They Never Intended to Share It

How Much of the Pie?

by DAVID MACARAY

 

One of the criticisms you hear about organized labor is that unions are too adversarial in their dealings with management.  They’re too belligerent.  People tell you that instead of seeing themselves as management’s “enemy,” unions would be better served by seeing themselves as management’s partners, because, in effect, that’s what they are.  Labor unions being regarded as partners?  Working people being treated as equals?  Wow, those are great ideas.  In fact, they could be the basis of an excellent science fiction story.

Labor unions—organized collectives established to represent the interests of employees—haven’t always been the first choice of discriminating workers looking to better themselves economically.  Historically, union membership was often pursued only after earlier and more ambitious efforts to get a larger slice of the pie had failed.

Once it became clear that the wage-based labor system had too many inherent defects to provide long-term security, American workers began seeking alternatives.  One of
those alternatives was the “cooperative.”  This was an arrangement where the workers independently owned and operated the business, and split all the profits among themselves.  They didn’t need a union to fight management because they were management. U.S. cooperatives go all the way back to the 19^th century.

Perhaps the most famous co-op in history was the Players League, established in 1890.  The Players League was a group of professional baseball players who decided they didn’t need to be “owned” by someone in order to flourish.  These weren’t marginal players or bench-warmers who recklessly set out on their own, believing they had little to lose.  The Players League (composed of eight teams) featured some of the biggest stars of the day, including legendary Hall of Famer Mike “King” Kelly.

While this was a revolutionary concept to many, the players themselves saw it as basic arithmetic.  In their view, all you needed to become a successful baseball team was a field to play on, teams to play against, and fans willing to pay to watch you play.  What could be simpler?  More to the point, what were the advantages of having a group of businessmen “own” you?  Alas, the Players League lasted only one year, falling victim to major league baseball’s threats, pleas and considerable muscle.

Manufacturing workers took a similar tack.  Because it was their sweat and toil that yielded the profits, workers decided to eliminate the middle-man, and run the operation themselves.  While it was a noble and ambitious endeavor, what killed the co-ops was, among other things, a terminal case of undercapitalization.  They simply didn’t have the cash to keep these enterprises going.  And unlike “conventional” businesses that always had the banks to turn to, worker co-ops found it difficult to get loans or attract investors.

Another creative alternative to the traditional wage-based format is what is loosely called “profit-sharing.”  Although profit-sharing schemes have been notoriously unreliable (e.g., profits are concealed, payments are deferred, benchmarks are manipulated, etc.), the premise itself is tantalizing.  You work for a base wage, but you also share in the profits.  In short, instead of simply being hired help, you are now part of the company.

It shouldn’t surprise anyone to learn that the reason many of these profit-sharing arrangements “failed” was because they were too successful.  It’s true.  Some of these profit-sharing ventures turned out to be wildly lucrative.  And once management saw how much money their employees (both salaried and hourly) were raking in under these profit-sharing plans, they immediately dismantled them.

Their thinking ran along these lines:  Why on earth are we giving people 6-and 7-percent annual raises when we know for a fact (by reviewing their earnings history) that they’re more than willing to accept 3-percent raises?  Why would we do that?  To management, the answer was simple.  You don’t do it.  Instead, you go back to the standard, wage-based format where workers are treated as “overhead,” and you take your chances at the bargaining table.

This is why the labor-management dynamic is adversarial.  The acquisitive impulse is biological.  Labor has to fight for every scrap because management is biologically hard-wired to resist any form of sharing.  No matter how profitable a business is, management cannot bring itself to part with one more nickel than is absolutely necessary, and therein lies the crux of the relationship.

Labor unions aren’t the solution to everything.  But given the unfortunate track record of worker co-ops and profit-sharing schemes—coupled with management’s detestation of sharing the wealth—unions (with roughly 14.8 million members) are clearly the only thing keeping the American working class afloat.

Who Benefits from the War on Drugs?

by Tim Kelly  February 23, 2012

Libertarians are absolutely correct about the war on drugs. Governments should have no say in what an adult ingests or consumes. And therefore all laws regulating or restricting the production, sale, or use of any drug or substance should be repealed.

Libertarians are also correct in pointing out the drug war’s disastrous consequences. Drug prohibition has made criminals out of otherwise law-abiding citizens, cost the taxpayers hundreds of billions of dollars, made drugs more dangerous, created powerful criminal syndicates, increased violent crime, corrupted law enforcement at all levels, and expanded the size and scope of government.

As Wendy Kaminer writes

A sensible person … might wonder why we criminalize the use of cocaine and heroin, not to mention marijuana, while we tolerate and even celebrate alcohol consumption. Of course, we learned long ago that prohibition of alcohol was bound to fail. So a sensible person might propose that we consider ending prohibition of drugs like marijuana, cocaine, and heroin, which pose much less threat to the public safety than alcohol, or at least reduce harsh penalties for their use. But sensible people have had little influence over the nation’s drug policies.

All of this has led many to declare the government’s anti-drug crusade a failure. But one man’s failed government program is another’s success. The war on drugs has transferred a vast amount of wealth and power to those who would otherwise have to find honest work. One doesn’t have to be a public-choice scholar to recognize that the drug war, like any war, is merely “politics by other means,” and that those who benefit from it have no desire to see it ended anytime soon.

Who are the beneficiaries of the war on drugs?

A major beneficiary, of course, is the U.S. government, which has used the drug war as a pretext to shred the Bill of Rights and claim vast new powers over the American people. That the drug war would lead to the depredation of civil liberties and the erosion of the rule of law was inevitable, given that there is simply no way for the government to effectively enforce its drug laws while abiding by the Constitution.
And as libertarians and many other constitutionalists have tirelessly pointed out, Washington’s drug war is illegal because the power to prohibit drugs has never been given to the federal government. Just as with alcohol prohibition, any federal law prohibiting or restricting the production, sale, and use of drugs (marijuana, cocaine, heroin, etc.) would require a constitutional amendment.

The war on drugs generates huge profits that enrich drug dealers and drug warriors alike. The dealers get very wealthy shipping and selling their contraband. The drug warriors, for their part, receive billions of dollars a year from the taxpayers and bank a sizeable portion of the war booty their raiding parties routinely snatch up. And this plunder includes more than just “drug money” but any property they suspect mightbe involved in narcotics trafficking. As the economist Robert Higgs writes,

The drug war has been a bonanza even to law-abiding cops, as the altered forfeiture laws have given the police free rein to seize private property more or less at will. … If in the process of padding their budgets the police arrest a throng of street-corner entrepreneurs who subsequently land in prison, well, c’est la guerre. (PDF)

Largess from asset forfeitures and federal grants allows local police departments to augment their salaries, expand payrolls, and purchase sophisticated surveillance equipment, high-powered weaponry, and other menacing-looking paramilitary gear. Indeed, the militarization of America’s police departments over the last 35 years has largely been a function of the drug war.

And behind the frontlines of this war is a vast legal-industrial-imprisonment complex employing thousands of judges, prosecutors, criminal-defense attorneys, bail bondsmen, prison guards, and vendors. For the corporations operating privatized “correctional facilities,” the drug war provides a steady supply of warm bodies to fill their prison cells.

Another major beneficiary of the drug war is the banking system, which takes in hundreds of billions of dollars annually from narcotics traffickers. The United Nations Office on Drugs and Crime (UNODC) describes money laundering as “the method by which criminals disguise the illegal origins of their wealth and protect their asset bases in order to avoid suspicion of law enforcement agencies and to prevent leaving a trail of incriminating evidence.”

Money laundering is more than just an opportunity for greedy bankers to collect fat commissions. The huge amount of cash churned up by the illegal drug trade has become a vital source of liquidity for the rickety fractional-reserve banking system. UNODC’s director, Antonio Maria Costa, told the British newspaper the Observer in late 2009 that proceeds from the illicit drug trade were “the only liquid investment capital” available to many banks on the brink of collapse. In fact, “a majority of the $352 billion of drugs profits was absorbed into the economic system as a result.”

According to Costa, “Inter-bank loans were funded by money that originated from the drugs trade and other illegal activities. … There were signs that some banks were rescued that way.”

The CIA has long been involved in drug trafficking. This conflux of the intelligence netherworld and the narcotics-trafficking underworld has been written about by a variety of credible journalists and scholars. The reports usually involve the CIA working with drug traffickers, providing them assistance in return for intelligence and material support. Alfred C. McCoy, author of The Politics of Heroin in Southeast Asia, writes,

In most cases, the CIA's role involved various forms of complicity, tolerance or studied ignorance about the trade, not any direct culpability in the actual trafficking … the CIA did not handle heroin, but it did provide its drug lord allies with transport, arms, and political protection. In sum, the CIA's role in the Southeast Asian heroin trade involved indirect complicity rather than direct culpability.

