Government takeover to a T
Government takeover to a T
By Julian Delasantellis
Asia Times
Dec 24, 2009
The 1990 gangster movie Goodfellas was a hit with movie critics and aficionados of the genre; it had plenty of blood and guts and mafia "hits", but it was also mostly a true story of the desire of a young gangster (played by Ray Liotta) to move to the top of an Italian American criminal gang in America, a desire being thwarted by the fact he wasn't Italian American.
In one famous scene, the gang is in one of their private haunts, playing cards. One, Tommy, (Joe Pesci) is dissatisfied with the slow pace with which his drink order is being filled by the young mafia functionary, Spider (Michael Imperioli, who would go on to reach the pinnacle of gangster role fame as Christopher Moltisanti in The Sopranos) attending the game.
Tommy, never the cool, collected type, takes out his small revolver, and waves it around in an attempt to spur Spider's attentions and efforts. The gun goes off, Spider is shot in the foot.
The next week, Spider is back, with a huge bandage on his wounded foot. Tommy is disrespecting him again, but now Spider has had enough and he suggests that Tommy perform a grammatically impossible copulation with himself. The other gang members are amused at the braggadocio, not Tommy. He fixes Spider with an ice-cold stare, then kills him by pumping five bullets into to him with a big .45 caliber cannon.
I wonder. When Goldman Sachs president Lloyd Blankfein settles in for a friendly card game after his day's work of ruling the world's markets and finances, if one of his flunkies is none too quick on the uptake, will Blankfein blow this youngster away, just like poor Spider?
"Spider, go get me another [1945 Chateau Mouton-Rothschild Jeroboam/AIG credit default swap/poached killer vampire squid]."
"Yes, sir," replies Spider, who probably did not think this would be his life's work after following up on his fellowship with the Clinton Global Initiative with a summa cum laude medical degree from Johns Hopkins, then a similarly ranked law degree from Stanford, then a top of the class MBA from Harvard.
But what if this is not brought fast enough for Blankfein's tastes. Just how far will a Wall Street unrestrained by any sense of rules or discipline go?
A few weeks ago, under the byline of commentator Alice Schroeder, Bloomberg News published a fairly curious story, about "Arming Goldman [Sachs] with pistols". In it, Schroeder claimed "that senior Goldman people have loaded up on firearms and are now equipped to defend themselves if there is a populist uprising against the bank."
Schroeder provided precious little evidence for this remarkable assertion; the most was that Blankfein "got permission from the local authorities to install a security gate at his house two months before Bear Stearns Cos collapsed". Other news outlets dug into the story and found it wanting. The Wall Street Journal's Dealblog blog found out that no Goldman employee had been granted a so-called "carry permit" in six years; carrying a concealed firearm in New York without one was considered a serious crime, unlike the current situation in most American sunbelt cities, where not wearing one gets you sized up for a waterboard.
Bloomberg pulled the story off the site for a day or two, then put it back up with corrections.
But I wonder, what if the story had been absolutely true? What if everybody in Goldman has the necessary permits, but, as with their skill in high-frequency computer trading, they've managed to bury the record somewhere in their worldwide forests of silicon? Maybe their task was even easier. Maybe, in much the same way that they've bought the US government lock, stock and barrel this year, they've done likewise with the bureaucrats and pencil pushers in the New York Police Department's permit office.
The key point is, after this past year, does anybody really doubt that they couldn't, or, more importantly, that they wouldn't?
If you looked around the world situation a year ago to try to guess who would be on top of the greasy pole of power today, the US banking industry might not have been on your list of favorites. Back then, most of its major players had already had to go running for the first round of government bailout, with many anticipating more life preservers to come.
Bank and financial stock prices were still in freefall, as they would be until the market lows in early March of this year. Indeed, it was in February that many observers such as former International Monetary Fund official Simon Johnson, economics columnist Paul Krugman, even conservative South Carolina Republican Senator Lindsay Graham, called for an expedited end of the banking crisis by means of the nationalization of America's banking system once and for all.
Then, on March 10, something anomalous happened - Citigroup reported better-than-expected profits in its first-quarter earnings statement. Nobody knew how or why this happened. But little did we know just how momentously significant it was. It was here, from about March 1-10 depending on the market, that most world stock indices made the bottoms that have held do far, with US stock prices up almost 65% since then.
With the clarion hindsight of time, we can see the hand behind the magician's trick. The main factor pressuring the banks, indeed, pressuring the entire world economy, was the question of what to do with the trillions, or possibly tens of trillions, of mortgages and mortgage-backed securities still in the banks' portfolios, the vast majority worth well under their par values due to the decline in value of the properties on which the initial mortgages were written.
For about a year, now many analysts have opined that unless something is done to get these securities out of the banks' portfolios, their continued festering would pressure and infect the global economy.
