Does My Health Care Cover Being Eaten by Piranhas?

The health care debate is as curious an American phenomenon as there ever was. And the most curious thing of all is that with all the heated rhetoric flying around today, the debate was over before it even began. The Health Insurers Have Already Won. That was the cover story of Business Week last week, hardly a left-leaning socialist rag. “The carriers have succeeded in redefining the terms of the reform debate to such a degree that no matter what specifics emerge in the voluminous bill Congress may send to President Obama this fall, the insurance industry will emerge more profitable.”

I have always said that Obama is, before he is anything else, a buttoned-down corporate guy, and will end up alienating more on the left than the right. It’s hard to imagine what the “town hall protest faction” think they want or don’t want from him. The anger rises to such a fever pitch I wonder if this even really about health care. Or, is the quality of discourse summed up by this sign seen at a rally last week: “KEEP YOUR GOVERNMENT HANDS OFF MY MEDICARE!” Never mind the so-called “death panels,” a notion so idiotic one is rendered speechless thinking of a response.

The funny thing is that the Town Hall crazies are turning blue trying to protect “the best health care system in the world,” when, by all the numbers and facts, dollar for dollar, in terms of actual outcomes, it’s actually just about the worst. Score 10 for the spin-meisters. But that’s the game: appeal to poorly-defined fears that will always linger among the “sound bite” news culture.

What we will get is a cobbled-together patchwork engineered by the insurance industry. It’s difficult right now to say whether it will be better or worse, but it will not be a whole lot different. The hundreds of millions in campaign donations and lobbying efforts directed toward all the key players in Congress have sealed the deal. All that’s left is arguing over semantics.

Having grown up in a country with a single payer system, Canada, but having spent the last 25 years here as a naturalized US citizen, I feel like I might have some worthwhile perspective to thrown into the mix, although I must admit it feels like dipping my toe into a river filled with piranhas.

When thinking about complicated things I usually try to pull back to the broadest possible perspective before narrowing the focus and arguing minutia. If there is one word that defines the fear that Americans have over government controlled medical care it is this: Rationing. To that I say this: All health care systems are rationed. No country on earth can provide ALL that medical science has to offer to EVERY individual. In many single-payer systems, care is rationed by waiting times. As it turns out, many times, if people must wait for a procedure, lo and behold, it turns out they didn’t really need it! Of course, yes, single-payer systems can and do apportion acute care in a timely manner. Most single-payer systems have higher life expectancies, lower infant mortality, etc. than the US private system, at half the cost. We are 37thin outcomes. Is this the best we can do?

Still, some Canadians feel they can’t get the level of care that US private insurers provide for their best customers. That’s true, they can’t. So they head south if they have to and can afford to. For sure, that truism forms the crux of what is the health care debate in Canada. It’s called a “two-tier system,” and the debate is: should we provide a moderate level of care as a baseline and then offer more expensive care to those who can afford it? That was the debate way back when I still lived there, and still rages today. Some provinces have edged toward providing that second tier while others fear it will wreck the system. In this way, that part of the debate is very similar to the “public school/ private school” debate.

But here’s the thing: When they do look for care outside of the system, Canadians typically head for the Mayo Clinic, a medical establishment so well-orchestrated they provide an astounding level of care for far less than what health care costs average in the US private system. Apparently they do it by managing the system coherently. No superfluous tests performed just to protect doctors against lawsuits, because doctors are paid by and protected by Mayo. They get to focus on just medicine and the patient.

Of course there are stories of Canadians heading south for care because waiting times were unacceptably long. These stories are exploited to maximum benefit by those arguing to stay with a private system. But what about the stories of the 14,000 people per day US health care companies drop because of pre-existing conditions or other technical violations, most of them in the midst of a health crisis. They would love to be on someone’s waiting list. Some of them are among the thousands who declare medical bankruptcy. (50% of all bankruptcies) Some just go without care. Others end up getting expensive procedures in more affordable places like Thailand or India.

Ask that same Canadian if they would like to sign up for a top-notch US plan. It will cost more than your mortgage, no pre-existing conditions please, and you can and will be dropped at any time if we feel there is a violation of our complex rules. If you didn’t read the fine print, you will either be denied certain procedures, or have to pony up a huge co-pay, especially if you didn’t “pre-authorize” the procedure correctly. You will probably have a large yearly deductible and by the way, they will kill you with red tape and don’t even think you can win. Oh, and did I forget to say that your premiums will double every 10 years? (Mine have.) I dare say most Canadians would take their chances with plain vanilla single payer, come what may.

Health care is rationed in the US, too: 47 million of us just don’t have it. Plus, all that aforementioned pre-authorizing and co-pay and denying coverage stuff is rationing too. If you’re really into tough love you can pretend that most of the uninsured and underinsured are too lazy to work hard enough to pay for a good plan. But, in a mostly Christian nation, does that seem like a charitable way to think? I cannot think that way. Go ahead and call me a bleeding-heart liberal. My heart does bleed. It bleeds for all the pain and suffering in the world, whether or not the sufferers deserve it. Health Care is a basic human right. If we can’t afford it then cut something else. If government can only accomplish two things, let it be health care and roads. Everything else is gravy.

Don’t get all bent out of shape when some socialized benefits go to “the least of you” (Jesus’ words), unless you also rally against all the socialized benefits that regularly go to agri-business, oil and gas industries, defense contractors, media conglomerates, corrupt foreign dictators and militaristic regimes. It’s not suddenly a Marxist plot when the little guy gets a break!

Speaking of gravy, the actuarial unit of United Health Care, one of the largest health care companies in America, is busy as a bee hive crunching numbers. Although they are trying to down play the results, most of them point to the incredible windfall the company will enjoy under almost any plan now being considered in the debate. Still, they are trying to squeeze the numbers further, having spent $3.4 million lobbying congress. Most scenarios would have the public still owing 25% of the cost of their care, even after the huge premiums. United Health Care would prefer something more like a 65-35 split. So, they’ll do more lobbying.

United, like all the other companies shaping this reform, will do fine. After hitting up mostly smaller employers with double-digit increases, their profits, especially in the units providing Medicare to the poorest of the poor, were up 34% last year. Single-payer is the worst thing that could possibly happen to these companies. Even a government-sponsored insurer operating as a competitor is unacceptable. That might be a “Trojan horse” to a single-payer system. Private plans have spent in excess of $19 million lobbying mostly Democratic members of congress to defeat a government-sponsored competitor.

Single-payer is not even on the table, and can’t even be discussed in polite company. By some estimates, a single-payer system might save Americans about 1 trillion dollars a year. Admittedly all estimates in something this volatile are suspect, and this one doesn’t explain what would happen to taxes. But this one comes from Business Week. Why would such a conservative publication propagate such a socialist notion? Because businesses small and large are getting killed by health care costs, especially when they compete with countries with single-payer systems. When “business” doesn’t trust the business of providing health care, why would you? Would it be impossible to run a nation-wide, non-profit health care corporation along the lines of the Mayo Clinic?

Medicare and Medicaid are held up as abysmal failures, yet what other plan of any kind in any country insures only the elderly, the infirm and the destitute? Of course it’s expensive! Private insurers want a chance to pick up that business? They do it only under contract with a guaranteed margin. Ask your grandparents if they’d like to take their chances with a private plan.

Let the debate continue, but extreme partisanship will not get us there. The current system cripples families, crushes small businesses, and drags the economy down. Let’s remove the rhetoric and have a serious debate. Single-payer already works worldwide, and yes it has its problems, some of them big. But there is no private model to go by. After big banking sent the economy on a suicide mission, how can we believe that big Pharma and big Health Care have anything in mind but this quarter’s balance sheet at your health’s expense?

