Original Link: http://www.nader.org/index.php?/archives/2141-Time-for-Citizens-to-Convene.html
By Ralph Nader
Just when many conditions seemed ripe for a progressive political movement, the likelihood is fading fast. Concentrated corporate power over our political economy and its control over peoples lives knows few boundaries.
As Republican investor advocate leader Robert Monks puts it: “The United States is a corporatist state. This means that individuals are largely excluded both in the political and corporate spheres.”
Since Wall Street’s self-inflicted multi-trillion dollar collapse last year, the corporate supremacists have shown no remorse. They have become more aggressive: they are blocking regulatory reforms; pouring campaign donations into the governing Democrats’ coffers; and, shamelessly demanding more bailouts, subsidies and tax reductions. They also continue to block avenues for judicial justice by aggrieved people, whether they be the wrongfully injured, defrauded consumers and investors, or jettisoned workers and bilked pensioneers.
The problem: large corporations have too many structural powers over the citizenry. These “artificial persons” have acquired the constitutional rights originally given in 1787 only to “natural persons.” In fact, corporations have enormously greater privileges and immunities than the people themselves because of their global control over politicians, capital, labor and technology.
Normal sanctions do not adequately deter multinational companies that can obscure their culpability, escape jurisdictions or create their own parents (holding companies) and endless progeny (subsidiaries) to evade or avoid accountability.
Even the most ardent progressives in Congress, and the most organized progressive groups, cannot begin to deal with such gigantic mismatches.
Decades ago, there was more debate about the need for different “rules of conduct,” to use conservative Frederick A. Hayek’s phrase, between corporations and human beings. Supreme Court Justice Louis Brandeis warned about corporations becoming “Frankensteins.” Presidents Teddy Roosevelt and William Howard Taft wanted to replace the permissive state chartering laws with tough federal chartering laws for large corporations.
For two generations the ever-expanding superior status of corporations has gone undiscussed in political realms. During that time, corporations and their attorneys rode roughshod over the “we the people” preamble of the Constitution. Our charter of government never mentions the word “corporation.”
Unabated, the corporate crime wave continues. The corporate welfare kings get fatter, the power disparity expands between corporations and shrinking unions, and the pull-down pressures, created by the corporate shipment of jobs and industries to repressive regimes abroad, further corrodes American work opportunities. More of government, including military functions, is being corporatized despite recurring reports of rising waste, fraud and abuse.
The federal government’s budget for auditors, investigators, inspectors and prosecutors is laughable, given the scale of looting: the defrauding of medicare; abuses of Pentagon contracts; the taking of minerals on the public lands; and the giveaways of government research and development to favored companies.
Corporate profits keep going up, except for bailout periods, while most Americans’ standards of living decline. Our country, so full of unapplied solutions, is gridlocked—stuck in traffic. Record levels of poverty, unemployment, home foreclosures, consumer debt and bankruptcies, and people lacking health insurance persist, yet corporate political power has not waned. A bad sign. Indeed, it has increased, notwithstanding large majorities of Americans decrying too much corporate control over their lives. The leave-it-to-the market ideology of Big Business, and its claims of patriotism, have lost credibility in this globalized era. Yet, the myth lives on even as socialism routinely saves big capitalism from its own greed.
What can active progressives do? In Congress, amongst the Republicans and corporate Democrats, the small progressive caucus of 83 members generates little political impact. Ironically, many of those progressive legislators are busy dialing for the same commercial campaign dollars.
Outside Congress, progressive groups have been on the defensive for so many years that they have few offensive political strategies. The two parties are in the narrowest channels of self-perpetuation. They gerrymander their opponents into one-party districts and together produce a matrix of obstacles to keep competition from third parties at bay.
Both parties give preferential access to the hordes of drug, coal, banking and other industry lobbyists, who are allowed de facto to choose many of the nominees that lead the government’s departments, such as the Defense and Treasury Departments.
Enough abuses have been documented. Enough power has been concentrated to shred our democratic processes and institutions. It is time to decisively shift power from the few to the many. Democratic power is the essence of progressive political philosophy, and the precondition for the emergence of a just society nourished by higher public expectations.
How to begin? Progressives—elected, civic, labor and funders—need to come together in a national convention to aggregate the existing forces for change. Such a gathering could create a clear-eyed vision of the common good to shatter debilitating public cynicism and passivity.
In attendance must be a broad range of energetic community organizers, thinkers, the seriously generous progressive mega-rich and the heroic dynamos who have risen from their suffering to act on behalf of “liberty and justice for all.”
There is ample historic precedent for the galvanizing effect of founding social justice conventions. This proposed convocation needs to take civic and political action to unprecedented levels, powerfully fueled by committed resources and strategies to build enduring democratic institutions.
Unused knowledge, and many working models of community economics, environmental advances and educational quality exist to further the larger progressive dynamic.
Lincoln once observed the crucial importance of “public sentiment” for moving a society forward. That “public sentiment” is here, deep, widespread and ready for clearly explained “redirections.”
If a mantra is needed in the convention hall, let the eternal words of the Roman, Marcus Cicero, be emblazoned for all to see: “Freedom is participation in power.” For this aspiration places responsibility where it must always reside: on the shoulders, in the minds, and in the hearts of an empowered American people.
Sunday, January 3, 2010
Saturday, January 2, 2010
GOP Healthcare Plan: Delay, Obstruct, Lie, Rinse, Repeat
Original Link: http://www.dailykos.com/storyonly/2009/7/21/755964/-GOP-Healthcare-Plan:-Delay,-Obstruct,-Lie,-Rinse,-Repeat
The RNC is building on the GOP consultant Alex Castellanos's messaging memo advising Republicans: "If we slow this sausage-making process down, we can defeat it, and advance real reform that will actually help. Key Message Point: We've got to 'SLOW DOWN the OBAMA EXPERIMENT WITH OUR HEALTH.'" The external manifestation of that is their scary Web site, and now Sam Stein at HuffPo has the lastest internal effort, a private memo from the RNC to anti-reform advocates (i.e., Republicans).
The memo, which was obtained by the Huffington Post from a Democratic source, provides the clearest illustration to date of the political playbook being used to stop Democratic attempts at a health care overhaul. Much of the material mirrors the speeches and presentations made by conservatives both inside and out of elected office to date. Obama's plan for health care is deemed an "experiment" and a "risk" that could bankrupt the country and dangerously change the doctor-patient relationship.
In particular, the 12-page memo makes the case that it is a Republican priority to slow down the consideration of health care reform before it can become codified.
"The Republican National Committee will engage in every activity we can to slow down this mad rush while promoting sensible alternatives that address health care costs and preserve quality," the memo affirmatively declares.
Of course, those "sensible alternatives" from the Republicans have yet to actually materialize, and don't go looking for them in this memo, either.
As for a Republican alternative to the president's agenda, the RNC memo doesn't offer much in the way of details, save to make the argument that the status quo isn't as bad as it is being painted.
"The Republican Party knows we have the best health care system in the world," the memo declares. "The Republican Party also knows it is a system in need of reform because it is costing our families and our businesses too much."
Here are the RNC talking points you're going to be hearing ad nauseum over the next few weeks from conservative pundits and on the floor of the House and Senate. And of course, Michael Steele.
President Obama and Democrats are conducting a grand experiment with our economy, our country, and now our health care.
President Obama's massive spending experiments have created more debt than at any other time in our nation's history.
The President experimented with a $780 billion dollar budget-busting stimulus plan and unemployment is still rising. The President experimented with banks and auto companies, and now we're on the hook for tens of billions of dollars with no exit plan.
Now the President is proposing more debt and more risk through a trillion dollar experiment with our health care.