Peter Dale Scott, a retired professor and the author of many books including Cocaine Politics: Drugs, Armies, and the CIA in Central America, and Drugs, Oil, and War: The United States in Afghanistan, Colombia, and Indochina, believes McCoy understates the extent of CIA involvment. Scott believes rather than being passively drawn into “drug alliances,” the CIA actively engages in narcotics trafficking in pursuit of certain “national-security” objectives and to finance “off-the-books” operations. Scott writes, “Far from considering drug networks their enemy, U.S. intelligence organizations have made them an essential ally in the covert expansion of American influence abroad.”

Robert Parry’s Lost History: Contras, Cocaine, the Press, & “Project Truth” and Alexander Cockburn and Jeffrey St. Clair’s Whiteout: The CIA, Drugs, and the Press are two well-researched books supporting Scott’s contention. And perhaps most notable is the reporting of the late Gary Webb. His “Dark Alliance”series published in the San Jose Mercury News in 1996 sparked a firestorm of controversy by asserting the CIA had engaged in cocaine smuggling as part of its covert operations supporting the Nicaraguan Contras. Though Webb was criticized at the time and driven out of the mainstream press for his investigative journalism, much of what he reported in the series was validated later by an inspector general’s investigation of the CIA.

The war on drugs has created shared interests for the world's largest banks, drug cartels, and the U.S. intelligence apparatus. As the economist Michel Chossudovsky writes,

This trade can only prosper if the main actors involved in narcotics have “political friends in high places.” Legal and illegal undertakings are increasingly intertwined, the dividing line between “businesspeople” and criminals is blurred. In turn, the relationship among criminals, politicians and members of the intelligence establishment has tainted the structures of the state and the role of its institutions.

The drug war is not about squashing narcotics trafficking, nor is it about protecting Americans from the ravages of drug addiction. The ugly truth is the war on drugs is one of America's most lucrative industries, funding police salaries and supporting the country’s vast prison system. It is apparently also propping up a bankrupt financial system and reportedly providing the spooks at Langley with cash to finance their black ops.

nding the drug war would require fundamentally rethinking decades of official policy, closing down multiple government agencies, as well as undermining the powerful, entrenched corporate interests that have developed over the last 40 years. Perhaps this is why U.S. government will make sure the war on drugs never ends. Meanwhile, civil liberties are violated, the Constitution is trashed, lives are ruined, and the death toll mounts.

Record Corporate Profits: 1000 Words or Less

Now. let's bring it on home...

BOOM!!!


(That blue line is the actual unemployment rate which includes everyone who wants/needs a job--whether they are looking or not and whether they have a part time job or not.--jef)

Job Destroyers Don't Deserve a Tax Holiday

Monday, October 10, 2011 by OtherWords
When thinks tanks from the left and the right agree on something, Congress should pay attention.
by Sarah Anderson and Chuck Collins

 

A coalition of big businesses is waging a campaign for a massive tax holiday on corporate profits stashed overseas. Its lobbyists claim that this windfall would create millions of jobs. If our lawmakers buy that, they've got very short memories.

Just seven years ago, big American corporations made the exact same promises. And Congress gave them a tax holiday that allowed 843 companies to reduce their tax rate from 35 percent to 5.25 percent on $312 billion in offshore profits. 

What did Americans get in return? This week, our organization, the progressive Institute for Policy Studies, released a report showing that 58 companies that received 70 percent of the tax windfalls didn't boost employment. In fact, they actually destroyed a total of nearly 600,000 jobs.

Almost simultaneously, the conservative Heritage Foundation released a paper with the same conclusion: Tax holidays don't create jobs. When thinks tanks from the left and the right agree on something, Congress should pay attention.

But we're up against powerful forces.

A coalition called Working to Invest Now in America, which goes by the slick name WIN America, has deployed more than 160 lobbyists and spent at least $50 million to win a tax holiday on more than $1 trillion in offshore funds that might get repatriated if Uncle Sam grants this tax break. Lawmakers in both the House and the Senate have introduced bills that would do just that.

The Senate version, unveiled in early October, would give the deepest tax discounts to firms that create jobs, but that requirement only applies for one year. We need jobs that last, not positions that could vanish after the nation's supposed job creators get their huge tax windfall.
Some executives argue that without the tax holiday, these global firms would keep their cash offshore permanently, and it's better for Uncle Sam to get something rather than nothing. Nevertheless, offering such drastic tax discounts sets a dangerous precedent.

Back in 2004, the corporate lobbyists argued that the holiday would be a "one-time" deal. But after they won that round, they turned around and began amassing their offshore stashes once again. They must have counted on getting more tax holidays.

A tax holiday for job destroyers isn't only a waste of taxpayer money at a time of urgent needs. It hurts small businesses and other firms that operate only domestically. What sense does it make to give global companies deep discounts on their IRS obligations while these small, yet strong, engines of job creation face standard tax rates?

There are many things that we can do to strengthen the U.S. economy and spur job growth. But providing subsidies to companies whose business model is based on minimizing labor costs, sending profits offshore, and dodging taxes isn't a good strategy. These companies may compensate their CEOs lavishly and deliver value to shareholders, but they aren't in the business of creating jobs.

The WIN America campaign leader that stands to gain the most is Pfizer. The pharmaceutical giant was the leading beneficiary of the 2004 tax holiday when it toted $40 billion in foreign funds back to the United States.

And what did Americans get for Pfizer's subsidy? Instead of creating jobs, the firm proceeded to scrap more than 58,000 jobs in the years since that holiday.

Today, Pfizer is holding more than $48 billion in profits offshore. Will Congress be fooled again?

Guy Fawkes = Time Warner

Guy Fawkes = Time Warner

 

It seems every time an Anonymous protester buys and wears the Guy Fawkes mask made famous by the rogue anarchist in the film V for Vendetta, massive corporate conglomerate Time-Warner - which owns the rights to the image - makes a buck or so. Oops.

Time to Topple Corporate Dictators

Americans Need to Start Showing Up
By RALPH NADER

The 18 day non-violent Egyptian protests for freedom raise the question: is America next? Were Thomas Jefferson and Thomas Paine around, they would likely say "what are we waiting for?" They would be appalled by the concentration of economic and political power in such a few hands. Remember how often these two men warned about concentrated power.

Our Declaration of Independence (1776) listed grievances against King George III. A good number of them could have been made against "King" George W. Bush who not only brushed aside Congressional War-making authority under the Constitution but plunged the nation through lies into extended illegal wars which he conducted in violation of international law. Even conservative legal scholars such as Republicans Bruce Fein and former Judge Andrew Napolitano believe he and Dick Cheney still should be prosecuted for war and other related crimes. The conservative American Bar Association sent George W. Bush three "white papers" in 2005-2006 that documented his distinct violations of the Constitution he had sworn to uphold.

Here at home, the political system is a two-party dictatorship whose gerrymandering results in most electoral districts being one-party fiefdoms. The two Parties block the freedom of third parties and independent candidates to have equal access to the ballots and to the debates. Another barrier to competitive democratic elections is big money, largely commercial in source, which marinates most politicians in cowardliness and sinecurism.

Our legislative and executive branches, at the federal and state levels, can fairly be called corporate regimes. This is corporatism where government is controlled by private economic power. President Franklin Delano Roosevelt called this grip "fascism" in a formal message to Congress in 1938.

Corporatism shuts out the people and opens governmental largesse paid for by taxpayers to insatiable corporations.

Notice how each decade the bailouts, subsidies, hand-outs, giveaways, and tax escapes for big business grow larger. The word "trillions" is increasingly used, as in the magnitude of the rescue by Washington of the Wall Street crooks and speculators who looted the peoples' pensions and savings.

It is not as if these giant companies demonstrate any gratitude to the people who save them again and again. Instead, U.S. companies are fast quitting the country in which they were chartered and prospered. These corporations, which were built on the backs of American workers, are shipping millions of jobs and whole industries to repressive foreign regimes abroad, such as China.

Over 70 percent of Americans in a September 2000 Business Week poll said corporations had "too much control over their lives." It's gotten worse with the last decade's corporate corruption and crime wave.

Wal-Mart imports over $20 billion a year in products from sweatshops in China. About a million Wal-Mart workers make under $10.50 per hour before deductions—many in the $8 an hour range. While Wal-Mart's CEO makes about $11,000 a hour plus benefits and perks.

This scenario has metastasized through the economy. One in three workers in the U.S. makes Wal-Mart level wages. Fifty million people have no health insurance and every year about 45,000 die because they cannot afford diagnosis or treatment. Child poverty is climbing as household income falls. Unemployment and underemployment are near 20% levels. The federal minimum wage, adjusted for inflation since 1968, would be $10.00 per hour now. Instead, it is $7.25.

Yet one percent of the richest Americans have financial wealth equivalent to the bottom ninety-five percent of the people. Corporate profits and compensation of corporate bosses are at record levels. While companies, excluding financial firms, are sitting on two trillion dollars in cash.

