Bankers And Their Dirty Tricks

Skimming Profits Off Bad Loans

by MIKE WHITNEY

 

 

Didn’t Ben Bernanke promise that another round of bond purchases would lower unemployment and boost economic growth?

We think he did, which is why we’re wondering why all the benefits from QE3 appear to be going to the banks. According to Bloomberg News:

“The Federal Reserve’s latest mortgage bond purchases so far are helping profit margins at lenders including Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM) more than homebuyers and property owners looking to refinance…

Since the Fed’s Sept. 13 announcement that it would buy $40 billion more securities per month, the rates offered for new 30- year loans have fallen by just 0.11 percentage point, compared with a drop of more than 0.6 percentage point for yields on the bonds into which the loans get packaged.” (“Fed Helps Lenders’ Profit More Than Homebuyers:Mortgages”, Bloomberg)

Well, how do you like that? That means that Mr. Bernanke’s trickle down monetary theories aren’t really working at all. Instead of the savings being passed along to homeowners in the form of lower rates, the banks are juicing profits by taking a bigger share for themselves. Who could have known?

Keep in mind, that Bernanke is not some madcap scientist who doesn’t fully grasp how QE works. That’s not it at all, in fact, he’s considered one of the world’s foremost authorities on the topic and has written extensively on Japan’s deflationary woes and their “broken channels of monetary transmission”, which is shorthand for saying that loading the banks with trillions of dollars in reserves won’t do a blasted thing except pump a little ether into stock prices. (which it has done in the last 2 rounds of easing) So, Bernanke’s been down this road before. He knows what QE will do and what it won’t do, which is why he instructed members from the Bank of Japan (BOJ) to implement fiscal-monetary policies that would have a chance of succeeding. His advice was: “BOJ purchases of government debt could support spending programs, to facilitate industrial restructuring.”

Now there’s an idea. Have the Fed buy the bonds that pay for the programs that put people back to work. Brilliant! Once the new workers get their weekly paycheck, it’s off to the grocery store, the gas station, the mall etc. Spending increases, state revenues soar, and the economy clicks back into high-gear. Simple, right? So, why are we still fiddling with this crackpot QE-circlejerk that does nothing but line the pockets of crooked bankers? That’s the question.

In theory, quantitative easing is supposed to lower interest rates and spur investment. That boosts activity and reduces joblessness. But according to a survey conducted by Duke University, the CFO’s of 887 large companies found that lower interest rates wouldn’t really effect their decisions. Here’s a summary:

According to the Duke University analysts:

“CFOs believe that … monetary action would not be particularly effective. Ninety-one percent of firms say they would not change their investment plans even if interest rates dropped by 1 percent, and 84 percent said they would not change investment plans if interest rates dropped by 2 percent.(“Currency war warnings follow US Fed’s “quantitative easing”, Nick Beams, World Socialist Web Site)

Of course it won’t change their investment plans, because what businessmen care about is demand. Who’s going to buy their bloody widgets, that’s what matters to them, not interest rates. Right now, there’s no demand for more widgets because unemployment is high, wages are flatlining, and policymakers have turned off the fiscal stimulus-spigot in an effort to shrink the economy so they can pursue their lunatic idea of dismantling public services and social programs. (mainly Medicare, Medicaid, and Social Security, the “real targets.”)

The point is, spending has to increase to get the economy off the canvas, and the only party that has money to spend is the government. So, Obama should be spending like crazy. The Central Bank cannot fix this problem with its wacko printing spree.

So, what else are the banks up to besides keeping rates elevated so they can make a bigger killing on refis?

Well, for one thing, they’re using their high-powered attorneys and lobbyists to twist arms at the Federal Housing Finance Agency (FHFA) to make it easier for them to make bad loans without suffering any consequences.

How can that be, after all, wasn’t it bad loans that got us into this mess to begin with?
Yes,  it was. Even so, the banks are back at it again, up to their same old tricks. Here’s the story from Reuters:

“Just four years after toxic U.S. mortgages brought the global financial system to its knees and triggered the deepest recession since the Great Depression, a U.S. housing regulator may be making it easier for banks to make bad loans without suffering losses.

The Federal Housing Finance Agency released a little-noticed rule last week that makes it harder for Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) – the government-owned companies that guarantee home loans made by banks – to hold lenders accountable when mortgages go bad.

Some experts said the new rules show that lessons of the housing crisis are already being forgotten, and could set up taxpayers for tens of billions of dollars of losses if the lending bubble re-inflates later in the credit cycle.

At issue is when Fannie Mae and Freddie Mac can press banks to make them whole when mortgages go bad.” (“Housing regulators loosen rules, but at what cost?”, Reuters)

Can you believe it? The FHFA is actually accepting responsibility for mortgages where the underwriting was either shoddy or fraudulent. This is the kind of power the banks have. The agency is also assuring that the banks will create more of these garbage loans now that they know that Uncle Sam will be picking up the tab. That’s what you call “bad incentives”! Up to now, the FHFA had been able to force the banks to repurchase the loans that showed “substantive underwriting and documentation deficiencies”. But that’s not going to happen anymore. The looser rules mean that the banks will return to their old ways and that future losses to taxpayers will tally in the hundreds of billions of dollars. According to Joseph Mason, a professor at Louisiana State University’s business school, “Fannie Mae and Freddie Mac could lose even more than they did this time around.” (Fannie and Freddie have already cost taxpayers $188 billion)

To repeat, the banks had changed their behavior because they were afraid of having to repurchase the dodgy loans they originated. (These returned mortgages are called “put-backs”) Now the rules are being tweaked so the banks can shrug off the bad loans for which they are alone responsible. Here’s more from the National Association of Realtors:

“The federal government is taking steps to ease a problem lenders have been complaining about for several years, and that’s the buy-back risk they face if they underwrite a federally backed loan that goes bad and the guarantor of the loan—whether FHA, Fannie Mae or Freddie Mac—determines that the loan was never underwritten in compliance with their “representation and warranty” requirements….

…lenders remain concerned about the risk they face, and in fact earlier this year, in February, Bank of America announced it would stop selling loans to Fannie Mae because of its concerns over the company’s buy-back policies. (“FHFA Gives Banks Reason to Revisit Overlays”, National Association of Realtors)

So B of A is threatening to “stop selling loans to Fannie Mae”? Hurt me some more.
What’s more important, is that the regulators had fixed this problem by imposing penalties on the lenders, but now they’ve backtracked and undone their progress. Now it’s business as usual where the taxpayer-pinata get’s clobbered with more toxic loans. Oh good.

And that’s not all the banks are up to. They’re also fighting “risk retention” rules because they don’t want to pony-up the small amount of capital (5 percent of the loan’s value) on high-risk mortgages that go into securitizations. It’s like an insurance company refusing to keep money on hand to pay off claims. If you think that’s fair, then you should probably be a banker. Now get a load of this excerpt from a “Letter to Bernanke on QE3″ from Moe Veissi, president of the National Association of Realtors:

“Reducing mortgage interest rates in general through MBS purchases will have diminished impact if three important rules counter the availability of mortgage credit. As you have noted, mortgage credit is already tight. A recent survey of NAR members indicates that 53 percent of loans in August went to borrowers with credit scores over 740. To put this in perspective, only 41 percent of loans backed by Fannie Mae in 2001 had scores above 740. If the forthcoming Ability to Repay/Qualified Mortgage (QM), Risk Retention/Qualified Residential Mortgage (QRM), and Basel III rules only serve to further tighten credit, the impact of QE3 is likely to be diminished and only felt among those of substantial wealth and pristine credit. In short, those who need access to affordable credit the least.

While the Federal Reserve (The Fed) is no longer the purveyor of the QM rule, we believe there is still time for the Fed to weigh in with the Consumer Financial Protection Bureau (CFPB) and ensure that this rule does not serve to further tighten credit.” (“NAR Submits Letter to Bernanke on QE3″, Mortgage Professional)

How do you like that, eh? So according to Moe Veissi, making the system safer is too expensive. We just can’t afford it. We need to make credit available to people who wouldn’t normally qualify for a loan.

Sure, Moe, what could go wrong? It’s not like we’re going to blow up the financial system by lending too much money to people who can’t repay their debts, right?

Oh wait….

In any event, the banks and the special interest groups are trying to unwind the “Ability to Repay” and “Risk Retention” portions of the new regulations, even these are the essential firewalls that protect the general public from another disaster like the Crash of ’08?

If we heap these recent developments together (FHFA changes on “put-backs”, opposition to “risk retention” and “ability to repay”), then we see that we’re fairly close to where we were in 2007 before the two Bears Stearns hedge funds defaulted sparking the downward spiral that ended with the obliteration of Lehman Brothers on September 15, 2008 and the beginning of the Great Depression 2.

