Say What?

We were pulled up short when a financial expert on a national radio show put forth the most nonsensical causal scenario for the 2008 economic collapse imaginable. It began with, “As we know, the cause of the collapse” –as if to imply that what followed was verifiable fact, set in stone. Actually what followed was nonsense. It was an effort by the reckless too-big-to-fail banks to shift the blame for their disaster to, well, anyone but them. It was even less plausible than the ongoing effort to pin the economic train wreck on some imaginary Clinton era mandate forcing banks to knowingly lend to people who they knew would never be able to repay the loans. Right; and even if this pipe dream were true, would it have taken eight plus years for those mortgages to sour?

While Bill Clinton had a role in running our economy off the cliff, it had nothing to do with any mortgage mandate. In 1999 Clinton signed into law a bill repealing the Glass-Steagall Act that had protected us from this kind of nonsense for sixty plus years. So Clinton played a minor part in passing a bill nicknamed the “Citigroup Relief Act.” At the time, Congressman John Dingell argued on the House floor that this bill would result in creating “too-big-to-fail banks and that should they get into trouble taxpayers would have to bail them out.” With help from another ill advised law, the 2000 “Commodity Futures Modernization Act” exempting the banks and others from State gambling laws it took less than a decade for Dingell’s prophecy to play out.

First let’s get things straight. While there are minor players in the 2008 tragedy, the too-big-to-fail banks bear 99.99% of the blame. Had they not been on the brink of failure, in need of a taxpayer bailout, there would be no recession. They put themselves in this position by bundling mortgages that they referred to as “Crap,” strong-arming the rating services into stamping them AAA, and selling them to anyone dumb enough to buy them. These banks pushed the little folk in the mortgage pipeline for more and more sub-prime mortgages until the whole house of cards collapsed. Everyone got hit, including some of the too-big-to-fail banks, and just as John Dingell predicted we had to bail them out. That left the big banks in good shape and the rest of us literally holding the bag; an empty bag.

So what are the Wall Street bankers up to? Why this propaganda campaign to shift the blame for the horrific recession we are still struggling to overcome? That is pretty clear. They are engaged in the same risky stuff that got us into this mess in 2008 and they want to keep right on doing it. Ethics be damned, they think that pouring millions into the pockets of the Washington crowd will stave off sensible regulation like the Volcker rule. They may be right; an outrageous lie combined with the big bucks may do it in an election year.

Let’s hope they’re wrong.

The Clock is Ticking

If ever there was a moment illustrative of the need to restore Glass-Steagall, enforce the Volcker Rule, and repeal the foolish gambling exemption Congress gave Wall Street, it is now. JPM Chase CEO Jamie Dimon’s culture of Wild West saloon gambling was outed when the loss side of the bank’s bets was exposed by a huge bet gone bad in their London trading office (AKA gambling hall). The $2 billion loss is quickly ramping up and will likely be double that or more.

Fast forward to the JPM Chase annual meeting last week (05.15.12) where we find a visibly irritated and agitated Dimon facing questions on the multi-billion dollar losses and a shareholders’ challenge to his dual role as both Board Chair and CEO. He managed to hold on to his grip at the top with 60% of the shares voting to defeat the move to unseat and replace him as Chairman. While that sounds good, you must keep in mind that prior to corporate meetings companies routinely include as part of the meeting notice a request to hand over the voting rights to the management if you do not plan to attend and vote in person. Most shareholders comply and so you can figure that Dimon walked into the meeting with the votes in his pocket. You can bet he was shaken by the margin; to have 40% opposed is too close for comfort in that game.

Turning to the “snake eyes” that is piling up billions in losses, Dimon, according to the New York Times, came up with this gem: “We are going to manage it to maximize economic value for shareholders.” That has to be one of the wildest -let’s flip the conversation to my favorite subject- “Shareholder Value” moves in history. We’d guess that Dimon’s point is that shareholders benefit from the JP Morgan Chase gambling hall because they win more often than lose, and besides in the unlikely event that we drive off the cliff we are “too big to fail” and so the suckers (that’s us, taxpayers) will bail us out again. There’s no way we can lose.

Shareholder Value -as former GE CEO Jack Welch pointed out- is an outcome; as a strategy Welch famously dubbed it, ”the dumbest idea in the world." Dimon and his ilk love it as a strategy; it enables them to parlay their gambling culture into monster bonuses, with the ultimate backup, taxpayer bucks. Shareholder Value is a meaningless term the way Jamie Dimon and others use it these days. And it will come around to bite the taxpayers unless we force the too-big-to-fail banks back into their corners. We need to get them out of high stakes gambling. We need to make them choose: either create capital as an investment bank, or take deposits and make loans as a commercial bank. Anything less leaves all of us outside the game at their mercy. It’s time for Congress to act, restore Glass-Steagall, enforce the Volcker Rule and repeal the foolish gambling exemption Congress gave them. 

