Tag Archives: financialists

Shady Lender Protection Act heard in Nevada Legislature Committee

AB 282

Perhaps this was a good week to revisit “Margin Call?”  Why? Because Fiore and Friends are promoting AB 282 in the Nevada state Legislature.

“AB 282: AN ACT relating to real property; revising provisions governing mediation of a judicial foreclosure action; revising provisions requiring certain actions related to the foreclosure of owner-occupied property securing a residential mortgage loan to be rescinded after a certain period; revising provisions governing civil actions brought by a borrower for certain violations of law governing the foreclosure of owner-occupied property securing a residential mortgage loan…”

This bill is on today’s agenda in the Assembly Judiciary Committee.  Might it be suggested that the informal title of the bill be “The Shady Lender Protection Act of 2015?”  Here’s why:

“Existing law provides that in a judicial foreclosure action concerning owner- occupied property, the mortgagor may elect to participate in the program of foreclosure mediation. (NRS 40.437) Section 1 of this bill removes provisions governing the process of such mediation and the documents required to be brought to the mediation. Section 1 instead requires the Nevada Supreme Court to adopt rules governing the mediation.” (emphasis added)

Let’s start with the part wherein the Nevada foreclosure mediation process has been successful.  It’s been especially beneficial for borrowers in owner occupied homes who want to avoid foreclosure. [nolo] Perhaps this is why Fiore and Friends and so dead set against it?  So, what are those documents required in the process?

“Nevada’s mediation program requires that borrowers and the lender provide the mediator and each other with certain documents prior to the mediation. The borrower must provide appropriate documentation, such as financial information, so that the lender can make a determination about whether the borrower is eligible for a loan workout. The lender must provide documents such as the original note, deed of trust, and assignments (or certified copies).” [nolo]

Remember those bad old days, the ones in the wake of the housing bubble debacle?  Those were the days during which lenders were seeking to foreclose properties on which they didn’t have the paperwork necessary to prove who held the mortgage.  And at this point we return to the messy problem of MERS.

MERS was an ‘electronic’ recording of mortgages which was supposed to facilitate the assignment of mortgages etc. at high speed – speed high enough to sate the demand from Wall Street for more and more and more mortgages to slice, dice, tranche, and otherwise divide into financial products for marketing.  The idea was that county recorders weren’t fast enough to keep pace with the Wall Street demand for mortgages in the secondary market.  The fall out from the MERS mess is still being felt in parts of the country. [Harpers]

Thus, what AB 282 does is to (1) eliminate a mediation process which has been successful in Nevada, and (2) eliminates the documentation requirements now on the books according to which the borrowers must provide their financial information and the lenders must prove they own the paperwork on the property.  We can guess who’s having problems with the paperwork, but an article in the Reno Gazette Journal in 2012 provides some interesting details:

“Data from the same report (on program effectiveness) , however, have some questioning what the program’s definition of good faith is. Out of the 3,183 total cases from the same time period, banks did not bring all the required documents in 1,149 cases — a rate of 36 percent.

JPMorgan Chase topped the list, failing to bring all necessary documents in 52 percent of its cases. Ally/GMAC was second at 50 percent, followed by Bank of America at 41 percent, US Bank at 32 percent and Wells Fargo at 31 percent. Citigroup posted the lowest rate of the six banks mentioned at 12 percent.”

And, why did the banks have problems with the paperwork?  They didn’t have it. The Great Wall Street Mortgage Mill had shredded the mortgages into sliced and diced financial products in which nobody knew who really owned what – much less what the paper was really worth.

“They want the original paperwork and not a certified copy, which becomes an issue for mortgages that have been securitized (into investments),” Uffelman said. “Once a mortgage gets securitized, the paperwork ends up in a different place and can be tough for a servicer to track down and pull back together. The more you securitize stuff, the easier it is to screw things up.” [RGJ 2012]

And screw things up they did. Since Wall Street was in such a glorious rush to manufacture asset based securities on offer in the Casino, the recording and other record keeping practices were lost in the great paper shuffle.  Only in the imagination of Wall Street sycophants does this create a problem to be borne solely by the homeowner.

If we look at the latest report (pdf) from the program we see the nature of the continuing documentation problem:

“Of the 1,894 mediations held during FY 2014, 73 percent resulted in the homeowner and the lender not coming to an agreement to retain or relinquish the property. In 28 percent of these cases, no resolution was reached because the lender failed to prove it had the authority to foreclose, or the lender failed to prove ownership of the deed of trust or the mortgage note.”  

“For example, in 319 cases, the beneficiary failed to bring the required certifications for each endorsement of the mortgage note. By statute, the lender must provide a certified deed of trust, a certification of each assignment of the deed of trust, a certified mortgage note, and a certification of each endorsement and/or assignment of the mortgage note.”

And just so borrowers aren’t inclined to take on the banks in a questionable foreclosure, AB 282 limits the time line for the mediation process, drops awards from $50,000 to $5,000, and eliminates the recovery of attorney fees by a prevailing borrower.

The Legislature already has AB 360 The Annuities Saleman’s Friend Bill in the hopper, and now the financialists must be rubbing their palms at the prospect of the Ultra-Big-Bank-Friendly AB 282!

AB 282 is a bill for the Banks, for the Wall Street Casino Players, for the Speculators, for the Financialists – and it is NOT a bill which does anything for average Nevada families.   As the session progresses it’s becoming ever more clear who the Nevada Republicans are supporting – and it’s definitely not Nevada homeowners.

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Filed under Economy, financial regulation, Foreclosures, Nevada economy, Nevada legislature, Nevada politics

From CDO’s to BTO’s: Wall St. tees up the next financial disaster

Wall Street Greed CDO

Think Progress picked up on a piece from Bloomberg News which ought to be raising eyebrows on Main Street.  The banksters are at it again, only this time those pesky Credit Default Obligations which brought down our financial system in 2007-2008 have been repackaged and served up under a new label: Bespoke Tranche Opportunities.

As the Think Progress analysis reports, these derivatives were an extremely important part of the last mess:

“The Financial Crisis Inquiry Commission concluded that derivatives “were at the center of the storm” and “amplified the losses from the collapse of the housing bubble by allowing multiple bets on the same securities.” In 2010, the total on-paper value of every derivative contract worldwide was $1.4 quadrillion, or 23 times the total economic output of the entire planet.”  [TP]

Let’s be careful here, not all of that $1.4 quadrillion is in BTO’s, but the newly labeled derivative has that same capacity to “amplify the losses” when the underlying value of the securities becomes volatile.  For those who would like this explained in really clear diagrams, click over to the Wall Street Law Blog and follow along with the  White Board Wine Glasses Explanation – one of the best I’ve discovered to date.

Now, we can move on to what makes these BTO’s a problem, beginning with their creation:

“The new “bespoke” version of the idea flips that (CDO) business dynamic around. An investor tells a bank what specific mixture of derivatives bets it wants to make, and the bank builds a customized product with just one tranche that meets the investor’s needs. Like a bespoke suit, the products are tailored to fit precisely, and only one copy is ever produced.” [TP]

Now, why would anyone want to buy one of these products, much less order a special one?  In the Bad Old Days  fund managers could choose to purchase some tranched up CDO, those blew up, so why go out and order one tailored to their specifications?  Let’s return to the Bloomberg article:

“Goldman Sachs Group Inc. is joining other banks in peddling something they’re referring to as a “bespoke tranche opportunity.” That’s essentially a CDO backed by single-name credit-default swaps, customized based on investors’ wishes. The pools of derivatives are cut into varying slices of risk that are sold to investors such as hedge funds.

The derivatives are similar to a product that became popular during the last credit boom and exacerbated losses when markets seized up. Demand for this sort of exotica is returning now and there’s no real surprise why. Everyone is searching for yield after more than six years of near-zero interest rates from the Federal Reserve, not to mention stimulus efforts by central banks in Japan and Europe.”  (emphasis added)

Translation: Because interest rates have been kept low by central banks hoping to keep struggling economies moving ahead, banks haven’t been able to make what they deem to be enough profit off corporate and Treasury bonds, and therefore have started playing in the “financial product” game again (not that they ever really stopped for long) and have started making ‘bets’ (derivatives) in the Wall Street Casino – with ‘products’ (BTO’s) which aren’t subject to the reforms put in place by the Dodd Frank Act.

So, what’s the problem? A hedge fund manager wants to buy a structured financial product from a bank which has a higher yield than what he can get by investing in corporate bonds or Treasuries… what could go wrong?  Let us count the ways.