The banks are again in a position where they can skim profits off bad loans to every Tom, Dick and Harry that can sit upright and sign on the dotted line. They don’t have to worry about holding capital against their dodgy assets or whether Uncle Sam is going to get fleeced on the bogus $400,000 loan they issued to that unemployed landscaper living on food stamps. No worries. They’ve covered all the bases.

Now if Bernanke can just get that bubble-thing going, they’ll be back in the clover.

Totally Corrupt America

Reckless Endangerment

by PAUL CRAIG ROBERTS

 

 

Last March I reviewed Matt Taibbi’s important book Griftopia, an entertaining account of the through-going financial fraud that gave us the financial crisis.  Taibbi shows that the US “superpower” can match any third world backwater in the magnitude of greed and fraud that is endemic in business and government. Taibbi’s Griftopia was published last year. This year Henry Holt publishers have provided us with Gretchen Morgenson and Joshua Rosner’s Reckless Endangerment.

Morgenson and Rosner tell the story again, but with less drama and provocation. Possibly, it might be more acceptable to those gullible Americans who wrap themselves in the flag and refuse to believe that their country could ever knowingly do anything that is wrong.

I am not suggesting that Morgenson and Rosner pull their punches.  To the contrary, the authors deliver enough knockouts to be contenders with Taibbi as world champions in exposing the reckless  fraud that the US financial sector and its regulators now epitomize.

The financial crisis, which is very much still with us, did not result from accident or miscalculation; neither did it result because of a flaw in Alan Greenspan’s theory, as he told Congress when a feeble effort was made to hold him accountable.   It was the intentional result of people motivated by short-term profits who wanted to get theirs and get out.

As Reckless Endangerment shows, fraud characterized every stage of the process from the fraudulent borrower incomes and credit scores that mortgage issuers gave to unqualified buyers, through the securitization of the mortgages and their triple-A investment grade ratings by the rating agencies (Standard & Poor’s especially, but also Moody’s and Fitch) to the investment banks that sold what the banks knew was junk to investors around the world as investment grade securities.  Indeed, Goldman Sachs was simultaneously betting against the mortgage derivatives that it was selling to clients.

Investment banks, such as Goldman Sachs, which once considered it a matter of honor to represent the interests of customers, took advantage of the trust that had been built up in the past to commit fraud against customers in order to advance the banks’ short-term profits and the out-sized multi-million dollar managerial bonuses that these fraudulent profits produced.

Morgenson and Rosner provide a number of unique accounts of how those benefitting from fraud were able to defeat laws that were passed that would have held them to account. For example, the state of Georgia passed perfect legislation that held predatory lending to account. William J. Brennan Jr. and Georgia Governor Roy E. Barnes got the Georgia Fair Lending Act through the state legislature. It was a model for other states.  As the federal regulators had thrown in the towel, the state laws would have prevent the worst part of the financial crisis, it not prevented the crisis altogether.

The Georgia law only lasted a few months, because the rating agencies saw that their enormous profits from issuing fraudulent investment grade ratings were threatened by the law. The corrupt rating agencies mischaracterized the consumer protection act as a jihad by regulators. Standard & Poor’s declared that it would no longer allow Georgia mortgages to be placed in mortgage securities that it rated.

In other words, Georgia mortgages could no longer be securitized.  This announcement banned Georgia  mortgage lenders from securitization. Thus, the law was overturned, and fraud ran wild.

These kind of mafia strong-armed tactics in order to protect at all costs the short-term mega-bonuses that drove the totally fraudulent system have never been held accountable or punished.  Totally innocent people are held indefinitely and tortured by the US government for no other reason than to convince the gullible public that they are endangered by terrorists, but those who wiped out the home ownership and retirement pensions of millions of Americans now hold high and honorable positions on corporate boards and US regulatory agencies.

Federal regulatory agencies totally failed. Brooksley Born tried to use her statutory authority to regulate over-the-counter derivatives, but she was blocked by the Federal Reserve chairman, the US Treasure secretary, and the SEC chairman and forced to resign. As University of Chicago Nobel economist George Stigler predicted, regulatory agencies are captured by those who are intended to be regulated.  This was the case.

Regulators turned a blind eye to obvious criminal fraud, and were rewarded with lucrative positions in the financial community. The same for the US senators and representatives who repealed Glass-Steagal and other financial regulations.

For example, former US senator Phil Gramm who spearheaded the repeal of the Glass-Steagall Act, which separated commercial from investment banking, the repeal of which set up the financial crisis, was rewarded by being made vice chairman of the mega-bank UBS, a Swiss global financial services company.

What Taibbi, Morgenson and Rosner make clear is that while monster criminals continue to collect their multi-million dollar annual incomes, depressed single mothers, deserted by the men who fathered their child, are sent to prison for having small quantities of illegal drugs to boost their depressed spirits, and their children are put out to adoption.

This is “justice” in America where there is “freedom and democracy.”

Obama Goes All Out For Dirty Banker Deal

(The president should change his name to Bank Obanka. Or Bankhere O Banker...--jef)


Thursday, August 25, 2011 by Rolling Stone

by Matt Taibbi 

 

A power play is underway in the foreclosure arena, according to the New York Times.

On the one side is Eric Schneiderman, the New York Attorney General, who is conducting his own investigation into the era of securitizations – the practice of chopping up assets like mortgages and converting them into saleable securities – that led up to the financial crisis of 2007-2008.

On the other side is the Obama administration, the banks, and all the other state attorneys general.

This second camp has cooked up a deal that would allow the banks to walk away with just a seriously discounted fine from a generation of fraud that led to millions of people losing their homes.

The idea behind this federally-guided “settlement” is to concentrate and centralize all the legal exposure accrued by this generation of grotesque banker corruption in one place, put one single price tag on it that everyone can live with, and then stuff the details into a titanium canister before shooting it into deep space.

This is all about protecting the banks from future enforcement actions on both the civil and criminal sides. The plan is to provide year-after-year, repeat-offending banks like Bank of America with cost certainty, so that they know exactly how much they’ll have to pay in fines (trust me, it will end up being a tiny fraction of what they made off the fraudulent practices) and will also get to know for sure that there are no more criminal investigations in the pipeline.

This deal will also submarine efforts by both defrauded investors in MBS and unfairly foreclosed-upon homeowners and borrowers to obtain any kind of relief in the civil court system. The AGs initially talked about $20 billion as a settlement number, money that would “toward loan modifications and possibly counseling for homeowners,” as Gretchen Morgenson reported the other day.

The banks, however, apparently “balked” at paying that sum, and no doubt it will end up being a lesser amount when the deal is finally done.

To give you an indication of how absurdly small a number even $20 billion is relative to the sums of money the banks made unloading worthless crap subprime assets on foreigners, pension funds and other unsuspecting suckers around the world, consider this: in 2008 alone, the state pension fund of Florida, all by itself, lost more than three times that amount ($62 billion) thanks in significant part to investments in these deadly MBS.

So this deal being cooked up is the ultimate Papal indulgence. By the time that $20 billion (if it even ends up being that high) gets divvied up between all the major players, the broadest and most destructive fraud scheme in American history, one that makes the S&L crisis look like a cheap liquor store holdup, will be safely reduced to a single painful but eminently survivable one-time line item for all the major perpetrators.

But Schneiderman, who earlier this year launched an investigation into the securitization practices of Goldman, Morgan Stanley, Bank of America and other companies, is screwing up this whole arrangement. Until he lies down, the banks don’t have a deal. They need the certainty of having all 50 states and the federal government on board, or else it’s not worth paying anybody off. To quote the immortal Tony Montana, “How do I know you’re the last cop I’m gonna have to grease?” They need all the dirty cops on board, or else the whole enterprise is FUBAR.

In addition to the global settlement, Schneiderman is also blocking an individual $8.5 billion settlement for Countrywide investors. He has sued to stop that deal, claiming it could “compromise investors’ claims in exchange for a payment representing a fraction of the losses.”

If Schneiderman thinks $8.5 billion is an insufficient, fractional payoff just for defrauded Countrywide investors, then you can imagine how bad a $20 billion settlement for the entire industry would be for the victims.

In that particular Countrywide settlement deal, it looks like Bank of New York Mellon, the New York Fed, Pimco and other players negotiated on behalf of defrauded investors. They told the Times they were happy with the deal, but investors outside the talks told Gretchen they weren’t happy with the settlement.

Schneiderman apparently listened to those voices instead of the Mellon-Fed-BofA crowd, which infuriated the insiders who struck the actual deal. In a remarkable quote given to the Times, Kathryn Wylde, the Fed board member who ostensibly represents the public, said the following about Schneiderman:

It is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.

This, again, is coming not from a Bank of America attorney, but from the person on the Fed board who is supposedly representing the public!