Collapse of an Empire

The ethical cesspool at the center of the media colossus Rupert Murdoch created over the years since he arrived on London’s Fleet Street, is beginning to suck him into its vortex. Last week (05.01.12) a Parliamentary Committee released a 121 page report detailing some of the smarmy activities and behaviors the Murdoch culture has spawned. As widely trumpeted in the media, it branded Murdoch “not a fit person” to run an enterprise like his.

Apologists for the Murdoch clan are quick to point out that the “not-a-fit-person” phrase was opposed by four of the nine members of the Committee, all members of Prime Minister David Cameron’s Conservative Party. While the Conservative members of the Committee dissented on the fit-person wordage, they agreed with most of the report. Cameron is connected to Murdoch’s organization in a number of aspects. Foremost is his former Communications Director, Andy Coulson, who moved directly to 21 Downing Street from one of Murdoch’s London newspapers. Coulson has been arrested but not charged. Prime Minister Cameron described his own ties to the Murdoch organization as “too cozy.”

Phone hacking, police bribery, and who knows what else were unearthed by the inquiry. “Who knows,” because many areas in the report are left untouched. The Committee did not venture into the domain of Scotland Yard and the prosecutors who are still building the criminal cases. As a result they did not explore the role of more than forty Murdoch editors, private investigators, and reporters, along with police officers who have been arrested so far. That group includes Murdoch darling Rebecca Brooks and ten others whose connections to the hacking scandal were reportedly referred to prosecutors last month by Scotland Yard.

All of this and the disclosures unfolding before a separate British judicial inquiry, raises the question, why are there no similar queries into the Murdoch Oligarchy in the United States? Rupert Murdoch and his clan are all US citizens; News Corp is a US corporation. While his trashy newspapers in the UK are often seen as the face of his holdings, they’re but a tiny segment. In America he has a couple dozen television licenses, so where is the FCC? Combined, these stations, Fox News, The New York Post, The Wall Street Journal and his entertainment entities dwarf any similar organization.

Where are the Congressional investigations? Given the detailed bribery charges in the UK, where are the FCPA (Foreign Corrupt Practices Act) concerns? If the SEC is hot on Walmart’s tail (properly) for spreading the wealth among Mexican officials, how about Murdoch’s minions greatly enriching Scotland Yard types? If a parliamentary investigation in the UK finds Murdoch “not a fit person” to run a handful of newspapers, what does that say about the television properties our FCC has awarded him? Are the bureaucrats and the political types in Washington afraid of his attack dogs at The New York Post and Fox News?

They’re Back – 
Run For Your Lives!

What do you think our leaders would do when confronted by the imminent collapse of a sector of our economy whose assets are equal to 56% of our GDP? Given what they did in 2008 –properly we think– we can safely assume they would prop up the institutions at risk. Are you surprised that five of the banks we rescued in 2008 now have assets equal to 56% of our GDP*? In 2006 -before the collapse- these same five banks’ combined assets equaled 47% of our GDP*.

Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, and Wells Fargo, five of the players whose reckless actions drove the world economy off the cliff, are lined up to do it again. Their assets grew more than 40% from 2006 through 2011*. Why? That’s no mystery, the banks know and investors know that if there’s another collapse we will bail the Zombies out again. With the taxpayers on the hook, big banks are gambling with the same risky stuff that led to the 2008 collapse –derivatives, swaps etc., the stuff the bankers refer to as “crap.”

If it goes all wrong, the bankers and their investors have the taxpayers ready to bail them out again. Where else would investors put their bucks, high returns no risk? Published reports say all three rating services along with a covey of regional Federal Reserve presidents, see a bailout for the Zombie Banks down the road. Meanwhile, your neighborhood community bank –the bank down the street on the corner– doesn’t have an investment (AKA gambling hall) division; putting them at a distinct disadvantage in finding investors and customers.

We know how to solve this problem, been there, done that. Eighty years ago when the wheels fell off our economy our nation faced the same dilemma. They busted up the big banks and made them choose the sector of the banking world in which they wanted to operate. The Glass-Steagall Act separated investment banks from the regular commercial banks that we ordinary folk deal with.

During the 1990s’ deregulation frenzy the investment banks –Goldman Sachs in particular– pressed hard to break down this wall. In 1999 they succeeded Glass-Steagall was repealed. Then they convinced the Congress to exempt them from the gambling laws and they were off to the races. Take any risk, bet on any crazy thing, as long as you could call it an investment – it is legal. Within a few years they distorted the derivative and commodity markets turning them into Zombie bank gambling halls. Here’s the catch. They know they can’t lose. They know the suckers (AKA customers) take the losses. Worse comes to worse the taxpayers will be stuck with the mess. The bankers and investors will be just fine.

We all know what happened in the decade following the repeal of Glass-Steagall. We had to bail the banks out and now they are fine; back doing the exact same things that drove us off the cliff. Meanwhile the rest of America –and the world– is working its way out the hole they left us in. They are not doing anything illegal; however, ethically it stinks. It’s time to break up the Zombie banks and put them back in their cages, investment banks on one side of the business and commercial banks on the other. If not, we’ll be bailing them out again. They are counting on it

 *Bloomberg 04.19.12