Democrats are proposing a government controlled health insurance system, which will control care, treatments, medicines and even what doctors a patient may see.
This health care experiment will have consequences for generations, but President Obama and Democrats want to ram this legislation through Congress in two months.
President Obama's health care experiment is too much, too fast, too soon. Our country cannot afford to fix health care through a rushed experiment.
Americans want health care reform that addresses, not increases, cost or debt.
Government takeover is the wrong way to go -- health care decisions should remain between the doctor and the patient.
I particularly like that last point--healthcare decisions between a doctor and patient, unless of course the patient is a pregnant woman. In which case government gets to dictate.
This is just longer form (10 pages, in fact) Bill Kristol. Kill it, kill it through delay. The sooner Democrats on the Hill recognize that delaying this process just plays into the Republicans' hands, the better.
But it also has the potential to put the Republicans in deeper political doo-doo, as the White House well knows. They are exposing the GOP's effort to kill healthcare reform for what it really is--an effort to bring down a very popular president. They're playing politics with our lives.
Update: It gets even more absurd. Check out this from Greg Sargent:
Turns out that RNC chair Michael Steele, who agreed approvingly that health care failure could be Obama’s "Waterloo," himself lacked health insurance for years and even advised his own children not to get hurt because he couldn’t afford to pay their medical bills.
The RNC is building on the GOP consultant Alex Castellanos's messaging memo advising Republicans: "If we slow this sausage-making process down, we can defeat it, and advance real reform that will actually help. Key Message Point: We've got to 'SLOW DOWN the OBAMA EXPERIMENT WITH OUR HEALTH.'" The external manifestation of that is their scary Web site, and now Sam Stein at HuffPo has the lastest internal effort, a private memo from the RNC to anti-reform advocates (i.e., Republicans).
The memo, which was obtained by the Huffington Post from a Democratic source, provides the clearest illustration to date of the political playbook being used to stop Democratic attempts at a health care overhaul. Much of the material mirrors the speeches and presentations made by conservatives both inside and out of elected office to date. Obama's plan for health care is deemed an "experiment" and a "risk" that could bankrupt the country and dangerously change the doctor-patient relationship.
In particular, the 12-page memo makes the case that it is a Republican priority to slow down the consideration of health care reform before it can become codified.
"The Republican National Committee will engage in every activity we can to slow down this mad rush while promoting sensible alternatives that address health care costs and preserve quality," the memo affirmatively declares.
Of course, those "sensible alternatives" from the Republicans have yet to actually materialize, and don't go looking for them in this memo, either.
As for a Republican alternative to the president's agenda, the RNC memo doesn't offer much in the way of details, save to make the argument that the status quo isn't as bad as it is being painted.
"The Republican Party knows we have the best health care system in the world," the memo declares. "The Republican Party also knows it is a system in need of reform because it is costing our families and our businesses too much."
Here are the RNC talking points you're going to be hearing ad nauseum over the next few weeks from conservative pundits and on the floor of the House and Senate. And of course, Michael Steele.
President Obama and Democrats are conducting a grand experiment with our economy, our country, and now our health care.
President Obama's massive spending experiments have created more debt than at any other time in our nation's history.
The President experimented with a $780 billion dollar budget-busting stimulus plan and unemployment is still rising. The President experimented with banks and auto companies, and now we're on the hook for tens of billions of dollars with no exit plan.
Now the President is proposing more debt and more risk through a trillion dollar experiment with our health care.
Democrats are proposing a government controlled health insurance system, which will control care, treatments, medicines and even what doctors a patient may see.
This health care experiment will have consequences for generations, but President Obama and Democrats want to ram this legislation through Congress in two months.
President Obama's health care experiment is too much, too fast, too soon. Our country cannot afford to fix health care through a rushed experiment.
Americans want health care reform that addresses, not increases, cost or debt.
Government takeover is the wrong way to go -- health care decisions should remain between the doctor and the patient.
I particularly like that last point--healthcare decisions between a doctor and patient, unless of course the patient is a pregnant woman. In which case government gets to dictate.
This is just longer form (10 pages, in fact) Bill Kristol. Kill it, kill it through delay. The sooner Democrats on the Hill recognize that delaying this process just plays into the Republicans' hands, the better.
But it also has the potential to put the Republicans in deeper political doo-doo, as the White House well knows. They are exposing the GOP's effort to kill healthcare reform for what it really is--an effort to bring down a very popular president. They're playing politics with our lives.
Update: It gets even more absurd. Check out this from Greg Sargent:
Turns out that RNC chair Michael Steele, who agreed approvingly that health care failure could be Obama’s "Waterloo," himself lacked health insurance for years and even advised his own children not to get hurt because he couldn’t afford to pay their medical bills.
The Numbers Don’t Lie--GOP Obstruction Efforts Unprecedented in Senate
Original Link: http://www.commondreams.org/newswire/2009/12/23-7
If it has seemed that Republican Senators have been expending tremendous amounts of energy for the sole purpose of slowing down the work of the Senate and the President’s reform agenda, that’s because they have.
A review of cloture attempts in past sessions of Congress reveals that Republican senators have gone to record lengths to use Senate rules with the goal of slowing down the work of Congress, often when they have no expectation of stopping legislation or even winning concessions.
So far, GOP foot dragging has forced the Senate leadership to file 67 cloture petitions and forced cloture votes on 38 occasions [1] . Those numbers, while high, aren’t yet on pace to break the record set by the GOP in the last Congress of 139 motions filed and 112 forced votes. But what is remarkable is that, of those 38 votes forced this year, cloture was invoked 34 times.
That means a full 89% of the time, the cloture vote did nothing but delay the inevitable—a huge increase from the previous high of 56%.
If it has seemed that Republican Senators have been expending tremendous amounts of energy for the sole purpose of slowing down the work of the Senate and the President’s reform agenda, that’s because they have.
A review of cloture attempts in past sessions of Congress reveals that Republican senators have gone to record lengths to use Senate rules with the goal of slowing down the work of Congress, often when they have no expectation of stopping legislation or even winning concessions.
So far, GOP foot dragging has forced the Senate leadership to file 67 cloture petitions and forced cloture votes on 38 occasions [1] . Those numbers, while high, aren’t yet on pace to break the record set by the GOP in the last Congress of 139 motions filed and 112 forced votes. But what is remarkable is that, of those 38 votes forced this year, cloture was invoked 34 times.
That means a full 89% of the time, the cloture vote did nothing but delay the inevitable—a huge increase from the previous high of 56%.
Moreover many of these votes didn’t just fail: they failed by such significant margins that no one, especially not an experienced vote counter like Senate Minority Leader Mitch McConnell, could possibly have expected they could actually pass. In fact, in a majority of cases, 65 or more Senators voted to cut off debate. In several cases the number reached into the seventies and eighties, and in one case 97 Senators voted in favor of cloture, but not before the maneuver chewed up valuable time.
Far from being a meaningless exercise, this effort to force unnecessary cloture votes has wasted an enormous amount of time. After cloture is filed it takes up to two days before Senate rules allow a vote on the petition. Then, Senate rules permit the Republicans to insist on an additional 30 hours of post-cloture debate. That means even when only a small minority of Senators actually oppose cloture, they have the ability to chew up days of the Senate’s time.
In 2010, the Senate will likely consider legislation addressing health care, global warming, the economy, immigration, and workers’ rights in addition to its obligation to confirm Supreme Court Justices, members of the federal bench and crucial administration officials. There’s plenty of work to be done, and time is already tight without needless intentional delay.
The Republican Senators should stop trying to grind the Senate to a halt and start working on the issues that Americans elected them to address.