This quote leads one to wonder just what Wylde would consider “indefensible,” given that stealing is pretty much the worst thing that a bank can do — and these banks just finished the longest and most orgiastic campaign of stealing in the history of money. Is Wylde waiting for Goldman and Citi to blow up a skyscraper? Dump dioxin into an orphanage? It’s really an incredible quote.

The banks are going to claim that all they’re guilty of is bad paperwork. But while the banks are indeed being investigated for "paperwork" offenses like mass tax evasion (by failing to pay fees associated with mortgage registrations and deed transfers) and mass perjury (a la the “robo-signing” practices), their real crime, the one Schneiderman is interested in, is even more serious.

The issue goes beyond fraudulent paperwork to an intentional, far-reaching theft scheme designed to take junk subprime loans and disguise them as AAA-rated investments. The banks lent money to corrupt companies like Countrywide, who made masses of bad loans and immediately sold them back to the banks.

The banks in turn hid the crappiness of these loans via certain poorly-understood nuances in the securitization process – this is almost certainly where Scheniderman’s investigators are doing their digging – before hawking the resultant securities as AAA-rated gold to fools in places like the Florida state pension fund.

They did this for years, systematically, working hand in hand in a wink-nudge arrangement with clearly criminal enterprises like Countrywide and New Century. The victims were millions of investors worldwide (like the pensioners who saw their funds drop in value) and hundreds of thousands of individual homeowners, who were often sold trick loans and hustled into foreclosure when unexpected rate hikes kicked in.

In a larger sense, even the (often irresponsible) people who simply bought more house than they could afford were victims of this scam. That's because in many of these cases, credit simply would not have been available to those people had the banks not first discovered a way to raise vast sums of money dumping crap loans on an unsuspecting market.

In other words: if Bank of America hadn’t found a way to sell worthless subprime loans as AAA paper to the Chinese and the Scandavians in May, you can be sure that it wouldn’t be going back to Countrywide in June to lend out more money for more subprime loans.
And Countrywide, in turn, wouldn’t then have been sending masses of reps out into the ghettoes to offer juicy home loans to undocumented immigrants and refis to confused old ladies on social security.

This is as bad as white-collar crime gets. But to Wylde, it doesn’t rise to the level of being “indefensible.” Until they do something worse than this, we apparently should support the banks, and make sure they don’t have to pay more than a fraction of what they made off of this kind of crime.

What is most amazing about Wylde’s quote is the clear implication that even a law enforcement official like Schneiderman should view it as his job to “do everything we can to support” Wall Street. That would be astonishing interpretation of what a prosecutor's duties are, were it not for the fact that 49 other Attorneys General apparently agree with her.
In Schneiderman we have at least one honest investigator who doesn’t agree, which is to his great credit. But everyone else is on Wylde’s side now. The Times story claims that HUD Secretary Shaun Donovan and various Justice Department officials have been leaning on the New York AG to cave, which tells you that reining in this last rogue cop is now an urgent priority for Barack Obama.

Why? My theory is that the Obama administration is trying to secure its 2012 campaign war chest with this settlement deal. If Barry can make this foreclosure thing go away for the banks, you can bet he’ll win the contributions battle against the Republicans next summer.
Which is good for him, I guess. But it seems to me that it might be time to wonder if is this the most disappointing president we’ve ever had.

Is Bank of America Headed Toward Collapse?

The nation's largest bank has only gotten bigger since the financial crisis and the government bailouts. But is big trouble ahead for the big bank?

Monday 15 August 2011

by: Sarah Jaffe, AlterNet | New Analysis 

 

Bank of America is no stranger to controversy. The largest bank in the United States has seen, in just the last six months, nationwide protests of its branches by groups like US Uncut, National People's Action and other progressive activists angered by the company's tax dodging, foreclosures, massive bonuses (paid after taxpayer bailouts) and other practices.

But could the too-big-to-fail behemoth actually be headed for failure?

On August 5, Yves Smith of the blog Naked Capitalism started a Bank of America Death Watch, writing:

“It is clear that the Charlotte bank has too much in the way of legal liability that it will not be able to shed and yet-to-be-taken writedowns on balance sheet items (for instance, roughly $125 billion of home equity loans and junior liens on residential real estate as of end of last year) for it not to be at risk of a death spiral.”

Back in 2008, Bank of America snapped up Countrywide, one of the subprime lenders that preyed on low-income home buyers, often with adjustable-rate mortgages that ballooned after a couple of years, leaving homeowners unable to make payments. Though it doesn't seem hard to figure out that many people would be driven into foreclosure by such loans, Countrywide was able to repackage these loans into mortgage-backed securities that were then resold as prime products to investors—investors that often were state pension funds, like CalPERS, the funds responsible for paying the benefits owed to public employees. These are the same public employees who are now being targeted around the country as greedy and unwilling to take cuts to their pensions. The unethical actions of big banks and mortgage lenders are at fault, yet working people are expected to take the hit.

"Countrywide exploited the American dream of homeownership," then-state attorney general, now California governor Jerry Brown said when he announced his state's lawsuit against the lender. "Countrywide was, in essence, a mass-production loan factory, producing ever increasing streams of debt without regard for borrowers," he said. "Californians...were ripped off by Countrywide's deceptive scheme."

As part of a massive settlement of Countrywide's practices, Bank of America was supposed to modify loans to help keep people in their homes, but it's all too often claimed the right to foreclose instead. Meanwhile, if borrowers happen to default again on a modified loan, B of A could profit from tacking added fees to the bill its investors are expected to foot.

But a wrench was thrown into B of A's plans this summer. In June, the bank announced an $8.5 billion settlement with investors, but New York's attorney general Eric Schneiderman, filed a motion to intervene. 

He called the settlement “unfair and inadequate,” and alleged “fraudulent and deceptive conduct” on the part of Bank of New York Mellon, which is the trustee in this case--supposedly acting on behalf of investors, but, Schneiderman alleges, possibly making a deal with Bank of America that gives the big bank the far better end of the bargain.

Schneiderman, unlike many government officials on the state and federal level, took the step of intervening because signing off on the settlement might affect his ability, later, to file charges against any of the companies involved.

As David Dayen at FireDogLake noted, the suit alleges that Countrywide sold what amounted to non-mortgage-backed securities to those investors. It reads:

“These provisions are central to any mortgage securitization, but they are now vitally important to trust investors in light of the housing market collapse. Any action to foreclose requires proof of ownership of the mortgage. This must be demonstrated by actual possession of the note and mortgage, together with proof of any chain of assignments leading to the alleged ownership. Moreover, complete mortgage files give borrowers assurance that their properties are properly foreclosed upon. The failure to properly transfer possession of complete mortgage files has hindered numerous foreclosure proceedings and resulted in fraudulent activities including, for example, 'robo-signing.' These fraudulent activities have burdened borrowers as well as the courts with flawed foreclosure proceedings.”

 Robert Scheer pointed out that Schneiderman stepped up when everyone from the White House on down was willing to sign off on a sweetheart deal that would “complete the job of saving the banks while ignoring their victims.” Schneiderman deserves credit for his fight, and also has some powerful tools on his side as the New York AG; the Martin Act, which, as Scheer quotes the Wall Street Journal, is “one of the most potent prosecutorial tools against financial fraud” because it doesn't require the AG to prove intent to defraud.

“There are so many people who got bad deals and are stuck with those bad deals that are just seething at the sense that the bankers who put them in the bad deals aren't stuck with the deal," Schneiderman said. “They’re not stuck with taking responsibility for this.”

Now Delaware attorney general Beau Biden (the son of Vice-President Joe Biden) has joined in the petition against Bank of America's settlement, noting the massive conflict of interest on the part of Bank of New York, and claiming his right to intervene and protect Delaware investors.

Yves Smith commented, “The fact that the rule of law is not completely dead in the US is looking increasingly likely to provide a very costly lesson to some very large banks and their asleep at the wheel regulators.”

While the intervention in this settlement by a couple of determined attorneys general certainly isn't enough to sink B of A, that's hardly the only problem facing the bank that many progressive groups call “Bad for America."

Also this week, AIG (yes, the same AIG that helped kick off the financial crisis with its own toxic financial business) filed suit against B of A for $10 billion in losses, making it “possibly the largest mortgage-security-related action filed by a single investor,” according to Gretchen Morgensen and Louise Story at the New York Times. The suit claims that B of A and its subsidiaries Countrywide and Merrill Lynch misrepresented the quality of the mortgages sold as securities to investors—the same subprime mortgages that created and then popped the housing bubble.

Morgensen and Story note that while the Justice Department has brought only three cases against employees at large banks and none against executives, private suits are still a possibility. AIG might have been part of the cause of the economic crisis, but at the moment it is still mostly owned by taxpayers (you and me) thanks to the bailout back in 2008. Kathleen C. Engel, a professor at Suffolk University Law School in Boston, told Morgensen and Story, “To the extent there are places where shareholders and borrowers can pursue claims, they are really serving the function of the government. They are our private attorneys general.”