#1.  These securities aren’t tied to the performance of the real economy as corporate bonds would be.  In the jargon du jour, the BTO portfolio is a table of reference securities.  Here come the Quants again, there are formulas for determining the ‘value’ of these securities which may or may not be valid, and they certainly weren’t during the Housing Bubble.

#2. The yields are related to the the ratings.  Here we go yet again. One of the major ratings services, Standard & Poor, is ever so sorry (to the tune of a $1.5 billion settlement with the Justice Department) they helped create the Derivatives Debacle of ‘07-‘08, but that hasn’t stopped them from continuing to get involved in evaluating derivatives. [See the FIGSCO mess]

#3. The BTO encourages the same Wall Street Casino behavior we saw in the last Housing Bubble/Derivatives Debacle.  It’s explained this way:

“The trouble with this game is that the value of most structured finance products is opaque and subject to sharp and violent change under conditions of financial stress. So when they are “funded” in carry-trade manner via repo or other prime broker hypothecation arrangements, the hedge-fund gamblers who have loaded up on these newly minted structures are subject to margin calls which can spiral rapidly in a financial crisis. And that, in turn, begets position liquidation, plummeting prices for the “asset” in question, and even more liquidation in a downward spiral.” [WolfStreet]

Sound familiar? Sound a bit like Lehman Brothers?  Remove the jargon and the message is all too familiar – no one really knows the value of the structured product, and if the product is purchased with borrowed funds it’s subject to margin calls (people wanting their money back) which in turn leads to sell offs and the price for the “thing” drops off the financial cliff, and…. down we go. Again.  We’ve seen this movie before, and the ending wasn’t pleasant.

#4. The BTO is a way around financial reform regulations. The offerings, be they FIGSCO or BTO’s are being peddled at the same time the Financialists are trying their dead level best to (a) get Congress to whittle down the regulations put in place under the Dodd Frank Act financial reforms; and (b) figure out ways to get around the Dodd Frank Act provisions – witness the BTO.

The profit motive is perfectly understandable. If I can invest in something that pays more than a Treasury bill or bond, or more than a corporate bond, then why not?  However, at this point, as an investor, I need to make a decision – Am I investing or speculating?  If I’m investing then it would make more sense to take a lower yield on something that has a more credible value. If I’m speculating (gambling) then why not borrow some money and purchase some exotic structured financial product the value of which is far less credible (or even comprehensible) and “make more money?”

It’s speculation that tends to get us into trouble. This new round of creative financial products shows all the elements that got us into financial trouble the last time in recent memory.  Formulaic determination of value which ran head first into the wall of reality. Valuations which were based on “what’s good for business,” rather than on what might be other plausible outcomes.  Emphasis on speculation rather than investment – or on financialism rather than capitalism.  Short term yields as opposed to long term investment.

It was a recipe for trouble in 2007-2008 and it’s still a recipe for trouble in 2015.

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Filed under banking, Economy, financial regulation

Wall Street Lilliputians Want To Tie Up the Regulators

H.R. 185

There was H.R. 37 – the Eleven Bill Wall Street Wish List, which passed the U.S. House of Representatives, a bill of, for, and by the Wall Street Wonders who brought us the Crash of ‘07-08.  On January 13, 2015 the House approved  H.R. 185, another De-regulation Bill from those same awesome people who burdened us with bailouts.   The bill has a lovely name, the “Regulatory Accountability Act of 2015,” and was introduced by Virginia’s own ultra-conservative Representative Bob Goodlatte (R-VA) The miserable measure passed on a 250-175 vote [rc 28] with Nevada Representatives Amodei (R-NV2), Heck (R-NV3) and Hardy (R-NV, Bundy Ranch) all voting in favor of it while Representative Titus (D-NV1) voted No.

What was it that the three Nevada Representatives found so appealing in the bill?  Gee Whiz folks, friends, and neighbors, don’t you know this bill will FREE us from those burdensome regulations on Clean Water, Clean Air, and Stable Financial Markets! In short, H.R. 185 is a bill of the polluters and exploiters, by the exploiters and polluters, and for the exploiters and polluters. And, it would be bad enough if we ended up drinking the dregs from phosphates and breathing smog – but this is also another example of the financial sector wanting to roll back regulations protecting consumers, investors, and ordinary working citizens.

The bottom line is summarized by the Center for Effective Government as follows:

“This legislation represents nothing more than a backdoor effort to undermine public protections without having to be on the record opposing implementation of laws the American people support, like the Clean Air Act and Clean Water Act. Instead of improving our system of public protections, the Regulatory Accountability Act would add numerous hurdles and delay to agency efforts to develop new safeguards and give big business even more opportunities to interfere in this process. This would waste government resources that agencies need to achieve their missions.”  (Emphasis added)

Most of the attention from opponents of the bill was focused on the environmental issues, and related worker safety regulations. However, this bill also “deregulates” the bankers as well. Before the SEC or the CFPB could issue rules for the protection of investors and citizens the agencies would be required to conduct a manipulated form of cost-benefit analysis concerning the “cost of the rule” for businesses.

The SEC, CFPB or other financial regulator would have to:

“…conduct a cost-benefit analysis for all proposed rules and guidance, as well as any potential alternatives to the proposals or guidance. The bill would also expand the scope of these analyses by requiring agencies to include highly speculative estimates of all “indirect” costs and benefits for each option. Yet the bill does not even define what would qualify as an indirect cost.” [CEG]

But, wait, there’s more:

“The bill would mandate that all federal agencies adopt the “least costly” rule out of all the alternatives considered. The only exception to this default rule is if the agency can demonstrate that the additional benefits to the rule justify the additional costs, although it is unclear what the agency would need to do to satisfy this requirement. Given that Congress has just recently cut agency budgets, agencies with already limited resources and rulemaking timelines may choose to adopt the least costly option when they lack resources to demonstrate that the additional benefits justify adopting a more costly rule.” [CEG]

Notice the two elements which are left vague, (1) the definition of an Indirect Cost; and, (2) the standard by which the Additional Benefit is to be evaluated. How convenient!  Are we to assume that if the financial industry can offer some form of sublime speculation and declare that to be an “indirect cost,” then what the Financialists say will be held as Gospel?  Are we to assume that no matter what “additional benefit” might accrue for the protection of consumers – if the industry (financial, industrial, manufacturing, etc.) can say it is “unjustified” then we’ll just have to take their word for it?

No, the supporters of the bill will say – We’re not for repealing the Clean Water or Clean Air Acts, or the Dodd Frank Act – we merely want to make it all but impossible for the agencies to implement those laws.

Let’s take a look at a real world example.  The Consumer Finance Protection Bureau is proposing a rule concerning pre-paid products.

“[The proposed rules] would close the loopholes in [the prepaid product] market and ensure prepaid consumers are protected whether they are swiping a card, scanning their smartphone, or sending a payment.”

Sounds reasonable.  However, it ranks in the litany of complaints from the American Banker’s Association, an organization still screaming about the ‘unfettered tyranny’ of the Consumer Financial Protection Bureau:

“…prepaid companies would be required to wait 30 days after issuing cards to begin offering their customers credit. That’s making, not implementing law. And the CFPB’s prerogative to unconditionally exempt parties from its rules is absolutism.”

Oh, the horror! There is another side to this story. 

“The proposal would require prepaid companies to limit consumers’ losses when funds are stolen or cards are lost, investigate and resolve errors, provide easy and free access to account information, and adhere to credit card protections if a credit product is offered in connection with a prepaid account. The Bureau is also proposing new “Know Before You Owe” prepaid disclosures that would provide consumers with clear information about the costs and risks of prepaid products upfront.

“Consumers are increasingly relying on prepaid products to make purchases and access funds, but they are not guaranteed the same protections or disclosures as traditional bank accounts,” said CFPB Director Richard Cordray. “Our proposal would close the loopholes in this market and ensure prepaid consumers are protected whether they are swiping a card, scanning their smartphone, or sending a payment.”  [Consumer Finance] (Emphasis added)

Funny how the American Banker’s Association left out the part wherein consumer losses would be limited in case of loss or theft, and the bank would investigate and resolve errors, and the same credit card protections would apply to prepaid cards, and the card holder could get “clear information about the costs and risks” of holding that card? And, they left out the part in which the protections which apply to plastic would also apply to the pre-loaded Smartphone.

Let’s guess what that “cost benefit analysis” might be, since it’s the bankers  who would be running the show.   What might be an “indirect” cost to the banks if they had to (1) limit a customer’s losses if his or her pre-loaded Smartphone were lost or stolen? (2) Investigate and resolve errors? Plastic or Electronic? or (3) If they actually had to inform the prospective customer about the costs and risks associated with a pre-loaded card or device?