This was to have been the original intent of the Troubled Asset Relief Program (TARP) introduced by then-Treasury secretary, Henry Paulson, in September 2008, as the credit markets froze and ossified towards what was feared to be a complete shutdown. The Paulson Plan, like most of its successor ideas to deal with the mortgage security problem, foundered on a simple contradiction - how much the government should pay for the mortgage securities.
On the secondary markets, since these securities traded at prices of 20 cents to the dollar or lower, they traded infrequently or never - the banks would rather let them rot away in their portfolios, thus inhibiting new lending due to the hit the reduced values did to their capital accounts. The government, on the other hand, had to look after its balance sheet as well as the overall health of the general economy. Offering cheap prices for the securities advanced the government's fiscal position, but it did little to get the US economy going again.
By mid-March, traders began to believe the message of the many administration leaks appearing in the press - that, when prices were finally made and offered for the mortgage-backed securities, the government would be cognizant of the banks' balance sheet needs; in other words, amazingly enough, it was almost as if the administration had decided that it, and the general public, was going to be the one taking the bullet for, and rather than, the banks.
What was the government's plan for the banks? It announced that it would involve so called "stress tests" of banks' ability to maintain financial viability in the case of another economic leg downward. However, like a large American university more concerned with its football results than its academic record, the Barack Obama administration soon found a way to ensure that the jocks breezed through this yet other instance of life's travails.
Since the beginning of the financial crisis, many financial observers, usually on the right side of the political spectrum, contended that there really wasn't any financial crisis at all, just a phenomenon arising from out of the mis-application of an obscure accounting rule, FAS 157, which called for banks to assign values for securities in their portfolio according to market prices. The markets were wrong (a remarkable assertion for conservatives) in that the low prices for mortgage-backed securities reflected actual values; just allow them to value the prices higher, and all the bad things would reverse themselves and everything would be fine again.
Therefore, a few eyebrows were raised when, in early April, the Treasury Department did exactly that - it loosened FAS 157. Exactly as predicted, what this did was to make bank balance sheets overnight look far healthier than they appeared previously. And, when these new, healthier bank asset values were applied to the stress tests, they came out better as well. Quite in contrast to the PR verbiage about stock prices and markets being ever-reliable lanterns of truth in a miasmic fog of lies, it appears that the soft lies of profit will always be more desired than the jagged, lacerating edges of truth.
Taken together, the subterfuges of spring went a long way towards keeping the banks alive until the present, for the banks anyway, happier holiday season; but it would not have been sufficient enough for today's circumstance, with society's keys to the kingdom actually jangling around on the banks' trousers.
Any little girl running a lemonade stand knows the secrets to prosperity; buy 50 cents of lemonade mix, add iced water and a smile, sell for $5. For the banks, it's just about the same - substituting a Hugo Boss suit for the gingham dress. You buy your product cheap, sell it dear.
The banks' product is, of course, money; the cost for acquiring it is the interest rate. For over a year now, the interest rate banks charge to each other to fund their overnight loan balances has been at a historically low rate of between 0.0% and 0.25%.
But for the big banks, the new Masters of the Universe, it's an even sweeter deal. Because of the Obama/Timothy Geithner Treasury fairly explicitly telling the public that it will not countenance these banks' failure, that they are in fact "too big to fail", these de facto wards of the state get to borrow at rates, from 0.0% to 0.1%, that only would apply if they had in fact been declared full wards of the state.
But still, that's not where the fun party is. Because these bankers had previously proved themselves so moronically maladroit at assessing the risks posed by their borrowers, like giving US$1 million mortgages to those who could barely work the zero key on their calculator, now banks would be encouraged to use their cheap money only on ultra-safe investments, like one-year US Treasury securities, currently paying around 3.6%. The revenue from these investments, coming from the borrower generally considered to be the world's No 1 quality borrower, could go a long way towards repairing the banks' fractured balance sheets and get them ready for life once again out from under the government's wings.
It hasn't worked out that way. The banks have learned that if they can earn a worry-free, risk-free $1.8 million investing $50 million at 3.6%, how much better would it be to just as easily earn $1.8 billion from investing $50 billion under the same terms.?
The flip side of the banks' carefree prosperity is a virtual siege war being conducted on other parts of the economy, as the money the private economy used to rely on for operation and expansion goes instead back into these Treasury securities. Since the crises of September 2008, the monetary base has grown by almost 2.5 times, as the Federal Reserve injected massive quantities of money through its quantitative easing strategy; in contrast, the monetary aggregate known as M-2 has only grown by about 7.5%, indicating just how effectively the banks are starving the general economy of all that new extra liquidity.
What really raises the ire of the general public on these issues is not the prospect of a new ruling class chosen entirely by un-democratic means, but the comparatively inconsequential issue of corporate bonuses, a somewhat minor affair considering the total aggregate sums the sector as a whole is withdrawing from the general economy, and the issue of the TARP loans.
