We know what a Financialist sounds like, and we probably need to pay more attention during upcoming Nevada elections to how Financialists campaign. The Financialist Agenda* is relatively simple, but requires a complex set of messages to be successful. Several of those messages are already in the public domain of political discourse.
Agenda Item One: The relaxation of regulation and oversight of financial markets.
Two messages are crucial for the success of this item. First, the American public must be convinced that the machinations of Wall Street bankers had little, if anything, to do with the financial crisis of 2008. Opponents of financial oversight sought to spread the blame for the financial collapse all over the landscape. Surely, they cried it was (1) “All Fannie and Freddie’s fault.” Not that these two institutions covered themselves in glory, especially when they reduced their underwriting standards and sought to find a niche in the burgeoning securitization sector. However, other than to call for the privatization of the two GSE’s (which were already private) the conservatives offered no suggestions as to how to reform the secondary mortgage market, nor did they set forth specific proposals concerning how to restrain the chaos in underwriting standards that reigned supreme during the Housing Bubble.
The Financialists also tried to blame the victims — (2) Surely, surely “the Housing Bubble was caused by Greedy People who bought houses they could not afford, and then didn’t want to pay for them!” Not. So. Fast. This argument requires that we indulge in massive collective amnesia, forgetting: “…the big subprime issuers (Ameriquest, Countrywide, New Century, IndyMac) were making money hand over fist on their subprime mortgages. Their profits and stock prices soared in the peak years of the housing bubble.” [CEPR] Fannie and Freddie weren’t handing out those no-doc loans, nor were they issuing those infamous adjustable rate mortgages, which got warehoused offshore, repackaged into CDOs, and sold off, bet against, and otherwise manipulated by Wall Street banks. Nothing in the Community Reinvestment Act required Wall Street financialists to perform these modifications on home loans.
The mortgages which eventually caused the Bubble to burst were made primarily to homeowners looking for “exurbian” properties [CEPR], the CRA requires banks to lend in inner city areas from which they take deposits.
“The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations. It was enacted by the Congress in 1977.” [CRA] (emphasis added)
If we missed the “housing boom” in inner city neighborhoods during the period from 2001 to 2008 it’s because it wasn’t there. Thus the provisions of the CRA had little, if indeed anything, to do with the creation of the housing bubble, it just happens to be a convenient whipping boy for right wing fanatics who get their talking points from the American Bankers Association and the Financialists on Wall Street.
Secondly, the Financialists would have us believe that “onerous, burdensome, restrictive….” regulations are intrinsically bad for American capitalism. There’s no small amount of irony in the continual clamor for “transparency and accountability” in government from the Right Wing while they just as enthusiastically beat their drums for less “accountability and transparency” in our financial markets.
For example, the conservatives and their allies in Congress are opposed to the Dodd-Frank Act which requires that major banks prepare a form of Living Will in case they are Too Big But Failing Anyway. Now, why would bankers be taking exception to this prudent form of institutional financial planning?
“Those in the banking industry tend to take any sort of criticism of orderly liquidation authority as something akin to an insult to their mother, while many in the bankruptcy community draw rather unrealistic analogies between manufacturing plants and repos.” [DealBook]
Returning to the central question: Why not be required to have and submit a plan for orderly liquidation? Because then the bank would be required to tally up and report what positions it had in various financial transactions — positions they might not want other parties and counterparties to know. This might be difficult for some banks which have un-priceable assets still stuck in their books or have taken positions against the interests of their own clientele?
The third proposition required in this narrative is a circular bit of illogical theory that because government agencies (FDIC, SEC, and OCC) didn’t stop the bankers from decimating the American economy by more than $10 trillion and the world economy by some $50 trillion when their Boom went Bust in 2008, then no government regulation will be sufficient — and so we shouldn’t have any. This argument, of course, requires that we forget about the “regulator shopping” being done by financial institutions during the Boom, the inadequate resources allocated by the Congress to the regulators during the period, and the revolving door between the regulated and the regulators.
If our memories remain intact, achieving objective number one requires a relentless stream of negativity about “the greedy little apartment dwellers or inner city people (read poor and maybe even African American) who victimized the nice bankers. Ever more “horrific,” those nice regulators who were so cooperative during the Boom, are now tasked with making the financial system more “accountable and transparent.”
Agenda Item Number Two: Conflate economic success with financial success.
Life for the Financialists will be ever so much more convenient and pleasant if we would all agree that everything comes with a price tag. They would be even more comforted if the Manic Mr. Market determined that price.
The Financialists have even provided a presidential candidate for whom financial success “proves” he’s a good businessman. The following analysis from the Wall Street Journal is apparently what constitutes “success” at Bain Capital:
“Amid anecdotal evidence on both sides, the full record has largely escaped a close look, because so many transactions are involved. The Wall Street Journal, aiming for a comprehensive assessment, examined 77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999, to see how they fared during Bain’s involvement and shortly afterward.
“Among the findings: 22% either filed for bankruptcy reorganization or closed their doors by the end of the eighth year after Bain first invested, sometimes with substantial job losses. An additional 8% ran into so much trouble that all of the money Bain invested was lost.
Another finding was that Bain produced stellar returns for its investors—yet the bulk of these came from just a small number of its investments. Ten deals produced more than 70% of the dollar gains.
Some of those companies, too, later ran into trouble. Of the 10 businesses on which Bain investors scored their biggest gains, four later landed in bankruptcy court.”
