BP, not Exxon, caused the Exxon Valdez disaster

By Greg Palast
March 2014 | Read the full story at TruthDig
 
Two decades ago I was the investigator for the legal team that sold you the bullshit that a drunken captain was the principal cause of the Exxon Valdez disaster, the oil tanker crackup that poisoned over a thousand miles of Alaska’s coastline 25 years ago today, on March 24, 1989.

The truth is far uglier, and the real culprit—British Petroleum, now BP—got away without a scratch to its reputation or to its pocketbook.

Just this month, the Obama administration authorized BP to return to drilling in the Gulf.

It would be worth the time of our ever-trusting regulators to take a look at my Exxon Valdez files on BP.  They would see a decades-long pattern of BP’s lies, bribes and cover-ups that led, inexorably, to the Deepwater Horizon blowout—and that continue today within BP’s worldwide oil operations.

Here’s a sample:

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Palast’s investigation of BP opens his latest film, Vultures and Vote Rustlers. Pre-release editions are available on DVD and download for a donation to Palast’s foundation for investigative reporting at http://www.palastinvestigativefund.org
And read the complete untold story of the Exxon Valdez and Deepwater Horizon disasters in Palast’s Vultures’ Picnic, BBC Newsnight’s Culture Program’s Book of the Year.

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Fraud No. 1: The Emergency Sucker Boat fraud
As the principal owner of the Alaska Pipeline and Terminal, BP, not Exxon, was designated by law to prevent oil spilled by the Exxon Valdez from hitting the beach. It was BP’s disastrous failures, more than Exxon’s, that allowed the oil to devastate Alaska’s coast.

Containing an oil spill—preventing spilled crude from spreading to the shore—is not rocket science.  All you need are rubbers and suckers. It works like this:

If a tanker, oil rig or pipe bursts open, you surround it with a giant rubber skirt known as “boom.” Then you suck the oil out through vacuum hoses on board special “containment” or “skimmer” ships.

The containment ship is the firetruck of oil spills. You simply don’t let tankers out of port unless a containment ship is ready to roll. It’s against the law.

But the law has never meant much to BP.

In May 1977, as the first tankers left Valdez, BP executives promised the state of Alaska that no tanker would leave port unless there were two containment barges at the ready and loaded with boom, with one placed near Bligh Island.

In fact, on March 24, 1989, when the Exxon Valdez ran aground, right at Bligh Island, the containment barge was far away in Valdez, locked in a dry dock, its boom and hoses under Alaskan ice. As a result, by the time the emergency oil spill vessel got to the stricken ship, the oil slick was a hundred miles in circumference and beyond control.

Two decades later, I watched fireboats uselessly spraying the burning oil on the Deepwater Horizon. Once again there were no BP skimmer barges, no boom surrounding the rig. Just as in Alaska, the promised spill containment operation was a con.

Fraud No. 2: Ghost Crews
There’s no sense having a fire truck without firemen. And so, years before the Exxon Valdez grounding, Alyeska, the oil company consortium headed by BP, promised the U.S. Department of the Interior and the U.S. Congress, under oath, that the oil shipper would employ a trained and equipped crew around the clock to jump from helicopters, if needed, to contain an oil spill. My clients, the Chugach Natives of Alaska, agreed to give up ownership of the land under the Port of Valdez to the oil companies in return for those jobs.

The night the Exxon Valdez grounded, Chugach Natives watched from the beach at nearby Tatitlek Village as the tanker headed into the reef. They could have prevented the disaster—but they were helpless: BP had fired them.

To save money, BP’s Alyeska simply drew up lists of nonexistent emergency spill response workers: an imaginary crew to man phantom emergency ships.

Fraud No. 3: Phantom Equipment
And the rubber boom? That was a phantom as well. BP’s Alyeska had promised that too, in writing. The equipment was supposed to be placed along the tanker route including Bligh Island—exactly the spot where the Exxon Valdez grounded.

And so, it was no surprise to me that 21 years later in the Gulf there were neither skimmers nor boom at the site of the Deepwater Horizon.

Cover-Up and Threats
Did BP’s top executives and partners know of the ghost response teams and phantom equipment ruse? Yes, we have the documents and insiders’ testimony. Just two examples from my bulging file cabinet:

In a confidential letter dated April 19, 1984, Capt. James Woodle, BP’s commander of the port at Valdez, warned that “due to a reduction in manning, age of equipment, limited training and lack of personnel, serious doubt exists that [we] would be able to contain and clean up effectively a medium or large size oil spill.”

In response, BP threatened the captain with a file on his marital infidelities (fabricated), fired him, then forced him to destroy his files. (I’ve got the letter—can’t tell you how.  Click here.)

In September 1984, before the Exxon Valdez disaster, BP’s shipping broker, Charles Hamel, was so concerned at what he saw as an immediate danger in Alaska that he flew by Concorde to London to warn BP’s chiefs of the looming emergency. In response, BP hired ex-CIA operatives to tap Hamel’s phone and intercept his mail. BP’s black ops team even ran a toy truck with a microphone into the air vents of a building where he was speaking with a congressman. (Ultimately, BP’s spooks were captured by a team of Navy SEALs.)

BP Gets Off Cheap
The team of attorneys representing the Natives and fishermen whose lives were destroyed by the tanker spill chose to hold back the true and ugly story of systematic fraud and penny-pinching negligence by BP and its partners. We focused instead on the simpler story of human frailty and error—“drunken skipper hits reef.”

We didn’t have a choice: Oil company chiefs had told our clients—Natives who were out of cash, isolated and desperate—that they wouldn’t get a dime unless we agreed not to use the “f-word”: fraud.

And BP? Who said crime doesn’t pay? BP walked away with a nominal payment to Alaska’s Natives, fishermen and towns of $125 million—100 percent of it covered by insurance.

The Oil is Still There
In 2010 for the U.K.’s Channel 4 Television, I returned to Alaska with filmmaker Richard Rowley. In the quiet rivulets of the islands within Prince William Sound, we kicked over some stones—and the place, two decades after the spill, smelled like a filthy gas station.

Maybe it’s time for the Obama Administration, eager to welcome BP back to plunder the Gulf, to wake up and smell the crude.

Published clinical trials shown to be misleading

Comparison of internal and public reports about Pfizer’s drug Neurontin reveals many discrepancies 
By Rachel Ehrenberg
ScienceNews
January 29, 2013

Editor's note: This story was updated on January 31 with comment from Pfizer.

A rare peek into drug company documents reveals troubling differences between publicly available information and materials the company holds close to its chest. In comparing public and private descriptions of drug trials conducted by pharmaceutical giant Pfizer, researchers discovered discrepancies including changes in the number of study participants and inconsistent definitions of protocols and analyses.

The researchers, led by Kay Dickersin, director of the Center for Clinical Trials at the Johns Hopkins Bloomberg School of Public Health, gained access to internal Pfizer reports after a lawsuit made them available. Dickersin and her colleagues compared the internal documents with 10 publications in peer-reviewed journals about randomized trials of Pfizer’s anti-epilepsy drug gabapentin (brand name Neurontin) that tested its effectiveness for treating other disorders. The results, the researchers say, suggest that the published trials were biased and misleading, even though they read as if standard protocols were followed. That lack of transparency could mean that clinicians prescribe drugs based on incomplete or incorrect information.

"We could see all of the biases right in front of us all at once,” says Dickersin, who was an expert witness in the suit, which was brought by a health insurer against Pfizer. Pfizer lost the case in 2010, and a judge ruled it should pay $142 million in damages for violating federal racketeering laws in promoting Neurontin for treating migraines and bipolar disorder.

Pfizer had in 2004 settled a case and paid $430 million in civil fines and criminal penalties for promoting Neurontin for unapproved use.

The study's results, published January 29 in PLOS Medicine, show that publications about drug trials don’t always reflect the research that was conducted, says Lisa Bero of the University of California, San Francisco, an expert in methods to assess bias in scientific publishing “We know that entire studies don’t get published and that what does get published is more likely to make a drug look favorable,” she says. “This adds another layer.”

In three of the 10 trials, the numbers of study participants in the published results didn’t match those in the internal documents. In one case, data from 40 percent of the participants were not included in the published trial. Dickersin and her colleagues also tried to directly compare several other aspects of the studies. But they found so many differences in definitions and in the analyses and protocols that the comparisons turned out to be difficult, she says.

“When we tried to draw a flow chart of who dropped out [of a trial], who stayed in — well, we couldn’t do it,” she says. “You can’t even judge if they did the right thing if you can’t figure out what they did.”