On February 7, President Obama showed us where the power is by walking across LaFayette Park from the White House to the headquarters of the U.S. Chamber of Commerce. Before a large audience of CEOs, he pleaded for them to invest more in jobs in America. Imagine, CEOs of pampered, privileged mega-companies often on welfare and in trouble with the law sitting there while the President curtsied.

With Bill Clinton in the Nineties, corporate lobbies tightened their grip on our country by greasing through Congress both NAFTA and the World Trade Organization agreements that subordinated our sovereignty and workers to the global government of corporations.

All this adds to the growing sense of powerlessness by the citizenry. They experience hundreds of thousands of preventable deaths and many more injuries every year in the workplace, the environment, and the marketplace. Massive budgets and technologies do not go to reduce these costly casualties, instead they go to the big business of exaggerated security threats.

While the ObamaBush deficit-financed wars in Afghanistan and Iraq have been destroying those nations, our public works here, such as mass transit, schools and clincs crumble for lack of repairs. Foreclosures keep rising.

The debt servitude of consumers is stripping them of control of their own money as fine print contracts, credit ratings and credit scores tighten the noose on family budgets.

Half of democracy is showing up. Too many Americans, despairingly, are not "showing up" at the polls, at rallies, marches, courtrooms or city council meetings. If "we the people" want to reassert our proper constitutional sovereignty over our country—we can start by amassing ourselves in public squares and around the giant buildings of our rulers.

In a country that has so many problems it doesn't deserve and so many solutions that it doesn't apply; all things are possible when people begin looking at themselves for the necessary power to produce a just society.

Was the President's Address Total Hogwash? (2 articles)

Obama was mealy-mouthed in avoiding the tough choices that a leader should delineate in a time of trouble.
By Robert Scheer, Truthdig
Posted on January 26, 2011

What is the state of the union? You certainly couldn't tell from that platitudinous hogwash that the president dished out Tuesday evening. I had expected Barack Obama to be his eloquent self, appealing to our better nature, but instead he was mealy-mouthed in avoiding the tough choices that a leader should delineate in a time of trouble. He embraced clean air and a faster Internet while ignoring the depth of our economic pain and the Wall Street scoundrels who were responsible -- understandably so, since they so prominently populate the highest reaches of his administration.

He had the effrontery to condemn "a parade of lobbyists" for rigging government after he appointed the top Washington representative of JPMorgan Chase to be his new chief of staff.
The speech was a distraction from what seriously ails us: an unabated mortgage crisis, stubbornly high unemployment and a debt that spiraled out of control while the government wasted trillions making the bankers whole. Instead the president conveyed the insular optimism of his fat-cat associates: "We are poised for progress. Two years after the worst recession most of us have ever known, the stock market has come roaring back. Corporate profits are up. The economy is growing again." How convenient to ignore the fact that this bubble of prosperity, which has failed the tens of millions losing their homes and jobs, was floated by enormous government indebtedness now forcing deep cuts in social services including state financial aid for those better-educated students the president claims to be so concerned about.

His references to education provided a convenient scapegoat for the failure of the economy, rather than to blame the actions of the Wall Street hustlers to whom Obama is now sucking up. Yes, it is an obvious good to have better-educated students to compete with other economies, but that is hardly the issue of the moment when all of the world's economies are suffering grievous harm resulting from the irresponsible behavior of the best and the brightest here at home. It wasn't the students struggling at community colleges who came up with the financial gimmicks that produced the Great Recession, but rather the super-whiz-kid graduates of the top business and law schools.

What nonsense to insist that low public school test scores hobbled our economy when it was the highest-achieving graduates of our elite colleges who designed and sold the financial gimmicks that created this crisis. Indeed, some of the folks who once designed the phony mathematical formulas underwriting subprime mortgage-based derivatives won Nobel prizes for their effort. A pioneer in the securitization of mortgage debt, as well as exporting jobs abroad, was one Jeffrey Immelt, the CEO of GE, whom Obama recently appointed to head his new job creation panel.

That the financial meltdown at the heart of our economic crisis was "avoidable" and not the result of long-run economic problems related to education and foreign competition is detailed in a sweeping report by the Democratic majority on the Financial Crisis Inquiry Commission to be released as a 576-page book on Thursday. In a preview reported in the New York Times, the commission concluded:

"The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done. If we accept this notion, it will happen again."

Just the warning that Obama has ignored by continually appointing the very people who engineered this crisis, mostly Clinton alums, to reverse its ongoing dire consequences. As the Times reports:

"The decision in 2000 to shield the exotic financial instruments known as over-the-counter derivatives from regulation, made during the last year of President Bill Clinton's term, is called 'a key turning point in the march toward the financial crisis.'"

Obama appointed as his top economic adviser Lawrence Summers, who as Clinton's treasury secretary was the key architect of that "turning point," and Summers protégé Timothy Geithner as his own treasury secretary. The unanimous finding of the 10 Democrats on the commission is that Geithner, who had been president of the New York Fed before Obama appointed him, "could have clamped down" on excesses by Citigroup, the subprime mortgage leader that Geithner and the Fed bailed out along with other unworthy banking supplicants.

Profligate behavior has hobbled the economy while running up an enormous debt that Obama now uses as an excuse for a five-year freeze on discretionary domestic spending cuts, that small part of the budget that might actually help ordinary people. Speaking of our legacy of deficit spending, Obama stated, "... in the wake of the financial crisis, some of that was necessary to keep credit flowing, save jobs, and put money in people's pockets. But now that the worst of the recession is over, we have to confront the fact that our government spends more than it takes in."

Why now? It is an absurd demarcation to freeze spending when so many remain unemployed just because corporate profits, and therefore stock market valuations, seem firm. Ours is a union divided between those who agree with Obama that "the worst of the recession is over" and the far larger number in deep pain that this president is bent on ignoring.


*****

Wednesday, January 26, 2011 by CommonDreams.org 
Obama’s State of the Union: No Jobs but More Business Tax Cuts

by Jack Rasmus

Not a word about the 25 million still jobless. Nothing about how to help the more than 7 million homeowners who have, or the additional 4 million who will soon, face foreclosures and evictions. Absolute silence about the dozens of states and hundreds of local governments in deepening fiscal crisis and approaching bankruptcy-and the hundreds of thousands of public employees who will pay for that bankruptcy with their jobs, wages, pensions, and health benefits. OK, some vague references to infrastructure and alternative energy jobs-over the next 25 years. Paid for by Obam's explicit reference to cut Medicare and Medicaid benefits for tens of millions.

But the most disturbing element of Obama's State of the Union address last Tuesday night was his firm commitment to cut corporate taxes even further, and thereafter to move on to ‘simplify' the US tax code in general-i.e. a code word in policy circles for further reducing top tax brackets which always results in tax cuts for the wealthiest households.


What Obama proposed in his address on Tuesday was a classic continuation of a supply side, ideological program focusing on business tax reduction, supplemented by various other measures to reduce business costs at the expense of consumers, workers, and others.

But the problem today is not excessively high business costs. It's not a supply side problem. Business has been cutting costs to the bone the past three years with massive layoffs, wage reductions, employee benefit cuts, hiring part time and temp workers, and implementing various productivity boosting measures. Obama and Congress have further lavished tax cuts and subsidies on business at historic levels the past two years. The Federal Reserve in turn has reduced business costs still further by reducing interest rates to record low levels. The result of all this business cost reduction has been a rapid return to pre-crisis levels of business profits and an accumulated corporate cash hoard of more than $2 trillion. And none of this $2 trillion has been spent by business thus far to create jobs to any reasonable extent.

In his address Obama praised the fact that business created 1 million jobs in 2010. But the majority of the 1 million were temp and part time jobs. And at that 1 million a year rate of job creation it will take 15 years just to recover the jobs lost in the recent recession. Yet Obama maintains Business needs further cost reduction assistance, and still more business tax cuts to ‘make them more competitive'.

The problem in the US economy, now experiencing the most lopsided (and weakest) economic ‘recovery' from any recession since 1947, is not too high business costs or insufficient supply side (business tax) stimulus. The problem is demand side-i.e. not enough income for the 90 million middle and working class households. That insufficient income means first and foremost not enough jobs. And Obama last Tuesday night said nothing of substance about how to create jobs today or even in the next one to two years. Job creation was relegated to the distant future, stretched out over the next 25 years.

The US economy and households do not need a 25 year job creation plan. They need an immediate job creation program. And they need a definitive solution to prevent 10 million foreclosures. And the better get quickly a rescue of the states and cities, before the local government crisis sinks the municipal bond markets and subsequently precipitates another ‘subprime'-like financial implosion. Yet no mention of any of this in the State of the Union address, as if these weren't the most serious issues confronting the US economy today.