Shifting Loses From the Banks to Taxpayers - Lining Up for the Wall Street Gravy Train
Original Link: http://www.counterpunch.org/whitney12312009.html
By MIKE WHITNEY
British economist John Maynard Keynes, believed in capitalism, but he was also sharply critical of its structural flaws. He summed it up succinctly like this:
Our analysis shows... that long-run development is not inherent in the capitalist economy. Thus, specific 'development factors' are required to sustain a long-run upward movement.
What Keynes was alluding to is the fact that mature capitalist economies tend towards stagnation. What happens, is that the rate of return on investment begins to dwindle as overcapacity builds. That causes declining profits which lead to belt-tightening, rising unemployment and falling demand. As investment drops off further, growth slows correspondingly and the economy dips into a protracted slump. This corrosive stagnation is the challenge that all advanced capitalist economies face. The solution--as Keynes notes--lies in "specific development factors", which in today's terms means "financial innovations".
Financial innovation, like derivatives contracts and securitization, have created vast new opportunities for investment and profitmaking. This complex netherworld of highly-leveraged debt-instruments and off-balance sheet operations, constitutes a shadow economy where the process of capital accumulation persists despite pervasive inertia in the underlying economy. This is why the Fed and the Treasury have been doing their best to stitch the system back together without changing its basic structure. The same is true of Congress, which has gone to great lengths to preserve the profit-generating instruments which brought the global financial system to the brink of disaster. This is from the Wall Street Journal:
Lobbying by Wall Street has blunted efforts to step up regulation on derivatives trading by carving out exceptions or leaving the status quo in place. Derivatives took blame for some of the worst debacles of the financial crisis. But a year after regulators and critics began calling for an overhaul in the way they are traded, some efforts have been shelved and others have been watered down.
The two main issues concerning regulators were trading and clearing of swaps, which allow investors to bet on or hedge movements in currencies, interest rates and many other things. Swaps generally trade privately, leaving competitors and regulators in the dark about the scope of their risks. In November 2008, the chairman of the Senate Agriculture Committee proposed forcing all derivatives trading onto exchanges, where their prices could be publicly disclosed and margin requirements imposed to insure that participants could make good on their market bets.
But a financial-overhaul bill passed by the House of Representatives on Dec. 11 watered down or eliminated these requirements. The measure still allows for voice brokering and allows dealers to use alternatives to public exchanges.
("How Overhauling Derivatives Died" Randall Smith and Sarah Lynch, WSJ)
"Voice brokering" is Wall Street parlance for making a deal over the phone. It makes a joke out of the anemic regulations passed into law by congressmen who are essentially agents of Wall Street.
The bottom line is that financial institutions will not be forced to trade trillions of dollars of derivatives on public exchanges where margin requirements would protect taxpayers against potential losses. Instead, Congress has given Wall Street the green light to continue selling products that are insufficiently capitalized so they can keep raking in gigantic profits. That means it's only a matter of time before another one of the financial giants keels over from its bad bets. It will be AIG all over again.
But derivatives are just part of the problem. The real issue is a financial model that doesn't really work and offers no tangible benefit to society. In its present form, the system--with its exotic OTC markets, its off-book SIVs and SPEs, and its opaque Dark Pools and High Frequency Trading-- is more snake oil than high finance. It does not "efficiently allocate capital to productive activity" as advertised, but--more often than not--diverts it away from production altogether into paper claims on all manner of financial exotica. So called "innovations" have had less to do with increasing the overall vitality of the economy or improving living standards than they do with circumventing regulations to enhance earnings by maximizing leverage. Deregulation has utterly transformed the system; creating a financial Frankenstein that hides its activities off public exchanges, that transfers the risk of losses onto the taxpayer, and that requires explicit government guarantees just to attract investment. It's a mug's game where only a small group of high-stakes speculators come up winners.
The same is true of the Fed's emergency lending programs. They're just another swindle wrapped in fancy public relations ribbon. Ostensibly, the facilities are supposed to provide cheap capital in exchange for dodgy collateral. But that's not a loan; it's a subsidy, and it helps to obscure the true, market price of the assets. As systemic regulator, the Fed has every right to provide liquidity during times of market stress or turbulence. But it does not have the right to help financial institutions conceal their losses by paying exorbitant prices for downgraded junk bonds. That's picking winners and losers, which is far beyond the Fed's mandate.
Quantitative easing (QE) is another Fed boondoggle. The program has been hyped as a way to get the banks to increase lending to businesses and consumers by creating over $1 trillion of excess bank reserves. But instead of increasing lending, QE does the exact opposite; it creates generous incentives for not lending. The banks who qualify have been taking the Fed's zero-rate reserves and exchanging them for safe, 10-year Treasury bonds which yield 3.5%. What a deal! Fed chairman Ben Bernanke has promised to maintain this policy for "an extended period" which means the banks will continue to reap the benefits of this stealth bailout for the foreseeable future.
This is the real reason the banks aren't lending, because the Fed is paying them not to. It's not a matter of creditworthy applicants. It's a matter of hopelessly mangled monetary policy. The ongoing credit contraction can be blamed on one man alone; Ben Bernanke.
Even though QE is mainly a backdoor way to recapitalize the banks; some lending has continued, although not to consumers and businesses. So where has the money gone? Here's part of the answer from the Wall Street Journal:
Former Salvadoran finance minister Manuel Hinds points out in the latest issue of International Finance that banks have indeed been shirking on their day job of transforming increased deposits into increased private-sector credit. But they haven't quit entirely. In fact, they've funneled significant new funds into nonbank financial institutions—which have not lent them on. What's happening is that U.S. banks have been behaving exactly like developing country banks during earlier crises, such as Indonesian banks in the late 1990s—raising lending to their worst borrowers to keep them alive, lest the banks themselves collapse from their borrowers' defaults.
For U.S. banks, these zombie borrowers are their affiliated financial entities set up to manage so-called off-balance-sheet activities—such as the famous SIVs (structured investment vehicles) created by Citigroup and others during the boom. Thus, the massive fiscal and monetary bailouts of the banks have served to worsen the credit misallocation that led to the general economic collapse in 2008. ("Prepare for a Keynesian Hangover", Ben Steill, Wall Street Journal)
So the banks are not only taking depositors money and using it in high-risk derivatives transactions and currency "carry trades", they're also propping up the long daisy-chain of insolvent creditors whose default could domino Lehman-like through the entire financial system. Funny how the media skips little tidbits like this when they give their rosy evening roundup.
And then there's this; on Christmas Eve, the Treasury Dept announced that it would lift existing caps on the mortgage-finance giants Fannie Mae and Freddie Mac. The two GSE's will no longer be limited to a ceiling of $200 billion in losses each. Although, the Treasury's action looks like it was designed to support the housing market, the real beneficiaries are the banks whose balance sheets are coming under greater pressure from the relentless uptick in foreclosures. It is widely believed that Treasury is laying the groundwork for a major revision of the Obama's mortgage modification program which has, so far, been a dismal failure. If the critics are right, the administration is planning to slash the principle on millions of mortgages sometime in 2010, thus shifting the sizable losses onto the US taxpayer. Otherwise, the banks will face potential losses on another 4 million foreclosures in the next year alone. (according to Credit Suisse)
Economist Dean Baker says that the Treasury's surprise announcement is an indication that Fannie and Freddie may have paid too much for the mortgage-backed securities they bought back in 2008 when the GSE's were used as a dumping ground for distressed bank assets.
This would mean that they were paying too much for mortgages and mortgage-backed securities bought from banks after the financial meltdown was already in full swing. This was the original purpose of the TARP program. Of course, TARP came with at least some restrictions and disclosure requirements. If Fannie and Freddie are overpaying for mortgages, then there are no conditions whatsoever put on the banks that get the money.