These suits, and the possibility of others down the line, are creating bigger headaches for Bank of America that it seems to have foreseen when it bought one of the biggest purveyors of toxic mortgages. “Obviously, there aren't many days when I get up and think positively about the Countrywide transaction in 2008," Brian Moynihan, Bank of America's CEO, said in a conference call last week.

There are indications that investors and customers are also betting against Bank of America. Credit default swaps—mechanisms by which investors protect against default on a loan by purchasing insurance against its default, thereby hedging their bets—against B of A surged recently to their highest since April of 2009. The difference between a credit default swap and traditional insurance is that you don't have to have any financial interest in the loan in question—so they effectively become a form of gambling on default. Smith noted that B of A had a near-death experience back in 2009 as well, but wasn't forced to make any significant changes to its operations. Until Schneiderman intervened in the foreclosure settlement, B of A was allowed to keep functioning in essentially the same way it had before the financial crisis, when taxpayer bailouts had to keep it from falling apart.

And of course, with all those public protests against B of A's practices, Smith pointed out that the bank has been steadily losing depositors, as customers move their money to different banks that have less of a reputation for shady dealings.  

So when, on Thursday, a mainframe computer malfunction in the Los Angeles area left customers unable to access their accounts, Demos fellow and former Wall Streeter Nomi Prins tweeted “Yesterday, BofA says it doesn't need to raise more capital, today its CA systems fail, thereby clamping down on capital. probably unrelated.”

Whether or not the Los Angeles computer glitch had anything to do with B of A's financial troubles, the bank is likely to see its problems magnify. The entire financial market took a hit over the past couple of weeks, and the bank's current legal troubles may be only the beginning. Jack Barnes at Money Morning called Bank of America “A house of cards on the verge of collapse.” With a double-dip recession looking increasingly likely, a giant, undercapitalized beast like Bank of America looming over the economy like a bomb waiting to go off should scare everyone.

Christopher Whalen at Reuters wrote “[Bank of America] is a too big to fail zombie created by the Obama administration and the Fed to protect US financial markets, but is now so vast and unstable that it threatens the global economy,” and argued that the best way to deal with it is to put it through a restructuring under the Dodd-Frank legislation.

In other words, for the FDIC to take control of the bank, proceeding like a regular bankruptcy but protecting depositors before creditors of the bank.

As we learned with the first round of financial crises, the government was unwilling to let the big banks go under, preferring to save giant institutions and hope that their largesse would trickle down to depositors and borrowers. They also proved unwilling to break up those giant institutions—in many cases, like that of Bank of America and Countrywide, putting multiple too-big-to-fail entities together to create an even bigger, more dangerous monster that could have serious impact on everyone if it goes down.

If Bank of America does wind up in the death spiral Smith and others predict, are taxpayers going to find themselves on the hook for another bailout? Is there hope in the interventions of AGs Schneiderman and Biden, that perhaps some government officials will put people before massive corporate profits, and hold the people at the root of the economic crisis responsible for their dealings? Only time will tell.

The Bernanke Scandal: Full-Frontal Cluelessness

Wednesday, June 8, 2011 by TruthDig.com
by Robert Scheer

 

How I wish that Ben Bernanke would get caught emailing photos of his underwear-clad groin. Otherwise we don’t stand a chance of reversing this administration’s economic policy, which is shaping up to be every bit as disastrous as that of its predecessor.


Indeed, the Fed chairman’s much anticipated remarks on Tuesday take one back to the contemptuous indifference of a Herbert Hoover to the public’s suffering: Bernanke dismissed the wobbly economy with its anemic 1.8 percent first-quarter growth as merely “somewhat slower than expected.” The rise in unemployment to 9.1 percent was “some loss of momentum.”

The problem with Bernanke is that he is utterly clueless as to the stark pain and fear endured by the 50 million Americans who have experienced, or face the prospect of, losing their homes. His remarks reflected the insularity of a ruling-power elite that is magnificently impervious to the damage that Bernanke’s policies in the current and past administration helped inflict on what used to be called the American way of life. This is a man who assured us there was no housing crisis, while his policies at the Fed encouraged the mortgage securitization swindles that caused the meltdown of the economy.

His full statement stands as a classic example of the limits of economic language as morally descriptive: 

“Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.” 

Frustratingly slow—how about going bat nuts with fear over not being able to make your mortgage payment and losing your home? Tell it to workers who must contend with stagnant wage rates and sharply rising gas and food costs as better jobs and therefore consumer demand move offshore. Bernanke takes low wages to be reassuring news on what he sees as the all-important inflation front: “subdued unit labor costs should remain a restraining influence on inflation.”

At home we are experiencing a social tsunami with the disappearance of a middle-class workforce of stakeholders who were assumed by observers as varied as Thomas Jefferson and Alexis de Tocqueville to be the very bedrock of America’s experiment in freedom. Many with jobs are struggling desperately to get by as the average workweek and pay scales fall, and countless workers find themselves settling for rewards well below their skill sets. Even those slim pickings are denied to the unemployed. Bernanke concedes: “Particularly concerning is the very high level of long-term unemployment—nearly half of the unemployed have been jobless for more than six months.”

The jobs that have been created by our large multinational corporations, like the bailed-out GE, are primarily outside of the country, as Bernanke admitted:

“Many U.S. firms, notably in manufacturing but also in services, have benefited from the strong growth of demand in foreign markets.” 

Those foreign gains, fueled by far more successful anti-recession policies in China, Brazil and Germany, have driven up demand and prices abroad in the areas of petroleum, food and key construction commodities.

Bernanke, speaking at a monetary conference in Atlanta, conceded that “the depressed state of housing in the United States is a big reason that the current recovery is less vigorous than we would like,” and that the “U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression.”

But he offered not a word as to how the severe effects of that housing bust might be mitigated. Not a word about assisting people to stay in their homes. Yet he claimed that the relief that the Fed provided to the bankers by buying up more than $1.2 trillion of the toxic mortgages those bankers had created “has been accomplished, I should note, at no net cost to the federal budget or to the U.S. taxpayer.”

This is the Big Lie technique at work, employed by a huge banking lobby that stresses the direct cost of the TARP program while ignoring other programs that will not be paid back, as well as the additional cost of $5 trillion to the national debt that a proper Fed policy could have avoided.

The record is by now indelibly clear that the economic approaches pursued by George W. Bush and Barack Obama, with Bernanke playing a key role in both administrations, can be most accurately summarized as a policy of government of the bankers, by the bankers, and for the bankers.

Assurances of stability to the financial markets, meaning the ability for companies to borrow government funds at a near-zero interest rate without giving anything back to the public in the form of mortgage relief or job creation, have been the overwhelming goal. But even by that standard, as the latest statistics on job creation and construction starts attest, the government’s effort is not working. Putting the bankers first has represented pushing on a string, what Paul Volcker condemns as a “liquidity trap,” a situation in which taxpayer money has been made available to major corporations that invest in job creation that benefits foreigners instead of U.S. workers. Now that’s an obscenity we should be concerned about.

The Student Loan Debt Bubble

The Curse of the First American Austerity Generation
By ALAN NASSER and KELLY NORMAN

It was announced last summer that total student loan debt, at $830 billion, now exceeds total US credit card debt, itself bloated to the bubble level of $827 billion. And student loan debt is growing at the rate of $90 billion a year.

There are far fewer students than there are credit card holders. Could there be a student debt bubble at a time when college graduates' jobs and earnings prospects are as gloomy as they have been at any time since the Great Depression?

The data indicate that today's students are saddled with a burden similar to the one currently borne by their parents. Most of these parents have experienced decades of stagnating wages, and have only one asset, home equity. The housing meltdown has caused that resource either to disappear or to turn into a punishing debt load. The younger generation too appears to have mortgaged its future earnings in the form of student loan debt.

The most recent complete statistics cover 2008, when debt was held by 62 percent of students from public universities, 72 percent from private nonprofit schools, and a whopping 96 percent from private for-profit ("proprietary") schools.

For-profit school enrollment is growing faster than enrollment at public schools, and a growing percentage of students attending for-profit schools represent holders of debt likely to default. In order to get a better handle on the dynamics of student debt growth, it is helpful to sketch the connection between the current crisis in public education and the recent rapid growth of the for-profits.

Crisis of Public Education Precipitates Private Growth

Since the most common advise to the unemployed is to "get a college education", and tuition at public institutions is at least half or less than private-school rates, public higher education institutions have been swamped with an influx of out of work adults. This has resulted in enrollment gluts at many state colleges. At the same time, tuition is increasing just when household income and hence the affordability of higher education are declining.

Here is how this scenario unfolds:

With few exceptions, state-funded colleges and universities set tuition rates based on policy and budget decisions made by state legislatures. High and increasing unemployment and declining wages have resulted in declining public revenues. This in turn leads to budget cut directives from legislative bodies to public higher education institutions, often accompanied by the authority to increase tuition.