In his Tuesday address Obama clearly followed in the footsteps of George W. Bush. Bush first passed more than $3 trillion in tax cuts for wealthy households between 2001-2003 by cutting capital gains, dividends, and estate taxes. (Obama last December extended the same for two more years). Bush then followed up in 2004 with several industry-by-industry specific corporate tax cuts worth another $1 trillion. (Obama now follows up with proposals to cut the corporate tax rate). Bush in 2005 then proposed to revise the general tax code in his second term to make it all permanent. Obama and the Republican Congress will pass the additional corporate tax cuts this year, then move on to the general tax code revision in 2012 that will ‘simplify' (lower) taxes on the wealthiest households before the next general elections.

On Tuesday Obama thus echoed the tired corporate refrain that ‘tax cuts create jobs'. His new twist is that the tax cuts are necessary to ‘make US corporations more globally competitive' vis-à-vis their foreign rivals. In other words, the primary focus of the tax cuts is to benefit US multinational corporations. As the argument goes, if they are ‘more competitive' (i.e. if their costs are less), they will be able to get a larger share of global exports and sales, which will mean more investment and jobs in the U.S.

But for more than a decade now multinational corporations as a group have been steadily reducing jobs in the U.S., and will continue to do so. Obama's corporate tax cuts will result in fewer-not more-jobs in the U.S., as corporations use the additional income to continue to invest in new equipment that will result in job displacement rather than new job creation.

More tax cuts for multinationals could also prove to have only a temporary effect at best at boosting exports and profits, and thus investment and jobs. The present period is one in which all the major global economic sectors-the U.S., the Eurozone, China, Japan, the Asian periphery, and BRICs like India and Brazil, are all intensifying their fight over the remaining global export pie.

Their respective, domestic economies have all been experiencing difficulty generating sustained internal economic recovery-except for China which has recently begun to slow its economy on purpose to deal with rising global speculation and internal inflation.

Japan has entered a double-dip recession. Asian periphery economies are rapidly slowing and some predicted to enter recession again. Like China, India and Brazil are slowing their economies intentionally as well, Growth in the Eurozone will slow, driven by its periphery nations' financial instability. Global competition over exports is growing more intense. More currency fights are erupting. More protectionism is likely. And all over a global export pie that will to grow more slowly in 2011 and perhaps more so in 2012.

The newly emerging Obama-Big Business focus on relying on exports and multinational corporations to lift the US recovery to a sustained path is therefore a highly risky policy shift. It will not only fail to create jobs; it will likely fail as well to provide the main source for a sustained economic recovery that has eluded Obama to date. For all who are not bankers, investors, or corporate managers and big stockholders or bond traders-we can expect more of the same for the next two years in a continuing lop-sided economic recovery.

Capitalism in Crisis

Get Your Wheelbarrows Ready!
By MARY LYNN CRAMER

Creating jobs is not the raison d'être nor the primary goal of a Capitalist economy. Creating profits for the purpose of Capital accumulation and expansion is the sine qua non and essential function of Capitalism.

Often larger profits can be made by increasing the productivity of workers and upping overall output. When such efforts are not possible or do not result in an increased rate of profit, some Capitalists---especially those who own and control vital resources---can limit real production, thus creating shortages of that essential product. They then raise prices without increasing production and thereby increase the profits of their particular enterprise. (Or, in the case of the US and British oil companies, they can support the creation of a foreign organization like OPEC that will cooperate in restricting output in ways that would be illegal in the US or Great Britain.) This hurts the "bottom-line" or profits of those other industries dependent upon the restricted resource; and, therefore, is not a long-run solution for correcting crises in profitability for the Capitalist system as a whole.

If profits cannot be increased through new investment in updated labor-saving technology, then those Capitalists who can may increase the hours of their workers, as well as cut their wages and benefits in order to increase company profits.

If investment in more modern plant and equipment is not deemed profitable, then Capitalists will invest their profits in things other than expanding real material production. Besides satisfying their own appetite for increased consumption of luxury goods, they turn to speculation in all forms of financial "instruments" (paper) that result in profits for the "winners" and enormous government bailouts for the so-called losers who are "too big to fail." No expansion of the real economy---i.e., no increased production of material goods, nor additional jobs---results from these high stakes gambling activities.

In sum, a rate of profit sufficient to attract investment in expanded Capital accumulation is what is necessary for increased Capitalist production in the real economy... the real economy of material production that is also the foundation for all other forms of exploitation and speculation. Increased consumption by exploited wage labor is contrary to the needs of Capitalism during periods of "economic down turns," and particularly during the global economic crisis we are experiencing today. Increasing the labor force in order to produce more "consumer" goods is not on the agenda.

Yet, the myth persists. Bourgeois theorists will insist that consumer demand of the working population is what drives Capitalist production. It is clear that after many of these well intentioned spokespersons actually believe what they are saying. (Even though they may also insist, within the same sound bite, that economic growth and stability depends upon "consumers" saving more.) The simple lay person, the professionals concede sympathetically, finds it difficult to understand often complex and contradictory theories of economics. Well, let me share with you one admittedly simple little thought that I often toy with: If a feudal lord were to have told his serf, that the sole purpose of his exploitation was to enable his lord to provide the serf with the material goods necessary to maintain an acceptable level of poverty, the serf would have thought the lord insane. Likewise, if an African slave had been told by the American plantation owner that his enslavement and low standard of living was necessary so that the plantation could produce what the slave needed to survive, she would have thought her master crazy. But for some reason, wage labor exploited by Capitalists are suppose to believe that all the accumulation of vast resources, enormous factories, state-of-the art ports, refineries, etc., etc., owned by the Capitalists are necessary for, and simply serve the purpose of producing what working people need to survive and maintain an acceptable standard of living. It is all done for us, and it all comes back to us working people. If that sounds absurd to you, maybe the following will more clearly reflect your reality:

Yes, under the Capitalist system of distribution, "consumer goods" sufficient for the the employed labor force to survive (at an acceptable standard of living), is necessary. However, Capital expansion and production of real, material "producer goods"--- such as industrial machinery, factories, infrastructure, technology, planes, company limos, corporate cars, trucks, freight trains, ships, docks, commercial ports and transport of all kinds, along with the communications centers, security apparatus, administrative compounds, together with the pipelines, refineries, natural resources, raw materials and fuel to operate this enormous, global empire---make up the larger part of material production and privately-owned accumulated wealth in this nation and globally; and these tremendous means of production are neither consumed by nor owned by the workers who produce them. Under a system of Capitalist production, exploitation of a labor force that produces much more than it consumes is the essential source of real profits. It is production and expansion of the enormous, modern industrial Capitalist empire that is the aim of Capitalism (and all those who identify as successful competitive players in this deadly game), not increased consumption of goods and services for working people. The latter is the necessary "spin-off" so to speak, until those workers themselves are no longer deemed "necessary."

If Capital expansion and accumulation can be periodically accomplished profitably with a smaller workforce, then that is incentive enough for Capitalism to ignore or eliminate, directly or indirectly, the "useless eaters" and the "unproductive" members of society (that is, those who cannot contribute to the profitability of Capitalist production)---like the old, the mentally and physically disable, and others unemployable*


We have witnessed today (and throughout history) the standard methods of increasing productivity in pursuit of profits without increasing consumption or improving the standard of living of working people. Most economists now are in agreement that the average wage of the American worker has not increased in real value since 1970. During the same time period, American manufacturing jobs have gone abroad in search of better rates of profit, and major American industries like steel and auto manufacturing plants have been closed and abandoned. During times like these, the most common Capitalist remedies to falling rates of profit include

(1) demanding employees work longer hours for the same or less pay; (2) raising prices without increasing production so that the value of real wages fall, workers' are forced to consume less, and the portion of value produced that goes to the Capitalist in form of profits increases; (3) requiring increased involvement of the federal government in the process of redistributing value and resources away from the "consumer" and into the bank accounts of Capitalists.

Social programs are cut, money is made available to Capitalists at 0% interest rates (while those on fixed incomes get just about 0% interest on their retirement and savings accounts ); and public services are discontinued or privatized as for-profit programs. Witness the $500 billion cut in government funding of Medicare Advantage HMO programs. These HMO programs---the most popular Medicare programs among low-income elderly---were determined to be the most efficient and least costly of all the Medicare programs according to the 2009 and 2010 Report to Congress on Medicare Spending. Nevertheless, private insurance CEO's agreed to Obama's huge cut in these programs, in exchange for a much more lucrative scheme forcing all "consumers" to purchase private, for-profit, health insurance plans. As mentioned above, transferring trillions of dollars to banks for lending, interest free, to large Capitalist corporations while allowing the foreclosure on home mortgages held by poor and middle class workers, is just one more example of how the government facilitates the cut in workers' consumption while increasing the Capitalists' piece of the pie--- all in the name of getting the economy going again. Nota Bene: It is not working this time.

The stockpiled banking and manufacturing trillions are not going into increased production and more jobs. The Obama administration complains that the banks are not making loans, and big manufacturers--- rather than invest in expanded production and employment---are just sitting on top of billions in record profits. No, they are not! Guess what they are doing with it...again. (Hint: Can you sing "I'm forever blowing bubbles, pretty bubbles in the air.")