(Fannie Mae and Freddie Mac: Just a four Letter Word, Dean Baker, Huffington Post)
The Treasury's action is tantamount to another stealth bailout by industry reps working within the Obama administration. All policymaking seems to revolve around two fundamental tenets: Increase the profit potential for the big Wall Street banks, and crimp the flow of credit to the real economy to increase privatization, crush the labor movement, and reduce the population to third world poverty. That's Neoliberalism in a nutshell and, apparently, Obama's economic dogma. In fact, as economist L. Randall Wray points out, Obama's new health care bill is just more of the same; another ginormous handout to Wall Street disguised as public policy.
There is a huge untapped market of some 50 million people who are not paying insurance premiums—and the number grows every year because employers drop coverage and people can’t afford premiums. Solution? Health insurance “reform” that requires everyone to turn over their pay to Wall Street. Can’t afford the premiums? That is OK—Uncle Sam will kick in a few hundred billion to help out the insurers. Of course, do not expect more health care or better health outcomes because that has nothing to do with “reform” … Wall Street’s insurers… see a missed opportunity. They’ll collect the extra premiums and deny the claims. This is just another bailout of the financial system, because the tens of trillions of dollars already committed are not nearly enough.
(Healthcare Diversions Part 3: The Financialization of Health and Everything Else in the Universe L. Randall Wray)
It's no wonder that the Obama administration's appeal to China to "expand its domestic market" focuses exclusively on health care and retirement programs. Wall Street is just lining up for the next gravy train.
By MIKE WHITNEY
British economist John Maynard Keynes, believed in capitalism, but he was also sharply critical of its structural flaws. He summed it up succinctly like this:
Our analysis shows... that long-run development is not inherent in the capitalist economy. Thus, specific 'development factors' are required to sustain a long-run upward movement.
What Keynes was alluding to is the fact that mature capitalist economies tend towards stagnation. What happens, is that the rate of return on investment begins to dwindle as overcapacity builds. That causes declining profits which lead to belt-tightening, rising unemployment and falling demand. As investment drops off further, growth slows correspondingly and the economy dips into a protracted slump. This corrosive stagnation is the challenge that all advanced capitalist economies face. The solution--as Keynes notes--lies in "specific development factors", which in today's terms means "financial innovations".
Financial innovation, like derivatives contracts and securitization, have created vast new opportunities for investment and profitmaking. This complex netherworld of highly-leveraged debt-instruments and off-balance sheet operations, constitutes a shadow economy where the process of capital accumulation persists despite pervasive inertia in the underlying economy. This is why the Fed and the Treasury have been doing their best to stitch the system back together without changing its basic structure. The same is true of Congress, which has gone to great lengths to preserve the profit-generating instruments which brought the global financial system to the brink of disaster. This is from the Wall Street Journal:
Lobbying by Wall Street has blunted efforts to step up regulation on derivatives trading by carving out exceptions or leaving the status quo in place. Derivatives took blame for some of the worst debacles of the financial crisis. But a year after regulators and critics began calling for an overhaul in the way they are traded, some efforts have been shelved and others have been watered down.
The two main issues concerning regulators were trading and clearing of swaps, which allow investors to bet on or hedge movements in currencies, interest rates and many other things. Swaps generally trade privately, leaving competitors and regulators in the dark about the scope of their risks. In November 2008, the chairman of the Senate Agriculture Committee proposed forcing all derivatives trading onto exchanges, where their prices could be publicly disclosed and margin requirements imposed to insure that participants could make good on their market bets.
But a financial-overhaul bill passed by the House of Representatives on Dec. 11 watered down or eliminated these requirements. The measure still allows for voice brokering and allows dealers to use alternatives to public exchanges.
("How Overhauling Derivatives Died" Randall Smith and Sarah Lynch, WSJ)
"Voice brokering" is Wall Street parlance for making a deal over the phone. It makes a joke out of the anemic regulations passed into law by congressmen who are essentially agents of Wall Street.
The bottom line is that financial institutions will not be forced to trade trillions of dollars of derivatives on public exchanges where margin requirements would protect taxpayers against potential losses. Instead, Congress has given Wall Street the green light to continue selling products that are insufficiently capitalized so they can keep raking in gigantic profits. That means it's only a matter of time before another one of the financial giants keels over from its bad bets. It will be AIG all over again.
But derivatives are just part of the problem. The real issue is a financial model that doesn't really work and offers no tangible benefit to society. In its present form, the system--with its exotic OTC markets, its off-book SIVs and SPEs, and its opaque Dark Pools and High Frequency Trading-- is more snake oil than high finance. It does not "efficiently allocate capital to productive activity" as advertised, but--more often than not--diverts it away from production altogether into paper claims on all manner of financial exotica. So called "innovations" have had less to do with increasing the overall vitality of the economy or improving living standards than they do with circumventing regulations to enhance earnings by maximizing leverage. Deregulation has utterly transformed the system; creating a financial Frankenstein that hides its activities off public exchanges, that transfers the risk of losses onto the taxpayer, and that requires explicit government guarantees just to attract investment. It's a mug's game where only a small group of high-stakes speculators come up winners.
The same is true of the Fed's emergency lending programs. They're just another swindle wrapped in fancy public relations ribbon. Ostensibly, the facilities are supposed to provide cheap capital in exchange for dodgy collateral. But that's not a loan; it's a subsidy, and it helps to obscure the true, market price of the assets. As systemic regulator, the Fed has every right to provide liquidity during times of market stress or turbulence. But it does not have the right to help financial institutions conceal their losses by paying exorbitant prices for downgraded junk bonds. That's picking winners and losers, which is far beyond the Fed's mandate.
Quantitative easing (QE) is another Fed boondoggle. The program has been hyped as a way to get the banks to increase lending to businesses and consumers by creating over $1 trillion of excess bank reserves. But instead of increasing lending, QE does the exact opposite; it creates generous incentives for not lending. The banks who qualify have been taking the Fed's zero-rate reserves and exchanging them for safe, 10-year Treasury bonds which yield 3.5%. What a deal! Fed chairman Ben Bernanke has promised to maintain this policy for "an extended period" which means the banks will continue to reap the benefits of this stealth bailout for the foreseeable future.
This is the real reason the banks aren't lending, because the Fed is paying them not to. It's not a matter of creditworthy applicants. It's a matter of hopelessly mangled monetary policy. The ongoing credit contraction can be blamed on one man alone; Ben Bernanke.
Even though QE is mainly a backdoor way to recapitalize the banks; some lending has continued, although not to consumers and businesses. So where has the money gone? Here's part of the answer from the Wall Street Journal:
Former Salvadoran finance minister Manuel Hinds points out in the latest issue of International Finance that banks have indeed been shirking on their day job of transforming increased deposits into increased private-sector credit. But they haven't quit entirely. In fact, they've funneled significant new funds into nonbank financial institutions—which have not lent them on. What's happening is that U.S. banks have been behaving exactly like developing country banks during earlier crises, such as Indonesian banks in the late 1990s—raising lending to their worst borrowers to keep them alive, lest the banks themselves collapse from their borrowers' defaults.
For U.S. banks, these zombie borrowers are their affiliated financial entities set up to manage so-called off-balance-sheet activities—such as the famous SIVs (structured investment vehicles) created by Citigroup and others during the boom. Thus, the massive fiscal and monetary bailouts of the banks have served to worsen the credit misallocation that led to the general economic collapse in 2008. ("Prepare for a Keynesian Hangover", Ben Steill, Wall Street Journal)
So the banks are not only taking depositors money and using it in high-risk derivatives transactions and currency "carry trades", they're also propping up the long daisy-chain of insolvent creditors whose default could domino Lehman-like through the entire financial system. Funny how the media skips little tidbits like this when they give their rosy evening roundup.
