Wall Street's Code of Silence

Getting Away With Murder
By RUSSELL MOKHIBER

Gretchen Morgenson and Joshua Rosner were at the Wilson Center in Washington, D.C. this week for a discussion about their book – Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon.

During the question period, Blair Ruble, who heads the Kennan Institute at the Wilson Center, stood up to speak.

Blair Ruble told a story about when he was at a conference in Elagua, Tartarstan.

"I was pulled out of the conference, and was told the Minister of Economics was coming from the capital of Kazan to see me."

The country had apparently invested some of its oil wealth with the U.S. government and the Minister was concerned about the lack of accountability after the collapse of the housing bubble.

"They had this oil revenue and they didn't trust the Russian government," Ruble said. "I was the first American he could find. We had lunch. After realizing I couldn't help him he said to me – 'When did you Americans become Russians?"

"I'm going to prove to you that you really are nothing but Russians," the Minister of Economics told Ruble.

"Five years from now, mark my words – none of the people responsible for this – not only not be held accountable – they will be in more important positions – that is what would happen in Russia."

Rosner pretty much agreed.

"My father was a federal prosecutor and my mother was a criminologist, and her speciality was Soviet criminology," Rosner said. "As she read our book – she kept saying – Jesus, this sounds like the way it is done there. Every piece of it. You have an entrenched bureaucracy without accountability."

Rosner said a "code of silence" protects those complicit in the recent collapse.

"All of the parties central to this crisis are unwilling to point fingers, recognizing that their power base comes from the silence," Rosner said. "As long as everyone keeps silent, each one will recognize that they rise to the next level. You see that throughout our government at this point."

Case in point: former Office of Management and Budget Director Peter Orszag.

Rosner said that the Orszag case is "one that I find most offensive."

"It's not on the level of Timothy Geithner or Hank Paulson, but it's troubling."

"Peter Orszag was co-author of a study paid for by Fannie Mae back in 2000 or 2001," Rosner said. "It argued that Fannie and Freddie are incredibly safe and sound, that the stress test that was going to be employed by the regulator insured their safety and soundness. And that there was something like a one in 500,000 chance that they would end up imperiled. And even if that happened, the cost to the taxpayers would be a few million dollars. That's pretty much what the paper said.

"Orszag ends up as the head of OMB. And when the government takes Fannie and Freddie into conservatorship, he says – there is about a five percent chance that the government could be on the hook for more than $100 billion. Wrong again. No one calls him out.

"Orszag is now the vice chairman at Citibank. I noticed the other day he put out an op-ed on Bloomberg which was clearly positioned to support his current institution. And nowhere does it say that he had anything to do with the government, the GSEs. And that's just the way Washington works.

"He obviously was in that position to add three zeros to his income on the other side. It's not about public service. It's about self service."

Morgenson lamented the lack of criminal prosecution:

"I know proving criminal intent is exceedingly hard. But if we don't get some scalps, you will have left most people with the idea that you can get away with murder as long as it's involving not a gun but a pen and a financial institution. That's the wrong message we should send. It's pernicious and damaging.

"In the savings and loan crisis there were 839 criminal prosecutions that resulted in jail time," Morgenson said. "And these were not just low level people. These were CEOs in some cases, CFOs – very high level people. We have had very few this time around. And the people who were on the scene (during the S&L crisis) tell me that because of the regulatory failure during the mania, we are now seeing very few prosecutions.

"It's bad enough that the regulators allowed the bad behavior and practices to proliferate. But now it's going to result in very few prosecutions.

"This feeds into the idea that there are two sets of rules in America. There is one set of rules for people like you and me. And there is another set of rules for people who are powerful, who are politically connected, who have very high level jobs, who know the right people."

Peter Orzag Goes to Citigroup

The Rest of Us are on Our Own
By DEAN BAKER

Last week we learned that President Obama intends to push for comprehensive tax reform. We also learned that Peter Orszag, who until recently headed up the Office of Management and Budget (OMB), will be taking a top job at Citigroup. These two events may seem to have little in common, but unfortunately they are intimately related.

With comprehensive tax reform, as President Obama told us, everything is supposed to be on the table. That sounds great. As everyone knows the tax code is a mess. It is full of items that may have at one time served a purpose, but now just hand money to powerful interest groups. Who could be opposed to cleaning up the muck?

If the group of people designing a new tax code really had the public interest foremost in their thoughts there is much good that could be done. The mortgage interest deduction in its current form is an utter absurdity. Most low- and middle-income people get little or nothing from this deduction. By contrast, millionaires often pocket tens of thousands a year in tax savings.