John Maynard Keynes, the sweetheart of the liberal left, made it crystal clear that the use of inflation is a much better economic tool for lowering workers real wages and consumption than direct wage cuts by employers. He explained that angry workers could be a threat to individual Capitalists, whereas employing workers in government-funded industries and projects that did not produce consumer goods would cause generalized inflation, but make it hard for workers to know whom to blame for the diminished value of their wages, their declining standard of living and lower consumption. Government transferring labor and material into war production, while rationing consumer goods for working people, was greatly facilitated in the 1930's by nationalist propaganda justifying the US entry into WWII and patriotic sacrifices.

What a magnificent booty was gained from America's participation in that fight for democracy and freedom overseas! And the Depression ended! The usual manner of correcting serious economic depressions is through wide-spread unemployment that lowers wages, causes bankruptcies of the less competitive companies, and facilitates the take over of devalued plant and equipment by larger corporations. This reorganization of Capitalist production on the basis of cheaper labor and cheaper materials all around, allows the surviving, enlarged and more "efficient" Capitalists to renew production at a rate of profit and Capitalist expansion of production and employment even greater than before the downward dive in the "business cycle." Prior to "the war effort," this usual process was underway but had not gotten the economy going again.

However, the riches plundered in times of war---the take over and reorganization of conquered nations' entire material wealth, equipment, cheap labor, factories, and infrastructure---are vastly more profitable than is the process of domestic bankruptcies and economic rebuilding at home. Keynes knew this. Roosevelt (whom Keynes complained did not understand anything he told him) did not have to be told this. As FDR said, the model he followed had already been proven effective in Communist Russia, Fascist Italy, and Nazi Germany under those "command economies."

What Keynes and Roosevelt could not have anticipated is the enormity of the current global depression . This time around, government-assisted attempts at redistribution of wealth, resources and cheaper labor does not appear to be adequate to the task of increasing U.S. Capitalists profitability sufficiently to encourage investment in the expansion of real material production domestically, and certainly not sufficient to attract private investment in overhauling existing, antiquated means of production. Waging wars this time has not provided a solution, although the economy is now dependent upon production and marketing of weapons, military equipment and related technology.

China and India with large numbers of starving displaced peasants and an abundance of slave labor may be able to increase profitability sufficiently to initiate the larger Capital goods production necessary to dominate the global economy, setting off yet another round of expanded global competition, depressions and war. A more likely scenario, given the authoritarian methods increasingly used throughout the world in an attempt to control all real and imagined forms of threat to those who had fancied themselves in control of global Capitalism, would be a world-wide economic collapse that could give birth to new forms of barbarism beyond what we have known in Fascist and Nazi attempts to overcome economic collapse. Get your wheel barrels ready.**

Our solution is not to give up on demanding an end to the wars, or more jobs with good wages and benefits, universal health care, the preservation of social security, continued funding of public schools, or respect for civil rights and human rights. But our solution must address the larger context within which all these individual issues and concerns exist. When we work to "Stop Global Warming," we need to recognize that business and industry, by their own accounting, use over 80% of the energy sources that are polluting the atmosphere. And the military is the biggest polluter of all. Capitalist industries and the military are fighting globally to protect the profitability of the system that benefits and empowers them. That system is suffering a global depression. The battle to sustain it leaves no room or resources for reorganizing Capitalist production to meet the needs of sound ecological production, let alone to provide for a better standard of living and increased consumption for working people. As mad as it sounds to the average normal person, increasing profits and maintaining positions of power are more meaningful to those who benefit from the militarized economy than is survival of the planet and the human race. Our solution will require a revolution in creative thinking about what are "economic problems," who can solve them, and how.

*Elderly, mentally and physically ill hospital patients were the first victims of Hitler's furnaces at Dachau. Children from the village laughed and shouted when they saw the bus loads of patients approaching: "You're going to the furnaces!" they taunted. When the parents of those same children complained to local officials of the Third Reich that the stench was too much, they were to told to shut up or they themselves would soon become fuel for the fires. This plan for exterminating the "unproductive consumers" was carried out sometime before the Communists, "Marxists," dissidents, and "Jews," became targeted victims of Third Reich concentration camps, gas chambers and incinerators.

**After WWI, Germans were reported to wander streets pushing wheel barrels filled with worthless Reich currency in attempt to purchase a loaf of bread.

Recommended Reading:

Economics, Politics, and the Age of Inflation, by Paul Mattick (1978)
Fascism and Big Business, by Daniel Guerin (1973)
The Coming of the Third Reich, by Richard J. Evans (2003)
Bound Upon a Wheel of Fire, by John V. H. Dippel (1996)

US Poverty Data Tells Only Half the Story...

by Ananya Mukherjee-Reed Thursday, September 23, 2010 by CommonDreams.org

In April this year, Fortune magazine published an insightful analytical piece Fortune 500: Profits bounce back.  Two days ago as I went back to the Fortune website to read the piece again, I found something very interesting: sitting right next to it was the story Poverty in the US Spikes. I took a screen-shot right away.  The picture is worth much more than a mere thousand words: I think its worth 391 billion dollars (2009 the Fortune 500 earnings) or the 14.9 million Americans without jobs. You choose.

Some excerpts from Profits Bounce Back: 

Amazingly, as consumers struggle, U.S. corporations are staging a nearly unprecedented comeback that's largely escaping notice. The gargantuan, dispiriting job cuts that seem to dominate the news have also been the spur for an epic resurgence in profits. For 2009, the Fortune 500 lifted earnings 335%, to $391 billion, a $301 billion jump that's the second largest in the list's 56-year history, approaching the increase in the robust recovery of 2003.

The crucial reductions came in the item accounting for two-thirds of their costs: labor. In 2009, the Fortune 500 shed 821,000 jobs, the biggest loss in its history -- almost 3.2% of its payroll. ... ... The result was a wondrous surge in productivity, defined as the hours needed to make a bicycle, a PC, or a ton of insulation (emphasis mine)

That ‘wondrous surge in productivity’ came from layoffs and by getting less workers to produce the same, or more. No wonder then, that during this same 2009 when profits bounced back and productivity soared, 4 millions more Americans fell into poverty. Or that almost 44 million Americans lived in poverty and 50.7 million were uninsured – the highest ever since the Census was taken.


Let us flip back to the Fortune piece:

The star of 2009 is undoubtedly health care. The sector's earnings jumped to an all-time high of $92 billion.. Health-care earnings rose by $23 billion, or 33%. It wasn't the band of new arrivals that accounted for most of the bounty, but extremely strong earnings from two groups ... medical insurers and pharmaceuticals.

In medical insurance, profits recovered by cutting jobs and raising premiums. Obviously, the number of the uninsured grew.


And there is more.  Almost at the same time that the Census Report on poverty was released, Phoenix Marketing released its report on the Size of Affluent Markets in the US.


‘Impressive Resilience of Affluent Investors’ reads the headline of its executive summary. It estimates that there are about 182,000 ‘deca-millionaire’ households in the US - with $10 million or more in liquid wealth, up 17 percent.  ‘Wealth households’, i.e. those with $1 million plus investible resources, grew by eight percent from 2009 to 2010 and now constitute nearly 5.6 million households.


The exact same story is being played out country after country. Private ‘fortunes’ of the few continue to grow alongside the misfortunes of many.  These fortunes come directly from production and investment strategies which involve layoffs, paying pittance to workers, tax dodging, abuse of tax payers’ money and so on.


And yet, while policy makers speak of poverty, hunger, maternal mortality etc., with so much moral outrage, there is a stony silence on inequality.  Even worse, governments actually design and implement policies which fuel inequality.  The ‘crisis’ was one such moment of policy intervention for inequality par excellence. Those who laid off the most workers got the most by way of bonuses. As a student of mine once said, “this is so not rocket science!”


What lies at the bottom of this inequality? Fundamentally, a completely irrational and unjust way of valuing people’s work.  Over time, the ‘value’ of how much a CEO’s work is worth has increased exponentially while that of the workers have fallen.


In the 70s, American executives made over 30 times what workers made. In 2007, it was 364; in 2009, the figure stands at 263.  By and large, an average CEO made in one day what a worker made in the entire year.  In Canada from where I write, the highest paid 100 Canadian CEOs earned 173 times the average pay of a Canadian in 2008 - up from 104 times in 1998.


Get this: by 1:06 pm on the first working day of the year, the Canadian CEO had already made what an average Canadian earns in the entire year.  Not even a whole day.


The comparisons are much worse if we look at the average worker in the developing world, who are all ‘informal’ workers with no contract or security or bargaining. In India, the alleged emerging economic giant, 93 percent of its workforce is in the informal sector. Wonder how long it takes for a CEO to earn what they earn in 16-17 hours of grueling labor every day, and mostly on empty or quasi-empty stomachs. A nano-second perhaps?