Pfizer did not immediately respond to requests for comment. The company outlined its policies for making clinical trial data public in a statement provided to Science News on January 30, concluding that the company reports on studies "in an objective, accurate, balanced and complete manner." The Johns Hopkins analysis highlights the need for standard definitions and protocols and greater transparency in reporting clinical trials, says Bero, a longtime advocate of making raw data from clinical trials publicly available. “You’re kind of held hostage to the paper that you are reading,” she says.

Payoff in the Pit of the Plutocracy

Burning Every Bridge

by RUSSELL MOKHIBER

 

Jeff Connaughton was a lobbyist, a Senate aide and a White House lawyer. He says he came to Washington, D.C. as a Democrat and left as a Plutocrat.

Now he’s written a book – The Payoff: Why Wall Street Always Wins (Prospecta Press, August 20, 2012.)

This book is about corporate crime – although that phrase doesn’t appear anywhere in its 288 pages.

It is in fact one of the best books on how corporate criminals manipulate the system to get away with their crimes.

One way is to enforce silence among the elites who know how the system works.

“Party cohesion and the desire to make a munificent living in DC go a long way to enforce silence,” Connaughton writes.

But Connaughton is silent no more.

“I’m willing to burn every bridge,” he writes. “Now that I’ve mutinied and fled to a remote place, I want to set flame to the ship that would take me back there.”

Connaughton says there have been no Wall Street prosecutions because the Obama Justice Department failed “to take a timely, targeted, all-in approach to the problem.”

“The truth is, the Justice Department never made investigating these actions a high priority,” he writes. “It never formed strike forces of investigators and lawyers that had sufficient resources and backing to doggedly pursue the obvious potential wrongdoers as long as it took to bring a fraud case.”

Prosecutors never used provisions in the Sarbanes-Oxley Act, which put in place tough criminal sanctions in the wake of Enron and other cases of massive corporate frauds, to indict those executives responsible for misleading financial reports.

“If Obama had appointed aggressive trial lawyers – and (Vice President Joe) Biden knew plenty of them – to these Justice Department positions and backed their efforts, there’s a good chance they would’ve hunted the worst Wall Street fraudsters relentlessly.”

“If the explanation for the inadequate effort is corruption (the administration could not afford to anger Wall Street contributors), the revolving door, or a belief that the health of the financial industry is more important than legal accountability, then we have an actual double standard. I don’t know the explanation, but in terms of faith in our institutions, it may not matter whether the double standard is real or apparent. That double standard has torn the social and moral fabric of our country in a way I find to be unforgivable.”

Connaughton says that two sources were telling him that Christine Varney, the assistant attorney general for the Antitrust Division, “was complaining to friends that Rahm Emanuel, then White House chief of staff, had sent her a message – in effect, throttle back on antitrust enforcement, because the top priority is economic recovery.”

“I was concerned that Attorney General Holder had gotten the same message about investigating Wall Street crime,” he writes.

Connaughton quotes Secretary of the Treasury Timothy Geithner as saying – “The stuff that seemed appealing in terms of…Old Testament justice…penalize the venal, would have been dramatically damaging to the basic strategy of putting out the panic, getting growth back, making people feel more confident in the future.”

“Geithner’s statement would seem to indicate that he believes utilitarian outcomes justify overlooking potentially criminal behavior by banks,” Connaughton writes.

Connaughton worked as chief of staff for Senator Ted Kaufman (D-Delaware.) Kaufman was appointed as Biden’s replacement and dedicated his two years in office to demanding accountability for Wall Street’s crimes.

During one meeting with Justice Department Criminal Division Chief Lanny Breuer, Breuer said the department was dependent on the “pipeline” to bring forward cases against Wall Street banks and their executives.

“That’s when I lost my temper,” Connaughton writes. “‘Lanny, you need to go down into your pipeline and make sure the FBI and U.S. attorney’s offices are making this a top priority.

Organize and shake your pipeline hard and get it to bring you cases. Don’t just sit back and wait.’”

“I also couldn’t resist invoking our mutual history in the White House Counsel’s office and even exhorting him to emulate the tactics of our former antagonist,” he writes. “‘You need to be like Ken Starr. You need to target some of these guys like they were drug kingpins, just like Starr targeted Clinton, and squeeze every junior person around them until you can get one to flip and give evidence against the senior people.”

The scene at the Securities and Exchange Commission (SEC) was not much better.

SEC Enforcement Division Director Robert Khuzami, when asked about federal judges rebuking the SEC for paltry fines, said to Kaufman: “I’m not losing any sleep over them.”

And SEC chair Mary Schapiro wasn’t much more responsive.

“Near the end of the [October 2009] meeting [Kaufman] told [SEC Chairman Mary] Schapiro, ‘I don’t believe you’re going to do anything about high-frequency trading.’ Looking him straight in the eye, she replied, ‘You just watch.’”

“We watched for nearly three years,” Connaughton writes. “It wasn’t until July 2011 and June 2012 that the SEC approved minimalist rules that would force market participates to collect the data that would enable the SEC to begin – begin – the process of understanding HFT’s impact on markets. In effect, Ted and I and America are still watching and waiting for the SEC to take meaningful action.”

“If my tenure as Ted’s chief of staff taught me anything, it’s that the C in SEC doesn’t stand for the speed of light.”

Kaufman introduced legislation with Senator Sherrod Brown (D-Ohio) to break up the big banks.

But Brown-Kaufman could muster only 33 votes in the Senate.

“Senator Diane Feinstein – one of the most liberal members of the Senate – asked [Senator Dick] Durbin, the majority whip, ‘What’s this amendment?’ [referring to the Brown-Kaufman amendment to break up the mega-banks]. According to Durbin, he replied: ‘To break up the banks.’ Giving the thumbs-down sign, Feinstein said bemusedly: ‘This is still America, isn’t it?’
Connaughton and Senator Kaufman tried to get enforcement authorities to move aggressively against Wall Street criminality. They tried to break up the big banks. To no avail.
They were up against The Blob.

And The Blob won.

“The Blob – its really called that – refers to the government entities that regulate the finance industry – like the Banking Committee, Treasury Department, and SEC – and the army of Wall Street representatives and lobbyists that continuously surrounds and permeates them,” Connaughton writes. “The Blob moves together. Its members are in constant contact by e-mail and phone. They dine, drink, and take vacations together. Not surprisingly, they frequently intermarry. No lobbying restrictions yet promulgated can prevent pillow talk between Blob spouses.”

Connaughton holds out hope for reform – but not until there is another Wall Street crisis.
In the meantime, he says it’s time to “stop voting for the lesser of two evils” – and stand on principle.

He has burned his bridges.

And he wants you to burn yours, too.

Libor Fraud Systemic: Entire Economy based on Fraud says Frmr Reagan Asst SecTreas.Paul C. Roberts

The economy is based on fraud, and another bigger, much worse collapse is inevitable. Eye opening stuff.--jef

About Dr. Paul Craig Roberts

Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy for the Reagan administration and associate editor of the Wall Street Journal. He was columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His internet columns have attracted a worldwide following.

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Getting Wall Street Off of Main Street
Shrinking Wall Street
by MOSHE ADLER

If you want to make Adam Smith, the founder of economics, and George Stigler, the Nobel Prize winning economist, spin in their graves, say the words “LIBOR scandal.”  LIBOR – London Interbank Offered Rate — is, as everyone learned this past week, the benchmark interest rate that members of the British Bankers Association collude to set. In 1776, in The Wealth of Nations, Smith wrote “[p]eople of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”  Smith would have banned the British Bankers Association altogether. But almost 250 years later, what does the Bank of England, do?  It blesses the collusion by “supervising” it.

Why would George Stigler spin in his grave?  Because to him, the LIBOR “scandal” would be nothing but regulation as usual.  It is routine for regulators to be captured by the executives of the industry they regulate, Stigler explained in his article “The Theory of Economic Regulation.”  The benefits from regulator malfeasance are concentrated on a small group of individuals–the executives of the industry–whereas the costs of such  malfeasance are diffused among tens and hundreds of millions of members of the public.   Because the executives have a huge monetary incentive to prevent the regulator from doing his or her job, they are willing to invest large amounts to get what they want.  LIBOR is just the latest example of Stigler’s theory at work.

The Bankers Association and LIBOR should never have been permitted to exist to begin with.  What did Timothy Geithner do in 2008 when, as the head of the Federal Reserve Bank of New York, he discovered that to improve their profits the banks were setting the benchmark at levels that did not reflect market forces?   Here was an opportunity to ban the Bankers Association and end LIBOR, but instead Geithner wrote a private letter to the Bank of England asking it to establish “procedures designed to prevent accidental or  deliberate misreporting.”  Certainly his discretion was a good career move; it’s hard to imagine that a whistleblower could have gone on to serve as Secretary of the Treasury.