Even worse, the incentives are 100 percent wrong. We are encouraging bakerwealthy people to buy bigger more expensive homes with this tax break. Think of some of the various competing uses of public funds: extending daycare and preschool education, financing energy conservation measures, providing benefits to the unemployed. How many people would put subsidizing a more expensive home for successful lawyers and doctors at the top of this list? That is what we are doing now with the current tax code.

The same story applies to retirement savings. Most low- and middle-income people benefit little or not at all from the current pattern of saving subsidies.

This is due partly to the fact that workers can do little savings at a time when their incomes have not kept pace with inflation. However, even when they do manage to put money aside for retirement, the tax subsidy is much smaller for the vast majority of workers who are in a 10 or 15 percent bracket, as opposed to the wealthiest in a 35 percent bracket. Do we really need to hand thousands of dollars in tax breaks to persuade wealthy families to do saving they would have done in any case?

Another item crying out to be dumped on the refuse heap is the special lower tax rate for capital gains and dividend income. Ordinary workers can't ask their boss to pay them in a form that will show up on tax returns as capital gains. By contrast, CEOs can arrange to get paid in ways that will be taxed as capital gains, allowing them to pay a lower tax rate than millions of ordinary workers.

There are hundreds of other areas where the tax code is both grossly unfair and leads to major economic distortions. We might hope that these will be fixed with comprehensive tax reform, but we have to go back to Peter Orszag and Citigroup.

One item that has never featured prominently in public debate in Washington is a financial speculation tax or some equivalent tax on the financial industry. This is striking because it is potentially a source of a vast amount of revenue, more than $150 billion a year by my calculation. The bulk of this money would come at the expense of the rents earned on Wall Street. This is the reason that even the IMF, an institution not known for being hostile to banks, now advocates new taxes on the financial sector.

Why do the folks in power in Washington seem unable or unwilling to consider a financial speculation tax? Let's imagine for a moment that during his stint as OMB director Peter Orszag had been a vocal advocate of financial speculation taxes. It doesn't seem likely that under these circumstances Citigroup would currently be offering him a job that, according to the New York Times, would typically pay $2 to $3 million a year.

Orszag and others in a similar situation undoubtedly understand how the positions they take in their roles in government can affect their future career options. Since many of these officials are obviously motivated in part by the lure of such huge paychecks (i.e. they take the jobs), it is reasonable to infer that the prospect of big-paying jobs on Wall Street and elsewhere affects the positions they advocate in the Obama Administration and Congress.

In other words, President Obama is not being truthful; everything is not on the table. The items that matter most to the rich and powerful will not be called into question because their interests are being protected. As far as the rest of us – as President Obama often said on the campaign, "you're on your own."

Obama Economic Team Bails, System Fails to Generate Jobs

Are the Causes, Um, 'Structural'?
by Danny Schechter | Monday, August 9, 2010 by CommonDreams.org

In Washington, the Obama economic team has sprung a leak. First, Budget Director Peter Orszag, the calculating numbers savant, bailed. And now, "distinguished" economist Christina Romer, the only woman in that inner circle boys club has quit too. (Would you want to be around Larry Summers all day long?)

Why this crew of losers wasn't fired eludes me despite their claims of having prevented a worse collapse. No doubt, they know more than they are saying, and, perhaps, now that they are no longer selling, they may be willing to do some telling on just how bad it is and what went wrong.

Who's next? Could Ben Bernanke be leaving the Fed for Fed-Ex?

Economist Max Wolfe has none of the political restraints of power. At the news of another 131, 000 jobs gone, at all the talk of permanent unemployment as the "new normal," he sighed with a tinge of optimism:

"We have been in the present labor market swoon since December 2007. We are 30 months into the process. Nearly everything is not getting worse fast. Most economic indicators have seen slow, uneven progress. We are a weary nation and hope, is running low. All lethality is dosage and we have received a massive dosage- an overdose- of bad economic news since the winter of 2007. Things are getting ever so slightly less bad in the aggregate.

"The sheriffs of this rough economic neighborhood are running low and out of ammunition. The populace is fed up. Our Sheriffs are The Treasury and The Fed and they have spent, cut taxes, slashed rates, bought securities and ballooned their balance sheets. They have made the bad less worse, but not appreciable better enough for many. All that economic toxin still pumps the blood of this economy. Now, the state is having a contractionary direct impact on employment."

"Contractionary"? I am a first-time contractionary word user so I will leave it to Stephen Colbert to take that term apart, but it can't be a good thing.