So, my friends, it comes down to this: Who do you want to manipulate your health care? The government, who seemingly can’t do anything right, or the corporations whose bottom lines don’t care a pig in a poke for what happens to your particular health? Worse than that – their bottom lines are completely dependent on how many claims they don’t pay. I don’t normally advocate bigger government anything. And it ticks me off that there’s nothing between cut-throat capitalism and government incompetence. This time though, I would prefer to take my chances with a government bureaucracy, it’s a lot less like getting eaten by piranhas.

Doug Friesen
8/13/09

“Bubblenomics” and The American Dream

The business of news-mongering just ain’t what it used to be. Walter Cronkite is dead and there‘s no one else believable. Two weeks ago, a Time Magazine poll revealed that Jon Stewart, with 44% of the vote, is the nation’s most trusted news personality. Brian Williams was a distant second with 29%, Charles Gibson was in there somewhere, and Katie Couric was an “also ran”, with a scant 7%.

The message is clear: the network anchors are reporting glossed-over and sanitized news, but few of us are buying it. In a world where someone like Sarah Palin can become famous uttering nothing but well-rehearsed sound bite platitudes, no two sentences having any direct correlation, one pauses to wonder, “where does America get its news?”

Into this vacuum of truth, morals and intellect walks Matt Taibi. Matt is a senior political correspondent for Rolling Stone who just wrote a very controversial article entitled “The Great American Bubble Machine – How Goldman Sachs Blew Up the Economy.” The subhead is: “From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression - and they're about to do it again”

Matt is a very earnest fellow. In interviews and talk shows he comes off as very knowledgeable and literate in the ways of Wall Street. He is smart, glib, and believable. I heard him on NPR take apart veteran Wall Street icon Charlie Ellis like slicing chicken. I have no reason not to believe him, because everything he says rings true compared with everything else we already know, and all the so-called experts lack any credibility whatsoever.

So this is the gist of it: Goldman Sachs has so many alums in positions to control the levers of power, they can and do manipulate world markets at their will. Matt calls it “pump and dump.” I call it “bubblenomics.” The scheme is the same. Run up the market by encouraging investors to jump in on the hot new thing. Get out ahead of time if you can, and even if you don’t, you’ve already made a killing. It worked on internet companies that had no earnings or even a saleable product or service. It worked on selling unsuspecting investors like pension funds, mortgage securities based on thin air. Matt even has credible evidence that Goldman Sachs had a lot to do with driving up the price of gas last year.

This is the new Wall Street. It’s not about building long-term wealth that creates jobs and commerce. It’s gimmick-driven wealth that does nothing for the overall economy. It’s not even capitalism. Capitalism is when people create value that someone else buys, and the ancillary benefits spin off through the system. I have no problem with people getting rich off that system; that’s the stuff of the American dream. These guys are hollowing out the economy by sucking the money straight out of the system. That some of their fabulous wealth eventually trickles down does not make for a robust recovery. It’s robbery! Some guys in three-piece suits cleaned out my 401K (twice in 10 years!), now those same guys are paying themselves billions in bonuses from bailout money that comes from MY taxes. Every time a bubble is inflated and busts, more wealth is stripped out of the working class and goes straight to the top. My friend, that’s no longer the American dream, that’s the stuff of Third World nightmares.

It all started when the giant investment banks went public. Before that there was a sense of guardianship among traders. Now it’s a “bonus culture” feeding frenzy, and the only sense is to jerk whatever chain you can to spill the money pot. With no one in control and no standards, greed has worked its magic throughout the system.

The list of Goldman Sachs alums is impressive: Robert Rubin (former GS CEO), Clinton’s treasury secretary, was the Godfather of deregulation. That sleight-of-hand was carried on by Rubin protégé Larry Summers, Clinton’s next Treasury Secretary and now Obama’s Chief Economic Advisor. Then there was Henry Paulson, Bush’s Treasury Secretary (former GS CEO). Hank strong-armed weak regulators (like SEC Head William Donaldson, former GS Head), and was instrumental in the gutting of rules governing leverage and the limits of risk. Together, they created an economy that was on a suicide mission.

The ultimate power-play was when Paulson allowed Lehman Brothers, Goldman Sachs’ chief competitor in many areas, to die, while they threw liferings to all the other drowning Wall Street souls.

Next Paulson bailed out AIG, (the day after he allowed Lehman to go down). That was because AIG was Goldman Sachs’ number one creditor. Of the original $80 billion AIG bailout, $13 billion went straight to Goldman Sachs, a bankruptcy payment of 100 cents on the dollar. (Unheard of in any insolvency situation, just ask General Motors creditors, who got pennies on the dollar, if anything at all; or GM stockholders, whose stock is worthless in the new re-organized GM.) Without this payout, Goldman Sachs would arguably not have survived.

Matt’s article was made all the more timely when Goldman Sachs, shortly after paying back bailout funds, went on to post the largest quarterly profit in its 180-year history. Of course the bailout money, which GS made a big deal about not needing, is just the tip of the iceberg. More important is the money coming out of the back door of the Fed, an amount that can never be known because of the shroud of secrecy under which the Fed operates. This cheap money means that GS and the other of the Government’s “chosen” banks have access to guaranteed profits, courtesy of the taxpayer. They used the bailout to fill their coffers and pay themselves record bonuses, an average of $700,000 for each employee.

The Goldman Sachs list goes on: Recently-departed New York Fed Chairman (Former GS CEO) Steven Friedman steered bailout dollars to GS while letting other banks twist in the wind. Present New York Fed Chairman is William Dudley (Former GS Chief Economist). Keep in mind that the NY Fed is the most powerful branch of the Fed and directly responsible for policing Wall St. Conveniently, when Goldman Sachs switched from an investment bank to a bank holding company in order to receive the cheap Government money, they would now be regulated by all their old buddies who now ran the Fed!

Garry Gensler, Rubin’s top aide in the deregulation years, is now the head of the Commodity Futures Trading Commission, the outfit that would be in charge of regulating derivatives — that is if there was any regulation, which there isn’t. The NY Insurance Department, which would regulate Credit Default Swaps (if there was any regulation), headed by, you guessed it, former GS Vice Pres.

That list only scratches the surface. Turn over any rock in any Government body that controls the economy; there you will find Goldman Sachs. President Obama vowed on the campaign trail that his White House would never employ a registered lobbyist. Regrettably, he has GS loyalists throughout the power structures.

After almost a year, nothing has changed. Instead of using that massive public subsidy to kick-start the economy, they are keeping the money and turning it into bonuses and yachts. Instead of adopting prudent business models, they are still engaging in extraordinarily risky behavior because they have a guaranteed stream of cheap money from the Government.

So, what’s the next bubble? Don’t be surprised; it’s already started: The cap and trade program in carbon emissions! This is a highly complex commodities market that, under the recently passed Energy Bill, is mandated by government but administered and controlled by Wall Street. Even Al Gore is in on the fun, having formed a cap and trade company with some former Goldman Sachs big wigs.

Goldman Sachs spent 3.5 million lobbying for the bill’s passage and they got exactly what they paid for, a new bubble to inflate. After all, Goldman Sachs was Obama’s second largest campaign contributor. Thought that Wall Street was a Republican sport? The street has, for the last several years, contributed to the Dems 3:1. As Nobel economist Paul Krugman says of Goldman Sachs “They are very good at what they do. It’s just that what they do isn’t very good for America.”

In response to Matt’s article, Goldman Sachs sent one of their “flacks” to respond. The rebuttal is laughable in its sanctimony. “We reject the assertion that we are inflators of bubbles and profiteers in busts, and we are painfully conscious of the importance of being a force for good.” “We could hardly be described as having been a major player in the mortgage market, unlike so many of our current and former competitors.”