For example, a 14 percent budget cut to an institution may be "offset" by giving the governing boards of the school the authority to raise tuition by a maximum of 7 percent. Often the imbalance created by a cut to the base budget and an increase in tuition is made worse by limits on enrollment. A state legislative body may cut an institution's budget, allow it to increase tuition, but not provide per-student funding increases to keep pace with the accelerating enrollment demand.

This affects tuition rates at for-profit institutions. More students who would otherwise attend a state institution or a private, non-profit school are finding themselves without a seat at over-enrolled campuses. More students are pushed into the online and for-profit sectors, and proprietary schools sieze the day by inflating their tuition costs.

Because online colleges lack the enrollment constraints of a physical campus, they are uniquely poised to capture huge proportions of the growing higher education market by starting classes in non-traditional intervals (the University of Phoenix, for example, begins its online classes on a 5-week rolling basis) and without regard to space, charging ever-increasing rates to students who have no other choice.

Instead of waiting for an admissions decision or a financial aid package from a traditional college, students can enroll immediately online. This ease of use and accessibility to any student has allowed the for-profit sector to capture a growing portion of the higher education market and a growing proportion of education-targeted public money. Enrollments at for-profit colleges have increased in the last ten years by 225 percent, far outpacing public institution increases.

Thus, the neoliberal assault on public education not only tends to push more students into private institutions, it also generates upward pressure on tuition costs. This results in growing pressure on enrollees at proprietary schools to take on student loan debt.

How Healthy Are Student Loans?

The extraordinary growth of student debt paralleled the bubble years, from the beginnings of the dot.com bubble in the mid-1990s to the bursting of the housing bubble. From 1994 to 2008, average debt levels for graduating seniors more than doubled to $23,200, according to The Student Loan Project, a nonprofit research and policy organization. More than 10 percent of those completing their bachelor's degree are now saddled with over $40,000 in debt.

Are student loans as financially problematic as the junk mortgage securities still held by the biggest banks? That depends on how those loans were rated and the ability of the borrower to repay.

In the build-up to the housing crisis, the major ratings agencies used by the biggest banks gave high ratings to mortgage-backed securities that were in fact toxic. A similar pattern is evident in student loans.

The health of student loans is officially assessed by the "cohort-default rate," a supposedly reliable predictor of the likelihood that borrowers will default. But the cohort-default rate only measures the rate of defaults during the first two years of repayment. Defaults that occur after two years are not tracked by the Department of Education for institutional financial aid eligibility. Nor do government loans require credit checks or other types of regard for whether a student will be able to repay the loans.

There is about $830 billion in total outstanding federal and private student-loan debt. Only 40 percent of that debt is actively being repaid. The rest is in default, or in deferment (when a student requests temporary postponement of payment because of economic hardship), which means payments and interest are halted, or in forbearance. Interest on government loans is suspended during deferment, but continues to accrue on private loans.

As tuitions increase, loan amounts increase; private loan interest rates have reached highs of 20 percent. Add that to a deeply troubled economy and dismal job market, and we have the full trappings of a major bubble. As it goes with contemporary bubbles, when the loans go into default, taxpayers will be forced to pick up the tab, since just about all loans made before July 2010 are backed by the federal government.

Of course the usual suspects are among the top private lenders: Citigroup, Wells Fargo and JP Morgan-Chase.

Financial Aid and Subprime Lending

A higher percentage of students enrolled at private, for-profit ("proprietary") schools hold education debt (96 percent) than students at public colleges and universities or students attending private non-profits.

Two out of every five students enrolled at proprietary schools are in default on their education loans 15 years after the loans were issued.
In spite of this high extended default rate, for-profit colleges are in no danger of losing their access to federal financial aid because, as we have seen, the Department of Education does not record defaults after the first two years of repayment.

Nor have the disturbing findings of recent Congressional hearings on the recruitment techniques of proprietary colleges jeopardized these schools'
access to federal funds. The hearings displayed footage from an undercover investigation showing admissions staff at proprietary schools using recruitment techniques explicitly forbidden by the National Association of College Admissions Counselors. Admissions and enrollment employees are also shown misrepresenting the costs of an education, the graduation and employment rates of students, and the accreditation status of institutions.

These deceptions increase the likelihood that graduates of for-profits will have special difficulties repaying their loans, since the majority enrolled at these schools are low-income students. (Forbes magazine, Oct. 26, 2010, "When For-Profits Target Low-Income Students", Arnold L. Mitchem)

A credit score is not required for federal loan eligibility. Neither is information regarding income, assets, or employment. Borrowing is still encouraged in the face of strong evidence that the likelihood of default is high.

Loaning money to anyone without prime qualifications was "subprime lending" during the ballooning of the housing bubble, when banks were enticing otherwise ineligible candidates to buy houses they could not afford.

Shouldn't easy lending without adequate credit checks to college students with insecure credit also be considered "subprime lending"?

Government Bias Toward Private Education

In 2009 President Obama initially pledged $12 billion in stimulus funds to help community colleges through the economic crisis. Last March that sum was slashed to $2 billion. The umpteenth example of a broken Obama promise.

We see a drastic cut in federal stimulus funding even as state funding for higher education is expected to fall even further. At a time when community colleges across the country are overflowing with returning students seeking new skills and high school graduates who can't afford ever-rising tuition rates at many four-year schools, the majority of education-bound stimulus funds are going to for-profit institutions, not community colleges. (Our home state of Washington illustrates the general direction of the administration's "reform" of higher education: for the first time in the state's history, public funds no longer pay the majority of higher education costs.)

Apart from stimulus funding, overall government student aid is disproportionately aimed at those attending proprietary schools. Nearly 25 percent of federal financial aid is spent on students attending for-profit colleges, even though these colleges enroll less than 10 percent of the nation's college students.

Proprietary schools now rely on federal financial aid – PELL Grants and federal loans – as their primary source of revenue.

Even the most profitable proprietary schools receive the majority of their funding from federal financial aid programs. According to a U.S.-Senate-sponsored study, The University of Phoenix, the largest private university in North America, receives 90 percent of its funding from the federal government. Not-so-incidentally, proprietary schools are among the largest donors to Education Committee members.

Proponents of the system defend it by pointing out that public colleges also rely on taxpayer subsidies for the majority of their revenue. But this overlooks a decisive difference: what proprietary schools don't have that public schools do, is an obligation as a state agency to deliver a high quality education to its students. Instead, proprietary schools have a legal fiduciary duty to their stockholders, like any other for-profit enterprise. As a result, according to a PBS Frontline investigation, the sector spends 20 to 25 percent of its budget on marketing and only 10 to 20 percent on faculty.

The Track Record of For-Profit Colleges

The track record of for-profit colleges does not justify their disproportionate share of government largesse.

Drop out rates are higher than they are at public and non-proprietary private schools, often as high as 50 percent. Irrespective of whether a student drops out, the for-profit college has already pocketed tuition and fees. The student is left still burdened with a substantial loan obligation.

As for graduation rates, a 2008 report by the National Center for Education Statistics puts the graduation rate for students at for-profits beginning their studies in 2002 at 22 percent, an 11 percent drop from students enrolling in 2000. The same cohort attending public and private non-profits graduated at rates of roughly 54 percent and 64 percent, respectively. Graduate or not, the debt burden remains.

Suppose the student either seeks to transfer to a public or another non-profit, or completes her studies and enters the job market with a proprietary degree? Many students assume that credits are transferable to a public or nonprofit, but they aren't, so they pay twice to attain their degree. The school holds out the lure of high-paying jobs upon graduation, but either no such jobs exist or they require education or experience beyond what the school provided. Congressional studies have shown that the earnings of proprietary graduates are the lowest of all graduates. According to a 2009 Bloomberg report on salary comparisons between traditional and online degree-holders, graduates with bachelor's degrees from traditional colleges earn a median salary of $55,200, while those with degrees from the University of Phoenix earn only $50,500, and $43,100 from for-profit American Intercontinental.

On top of these earnings and job-prospect disadvantages, proprietary graduates bear the heaviest academic debt burden. The Education Department reports that 43 percent of those who default on student loans attended for-profit schools, even though only 26 percent of borrowers attended such schools. Many of those who attended for-profits don't earn enough to repay their loans. It's not uncommon for a student who either paid out of pocket or took out a loan for a $30,000 degree to find herself stuck in a $22,000 a year job. This only adds insult to injury: a Government Accounting Office study reports that "A student interested in a massage therapy certificate costing $14,000 at a for-profit college was told that the program was a good value. However, the same certificate from a local community college cost $520.00." (GAO, "For-Profit Colleges: Undercover Testing Finds Colleges Encouraged Fraud and Engaged in Deceptive and Questionable Marketing Practices", Nov. 30, 2010)

Paying back student loans out of low income and over a long period of time can rule out the possibility of making other financial investments required for the vanishing American Dream, such as buying a house, or saving for retirement or for one's children's education.