But why is this the case? As Leo Leopold asked very straightforwardly in his piece yesterday: What do these guys actually do that earns them such wealth?


They control.  Their decision-making power is without limits.  The corporate model allows for unlimited control by a few, a very few.  All other stakeholders have only residual power.


This is not to say that corporate power goes entirely unchallenged. Indeed, there are numerous ongoing struggles worldwide that are doing exactly that.


But the challenge is not yet as loud in North America as it needs to be.  And there are perhaps important historical reasons for that. Most importantly, when one is out of work and waiting for another, it is difficult to think of challenging those who we think are our prospective employers.


This is not merely a question of asking the minimum wage to be raised, although that would help. But really, seriously asking how those enormous salaries on the one hand – and the minuscule ones on the other - can be justified.  In some parts of the world they would not be. It depends entirely on how a society collectively comes to decide on the value of people’s work.


A very interesting example is the Scandinavian model, the ‘Management Theory S’ as Professor Robert Schuter calls it.  As he explains, ‘S’ is based on two principles: everyone is equal, and the common good is more important than individual success.  Schuter shows how these two principles keep employee compensation differences to the minimum, allows ‘extras’ to be taxed, and subjects all decision-making to constant scrutiny.
There are also other alternatives. The corporate model is not the only one we have. In India, the largest food products marketing organization, Amul, is a cooperative, i.e., it is owned by its producer members.  It has 2.79 million members, produces 11.22 million liters of milk per day and has very solid fundamentals certified by India’s top credit rating agencies.


Crucial here are the principles at play. In addition to the principle that everyone is equal, and that everyone’s work is of roughly equal value, the cooperative model also asserts that it is the workers/the producers who should collectively own and control what they produce.  Implicit here is the belief that it is people’s work and not just ‘management strategies’ that produces value.


Unfortunately, every crisis drives down the value of work even further and heightens our insecurities so that it is even more difficult to raise these questions.  But we have to: and now.

Banks' Created Fake Demand to Boost Profits and Yearly Bonuses

Over the last two years of the housing bubble, Wall Street bankers perpetrated one of the greatest episodes of self-dealing in financial history.

By Jake Bernstein and Jesse Eisinger, ProPublica
Posted on August 27, 2010

Over the last two years of the housing bubble, Wall Street bankers perpetrated one of the greatest episodes of self-dealing in financial history.

Faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, the banks hit on a solution that preserved their quarterly earnings and huge bonuses: 

They created fake demand.

A ProPublica analysis shows for the first time the extent to which banks -- primarily Merrill Lynch, but also Citigroup, UBS and others -- bought their own products and cranked up an assembly line that otherwise should have flagged.

The products they were buying and selling were at the heart of the 2008 meltdown -- collections of mortgage bonds known as collateralized debt obligations, or CDOs.

As the housing boom began to slow in mid-2006, investors became skittish about the riskier parts of those investments. So the banks created -- and ultimately provided most of the money for -- new CDOs. Those new CDOs bought the hard-to-sell pieces of the original CDOs. The result was a daisy chain [1] that solved one problem but created another: Each new CDO had its own risky pieces. Banks created yet other CDOs to buy those.

Individual instances of these questionable trades have been reported before, but ProPublica's investigation, done in partnership with NPR's Planet Money [2], shows that by late 2006 they became a common industry practice.

[3]

Click to see how frequently the banks turned to their best customers -- their own CDOs.

An analysis by research firm Thetica Systems, commissioned by ProPublica, shows that in the last years of the boom, CDOs had become the dominant purchaser of key, risky parts of other CDOs, largely replacing real investors like pension funds. By 2007, 67 percent of those slices were bought by other CDOs, up from 36 percent just three years earlier. The banks often orchestrated these purchases. In the last two years of the boom, nearly half of all CDOs sponsored by market leader Merrill Lynch bought significant portions of other Merrill CDOs [3].

ProPublica also found 85 instances during 2006 and 2007 in which two CDOs bought pieces of each other's unsold inventory. These trades, which involved $107 billion worth of CDOs, underscore the extent to which the market lacked real buyers. Often the CDOs that swapped purchases closed within days of each other, the analysis shows.

There were supposed to be protections against this sort of abuse. While banks provided the blueprint for the CDOs and marketed them, they typically selected independent managers who chose the specific bonds to go inside them. The managers had a legal obligation to do what was best for the CDO. They were paid by the CDO, not the bank, and were supposed to serve as a bulwark against self-dealing by the banks, which had the fullest understanding of the complex and lightly regulated mortgage bonds.

It rarely worked out that way. The managers were beholden to the banks that sent them the business. On a billion-dollar deal, managers could earn a million dollars in fees, with little risk. Some small firms did several billion dollars of CDOs in a matter of months.

"All these banks for years were spawning trading partners," says a former executive from Financial Guaranty Insurance Company, a major insurer of the CDO market. "You don't have a trading partner? Create one."

The executive, like most of the dozens of people ProPublica spoke with about the inner workings of the market at the time, asked not to be named out of fear of being sucked into ongoing investigations or because they are involved in civil litigation.
Keeping the assembly line going had a wealth of short-term advantages for the banks. Fees rolled in. A typical CDO could net the bank that created it between $5 million and $10 million -- about half of which usually ended up as employee bonuses. Indeed, Wall Street awarded record bonuses in 2006, a hefty chunk of which came from the CDO business.

The self-dealing super-charged the market for CDOs, enticing some less-savvy investors to try their luck. Crucially, such deals maintained the value of mortgage bonds at a time when the lack of buyers should have driven their prices down.

But the strategy of speeding up the assembly line had devastating consequences for homeowners, the banks themselves and, ultimately, the global economy. Because of Wall Street's machinations, more mortgages had been granted to ever-shakier borrowers. The results can now be seen in foreclosed houses across America.
The incestuous trading also made the CDOs more intertwined and thus fragile, accelerating their decline in value that began in the fall of 2007 and deepened over the next year. Most are now worth pennies on the dollar. Nearly half of the nearly trillion dollars in losses to the global banking system came from CDOs, losses ultimately absorbed by taxpayers and investors around the world. The banks' troubles sent the world's economies into a tailspin from which they have yet to recover.

It remains unclear whether any of this violated laws. The SEC has said [5] that it is actively looking at as many as 50 CDO managers as part of its broad examination of the CDO business' role in the financial crisis. In particular, the agency is focusing on the relationship between the banks and the managers. The SEC is exploring how deals were structured, if any quid pro quo arrangements existed, and whether banks pressured managers to take bad assets.

The banks declined to directly address ProPublica's questions. Asked about its relationship with managers and the cross-ownership among its CDOs, Citibank responded with a one-sentence statement:
"It has been widely reported that there are ongoing industry-wide investigations into CDO-related matters and we do not comment on pending investigations."

None of ProPublica's questions had mentioned the SEC or pending investigations.
Posed a similar list of questions, Bank of America, which now owns Merrill Lynch, said:

"These are very specific questions regarding individuals who left Merrill Lynch several years ago and a CDO origination business that, due to market conditions, was discontinued by Merrill before Bank of America acquired the company."

This is the second installment of a ProPublica series about the largely hidden history of the CDO boom and bust. Our first story [6] looked at how one hedge fund helped create at least $40 billion in CDOs as part of a strategy to bet against the market. This story turns the focus on the banks.

Merrill Lynch Pioneers Pervert the Market

By 2004, the housing market was in full swing, and Wall Street bankers flocked to the CDO frenzy. It seemed to be the perfect money machine, and for a time everyone was happy.

Homeowners got easy mortgages. Banks and mortgage companies felt secure lending the money because they could sell the mortgages almost immediately to Wall Street and get back all their cash plus a little extra for their trouble. The investment banks charged massive fees for repackaging the mortgages into fancy financial products. Investors all around the world got to play in the then-phenomenal American housing market.

[1]

Click to see how the CDO daisy chain worked.

The mortgages were bundled into bonds, which were in turn combined into CDOs offering varying interest rates and levels of risk.

Investors holding the top tier of a CDO were first in line to get money coming from mortgages. By 2006, some banks often kept this layer, which credit agencies blessed with their highest rating of Triple A.

Buyers of the lower tiers took on more risk and got higher returns. They would be the first to take the hit if homeowners funding the CDO stopped paying their mortgages. (Here's a video explaining how CDOs worked [7].)

Over time, these risky slices became increasingly hard to sell, posing a problem for the banks. If they remained unsold, the sketchy assets stayed on their books, like rotting inventory. That would require the banks to set aside money to cover any losses. Banks hate doing that because it means the money can't be loaned out or put to other uses.
Being stuck with the risky portions of CDOs would ultimately lower profits and endanger the whole assembly line.
The banks, notably Merrill and Citibank, solved this problem by greatly expanding what had been a common and accepted practice: CDOs buying small pieces of other CDOs.

