That Greasy Sleazy Feeling

 

As we pull out of the gas station these days, in addition to the empty spot in our wallets there’s a scent of sleaze in the air. It’s not our friendly gas station dude, he’s just trying to get by like a lot of us; it’s more complicated than that. The more we drill down, we discover that it has little to do with the price of oil. But isn’t oil scarce, aren’t we importing more than ever before? No, actually we are producing about 80% of our needs. All that new drilling that fired up over the last few years combined with reductions in usage, has narrowed that gap. Don’t say anything out loud, but America is even exporting oil. What’s the problem then?

There are many factors from the seasonal bump we see this time every year, to the capacity of our refineries, to unrest in the Middle East. While the latter does not seem to be a real factor given how little we need from those folks, there is no doubt that it is a factor. Not in the way you might think, however. No less an authority than Goldman Sachs has found a culprit that adds at least $.56 to the price of every gallon of gasoline. It’s the casino called Wall Street.

The commodities market was designed to stabilize the price of grain, cattle, pork and other things including oil. The idea is to assure the producer’s pricing when the fruits of their labor hits the market. But of course it turns out that you don’t have to be a buyer or seller of these commodities to get into the game. You just have to have the bucks and the free pass that the Congress gave Wall Street, immunity from gambling laws. Add something like instability in the Middle East and give their roulette wheel a spin; we always lose.

Now the commodities market is flooded with all kinds of financial instruments, things like “swaps,” the fun stuff that helped toss the world economy into the dumpster. Speculating on commodities has always been around but until recently the end users and producers controlled over two-thirds of the contracts. Today that number has flipped and two-thirds are in the hands of speculators. Not the players in the oil market that have traditionally dominated this game. Today a frighteningly small number of Wall Street types hold the price of oil in their hands; playing with what we pay at the pump.

You can figure that seven to eight bucks is pocketed by the Wall Street types every time you fill up, ten bucks or more if you drive a bigger vehicle. The average price for a gallon would be a little over three bucks without Wall Street’s “take.” Given the rare peek we got into the wonderful world of Wall Street when one of its own, Greg Smith, laid out his reasons for leaving Goldman Sachs in an OP-ED, you can imagine the nicknames the Wall Street types pin on us. While most businesses, in fact most folks are trying to do the right thing, pond scum like Goldman and their ilk have no concept of the ethical life.

“Good News, Bad News”

First, the good news. A study* by a group of academics from UC Berkeley and the University of Toronto supp0rts our long-held belief that most folks are by nature ethically inclined. They carried out a series of seven naturalistic and experimental studies. The first two –using the naturalistic method– in our opinion put their unwitting participants in the easiest atmosphere to ignore their ethical standards – they were encased in a large steel machine, driving their cars.

The academics had students work in teams during light traffic periods. In one test they had a student walk up to a crosswalk as a car approached and make eye contact with the driver. Sixty-five percent of the drivers stopped and allowed the student to cross. The other study had to do with stop sign courtesy. At a four-way intersection, observers watching from a distance noted when drivers cut in front of another car that had the right of way. About thirteen percent hit the gas pedal, but a wide majority, eighty-seven percent of those in this study waited their turn.

The other five experimental studies tested voluntary participants in a controlled laboratory environment. They went through a series of tests that showed-up those who cheat, lie, and seem to feel that they are entitled to more than their share. In these studies –just like the first two– a majority of the participants chose an ethical path.

Now the bad news. The academics were checking the relative ethical behavior of the rich vis-à-vis those further down the food chain. They found that some of the well-dressed luxury car drivers were more likely to blow through a pedestrian crossing or to cut in front of a car with the right of way at an intersection. In the other experiments more of the well-off took extra candy from a jar leaving less for the children, and they endorsed the over-worked Gordon Gekko line from the movie Wall Street, “Greed is Good, etc., etc., etc.

Keep in mind that disappointed as we might be that those blessed with wealth and its accoutrements do not deal with their fellows as ethically as those less endowed, the majority of the well-off “did” follow an ethical path. Even Gekko has changed his view and can now be seen in FBI sponsored television appeals to guard against insider trading.