All in all, the for-profits' track record is more than dismaying. In too many cases, students leave proprietary schools in worse financial shape than they were in before they enrolled. The problem is not limited to proprietary graduates: this generation of college grads now possesses more debt than opportunity.

You might think that the unflattering record of for-profit schools would restrain government gift-giving. After all, the Obama administration's current education policy would punish "underperforming" public schools and teachers. But these policies target the public sector exclusively: the aim is to undermine teachers' unions and encourage privatization by boosting charter schools. It is entirely consistent with Washington's agenda that the dismal performance of proprietary schools does not jeopardize their future access to public financial aid funds - as long as the student does not default on their loan within two years of dropping out.

The Career College Association, the lobbying arm of publicly traded colleges, finds all this irrelevant. It relies on a different type of indicator from the rest of the higher education sector to measure the success of its for-profit colleges: stock prices. Remarkable. We see the disproportionate flourishing of "schools" whose primary concern has nothing to do with education.

The Private Lenders: Securitization As Usual

The two largest holders of student loans are SLM Corp (SLM) and Student Loan Corp (STU), a subsidiary of Citigroup. SLM -Sallie Mae- was originated as a Government Sponsored Enterprise (GSE) in 1972. The idea was to prime it for eventual privatization. In 2002 Sallie Mae shed the its GSE status and became a subsidiary of the Delaware-chartered publicly traded holding company SLM Holding Corporation. Finally, in 2004 the company officially terminated its ties to the federal government.

As the nation's largest single private provider of student loan funding, SLM has to date lent to more than 31 million students. In 2009 it lent approximately $6.3 billion in private loans and between $5.5 billion and $6 billion in 2010.

In the 1990s, well before its full privatization, Sallie's operations were increasingly swept into the financialization of the economy. It jumped whole hog onto the securitization bandwagon, lumping together and repackaging a large portion of its loans and selling them as bonds to investors. SLM created and marketed its own species of asset-backed securitized student loans, Student Loan Asset Backed Securities (SLABS). When derivatives trading went through the roof following the 1998 repeal of Glass-Steagal, increasingly diverse tranches of Sallie-Mae-backed SLABS entered the market. The company is now also buying and selling the obligations of state and nonprofit educational-loan agencies.

Student loans were included in the same securities that are blamed for the triggering of the financial crisis, and financial products containing these same student loans continue to be traded to this day. The health of these tranches and securities is, as we have seen, highly suspect.

SLM's risk was minimized as long as the feds guaranteed its loans. But as part of last March's health care legislation, starting in July 2010 federally subsidized education loans were no longer available to private lenders. What do education loans have to do with health care? Since the government took federal loan originations in-house, making them available only through the Department of Education, it no longer has to pay hefty fees (acting as the guarantee) to private banks. The Obama administration expects to save $68 billion between now and 2020. $19 billion of this will be used to pay for the $940 billion health care bill.

While there is scant relief for student borrowers, private banks manage to survive apparent setbacks just fine. SLM will do quite well despite the withdrawal of government backing. The company anticipated the change in government lending policy by executing an ingenious trick as a borrower. Early last year it made its insurance subsidiary a member of the Federal Home Loan Bank of Des Moines, which agreed to lend to big-borrower SLM at the extraordinary rate of .23 percent. And anyhow, subsidized loans are almost always insufficient to cover the entire cost of a college degree. For a while the student gets to enjoy the benefits of a government loan. Interest rates are lower and during deferment interest does not accrue. But eventually many students must also take out a private loan, usually in larger amounts and with higher interest rates which continue to mount during deferment.

The Worst-Case Scenario: Going Bankrupt

Credit card and even gambling debts can be discharged in bankruptcy. But ditching a student loan is virtually impossible, especially once a collection agency gets involved. Although lenders may trim payments, getting fees or principals waived seldom happens.

The Wall Street Journal ran a revealing report on the kinds of situation that can lead to financial catastrophe for a student borrower. ("The $550,000 Student Loan Burden: As Default Rates on Borrowing for Higher Education Rise, Some Borrowers See No Way Out", Feb. 13, 2010) Here is an excerpt illustrating the toll that forced indebtedness can take on the student borrower:

"When Michelle Bisutti, a 41-year-old family practitioner in Columbus, Ohio, finished medical school in 2003, her student-loan debt amounted to roughly $250,000. Since then, it has ballooned to $555,000.

It is the result of her deferring loan payments while she completed her residency, default charges and relentlessly compounding interest rates. Among the charges: a single $53,870 fee for when her loan was turned over to a collection agency.

Although Bisutti's debt load is unusual, her experience having problems repaying isn't. Emmanuel Tellez's mother is a laid-off factory worker, and $120 from her $300 unemployment checks is garnished to pay the federal student loan she took out for her son.

By the time Tellez graduated in 2008, he had $50,000 of his own debt in loans issued by SLM... In December, he was laid off from his $29,000-a-year job in Boston and defaulted.

Heather Ehmke of Oakland, Calif., renegotiated the terms of her subprime mortgage after her home was foreclosed. But even after filing for bankruptcy, she says she couldn't get Sallie Mae, one of her lenders, to adjust the terms on her student loan. After 14 years with patches of deferment and forbearance, the loan has increased from $28,000 to more than $90,000. Her monthly payments jumped from $230 to $816. Last month, her petition for undue hardship on the loans was dismissed."

The First Austerity Generation's Job Prospects

Most of those affected by the meltdown of 2008 had completed their education and were either employed or retired. The student loan debt bubble signals a generation that enters the work of paid work cursed with what is more likely than not to be a life of permanent indebtedness and low wages.

The current cohort of indebted students will face earnings prospects far poorer than what job seekers could expect during the period of the longest wave of sustained economic growth and the highest wages in US history, 1949-1973. The present generation will experience the indefinite extension of Reagan-to-Obama low wage neoliberalism.

According to the National Association of Colleges and Employers more than 50 percent of all 2007 college graduates who had applied for a job had received an offer by graduation day. In 2008, that percentage tumbled to 26 percent, and to less than 20 percent in 2009. And a college education has been producing diminishing returns. For while a college degree does tend to correlate with a relatively high income, during the last eight to ten years the median income of highly educated Americans has been declining.

Every two years the Bureau of Labor Statistics issues projections of how many jobs will be added in the key occupational categories over the next ten years. The projected future jobs picture indicates that the grim employment situation is not merely a temporary reflection of the current unusually severe downturn. But you miss this if you get your news only from mainstream sources. The New York Times's report on the most recent BLS projections, released in December 2009, paints an unduly optimistic picture of future employment opportunities. (Catherine Rampell, "Where the Jobs Will Be", Dec. 15, 2009) Here is how a misleading report can be produced without falsifying the facts:

BLS releases two job projections, on the Fastest Growing Occupations and on Occupations With the Largest Job Growth. The Times focuses on the former, where the two fastest growing occupations, biomedical engineers and network systems and data communications analysts, require a college degree. The Times echoes BLS's comment that occupations requiring postsecondary (a bachelor's degree or higher) credentials will grow fastest. This is redolent of the ideology of the "New Economy" : the US is turning into a society of professionals and knowledge workers, and the key to success in this upgraded economy is a college education.

But we need more information, about the degree requirements of the total number of job categories listed in both projections, and about the number of new jobs expected to materialize in each projection.

Of the total jobs listed, only one of five require a postsecondary degree. By far the fastest growing category is biomedical engineers, projected to grow 72.02 percent, from 16,000 in 2008 to 27, 600 in 2018. That's 11,600 new jobs. Is that a lot? Well, compared to what? The percentage figure, 72.02, is high, but what about the number of new jobs? Let's compare that Fastest Growing occupation with retail salespersons, the occupation fifth down on the Largest Growth list. Retail sales workers will grow by a mere 8.35 percent. But that amounts to almost 375,000 new jobs, an increase from 4,489,000 jobs in 2008 to 4,863,000 jobs in 2018. Compare that to the 11,600 new jobs at the top of the Fastest Growing list. Just do the simple math on all the categories on both lists: the great majority of new jobs will be low-paying.

This is a nation of knowledge workers? Most new jobs will offer the kind of wage we would expect from an economy in which, according to one of Obama's most repeated mantras, "we" will "consume less and export more". BLS avers as much when it projects that fewer than 12 million of the 51 million "job openings due to growth and replacement needs" will require a bachelor's degree.