Ahem: In 2006 alone, Goldman Sachs sold $77 billion in mortgage securities, a third of which went bad. Sure, some sold more, but where I come from, $77B is real money.

In light of all the GS henchmen who marched the economy over a cliff and are now picking the pockets of the fallen, here’s the best one: “…in the wake of the events of the past year or two, Goldman’s partners have pretty much lost their appetite for going into public service.” Thank God. I doubt the public would survive any more of Goldman Sachs’ “largesse.”

Doug Friesen
Aug 10, 2009

The “Black Hole” Economy

In many an economic downturn, the media is blamed for dispensing too much doom and gloom, crushing consumer confidence and needlessly delaying recovery time. Now, the opposite is happening. People and media alike want very badly to believe that the old “bubble” economy is just around the corner. But, just like the economy spun out of control due in part to mass financial hysteria, there exists today a collective failure to confront reality. Hey, don’t get me wrong, I would love to return to the days when my phone was ringing off the wall with new business, and people were put on waiting lists.

But I have decided that at this point, the only hope of arriving on a solid footing in some blissful future starts with confronting reality, as bad as that might be, and making the necessary adjustments to the system. In fact, I’m convinced that failure to do so is far more scary than the worst that reality can hold.

The dictionary defines a black hole as “a gravitational field so intense that its escape velocity is equal to or exceeds the speed of light.” That mind-bending explanation aptly describes the Sisyphean task of trying to push the limp economy to recovery by printing money, against the backward pull of everything being devalued or “repriced.” Or, as economist Gary North describes this recovery, “pushing on a string.”

Much of the confusion as to which tool to use for the fix revolves around one key conundrum: will inflation or deflation rule the next decade? Inflation is normally too much money and credit chasing too few goods, while deflation is the opposite. Right now, it seems that the inflationary effect of the Fed printing almost unlimited amounts of money is offset by the deflationary effect of the falling value of just about everything. No one knows how this will play out, although some pretend to.

The big unknowable variable, the one which makes any vigorously-held prognostication an exercise in arrogance, is the proliferation of economic “black holes.” Stability and predictability are the first casualties as these things move through the economy. Here are a few:

Black Hole #1: Debt as Money - The easy money supply which fueled the bubble was driven in part by an ever-broadening definition of “money.” John Rubino points out in a 2007 article entitled Nope, That’s Not Money: “more and more instruments came to be used as a store of value or medium of exchange or even a standard against which to value other things—in other words, as money. Thus, mortgage-backed bonds and even more exotic things came to be seen as nearly risk-free and infinitely liquid... credit gained ‘moneyness,’ which sent the effective global money supply through the roof. This in turn allowed the U.S. and its trading partners to keep adding jobs and appearing to grow, despite debt levels that were rising into the stratosphere. For a while there, borrowing actually made the world richer, because both the cash received and the debt created functioned as money.”

Rubino goes on to state the obvious: debt as money turns out not to be one of humanity’s better ideas. “Hedge-fund traders found out that an asset-backed bond was not the same as a stack of hundred dollar bills.” This huge pool of debt/money is far from being fully wrung out. So pervasive was it, with its tendrils reaching far into the most hidden recesses of the economy, it will be years until we even are aware of how much wealth is “real.”

Black Hole #2: The Job Swap – Between 1998 and 2003 alone, three million manufacturing jobs were lost. At the same time, the trade deficit in manufactured goods rose by $230 billion. It’s not hard to notice this trend, just go to WalMart, China’s sixth largest trading partner. Clearly, globalization has re-arranged a huge sector of America’s economy. We are addicted to cheap goods from Third World countries. I’m not knocking globalization, I think that’s futile. The question is how we address this re-shuffling, and what hand we think we will draw after the cards are cut.

So far, most of the manufacturing jobs have been replaced with jobs in the service industry at about half the pay rate. Whereas Dad was able to support a family working at “the factory” while Mom raised the kids, almost every family with an income over $75,000 now has at least two wage-earners.

There is a big reason why this huge restructuring was not felt in the overall economy in the boom-boom 2000s. The answer lies in an innocuous-looking statistic I pulled up while researching economic trends. In 1990, the “financials” (investment banks) represented 16 % of corporate profits. In 2006, they were 42%. In the 16 years of shipping factories overseas and buying cheap stuff from China, we conjured up a whole new monetary behemoth that fueled corporate profits and the GDP.

That trend probably represented one of the largest re-arrangements of wealth in history – from the middle class to the very wealthy. The resulting income inequality has yet to be addressed, and will be a huge drag on any recovery – there won’t be one until the middle class is comfortable again.

That same statistic highlights another even bigger problem: A substantial portion of the rise in the financials turned out to be just smoke and mirrors. The net effect of taking that manufacturing and replacing it with financial gimmickry is a very large black hole that will be moving through our economy for some time to come.

Black Hole #3 – The Savings Deficit – Just like the proverbial frog in a pot of water that is not yet boiling, we eased into the debt a little at a time, because it felt good. And just like the frog, we didn’t notice the temperature until it was too damn hot.

Debt overload is crippling many companies and many families. As reported in “the Motley Fool,” the economy reaches a tipping point called a “Minsky moment.” That is when everyone tries to de-lever debt at the same time, after the economy has gorged on more debt than its cash flow can bear. It’s named after economist Herman Minsky. Obviously, we need to get past our “Minsky moment”, to reach a point where debt is sustainable.

The consumer debt orgy did not start just recently. It has been rising from the mid 70s, more than doubling since then, to 130% of household debt compared to disposable income. The task of retiring those staggering levels of debt is daunting. The last five quarters, after consumers shut off the faucets, sending the consumer-based segments of the economy into a tailspin, have only dented the debt by a few percentage points.

Getting back to 70s debt levels of 63% is not even attainable. We are finally saving now, rising from negative numbers in 2005 to 4% this year. But it will take 10 years of dedicated saving to get back to the 35-year average of 88%. That means extracting something like $5 trillion from consumer spending during that period. Ouch, that’s going to hurt! (All these figures come from “the Motley Fool”).

These are just a few of the black holes. I’m sure there are more. They are not going away. The easiest thing to do is re-heat the economy and deal with them another day.

To use the admittedly simplistic analogy of a sinking ship, in the long run we’d be far better off by mending the holes than furiously bailing incoming water. True, we have to bail enough water to buy enough time to mend the holes (especially black ones). Right now, we are not even discussing the holes or the mending. Given our three-decade history of entitlement thinking, we will probably just keep bailing and hope for the best. But I’m hoping we deal with the black holes, so that the economy we pass on to our children is not just another train wreck in the making.

Doug Friesen July 20, 2009

We Won’t Get Fooled Again

President Obama’s new regulatory reforms are weak and ineffective, and they will do almost nothing to rein in the worst excesses of Wall Street. That’s the charge being leveled by a wide variety of business commentators, and even by legislators in Obama’s own party. The only constituency that likes the reforms are the bankers. They should, they may as well have penned them. Is this “change we can believe in?”

The plan is still sketchy, but the details revealed so far paint a picture of a President no less in the pocket of big banking than any others have been. This is not why my wife was out on so many early mornings holding Obama signs on highway overpasses. In announcing the new regulatory scheme, Obama starts off by chiding “a culture of irresponsibility (that) took hold from Wall Street to Washington to Wall Street.” But right away he gets all wishy-washy and talks about how the regulatory system was “overwhelmed by the speed and sophistication of a 21st century global economy.” The implication is that no one was really to blame.

As award-winning writer and author William Geider puts it: “That is not what happened, to put it charitably… The regulatory system was not overwhelmed by historic forces. It was systematically gutted and dismantled by the government in Washington at the behest of the banking interests. If Obama wants details, he can consult his economic advisors--Summers-Geithner--who participated directly as accomplices in unwinding the prudential rules and regulations. Cheers were led by the Federal Reserve with heavy lifting by both political parties.”