And then there's this; on Christmas Eve, the Treasury Dept announced that it would lift existing caps on the mortgage-finance giants Fannie Mae and Freddie Mac. The two GSE's will no longer be limited to a ceiling of $200 billion in losses each. Although, the Treasury's action looks like it was designed to support the housing market, the real beneficiaries are the banks whose balance sheets are coming under greater pressure from the relentless uptick in foreclosures. It is widely believed that Treasury is laying the groundwork for a major revision of the Obama's mortgage modification program which has, so far, been a dismal failure. If the critics are right, the administration is planning to slash the principle on millions of mortgages sometime in 2010, thus shifting the sizable losses onto the US taxpayer. Otherwise, the banks will face potential losses on another 4 million foreclosures in the next year alone. (according to Credit Suisse)
Economist Dean Baker says that the Treasury's surprise announcement is an indication that Fannie and Freddie may have paid too much for the mortgage-backed securities they bought back in 2008 when the GSE's were used as a dumping ground for distressed bank assets.
This would mean that they were paying too much for mortgages and mortgage-backed securities bought from banks after the financial meltdown was already in full swing. This was the original purpose of the TARP program. Of course, TARP came with at least some restrictions and disclosure requirements. If Fannie and Freddie are overpaying for mortgages, then there are no conditions whatsoever put on the banks that get the money.
(Fannie Mae and Freddie Mac: Just a four Letter Word, Dean Baker, Huffington Post)
The Treasury's action is tantamount to another stealth bailout by industry reps working within the Obama administration. All policymaking seems to revolve around two fundamental tenets: Increase the profit potential for the big Wall Street banks, and crimp the flow of credit to the real economy to increase privatization, crush the labor movement, and reduce the population to third world poverty. That's Neoliberalism in a nutshell and, apparently, Obama's economic dogma. In fact, as economist L. Randall Wray points out, Obama's new health care bill is just more of the same; another ginormous handout to Wall Street disguised as public policy.
There is a huge untapped market of some 50 million people who are not paying insurance premiums—and the number grows every year because employers drop coverage and people can’t afford premiums. Solution? Health insurance “reform” that requires everyone to turn over their pay to Wall Street. Can’t afford the premiums? That is OK—Uncle Sam will kick in a few hundred billion to help out the insurers. Of course, do not expect more health care or better health outcomes because that has nothing to do with “reform” … Wall Street’s insurers… see a missed opportunity. They’ll collect the extra premiums and deny the claims. This is just another bailout of the financial system, because the tens of trillions of dollars already committed are not nearly enough.
(Healthcare Diversions Part 3: The Financialization of Health and Everything Else in the Universe L. Randall Wray)
It's no wonder that the Obama administration's appeal to China to "expand its domestic market" focuses exclusively on health care and retirement programs. Wall Street is just lining up for the next gravy train.
Friday, January 1, 2010
Wall Street's 10 Greatest Lies of 2009
Original Link: http://www.alternet.org/media/144776/wall_street's_10_greatest_lies_of_2009?page=entire
By Nomi Prins
Lies that justify screwing over Main Street.
On December 13, President Obama declared that he was not elected to help the “fat cats." But the cats got another version of that memo. A day later, 10 of them were supposed to partake in some White House face-time to talk about their responsibilities to the rest of the country, but only seven could make it. No-shows for the "very serious discussion" -- due to inclement New York weather or being too busy with internal bonus discussions to bother with the President -- were Goldman Sachs CEO Lloyd Blankfein, Morgan Stanley CEO John Mack and Citigroup Chairman Richard Parsons.
Yes, Obama inherited a big financial mess from the Bush administration – which inherited its set-up from the Clinton administration (financial recklessness, it turns out, is non-partisan) -- but he and his appointees have spent the year talking about fighting risk and excess on Wall Street, while both have grown.
Treasury Secretary Tim Geithner patted himself on the back for making the "difficult and necessary” decisions of fronting Wall Street boatloads of money to cover its losses and capital crunch last fall. Federal Reserve Chairman Ben Bernanke (a Bush-Obama favorite) was named Time Magazine’s Person of the Year for saving the free world as we know it. And Congress is talking "sweeping reform" about a bill that leaves the banking landscape intact, save for some minor alterations. For starters, it doesn’t resurrect the Glass-Steagall Act of 1933, which separated risk-taking (once non-government-backed) investment banks from consumer oriented (government-supported) commercial banks.
Meanwhile, Wall Street is restructuring (the financial equivalent of re-gifting) old toxic assets into new ones, finding fresh ways to profit from credit derivatives trading, and paying itself record bonuses -- on our dime. Despite recent TARP payback enthusiasm, the industry still floats on trillions of dollars of non-TARP subsidies and certain players wouldn’t even exist today without our help.
Wall Street’s return to robustness and Main Street’s continued deterioration are the main takeaways for 2009 that stemmed from the 2008 choices to flush the financial system with capital and leave the real economy to fend for itself. Lies that exacerbate this divide only perpetuate its growth. With that, here is my top 10 list of lies. Please consider adding your own, and let’s all hope for a more honest New Year.
1) The economy has improved.
Earlier this month, Bernanke declared, “Having faced the most serious financial crisis and the worst recession since the Great Depression, our economy has made important progress during the past year. Although the economic stress faced by many families and businesses remains intense, with job openings scarce and credit still hard to come by, the financial system and the economy have moved back from the brink of collapse."
Sure, the economy is better -- if you work at Goldman Sachs or had an affair with Tiger Woods. But while Bernanke, former Treasury Secretary Hank Paulson and Geithner turned the Federal Reserve into a national hedge fund (cheap money backing toxic assets in secrecy), and the Treasury Department into a bank insurance policy, the rest of the real economy took hit after hit -- starting with jobs.
The national unemployment rate remains at double digits. Despite Washington’s bizarre euphoria about unemployment rates last month being better (they edged down in November to 10 percent from 10.2 percent in October), the number of Americans filing for initial unemployment insurance rose during the second week of December. After all the temporary holiday hires, that number will probably increase again. Plus, unemployment rates in 372 metropolitan areas are higher than they were last year.
2) If you give banks capital, they will lend it out.
On Jan. 13, 2009 Bernanke concluded that "More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.” He said that "Our economic system is critically dependent on the free flow of credit." He was referring to the big banks. Not the little people.
Ten months later, though, he admitted that, "Access to credit remains strained for borrowers who are particularly dependent on banks, such as households and small businesses” and that “bank lending has contracted sharply this year."
In other words, big banks don’t share their good fortunes. Shocking. And as a result, bankruptcies are rapidly rising for businesses and individuals – a direct result of lack of credit coupled with other economic hardships like job losses.
Total bankruptcy filings for the first nine months of 2009 were up 35 percent to 1,100,035 vs. the same period in 2008. The number of business bankruptcies during the first three quarters of 2009 eclipsed all of 2008. Individual consumer filings totaled 373,308 during the third quarter of 2009 and were up 33 percent vs. the same period of 2008. Tell those people about the free flow of credit, Ben.
3) Taxpayers are being repaid.
On December 17, the Treasury Department announced: ”As a result of our efforts under EESA (the Emergency Economic Stabilization Act that spawned TARP), confidence in our financial system has improved, credit is flowing, and the economy is growing. The government is exiting from its emergency financial policies and taxpayers are being repaid.”