And our Banker Says: “It is simply too costly, it absolutely can’t be done, it will ruin our bottom line, and deplete our shareholder value! Whatever benefit might redound to the customer – it will never be enough to justify the expense to which we will be put.  And besides that “It’s Tyranny!”Really?

And, NO, this isn’t like the EU defining a banana – it’s like requiring the seller of the financial product in question to be upfront about the costs and risks, and to address the issues created by loss and theft, and to investigate and resolve errors.   The ABA would have us believe this is about picky details like the URL addresses, and not about basic credit protection services.

There’s one form of direct cost the banker would like to avoid – any infringement on their activities in the secondary market for credit card debt, which is done this way:

“The process of securitizing credit card receivables is very similar to that of securitizing mortgages and other loan obligations. A card issuer sells a group of accounts to a trust, which issues securities backed by those receivables. The card issuer still services the account, but the assets are removed from its balance sheet. This allows the card issuer to issue more accounts and to reduce its capital reserve requirements, the amount of money banks are required by law to hold to do business. This money doesn’t earn interest, so, naturally, the card issuer wants to reduce its required reserves as much as possible. As the cardholders pay on their accounts monthly, most of the money is sent to the trust, which pays the holders of the credit card ABSs interest and principal. The card issuer retains a servicing fee and part of the finance charge as profit, and also includes part of the principal—the seller’s interest.” [TM.com] (Emphasis in original)

Oh, precisely what we want to hear! Right? When the banks securitize their credit card receivables it’s JUST LIKE mortgages and other loan obligations? We’ve seen that movie before and the ending was most unpleasant.  Nor are we looking at pittances. When Credit Card Receivables where first securitized in 1987 the total was $2,295.20 million, this climbed to a hefty $52,159.57 million by 2014. [SIFMA download] Little wonder the Bankers of the ABA don’t want anyone treading on their territory and placing any restrictions on to whom they may sell pre-loaded financial products.

So, what would a “cost benefit analysis” yield?  If just one customer was reduced from the total of those whose pre-paid (pre-loaded) debt could be securitized – would that be enough to trigger the “NO.”  If the amount stemming from the securitization of that customer’s credit was removed would that trigger the “indirect cost” NO?  The beauty of leaving the language in H.R. 185 vague is that all costs – no matter how speculative – must be considered, and all “indirect costs” – no matter how small or creative — must drive the regulation of the banking industry.  Not, Heaven Forefend, the costs to the consumers when credit cards/pre-loaded phones are lost or stolen, or when disputes cannot be resolved by the consumer without recourse to expensive and protracted litigation?

So, we’d have to ask Representatives Heck, Amodei, and Hardy, is this what you intended – that pre-paid/loaded Smartphone credit line holders do NOT have the right to know, in clear plain old readable English, the costs and risks of holding Corporation X’s credit card?  That they do not have a right to know that they have free and easy access to their credit information? That they do not have a reasonable expectation that errors will be corrected and disputes resolved without litigation?  Because in voting in favor of H.R. 185 that is exactly what they are saying.  (Our thanks and praise  to Representative Titus for NOT joining that chorus.)

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Filed under Congress, ecology, Economy, financial regulation, public health, public safety

House Republicans Set Up Next Financial Bust?

CLO cards Financialists score on H.R. 37. When at first you don’t succeed – keep voting – and pass the Eleven Bill Wall Street Wish List on January 14, 2015. [rc37]  This amalgamation of pro-Financialist bills is guaranteed to warm the cockles of the Wall Street denizens, even if it has some very real potential dangers for Main Street and Elm Street.   There is at least one reason to sound the alarm.

Collateralized Loan Obligations

One of the items on the Wall Street Wish List was more time for the banks to deal with Collateralized Loan Obligations.  Let’s break this down into some easy-to-understand parts, beginning with the CLO.

“A security backed by a pool of debt, often low-rated corporate loans. Collateralized loan obligations (CLOs) are similar to collateralized mortgage obligations, except for the different type of underlying loan.”

And, what’s a security?

“A financial instrument that represents: an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option. A security is a fungible, negotiable financial instrument that represents some type of financial value. The company or entity that issues the security is known as the issuer.”

So, what we have in the CLOs  are financial instruments (fungible, and negotiable) issued by a corporation (financial institution). These bits of paper are made up from pools of corporate debt, usually of the low rated variety, sliced diced tranched etc. for Wall Street’s trading pleasure.

If this is sounding familiar, it should because those sliced diced tranched mortgage based pools were precisely what got Wall Street in big trouble in 2007-2008.  The only thing that’s different now is that the pools in question are made up of questionable corporate debt instead of questionable mortgages.  Let’s drill down more closely to see what’s so attractive to Wall Street about putting off the deadline for bankers to comply with the Volcker Rule on CLOs.

Collateralized loan obligations are investment funds which are primarily made up of leveraged loans, associated with large corporate loans with low to very low credit ratings; these loans can be swapped in and out by the fund manager throughout the life of the fund. Watch closely now – because the next point is important.

CLOs are NOT backed by loans to small business or individuals, but rather are typically composed of the debt that companies incur after being taken over by a private equity firm. [BetterMarkets]   Right! We are not speaking of loans to small business firms on Main Street, no matter how much obfuscatory palaver is applied by the Republican allies of the Wall Street Casino Major Players – this is about allowing banks to play with debt incurred during when private equity firms take over a company.

This isn’t about your neighborhood bank either.  Only four banks (Wells Fargo CLO Holdings, Citigroup CLO Holdings, State Street CLO Holdings) have 69% of all CLOs.  Nor is this a minor item, because the total U.S. bank CLOs add up to about $85 billion. [BetterMarkets]  Many crocodile tears have hit the floor from the faces of the Financialist collaborators in Congress about those “poor little neighborhood banks, distressed by government regulations,” to which we might say, “Horse Pucky.”  Why don’t the CLO Holdings want to comply with the Volcker Rule?

“The Volcker Rule prohibits proprietary trading and limits bank ownership of hedge funds. Bank investments in CLOs have the potential to be both a proprietary position and an investment in hedge funds because investing in a CLO is functionally identical to owning part of a hedge fund that invests in leveraged loans. Importantly, the Volcker Rule already provides both ample time to divest these sought-after instruments, and a variety of ways to bring existing CLOs into compliance with the rule. Specifically, CLOs backed entirely by loans are excluded from the Volcker Rule and many CLO holdings are not considered “ownership interest” under the Volcker Rule.” [BetterMarkets] (emphasis added)

In short, when a bank is trading in CLOs for its own direct gain, and not on behalf of any customer, and when it’s trading in funds which are composed of some loans, and a basket-load of other Stuff – sovereign debt, junk bonds, structured derivatives, credit default swaps – it would have to sell off the CLOs if they involve “high risk activity.”  “High Risk Activity” is pretty-speak for junk.  Also, when we hear bankers lament that they’d have to sell off their not-so-pretty CLOs at “fire sale prices” if they had to comply with the Volcker Rule sooner rather than later, we should not waste a whole box of tissues immediately.

Wall Street CLO funds which are not in compliance will be almost gone by 2019 – having been either matured or redeemed – so why worry? [LeveragedLoan] First, there’s that “almost” part. The idea behind the Volcker Rule was that banks should not be allowed to play with depositors’ money in the Wall Street Casino. Period. So the notion that having just a few “non-compliant” CLOs (those made up with pounds of junk included) isn’t acceptable. Period.

Secondly, it’s not like the leveraged loan business is slacking.  U.S. CLO issues hit $124 billion in new issues from 234 deals in 2014, up from $83 billion in 2013, and “blowing through” the previous $97 billion high in 2006. [LeveragedLoan]  Could someone be counting on another four years to do some back-door proprietary trading while waiting for the front door (Volcker Rule) to close?  Might a few of the Wall Street Bankers be counting on the fading memories of Main Street and Elm Street, so that as the memory of the Banking Debacle of 2007-2008 wafts off to the horizon they can go back to their Casino Business As Usual? [BetterMarkets]

It’s important to remember at this point that the CLOs based solely on loans and therefore  excluded from the Volcker Rule aren’t the beneficiaries of the services of the House of Representatives in voting for H.R. 37.  That would be the Junque Boutique CLOs padded with credit default swaps, structured derivatives, sovereign debt, and good old fashioned junk bonds that are the primary beneficiaries of Congressional largess, or exactly the financial products that got Wall Street in trouble the last time.