In his June 19th piece in The Nation, Geider goes on to say how similar this is to stumbling into Iraq with false CIA telemetry and then claiming “hey, we were all fooled.” Just like Iraq was premeditated ideological adventurism, with facts on the ground ignored and/or distorted to fit that ideology, this meltdown, and the official response to it, is robber barons plundering the nation under State protection.

The biggest problem with the new regulations lies in giving much of the power to the Fed. At a time when more and more people are questioning the murky and secretive nature of the Fed, and its outsize role in manipulating money for the benefit of the wealthy elite, it hardly seems a good idea to make them the watchdog of Wall Street. As Geider says, “give the mess to the Wizard of Oz, the guy behind the curtain.” 230 House members have endorsed a measure to audit the Fed (this has never been done). Even Nancy Pelosi has said “The American people want to know more about The Secrets of the Temple,” which was a good plug for Geider’s book of the same name, about the Fed. Chris Dodd (D-Conn.) likens trusting the Fed with more regulatory power after their complete failure to stop out-of-control greed, to “a parent giving his son a fast new car after he just crashed the family station wagon.”

This “irresponsibility” President Obama keeps talking about, as if someone was naughty and needs a good talking to, is fraud and corporate crime, pure and simple. The cure for that irresponsibility is to crack a few heads and send some of the worst offenders to prison. It is not as if it’s a mystery who they are.

This notion of responsibility is at the heart of what’s wrong with most everything. Responsibility has to start with a detailed, in depth understanding of everything that led to the breakdown, something that has been scrupulously avoided. At the risk of being repetitive, building a new stable economy without really understanding what happened to the old one is nonsense, and dangerous nonsense at that. Steven Pearlstein at the Washington Post mocks the new regulations as “not being grounded in a thorough and independent analysis of how the crisis was allowed to develop and what regulators did and didn’t do to prevent it.”

Securitized mortgages were at the heart of the meltdown. Wall Street was able to bundle junk, collect a huge fee, and pass the mess on to unsuspecting investors. New regs would require the originator to retain a 5% stake. That will not make them responsible. 50% would.
Glaringly missing are any new controls of hedge funds, private equity funds, structured investment vehicles, derivatives, or credit default swaps. Some of this stuff is only dimly understood, even by the people that trade them, and still represent a potential cloud of doom hanging over the economy.

The only bright light is the new consumer protection agency to control Wall Street’s predatory behavior. Ironically, some House member, I can’t remember which one, but a Republican, got up during the debate and decried that cracking down on the credit card companies would raise the cost of credit to consumers. Elizabeth Warren, Harvard Law Professor, head of the Congressional Oversight Committee on the bailout, and the one brave and brilliant high-profile critic of Wall Street out there today, laughs about that. “So the only way these companies can survive is to con and trick their customers?”

Wall Street warns against new excessive regulations stifling the fragile recovery. But what has really changed that would cause us to think a recovery is around the corner? As John Carney writes in the Business Insider, “the financial sector faces almost all the same challenges it did last autumn—uncertainty about profits, outdated business models, heavily leveraged balance sheets, self-dealing, short-term thinking by bonus-hungry executives, ineffective regulation and—perhaps most of all—a huge amount of credit assets of extremely questionable value.”

In as much as I was cheering the downfall of the Bush Jr. administration, what most presidential historians are now calling the “worst presidency in US history,” I didn’t think it would involve such a complete evisceration of the Republican party. Now I’m lamenting the lack of an opposition with any gravitas. And as Frank Rich, New York Times columnist writes, “That’s a double-edged sword for Obama.”

The fact is, nothing much has changed on Wall Street. The SEC has charged Angolo Mozilo, (Countrywide CEO) with insider trading, but that was a no-brainer. The revolving door between the SEC, Washington, and the boardrooms of Wall Street is as greased as ever. The rating agencies are still being paid for ratings by the companies they rate. Eric Dash writes in The Times “It is as if Hollywood studios paid critics to review their would-be blockbusters.” The CEOs are not in retreat, they are re-grouping and re-branding (AIG is now AIU).

To paraphrase Frank Rich writing in the New York Times, the “hope” phase of Obama’s presidency is now evolving into the “change” phase, and we won’t be fooled again. Even if these new porous regulations permit another meltdown a decade hence, Obama might still look pretty good. But if, in the shorter term, the economic quality of life for most Americans remains unchanged as the financial sector resumes living large, he’ll face anger from voters of all political persuasions.

Doug Friesen
July 5 2009

Bernanke Throws Stockholders and Taxpayers Under the Bus.

In my April 26th blog post, entitled “There is a crack in everything,” I wrote about Ken Lewis testifying under oath that Federal Reserve Chairman Ben Bernanke broke the law in a number of ways in December 08 and January 09, in regard to Bank of America’s acquisition of Merrill Lynch. Ways that I predicted would prove to be of huge consequence. That scenario played out this week as Bernanke testified under oath before Congress and denied Ken Lewis’ claims.

The fall ‘08 banking meltdown for sure featured many tense stand-offs in corporate boardrooms. None, perhaps more tense than interactions between Bernanke and Lewis. Bank of America (B of A), at the time, was not one of the banks about to go under because of toxic investments. They had problems, but still had “liquidity.”. That is why Bernanke chose B of A to absorb the floundering Merrill Lynch, who had spent an entire year losing an average of 59 million dollars a day, and had only days left to survive.

By this time Bernanke already had “bailout fatigue” and was in no mood for gamesmanship or negotiating. He was pretty much just telling everyone how it was going to be. The deal was struck during the three week period in early fall that featured collapses, bailouts, and forced marriages affecting every Wall Street investment house. The problem with the deal between B of A and Merrill Lynch was that Lynch CEO John Thain was not done losing money yet. He doubled down on his already toxic mortgage securities, having misjudged where the bottom was.

By December ‘08, when the two companies began preparing for a January ‘09 closing, Merrill revealed another $16 billion in losses on top of $118 billion in toxins. A stunned Ken Lewis notified Bernanke that he was thinking of backing out of the deal, invoking “MAC” (Materially Adverse Change), a clause that would have allowed him to walk away from the deal without consequence.

This is the moment Bernanke crossed the line. He went from powerful financial regulator to illegal megalomaniac manipulator, when he (according to Lewis’ testimony under oath), told Lewis that would he would remove Lewis and his entire Board if Lewis invoked MAC. Whether Bernanke in fact had the power to do so, or whether it was just pretending he was King of the World is not something that I have read anyone commenting on. More importantly though, Bernanke went on to instruct Lewis not to disclose the losses to the SEC (Securities and Exchange Commission) until the deal closed, a serious violation of the law.

Clearly, the onus for disclosure was on Lewis. And these are serious laws, meant to protect investors, who must trust the system to give them honest information to make informed investment decisions. This goes to the core of why the confidence is gone from Wall Street. If Bernanke used his position to threaten Lewis to break the law, he too, is guilty, and should (and perhaps will) be prosecuted to the full extent of the law.

If the SEC can spend months and years going after Martha Stewart for an insider trading charge that involved, I can’t remember, $50 thousand or something, then surely the illegal manipulation of information about a deal in the tens of billions is actionable, especially when the net result deprived stockholders of the right to dump B of A before the toxins hit.

So far, the congressional committee is not buying the inconsistencies in Lewis’ and Bernanke’s stories. The committee’s ranking member, Darrell Issa (R-Calif.): “I for one personally doubt all these can be explained away.” Bernanke denies that what he told Lewis constituted a threat. It was just a “suggestion.” Trouble is, someone in Bernanke’s position has to be aware of the power he wields. Jason Chaffetz (R-Utah): “with all due respect, I’m just not buying that…I think that’s a threat, and I think it’s reasonable for the CEO and the board to take it as a threat.” Richmond Regional Fed Bank President Jeffrey Lacker has already supplied e-mail evidence that very clearly has Bernanke bragging about threatening Lewis and his Board with their jobs if they pulled out of the deal.