The bigger surprise is being buried. The more serious problem is more systemic and rooted in the structure of our economy. These structural problems used to be referenced to show how deep the rot goes and why more fundamental reforms are needed, but now, as Paul Krugman has argued, this very idea is now being used to encourage acceptance of the problems because they are beyond repair, as in, "we can't change that because it is, so, um, 'structural'!") Thus, the existing power relations can't be questioned because they are the existing power relations

Makes sense, doesn't it?

Part of the problem is that while the livelihoods of workers and homeowners are sinking, the economic and political elite is doing just fine, as the Automatic Earth Website explains:

"Perhaps what we witness is an ongoing and deepening chasm that divides the world of finance and politics on the one hand and the world of everyday people on the other, as Rasmussen Reports indicates: 67% of Political Class Say U.S. Heading in Right Direction, 84% of Mainstream Disagrees. This chasm was greatly facilitated by governments relying on policies based on the notion that too-big-to-fail -financial- institutions needed to be bailed out at any cost. Later in the year, as a direct consequence of these policies, we will see another round of insane banker and trader bonuses, just as citizens' sentiments and incomes fall, and unemployment and poverty keep rising."

When you create and enable a casino economy, the public becomes a player too, taking risks they shouldn't at the behest of bankers and finance companies who assure them all is fine.

Last week, Countrywide, the country's mortgage fraud factory, reached a settlement with the SEC for more than Goldman Sachs settled its last complaint for a whopping $600 million. Their shark-in-chief, Anthony Mozillo, still facing a criminal investigation, later said he was pleased when the federal regulators admitted that the investors were not defrauded, because they knew what kind of projects they were funding. How reassuring!

So the circle of complicity widens. We now learn that the companies and individuals that invested in the subprime/subcrime mortgages KNEW people were being ripped off but did it anyway because there was so much money to be made.

And because security laws only protect investors, who were defrauded, many have no case. What about the borrowers, the homeowners now facing foreclosure? They are apparently not worthy of protection. This is comparable to the Madoff investors who profited in his illegal scheme and knew his returns were too good to be true but shoveled money to him anyway. They became partners in the ponzi, not just "victims" trying to be made whole.

Is anything changing? The banks say they will not change the way they finance mortgages so it is still buyer beware. The Wall Street Journal reports another instant crash of the markets is possible. And General Motors that was down and on the way out is back thanks to the government's largesse but sniping at its rescuers, insisting an end to government ownership would be good for their image and "employee morale." Huh?

"We want the government out period," blusters GM's ungrateful CEO Edward E. Whitacre Jr. This same company recently spent $3.5 billion buying a new subprime lending company to replace GMAC, the GM lender whose bad loans sunk GM. On top of that, these geniuses just produced The Volt electric car that sells for $40,000, hardly a brilliant move in this economy. Of course they blame all their problems on the government, never themselves.

Like so many others, they seem to be banging on Obama, everyone's target of choice. If that's your inclination, let's blame him also for what he has not done.

He hasn't led a consistent push back against Wall Street, perhaps because he hopes in vain that big business will create private sector jobs and wants to show naysayers how pro-business he really is. This has turned him into an inversion of FDR.

As Ezra Klein of the Washington Post observed:

"The reality is that America's supposedly anti-business president has led an extremely pro-business recovery. Businesses are sitting on about $2 trillion in cash reserves. Business spending jumped 20 percent last quarter, and is up by 13 percent against 2009. The Obama administration has dropped taxes for small businesses and big ones alike."

So much for that canard.

Is there anything to be done? There is no shortage of proposals for jobs programs and taxes on transactions, for tougher rules on derivatives, and imposed compensation limits. In most cases the US, with pressure from Wall Street and its political allies, has opted for easily maneuvered around and malleable regulations.

One small reform has been proposed by the much-maligned Ralph Nader for those of us who live in the appropriately named "Empire State," one that currently shelters a Wall Street where hedge fund managers make billions.

Nader notes, "Low-moderate and middle-income New Yorkers already pay a higher percentage of family income in state and local taxes than do the richest one percent of New Yorkers!

"Surprisingly, there is a simple way to eliminate the state deficit and prevent tens of thousands of layoffs and large service cutbacks.

What most New Yorkers do not know is that for about a century there has been a state stock transfer tax on purchases of securities. This year, this tax, similar to ones imposed in 30 other countries, will amount to about $16 billion. Amazingly, since 1979, this tax has been instantly rebated by New York State back to the brokers or clearinghouses who paid it. A 100% rebate every year for the bailed out industry that caused the recession and its immense human damage."

Putting a stop this sleazy practice could be as important in phasing out the Bush tax cuts but so far it's not on anyone's agenda, Dems, Repugs or Media.

Maybe because they think of it as "structural."