Our first austerity generation will be in debt to its teeth and stuck with low-wage work. The relative penury will require more debt still. Michael Hudson calls this debt peonage. Not to sound like a broken record, but we need to get off our asses and begin taking seriously political organization that goes beyond the ballot box. Not that voting is entirely irrelevant. We can imitate those activists -bankers, hedge fund managers, and corporate CEOs- who stoutly refuse to support, financially or at the ballot box, candidates who will not give them what they want. These days, those folks always get what they want. Liberals and too many Leftists have not learned that elementary political lesson.

Matt Taibbi's Great Squid Hunt

In Griftopia Matt Taibbi argues that America has been corrupted by the merger of government and finance.
By Chris Lehmann, The Nation
Posted on December 12, 2010

The epic failure of America's financial system in 2008 was, among other things, a sobering gloss on the American romance with technical expertise. The tidal onrush of securitized debt that kept the housing bubble afloat was more than the simple byproduct of decades of deregulation in the nation's financial sector; it was also the handiwork of a new generation of market analysts known as the Quants. These ingenious souls harnessed arcane financial instruments like collateralized debt obligations (CDO) and credit default swaps (CDS) to magically scrub bad housing debt of all apparent risk as it was traded up the Wall Street food chain.

 The rickety structure was bound to collapse, but the amazing thing is that even though the Quants and all their schemes have been exposed as fraudulent, the cult worship of market savants has gone on unabated. Look no further than the Obama administration, which met the challenge of leading the economy out of the worst recession in seventy years by retaining Ben Bernanke, the Fed chair who'd presided over the meltdown; promoting Timothy Geithner, a principal architect of the shoddy TARP bailout of Wall Street, to treasury secretary; and recruiting Larry Summers, a stalwart advocate of Clinton-era deregulation during his own treasury tenure, as its chief economic adviser. (Summers announced that he would decamp from his post at the head of the Council of Economic Advisers in September, only to return to that other citadel of technocratic hubris he had long ago captained and, not incidentally, helped steer into its own economic peril: Harvard University.) It was a bit like the government subcontracting all future deepwater drilling oversight to BP.

When the idolatry of the market, and market expertise, becomes this perverse and unchecked, the value of a stubborn autodidact like Matt Taibbi stands out in high relief. Heeding the shifting tenor of the times, Taibbi, a contributing editor for Rolling Stone, moved from the campaign beat into finance journalism shortly after the 2008 meltdown. At the outset, he muffed a few things. In his now (in-)famous July 2009 takedown of Goldman Sachs, which placed the investment house at the center of three signature market bubbles—the 1920s joint stock fiasco, the '90s Internet mania and the recent housing Guignol—he overstated the firm's power to drive markets while mischaracterizing crucial Goldman operations such as CDO exchanges as derivatives deals. But despite such missteps—which earned Taibbi the concerted scorn of most of the financial press—the brunt of his argument about Goldman's particular outsize role in the housing debacle has been proven correct, and has gained remarkable traction in our emerging and impressionistic understanding of the past decade of Wall Street larceny. When Taibbi quoted a hedge-fund operator as saying that Goldman's initiative to sell short on the same mortgage deals it systematically inflated in pitches to other investors was nothing less than "securities fraud," the same financial journalists derided Taibbi as an irresponsible naïf—until the SEC charged the bank with securities fraud for constructing just those kinds of deals, in a prosecution that eventually produced the largest civil settlement in the regulatory agency's history. After Goldman-brokered interest-rate swaps proved instrumental in the debt meltdown of the Greek economy in February, Atlantic business and economics editor Megan McArdle's earlier, airy dismissal of Taibbi's reporting on Goldman's hand in the interest-rate markets sounded like a grim joke: "No one, as far as I know, is now proposing that we need to curtail the use of interest-rate swaps." Well, perhaps someone should have.

In Griftopia, Taibbi revisits the whole Goldman saga, and does cop, in very general terms, to his past oversights, noting that in retrospect he and his Rolling Stone editors "left out quite a lot, a problem I've tried to rectify here by adding some to the original text." Happily, though, the pugnacious Taibbi—whom, I should note, I've edited but never met, and have previously defended in my own autodidactic and regrettably imprecise way—doesn't confine his new book to Goldman score-settling. Rather than burrowing further into the financial-press turf wars, Taibbi builds an account of bailout America around a broad indictment of the way the political class and the investor class intersect and sometimes collude. "What has taken place over the last generation," he writes, "is a highly complicated merger of crime and policy, of stealing and government.... The financial leaders of America and their political servants have seemingly reached the cynical conclusion that our society is not worth saving and have taken on a new mission that involves not creating wealth for all, but simply absconding with whatever wealth remains in our hollowed-out economy. They don't feed us, we feed them."

* * *

It's a social contract that transcends the tedious partisan shadow play Taibbi dutifully recorded during the 2008 campaign, and at key points in Griftopia he underscores the painful irrelevance of our political process to the consolidation of a new political economy. The American electoral scene "grounds our new and disturbing state of affairs in familiar forty-year-old narratives," he observes. "The right is eternally fighting against Lyndon Johnson; the left, George Wallace." Meanwhile, "political power is simply taken from most of us by a grubby kind of fiat, in little fractions of a percent here and there each and every day, through a thousand separate transactions that take place in fine print and in the margins of a vast social mechanism that most of us are simply not conscious of."

These fine-grained transactions lie at the heart of the mortgage fiasco. For example, the interest-rate swaps that upended Greece and were a key factor in our housing market's collapse also midwifed an ingenious investment tool called the "CDO squared"—that is, a debt instrument composed wholly of other debt instruments. These contrivances allowed substandard BBB or lower mortgages to get nudged back up into AAA territory; and in the heat of a bubble, all that a broker of fluid capital usually needs to hear is the simple "AAA" incantation to set the geysers loose. As Taibbi explains, the Quants' brave new parcels of repackaged debt were also appealing to international bankers because of their transaction fees, measured in hundredth-percentage "basis points."

Taibbi brings home the dramatically out-of-kilter state of the bubble market by recounting the global investing adventures of an anonymous banker he calls Andy. (As Taibbi explains in a note on sourcing, he grants anonymity to sources in the financial industry in order to protect their professional standing. He uses anonymous sources mainly to confirm already reported details of the meltdown; in only one case—the back-room deal to bail out the moribund American International Group—does Taibbi rely on an anonymous source to break news.) As Taibbi sums up the process, CDO-squared transactions "allowed Andy's bank to take all the unsalable BBB-rated extras from these giant mortgage deals, jiggle them around a little using some mathematical formulae, and—presto! All of a sudden 70 percent of your unsalable BBB-rated pseudo-crap ('which in reality is more like B-minus-rated stuff, since [consumer lending] scores aren't accurate,' reminds Andy) is now very salable AAA-rated prime paper, suitable for selling to would-be risk-avoidant pension funds and insurance companies. It's the same homeowners and the same loans, but the wrapping on the box is different." At the crest of the bubble, another global banker, whom Taibbi calls Miklos, recalls fielding a bond deal offering him fifty basis points above the standard international borrowing rate, known as the London Interbank Offered Rate; he was then able to turn around and repackage the original bonds into a credit default deal with the now-infamous flamed-out-and-bailed-out AIG for ten points above the London rate. In other words, Miklos's bank would collect forty basis points—translating into millions in fees—for nothing more than rechristening debt instruments with different nomenclature. "It was so unreal, my bosses wouldn't let me book this stuff as profit," Miklos says now. "They just didn't believe it could be true." Miklos had lucked into the early part of a global run on these AIG-brokered deals—but it couldn't last. "Suddenly someone is buying like five hundred million dollars of this stuff and getting the same swap deal from AIG," he says. "I'm getting blown out of the water."

It's worth remembering, in the thick of all this surreal detail, that these wild market lurches happened because credit default insurance was completely unregulated: no bank had to show underlying assets to any counterparty, let alone to the public. "Wall Street is frequently compared by detractors to a casino," Taibbi writes in summing up this asinine state of affairs, "but in the case of the CDS, it was far worse than a casino—a casino, at least, does not allow people to place bets they can't cover."

The other deformed stepchild of deregulation in this set piece was, of course, AIG, the firm that became the CDS guarantor of first resort for profit-hungry investors. AIG was once a simple insurance company, but under the dispensation of the 1999 Gramm-Leach-Bliley law, which wiped out New Deal prohibitions against the consolidation of insurers, investment banks and commercial banks, AIG soon morphed into an extremely shortsighted purveyor of securitized debt. (Whether credit default swaps can technically be viewed as insurance is, rather hilariously, still a subject of controversy among state and federal regulators.) The AIG Financial Products division is already a byword for bubble excess in the nation's new financial lexicon; under the deranged leadership of division head Joe Cassano, the financial products team leveraged some $500 billion into the CDS market (thereby permitting Cassano to pocket $280 million during an eight-year period of his twenty-year run of the shop) before the gradual collapse of the housing market caused a run of collateral claims on all the default-swap debt as borrowers defaulted.