So, who from our Silver State voted to coddle the non-compliant CLO Holdings, to protect the managers of highly questionable funds with highly questionable holdings? And, to put the taxpayers on the hook for any fall out when this latest house of cards collapses?   The Big Banker Roundtable of High Flying Traders – with other peoples’ money – will want to thank: Representative Joe Heck (R-NV3), Representative Mark Amodei (R-NV2), and Representative Cresent {Does He Really Even Understand This Stuff?} Hardy (R-NV-Bundy Ranch).  Representative Dina Titus (D-NV1) had the good sense to stand with Main Street and Elm Street on this one.

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Filed under Economy, financial regulation

GOP Second Bite at the Financial Reform Apple

 Bankers Deregulation The Republican majority in the House of Representatives is about to try another bite at the Roll Back Dodd Frank Financial Reforms apple.  [HuffPo]

“The vote will come within days, if not hours. Under conditions laid down by the House Rules Committee late Monday, the GOP will be able to easily pass the legislation as part of an 11-point deregulation plan without Democratic support, while ignoring any Democratic amendments. President Barack Obama has threatened to veto the bill.” [HuffPo]

A point we should emphasize at the moment is that this piecemeal roll back of Dodd Frank Act reforms is being down without any Congressional hearings, nor will any amendments be allowed to the 11-Bill Wall Street Wish List.  Representative Maxine Waters (D-CA), the ranking member of the House Financial Services Committee, had something to say about this matter:

“House Republicans continue to stop at nothing to push legislation that benefits Wall Street’s biggest banks at the expense of American consumers. Last year, GOP leadership snuck a sweetheart giveaway for banks like JP Morgan and Citigroup into a must-pass spending measure. On just the second day of the Congressional session, they continued that strategy by trying to push through a complicated package of 11 bills to deregulate Wall Street. Fortunately, House Democrats joined together to stop that effort from moving forward. But Republicans won’t be daunted in their efforts to gut important Wall Street reforms.

Next week, House Republicans will take another shot at deregulation – making it clear that nothing will stop their efforts to make rewarding the biggest banks the first order of business in this Congress.
At a time when the American people are still hurting, I am disappointed that House Republicans are continuing to waste our valuable time on bills that help Wall Street and hurt Main Street. Americans are still suffering from the impacts of the worst financial crisis in a generation. They need their elected leaders to work for them, not for the mega-banks.”

The statement from Representative Waters pretty well sums up the situation.  Investment banks collapsed under the deluge of their own greed in 2007-2008, they were bought up and out by the commercial bankers, and they sought the protection of the federal government – they were bailed out and then as commercial banks were protected by the statutes governing commercial (as opposed to investment) banking.  Heads they win, tails they win.  

The Financial Services Roundtable supported H.R. 37 (the first attempt to roll back Dodd Frank in the 114th Congress) calling the delay in the implementation of the Volcker Rule a “technical change.” [FSR pdf ]  The financial interests would have more time to “conform their holdings of collateralized loan obligations under new regulations.”

No to put too fine a point to it, BUT the bankers have had since the collapse of their financial sector to get their houses in order, that would be since, say, October 2008?  But, Financial Services Chair Hensarling was “disappointed the first time and Wall Street Wish List failed, and his comments are instructive:

“They’ve regrettably told the millions of Americans who are still unemployed, the Main Street small businesses that are the engines of economic growth, and our farmers and ranchers in the Heartland that they will sacrifice positive, bipartisan ideas on the altar of ideological politics.  Still, there are many days left in the 114th Congress and I will continue to invite my Democratic colleagues to abandon partisan games and instead join me and many others in doing the hard work of the American people.  I hope that the House will return to this bipartisan bill in the near future for the sake of the people who sent us to Washington to make a difference.” [Hensarling]

Let us parse.  First, H.R. 37 has NOTHING to do with “unemployed Americans,” Main Street businesses, farmers or ranchers in the “Heartland.”  Unless, of course, they happen to be investment bankers on the side.  Second, this isn’t any “partisan game,” it’s a question of whether or not the banks are going to be regulated.  That’s pretty much a policy dispute. And, third, we might ask: Who were the people who sent you to Washington? Because support for H.R. 37 or its substitute tells all concerned that the constituency being supported resides in Wall Street offices.  In this instance, those Main Streeters, Elm Streeters, and happy Rurals are being hauled out as props to screen the Financial Services Roundtable interests.

Here’s the list of Financial Services Roundtable members.  Does this look like Main Street, Elm Street, or the happy Rurals to you?  When did Wells Fargo last plow a field? Or Barclay’s run a grocery store? Or Citigroup manage a family owned construction company?  What we have here looks like the standard-garden-variety Republican ploy – talk about Main Street while looking out for the interests of Wall Street.

If you are keeping score – you can tell the orientation of your Representative in Congress by tracking bills like H.R. 37 or its substitute.  If your Representative is oriented toward the intersection of Main and Elm, he or she will vote NO; if he or she is oriented toward Wall Street the vote will be YES.  Or, more simply: A capitalist would vote “no,” a financialist would vote “yes.”

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Filed under Economy, financial regulation

Death and Resurrection: Attacks on Financial Regulation Reform

Avarice Dante

Watch enough television and a person could get the impression that the greatest threats to mankind are bloody minded terrorists and crashing aircraft.  However, the “If It Bleeds, It Leads” brand of modern journalism tends to distract us from some much more realistic threats to our well being.

The odds of being killed in a terrorist attack are approximately 1 in 20,000,000.  The odds that our financial and economic well being are in jeopardy are being created right now in a Congress which has thus far in its short existence catered to the Financialists – those “weary souls” who will never have enough gold (wealth) to relax.   Witness the attempt at unraveling the Dodd-Frank Act financial regulation reforms during the first week in the 114th Congress.  [Business Day, NYT]

The bill was called the “Promoting Job Creation and Reducing Small Business Burdens Act.” [H.R. 37]  Nothing could have been much further from the truth of the matter. The opponents of bank regulation are depending on a public which doesn’t know a “counter-party” from a “counter-pane.”  This bill was an attack on the imposition of the Volcker Rule, and would have allowed some private equity funds from having to register with the S.E.C.   There is nothing in the bill about “creating jobs” except the old hoary delusion that making bankers more wealthy will “trickle down” eventually – sometime after the Second Coming?

Nor are any “small businesses” being “burdened,” unless of course we mean wealth management, hedge, and other financial services corporations with a small number of employees and massive amounts of money under management.  We are not, repeat NOT, speaking here of Joe’s Garage, Maria’s Dress Shop, or Anderson’s Bodega and News-stand.  In addition to the two big blasts at the Dodd Frank Act reforms, H.R. 37 contained provisions for lots of other goodies the financialists would like to find in their 4th Circle.

There were changes in margin requirements, changes in the accounting treatment of affiliate transactions, the registration of holding companies, a registration threshold for savings and loan holding companies, a ‘brokerage simplification act,’ a registration exemption for merger and acquisition brokers, a repeal of indemnification requirements for SWAP repositories and clearinghouses, changes to benefit “emerging growth companies,” – an EGC is any company with less than $1 Billion in gross revenue in a given year, extended deadlines for dealing with collateralized loan obligations, and various provisions to make fewer required reports from the financial sector EGC’s to the regulators.   In short, nothing in the bill had anything to do with the garage, the dress shop, or the neighborhood bodega.  This was a bill BY the financial services industry, FOR the financial services industry, or as Minority Leader Pelosi called it, “An eleven bill Wall Street Wish List.”

The good news is that this bill was defeated in the House on January 7, 2014 [rc 9] – the bad news is that the defeat came because the Republican leadership went for expedited passage and Democrats who had previously supported some provisions bailed out on them leaving the leadership without the 282 votes necessary for passage.  [Bloomberg] And, there’s more bad news – next time the Republican leadership won’t make the same error, and the bill will come up in another form, this time requiring only a simple majority.

As the bills come back in resurrected form, perhaps a short glossary of Republican rhetoric is desirable:

Small Business – any private equity or wealth management firm with less than a BILLION dollars in annual revenue.

Job Creation – any bill which allows financial sector (Wall Street) banks to make more money; see “Trickle Down Hoax.”

Burdensome Regulation – any requirement that a private equity or other investment entity doesn’t want to follow, even if it means leaving the public (and investors) in the dark about financial transactions.

Simplification Act – provisions in a bill to make it easier for private equity or any investment/wealth management firm to conceal what it is doing from financial regulators – and from anyone else.

Improving Financing – provisions in a bill to let the Wall Street bankers revert to the old Casino format of complicated, convoluted, and “creative,” financing of the variety best known for crashing and burning in 2007 and 2008.

