MONEY AND WORK

News from the Progressive Review, providing alternative news and comment for over four decades.

July 17, 2009

CRASH TALK

Robert Scheer, Truthdig - Since most of the increase in the federal deficit is due to bailing out the banks and salvaging the greater economy they helped destroy, why is the top investment bank doing so well? Well, because that was the plan, as devised by Bush Treasury Secretary Henry Paulson, a former CEO of Goldman Sachs. Remember that Lehman Brothers, Goldman's competitor, was allowed to go bankrupt. The Paulson crowd wouldn't let Lehman change its status to that of a bank holding company and thus qualify for federal funds; soon afterward, Goldman was granted just such a deal, worth a quick $10 billion. Much is now made of Goldman paying back part of its bailout money, but forgotten is the $12.9 billion that Goldman got as its cut of the $180 billion AIG payoff. That is money that will not be paid back.

. . . Goldman was not just another bank. Before Paulson ran the Treasury Department, another former Goldman head, Robert Rubin, pushed through the repeal of the Glass-Steagall controls on banking activity. While some now play down the significance of this radical deregulation, not so Goldman Sachs CEO Lloyd C. Blankfein-at least not back in June 2007, when the markets were still doing well. "If you take an historical perspective," Blankfein told The New York Times by way of explaining his company's spectacular success at the time, "we've come full circle, because that is exactly what the Rothschilds or J.P. Morgan the banker were doing in their heyday. What caused an aberration was the Glass-Steagall Act."

That 1933 act was repealed in a law signed by President Bill Clinton at Rubin's urging, and in the following eight years Goldman Sachs recorded a 265 percent growth in its balance sheet. "Back then," The Wall Street Journal reports, "Goldman was churning out profits by trading credit derivatives, speculating on currencies and oil and placing big bets [on] the roaring stock market."

Big bets made in a casino designed by Goldman, which now makes money off loans to the victims. High on the list of victims are state governments that have to turn to Goldman for money because the federal government that saved the banks won't do the same for the states, which have watched their tax bases shrink because of the banking meltdown. As the WSJ noted, "issuing debt to ailing governments" is now a growth industry for Goldman.

Why didn't the federal government just lend the money to the states? Why was all the money thrown at Wall Street instead of needy homeowners or struggling school systems? Because the federal government works for Goldman and not for us. Indeed, when it comes to the banking bailout, Goldman Sachs is the government.

So much so that last fall The New York Times ran a story, headlined "The Guys From 'Government Sachs,' " that stated: "Goldman's presence in the [Treasury] department and around the federal response to the financial bailout is so ubiquitous that other bankers and competitors have given the star-studded firm a new nickname: Government Sachs."

One of those stars was Stephen Friedman, another former head of Goldman. Friedman was both a director of the company and chairman of the New York Federal Reserve Bank when he helped work out the details of the Wall Street bailout. The president of the N.Y. Fed at the time, Timothy Geithner, now secretary of the treasury, requested a conflict-of-interest waiver that allowed Friedman to buy more Goldman Sachs stock, and Friedman ended up with 98,600 shares. At market close on Tuesday that was worth $14,756,476.

Open Left
- A couple of especially scary things from [Leo Hindery's congressional testimony]:

- A quarter of the nation's remaining manufacturing companies are now deemed severely at risk. That means that manufacturing jobs, which traditionally are not only better paying but have a bigger multiplier effect in the economy and reduce our critically important balance of payments deficit with foreign countries, could shrink far lower from it's current abysmally low 8.7% of American jobs.

- A high level Obama administration economic adviser is quoted as saying that America's export future resides in exporting "consulting and legal services, software, movies, and medicine." If that's the view of how we are going to get out of our balance of payments mess, we really are in deep trouble.

The last time our economy faced this kind of deep and enduring economic challenge, in the Great Depression, FDR understood that the only way to climb out of the pit we were in was to fundamentally realign the way the federal government's economic policies worked, to invest in a truly bottom-up economic strategy that involved the government creating jobs and putting income into the hands of the poor, so that they would spend that money and make the economy grow again. That is what it is going to take this time. We need jobs. And then we need more jobs. And then we need more jobs. . . . The trickle down strategy of making sure the big banks are healthy so that they will lend money to everyone else? Guess what, it is not working. What we need to try now is investing in good jobs for regular people.

Pro Publica -
AIG has made public the financial terms of seven of the transactions, including the sale of its iconic building in Tokyo for $1.2 billion and six insurance subsidiaries for a combined total of more $5 billion.
But for five other transactions, the company is keeping the numbers a secret. AIG says there's no particular reason why it won't tell the public how much it is getting for the companies, which include consumer finance operations in Mexico and Argentina and a bank subsidiary in Russia. "It's decided on a case-by-case basis," said spokeswoman Lauren Day. "It's a function of the preference of the buyer." But financial analyst Sylvain Raynes thinks AIG has an obligation to be more open given that taxpayers own 80 percent of the company.

Time - In a clear departure from the historical norm, the White House is not cheering the return of huge profits to Wall Street. On the contrary, the recent windfalls at Goldman Sachs and JP Morgan, and the promise of giant year-end paydays for banking executives and traders, has caused a bit of consternation in the West Wing, coming as it does so soon after the taxpayer bailouts saved the entire financial system from total collapse. . .