Both US political parties are now furiously trying to establish their bona fides as agents of change, but as for the issue of the role of finance capital in politics, they both seem quite content singing the song that the country knows well, and, judging from their electoral rejection of those who try to change it, loves the most.
Recently in Washington, Obama held a "jobs summit", seeking to un-dam the flow of investment capital to new industries so they can expand product lines and create new jobs. Even though they were the intended audience for the pitch, and even though the railroad service is better between New York City and Washington DC than anywhere else on the North American continent, three bankers, John Mack of Morgan Stanley, Richard Parsons of Citigroup, and Lloyd Blankfein of Goldman Sachs, declined to attend, citing the difficulty of their private planes to make the 320 kilometer journey in freezing fog.
All through this past year, it has been Goldman Sachs that has been portrayed in the financial and popular media as having the strongest crime organization amongst the five New York families, the Gambino family of finance. Whenever there was a story about a financial institution going bad, it was usually one of Goldman's goombas being led away with a raincoat over their face.
Early in the year, it was the news that Goldman was attempting to arrange the repaying of its $10 billion in TARP loans. Some wondered where this bank, albeit the best managed, most profitable of the majors, had managed to cobble together the $10 billion; others quite correctly assumed that, free of the TARP's payroll restrictions, the bank would be free to offer its senior capos truly astounding bonus payments. This they did, to the tune of about $11 billion in bonuses for the spring quarter, $17 billion for autumn.
Add to that the exposure of Goldman's dominance in what became known as "High Frequency Trading" (see Goldman Sachs - the lords of time Asia Times Online, August 5, 2009) as well as the reports of the $13 billion in US taxpayer money the firm sucked through the dead carcass of AIG, and one can see why Goldman never even attempted an ad campaign featuring it as "your friendly local neighborhood bank".
In December, Goldman chief executive officer Blankfein actually tried to defend himself by claiming his bank was just doing "God's work", but he quickly had to backtrack on that - Americans must have remembered that this was the same sales pitch the Conquistadores tried to sell their rule of whips and chains to the first nations of South America.
But it's more than just one person, Blankfein or anybody, and it's more than just one firm, Goldman.
Part of it is America now commencing its 30th year of a conservative ascendency, in spite of what we now know were the two false dawns of liberalism - eight years with Bill Clinton and more recently Obama. Part of it must be the steering of the Democratic Party to the right after Clinton's congressional electoral thumping in 1994, after which labor/consumerist voices such as Robert Reich were pushed aside and delegitimized in favor of Wall Street's contingent of those such as Robert Rubin and Lawrence Summers.
A very large part of it is the fact that, if Americans continue to refuse to alter the current dynamic that has money ruling its politics, it is sheer sophistry to express a populist outrage when the public continually places finance capital first in line with knife and fork every time the solons ring the dinner bell.
But all tyrannies breed a resistance, and so has the pax financia. Curiously, if all the new rulers are marked by the multitude of initials representing the multiplicity of academic degrees that supposedly represent their credentials and legitimacy of rule, the resistance is marked by its absolute satisfaction over its lack of such awards.
Yes, I'm talking about the tea party movement.
The rise of the tea party movement in response to Obama's first months in office was the most fascinating feature of American public and economic life this past year, and possibly one of the most momentous. First, there is a very significant base of secessionism within the movement. Even if this does not lead to another civil war in the style of the 1860s, it could lead to such a devolution of resources and authority of the central government to the states so as to put the United States' continued existence as a federal state in question.
If the United States reverts to a weak central state overwhelmed by the power of the individual states that compose it, as was the case before Franklin Roosevelt's New Deal in 1933, or maybe even before the creation of the Federal Reserve (which many in the tea party groupings want to abolish) in 1913, will the US still be a credible enough agent to assume its place as the most important player in the management of the world financial system?
If in the future there are a dozen fiscal and monetary policies where once there was one unified policy, will they be able to find and steer a collective voice sufficient to right the sails of a world economy in some future crisis, or will the Europeans and Asians be then forced to assume the world economic power positions they have previously eschewed?
But the other thing I find fascinating is just how close the tea-party analysis comes to what's actually going on here. Through all their trailer-park torpor and beer-nut bravery comes the truth. The tea folk see the government taking over the banks; no, what we actually saw this year was the banks taking over the government. While the process goes on, the flows of power between the two processes must look very similar; it is only when they are concluded do we see just how massively the people's lives have changed.
And if any member of the populace objects, Blankfein et al can just "make 'em an offer they can't refuse". No one has yet.
Julian Delasantellis is a management consultant, private investor and educator in international business in the US state of Washington. He can be reached at juliandelasantellis@yahoo.com.
http://www.atimes.com/atimes/Global_Eco ... 4Dj01.html