Encouraging Employee Ownership – a provision in a bill to — “to increase from $5,000,000 to $10,000,000 the aggregate sales price or amount of securities sold during any consecutive 12-month period in excess of which the issuer is required under such section to deliver an additional disclosure to investors. The Commission shall index for inflation such aggregate sales price or amount every 5 years to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, rounding to the nearest $1,000,000.”  (This is NOT a joke.)

Since the people who want the enactment of these provisions are not satisfied with “all the gold under the moon, or ever has been,” the specifics of H.R. 37 will be resurrected, re-introduced, and the Republicans will seek passage of every item on the Wall Street Wish List.

Voting in favor of the H.R. 37 Wall Street Wish List were Representatives Heck (R-NV3), Amodei (R-NV2), and Hardy (R-Bundy Ranch). Representative Titus voted against the roll back of the Dodd Frank financial regulations reforms.

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Filed under Amodei, Economy, financial regulation, Heck, Titus

The Shareholder Value Scam

 God Thinks of MoneyNothing will be better received by the economic elites than a theory that rationalizes and promotes their self interest, and few theories have done so as well as the myth of “Shareholder Value.”  Harold Meyerson summed the theory up succinctly:

“The idea that corporations exist to reward their shareholders arose not in a body of law but from the work of ideologically driven economists. In 1970,Milton Friedman wrote that business properly had but one goal: to maximize profits. The same year, Friedman’s University of Chicago colleague Eugene Fama argued that a corporation’s share price was always the accurate reflection of the enterprise’s worth, an idea that trickled down into the belief that the proper goal of a corporation was to boost its share value — particularly after most CEO salaries and bonuses became linked to that value.” [WaPo]

The musings (or rationalizations if you will) of Friedman and Fama were expanded by Michael Jensen and William Meckling in a 1976 Journal of Financial Economics article “Theory of the Firm: Managerial Behavior, Agency Cost, and Ownership Structure,” a long title for a short idea: Shareholder Value. [DSE]

Yesterday’s post took a few swings at the Shareholder Value mythology, but the subject deserves a closer look.

First, there is no requirement in law which requires the management of an enterprise to direct its focus toward Shareholder Value.  None, zip, zero. [HarvardLawF] So, why is the theory now treated as dogmatically as received wisdom? 

Let’s try one notion on for size – the theory is arithmetically convenient.  As a nation, we do love to count things. We’ll even count the number of times we’ve counted things.  A posted price for a share of common stock is easy to recognize and count.   It is what the stock market for the day says it is.  Arena Pharmaceuticals is selling for $5.12 today [YahooF] There are some sticky questions we might ask, such as will the study of its autoimmune drug yield an effective and profitable product?  If the price of ARNA today is $5.12 per share does that describe the value of the company?  The Friedman/Fama profit motif combined with the Shareholder Value Theory assumes that the price of the share x number of shares = the value of the company.  And, here’s where things break down.

According to the vaunted “efficient market” theory the answer is Yes! The share price is a measure of value — except when it isn’t.  On July 23, 2008 the closing price for Lehman Brothers was $16.05 for 33,685 in share volume.  Did that describe the value of the corporation? Or, should we look at the stock price in September 22, 2008 when Lehman Brothers was closing at $0.23?  [NASDAQ]  Apparently, one of the flaws in the arithmetically convenient adoption of stock price as a measure of corporate value is that if the corporation can’t properly value its holdings then the price and the value aren’t coterminous.  In English that would be: If the company can’t value its assets properly then why on God’s Green Earth should we believe the stock price is anything other than  guesswork on the part of some investors?

Since the Shareholder Value Theory, although flawed,  might be convenient it also appeals to another notion worth exploring – the theory holds appeal for those who have short term interest in market trading.  Under all the fancy mathematics and all but impenetrable jargon, the proponents of the Shareholder Value myth were alleging that since the price equated to the value of the firm, then using the stock price as a measuring tool meant one could evaluate the short term success of a company.  Lovely, but that misses a few marks.

Secondly, under the older “retain and reinvest” or the “stakeholders” models of corporate performance there were niches for thinking about long term corporate viability.  Was the company doing enough in terms of research and development? Was it investing in new plants and equipment? Was it retaining and retraining its labor force?   If “Engulf & Devour” acquired some firms using leveraged buyouts and hostile takeovers in the heat of the 20th century M&A boom, then what was to prevent the management from treating the newly acquired companies as little more than  paper in the portfolio? Share price moved the M&A, and share price would be the convenient measure of the “value” of the company.  What shareholder value was produced by, say, the Quaker Oats takeover of Snapple? Or America Online with Time Warner? Or Sprint and Nextel? [Investopedia]

Instead of “stakeholders,” management, labor, customers, etc. involved in the interests of the corporation, the financial engineers became the model for corporate management.  Thence, the financial engineers became beholden to the financial Auspex.  Roger Martin’s book, Fixing the Game, proposes two categories – the “real market,” and the “expectations market.” The ‘real’ market includes the world in which factories are built and staffed, goods and services are bought and sold, and revenue is earned and the bills are paid. The Expectations Market is another world.  In it the stock market via the analysts and rating services assess the real market activities of the firm and based on that analysis makes prognostications about how the company will perform in the future. Why would an executive go to all the trouble to improve real market performance in the long run when simply raising short term expectations will do nicely? Who loves this short term market perspective?

If you guessed Hedge Funds, take your seat at the head of the class.  And, do the hedge fund and private equity firms deliver on Shareholder Value?  Not quite:

“…the most generous conclusion one may reach from these empirical studies has to be that “activist” hedge funds create some short-term wealth for some shareholders as a result of investors who believe hedge fund propaganda (and some academic studies), jumping in the stock of targeted companies. In a minority of cases, activist hedge funds may bring some lasting value for shareholders but largely at the expense of workers and bond holders; thus, the impact of activist hedge funds seems to take the form of wealth transfer rather than wealth creation.” [IOGPP pdf]

Note the last part? “Take the form of wealth transfer rather than wealth creation.” What have some of the more critical articles of the current economic situation been saying all along?  That in the matrix of Shareholder Value and Financialism, intensified by corporate compensation schemes, and further abetted by hedge fund activism – we have transfers of wealth without the actual creation of a better economy for everyone.

Finally, about all that can be said of the Shareholder Value Scam is that it serves the purposes of those who have vested interests in stock market short-termism and volatility, who have an interest in transferring rather than creating wealth, and who have a predilection for espousing those theories which will make them feel better about the whole thing.

References and Recommended Reading:  R. Straub, “Shareholder Value – A Theory that changed the course of history – for the better or the worse,” Drucker Society Europe, June, 2012.  Jensen and Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics, October 1976. (pdf) Lynn Stout, “The Shareholder Value Myth,” Harvard Law School Forum, June 2012.  Yves Smith, “Maximize Shareholder Value” Myth, Naked Capitalism, May 2014. Diane E. Davis, “Political Power and Social Theory,” MIT Cambridge, 2005. (pdf)  Steve Denning, “The Origin of the World’s Dumbest Idea: Milton Friedman,” Forbes, June 2013.  Steve Denning, The Dumbest Idea in the World, Forbes, Novmber 2011.  Yvan Allaire, “Activist Hedge Funds: Creators of lasting wealth, What do the empirical studies really say? Institute for Governance of Private and Public Organizations, July 2014.

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Filed under Economy

It’s Not Capitalism Anymore, and someone has noticed

Middle Class photo

Jim Tankersley has a series of articles published in the Washington Post which ought to do for Wall Street what Dana Priest and Ann Hull did for the Walter Reed Army Hospital and other veterans’ care centers in previous publications – expose problems at the core of the institution.

“In 2012, economists at the International Monetary Fund analyzed data across years and countries and concluded that in some countries, including America, the financial sector had grown so large that it was slowing economic growth. Using a different methodology, the most prominent researcher on the size and economic value of Wall Street, a New York University economist named Thomas Philippon, estimates that the United States is sinking nearly $300 billion too much annually into finance.” [WaPo]

How could this be? Isn’t the financial sector supposed to be the heart pumping capital through the veins of American enterprise? That would be capitalism, in which money saved (surplus) is channeled into investment (scarcity) and the machine moves smoothly.  What happened?  We’ve heard this before, from those economists who decry the inflation of the financial sector – that the firms (banks) are more interested in devising financial products for their own profit than they are in acting as brokers for financial markets between business and finance.  The result is a drain:

“In perhaps the starkest illustration, economists from Harvard University and the University of Chicago wrote in a recent paper that every dollar a worker earns in a research field spills over to make the economy $5 better off. Every dollar a similar worker earns in finance comes with a drain, making the economy 60 cents worse off.”  [WaPo]

Compounding the problem we have a consumer culture and institutional environment which abet this drain.  In a good old fashioned Capitalist system the financial sector is concerned with creating markets for investment, again that’s moving money (capital) from savings to scarcity.  However, when the financial sector changes function to moving money from scarcity (debt) to revenue for the firm the investment firm (bank) does well but the underpinnings of the economy are weakened.