This is about more than the Fed Chairman overstepping his boundaries. One, it falls into the same disturbing pattern we have repeatedly seen during this crisis, one of protecting the high and mighty and handing the bill to investors and taxpayers. Two, at a time when new (much-needed) regulatory powers are being debated as possibly being given largely to the Fed, it raises important questions about whether the Fed already has too much power, and whether the Fed often uses that power to its own ends. Remember, the Fed is not answerable to Congress or the President, or to anyone for that matter. It has never been audited. Its creation in secret on Jekyll Island in Georgia in 1917, and its role ever since, is shrouded in mystery.

Also, does the Fed deserve more power after its dismal performannce managing the economy? Senator Chris Dodd (D-Conn.) likens giving the Fed more regulatory power to "a parent giving his son a bigger faster car after he just crashed the family station wagon."

Bernanke keeps claiming his actions were to protect us against a broader systemic risk. But this is starting to feel more like decrees made by “divine” right. And always to the benefit of the Devine.

The words were taken from my mouth before I could utter them, when Chris Rupkey of the Bank of Tokyo/Mitsubishi UFJ said “It does have a kind of a Watergate feel to it.” Except that Watergate was after all, nothing more than a petty burglary. More about the implication of the action than actual consequence of that action. I’m not sure that the burglary itself ever netted anything. But it was enough to bring down a President. This is much different. This is all about a person of vast power, entrusted by us regular people to protect the financial system we depend on, using that power to break the law and manipulate vast sums of money for the benefit of the financial elite.

Committee Chairman Issa has charged that the Fed has covered up its involvement in the merger and “deliberately hid” important details from other regulators. In an atmosphere where so much white collar criminality is being swept under the rug, probably because no one has the stomach to upset the fragile recovery with high-profile prosecutions, it will be interesting to see if Congress and/or the SEC can find the willpower to go after Bernanke.

Doug Friesen
June 27, 2009

Alice in Bankland

In a world awash in acronyms, PPIP is just another side show in the rodeo. It stands for Public/Private Investment Partnership. Who cares? Except this innocuous sounding scheme, hatched by Obama’s financial czar Larry Summers and Treasury Secretary Tim Geithner had the potential of further bankrupting the American taxpayer in an effort to re-inflate the banking bubble. The plan involved doing quadruple by-pass surgery to balance sheets of superbanks, but with a twist. In this operation, the risk was not to the patient (the banks) nor to the surgeons (The Fed and the Treasury) but to the person who pays for the insurance (the public). But you don’t have to worry about it any more. The plan died on the table before the operation began.

Still it’s instructive to pull this apart as a stark reminder that the fantasy economy remains in la-la land. Here’s what happened. After the music stopped, the banks ended up with trillions in toxic assets. So many trillions, that many of Americas largest banks, even though they had huge assets, had even huger losses. They were close to insolvency or maybe even way over the line. We will never really know. But it all depends on how you tally the balance sheet. If you want to live to play another day, you do anything you can to pretend the losses really don’t exist. To do that, you must somehow hide the toxic assets from the balance sheets. Then you hope like hell something substantial will magically happen to erase them.

PPIP was that white night, created by the government just for that purpose. The government and the banks have a similar MO. For the banks, it’s more important to create a quarterly report that will maintain the illusion of prosperity than to peck away at the slow plodding work of long term viability. And the government has exactly the same agenda.

This is how it was supposed to work: The banks would remove the troubled assets from their balance sheets and put them up for auction. The auction price would be paid thusly: 7.5% from private investors, 7.5% from government (taxpayer) funds, and 85% from a loan from the FDIC. If the assets prove to be worth more, the private investor and taxpayer portion could pay out at 2:1, 3:1, even 4:1. They would then pay out the FDIC loan. If it turns out to be a bust, everyone walks away from the table with nothing and the FDIC owns the mess.

What’s wrong with this picture? The FDIC is ultimately backstopped by the taxpayer, so, in this highly leveraged investment, (weren’t we supposed to quit those?) the private investor has 7.5% of the risk and the taxpayer has 92.5% of the risk, but for the same potential payout.

A sucker’s deal all the way. In fact, with this set up, there is a very real risk of the private investor over bidding, since the risk is so small the potential reward so great. According to financial expert Peyton Young, “the more aggressively investors compete in bidding for these assets, the worse off the taxpayer will be”.

So the bank walks away with a good payout on their previously almost worthless toxic assets. Oh, sorry, we are calling them “legacy” assets now. Another nice perk for the banks is that they would get transaction fees as both the buyers' and sellers' agents. The banks liked the idea so much they lobbied to be able to bid on the assets themselves, essentially buying back their own assets at pennies on the dollar. According to Joe Wiesenthal of the Business Insider, “Having no shame, the only way the PPIP appeals to them is if they can use it for straight up money laundering.” Plenty of other highly regarded economists publicly expressed shock, including Nobel economist Paul Krugman, former World Bank chief Economist Joseph Stiglitz, and former IMF Chief Economist Simon Johnson.

But a funny thing happened on the way to the operating table: The patient got cold feet. A number of things substantially changed between idea and implementation. One problem was pegging an actual value for these hard to price assets. That would make it very difficult for the banks to pretend the assets were worth much more, and also would expose thier hand to other players. Also, the banks were able to raise billions in private capital, reducing the need to unload assets. Mostly because private investors were realizing the government would do anything, risk any amount of money, to make sure the superbanks came out smelling like a rose.

Instead of this meltdown punishing the big banks for engaging in foolishness, and rewarding the smaller banks who didn’t, it is exactly the other way around. Mostly the bailed out banks survive and smaller banks don’t because in this plan, winners and losers are chosen by the government. Competition in the banking sector is reduced, and the big banks remain “too big to fail”. You talk about your “moral hazard.” The incentive to step back from the brink of excessive risk is gone.

Another thing was the reversal of the “mark to market” rule. Under this rule, banks had to mark their assets as being worth what the current market would pay for them. That was great in good times, because it bloated the balance sheet in the banks favor. When times got bad, they lobbied heavily to reverse the rule. The worry was that the toxic assets' fall in value would reveal the Banks to be the hollow shells they really were. The rule was changed in March. Now, the banks could value the assets at whatever they felt they would fetch in some rosy future. With those pesky toxins not dragging down the books anymore, the banks were actually reporting profits.

PPIP is not officially dead. Instead it’s bobbing about in what one pundit called, “a Monty Python moment.” Critics of the plan say the banks can too easily game the system from both ends. Banks don’t like it anymore because they are afraid the bidding will reveal the real sorry truth about the “legacy” assets. Even investors worry that the rules would be changed mid-game if the public realized how crazy the whole thing was.

And in a world where no one really wants to face the painful reality that the delusional bubble we called prosperity isn’t likely to return any time soon, and certainly not by efforts like PPIP, this is what passes for reality.

Doug Friesen
6/16/09

Duxbury Clipper reviews "Age of Entitlement"

click this link for review by Duxbury Clipper owner David Cutler:

http://www.eduxbury.com/index.php?option=com_content&view=article&id=3579:tough-words-for-financial-leaders&catid=62:duxbury-aae&Itemid=100

Your Party Affiliation Won’t Get You into Heaven Anymore

Gun control, homeland security, stem cell research, abortion. There are many heated debates among liberals and conservatives that are in no danger of being reconciled or solved. That’s good. It means the electorate is not asleep at the switch. As the power of the left and the right ebb and flow from one administration to the next, these issues usually find some sort of equilibrium, even if it’s usually an unhappy one for both sides.