Greed is not good. It’s a lousy way to live, even for those who succeed following this path. Those who choose an ethical business model, those who care for their customers, their employees, their suppliers, their community, the environment, those who put their fellows first, find that their bottom line takes care of itself. Studies show this path to be many times more profitable than that taken by the what-ever-it-takes, profit-comes-first believers. It’s all good news! 

*Citation: Proceedings of the National Academy of Sciences (PNAS), Vol. 109 No. 9, Feb. 28, 2012.  “Higher social class predicts increased unethical behavior.” By Paul K. Piff, Daniel M. Stancato, Stéphane Côté, Rodolfo Mendoza-Denton, and Dacher Keltner.

Banking 101

The “K” Street Banker Boys are pouring millions into the political arena in a desperate effort to hold on to the massive Las Vegas style gambling enterprise that characterizes too much of our banking sector today. Banking differs from Vegas in two important ways, however.

1)  When the bets the Wall Street Bankers place against the suckers (AKA “us”)  go against them, they just run to the taxpayers (us) who cover their losses. So they can’t lose. That’s too-big-to-fail banking.

2) The banks managed to get themselves immunized from the state lottery laws, so they can bet on anything. For instance, they could legally bet whether you will make your mortgage payment on time when they have no connection to you or your mortgage.

This set some of our biggest financial institutions onto a path focused on profit and the outrageous bonus structure that this gambling hall culture has spawned. A culture defended haughtily by JPMorgan Chase “Whiner-in-Chief” Jamie Dimon, who chose newspapers to justify the banker’s insane paychecks.

Duded out in his trademark 1950’s “Ducktail” do, Jamie is quoted, “Obviously our businesses have high capital and high human capital,” implying that nobody in newsprint land could compare. What nonsense. And, their capital –cash, that is– is not theirs, it’s ours, the billions we gave the banks to stabilize our economy. So what are they doing with our money? They are rolling the dice again, confident that we will bail them out again, when the dice come up snake-eyes again.

 “Proprietary Trading,” as the bankers like to call it, was a principle cause of the recession. This practice is a recipe for disaster. Here and there the milk-toast mild Dodd Frank Act does have a tooth left. The one dealing with proprietary trading, called the Volcker Rule, is facing a firestorm from the banking lobby. It would pretty much take gambling out of the banking business, push the bankers back into the real world where they can fail, and when they do, fail without taking the country down with them.

When Bill Clinton signed “The Commodity Futures Modernization Act” opening up Wall Street to gambling, Washington unleashed a chain of events that resulted in the collapse of the world economy eight years later. Wall Street began leaping one ethical barrier after another and today everyone but the bankers is suffering.

The folks who actually toil day in and day out for a living, like those struggling to find a workable journalism model, shouldn’t have to put up with sneers from a second-rate punk like Jamie Dimon. Banking at every level has but one reason to exist, to provide the capital that sustains our economic life. Dimon and his lot are clueless when it comes to that kind of banking.

Our Banking Problem

Last week (02.23.12) Bank of America kissed off Fannie Mae saying it would no longer sell mortgages to the (closet taxpayer backed) mortgage buyer. Published reports say the break is over some of the crappy mortgages BofA sold Fannie in the past. Mortgages, Fannie thinks BofA knew –or should have known – were crap. Fannie apparently wants their money back. BofA says the mortgages went south because of the recession, so Fannie (we the taxpayers) should eat them.

Like a lot of bad things this looks back to 2008. BofA bought subprime mortgage lender Countrywide Financial as it was about to go belly up. BofA says the Feds “made us” buy it; some think BofA thought it was getting a real steal. In any case, BofA is down +/- $30 billion on the deal so far. The once biggest dude in the world of banking has been on a diet slimming down, dumping anything it can and backing away from the mortgage business, whilst dodging its responsibilities and sticking the taxpayers with its problems at every opportunity. Case in point: last August, when BofA ran their manure spreader through Fannie they picked up a half billion dollars of our money.

