised Sarah Lawrence becomes “Benton College,” and a cast of campus characters jockey and hustle for position in prose that will have even seasoned readers reaching for the dictionary. Higher education has rarely been savaged so knowingly.

David Lipsky, Although Of Course You End Up Becoming Yourself; A Road Trip With David Foster Wallace

One interpretation – decade-old conversations literally transcribed and rushed to publication in the aftermath of tragic suicide. Another, more generous, interpretation – rare fly-on-wall opportunity to sit in with a young author circa 1996 as he muses on matters ranging from Pauline Kael and Heidegger to his own discomfiting brush with fame. Always the smartest guy in the room, Wallace – and often the kindest, too.

David Foster Wallace, The Pale King

Unfinished when Wallace ended his life, the 500+ pages of this novel about IRS agents assume an eerie completion, due to fragmented characters seen through the unforgiving lens of itemized deductions. But in essence this novel is emotional and political – emotional in the way dead-end lives are painted with sympathy, political in that Wallace suggests those able to withstand boredom will help carry us to our doom.