The interesting part is to observe how carefully politicians tread these minefields, their utterances coming only after whetting a finger and holding it up to test the wind direction of the masses. That is why it is so stunning to watch the public stand mutely by while politicians of both parties have engineered the gutting of the public purse by the kings of Wall Street.

Setting aside hysterical partisan blaming, little healthy reasoned debate is heard, let alone a hue and cry that should be directed at outlaw bankers whose greed fest destroyed the economy. This is not a partisan issue, this economic meltdown is an equal opportunity destroyer. Shrinkage is affecting every sector, and Job losses go right from the factory floor to the management suites of executive America. Perhaps our outrage is held in reserve for fear of rocking the economic boat. For sure, the governments’ idea is to return to prosperity as quickly and easily as possible, even if it means a return to the same fantasy bubble economy that just imploded. That’s likely what we have in mind too.

Contrary to what many believe though, the so called prosperity of the last few decades has not been broadly based. It’s been concentrated almost entirely to the top 1% of earners, and even more so on the top 1/10th of 1%, who have seen their income rise by over 500%. For the rest of us? The average middle class income taken by itself and adjusted for inflation has stayed more or less flat for over 30 years.

Sure, we feel wealthier than we were in the seventies, but that’s primarily for two reasons: Firstly, almost all households with income over $75,000 have two wage earners now instead of just one. That alone is responsible for rising household incomes since the seventies. Secondly, much of our “stuff” was bought on credit. The 12% personal savings rate from the eighties has been reduced to almost zero, while consumers have taken on a staggering 11 trillion in debt, doubling in just the last decade. The 50% gain in worker productivity during the same time period hasn’t helped either. That benefit by-passed the middle class entirely.

The trickle down effect of tax cuts for the wealthy was supposed to be a rising tide that lifted all boats. But the last time middle class wages consistently rose was in the post war period, up to the mid seventies, the longest sustained broadly based prosperity ever. Middle class incomes, adjusted for inflation rose consistently for almost 30 years. And that was when tax rates for corporations and the wealthy were twice what they are now, and had been for almost 40 years, ever since FDR’s “New Deal” created the middle class after the great depression. Since the eighties, tax cuts for the wealthy have succeeded only in a huge concentration of wealth at the highest income levels while all other income levels stagnated.

That subtle redistribution of wealth happened while the middle class was comfortably numb in a credit induced stupor. The dirty little secret of the GOP: if you are a Republican and you are middle class, you voted yourself a pay freeze. And who is middle class? Almost all of us. Individually, only 2% make over $250,000, and only 7% make over $100,000. And most of these tax cuts happened at levels far above that.

Does that make Democrats the friend of the middle class? Not while the entire Obama economic team is comprised of Wall Street bankers. The two main players Geithner and Summers, are hugely guilty of creating the conditions for the crash. Tim Geithner, as chairman of the New York Fed was responsible for policing Wall Street. Summers, as Clintons Treasury Secretary, was among a handful who are responsible for refusing to regulate trading in derivatives, a major cause of the meltdown. The entire top level of Obama’s financial team are Wall Street alums who at the very least, aided and abetted Wall Street’s criminal behavior. Why would they be of any help now except to drive the getaway car?

If banks are too big to fail, that must make us too small to succeed. Both the outgoing Bush administration and the present Obama team sold an angry public the same ugly bill of goods: Salvation lies in propping up the existing flawed financial structure regardless of cost, or society will face financial Armageddon. But wait: isn’t this the same house of cards that sowed the seeds of its own (and our own) destruction? Has there been any assurance the business models have been recalculated or even updated? Has there been introspection or contrition? The geniuses who had no idea the havoc they were wreaking will now apparently lead us to a stable future. But first they need us to recapitalize their banks. It sounds almost as preposterous as that e-mail scam where a Nigerian prince wants you to help him transfer several million dollars of which he will give you 20%. But first you need to send him $10,000.

Have we learned anything? Mortgage lenders are already gaming the $8,000 first time home buyer credit, and have reportedly begun signing up another round of sub-prime borrowers, as if there were even any left. Banks are gaming the bailout, and many banks that should have been seized and the parts sold to the highest bidder, will come out stronger than ever in a few years. Instead of the business being spread out to smaller smarter banks, the bigger dumber ones will dragged to prosperity on our nickel. Competition in the banking sector will be reduced instead of enhanced, and the behemoth banks will still be “too big to fail.” But wait that’s not all: The taxpayers will be handed the tab for trillions of dollars. If “free enterprise” means the freedom to plunder the public at will, maybe next time we’ll try the “Armageddon” option.

What can we do? It is not correct to say politicians don’t listen to people. Witness the rise of “green”, even though it’s still more talk than action. No politician of either party can afford not to talk about green. That’s not because they want to talk about it. Not because there is a green lobby paying them to talk about it. It’s because we demanded the issue be addressed. Is it too much to demand a proper accounting of why our economy is so whacked out, and what we are going to do to really fix it? And sorry, re-inflating the bubble by throwing billions at idiot bankers does not constitute fixing it.

FDR’s New Deal ended the last banking reign of terror and helped to set the stage for the great middle class prosperity we all grew up in. That didn’t happen by accident. It was governments’ response to popular outrage. FDR created a middle class that never existed before the depression, by taxing the outrageous income of the robber barons of the day, creating conditions that allowed the middle class to flourish. Big business was outraged too, but at the New Deal policies, to which FDR quipped: “Why are you so mad at me? I’m saving you from yourselves.” He was right. Business ended up doing as well as the middle class in the great post war boom.

That’s the lesson for our situation now. There will be no broadly based return to prosperity with a shrinking middle class, for that is the engine of the economy. And this attempt to fix the economy from the top down by reimbursing wealthy investors for their lost equity is not going to do it.

At your next cocktail party debate, don’t bother blaming the “other” party for this meltdown. You are wasting your outrage on fellow victims while the bankers get away with murder. Your party affiliation won’t get you into heaven anymore.

Doug Friesen
5/25/09

Bank Stress Tests: The crazy Grandmother is still in the attic

It was abundantly clear long before the results of the so called “stress tests” report card, the object was not to see which banks where too weak to survive. The object was always to see how much money it will take to make them survive. Treasury has made clear that they will not allow any of the big banks to fail. It doesn’t matter how much money it takes. This is the new economy, where the government picks the winners and losers by decree.

The test contains two economic scenarios for the next several years, a baseline scenario and an adverse scenario. As Andrew Leonard points out in his May 7 Salon.com article, The biggest economists of the day, at least the biggest ones not being paid by someone to issue “happy talk” forecasts, Paul Krugman, Joseph Stiglitz, Simon Johnson, are all convinced that the biggest US banks are insolvent. According to them, the “adverse” scenario has already become the baseline, and it could get much worse.

That view is backed up by Elizabeth Warren, head of the Congressional Oversight Committee: “It looks disturbingly close to where we are now.”

The results indicate the banks in need of a further 75 billion immediately and perhaps 600 billion over the next several years. Nothing that investors don’t already know. But now they know the government will backstop the losses no matter how large they get. Whether that will instill confidence in the markets is an open question. Bank stocks have rallied in the last six weeks, so now investors will get to grade the report card itself. It will be interesting when that grade is handed down, which will be indicated by what happens to the banks’ share prices in the next few weeks.