It’s sickening when you consider how much (+/- $45 billion in TARP) we gave BofA to forestall their potential collapse. Not to mention BofA’s use of the Federal Reserve “Discount Window” where the Fed passes under-the-radar loans to the banks. Late in 2008 as BofA was attempting to take over Merrill Lynch, between them the two entities were living on about $80 billion in the Fed’s stealth loans.

All the while, regular folks, many of whom had been -through their naivety- lured into home loans they could not possibly hope to pay, were getting no help from the banks. Instead of using TARP and the other taxpayer bucks to help little folks they had set up to fail, the banks went back to gambling with more of the shaky financial products like derivatives that got us into this mess.

How big a deal is BofA’s decision to stop selling loans to Fannie Mae? It’s pretty big if you think it’s the people’s job to make sure that these too-big-to-fail banks don’t fail. BofA says it’s no big deal, they can sell off their mortgages to Freddie Mac and Ginnie Mae. These two agencies complete the triumvirate of federal agencies created to help make the American Dream –home ownership- come to be. Like Fannie Mae, Freddie Mac is a publically owned company and is “wink, wink” not backed by the taxpayers. Ginnie Mae was spun off from Fannie and is the only openly taxpayer backed entity of the three.

It’s past time to stop the reckless gambling, to break up these ethically challenged too-big-to-fail behemoths, and get the resultant smaller banks refocused on the reason for their existence, to provide the funds to keep our economy moving. If we could get the banking sector resized and refocused, the two Maes and a Mac might be good for us; right now they are just good for the banks.

What BP Was Hiding

Two years ago come April reckless shortcutting by BP and its partners in the Gulf of Mexico triggered a blowout of one of its deepwater wells killing eleven of those working on the platform and injuring 17 others. For roughly three months the well spewed crude oil into the Gulf. It was five months before it was capped once and for all.

Monday (02.27.12) the people of the United States will finally begin to get their day in court. The U.S. District Court in New Orleans begins what will be years of responsibility dodging and finger pointing by BP, Halliburton, Transocean, and some of the other players in this tragedy. Among the +/- 600 claimants there will be one more class of the ethically challenged, those who make false claims in an attempt to cash in on this awful event.

An event that we do not as yet know its full impact. Some environmental damage could play out for years. Some facts up to now hidden will come out in court. One shocker was disclosed as a part of the run-up to the trial. In the early hours of the first day BP managers estimated that the spill could dump 3.4 million gallons of crude oil into the Gulf every day. A number higher than the final US estimate by about a million gallons a day.

But instead of following the tried and true “Prepare for the worst and hope for the best” path, BP instead buried this estimate. Internal memos and emails released last week show that BP engaged in a frantic effort to keep secret their estimates of the potential damage of the spill and to browbeat the US Coast Guard into down playing it as well; despicable.

It will be years, two or three at least, perhaps another twenty before the claims are all settled. BP is trying to settle as many as possible before they get into court. They are looking to settle much as $20 billion in federal fines before the trial gets underway. There’s the much of the touted $20 billion that BP set aside early on to pay those (especially the little folks) who suffered financially from the spill and they could face more. All of these big numbers need to be viewed in light of the windfall BP and others enjoyed when the blowout triggered a spike in oil prices.

Keep in mind that this court date is just to determine financial responsibility. Yet to come –we can only hope– are the criminal charges that may be leveled at some of the entities and individuals involved. It is important to remember the horrific deaths and injuries sustained in the explosion, the fireball, and the crash into the Gulf that day in April are of much greater significance than any other part of this tragedy. The environment will heal. Financial loss will be recovered - or not. But those left in physical and mental pain, along with the families left without their sons and brothers, and fathers, and husbands, they will live with their loss for the remainder of their lives.

A Glimmer Of Justice

Last week (2.9), we finally got a deal for a few big banks to make a $25 billion down payment on what they owe America. You’ll recall that less than a decade after they conned Congress into dumping the Glass-Steagall Act passed in 1932 to protect Americans from reckless bankers, reckless bankers drove most of the world off a cliff. A cliff created through their relentless efforts to profit from packages of securitized mortgages. They lured naïve folks into mortgages the bankers and their cronies knew they couldn’t afford. When the bottom fell out did the bankers use the money we gave them 2008 to help those they had enticed?