Reforms of the regulations of the financial industry fail one after the next, and bankers continue to rob their clients and to destabilize the economy. So what can be done about Wall Street?

The most remarkable thing about Wall Street is that while it flourishes, working people wither.  How can this be?  The reason for this is the near-zero-interest-rates policy of Ben Bernanke, the chairman of the Fed.  A five year Certificate of Deposit pays now on average less than 1% a year and that has made it impossible for savers to save, except by putting their savings into stocks; this is why the prices of stocks are high.  The ones who benefit from these high prices the most are the executives, because they use these  bloated stock prices to justify their outlandish “compensation.”  As social policy, however, forcing people to buy stocks has no justification.

When individuals buy stocks it is called “investing,” but this is a misnomer, because people are not buying investment goods (e.g., machines, structures, intermediate goods, etc.).  Their trades with the people who sell them stocks are zero-sum games, not economic investments.  The correct policy would be to channel savings toward economic investment, both private and public.  In order to accomplish this, the government should take two steps.  First, it should pay on its bonds an interest rate that, after correcting for inflation, is equal to the average long term growth of real GDP per capita.  What is this rate?  In the years 2001-2010 the average rate of real growth of the economy was only .62%. But that decade saw the bursting of two bubbles, first the dot com bubble, in 2000, and then the subprime bubble, in 2007.  The real growth rate of 2% a year that existed from 1970 to 2000 is a better estimate of the long term growth rate, and the government should pay this rate (in real terms) on its bonds.  (Under this formula a five year bond that was issued in May 2009 would have paid 4% in May 2010, 5.5% in May 2011 and 3.8% in May 2012.)  In order to attract customers away from government bonds to their own CDs and bonds, banks and corporations would have to offer similar or even better terms to savers. And in order to be able to make money themselves, the banks and the corporations would have to finance investments that earn even higher returns still. Furthermore, only deposits that finance real economic investment should be insured by the government.  This will prevent banks from using regular deposits for mergers and acquisitions.  Savers and banks would, of course, be free to trade in stocks, but they would have to do so without government subsidies.

There is an additional step the government should take.  Because the trading of stocks is a zero-sum-game rather than true economic investment, the government should further discourage it by ending the tax deferment to retirement plans (401k) that “invest” in the  stock market instead of channeling that money to government bonds or certificates of deposit.

But what does all of this have to do with the regulation of Wall Street?  First, when savers are no longer forced to give their money to gambles in stocks, the share of the public that has a stake in Wall Street will be far smaller.  And when Wall Street no longer has captive clients, it will have to become more transparent and behave more honestly. Consumers will thus become the regulators.  Even a new, weaker and therefore more honest, Wall Street would still have to be regulated, and this regulation would still have the challenges that Stigler identified. But the damage from the regulatory failures that are sure to continue would be miniscule in comparison to those we have now.  Best of all, a weaker Wall Street would mean stronger investments, both private and public, lower executive “compensation,” and, as a result, as much healthier economy for the rest of us.

The Meaning of Libor-gate

The Rate-Fixing Scandal in Full Perspective

by PAUL CRAIG ROBERTS

 

The price of Treasury bonds is supported by the Federal Reserve’s large purchases. The Federal Reserve’s purchases are often misread as demand arising from a “flight to quality” due to concern about the EU sovereign debt problem and possible failure of the euro.

Another rationale used to explain the demand for Treasuries despite their negative yield is the “flight to safety.” A 2% yield on a Treasury bond is less of a negative interest rate than the yield of a few basis points on a bank CD, and the US government, unlike banks, can use its central bank to print the money to pay off its debts.

It is possible that some investors purchase Treasuries for these reasons. However, the “safety” and “flight to quality” explanations could not exist if interest rates were rising or were expected to rise. The Federal Reserve prevents the rise in interest rates and decline in bond prices, which normally result from continually issuing new debt in enormous quantities at negative interest rates, by announcing that it has a low interest rate policy and will purchase bonds to keep bond prices high. Without this Fed policy, there could be no flight to safety or quality.

It is the prospect of ever lower interest rates that causes investors to purchase bonds that do not pay a real rate of interest. Bond purchasers make up for the negative interest rate by the rise in price in the bonds caused by the next round of low interest rates. As the Federal Reserve and the banks drive down the interest rate, the issued bonds rise in value, and their purchasers enjoy capital gains.

As the Federal Reserve and the Bank of England are themselves fixing interest rates at historic lows in order to mask the insolvency of their respective banking systems, they naturally do not object that the banks themselves contribute to the success of this policy by fixing the LIbor rate and by selling massive amounts of interest rate swaps, a way of shorting interest rates and driving them down or preventing them from rising.

The lower is Libor, the higher is the price or evaluations of floating-rate debt instruments, such as CDOs, and thus the stronger the banks’ balance sheets appear.

Does this mean that the US and UK financial systems can only be kept afloat by fraud that harms purchasers of interest rate swaps, which include municipalities advised by sellers of interest rate swaps, and those with saving accounts?

The answer is yes, but the Libor scandal is only a small part of the interest rate rigging scandal. The Federal Reserve itself has been rigging interest rates. How else could debt issued in profusion be bearing negative interest rates?

As villainous as they might be, Barclays bank chief executive Bob Diamond, Jamie Dimon of JP Morgan, and Lloyd Blankfein of Goldman Sachs are not the main villains. The main villains are former Treasury Secretary and Goldman Sachs chairman Robert Rubin, who pushed Congress for the repeal of the Glass-Steagall Act, and the sponsors of the Gramm-Leach-Bliley bill, which repealed the Glass-Steagall Act. Glass-Steagall was put in place in 1933 in order to prevent the kind of financial excesses that produced the current ongoing financial crisis.

President Clinton’s Treasury Secretary, Robert Rubin, presented the removal of all constraints on financial chicanery as “financial modernization.” Taking restraints off of banks was part of the hubristic response to “the end of history.” Capitalism had won the struggle with socialism and communism. Vindicated capitalism no longer needed its concessions to social welfare and regulation that capitalism used in order to compete with socialism.

The constraints on capitalism could now be thrown off, because markets were self-regulating as Federal Reserve chairman Alan Greenspan, among many, declared. It was financial deregulation–the repeal of Glass-Steagall, the removal of limits on debt leverage, the absence of regulation of OTC derivatives, the removal of limits on speculative positions in future markets–that caused the ongoing financial crisis. No doubt but that JP Morgan, Goldman Sachs and others were after maximum profits by hook or crook, but their opportunity came from the neoconservative triumphalism of “democratic capitalism’s” historical victory over alternative socio-politico-economic systems.

The ongoing crisis cannot be addressed without restoring the laws and regulations that were repealed and discarded. But putting Humpty-Dumpty back together again is an enormous task full of its own perils.

The financial concentration that deregulation fostered has left us with broken financial institutions that are too big to fail. To understand the fullness of the problem, consider the law suits that are expected to be filed against the banks that fixed the Libor rate by those who were harmed by the fraud. Some are saying that as the fraud was known by the central banks and not reported, that the Federal Reserve and the Bank of England should be indicted for their participation in the fraud.

What follows is not an apology for fraud. It merely describes consequences of holding those responsible accountable.

Imagine the Federal reserve called before Congress or the Department of Justice to answer why it did not report on the fraud perpetrated by private banks, fraud that was supporting the Federal Reserve’s own rigging of interest rates (and the same in the UK.)

The Federal reserve will reply: “So, you want us to let interest rates go up? Are you prepared to come up with the money to bail out the FDIC-insured depositors of JPMorganChase, Bank of America, Citibank, Wells Fargo, etc.? Are you prepared for US Treasury prices to collapse, wiping out bond funds and the remaining wealth in the US and driving up interest rates, making the interest rate on new federal debt necessary to finance the huge budget deficits impossible to pay, and finishing off what is left of the real estate market? Are you prepared to take responsibility, you who deregulated the financial system, for this economic armageddon?

Obviously, the politicians will say NO, continue with the fraud. The harm to people from collapse far exceeds the harm in lost interest from fixing the low interest rates in order to forestall collapse. The Federal Reserve will say that we are doing our best to create profits for the banks that will permit us eventually to unwind the fraud and return to normal. Congress will see no better alternative to this.