Risk, more than any single factor, is what caused the meltdown, as in, inability to judge how much risk is prudent. So it seems like a good idea to introduce some risk controls, at least to protect capitalism from itself. Here’s the problem: Backstopping the risk by government fiat may backfire. Look at Fannie and Freddie, the two quasi government mortgage companies whose risk was backstopped by the government. That went well, didn’t it? They required the largest single bailout ever, because it was never their own butts on the line. Sebastian Mallaby of the Washington Post suggests the government’s unending bailout will transform all of Wall Street into Fannie and Freddie, and they will charge ahead, oblivious to risk.

I realize that Obama’s message here is that it can all be fixed, some banks are not weak and the ones that are weak can be strengthened. In this perfect world, at some point, when the banks are strong enough, the fantasy economy would be replaced by the real economy. I wish I believed that could work. But the economy can’t be tinkered with as if it’s a Swiss watch. It’s more ethereal than that. It’s all about uncontrollable things like trust, risk, belief and confidence, stuff that slips through your fingers.

Jaidev Iyer, a former chief of risk management at Citigroup, says taxpayers will ultimately be on the hook. “If there is no appetite to let losers fail, then the real losers are the market at large, the government, and the taxpayers.”

I continue to be perplexed by the lack of accountability for the meltdown. Consider the airline industry. When they have a crash, It is picked apart in excruciating detail, sometimes for years, then a report is issued. The airline industry has an incredible safety record. The economy, well that’s a whole different matter. In our dysfunctional economic model, the crash is the crazy grandmother in the attic; it will not be spoken of. Somehow we are going to build a new economy without really ever doing any detailed thinking about what went wrong with the old one.

Doug Friesen
5/08/09

This just in!!

Article about "The Age Of Entitlement" in May 1st edition of Duxbury reporter:

http://www.wickedlocal.com/duxbury/news/x845557666/Duxbury-businessman-Doug-Friesen-writes-book-on-financial-crisis

The Banksters ride again

The Banksters ride again.

During the heyday of the market run-up that led to the Great Depression, the last time tycoons hollowed out the economy, a new term was born: Banksters. The veiled reference to the mob aptly described the manner in which the barons of the day used deceit and fraud to accomplish what Capone did with a machine gun. William K. Black conjures up the reference to describe todays "banksters" fleecing the public. Black knows fraud, perhaps better than anyone. He wrote a book with the title “The Best Way to Rob a Bank is to Own One.” Black is the former director of the Institute for Fraud Prevention, and has caught some pretty big fish, including the “Keating five” which touched off the Savings and Loan scandal.

According to Black, the essence of fraud is creating a foundation of trust, then betraying that trust to get something of value. In an interview with Bill Moyers, Black makes it clear that most corporate failures result from calculated dishonesty by those the highest levels. The current meltdown is no different. CEO’s deliberately jacked up bad deals to create record profits and huge bonuses. In fact the bonus system is the mechanism by which companies’ internal checks and balances are defeated. Money buys out the morality.

Black goes on to talk about how the entire system, stripped of regulation, drifted to the dark side. There was no one looking in from outside, and from inside, well, it all just felt so good. Corporate culture being what it is, who is going to kill the golden goose? Case in point - one of the truly slimy aspects of the mortgage crisis: so called “liar” loans. No income verification, no job verification and no asset verification. The more you lie, the better deal you get. One bank, Indy Mac, specialized in these loans, and in 2006 resold 80 billion dollars worth of them into the securities markets. This company eventually recorded loses greater than the entire S&L debacle.

As Ronald Reagan said, trust, but verify. It was the lack of verification that allowed the fraudulent loan securities to be cleansed and passed along to innocent pension plans and the 401K’s of widows. That part of the laundering was done by the rating agencies, who have yet to adequately answer for consistently giving these toxic securities triple A ratings, when these investments went on to lose 60-80% of their value. Of course, by the time that scenario played out, the fraudsters have cashed their bonuses and are driving the getaway car over the proverbial state line. It was a classic Ponzi scheme in all respects but one: everyone knows who did it; no one is being prosecuted. In fact William K Black calls Bernie Madoff a “piker, he doesn’t even get into the front ranks of Ponzi schemes.”

The FBI warned the Bush administration way back in 2004 that there was an epidemic of mortgage fraud going on that would result in a debacle at least as large as the S&L. At the time Bush had re-allocated most of the white collar crime unit to counter-terrorism, and they were never replaced. Now, with a fraud a hundred times worse that the S&L, there are one fifth the number of available white collar crime specialists that worked the S&L.

After the S&L, congress passed a law called the Prompt Corrective Action Law. This law requires the government to put failed banks into receivership immediately, not to keep them alive on corporate welfare. What was called “Receivership” then, is now being called “nationalization” by the hotheads hoping to hang the socialist mantle around Obama’s neck. That mantle rightfully is shared by both parties, who both have ignored and are still ignoring what this law mandates them to do. That would be to make these banks rightfully eat their own losses, not hang them on the broke, beleaguered, and unemployed taxpayers for the purposes of recapitalizing millionaires.

Politicians of both parties have acted in consort with the Treasury and Fed to hide the true extent of the losses and to prop up the existing power structures. All done, I’m sure they would claim, to protect the system from panic and total collapse. But the net result is to protect criminals with taxpayer money.

There is another reason no one being prosecuted, or even being asked to account for their mistakes. It is because this Ponzi scheme is systemic. It’s not where do you start prosecuting, it’s where do you stop? When half of Wall Street is behind bars? That’s the dilemma. A proper accounting of what went wrong would require stomping on the patient (the economy) right when we are desperately trying to revive him. We won’t swallow that medicine either, because we all got mighty used to the prosperity and we want it back as soon as possible. In that way, we too, are playing our part in the world’s largest Ponzi scheme.

Doug Friesen
5/04/09

There is a crack in everything

There is a crack in everything
Sunday April 26, 2009

The occurrence last week of a financial event so profound as to be the equivalent of a crack in the fabric of space/time went largely unnoticed and underreported. I speak of the under oath testimony of Bank of America Chief Ken Lewis to NY Attorney General Andrew Cuomo, wherein Lewis claims that in December 08 Paulson and Bernanke more or less blackmailed him into completing B of A merger with Merrill Lynch even after he learned huge additional losses by Merrill Lynch just before the deal was ready to close.

Here’s the back story: Earlier last year, when the banking crisis first started to unfold, then treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke stepped in to “save” Bear Stearns, by forcing a shotgun marriage to JP Morgan Chase. By the end of summer, Fannie Mae and Freddie Mac, the two giant quasi government mortgage houses also required bailout, to the tune of $200 billion, the largest US bailout ever. When venerable trading house Lehman Brothers appeared to be on the brink of collapse, Paulson and Bernanke demurred. They had bailout fatigue, and played “tough love” with Lehman. A worldwide financial panic ensued, and Paulson and Bernanke were widely vilified for failure to take the reigns.

In September, as almost every major bank and investment house on Wall Street started to come apart at the seams, the two were desperate to somehow save the rest of the financial system and prevent a worldwide collapse. Merrill Lynch, which had lost billions in toxic mortgage securities was paired up with Bank of America. At the time, Ken Lewis was enthusiastic about the deal, as they were picking up a Wall Street giant for pennies on the dollar, and one which nicely filled holes in their financial profile.

These deals are not easily done, and Merrill Lynch was operating independently in the fall of 2008 pending shareholder approval and transfer of assets. Meanwhile, Merrill Lynch CEO John Thain was a busy man. Not only did he take time for a $1.5 million re-do of his office, he kept aggressively trading mortgage securities. Not chastened by billions in losses over the past year, he apparently believed the market for them had bottomed, and there was money to be made. He was buying. The same dense brained hubris that lost Merrill Lynch and average of 59 million a day for the last year caused Thain to think he could still master the situation. By the time he was done, in December 08, Merrill had lost an additional 15.8 billion, a staggering amount of money.