Yes, Bain was “successful” in that it raked in revenues. However, note that only TEN deals yielded nearly 70% of those revenues. Only 13% of Bain’s Big Deals produced 70% of the “dollar gains.” The definition of “success” also calls for some careful clock-watching. The Wall Street Journal continues:
“The Journal analysis shows that in total, Bain produced about $2.5 billion in gains for its investors in the 77 deals, on about $1.1 billion invested. Overall, Bain recorded roughly 50% to 80% annual gains in this period, which experts said was among the best track records for buyout firms in that era.
Some of the companies that ran into trouble did so after Bain was no longer involved and new owners had taken charge. Bain declined to provide information on when its involvement in its investments ended.” [WSJ]
Yes, one can have a “good track record” especially if one gets to unilaterally determine where the track ends. Mr. Romney was a good Financialist, and Bain was profitable, BUT does this automatically transform him into a good economic policy maker?
The example of Kansas City, Missouri’s Worldwide Grinding System isn’t as comforting. In October 1993 Bain Capital became the majority shareholder.
“Less than a decade later, the mill was padlocked and some 750 people lost their jobs. Workers were denied the severance pay and health insurance they’d been promised, and their pension benefits were cut by as much as $400 a month.
What’s more, a federal government insurance agency had to pony up $44 million to bail out the company’s underfunded pension plan. Nevertheless, Bain profited on the deal, receiving $12 million on its $8 million initial investment and at least $4.5 million in consulting fees.” [Reuters] via [ThinkProgress]
Success for Bain, obviously didn’t mean future success for Worldwide Grinding Systems, nor did it improve the future for DDI Inc., American Pad and Paper, Dade International, and LIVE Entertainment. [Think Progress]
For most people the notion of “being a successful businessman” means a person who founds a company, builds it, and then either sustains it for a lifetime or sells it at a profit. Narrowly viewed, Bain fits this definition, until we note that the function and profitability of Bain Capital didn’t necessarily have much to do with the insuring of the long term viability of the company in question. Bain’s financial function was to acquire companies, make the deal revenue producing, and after an industry average of 5 1/2 years wash its hands of the deals and move on. This isn’t “economic policy,” it’s “financialist policy.”
There is a larger point to be made, beyond that of defining the width and depth of what constitutes business success — at some point we need to have the discussion Prof. Michael Sandel calls for in “What Money Can’t Buy.”
“The problem with being able to buy and sell increasing numbers of things is that we devalue the things we are buying and selling — including our foreheads, our health, our children’s education, Sandel argues. Ultimately this corrodes the ties that bind Americans together.” […]
“The more things money can buy, the more the affluent can buy their way out,” Sandel said. “The affluent lose a stake in the public sphere, and increasingly we lead separate lives.” “That’s not good for democracy, and it’s not a satisfying way to live,” he added. [HuffPo]
Sandel is too polite to say that we are in danger of becoming a nation of cynics who know the price of everything and the value of nothing. Let’s generalize the message to read, “the more things we privatize the more we devalue our communities and our sense of community,” and see where this takes us.
Yes, the ultra-rich may purchase top-of-the-line home security systems, behind electronic gates at the perimeters of their estates, and hire additional private security guards for their properties. The “market” sets a price for private security personnel and equipment. Having bought all these accoutrements of security, what stake does the 1%’er have in the support of developing an efficient and effective local police force?
Yes, the ultra-rich may purchase the best education money can buy for the offspring. It would be very instructive at this point to take a gander at the check list for “visiting a private school.” It also doesn’t take much imagination to guess what the criteria are — smaller class sizes, extracurricular programs, programs to accommodate special needs, “appearance, structure, and composition” of the campus, athletic facilities, science labs, library and media facilities… Precisely what we’d hope to find in public schools. However, having secured these top flight schools by paying the price set by Mr. Market, what stake do the ultra-rich have in securing them for the other 99%?
Yes, the rich would have no difficulty purchasing every book they’d ever want to read. But, what stake would they have in supporting local public libraries? And, yes, the rich can purchase resort accommodations, so why would they feel the need for public parks? If Sandel is correct, then the further the 0.5% move from the public sphere, the greater the incentive to privatize the components of that sphere.
If the market sets a price for home security, for education, even for recreation, then why not allow the privatization of all the components of public life such that the indebtedness of the corporations which run our security firms and prisons, operate our schools, and administer our parks can be securitized, shipped into offshore ‘warehouses,’ sliced, diced, and tranched into securitized debt obligations (CDOs) and sold in private placement markets?
What remains is a world without much of a public sphere, one in which the indebtedness of private sewer and water systems, private security firms, and private transportation systems can be monetized, securitized, and when the investors become dis-enamored of the deals in the average 5 1/2 year span the “government” can bail out the enterprise? What if 22% of our water companies went bankrupt? Our private police forces? Our public libraries, our schools, or our fire departments? Do we shrug and say — Gee, that’s just the market?
Unfortunately, the popular image of former Governor Romney as “out of touch,” gives us a superficial impression of a man who has difficulty relating to the issues facing 99% of Americans. A more complete picture might include an image of a man who has invested heavily in the financial sphere while opting out and dis-investing in the public sphere he seeks to administer.
*A financialist believes that finance is the core of capital markets, this doesn’t necessarily mean the core banking operations (the transfer of wealth from areas of surplus to areas of shortage) is the self-same core of operations. In a financialist system the manipulation of financial instruments of varying levels of complexity becomes more important (as a source of revenue) than the efficient delivery and allocation of capital.