Even as banks rush to repay TARP in order to get the government off their backs before annual bonuses are set, the Treasury Department is helping them out. On December 11, the Internal Revenue Service gave government-subsidized banks a tax exemption that, for instance, allows Citigroup to keep the benefit of $38 billion. Three days later, Citigroup announced its $20 billion repayment of TARP. Get the math? Not exactly a taxpayer windfall.
Additionally, the FDIC gave banks including Citigroup, Bank of America, and JPMorgan Chase a holiday gift -- at least a six-month break from having to raise capital to support the billions of dollars of securities (read: toxic assets – remember those?) that firms are going to have to add to their books in 2010. That will open a whole new can of worms – a glimpse into either insolvency and a replay from the too-big-to-fail scenario, or book-cooking (the Financial Accounting Standards Board, as of last year, has allowed banks to price their own assets if there’s no true market for them – fun times), or both. Meanwhile, banks can use the capital for bonus payments instead.
4) Homeowners are being helped.
Last year’s big lie was that banks would turn around and help their borrowers if they got federal money. Yet, they were under no obligation to do so, and thus, they didn’t.
Since the Obama administration released guidelines for the Home Affordable Modification Program (HAMP) on March 4, 2009, the HAMP permanent loan modification numbers have been anemic.
Separately, by almost every measure, mortgage and credit problems are worse this year than last. There were almost a million new foreclosure fillings in the third quarter of this year, 5 percent more than in the second quarter, and 23 percent more than during the third quarter of 2008.
Plus, foreclosures are not abating. Mortgage delinquencies (borrower 60 or more days overdue) increased for the 11th quarter in a row, reaching a national average record of 6.25 percent for the third quarter of 2009. Delinquencies precede foreclosures. Compared to last year, mortgage borrower delinquencies are up 58 percent. Meanwhile, banks are sitting on properties they acquired to avoid selling them into the market and having to book the resultant loss.
5) Big banks will help small businesses.
On October 24, because a whole year had passed without this happening, Obama declared, “It's time for our banks to stand by creditworthy small businesses and make the loans they need to open their doors, grow their operations and create new jobs."
Small businesses, which employ half of all private sector employees, had received less than $400 million in new loans under government programs, and were granted access to just one program that buys up to $15 billion in securities tied to small business loans. According to the Small Business Administration (SBA) the number of approved loans shrunk from 124,360 in 2007 to 69,764 in 2009 (it was 93,541 in 2008).
Two months later, since that didn’t work, Obama reiterated, “given the difficulty business people are having as lending has declined, and given the exceptional assistance banks received to get them through a difficult time, we expect them to explore every responsible way to help get our economy moving again." He asked the big bank chiefs to take "extraordinary" steps to revive lending for small businesses and homeowners.
Too bad banks don’t gear their business strategy to expectations and suggestions. Still, as a gesture of good faith, Bank of America promised to kick in an extra $5 billion more to small- and medium-sized businesses next year. JP Morgan Chase promised to increase lending by $4 billion. Goldman had already decided to go the pledge route a few weeks earlier, putting up half a billion dollars in small business “charity" to help its deservedly negative image.
To make up for what the banks aren’t doing, the Obama administration is setting aside $30 billion from the financial bailout fund to stimulate lending to small businesses.
6) The Fed values transparency.
On February 10, Bernanke told the Committee on Financial Services that he "firmly believes that central banks should be as transparent as possible. Likewise, the Federal Reserve is committed to keeping the Congress and the public informed about its lending programs and balance sheet."
Yet, on March 5, the Fed refused to comply with a Freedom of Information Act request and lawsuit filed by Bloomberg News to disclose the details of its 11 lending facilities. In front of the Senate Budget Committee, and in response to a question from Senator Bernie Sanders, I-VT, about naming the firms that got money from those facilities, Bernanke said "No" -- such disclosure would be "counterproductive" and risk “stigmatizing banks."
Undaunted by this irony, on May 5, before the Joint Economic Committee, Bernanke reiterated, “The Federal Reserve remains committed to transparency and openness and, in particular, to keeping the Congress and the public informed about its lending programs and balance sheet.” He told PBS NewsHour on July 28 that “We are completely open to providing any information Congress wants.”
To date, the Fed has not disclosed the recipients of its cheap loans for toxic collateral.
7) History will not repeat itself.
In the beginning of the year, Obama said of Wall Street firms, “There will be time for them to make profits, and there will be time for them to get bonuses. Now is not that time.”
He also said that "part of what we’re going to need is for the folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility.”
Yeah. Wall Street’s really into restraint....
Nine month later, as banks were racking up record profits and bonuses, Obama said the same thing, in different words, in his September 14 Federal Hall speech. “We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses… the old ways that led to this crisis cannot stand...History cannot be allowed to repeat itself.”
The only problem? History was repeating itself, as he spoke. Big banks took more risk in 2009, and posted more of their profits from trading operations than they had before they nearly collapsed in 2008. Trading profits at the top five banks rose from a $608 million loss in 2008 to $118.5 billion for annualized 2009, and $61.7 billion in 2007.
8) The pay czar will fight against – pay.
Treasury Department pay czar Ken Feinberg was supposedly appointed to keep a lid on excessive compensation for companies sitting on federal bailouts. Two problems with that: first, the Treasury Department continues to ignore the fact that the TARP portion of the bailout was only a tiny portion of the full bailout, and second, Wall Street was pushing back and winning at every turn.
For instance, after announcing he’d cap compensation for the top 25 execs at AIG, on October 23, Feinberg gave three of them a pass. These men were apparently “particularly critical to the company's long-term financial success.” Turning to his other role as Wall Street’s mouthpiece, Feinberg made excuses for AIG. “AIG compensation practices are unique. We took into account independent, very credible opinions of others to come up with a package that we think will help AIG thrive." That’s nice.
But he’s not kidding about thriving – those three employees will receive bonuses of about $4 million, $5 million and $7 million. AIG’s new CEO, Robert Benmosche, who joined AIG in August and got his pay approval out of the way on October 2, is bagging $10.5 million in annual compensation, including $3 million in cash, $4 million in stock options and $3.5 million in annual performance bonuses.
Then, on November 12, Feinberg said he was "very concerned" about scaring away top talent at the seven firms that took the biggest bailouts. Way to keep a lid on it, Ken.
But to be fair, it’s not really Feinberg’s fault. New York Fed and Treasury Department officials have been urging him to dial back restrictions for AIG folks in 2010 as well. Why? Because restricting pay will make it harder for the government to get back its loans to AIG. Right. Somehow paying these people stupid sums of money is the only way to get our money back. Because their "talent" worked out so well going into last year.
Elsewhere on Wall Street, the top six banks are getting set to pay out $150 billion in bonuses ($10 billion more than in 2008). GS is leading the pack in terms of bonus increases; it will dole out a projected $22 billion in compensation in 2009, compared to $11.8 billion in 2008 and $20.2 billion in 2007. JPM put aside $29.1 billion for 2009, compared to $24.6 billion in 2008 and $29.9 billion in 2007. Wells Fargo is spending $26.3 billion this year, compared to $23.1 billion in 2008 and $25.6 billion in 2007.
9) The lobbyists made us do it.
Going back to the big bank love fest at the White House earlier this month, execs promised to do better on regulation matters, citing a "disconnect" between their steadfast support for regulation and the fact that their lobbyists were pushing for as little new regulation as possible.
Really? Because this disconnect cost the financial sector $334 million so far this year for 2,560 lobbyists; a pittance compared to bonuses, but still, hard-taken cash. I’m sure another $334 million is coming to fight for stricter regulation in the New Year. Not.
10) Citigroup is the picture of health and too-big-to-fail is over.