But the question remains: How long can the regime of negative interest rates continue while debt explodes upward? Currently, everyone in the US who counts and most who don’t have an interest in holding off armageddon. No one wants to tip over the boat. If the banks are sued for damages and lack the money to pay, the Federal Reserve can create the money for the banks to pay.

If the collapse of the system does not result from scandals, it will come from outside. The dollar is the world reserve currency. This means that the dollar’s exchange value is boosted, despite the dismal economic outlook in the US, by the fact that, as the currency for settling international accounts, there is international demand for the dollar. Country A settles its trade deficit with country B in dollars; country B settles its account with country C in dollars; and so on throughout the countries of the world.

For whatever the reason–perhaps to curtail their accumulation of suspect dollars or to bring Washington’s power to an end–the BRICS countries, Brazil, Russia, India, China, and South Africa, are agreeing to settle their trade between themselves in their own currencies, thus abandoning the use of the dollar.

According to reports, China and Japan have reached agreement to settle their trade between themselves in their own currencies.

The moves away from the dollar as the currency of international transactions means that the dollar’s exchange value will fall as the demand for dollars falls. Whereas the Federal Reserve can create dollars with which to purchase the Treasury’s debt, thus preventing a fall in bond prices, the Federal Reserve cannot prop up the dollar’s exchange value by creating more dollars with which to purchase dollars. Dollars would have to be taken off the foreign exchange market by purchasing them with other currencies, but in order to have these currencies the US would have to be running a trade surplus, not a long-term trade deficit.

In the short-run, the Federal Reserve could arrange currency swap agreements in which foreign central banks swap their currencies for dollars in order to supply the Federal Reserve with currencies with which to soak up dollars. However, only a limited number of swaps could be negotiated before foreign central banks understood that the dollar’s fall in value was not a temporary event that could be propped up with currency swaps.

As the value of the dollar will fall as countries move away from its use as reserve currency, the values of dollar-denominated assets also will fall. The Federal Reserve, even with full cooperation from the banking system employing every fraud technique known, cannot prevent interest rates from rising on debt instruments denominated in a currency whose value is falling.
Think about it this way. A person, fund, or institution owns bonds or any debt instruments carrying a negative rate of interest, but continues to hold the instruments because interest rates, despite the increase in debt, are creeping down, raising bond prices and producing capital gains in the bonds. What happens when the exchange value of the currency in which the debt instruments are denominated falls? Can the price of the bond stay high even though the value of the currency in which the bond is denominated falls?

The drop in the exchange value of the currency hits the bond price in a second way. The price of imports rise, and this pushes up prices. The inflation measures will show higher inflation. How long will people hold debt instruments paying negative interest rates as inflation rises? Perhaps there are historical cases in which bond prices continue to rise indefinitely (or even hold firm) as inflation rises, but I have never heard of them.

As the Federal Reserve can create money, theoretically the Federal Reserve’s prop-up schemes could continue until the Federal Reserve owns all dollar-denominated financial assets. To cover the holes in its own balance sheet, the Federal Reserve could just print more money.

Some suspect that the Federal Reserve, in order to forestall a declining dollar and thus declining prices of dollar-denominated financial instruments, is behind the sales of naked shorts every time demand for physical bullion drives up the price of gold and silver. The short sales–paper sales–cancel the impact on price of the increased demand for bullion.

Some also believe that they see the Federal Reserve’s hand in the stock market. One day stocks fall 200 points. The next day stocks rise 200 points. This up and down pattern has been ongoing for a long time. One possible explanation is that as wary investors sell their equity holdings, the Federal Reserve, or the “plunge protection team,” steps in and buys.

Just as the “terrorist threat” was used to destroy the laws that protect US civil liberty, the financial crisis has resulted in the Federal Reserve moving far outside its charter and normal operating behavior.

To sum up, what has happened is that irresponsible and thoughtless–in fact, ideological–deregulation of the financial sector has caused a financial crisis that can only be managed by fraud. Civil damages might be paid, but to halt the fraud itself would mean the collapse of the financial system. Those in charge of the system would prefer the collapse to come from outside, such as from a collapse in the value of the dollar that could be blamed on foreigners, because an outside cause gives them something to blame other than themselves.

How Banks Cheat

Artful Liars

by CHRISTOPHER BRAUCHLI

I think a lie with a purpose is wan iv the’ worst kind an’ the mos’ profitable.
– Finley Peter Dunne On Lying

There was something refreshing about Bernie Madoff.  He robbed Peters to pay Pauls and it worked well until there were more Pauls than Peters. It was straightforward and simple.  And that is the difference between him and Barclays, JPMorgan Chase, Goldman Sachs and the many other large financial institutions that cheat those with whom they deal. Bernie was not subtle.  No Congressional hearings or hearings in the British parliament were required in order to understand what happened.

A man named Diamond runs Barclays and a man named Dimon runs JPMorgan Chase. The similarity in names is not all they have in common. Each man has presided over an institution that has dealt less than fairly, in the case of JPMorgan, with its customers,  and in the case of Barclays, with consumers everywhere.  JPMorgan did it by ripping off its customers and Barclays did it by manipulating the LIBOR rate.  (It is now reported that four other major European banks are being investigated for similar behavior.)

Barclays manipulated the LIBOR rate from 2005-2009.  The LIBOR rate is the rate banks charge each other for inter-bank loans.   

According to Ezra Klein from 2005 to 2007 Barclay’s placed bets that LIBOR rates would increase.  Barclays would then report artificially high rates to the authority gathering the rates from the banks to establish the LIBOR rate thus improving the chance that the LIBOR rate would go up and the bets the firm made would pay off.    Investors on the other side of the bet were losers and borrowers whose interest rates on loans were set to LIBOR were paying artificially high rates. Beginning in 2008 when the solvency of financial institutions was being questioned, instead of reporting artificially high rates Barclays reported artificially low rates leading regulators to believe the bank was healthier than it was thus reducing the likelihood that its stability would be questioned.  (When rates were low consumers benefitted since mortgages, credit card loans and other financial transactions are tied to those rates.)   When the LIBOR manipulation came to light, Mr. Diamond sent a memo to staff saying he was “disappointed because many of these things happened on my watch.” 

On July 2 he said that although disappointed he would not resign his position.  On July 3 he resigned.  Chancellor of the Exchequer, George Osborne, said the episode was “evidence of systematic greed at the expense of financial integrity and stability” and said the bank was in flagrant breach of its duty “to observe proper standards of market conduct. . . .”  Any reader who tries to understand my attempt to describe the LIBOR manipulation and its effects will certainly appreciate the simplicity of Mr. Madoff’s scheme.

JPMorgan Chase is one of the largest mutual fund managers in the country.  In addition to selling its own funds, it is in a position to sell other funds to its customers.  According to a story in the New York Times its sales personnel were encouraged to sell customers its proprietary funds rather than those of competitors, even when the competitors’ funds had historically performed better than the bank’s funds. One former employee said he was “selling JPMorgan funds that often had weak performance records, and  I was doing it for no other reason than to enrich the firm.  I couldn’t call myself objective.”  Some people might have been surprised at those disclosures thinking that the bank would have reformed its ways after 2011.  That was the year the bank was ordered to pay $373 million to American Century Investments because it failed to honor its agreement with American Century to promote American Century products when it acquired that firm’s retirement-plan services unit.  The arbitrators who heard the case said JPMorgan employees were rewarded for pushing JPMorgan’s own products.

Goldman Sachs is another venerable institution that benefits itself at the expense of its customers.  In March 2012 Chancellor Leo Strine of the Court of Chancery in Delaware issued a lengthy ruling in the case of in re El Paso Shareholder Litigation.   He criticized Goldman for its blatant conflict of interest when trying to acquire El Paso Corp describing it as “disturbing behavior.” Jonathan Weil who writes for Bloomberg,  made the observation about Goldman’s conduct in that transaction that  Goldman had “every incentive to maximize its own investment and fleece El Paso shareholders.”   

At roughly the same time Chancellor Strine’s opinion was making the news a former Goldman employee published an op-ed piece in the New York Times in which he said, among other things, that the firm’s clients were “sidelined in the way the firm operates and thinks about making money. . . . It is purely about how we can make the most possible money off them {clients.}.”

Readers should understand that the foregoing does not purport to be a complete list of banks that have devised schemes to enrich themselves at the expense of their customers. It is only a small sampling.  As I said at the outset, the nice thing about Bernie was how straightforward his malfeasance was.   Everyone can understand it.  The banks are no more honest than he-just more artful.