The eye-popping Goldman profits create a policy problem for lawmakers, including the President, as they try to reform the financial system to ensure that history does not repeat itself. At issue is not just the safeguards that traders are using to ensure that another crisis of confidence doesn't occur, but whether traders on Wall Street are taking advantage of the public backstop against systemic failure to create personal profits. . .

According to company data, Goldman - which converted to a commercial bank at the height of the crisis in order to gain easier access to cheaper government credit - has significantly reduced its leverage ratio, which measures how much money it borrows, from 27.9 at the beginning of 2008 to 14.2 today. At the same time, Goldman has increased the amount of money it is risking on a day-to-day basis, and the number of competitors it faces in the marketplace has significantly shrunk, with onetime stalwarts like Bear Stearns and Lehman Brothers becoming casualties of the crisis.

Paul Krugman, NY Times - Goldman's role in the financialization of America was similar to that of other players, except for one thing: Goldman didn't believe its own hype. Other banks invested heavily in the same toxic waste they were selling to the public at large. Goldman, famously, made a lot of money selling securities backed by subprime mortgages - then made a lot more money by selling mortgage-backed securities short, just before their value crashed. All of this was perfectly legal, but the net effect was that Goldman made profits by playing the rest of us for suckers.

. . . The huge bonuses Goldman will soon hand out show that financial-industry highfliers are still operating under a system of heads they win, tails other people lose. If you're a banker, and you generate big short-term profits, you get lavishly rewarded - and you don't have to give the money back if and when those profits turn out to have been a mirage. You have every reason, then, to steer investors into taking risks they don't understand.

. . . You can argue that such rescues are necessary if we're to avoid a replay of the Great Depression. In fact, I agree. But the result is that the financial system's liabilities are now backed by an implicit government guarantee.

Now the last time there was a comparable expansion of the financial safety net, the creation of federal deposit insurance in the 1930s, it was accompanied by much tighter regulation, to ensure that banks didn't abuse their privileges. This time, new regulations are still in the drawing-board stage - and the finance lobby is already fighting against even the most basic protections for consumers.

Saul Landau, Counterpunch - As dupes of Madoff like Elie Wiesel kvetch about his and his charity's lost millions, the LA Times reported that "officials at Hollywood Presbyterian Medical Center, Kaiser Permanente West Los Angeles and Martin Luther King Jr./Drew Medical Center had discharged patients, put them in cabs and dumped them on skid row." . . . ABC News showed video of Carol Ann Reyes, 63, being "loaded into a cab by Kaiser Permanente hospital staff and dumped on Skid Row, wearing nothing more than a hospital gown and socks." Regina Chambers, who works at the Union Rescue Mission, said Reyes "was very disoriented. She didn't know where she was or what she was doing." Marveil Williams, another dumping victim, informed ABC: "They told me I needed to get out that hospital bed and go find somewhere to stay." The reporter concluded: "His head and eyes still swollen, Williams was dumped on the doorstep of Skid Row's Union Rescue Mission.". . .

Paul Craig Roberts, Counterpunch
- There is no economy left to recover. The US manufacturing economy was lost to offshoring and free trade ideology. It was replaced by a mythical "New Economy."

The "New Economy" was based on services. Its artificial life was fed by the Federal Reserve's artificially low interest rates, which produced a real estate bubble, and by "free market" financial deregulation, which unleashed financial gangsters to new heights of debt leverage and fraudulent financial products.

The real economy was traded away for a make-believe economy. When the make-believe economy collapsed, Americans' wealth in their real estate, pensions, and savings collapsed dramatically while their jobs disappeared.

The debt economy caused Americans to leverage their assets. They refinanced their homes and spent the equity. They maxed out numerous credit cards. They worked as many jobs as they could find. Debt expansion and multiple family incomes kept the economy going.

And now suddenly Americans can't borrow in order to spend. They are over their heads in debt. Jobs are disappearing. America's consumer economy, approximately 70% of GDP, is dead. Those Americans who still have jobs are saving against the prospect of job loss. Millions are homeless. Some have moved in with family and friends; others are living in tent cities.

Meanwhile the US government's budget deficit has jumped from $455 billion in 2008 to $2,000 billion this year, with another $2,000 billion on the books for 2010. And President Obama has intensified America's expensive war of aggression in Afghanistan and initiated a new war in Pakistan.

There is no way for these deficits to be financed except by printing money or by further collapse in stock markets that would drive people out of equity into bonds.

The US government's budget is 50% in the red. That means half of every dollar the federal government spends must be borrowed or printed. Because of the worldwide debacle caused by Wall Street's financial gangsterism, the world needs its own money and hasn't $2 trillion annually to lend to Washington

Into every cloudy day, some sun must shine: Croc, makers of those bizarre clogs, lost $185 million last year. Reports the Washingotn Post: ""The company's toast," said Damon Vickers, who manages an investment fund at Nine Points Capital Partners in Seattle. "They're zombieish. They're dead and they don't know it."

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