Once the nation’s largest bank, later its largest bailout recipient, the firm exited its TARP obligation on December 14 with CEO Vikram Pandit stating, "Once Citi repays the $20 billion of TARP trust-preferred securities and upon termination of the loss-sharing agreement, it will no longer be deemed to be a beneficiary of ‘exceptional financial assistance’ under TARP beginning in 2010." (Read: I don’t want to hear about compensation caps anymore!)
He went on to say that, "By any measure of financial strength, Citi is among the strongest banks in the industry, and we are in a position to support the economic recovery."
Shareholders didn’t feel the same way. Citigroup shares already trading well below those of its main competitors have fallen 13.5 percent since that announcement. One of their key clients, the Abu Dhabi Investment Authority, accused the firm of misleading them over a $7.5 billion investment. Plus, in order to come up with the money to pay back the government, they had to raise it in the markets, thus diluting their stock – all to keep their petulant star employees happy at bonus time.
The Citigroup story should be examined for the other big banks. They may talk tough about paying back the government, but underneath they are hurting. And their pain will become our cost again – because nothing fundamental has changed this year, and that means – floating on our public money, these banks are actually still ticking time bombs.
Bonus Lie: Goldman Sachs is sorry.
On November 17, Lloyd C. Blankfein said he was sorry about his firm’s role in the financial crisis. "We participated in things that were clearly wrong and have reason to regret, we apologize." He didn’t say he was sorry the firm is still floated on $43 billion of total subsidies including FDIC guarantees for debt it raised, that were logically supposed to aid consumer oriented banks, and the $12.9 billion it got through the AIG bailout.
Yet the firm has the highest percentage of trading revenue of all the banks that got assistance; in other words, the revenue most linked to risk-taking, at 79 percent, or $38 billion out of $47 billion for annualized 2009. This is up from 41 percent, or $9 billion in 2008, and 68 percent in 2007 and 2006. And as noted before, Goldman leads the bonus sweepstakes for 2009. The firm is probably not very sorry about all of that.
Maybe I’m being too hard on everyone. Maybe all those toxic assets we all forgot about have value now. Maybe bank profits are based on something real. Maybe the increasing reserves against increasing credit losses aren’t happening. Maybe those foreclosures aren’t really happening. Maybe banks aren’t sitting on homes because they don’t want to dump them into the market and ruin the fantasy that prices have hit bottom. Maybe eight million jobs are waiting on the other side of 2010. Maybe I should just send a holiday card to Goldman saying thanks for everything. I’m sorry I ever quit. Maybe Lloyd Blankfein really is God.
Or maybe, the next mammoth pillage will be the one that makes a difference. But I truly don’t want us to have to find out. May 2010 be the start of a more insightful decade.
By Nomi Prins
Lies that justify screwing over Main Street.
On December 13, President Obama declared that he was not elected to help the “fat cats." But the cats got another version of that memo. A day later, 10 of them were supposed to partake in some White House face-time to talk about their responsibilities to the rest of the country, but only seven could make it. No-shows for the "very serious discussion" -- due to inclement New York weather or being too busy with internal bonus discussions to bother with the President -- were Goldman Sachs CEO Lloyd Blankfein, Morgan Stanley CEO John Mack and Citigroup Chairman Richard Parsons.
Yes, Obama inherited a big financial mess from the Bush administration – which inherited its set-up from the Clinton administration (financial recklessness, it turns out, is non-partisan) -- but he and his appointees have spent the year talking about fighting risk and excess on Wall Street, while both have grown.
Treasury Secretary Tim Geithner patted himself on the back for making the "difficult and necessary” decisions of fronting Wall Street boatloads of money to cover its losses and capital crunch last fall. Federal Reserve Chairman Ben Bernanke (a Bush-Obama favorite) was named Time Magazine’s Person of the Year for saving the free world as we know it. And Congress is talking "sweeping reform" about a bill that leaves the banking landscape intact, save for some minor alterations. For starters, it doesn’t resurrect the Glass-Steagall Act of 1933, which separated risk-taking (once non-government-backed) investment banks from consumer oriented (government-supported) commercial banks.
Meanwhile, Wall Street is restructuring (the financial equivalent of re-gifting) old toxic assets into new ones, finding fresh ways to profit from credit derivatives trading, and paying itself record bonuses -- on our dime. Despite recent TARP payback enthusiasm, the industry still floats on trillions of dollars of non-TARP subsidies and certain players wouldn’t even exist today without our help.
Wall Street’s return to robustness and Main Street’s continued deterioration are the main takeaways for 2009 that stemmed from the 2008 choices to flush the financial system with capital and leave the real economy to fend for itself. Lies that exacerbate this divide only perpetuate its growth. With that, here is my top 10 list of lies. Please consider adding your own, and let’s all hope for a more honest New Year.
1) The economy has improved.
Earlier this month, Bernanke declared, “Having faced the most serious financial crisis and the worst recession since the Great Depression, our economy has made important progress during the past year. Although the economic stress faced by many families and businesses remains intense, with job openings scarce and credit still hard to come by, the financial system and the economy have moved back from the brink of collapse."
Sure, the economy is better -- if you work at Goldman Sachs or had an affair with Tiger Woods. But while Bernanke, former Treasury Secretary Hank Paulson and Geithner turned the Federal Reserve into a national hedge fund (cheap money backing toxic assets in secrecy), and the Treasury Department into a bank insurance policy, the rest of the real economy took hit after hit -- starting with jobs.
The national unemployment rate remains at double digits. Despite Washington’s bizarre euphoria about unemployment rates last month being better (they edged down in November to 10 percent from 10.2 percent in October), the number of Americans filing for initial unemployment insurance rose during the second week of December. After all the temporary holiday hires, that number will probably increase again. Plus, unemployment rates in 372 metropolitan areas are higher than they were last year.
2) If you give banks capital, they will lend it out.
On Jan. 13, 2009 Bernanke concluded that "More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.” He said that "Our economic system is critically dependent on the free flow of credit." He was referring to the big banks. Not the little people.
Ten months later, though, he admitted that, "Access to credit remains strained for borrowers who are particularly dependent on banks, such as households and small businesses” and that “bank lending has contracted sharply this year."
In other words, big banks don’t share their good fortunes. Shocking. And as a result, bankruptcies are rapidly rising for businesses and individuals – a direct result of lack of credit coupled with other economic hardships like job losses.
Total bankruptcy filings for the first nine months of 2009 were up 35 percent to 1,100,035 vs. the same period in 2008. The number of business bankruptcies during the first three quarters of 2009 eclipsed all of 2008. Individual consumer filings totaled 373,308 during the third quarter of 2009 and were up 33 percent vs. the same period of 2008. Tell those people about the free flow of credit, Ben.
3) Taxpayers are being repaid.
On December 17, the Treasury Department announced: ”As a result of our efforts under EESA (the Emergency Economic Stabilization Act that spawned TARP), confidence in our financial system has improved, credit is flowing, and the economy is growing. The government is exiting from its emergency financial policies and taxpayers are being repaid.”
Even as banks rush to repay TARP in order to get the government off their backs before annual bonuses are set, the Treasury Department is helping them out. On December 11, the Internal Revenue Service gave government-subsidized banks a tax exemption that, for instance, allows Citigroup to keep the benefit of $38 billion. Three days later, Citigroup announced its $20 billion repayment of TARP. Get the math? Not exactly a taxpayer windfall.
Additionally, the FDIC gave banks including Citigroup, Bank of America, and JPMorgan Chase a holiday gift -- at least a six-month break from having to raise capital to support the billions of dollars of securities (read: toxic assets – remember those?) that firms are going to have to add to their books in 2010. That will open a whole new can of worms – a glimpse into either insolvency and a replay from the too-big-to-fail scenario, or book-cooking (the Financial Accounting Standards Board, as of last year, has allowed banks to price their own assets if there’s no true market for them – fun times), or both. Meanwhile, banks can use the capital for bonus payments instead.