The Real Libor Scandal

Is the Era of Rigged Bond Prices Coming to an End?

by PAUL CRAIG ROBERTS and NOMI PRINS

 

According to news reports, UK banks fixed the London interbank borrowing rate (Libor) with the complicity of the Bank of England (UK central bank) at a low rate in order to obtain a cheap borrowing cost.  The way this scandal is playing out is that the banks benefitted from borrowing at these low rates. Whereas this is true, it also strikes us as simplistic and as a diversion from the deeper, darker scandal.Banks are not the only beneficiaries of lower Libor rates.  Debtors (and investors) whose floating or variable rate loans are pegged in some way to Libor also benefit.  One could argue that by fixing the rate low, the banks were cheating themselves out of interest income, because the effect of the low Libor rate is to lower the interest rate on customer loans, such as variable rate mortgages that banks possess in their portfolios. But the banks did not fix the Libor rate with their customers in mind. Instead, the fixed Libor rate enabled them to improve their balance sheets, as well as help to perpetuate the regime of low interest rates. The last thing the banks want is a rise in interest rates that would drive down the values of their holdings and reveal large losses masked by rigged interest rates.

Indicative of greater deceit and a larger scandal than simply borrowing from one another at lower rates, banks gained far more from the rise in the prices, or higher evaluations of floating rate financial instruments (such as CDOs), that resulted from lower Libor rates. As prices of debt instruments all tend to move in the same direction, and in the opposite direction from interest rates (low interest rates mean high bond prices, and vice versa), the effect of lower Libor rates is to prop up the prices of bonds, asset-backed financial instruments, and other “securities.” The end result is that the banks’ balance sheets look healthier than they really are.

On the losing side of the scandal are purchasers of interest rate swaps, savers who receive less interest on their accounts, and ultimately all bond holders when the bond bubble pops and prices collapse.

We think we can conclude that Libor rates were manipulated lower as a means to bolster the prices of bonds and asset-backed securities.  In the UK, as in the US, the interest rate on government bonds is less than the rate of inflation.  The UK inflation rate is about 2.8%, and the interest rate on 20-year government bonds is 2.5%. Also, in the UK, as in the US, the government debt to GDP ratio is rising. Currently the ratio in the UK is about double its average during the 1980-2011 period.

The question is, why do investors purchase long term bonds, which pay less than the rate of inflation, from governments whose debt is rising as a share of GDP?  One might think that investors would understand that they are losing money and sell the bonds, thus lowering their price and raising the interest rate.

Why isn’t this happening?

Despite the negative interest rate, investors have been making capital gains from their Treasury bond holdings, because the prices were rising as interest rates were pushed lower.
What was pushing the interest rates lower?

The answer is even clearer now.  Wall Street has been selling huge amounts of interest rate swaps, essentially a way of shorting interest rates and driving them down.  Thus, causing bond prices to rise.

Secondly, fixing Libor at lower rates has the same effect. Lower UK interest rates on government bonds drive up their prices.

In other words, we would argue that the bailed-out banks in the US and UK are returning the favor that they received from the bailouts and from the Fed and Bank of England’s low rate policy by rigging government bond prices, thus propping up a government bond market that would otherwise, one would think, be driven down by the abundance of new debt and monetization of this debt, or some part of it.

How long can the government bond bubble be sustained?  How negative can interest rates be driven?

Can a declining economy offset the impact on inflation of debt creation and its monetization, with the result that inflation falls to zero, thus making the low interest rates on government bonds positive?

According to his public statements, zero inflation is not the goal of the Federal Reserve chairman.  He believes that some inflation is a spur to economic growth, and he has said that his target is 2% inflation.  At current bond prices, that means a continuation of negative interest rates.

The latest news completes the picture of banks and central banks manipulating interest rates in order to prop up the prices of bonds and other debt instruments.  We have learned that the Fed has been aware of Libor manipulation  (and thus apparently supportive of it) since 2008. Thus, the circle of complicity is closed. The motives of the Fed, Bank of England, US and UK banks are aligned, their policies mutually reinforcing and beneficial. The Libor fixing is another indication of this collusion.

Unless bond prices can continue to rise as new debt is issued, the era of rigged bond prices might be drawing to an end. It would seem to be only a matter of time before the bond bubble bursts.

This Global Financial Fraud and Its Gatekeepers

Sunday, July 15, 2012 by The Guardian/UK
The media's 'bad apple' thesis no longer works. We're seeing systemic corruption in banking – and systemic collusion

by Naomi Wolf

 

Last fall, I argued that the violent reaction to Occupy and other protests around the world had to do with the 1%ers' fear of the rank and file exposing massive fraud if they ever managed get their hands on the books. At that time, I had no evidence of this motivation beyond the fact that financial system reform and increased transparency were at the top of many protesters' list of demands.

But this week presents a sick-making trove of new data that abundantly fills in this hypothesis and confirms this picture. The notion that the entire global financial system is riddled with systemic fraud – and that key players in the gatekeeper roles, both in finance and in government, including regulatory bodies, know it and choose to quietly sustain this reality – is one that would have only recently seemed like the frenzied hypothesis of tinhat-wearers, but this week's headlines make such a conclusion, sadly, inevitable.

The New York Times business section on 12 July shows multiple exposes of systemic fraud throughout banks: banks colluding with other banks in manipulation of interest rates, regulators aware of systemic fraud, and key government officials (at least one banker who became the most key government official) aware of it and colluding as well. Fraud in banks has been understood conventionally and, I would say, messaged as a glitch. As in London Mayor Boris Johnson's full-throated defense of Barclay's leadership last week, bank fraud is portrayed as a case, when it surfaces, of a few "bad apples" gone astray.

In the New York Times business section, we read that the HSBC banking group is being fined up to $1bn, for not preventing money-laundering (a highly profitable activity not to prevent) between 2004 and 2010 – a six years' long "oops". In another article that day, Republican Senator Charles Grassley says of the financial group Peregrine capital: "This is a company that is on top of things." The article goes onto explain that at Peregrine Financial, "regulators discovered about $215m in customer money was missing." Its founder now faces criminal charges. Later, the article mentions that this revelation comes a few months after MF Global "lost" more than $1bn in clients' money.

What is weird is how these reports so consistently describe the activity that led to all this vanishing cash as simple bumbling: "regulators missed the red flag for years." They note that a Peregrine client alerted the firm's primary regulator in 2004 and another raised issues with the regulator five years later – yet "signs of trouble seemingly missed for years", muses the Times headline.

A page later, "Wells Fargo will Settle Mortgage Bias Charges" as that bank agrees to pay $175m in fines resulting from its having – again, very lucratively – charged African-American and Hispanic mortgagees costlier rates on their subprime mortgages than their counterparts who were white and had the same credit scores. Remember, this was a time when "Wall Street firms developed a huge demand for subprime loans that they purchased and bundled into securities for investors, creating financial incentives for lenders to make such loans." So, Wells Fargo was profiting from overcharging minority clients and profiting from products based on the higher-than-average bad loan rate expected. The piece discreetly ends mentioning that a Bank of America lawsuit of $335m and a Sun Trust mortgage settlement of $21m for having engaged is similar kinds of discrimination.

Are all these examples of oversight failure and banking fraud just big ol' mistakes? Are the regulators simply distracted?

The top headline of the day's news sums up why it is not that simple: "Geithner Tried to Curb Bank's Rate Rigging in 2008". The story reports that when Timothy Geithner, at the time he ran the Federal Reserve Bank of New York, learned of "problems" with how interest rates were fixed in London, the financial center at the heart of the Libor Barclays scandal. He let "top British authorities" know of the issues and wrote an email to his counterparts suggesting reforms. Were his actions ethical, or prudent? A possible interpretation of Geithner's action is that he was "covering his ass", without serious expectation of effecting reform of what he knew to be systemic abuse.

And what, in fact, happened? Barclays kept reporting false rates, seeking to boost its profit.

Last month, the bank agreed to pay $450m to US and UK authorities for manipulating the Libor and other key benchmarks, upon which great swaths of the economy depended. This manipulation is alleged in numerous lawsuits to have defrauded thousands of bank clients. So Geithner's "warnings came too late, and his efforts did not stop the illegal activity".

And then what happened? Did Geithner, presumably frustrated that his warnings had gone unheeded, call a press conference? No. He stayed silent, as a practice that now looks as if several major banks also perpetrated, continued.

And then what happened? Tim Geithner became Treasury Secretary. At which point, he still did nothing.

It is very hard, looking at the elaborate edifices of fraud that are emerging across the financial system, to ignore the possibility that this kind of silence – "the willingness to not rock the boat" – is simply rewarded by promotion to ever higher positions, ever greater authority. If you learn that rate-rigging and regulatory failures are systemic, but stay quiet, well, perhaps you have shown that you are genuinely reliable and deserve membership of the club.