Savings Rate

We’ve been keeping track of the personal savings rate since 1959.  Notice the general direction of the trend line since 1980.  The ratio of  personal income saved to our personal net disposable income has been tightening. We are, as a nation, saving less than we saved in the decades before 1980.  And, we’re accumulating more debt:

Household Debt trends

Note, again, that the accumulated liability for consumer debts started pulling up in the 1970s and 1980s.  When the savings rate is trending down and the household debt level is trending up how are the bankers and financiers to make money?

Debt is inherently risky.  So, securitize the debt and spread it around. And earn fees for the bank in the process.  In 1970 Ginnie Mae launched the first securitized mortgages, and in 1985 Wall Street securitized the first auto loans.  This situation expanded to include the packaging of credit card backed securities, home equity backed securities, collateralized debt obligations, student loan backed securities, equipment lease backed securities, manufactured housing backed securities, small business loans, and aircraft leases.

Once more with even more feeling: One man’s debt is another man’s asset. Now, one man’s debt can be magically transformed into the assets of several investors.  As long as Americans are willing to accumulate more and more indebtedness, the bankers will be equally willing to create “financial products” to securitize that debt and make money doing so.  The consumer culture and the institutions that profit from all the mortgages, auto loans, credit cards, student loans…. works perfectly well for the financialists.  Gone are the days when savings formed the basis for the health and wealth of Wall Street. Now it’s debt.  And, the corollary of debt: We have put about $300 billion per year too much into the Wall Street Casino.

Even our tax system permits this situation – we tax capital gains at 15% and productive work at levels above that. We have loopholes aplenty for writing off debts incurred by major corporations. We have a tax structure which depreciates work and products while appreciating financial products. If this isn’t bad enough, we’ve based the system on some very tentative valuations.

What is the “fair value” of any package of securitized assets?  This is not only an accounting problem. It’s also an issue for accountants.  [GSBColumbiaEdu pdf]  It’s also an issue for homebuyers who are now being told that the down-payment standards could be reduced to 3%. [MortgageNews]  What do the mortgage lenders want?  Their strategic goal:

“Maintain, in a safe and sound manner, foreclosure prevention activities and credit availability for new and refinanced mortgages to foster liquid, efficient, competitive and resilient national housing finance markets.”

What does Wall Street hear?  More people taking out more mortgages, which can be diced and sliced, warehoused, tranched into pieces, and sold as securitized asset based financial products.  So, what IS the value of one of these products?  After the Housing Bubble Debacle of 2007-08 the Federal Reserve created the Term Asset-Backed Securities Loan Facility which was supposed to help untangle the mess made by the Wall Street Casino.  Two new acronyms entered the financial vocabulary – TALF and CMBS (non-mortgage securities).  When the Office Monetary Policy studied the results of the program it found:

“In terms of benefits, the results point to substantially stronger effects at the market level than at the security level, which suggests that the impact of TALF may have been to calm investors, broadly speaking, about U.S. ABS markets, rather than to subsidize or certify the particular securities that were funded by the program.” [Campbell pdf] 

Okay, the investors felt better, more comfortable, and the government wasn’t at great risk, that’s the good news.  The bad news is that despite the best efforts of algorithm creating quants – there is still no valuation of ABS (asset based securities) which goes much beyond “what they’re worth is what someone is willing to pay.”  From the Campbell Study: “In addition, we find that the program screened out the riskiest deals but attracted somewhat riskier than average deals among the pool of potentially eligible securities.”

Thus we find ourselves with a tax structure which rewards investment gains over productive work, an investment system that rewards the sale of financial products derived from indebtedness, and banking institutions which make investors “more comfortable.” Top this off with  a population far more willing to spend than to save and there’s all manner of potential for yet another Casino Bust.

When does the indebtedness become unsustainable?  In order to create all the ‘wonderful’ products on Wall Street someone has to buy a house, purchase a car, take out a student loan, put items of the household credit card, lease some heavy equipment, lease an aircraft, take out a small business loan, or in some other way accumulate debt which can be transformed into an “asset.” What happens when the stagnation of wages becomes such that there is no more room in the family budget for more debt?

For most workers in the United States their wages haven’t moved significantly for decades.  In the old fashioned Capitalism vernacular, when labor markets tighten, wages will go up.  However, this hasn’t been the case for years. [HuffPo]

“… after adjusting for inflation, today’s average hourly wage has just about the same purchasing power as it did in 1979, following a long slide in the 1980s and early 1990s and bumpy, inconsistent growth since then. In fact, in real terms the average wage peaked more than 40 years ago: The $4.03-an-hour rate recorded in January 1973 has the same purchasing power as $22.41 would today.” [HuffPo] [BLS]

Not to be a complete Grinch in the midst of everyone’s Christmas season, but to suggest that either savings or indebtedness (or both) can sustain a long term healthy growth rate in the U.S. economy is pure lunacy, unless wages and salaries make some significant gains.  Arguing that “we can’t afford” to increase the minimum wage because we’ll be “non-competitive” in world markets is essentially contending that it’s somehow better to risk ending up being nothing. 

The BLS report for December 2013 shows an average hourly wage of $20.35, and an estimated average hourly wage of $$20.74 for 2014.  Both of these numbers show less purchasing power than the January 1973 average hourly wage.  In the long view: Less purchasing power = fewer purchases = less indebtedness for large expenses = fewer asset based securities = less income for financiers, who for the moment give every appearance of believing that short term gains are preferable to long term losses.

If anyone is arguing that the income gap doesn’t really matter, and perhaps it’s just that some people are better at earning than others – and we shouldn’t punish success, then we ought to take a second look at what this philosophical perspective means for long term economic growth.

Income Gap

When more income is siphoned off toward the upper income earners, and the gap continues to expand, the obvious conclusion is that those who earn middle incomes are less likely to … and here we go again … spend money, have disposable income to spend, have the capacity to take out loans and mortgages…  For those who prefer numbers to charts, the Census Bureau has handy downloads.  In 1967 the top 5% had an aggregate of 17.2% of the nation’s income, and the middle category had 17.3%.  As of 2013 the top 5% had 22.2% and the middle category had 14.4%. (Table H2)

How is it possible to sustain, much less grow, an economy in which larger accumulations of income are consistently moving into the hands of fewer consumers?  It may be fine (for the financiers) for families to take on more debt to sustain a middle class lifestyle in the short run, but eventually the pinch has to be felt by the financialists who are benefiting from the situation.

It almost seems as if we have a financial system which has turned old fashioned Capitalism on its head – savings bad, spending good, indebtedness better; a financial system that is feeding off the debts of people who have less capacity to even become indebted as time moves on.  Instead of a vision of Capitalism writ large, we’ve settled for a myopic view of short term gains to satisfy an investor class moving ever so steadily away from the realities of our economic life.

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Filed under Economy, financial regulation, Politics

America’s Most Accomplished Looters: The Great Pension Robbery

Pension Fund Robbery The corporate media outlets are ever so fearful that the raw emotions unleashed by the fate of young black men at the hands of the police will lead to vandalism and looting… they are not so attentive to the wholesale looting conservatives have in mind for America’s pension funds.   The retirement savings of millions of Americans — The money scraped together from modest earnings over a life time —  The funds intended to keep elderly Americans out of poverty.

The Financialists’ attack on American pension funds encompasses both the public and private sector, and it is nothing less than A Great Pension Robbery.

The Public Sector  Great Pension Robbery

Those, like the Arnold Foundation, who would like nothing more than to get their financialist mitts on public pension funds must first convince people that it would be “better” for the private sector to handle public employee pension funds, and to do so requires a concerted campaign of mis-information and dis-information about pension funds for public employees which are not associated with Social Security.   This scam incorporates a multi-layered attack.