Even then, on his way out the door, Thain wrote himself a $40 million bonus and handed out almost $4 billion in bonuses to his crew. This was the start of the Wall Street Bonus scandal, and was what caused New York Attorney General Andrew Cuomo to investigate. Thain offered to reduce his bonus to $10 million. Cuomo felt zero was more what he had in mind, and also aimed to shine a spotlight in some of the dark corners of this messy deal.

December 5, Bank of America shareholders approved the merger. That’s what Merrill was waiting for, and the following week, they quietly and quickly recorded their additional losses. According to sworn testimony, On December 14 Bank of America CEO Ken Lewis was informed by his CFO of the additional losses, described as “a staggering amount of deterioration.” Lewis had expected additional losses and some of these losses were known to B of A officials but nothing of this magnitude. December 17, Lewis informed Paulson that he was thinking of invoking a “MAC” clause. MAC, stands for “material adverse change,” and allows a partially completed merger to be legally rescinded without penalty if adverse conditions arise during the merger.

Paulson and Bernanke were also busy men during this time, charged with saving the free world from financial Armageddon. They were in no mood for gamesmanship, and bluntly told Lewis that if he did invoke MAC, he and his entire board would be removed. Most importantly, they told Lewis to keep quiet about the losses until after the deal closed January 1. Lewis replied “that makes it simple, let’s deescalate.” Paulson also told Lewis that the government would at some point make TARP funds available to restore the lost equity. When Lewis asked for that in writing, Paulson said no. The deal closed Jan 1 right on schedule, and the shareholders were not informed of the losses until the second week in January. As expected B of A’s stock cratered, investors lost billions, and taxpayers were stuck with another bailout.

As Dianne Francis writes in the Financial Post “the gang that couldn’t shoot straight shot investors in the head.” Sure, Paulson and Bernanke felt they were justified in their actions because they felt the failure of the Merrill/B of A merger posed a systemic risk. But does that mean they can throw shareholders under the bus in such a selective manner?

Here’s the thing: Paulson and Bernanke’s actions violate Securities laws, which require material facts to be disclosed in a timely manner. Thing two is that the onus for this disclosure rests entirely on the shoulders of the CEO, and in an eventual suit between shareholders and Lewis, which now seems more likely than not, the defense “the government made me do it” will not stand up in court. Lewis was free to say: “No deal, I’m disclosing”.

Does the government have the right to play high stakes poker with the pension funds of Retirees? Especially when the resulting damage is almost entirely to shareholders, while the CEOs and traders still get their bonuses? Once again the Titans of finance come out intact and the public is collateral damage.

Thing three is that it is inconceivable that Timothy Geithner, (now Treasury Secretary) as the chairman of the New York Fed at the time, was not kept in the loop on this.

Thing four is the burning question: What other lies and deceit by those in power have been perpetrated during this collapse to keep themselves in power. The only constituency not being bailed out or protected in any way is the public.

Thing five is that such a violation of the rule of law will inevitably shake the confidence of the very markets we are trying to fix. As I say in my recently published book The Age of Entitlement (www.amazon.com, www.AgeOfEntitlement.com): From the most powerful hedge fund trader to the simplest homeowner, … the lack of market discipline removes the foundation of every investors decision to part with his cash.

This story could have huge implications. Not only does it blatantly expose the lengths that those in charge of the economy will go to in order to keep existing power structures intact, it highlights a casual disregard for protecting the rights of shareholders and taxpayers, the very people these regulators are entrusted to protect.

First Review of the book!!

"This interesting and easy-to-read book is packed with information for the average hard-working American. Doug's research into what has happened to our economy is outstanding. I think it is a very important book on two levels: First, it is a simple "kitchen table" tutorial on economics for those of us who have trusted others to be the experts. Second, it reminds me of those pre-Revolution pamphleteers (although this book is much more than a pamphlet) who spread their ideas far and wide resulting in vast change. I like to think that Doug's book will spur others to become active in grass-roots reform. I applaud Doug for caring enough to wade into the economic morass. It's all too easy to gripe about what is happening, but Doug has laid out the situation in a largely non-political, reasoned manner. For that he deserves credit for using his frustrations constructively and for being a good citizen. We need many, many more to read this and then speak out."

—Joan Collins, Business Coach 04/22/09

Intro to The Age of Entitlement book

Doug Friesen isn’t an economist. He’s a builder and home designer who, upon watching the business he painstakingly built over 30 years suffer and fall apart amid the economic meltdown, got angry enough to do something about it.

The result is The Age of Entitlement, a book that promises to help average Americans understand just how the worst economic crisis since the Great Depression happened.

The story, Friesen says, is one of corporate greed exacerbated by a society that has developed a profound sense of entitlement and an expectation of instant gratification.

With chapter titles like, “Chronology of a Crash,” “Self Esteem Run Amok” and “The Housing Bubble – or Hell in a Handbasket,” The Age of Entitlement concludes by addressing the question that many people are asking: “Where do we go from here?”

The Politics of Paralysis

The Politics of Paralysis

In today’s extreme political polarization, both Democrats and Republicans have reached a point of paralysis, where neither side can focus on the real issues as long as their brains are pre-occupied with demonizing the other. During a talk I gave last week about my recently published book, “Age of Entitlement – How greed and arrogance got us here” (Available from http://www.ageofentitlement.com/), the questions were narrowly focused on partisan attacks, instead of the real meat of the matter, which was taxpayers bailing out negligent banks even while our own 401Ks are halved because of Wall Street’s greed.

The fact that the bailout under President Obama is unfolding seamlessly from the bailout first engineered by President Bush should be sign enough that the top bankers have a stranglehold on both parties and all branches of government. I’m not suggesting a secret conspiracy with black helicopters and all. What I am suggesting is, what other outcome would you expect? After all, the key financial players in both administrations, Alan Greenspan, Ben Bernanke, Hank Paulson, Tim Geithner, Larry Summers, are all alums of the Federal Reserve or Wall St. banks, and as such will protect their own. Not necessarily because they are bad people, but just because it’s the only world they know.

Nowhere in the bailout debate is the common sense, time-tested solution: Failing companies that have made huge mistakes must be allowed to fail. The excuse “too big to fail” is worse than just an excuse, it’s legalized extortion. The stock market has functioned many years through ups, downs, and severe depressions. It has done so by refreshing the free enterprise system with the blood of failed business models. Smaller banks that didn’t make stupid risks would gladly fill the void created by the fall of Citibank and others.

Propping up zombie banks with taxpayer cash only serves to confuse investors as to where real value is. Ask Japan, who did the same with their banks in the 90’s and are now languishing with a stock market at a 25 year low.

Confidence cannot return to the markets with fake valuations and accounting tricks that falsely claim operating profits when in fact these banks still have huge losses and are in fact, insolvent. The bailout becomes nothing more than the people who caused the meltdown reimbursing themselves for their lost equity.

It’s all about personal responsibility. Not one single official in charge during the economic meltdown has come forward to say “Sorry, we really screwed up.” Not that it would make us feel better, but acknowledgement of past mistakes is the only solid foundation on which a recovery can be built.

No one, not politician nor voter, is taking responsibility for the crippling $11 trillion and mounting national debt on which we paid $451 billion in interest payments last year. It didn’t even come up during the last election cycle. Politicians didn’t talk about it because we didn’t talk about it, and we’re still not taking it seriously now. Why? Because people of all political persuasions are too busy trying to lay the blame on whoever isn’t in their clique.

Democrats would have to admit that they have to stop spending the next generations’ money on government programs, whether or not they have merit. Republicans would have to admit that 8 years of tax cuts without cuts to government spending have brought us to the brink of bankruptcy. There is absolutely no difference between increasing government spending, and cutting taxes without cutting government. Either way, we are spending money we don’t have and have no hope of paying back in our generation.