Whatever motivated Geithner's silence, or that of the "government official" in the emails to Barclays, this much is obvious: the mainstream media need to drop their narratives of "Gosh, another oversight". The financial sector's corruption must be recognized as systemic.

Meanwhile, Britain is sleepwalking in a march toward total email surveillance, even as the US brings forward new proposals to punish whistleblowers by extending the Espionage Act. In an electronic world, evidence of these crimes lasts forever – if people get their hands on the books. In the Libor case, notably, a major crime has not been greeted by much demand at the top for criminal prosecutions. That asymmetry is one of the insurance policies of power.

Another is to crack down on citizens' protest.

Why Corporate Compliance is a Joke

An Interview With Patrick Burns

by RUSSELL MOKHIBER

 

Patrick Burns says what others know and refuse to acknowledge. Compliance is a joke. Burns is the communications director at Taxpayers Against Fraud.

“What do companies do to people who threaten their profit center – even and maybe especially if the profit center is one based on fraud? They move to isolate, to humiliate and to terminate,” Burns said last week. “And they do it every single time.”

“When I speak to compliance officers, I always ask one question right at the beginning. I raise my hand and say – any companies here ever made a whistleblower employee of the year?”

“Invariably, the room bursts out laughing. It’s treated as the opening of a comedy act when I ask that question.”

“And these are the compliance officers. Then I turn it around on them.”

“I ask them, at the end of this session, to go into their car and turn off the radio and not start the engine. And think for thirty seconds about this question – why was I hired at this company?”

“Was I hired because I am a fierce, tough, brave compliance officer?”

“Or was I hired because they sensed a weakness in me and they thought that I would be a compliant officer? An officer who would be useful to them to ferret out and finger anybody in the company who was actually going to blow the whistle, internally or externally, on massive fraud within the company.”

Does anybody object when you say that?

“They can’t.”

Because what you’re saying is that compliance is a joke?

“I have to say that it really is most of the time.”

Have you come across exceptions?

“No,” Burns said. “The compliance officers are great for the little stealing.”

“The compliance officer at Wal-Mart is there to stop employee theft. It’s to stop someone from bundling up a bunch of frozen meat in the trash bag and throwing it into the trash and then pulling it out thirty minutes later.”

“But some massive bribery scheme in Mexico, importing goods from China that have a made in America label sewed on to them – they won’t pay attention to that.”

“Not paying taxes on what they’re selling, none of that stuff, none of that is going to happen.”

“That is not what a compliance officer is supposed to do. The compliance officer is about twenty levels down within a company. He’s above the rent-a-cop in the lobby, but he’s not much higher than that most of the time.”

“And they are not able to challenge the people in the top executive suites. The never even meet those people most of the time.”

“This idea that a compliance officer is somehow a combination of the Fantastic Four meets the X-men – it’s just not true. It’s a lot closer to Barney Fife with his one bullet.”

And Burns has no illusions about the Justice Department’s war on fraud.

“If you go out to a farm field and you see 2000 pounds bulls standing behind a single strand of hot electric wire,” Burns said. “Those bulls have touched the wire once or twice. And after they touched that wire once or twice and got an immediate serious shock, they never touched it again.”

“That is not the way the Department of Justice works. The Department of Justice will take two, three, five, ten years to work a case.”

“Let me be explicit in what I’m saying here. The GlaxoSmithKline case was settled yesterday for three billion dollars. It’s the largest healthcare fraud case in US history.”

“Whistleblowers went to the company internally. The company did an internal investigation. The compliance officers in the company said – “yes we are indeed doing this fraud.”

“GlaxoSmithKline ran the numbers and decided that doing the fraud and delaying with its interaction with the Department of Justice was a better business plan than fessing up and paying up.”

“So they lawyered up and delayed.”

At the end of eleven years, they paid the three billion dollar fine. But during that time, they’ve collected billions and billions of dollars in profits.”

“Now here’s the perverse part of all of this. During that ten year period, people at GlaxoSmithKline were promoted, they were paid, they got bonuses and they got stock options based on this extravagant fraud scheme that involved nine different drugs, and was a virtual clown car of fraud.”

“All of the profits from this fraud were privatized. Private beach houses were bought. Private careers were made. Private bonuses were cashed. People sent their kids to private schools based on these frauds – this poisoning for profit.”

Burns doesn’t think jailing top corporate executives is likely. He says we need to exclude them from the industries in which they work.

“Putting people in jail we don’t think is very likely,” Burns said.

“The truth of the matter is a criminal prosecution requires a standard of evidence that is beyond a reasonable doubt. Companies will fund a full push back against the Department and there’s a very good chance that they will prevail.”

“The good thing about exclusion is that it can be done administratively.”

“Let me make it as simple as possible here. When you go to a dry cleaner and you put in a shirt or a tie and it comes back stained or ripped, you may get a little miffed. But you’ll talk to them about it, and maybe they’ll promise to never do it again.”

“But the next time you bring in a shirt or a tie and it comes back stained or ripped, you don’t say anything.”

”You just walk away and you never do business with them again.”

“We can do that. The US government is just like you. It is a consumer of goods and services. It can say – we’re done with you. If you continue to hire this person to run this dry cleaner, we will never go to this dry cleaner again.”

“We are not calling for more fines. We want America’s stolen money to be recovered, sure. But we need to disenthrall ourselves from the notion that money alone will change corporate behavior.”

“We also need to disenthrall ourselves that there is a single silver bullet solution. We need to recover America’s stolen billions, but at the same time, we need to make the pain personal within the fraudster companies.”

“That means that people who design frauds, who wink at these frauds, who operationalize these frauds, need to be made unemployed and unemployable.”

“Right now that penalty is only vested upon the whistleblower, the truth teller, the person who stands up to power for the good of all.”

“Being unemployed and unemployable is not something we do to the big fraudsters. We do not send them to jail.”

“We are not going to exclude big companies like Pfizer and Schering Plough and GlaxoSmithKline and McDonnell Douglas.”

“They employ too many people and they’re too central to healthcare and defense in this nation.”

“But if a company is too big to fail, and that may be true, there is no executive that is too big to jail. And certainly there is not an executive too big not to make unemployed and unemployable.”

Token Fine for GlaxoSmithKline Won't Stop BigPharma's Bad Behavior: Watchdog

Tuesday, July 3, 2012 by Common Dreams

Pharmaceutical mammoth GlaxoSmithKline (GSK) has been ordered to pay $3 billion fine in what is described as the largest case of healthcare fraud in U.S. history. But critics say it is just as a slap on the wrist as the amount "pales in comparison" to the profits pharmaceutical companies earn and does nothing to preclude such further behavior from big pharma.

GSK, which had $44 billion in sales and a net profit of nearly $9 billion in 2011, faces the fine for marketing its antidepressants Paxil and Wellbutrin for non-FDA-approved purposes, including marketing them to children, and for withholding from the FDA safety information for its diabetes drug Avandia.

Deputy U.S. Attorney General James Cole said, "At every level, we are determined to stop practices that jeopardize patients' health; harm taxpayers; and violate the public trust — and this historic action is a clear warning to any company that chooses to break the law," he said.

But Dr. Sidney Wolfe, Director of Public Citizen’s Health Research Group, states that this is in no way a "clear warning."

"The fines imposed on pharmaceutical companies for dangerous and illegal conduct pale in comparison to the profits generated from such activity. The industry is therefore tacitly encouraged to continue its illegal activity," Wolfe said in a statement.

"Until more meaningful penalties and the prospect of jail time for company heads who are responsible for such activity become commonplace, companies will continue defrauding the government and putting patients’ lives in danger," added Wolfe.

Economist Dean Baker notes that GSK's lying about its drugs' safety and uses was incentivized by the monopolies drug companies are allowed to have. "This is the incentive that we give to drug companies when the government grants patent monopolies that allow them to sell drugs for hundreds or even thousands of times the cost of production."

GlaxoSmithKline settles healthcare fraud case for $3 billion

By David Ingram - Reuters

WASHINGTON (Reuters) – GlaxoSmithKline Plc agreed to plead guilty to misdemeanor criminal charges and pay $3 billion to settle what government officials on Monday described as the largest case of healthcare fraud in U.S. history.

The agreement, which still needs court approval, would resolve allegations that the British drugmaker broke U.S. laws in the marketing and development of pharmaceuticals.

GSK targeted the antidepressant Paxil to patients under age 18 when it was approved for adults only, and it pushed the drug Wellbutrin for uses it was not approved for, including weight loss and treatment of sexual dysfunction (one of its side effects is sexual dysfunction), according to an investigation led by the U.S. Justice Department.