Layer One: Convince the general public that public sector employees are pigs at the taypayer’s trough.  The evidence for this line of assault is rather blatant.  The media is only too pleased to provide outlier stories of high pensions such as “Retired Doctor Earns Highest Pension in Illinois History,” [Fox Chicago] or “$204,000 per year, Is This Retired Cop’s Pension Too High?” [Atlantic] or “Wall Street Isn’t The Problem, The Benefits Are” [New York Times] and a steady drum beat of propaganda from the conservative think-tank network including the Manhattan Institute, Cato Institute, Heritage Foundation, etc. will eventually lead to headlines like “Half New Jersey Voters Say Pension Are Too High.” [Courier Post]

Layer Two: A coterminous line of attack comes from those who want “transparency,” or say they want “accountability” on the part of public pension funds so that the public will know exactly how much retirees are benefiting from their pensions.  That there may be some very serious breaches of identity and financial information is given far less consideration than the idea that the publication of benefit amounts will result in little gold mines of outlier amounts which can be inserted into articles about “highest pensions,” leaving out the part about average benefits, or the levels of training, education, seniority, and other factors which contributed to the pension.  Nor is it made clear in many articles that the employees themselves have made contributions to the retirement plan.   The impression is left that the taxpayers are footing the entire freight for “outlandish” pension benefits. The impression is false, fallible, but if repeated often enough rather enduring.

Layer Three: Convince the general public that public employee pension obligations are the cause of financial problems in the political subdivisions or governments.  This assault requires that we ignore the gorilla in the corner – that local and state governments are saddled with enormous subsidies and tax breaks for corporations which dwarf the pension short-falls citied in the alarmist publications. [OurFuture]

Cities, counties, and states in this country are subsidizing corporations to the tune of $696 per family. [NYT]  In the state of Nevada that adds up to to nice $33.4 million, or $12 per capita, or more specifically: $16.4 million in sale tax refunds, exemptions, or other sales tax discounts; $10 million in cash grants, loans, or loan guarantees, and $5.54 million in property tax abatements.  State Tax credit, rebate, or reductions over $5 million have gone to Apple Inc., Switch Communications, Amonix, Enel North America Inc, Solargenix Energy LLC, and PowerLight Corporation.  Other reductions have been given to Georgia Pacific, Sherwin-Williams, Western Dairy Specialties, General Motors, PPG Industries, Cardinal Health, Ford, Ocean Spray Cranberries, General Electric, Global Health Management, Ameriprise Financial, Johns Manville, ING Financial Services, Intuit Inc, and  Starbucks Mfg Group.  [NYT]

It’s obvious that the arguments are being framed in terms of why public pension benefits must be cut in order to preserve servicesNOT as public pension benefits must be cut in order to preserve tax credits, abatements, reductions, and rebates for corporations.

Layer Four: Convince the general public that public pensions must be “reformed” into defined contribution plans and that those plans could be more efficiently run by private financial interests.  The predominant theme is that the current plan is “insolvent,” and therefore must be reformed! Not. So. Fast.  From the “If You Can’t Dazzle Them With Facts Baffle Them With Bull Shit” Department, there’s the RJ’s editorial with these three instructive paragraphs:

But the best argument for pension reform is not how Nevada’s fund compares to those of other states. It’s how public employee pension benefits compare to the compensation and retirement options available to the taxpayers who fund the pension system. Which is to say they don’t.

That’s because the defined-benefit pension has all but vanished from the business world. Portable savings plans such as 401(k)s have taken their place, and many companies can no longer afford to provide matching contributions. Workers largely are on their own in saving for retirement, with the insolvent Social Security system as a backstop to poverty.

Yet they’re also on the hook for the retirement of public employees, who can start collecting benefits after as few as 20 years of work. Already, taxpayer-funded pension contributions are squeezing public services such as public safety and education. Those contributions are creeping ever higher to ensure PERS can make good on its generous benefits, which are based on top salaries, not an average of lifetime earnings.

Let us parse:  Having acknowledged that the Nevada system IS, in fact, solvent, the RJ dismisses that and hurries on to the rationalization for the Great Pension Robbery.  Compare the pensions to the “taxpayers who fund the system?”  Wait a minute.   By this standard the public employee would only receive pension benefits equal to or less than the lowest pension benefit available to the general public.  Or, a public employee with a master’s degree in hydrological engineering would be a pig at the trough if he or she were paid benefits greater than a mechanic at Lou’s Garage? On some alien planet this might make sense – just not on this one.

The second paragraph is just as interesting, and we’ll return to it in another context in a moment, but for now we should note that what the editorial is arguing for is that government should adopt not the best practice (defined benefit plan) but the worst (defined contribution plan) and should do so because everyone else is doing it – ignoring the reason WHY it’s being done that way.  Defined contribution plans are good for the shareholders (read: institutional investors) in private corporations because they increase shareholder value – i.e. reduce personnel expenses.  There is no “shareholder value” to be accomplished by slashing or “reforming” public sector employee benefits – there is only “austerity” on steroids, cost cutting so that the subsidies, and tax breaks for the corporations can be maintained.

And, notice once more – the argument is framed as if the pension obligations are squeezing the availability of services, NOT that the pension obligations are making it more difficult to balance a budget wherein revenue is restricted by low tax rates, tax credits, tax rebates, tax reductions, and outright subsidies for corporations.   Those who argue for pension “reform” having no traction on the solvency element appear to be playing the Pig at the Trough Game combined with an unsustainable argument about equity.

The Private Sector Great Pension Robbery

Now that we’ve stuck a toe into the slime of defined contribution plans and 401(k) ‘reforms’ in the business sector, it’s time to take a look at what the financialist robber (barons?) have in mind for those other taxpayers.

Yes, indeed, those 401(k) plans are popular, with the corporations, but that doesn’t mean they are necessarily a good deal for the workers.  Seeking Alpha, a popular financial blog, is a bit pessimistic about these plans:

“But, beginning in the 1980s and accelerating of late, we have gone off into a different direction. Most concerning to this conversation is the death of the pension, and the replacement of pensions with 401ks/IRAs, etc. Why is this concerning? Clearly, when you are forcing people who have no acumen and are hardwired to avoid risk to invest on their own to provide for their old age, that is a recipe for disaster. That would be fine, if the consequences for our society weren’t so devastating.”

All right, the idea of having financial novices in charge of their own pension plans isn’t necessarily a good idea – you can call it ‘Freedom’ if you like, but it boils down to YOYO – you’re on your own.  And, in a world of volatile markets which may or may not be rigged against the little guy, the 401(k) notion is dubious at best.  We might want to take a moment to look at this more closely – why is the 401(k) not the best way to insure the ability of seniors to stay out of poverty in their later years.

Most workers don’t have enough money left over after basic expenses to invest in an individual pension plan, and now we have the numbers to prove it:

“When broken down to the individual level, those numbers add up to nowhere near enough money. According to a recent report issued by the National Institute on Retirement Security, the median amount a family nearing retirement has saved for their post-work lives is $12,000. As for the magical 401(k)? If a household where the earners are between the ages of 55 and 64 does have a retirement account, they barely hit the six-figure mark at $100,000—a far cry from $1 million we’re told we need.”  [Salon]

Anyone who wants to get into the weeds of this argument needs to take the time to read the testimony of John Bogle, founder of the Vanguard group, before the Senate Finance Committee on September 16, 2014. (pdf)  Among Bogle’s suggestions we find, limited participation, and excessive management fees cited as problems for the 401(k) advocates.  This finds support from other voices who note:

“Most middle-class savers end up either undersaving, overtrading, investing in excessively high-fee vehicles or some combination of the three. A small number of highly compensated folks now have lucrative careers offering bad investment products to a middle-class mass market based on their ability to swindle people.” [Slate]

There are a couple of elements in the Great Private Pension Robbery which perhaps need a bit more explication. First, most people have no idea how much they are paying in management fees for their retirements investments. Secondly, most people have no idea how and why that management makes investment decisions on their behalf.

There are two kinds of fees charged, the management fee – usually about 1-2% depending on the size and structure of the plan, and the trading fee, based on the activity of the account.  And most people don’t have a clue how much they are paying and for what. [MJ]  And, we are not speaking of some piddling amount in fees, as the study by Demos discovers:

  • “According to our fee model, a two-earner household, where each partner earns the median income for their gender each year over their working lifetime, will pay an average of $154,794 in 401(k) fees and lost returns.
  • A higher-income dual-earner household, one where each partner earns an income greater than three-quarters of Americans each year can expect to pay an even steeper price: (as much as) $277,969. “

Those fees and the accounts to which they are attached are extremely attractive for the denizens of the Wall Street Casino, and there’s a little secret involved – there are cheaper ways of investing for retirement, but they aren’t likely to be included in the pitch from the investment managers. Why? The explanation requires that the worker know the difference between “active” and “passive” management:

“Most funds are “actively managed” by managers who pick and choose stocks for their funds, and the fees for these services add up to about 0.93 percent on average — again, year after year, every year. Putting your 401(k) money in passive “index” funds, which simply and automatically track the returns of major stock market indexes, can cost as little as 0.14 percent per fund — less than one-fifth the average cost.” [DFIC]

So, how much does an investment advisor have to tell the client?  Not much, and they want to tell you even less.