Nope, but the alarm bells were set off by Hank Paulsen, plucked by George Bush from his post as CEO of Goldman Sachs –perhaps the most reckless and devious nest of bankers on the planet– to become Secretary of the Treasury. The Congress passed the $700 Billion TARP Act (largely crafted by Paulson) to save the banks. At the same time – unbeknownst to most of us until earlier this year– the Federal Reserve poured about ten times that much into the banks, interest free. The $25 billion –chump change for these banks– will help a few of the millions who owe more on their mortgages than their homes are worth. Others, pushed out of their homes erroneously may get a few bucks.

The deal, in the works forever, was held up by two State Attorneys General who refused to sign because the banks got protection against future prosecution. California AG Kamala Harris and New York’s Eric Schneiderman booted the get-out-of-jail-free-cards. Housing Secretary Shaun Donovan brokered the deal over Super Bowl week and last Friday (2.10) announced that 49 states, the Justice Department, and other Federal entities had signed onto the deal. Ally Financial (formerly GMAC), Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo, the biggest mortgage servicers, are coming up with the$25 billion.

It better be a down payment; the bankers received hundreds of billions from the American taxpayers. Up to now they have used our money mostly to return to the reckless risks that got us into this mess in the first place. An outcome Mr. Paulson could have forestalled, had there been any real conditions attached to the bailout bucks. But why would he? Could it be because Paulson had his hand on the tiller at Goldman while they were raking in billions selling crap (their term), all-the-while betting against their customers with the idiots at AIG? The same AIG we bailed out only to have Goldman suck up a ton of that bailout, collecting on the sure losers they hung on AIG.

Before sundown the day the $25 billion deal went public Schneiderman sued three big banks: Bank of America, JP Morgan Chase, and Wells Fargo, along with the MERS system. The banks set up and control MERS cloaking the foreclosure world. The banking entities and some of the individuals involved left the ethical line far behind in this display of unbridled greed.

A Return To Stability

Close to 3000 movers and shakers took to the world stage in Switzerland last week (01.25-29) for the annual World Economic Forum, commonly referred to as Davos. This year’s theme was The Great Transformation, Shaping New Models. And while there was much discussion on new models, most looked a lot like the model that emerged from the Great Depression and served America well for two generations. That would be the model we dismantled in the 1980s and 1990s.

As the doings began at Davos, Bloomberg released their Global Poll of more than 1.200 investors, analysts and traders who shared their thinking on the state of the economy. Surprising numbers; more than half agree with the Occupy Wall Street movement that income inequality harms the economy, harms growth. Seven in ten believe the banks have too much control over government. Two-thirds of the respondents think governments should pursue policies to tackle that issue.

A participant on the opening panel at Davos, Sharan Burrow, general secretary of the International Trade Union Confederation said, “If you’ve got a group that is too big to fail, what it means is that you are the biggest bullies on the planet. The financial sector has lost its moral compass.” More than 80% of the respondents to the Bloomberg study think banks need to be regulated so they’re not too big to fail.

 

About two-thirds see at least some truth in the argument that bankers’ actions are driven by greed and harm the economy. This is in line with studies showing that when executive pay scales escalate too far above the average employee in their company, it takes focus off what’s best for the company and moves it to what’s best for those at the top. When bankers start focusing on their pay, they forget their role in the community. They forget they are there to protect the funds the members of the community entrust to them. They forget that they are there to find local businesses that need loans to grow. They forget that they are there to help people in their community finance their homes. 

When it comes to the investment bankers on Wall Street, they get so focused on their paychecks that they forget they are there to help create capital. Instead they are busy devising ways to play high-stakes gambling games, all the while setting up their customers to take the fall if the bank’s bet goes south. Moral compass? There’s none to be found. While most business people and small businesses are striving to do the right thing every day, the Wall Street types have the morals of an alley cat.