The company went to extreme lengths to promote the drugs, such as distributing a misleading medical journal article and providing doctors with meals and spa treatments that amounted to illegal kickbacks, prosecutors said.

In a third instance, GSK failed to give the U.S. Food and Drug Administration safety data about its diabetes drug Avandia, in violation of U.S. law, prosecutors said.

The misconduct continued for years beginning in the late 1990s and continued, in the case of Avandia’s safety data, through 2007. GSK agreed to plead guilty to three misdemeanor criminal counts, one each related to the three drugs.

Guilty pleas in cases of alleged corporate misconduct are exceedingly rare, making GSK’s agreement especially unusual.

The agreement to settle the charges “is unprecedented in both size and scope,” said James Cole, the No. 2 official at the U.S. Justice Department. He called the action “historic” and “a clear warning to any company that chooses to break the law.”

The settlement includes $1 billion in criminal fines and $2 billion in civil fines.

GSK said in a statement it would pay the fines through existing cash resources. The company announced a $3 billion charge in November related to legal claims [ID:nL5E7M315A].

NEW ‘ERA’ AT GSK

Chief Executive Officer Andrew Witty said the misconduct originated “in a different era for the company” and will not be tolerated. “I want to express our regret and reiterate that we have learnt from the mistakes that were made,” he said in a written statement.

The GSK settlement surpasses what had been the largest criminal case involving a drugmaker in U.S. history. In 2009, Pfizer Inc agreed to pay $2.3 billion to settle allegations it improperly marketed 13 drugs.

The cases follow a trend of U.S. authorities cracking down on how pharmaceuticals are sold, in part because of the rising cost of providing drugs through government programs.

Part of civil fines address allegations that, from 1994 to 2003, GSK underpaid money owed to Medicaid, the healthcare program for the poor run jointly by states and the federal government. The company had an obligation to tell the government its “best prices” but failed to do so, prosecutors said, and $300 million of the settlement will go to states and other public health authorities.

A portion of the $2 billion in civil fines may go to a group of whistleblowers who contributed to the government’s investigation and who are eligible to share in the recovery under the False Claims Act. Cole said the amount has not been determined.

‘INTEGRITY’ PLAN

As part of the settlement, GlaxoSmithKline agreed to new restrictions by the U.S. government to prevent the use of kickbacks or other prohibited practices. The inspector general of the U.S. Department of Health and Human Services will oversee the “Corporate Integrity Agreement” for five years.

The company will not be able to compensate its salesmen based on sales goals for territories. It was also required to change its executive compensation program to allow the company to “claw back” certain pay for those engaged in misconduct.

Witty said GSK’s U.S. unit has “fundamentally changed our procedures for compliance, marketing and selling. When necessary, we have removed employees who have engaged in misconduct.”

Prosecutors have not brought criminal charges against any individuals in connection with the GSK case, although the settlement expressly leaves open that possibility. Cole declined to comment on the possibility of future charges.

Almost exactly a year ago GSK agreed to pay nearly $41 million to 37 states and the District of Columbia in an unrelated case about substandard manufacturing processes at a Puerto Rico factory.

In 2010, the company took a $2.4 billion charge in connection with Avandia to settle claims from patients.

GSK’s shares were positive on the New York Stock Exchange on Monday, up 1.6 percent to $46.29 at 1400 EDT.

The case is U.S. v. GlaxoSmithKline LLC, U.S. District Court for the District of Massachusetts, No. 12-cr-10206.

Why Most of the Very Rich Have NOT Earned Their Money

Monday, April 16, 2012 by Common Dreams

by Paul Buchheit

 

The wealthiest Americans believe they've earned their money through hard work and innovation, and that they're the most productive members of society. For the most part they're wrong. As the facts below will show, they're not nearly as productive as middle-class workers. Yet they've taken almost all the new income over the past 30 years.

Any one of these five reasons should reinforce the belief that the rich should be paying a LOT more in taxes.

1. They've Taken All the Middle Class Wage Increases

In 1980 the richest 1% of America took one of every fifteen post-tax income dollars. Now, according to IRS figures, they take THREE of every fifteen (doc) post-tax income dollars. They've tripled their cut of America's income pie. That's a trillion extra dollars a year.

For every dollar the richest 1% earned in 1980, they've added three more dollars. The poorest 90% have added ONE CENT.

Yet the average American factory worker, according to Berkeley economist Enrico Moretti, produces $180,000 worth of goods a year, more than three times what he or she produced in 1978, in inflation-adjusted dollars.

So workers have TRIPLED their productivity over 30 years while the richest 1% have TRIPLED their share of income. Worker pay remained flat as the top 10% took almost all the productivity gains since 1980.

2. They've Mismanaged Key American Industries

We have the most expensive health care system in the world. Failing banks have survived because of taxpayer bailouts. Management-approved shortcuts have led to workplace deaths and chemical leak disasters. Companies lobby for cap and trade laws so their profits can pay for their pollution.

Over twenty percent of Americans are unemployed or underemployed as big companies hoard $2 trillion in cash. 93% of post-recession income (pdf) is going to the 1% "job-creators" with no appreciable increase in jobs.

Private tuition is skyrocketing, with student loans reaching the $1 trillion mark. Bonuses continue for executives at Ford and Bank of America and Sirius and other companies who have underperformed and/or laid off workers.

No, the captains of industry have not earned their money because of their top-notch management skills.

3. They've Benefited from 50 Years of Public Research

The very rich have made their fortunes in good part because of taxpayer-funded research at the Defense Advanced Research Projects Agency (the Internet), the National Institute of Health, the National Science Foundation, and numerous other government agencies.

Consider just a simple communications device. Computer chips and audio/video/voice technologies grew out of decades of funding at the Department of Defense, the Air Force, NASA, and public universities. The pieces of the device were put together by a procession of chemists, physicists, chip designers, programmers, engineers, production-line workers, market analysts, testers, troubleshooters, etc., etc. They, in turn, couldn't have succeeded without another layer of people providing sustenance and medical support and security and administrative assistance and transportation and office maintenance for the technologists. ALL of them contributed to the final product.

But over the years private businesses have received government contracts to produce and market the results, and "entrepreneurs" have rearranged the pieces into products that seem to appear out of the magical world of a single individual.

4. They've Increased Their Incomes By Not Paying Taxes

The richest 10% own 80% of the stock market, providing billions in "unearned income" that is taxed at less than half the rate of income earned through real work.

Hedge fund managers call their income "carried interest" instead of "income" to keep their tax rate at 15%. Even this small amount may not be paid. Hedge fund managers with incomes in the billions can pay ZERO income tax by deferring their profits through their companies indefinitely.

Real tax rates for the richest Americans have gone way down over the last 30 years, from 34% in 1980 to 23% in 2006. Yet the 1% claim they pay most of the taxes. They don't, if all taxes are considered. Based on recent data from the Center on Budget and Policy Priorities, the total of all state and local taxes, social security taxes, and excise taxes (gasoline, alcohol, tobacco) consumes 22% of the annual incomes of the poorest quintile. For the top 1% of Americans, the same taxes consume less than 10% of their incomes.

In addition, most inherited wealth goes untaxed, with estates valued up to $5 million exempt from federal taxes. The average tax rate on inheritance is less than 3 percent.

It's no different for corporations. U.S. Office of Management (OMB) figures show a gradual drop over the years in Corporate Income Tax as a Share of GDP, from 4% in the 1960s to 1.3% in 2010. That's ONE-THIRD of their previous share. From 2008 to 2010, the top 100 U.S. corporations paid only 12.2% of their income in taxes, and thirty of them paid nothing at all (pdf).

The lack of SEC regulation has also allowed corporate America to seek tax dodges beyond our borders. Citizens for Tax Justice reports that the 280 most profitable U.S. corporations sheltered half their profits from taxes - up to $337 billion a year (pdf) - between 2008 and 2010.

Most shocking is the long-term shift in the tax burden from corporations to middle-class workers. For every dollar of workers' payroll tax paid in the 1950s, corporations paid three dollars. Now it's 16 cents.

5. They've Contributed Little to Society

The richest individuals and corporations have shown little regard for the majority of Americans who depend on sound financial management for their economic security. According to sources such as the New York Times and ProPublica, Wall Street firms including JPMorgan, Citigroup, Bank of America, and Goldman Sachs have been repeatedly charged with fraud only to avoid punishment by paying a fraction of their profits in fines.