Architects of CDOs typically included what they called a "bucket" -- which held bits of other CDOs paying higher rates of interest. The idea was to boost overall returns of deals primarily composed of safer assets. In the early days, the bucket was a small portion of an overall CDO.

One pioneer of pushing CDOs to buy CDOs was Merrill Lynch's Chris Ricciardi, who had been brought to the firm in 2003 to take Merrill to the top of the CDO business. According to former colleagues, Ricciardi's team cultivated managers, especially smaller firms.

Merrill exercised its leverage over the managers. A strong relationship with Merrill could be the difference between a business that thrived and one that didn't. The more deals the banks gave a manager, the more money the manager got paid.

As the head of Merrill's CDO business, Ricciardi also wooed managers with golf outings and dinners. One Merrill executive summed up the overall arrangement: "I'm going to make you rich. You just have to be my bitch."

But not all managers went for it.

An executive from Trainer Wortham, a CDO manager, recalls a 2005 conversation with Ricciardi. "I wasn't going to buy other CDOs. Chris said: 'You don't get it. You have got to buy other guys' CDOs to get your deal done. That's how it works.'" When the manager refused, Ricciardi told him, "'That's it. You are not going to get another deal done.'" Trainer Wortham largely withdrew from the market, concerned about the practice and the overheated prices for CDOs.

Ricciardi declined multiple requests to comment.

Merrill CDOs often bought slices of other Merrill deals. This seems to have happened more in the second half of any given year, according to ProPublica's analysis, though the purchases were still a small portion compared to what would come later. Annual bonuses are based on the deals bankers completed by yearend.
Ricciardi left Merrill Lynch in February 2006. But the machine he put into place not only survived his departure, it became a model for competitors.

As Housing Market Wanes, Self-Dealing Takes Off

By mid-2006, the housing market was on the wane. This was particularly true for subprime mortgages, which were given to borrowers with spotty credit at higher interest rates. Subprime lenders began to fold, in what would become a mass extinction. In the first half of the year, the percentage of subprime borrowers who didn't even make the first month's mortgage payment tripled from the previous year.

That made CDO investors like pension funds and insurance companies increasingly nervous. If homeowners couldn't make their mortgage payments, then the stream of cash to CDOs would dry up. Real "buyers began to shrivel and shrivel," says Fiachra O'Driscoll, who co-ran Credit Suisse's CDO business from 2003 to 2008.

Faced with disappearing investor demand, bankers could have wound down the lucrative business and moved on. That's the way a market is supposed to work. Demand disappears; supply follows. But bankers were making lots of money. And they had amassed warehouses full of CDOs and other mortgage-based assets whose value was going down.

Rather than stop, bankers at Merrill, Citi, UBS and elsewhere kept making CDOs.

The question was: Who would buy them?

The top 80 percent, the less risky layers or so-called "super senior," were held by the banks themselves. The beauty of owning that supposedly safe top portion was that it required hardly any money be held in reserve.
That left 20 percent, which the banks did not want to keep because it was riskier and required them to set aside reserves to cover any losses. Banks often sold the bottom, riskiest part to hedge funds [6]. That left the middle layer, known on Wall Street as the "mezzanine," which was sold to new CDOs whose top 80 percent was ultimately owned by ... the banks.

"As we got further into 2006, the mezzanine was going into other CDOs," says Credit Suisse's O'Driscoll.

This was the daisy chain [1]. On paper, the risky stuff was gone, held by new independent CDOs. In reality, however, the banks were buying their own otherwise unsellable assets.

How could something so seemingly short-sighted have happened?

It's one of the great mysteries of the crash. Banks have fleets of risk managers to defend against just such reckless behavior. Top executives have maintained that while they suspected that the housing market was cooling, they never imagined the crash. For those doing the deals, the payoff was immediate. The dangers seemed abstract and remote.

The CDO managers played a crucial role. CDOs were so complex that even buyers had a hard time seeing exactly what was in them -- making a neutral third party that much more essential.

"When you're investing in a CDO you are very much putting your faith in the manager," says Peter Nowell, a former London-based investor for the Royal Bank of Scotland. "The manager is choosing all the bonds that go into the CDO." (RBS suffered mightily in the global financial meltdown, posting the largest loss in United Kingdom history, and was de facto nationalized by the British government.)

Source: Asset-Backed Alert

By persuading managers to pick the unsold slices of CDOs, the banks helped keep the market going. "It guaranteed distribution when, quite frankly, there was not a huge market for them," says Nowell.

The counterintuitive result was that even as investors began to vanish, the mortgage CDO market more than doubled from 2005 to 2006, reaching $226 billion, according to the trade publication Asset-Backed Alert.

Citi and Merrill Hand Out Sweetheart Deals

As the CDO market grew, so did the number of CDO management firms, including many small shops that relied on a single bank for most of their business. According to Fitch, the number of CDO managers it rated rose from 89 in July 2006 to 140 in September 2007.
One CDO manager epitomized the devolution of the business, according to numerous industry insiders: a Wall Street veteran named Wing Chau.

Earlier in the decade, Chau had run the CDO department for Maxim Group, a boutique investment firm in New York. Chau had built a profitable business for Maxim based largely on his relationship with Merrill Lynch. In just a few years, Maxim had corralled more than $4 billion worth of assets under management just from Merrill CDOs.

In August 2006, Chau bolted from Maxim to start his own CDO management business, taking several colleagues with him. Chau's departure gave Merrill, the biggest CDO producer, one more avenue for unsold inventory.

Chau named the firm Harding, after the town in New Jersey where he lived. The CDO market was starting its most profitable stretch ever, and Harding would play a big part. In an eleven-month period, ending in August 2007, Harding managed $13 billion of CDOs, including more than $5 billion from Merrill, and another nearly $5 billion from Citigroup. (Chau would later earn a measure of notoriety for a cameo appearance in Michael Lewis' bestseller "The Big Short [8]," where he is depicted as a cheerfully feckless "go-to buyer" for Merrill Lynch's CDO machine.)

Chau had a long-standing friendship with Ken Margolis, who was Merrill's top CDO salesman under Ricciardi. When Ricciardi left Merrill in 2006, Margolis became a co-head of Merrill's CDO group. He carried a genial, let's-just-get-the-deal-done demeanor into his new position. An avid poker player, Margolis told a friend that in a previous job he had stood down a casino owner during a foreclosure negotiation after the owner had threatened to put a fork through his eye.

Chau's close relationship with Merrill continued. In late 2006, Merrill sublet office space to Chau's startup in the Merrill tower in Lower Manhattan's financial district. A Merrill banker, David Moffitt, scheduled visits to Harding for prospective investors in the bank's CDOs. "It was a nice office," overlooking New York Harbor, recalls a CDO buyer. "But it did feel a little weird that it was Merrill's building," he said.
Moffitt did not respond to requests for comment.

Under Margolis, other small managers with meager track records were also suddenly handling CDOs valued at as much as $2 billion. Margolis declined to answer any questions about his own involvement in these matters.

A Wall Street Journal article [9] ($) from late 2007, one of the first of its kind, described how Margolis worked with one inexperienced CDO manager called NIR on a CDO named Norma, in the spring of that year. The Long Island-based NIR made about $1.5 million a year for managing Norma, a CDO that imploded.

"NIR's collateral management business had arisen from efforts by Merrill Lynch to assemble a stable of captive small firms to manage its CDOs that would be beholden to Merrill Lynch on account of the business it funneled to them," alleged a lawsuit filed in New York state court against Merrill over Norma that was settled quietly after the plaintiffs received internal Merrill documents.

NIR declined to comment.

Banks had a variety of ways to influence managers' behavior.

Some of the few outside investors remaining in the market believed that the manager would do a better job if he owned a small slice of the CDO he was managing. That way, the manager would have more incentive to manage the investment well, since he, too, was an investor. But small management firms rarely had money to invest. Some banks solved this problem by advancing money to managers such as Harding.

Chau's group managed two Citigroup CDOs -- 888 Tactical Fund and Jupiter High-Grade VII -- in which the bank loaned Harding money to buy risky pieces of the deal. The loans would be paid back out of the fees the managers took from the CDO and its investors. The loans were disclosed to investors in a few sentences among the hundreds of pages of legalese accompanying the deals.

In response to ProPublica's questions, Chau's lawyer said, "Harding Advisory's dealings with investment banks were proper and fully disclosed."

Citigroup made similar deals with other managers. The bank lent money to a manager called Vanderbilt Capital Advisors for its Armitage CDO, completed in March 2007.

Vanderbilt declined to comment. It couldn't be learned how much money Citigroup loaned or whether it was ever repaid.

Yet again banks had masked their true stakes in CDO. Banks were lending money to CDO managers so they could buy the banks' dodgy assets. If the managers couldn't pay the loans back -- and most were thinly capitalized -- the banks were on the hook for even more losses when the CDO business collapsed.