Now we come to the part where public and private pension plans meet: How much does the management have to disclose to the retirement plan investor?  In the state of Kentucky a public school teacher was summarily informed that he had no right to know the terms of the agreement between the Kentucky Teachers’ Retirement System and the Wall Street wealth management firms handling the actual investments. The management trade group excuses this total lack of transparency saying, “secrecy is necessary and appropriate to protect the financial industry’s commercial interests.” [Moyers]

We might translate “financial industry’s commercial interests,” to something like the financial services industry’s proprietary information including how much they are collecting and for what services rendered.  If system wide information isn’t available then how is the individual investor in a 401(k) plan supposed to find out what is going on?

The stance of financial management gives every appearance of being: Give us your money, and shut up.  We’re the experts here, and please just trust us to do the right thing – except

“One casualty of the House budget talks to avert a government shutdown may be a proposed rule requiring investment advisers to act in the best interests of their clients, according to multiple House Democratic sources.

Labor activists and financial reform experts have heralded the rule as a critical step toward enhancing retirement security. The policy would impose a “fiduciary duty” on financial professionals who oversee retirement accounts, barring them from considering the potential profits of their own firm when choosing investments. Instead, investment managers would have to pick stocks, bonds and other assets based only on what was in the best interest of retirees.” [HuffPo]

Get that?  The financial professional is supposed to exercise a “fiduciary duty” to pick investments on how well the investment is likely to perform and NOT on the fee’s the professional’s firm could rake in.  That simple rule has been drafted, attacked by the lobbyists from the financial sector, and is now a hostage during government funding debates in the House.   Not only are investors in pension plans unaware of the terms and fees attached, they cannot assume that the investments in their plans were made with their best interests in mind.  Just hand over the money – and keep very, very, quiet?

How To Pull Off The Perfect Heist

The elements for the Great American Pension Heist are all in place. On the public side of the ledger – convince the public that pensions and the potential pensioners are the problem – never the Wall Street debacle of 2007-2008 or the tax subsidies gladly handed out to corporations.   Clamor loudly and at length about the need for pension “reform.” Wait for a compliant legislature, city council, or other government entity to hand over the money – and then tell them they have no right to find out the terms of the management operations.  Go quietly and no one will get hurt!

On the private side – Continue to tell workers that they’ll be better off with their “economic freedom” to finance their own retirement plans with “flexibility,” and they can use their money as they want – just make the management fee structure so complicated it takes a degree in Finance to figure it out, and then operate on the happy assumption that the financial professional’s first duty is to his own firm’s bottom line not with no specific obligation to cover the future retiree’s bottom.   Give us your money, pay us the fees, and just trust us!  Go quietly, and no one will get hurt?

Additional information and references:

“Looting the Pension Funds: Wall St. is grabbing money meant for public workers,” Rolling Stone, September 2013.  “The  Plot Against Pensions,” Institute for America’s Future.  “The 401(k) Scam,” Seeking Alpha, September 2014.  “401(k)’s are a sham,” Salon,  August 2013.  Testimony, John Bogle, Vanguard Group, Senate Finance Committee, September 2014. (pdf)  “401(k) Plans are a Rip Off, Mother Jones,  May 2013.  “Hidden 401(k) fees: The Great Retirement Plan Rip Off,”  Daily Finance Investor Center, June 2012.  “The Retirement Savings Drain, Demos, May 2012. “401(k) Fees are Robbing You Blind,” My Daily Finance, April 2013.  “Public Pensions and Hedge funds don’t mix,” Demos, October 2013.

Edit: Sorry for the confusion — “Layer Five” should have been Layer Four! Thanks for the proofreading, and maybe next time I’ll remember the maxim “The Preview Button Is Your Friend!”

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Let’s Save Capitalism

Adam Smith If we want to do something big why not craft a nationwide campaign to save capitalism?  Basic, dictionary definition capitalism:

“ (noun) an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, especially as contrasted to cooperatively or state-owned means of wealth.” [Dict.com]

Let’s declare, right out front, that capitalism is NOT a political system.  It does, however, require a political apparatus and infrastructure to maintain our economic institutions.   Let’s assume that Adam Smith was correct, that monarchical controlled monopolies and charters were counter-productive.  Indeed, Adam Smith was quite vehement on the subject of monopolies. He was particularly opposed to those guild members, shop keepers, and manufacturers who conspired to operate in the Wretched Spirit of Monopoly.”  [Kurz pdf]  He’d seen the results of  conglomerates such as the East India companies of Great Britain and the Netherlands – and he disapproved.   That critique hasn’t prevented the monopolists from mangling the message by adding a bit of  Mandeville here, adding a touch of Samuelson there; marinated in the toxic and sophomoric economics of Rand,  and devising a philosophy to justify unadulterated greed.

The problem for the Justification of Greed crowd is that at some point in the economic process someone has to buy something.  At least in the real world, someone must manufacture a product using primary products (minerals, timber, etc.) and then must transport the products to distributors (secondary) markets, so that ultimately a consumer will purchase the product at a price determined by the balance of supply and demand.  This, at its simplest, is pure capitalism.  We need more of it.

In America’s bifurcated economic system the financial sector, which once primarily facilitated the investment in the manufacturing, distribution, and selling of goods and services, has taken it upon itself to function for its own benefit – one all too often at odds with the Main Street economy it was meant to serve.

The financialists [Forbes]  discovered the gold to be mined from mountains of debt, and sought profit from the debt, the service of the debts, the trading of debt, the manufacturing of securitized assets based on debts, and they turned Adam Smith on his head:

“Adam Smith never espoused the beliefs that control our capitalist system today, that the only purpose of a business is to create shareholder value and that the unfettered market will effectively regulate itself. These two views have been widely adopted, without empirical foundation, by many influential financial and political policy-makers. They have been used to justify systemic deregulation and a maniacal focus on generating short-term earnings that are not necessarily real economic earnings.” [Forbes]

And, they’ve held sway for almost the last three decades:

“Over the last 25 years American capitalism has become financialism, which is primarily transactional, unrestrained greed. Financialism embraces the view that the only purpose of business is to create shareholder value, measured primarily by short-term results. The dominance of short-termism is evidenced by the magnitude of institutional stock “renting” for terms of 12 months or less, the volume of high-speed, high-frequency algorithmic short-term trading, the short average tenures of chief executive officers and the dominance of executive compensation tied solely to short-term results.” [Forbes]

In short, ‘faster and more volatile’ has replaced ‘visionary and more rational’ in our economic system.  And the politicians in place are either wedded to this financialism and actively abetting it, or they are such close allies that the differentiation is difficult to discern. Or to put it in harsher terms: The politicians are selling out the long term benefits of American capitalism for the benefit of short-term financialism.  What’s been the result?

“When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first,” said Piketty, “capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.” [Piketty, Farrell]

We might simplify this statement by saying: When the financialists take over the field from the capitalists the economic inequalities they create unleash havoc on our real economy and our national values.  Who warned us about this?  None other than the patron saint of financialists – Adam Smith:

“The disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition is the great and most universal cause of the corruption of our moral sentiments.” [Piketty, Farrell

Smith wasn’t quite finished with the Greedy:

“The great source of both the misery and disorders of human life, seems to arise from over-rating the difference between one permanent situation and another. Avarice over-rates the difference between poverty and riches: ambition, that between a private and a public station: vain-glory, that between obscurity and extensive reputation. The person under the influence of any of those extravagant passions, is not only miserable in his actual situation, but is often disposed to disturb the peace of society, in order to arrive at that which he so foolishly admires.” [Smith; Theory of Moral Sentiments]

So, what have we done for the past 25 years?  We de-regulated the avaricious, we praised the vain-glorious, and we rewarded those harboring these “extravagant passions” with riches beyond their dreams.  Then we declared it “good,” and “American” and the culmination of “Free Enterprise,” when in fact the effect was to “disturb the peace of society,”  and create such income inequality that it is difficult to sustain the basic capitalism we say we admire.

Politicians need to make their positions clear: Do you support American capitalism or do you support Financialism?  If the former, you are deserving of our praise and votes. If the latter, you need to be out of any office of influence until you understand that you are destroying the very system you purport to value above all else.

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