Financial insiders have figured out how to cheat other investors by timing the purchase of a stock option to precede good corporate news, timing the sale of a stock option to precede bad corporate news, and changing the purchase date (pdf) on a stock option to a time when the price was lower.

One hedge fund manager, John Paulson, made $4 billion by working with Goldman Sachs to create a financial product that would allow him to bet on the collapse of the housing market. Other financial masterminds packaged toxic derivatives for sale to unknowing pension funds, as ratings agencies were paid to ensure the worthless packages received AAA ratings.

Meanwhile, the banks were roughing up the homeowners. Bank of America foreclosed on tens of thousands of Americans by using unverified evidence called "robo-signing."

Disdain for average citizens goes way beyond fraud, and well outside our borders, into the areas of environmental and human rights abuses. Computer and phone makers like Apple save money by obtaining their coltan from the Congo, where children dig it out of the mines. The "blood coltan" goes to China, where teenagers stand for 12 hours a day performing repetitive tasks for a few dollars. Monsanto's herbicides and pesticides cause biological damage, promote the growth of 'superbugs' and 'superweeds,' and generally don't outperform organic methods of farming. Exxon is not only the biggest profitmaker and polluter, but the company has conducted a lengthy campaign (pdf) to deceive the public about global warming. Corporate Accountability International named Monsanto, Exxon, Koch Industries, Chevron, Blackwater, and Halliburton to its Corporate Hall of Shame.

And finally, how well is society served when valuable resources are spent on a yacht complete with golf course, submarine, beach, and helicopter, and which qualified for a second-home mortgage deduction? Or on a $250,000 playhouse for the kids?

Studies show that increased wealth is correlated with a lesser degree of empathy for others. Despite their dependency on society for everything else, the super-rich have apparently earned the right to live in their own privileged world.

A Fraudulent JOBS Bill

Let Them Eat Money
by ROB URIE


One of the businesses of Wall Street in the 1980s was the “bucket shop;” firms with networks of stockbrokers who defrauded senior citizens with phony stories about the businesses and prospects of the companies whose stocks they were selling. The companies for the most part existed only on paper, but they were legally registered with the SEC (Securities and Exchange Commission) leaving gullible and / or desperate “investors” with the impression that they were legally sanctioned by the government and therefore legitimate. And in fact, this business model moved to the mainstream of Wall Street in the tech bubble of the late 1990s and was only temporarily shut down with threats of prison terms.

With this history behind it Barack Obama and both political parties in Congress recently passed the misleadingly named JOBS bill that legalizes and institutionalizes the bucket shop business model. Matt Taibbi does a good takedown of the bill in his Rolling Stone blog, but the question that even he fails to answer is why? Why would removing legal barriers to fraud make sense to anyone? Or more precisely, to whom would doing so make sense?

The purported purpose of the bill is to make it easier for startup companies to raise capital in capital markets. Fair enough, but then why legalize fraud? The bill explicitly legalizes the telling of stories about a company’s prospects divergent from the truth in order to sell stock. In the 1980s a few of the more egregious and / or less politically connected bucket shops were shut down and their executives sent to prison for doing exactly this. So again, to whom would it be deemed legitimate to tell lies to people to part them from their money?

Readers who don’t work on Wall Street or who aren’t Barack Obama can be forgiven if no answer readily leaps to mind. So please consider the following question—what has been the source of the astounding wealth that has been concentrated in so few hands over the last forty years? There were never enough gullible seniors in all of history to pay Wall Street’s way, so there must be other ways that the money was made? By way of economic parables, I provide three different explanations below and then tie them together:

• In the movie “Tommy Boy” the predatory car parts executive played by Dan Aykroyd explains to the accidental savior of a car parts factory, played by Chris Farley, that what he wants in buying the factory and firing its workforce is “the box,” the company name, so that he can sell his lower quality car parts for the premium price that the factory’s high quality products commanded. Although the movie is fiction, the strategy of making struggling companies profitable by scamming consumers into paying more for low quality products by attaching premium names to them was part and parcel of the 1980s leveraged buyouts that purported to revive American industry while making bankers and company executives fabulously rich.

As this scam can’t run-on forever without people catching on, the next step was:

• Apple Computer has recently become one of the most “profitable” companies in the world by outsourcing its manufacturing to low wage manufacturers in China (primarily Foxconn). The word profitable is in scare quotes because there is no theory of capitalism that supports the claim that systematically paying labor less than its product (what labor produces less a market rate of profit) produces profits. What is produced are returns to economic power called economic rents, a form of extortion so odious to the theorists of capitalism that “capitalism” was invented to end their existence. While to most contemporary Americans the difference between profits and economic rents may seem a matter of mere semantics, so then is the difference between legal and criminal behavior when criminals write the laws.

• Third, one of the main reasons why banks in the West have historically been heavily regulated is that they have been given the right to create money. (If you don’t know this then (1) you qualify to be a professor of economics at an Ivy League university and (2) the MMT (Modern Money Theory) crowd has expositions explaining banks and money all over the web). In exchange for this right to create money banks were regulated like utilities with strict rules regarding under what conditions, and to whom, loans could be made. And they were forbidden from engaging in financial speculation that might put depositors’ funds at risk. When banking regulations were effectively eliminated in the late 1990s and early 2000s bankers quickly set about writing themselves massive paychecks with the money they had been granted the right to create.

These three corporate strategies, knowingly defrauding consumers (example: The Insurance Hoax By David Dietz and Darrell Preston Bloomberg Markets September 2007), using economic / political power to systematically underpay labor here and abroad and using a deregulated financial system premised on heavy regulation to facilitate unlimited withdrawals of social wealth by connected insiders define the methods of expropriation used by American business over the last forty years. But none of these tactics individually would account for the amount of money expropriated by plutocrats.

The linchpin in this system of expropriation is “financialization,” the modes of monetizing social wealth so that it can be effectively expropriated. Banks create money directly by making loans. Investment banks create financial instruments, such as stocks and bonds, which become monetized social wealth when they are exchanged for money. A company can be looted by granting stock options to executives that represent a substantial ownership interest in the firm. Creating the stock options requires an investment bank and creating the money to buy them (monetize them) from executives requires a commercial bank to make a loan to buy the stock, say, to the same company. (This explanation is simplistic but it captures the basic truths of what is being described).

The motivation for defrauding consumers and systematically underpaying labor that this system creates is that both increase the profits on which the value of stock granted to connected insiders is based. Should this seem legitimate, imprisoning the overpaid executives and hiring competent management at wages commensurate with what other labor earns would have this same effect and would be much more broadly socially beneficial. But this system is set up to push social wealth into ever fewer hands. And it has been used to buy our political system, to destroy labor and other organized resistance and to create a police / surveillance state that is designed to maintain this system of expropriation. Now add to this one more tool for expropriation: Barack Obama’s JOBS bill.

It is no accident that the phenomenal accumulation of expropriated wealth that has taken place in recent decades has coincided with the declining wealth and prospects of the middle and lower classes. Government policies since the early 1970s have been designed to destroy organized labor so that predator-capitalists can again underpay labor. Consumer protections have been systematically dismantled so that bait and switch tactics and outright theft by corporations face no recourse. And any legitimate “deregulation” of finance would have rescinded the right of unregulated banks to create money and any guarantees of rescue should banks fail.

The facts are that the new plutocrats are rich because they took what belonged to working people, the middle and lower classes, including wealth, incomes, social organization and our ability to act for the common good through economic, political and social cooperation and put it into their own pockets. Plutocrats argue that consumer and environmental regulations are burdensome, but burdensome to whom? If they profit from the systematic taking from consumers and the ability to destroy the environment that we depend on, then straightforwardly they profit from our loss. Fabulously well-paid bankers required a multi-trillion dollar bailout—more money than these banks earned in the entirety of their existences, less than a decade after they were given free rein to act in their own interest. And again, “freedom” to systematically underpay labor is thievery under any theory of capitalism.

So finally, why do Barack Obama and a bipartisan Congress believe that legalizing fraud is legitimate? The immediate answer is because that is all that they know. They exist in a self-legitimizing universe where if you have something it is because you earned it. The broader answer is that an economic system based on exploitation (capitalism) isn’t set up to differentiate between socially productive behavior and radically socially destructive behavior.

And notice please, Washington isn’t working to eliminate all laws, just the ones that impede the progress of social wealth from those who create it up to the plutocracy. With respect to protecting the wealth and privilege of the plutocrats, Washington (and Brussels and London) is all about laws. With strip searches and indefinite detention priority one for Washington, we are a nation of laws by the rich for the rest of us. But remember where the wealth came from. To turn a phrase, let them eat money. Strike!