Goldman, Merrill and Others Get Tough

When the housing market deteriorated, banks took advantage of a little-used power they had over managers.

Source: Thetica Systems

The way CDOs are put together, there is a brief period when the bonds picked by managers sit on the banks' balance sheets. Because the value of such assets can fall, banks reserved the right to overrule managers' selections.

According to numerous bankers, managers and investors, banks rarely wielded that veto until late 2006, after which it became common. Merrill was in the lead.

"I would go to Merrill and tell them that I wanted to buy, say, a Citi bond," recalls a CDO manager. "They would say 'no.' I would suggest a UBS bond, they would say 'no.' Eventually, you got the joke." Managers could choose assets to put into their CDOs but they had to come from Merrill CDOs. One rival investment banker says Merrill treated CDO managers the way Henry Ford treated his Model T customers: You can have any color you want, as long as it's black.

Once, Merrill's Ken Margolis pushed a manager to buy a CDO slice for a Merrill-produced CDO called Port Jackson that was completed in the beginning of 2007: "'You don't have to buy the deal but you are crazy if you don't because of your business,'" an executive at the management firm recalls Margolis telling him. "'We have a big pipeline and only so many more mandates to give you.' You got the message." In other words: Take our stuff and we'll send you more business. If not, forget it.

Margolis declined to comment on the incident.

"All the managers complained about it," recalls O'Driscoll, the former Credit Suisse banker who competed with other investment banks to put deals together and market them. But "they were indentured slaves." O'Driscoll recalls managers grumbling that Merrill in particular told them "what to buy and when to buy it."
Other big CDO-producing banks quickly adopted the practice.

A little-noticed document released this year during a congressional investigation into Goldman Sachs' CDO business reveals that bank's thinking. The firm wrote a November 2006 internal memorandum [10] about a CDO called Timberwolf, managed by Greywolf, a small manager headed by ex-Goldman bankers. In a section headed "Reasons To Pursue," the authors touted that "Goldman is approving every asset" that will end up in the CDO. What the bank intended to do with that approval power is clear from the memo: "We expect that a significant portion of the portfolio by closing will come from Goldman's offerings."

When asked to comment whether Goldman's memo demonstrates that it had effective control over the asset selection process and that Greywolf was not in fact an independent manager, the bank responded: "Greywolf was an experienced, independent manager and made its own decisions about what reference assets to include. The securities included in Timberwolf were fully disclosed to the professional investors who invested in the transaction."

Greywolf declined to comment. One of the investors, Basis Capital of Australia, filed a civil lawsuit in federal court in Manhattan against Goldman over the deal. The bank maintains the lawsuit is without merit.

By March 2007, the housing market's signals were flashing red. Existing home sales plunged at the fastest rate in almost 20 years. Foreclosures were on the rise. And yet, to CDO buyer Peter Nowell's surprise, banks continued to churn out CDOs.

"We were pulling back. We couldn't find anything safe enough," says Nowell. "We were amazed that April through June they were still printing deals. We thought things were over."

Instead, the CDO machine was in overdrive. Wall Street produced $70 billion in mortgage CDOs in the first quarter of the year.

Many shareholder lawsuits battling their way through the court system today focus on this period of the CDO market. They allege that the banks were using the sales of CDOs to other CDOs to prop up prices and hide their losses.

"Citi's CDO operations during late 2006 and 2007 functioned largely to sell CDOs to yet newer CDOs created by Citi to house them," charges a pending shareholder lawsuit against the bank that was filed in federal court in Manhattan in February 2009. "Citigroup concocted a scheme whereby it repackaged many of these investments into other freshly-baked vehicles to avoid incurring a loss."

Citigroup described the allegations as "irrational," saying the bank's executives would never knowingly take actions that would lead to "catastrophic losses."

In the Hall of Mirrors, Myopic Rating Agencies

The portion of CDOs owned by other CDOs grew right alongside the market. What had been 5 percent of CDOs (remember the "bucket") now came to constitute as much as 30 or 40 percent of new CDOs. (Wall Street also rolled out CDOs that were almost entirely made up of CDOs, called CDO squareds [11].)
The ever-expanding bucket provided new opportunities for incestuous trades.

It worked like this: A CDO would buy a piece of another CDO, which then returned the favor. The transactions moved both CDOs closer to completion, when bankers and managers would receive their fees.

Source: Thetica Systems

ProPublica's analysis shows that in the final two years of the business, CDOs with cross-ownership amounted to about one-fifth of the market, about $107 billion.
Here's an example from early May 2007:

• A CDO called Jupiter VI bought a piece of a CDO called Tazlina II.
• Tazlina II bought a piece of Jupiter VI.

Both Jupiter VI and Tazlina II were created by Merrill and were completed within a week of each other. Both were managed by small firms that did significant business with Merrill: Jupiter by Wing Chau's Harding, and Tazlina by Terwin Advisors. Chau did not respond to questions about this deal. Terwin Advisors could not reached.

Just a few weeks earlier, CDO managers completed a comparable swap between Jupiter VI and another Merrill CDO called Forge 1.

Forge has its own intriguing history. It was the only deal done by a tiny manager of the same name based in Tampa, Fla. The firm was started less than a year earlier by several former Wall Street executives with mortgage experience. It received seed money from Bryan Zwan, who in 2001 settled an SEC civil lawsuit over his company's accounting problems in a federal court in Florida. Zwan and Forge executives didn't respond to requests for comment.

After seemingly coming out of nowhere, Forge won the right to manage a $1.5 billion Merrill CDO. That earned Forge a visit from the rating agency Moody's.

"We just wanted to make sure that they actually existed," says a former Moody's executive. The rating agency saw that the group had an office near the airport and expertise to do the job.

Rating agencies regularly did such research on managers, but failed to ask more fundamental questions. The credit ratings agencies "did heavy, heavy due diligence on managers but they were looking for the wrong things: how you processed a ticket or how your surveillance systems worked," says an executive at a CDO manager. "They didn't check whether you were buying good bonds."

One Forge employee recalled in a recent interview that he was amazed Merrill had been able to find buyers so quickly. "They were able to sell all the tranches" -- slices of the CDO -- "in a fairly rapid period of time," said Rod Jensen, a former research analyst for Forge.

Forge achieved this feat because Merrill sold the slices to other CDOs, many linked to Merrill.

The ProPublica analysis shows that two Merrill CDOs, Maxim II and West Trade III, each bought pieces of Forge. Small managers oversaw both deals.

Forge, in turn, was filled with detritus from Merrill. Eighty-two percent of the CDO bonds owned by Forge came from other Merrill deals.

Citigroup did its own version of the shuffle, as these three CDOs demonstrate:

• A CDO called Octonion bought some of Adams Square Funding II.
• Adams Square II bought a piece of Octonion.
• A third CDO, Class V Funding III, also bought some of Octonion.
• Octonion, in turn, bought a piece of Class V Funding III.

All of these Citi deals were completed within days of each other. Wing Chau was once again a central player. His firm managed Octonion. The other two were managed by a unit of Credit Suisse. Credit Suisse declined to comment.

Not all cross-ownership deals were consummated.

In spring 2007, Deutsche Bank was creating a CDO and found a manager that wanted to take a piece of it. The manager was overseeing a CDO that Merrill was assembling. Merrill blocked the manager from putting the Deutsche bonds into the Merrill CDO. A former Deutsche Bank banker says that when Deutsche Bank complained to Andy Phelps, a Merrill CDO executive, Phelps offered a quid pro quo: If Deutsche was willing to have the manager of its CDO buy some Merrill bonds, Merrill would stop blocking the purchase. Phelps declined to comment.

The Deutsche banker, who says its managers were independent, recalls being shocked: "We said we don't control what people buy in their deals." The swap didn't happen.

The Missing Regulators and the Aftermath

In September 2007, as the market finally started to catch up with Merrill Lynch, Ken Margolis left the firm to join Wing Chau at Harding.

Chau and Margolis circulated a marketing plan for a new hedge fund to prospective investors touting their expertise in how CDOs were made and what was in them. The fund proposed to buy failed CDOs -- at bargain basement prices. In the end, Margolis and Chau couldn't make the business work and dropped the idea.

Why didn't regulators intervene during the boom to stop the self-dealing that had permeated the CDO market?

No one agency had authority over the whole business. Since the business came and went in just a few years, it may have been too much to expect even assertive regulators to comprehend what was happening in time to stop it.

While the financial regulatory bill passed by Congress in July creates more oversight powers, it's unclear whether regulators have sufficient tools to prevent a replay of the debacle.

In just two years, the CDO market had cut a swath of destruction. Partly because CDOs had bought so many pieces of each other, they collapsed in unison. Merrill Lynch and Citigroup, the biggest perpetrators of the self-dealing, were among the biggest losers. Merrill lost about $26 billion on mortgage CDOs and Citigroup about $34 billion.