Leading the pack of collateral claimants was Taibbi's old nemesis, Goldman Sachs. What's more, as Cassano's division brutally unwound during the crazed 2008 run of Wall Street lenders on the firm, Goldman mounted a pincer-like assault on another troubled AIG division, Asset Management, whose woes jeopardized the health of the company's erstwhile core business of insurance—as well as the scores of state insurance and pension plans that were lashed to the mast of the sinking division. But as Taibbi explains in an illuminating account of the behind-the-scenes negotiations to rescue AIG from oblivion, the run on the company's Asset Management arm didn't really make sense, since its insurance securities, unlike the dismal CDS operation, still retained a good deal of underlying value.

At the time, federal and state regulators urged caution on creditors holding Asset Management paper, but Goldman was having none of it. In the conclave of bankers frantically convened to help determine AIG's fate, Goldman CEO Lloyd Blankfein insisted long and loudly, as one of Taibbi's informants put it, "that he wanted his fucking money." As a result, the deal's overseers faced a Hobson's choice: "Either the state would pour massive amounts of public money into the hole in the side of the ship, or the Goldman-led run on AIG's sec-lending business would spill out into the real world. In essence, the partners of Goldman Sachs held the thousands of AIG policyholders hostage, all in order to recover a few billion bucks they'd bet on Joe Cassano's plainly crooked sweetheart CDS deals."

The ultimate reasons for Goldman's hardline stance are still inscrutable, like much of the detail involving the AIG bailout, though it's hard to dispute Taibbi's dour assessment. In his view, Goldman's AIG ultimatum was like the Mafia's neighborhood business model as laid out in Martin Scorsese's Goodfellas: pump up a local restaurant or bar with supplies extorted from your protection-paying debtors, and when the thing is leached of its last profit, set it afire for the insurance money. "In the end, Blankfein and Goldman...did a mob job on AIG, burning it to the ground for the 'insurance' of a government bailout they knew they would get, if that army of five hundred bankers could not find the money to arrange a private solution." In this, Taibbi argues, Goldman was no different from the shakedown artists pumping out "no down payment" adjustable-rate mortgages to borrowers who had no earthly hope of making their adjusted ARM payments—"the kind of shameless con man who preyed on families and kids and whom even other criminals would look down on.... The only difference with Goldman was one of scale."

Such rhetorical flourishes can often seem excessive, and Taibbi can be something of a Hunter S. Thompson 2.0, both in his exuberant way with profanity (his analytically spot-on chapter on former Fed chair Alan Greenspan, for instance, bears the frattish title "The Biggest Asshole in the Universe") and his penchant for colorful metaphor (thanks to his 2009 Rolling Stone article about Goldman, he and the firm will forever be yoked together on Google with the expression "vampire squid"). Yet Taibbi is correct to insist that at a moment of maximum crisis, when other bankers as well as government regulators were feverishly trying to work out a scheme to stave off a ruinous run on insurance and pension funds, Goldman's behavior in the AIG episode makes sense only as a textbook example of gangster capitalism. And it's hard to avoid the corollary conclusion that a federal economic team that has extravagantly rewarded this bottom-feeding operation with virtually free money at the Fed discount window is a hopelessly corrupt police force, of the sort moviegoers might recall from Serpico or Training Day.

* * *

It bears reminding that throughout the nation's history, the lords of finance have not hesitated to ransack the economy during a national emergency. In 1895, for instance, the nation was suffering an acute contraction of gold reserves, under the administration of Grover Cleveland—another stolid probusiness Democrat in the Clinton-Obama mold. As the nation's bankers hoarded their private reserves of gold, Cleveland grew increasingly desperate in his efforts to persuade investment titans to negotiate a gold-backed bond sale in order to prevent the already ruinous financial panic from escalating to a full-scale depression. Enter the financier J.P. Morgan—whose name lives on, fittingly enough, in Morgan Stanley, which together with Goldman is the only investment banking colossus left standing after the '08 calamity. Through his firm's extensive connections in London, Morgan assembled a syndicate of global bankers to rig a $65 million government-issued bond sale at what was then an unheard-of rate of 3.75 percent. When the hapless Cleveland staged an eleventh-hour meeting with the banking titan, a Treasury official informed him that, in the wake of the latest run, New York gold reserves had dwindled to $9 million. At that point, Morgan interjected: "Mr. President, the Secretary of the Treasury knows of one cheque outstanding for 12,000,000 dollars. If this is presented today it is all over."

Cleveland promptly caved to Morgan's demands; the overnight yield on the deal for the Morgan syndicate was placed at somewhere between $5 million and $9 million—real money back in 1895. Plus, there was an abundance of longer-term returns, which in structural terms at least, closely parallel the sort of deal-making Taibbi describes at the dark heart of the housing bubble some 110 years later. The Morgan "syndicate borrowed exchange in London, on its own credit, and thus sold bills for American currency, pegging the world exchange rate of the dollar at a point favorable to their gold operations," wrote muckraking journalist Matthew Josephson in his chronicle of the episode. "Morgan also supervised and controlled for several months the gold reserve of the Treasury. Every banking house and exchange dealer in New York having important European connections was bound to the undertaking by being given an allotment of the syndicate's bonds at profitable rates."

In retrospect, even Cleveland—a diehard gold bug—blanched at the scope of the shakedown. "I am afraid as we triumph our party loses and the country does not gain as it should," he confided to Thomas Bayard, the US ambassador to Britain. The insurgents within Cleveland's Democratic Party took a much harsher view. When the Morgan deal was announced, Nebraska Congressman William Jennings Bryan—a bitter foe of the gold standard who would supplant Cleveland as the party's national leader the following year—rose on the floor of Congress to denounce it as an illicit deal "with the representatives of foreign money loaners. It is a contract made with men who are desirous of changing the financial policy of this country...they come to us with the insolent proposition, 'we will give you $16,000,000, paying a proportionate amount each year, if the United States will change its financial policy to suit us.' Never before has such a bribe been offered to our people by a foreign syndicate."

The chief distinction between the present Gilded Age and its nineteenth-century forerunner is that the lines of extortion are reversed. Whereas Morgan and other private bankers used their own ample access to credit and gold reserves to shore up the public treasury on the most favorable terms they could dictate, now capital-starved lending institutions turn on one another in the scrum for government bailout money.

Also, Congress no longer harbors any crusading populist reformers like Bryan. Instead, we have the pasteboard populism of Tea Party conservatism, which tirelessly advertises its superior heartland virtues in pursuit of banker-friendly tax policies. As Taibbi dryly notes, one key bailout deal—the government-orchestrated merger of the failed Wachovia Bank with Wells Fargo—was announced on October 12, 2008, "the same day that Barack Obama had his infamous encounter with Samuel 'Joe the Plumber' Wurzelbacher in Ohio. When the last McCain-Obama debate took place three days later...there was plenty of talk about which candidate was a bigger buddy to middle America's plumbers, but neither man bothered to mention that week's sudden disappearance of the country's fourth-largest commercial bank."

Nor did either man note the exceedingly generous terms that Treasury Secretary Hank Paulson used to induce Wells Fargo to swallow Wachovia's toxic debt: $25 billion in bailout funds, together with an alteration in the tax code to net Wells Fargo another $25 billion or so. In other words, Taibbi writes, "America's fourth-largest bank goes broke gambling on mortgages, then gets sold to Wells Fargo for $12.7 billion after the latter receives $50 billion in bailout cash and tax breaks from the government. The resulting postmerger bank is now the second-largest commercial bank in the country, and, presumably, significantly more 'systemically important' than even Wachovia was. Fattened by all this bailout cash, incidentally, postmerger Wells Fargo would end up paying out $977 million in bonuses for 2008."

A populace habituated to a bubble economy and a political system fattened by its spoils isn't equipped to process a bubble's inevitable bursting. As Taibbi writes in the bleak concluding pages of Griftopia, the financial crisis briefly "forced a nation of people accustomed to thinking that their only political decisions came once every four years to consider, for really the first time, the political import of regular or even daily items like interest rates, gasoline prices, ATM fees, and FICO scores." And that, he rightly notes, isn't a thinkable outcome for the leaders of the American financial oligarchy. "If the people must politick," as he paraphrases their thinking, "then let them do it in the proper arena, in elections between Wall Street-sponsored Democrats and Wall Street-sponsored Republicans. They want half the country lined up like the Tea Partiers against overweening government power, and the other half, the Huffington Post crowd, railing against corporate excess. But don't let the two sides start thinking about the bigger picture and wondering if the real problem might be a combination of the two."

If this deadlock is ever to be broken, Taibbi's angry, astute and detailed indictment is a great starting point for citizens looking to shake off the past decades of pseudo-populist stupor stoked by the leaders of both major parties. Should the mobbed-up status quo continue to hold, well, then we should all recall that Martin Scorsese's de facto sequel to Goodfellas was Casino.