4) Homeowners are being helped.
Last year’s big lie was that banks would turn around and help their borrowers if they got federal money. Yet, they were under no obligation to do so, and thus, they didn’t.
Since the Obama administration released guidelines for the Home Affordable Modification Program (HAMP) on March 4, 2009, the HAMP permanent loan modification numbers have been anemic.
Separately, by almost every measure, mortgage and credit problems are worse this year than last. There were almost a million new foreclosure fillings in the third quarter of this year, 5 percent more than in the second quarter, and 23 percent more than during the third quarter of 2008.
Plus, foreclosures are not abating. Mortgage delinquencies (borrower 60 or more days overdue) increased for the 11th quarter in a row, reaching a national average record of 6.25 percent for the third quarter of 2009. Delinquencies precede foreclosures. Compared to last year, mortgage borrower delinquencies are up 58 percent. Meanwhile, banks are sitting on properties they acquired to avoid selling them into the market and having to book the resultant loss.
5) Big banks will help small businesses.
On October 24, because a whole year had passed without this happening, Obama declared, “It's time for our banks to stand by creditworthy small businesses and make the loans they need to open their doors, grow their operations and create new jobs."
Small businesses, which employ half of all private sector employees, had received less than $400 million in new loans under government programs, and were granted access to just one program that buys up to $15 billion in securities tied to small business loans. According to the Small Business Administration (SBA) the number of approved loans shrunk from 124,360 in 2007 to 69,764 in 2009 (it was 93,541 in 2008).
Two months later, since that didn’t work, Obama reiterated, “given the difficulty business people are having as lending has declined, and given the exceptional assistance banks received to get them through a difficult time, we expect them to explore every responsible way to help get our economy moving again." He asked the big bank chiefs to take "extraordinary" steps to revive lending for small businesses and homeowners.
Too bad banks don’t gear their business strategy to expectations and suggestions. Still, as a gesture of good faith, Bank of America promised to kick in an extra $5 billion more to small- and medium-sized businesses next year. JP Morgan Chase promised to increase lending by $4 billion. Goldman had already decided to go the pledge route a few weeks earlier, putting up half a billion dollars in small business “charity" to help its deservedly negative image.
To make up for what the banks aren’t doing, the Obama administration is setting aside $30 billion from the financial bailout fund to stimulate lending to small businesses.
6) The Fed values transparency.
On February 10, Bernanke told the Committee on Financial Services that he "firmly believes that central banks should be as transparent as possible. Likewise, the Federal Reserve is committed to keeping the Congress and the public informed about its lending programs and balance sheet."
Yet, on March 5, the Fed refused to comply with a Freedom of Information Act request and lawsuit filed by Bloomberg News to disclose the details of its 11 lending facilities. In front of the Senate Budget Committee, and in response to a question from Senator Bernie Sanders, I-VT, about naming the firms that got money from those facilities, Bernanke said "No" -- such disclosure would be "counterproductive" and risk “stigmatizing banks."
Undaunted by this irony, on May 5, before the Joint Economic Committee, Bernanke reiterated, “The Federal Reserve remains committed to transparency and openness and, in particular, to keeping the Congress and the public informed about its lending programs and balance sheet.” He told PBS NewsHour on July 28 that “We are completely open to providing any information Congress wants.”
To date, the Fed has not disclosed the recipients of its cheap loans for toxic collateral.
7) History will not repeat itself.
In the beginning of the year, Obama said of Wall Street firms, “There will be time for them to make profits, and there will be time for them to get bonuses. Now is not that time.”
He also said that "part of what we’re going to need is for the folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility.”
Yeah. Wall Street’s really into restraint....
Nine month later, as banks were racking up record profits and bonuses, Obama said the same thing, in different words, in his September 14 Federal Hall speech. “We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses… the old ways that led to this crisis cannot stand...History cannot be allowed to repeat itself.”
The only problem? History was repeating itself, as he spoke. Big banks took more risk in 2009, and posted more of their profits from trading operations than they had before they nearly collapsed in 2008. Trading profits at the top five banks rose from a $608 million loss in 2008 to $118.5 billion for annualized 2009, and $61.7 billion in 2007.
8) The pay czar will fight against – pay.
Treasury Department pay czar Ken Feinberg was supposedly appointed to keep a lid on excessive compensation for companies sitting on federal bailouts. Two problems with that: first, the Treasury Department continues to ignore the fact that the TARP portion of the bailout was only a tiny portion of the full bailout, and second, Wall Street was pushing back and winning at every turn.
For instance, after announcing he’d cap compensation for the top 25 execs at AIG, on October 23, Feinberg gave three of them a pass. These men were apparently “particularly critical to the company's long-term financial success.” Turning to his other role as Wall Street’s mouthpiece, Feinberg made excuses for AIG. “AIG compensation practices are unique. We took into account independent, very credible opinions of others to come up with a package that we think will help AIG thrive." That’s nice.
But he’s not kidding about thriving – those three employees will receive bonuses of about $4 million, $5 million and $7 million. AIG’s new CEO, Robert Benmosche, who joined AIG in August and got his pay approval out of the way on October 2, is bagging $10.5 million in annual compensation, including $3 million in cash, $4 million in stock options and $3.5 million in annual performance bonuses.
Then, on November 12, Feinberg said he was "very concerned" about scaring away top talent at the seven firms that took the biggest bailouts. Way to keep a lid on it, Ken.
But to be fair, it’s not really Feinberg’s fault. New York Fed and Treasury Department officials have been urging him to dial back restrictions for AIG folks in 2010 as well. Why? Because restricting pay will make it harder for the government to get back its loans to AIG. Right. Somehow paying these people stupid sums of money is the only way to get our money back. Because their "talent" worked out so well going into last year.
Elsewhere on Wall Street, the top six banks are getting set to pay out $150 billion in bonuses ($10 billion more than in 2008). GS is leading the pack in terms of bonus increases; it will dole out a projected $22 billion in compensation in 2009, compared to $11.8 billion in 2008 and $20.2 billion in 2007. JPM put aside $29.1 billion for 2009, compared to $24.6 billion in 2008 and $29.9 billion in 2007. Wells Fargo is spending $26.3 billion this year, compared to $23.1 billion in 2008 and $25.6 billion in 2007.
9) The lobbyists made us do it.
Going back to the big bank love fest at the White House earlier this month, execs promised to do better on regulation matters, citing a "disconnect" between their steadfast support for regulation and the fact that their lobbyists were pushing for as little new regulation as possible.
Really? Because this disconnect cost the financial sector $334 million so far this year for 2,560 lobbyists; a pittance compared to bonuses, but still, hard-taken cash. I’m sure another $334 million is coming to fight for stricter regulation in the New Year. Not.
10) Citigroup is the picture of health and too-big-to-fail is over.
Once the nation’s largest bank, later its largest bailout recipient, the firm exited its TARP obligation on December 14 with CEO Vikram Pandit stating, "Once Citi repays the $20 billion of TARP trust-preferred securities and upon termination of the loss-sharing agreement, it will no longer be deemed to be a beneficiary of ‘exceptional financial assistance’ under TARP beginning in 2010." (Read: I don’t want to hear about compensation caps anymore!)
He went on to say that, "By any measure of financial strength, Citi is among the strongest banks in the industry, and we are in a position to support the economic recovery."
Shareholders didn’t feel the same way. Citigroup shares already trading well below those of its main competitors have fallen 13.5 percent since that announcement. One of their key clients, the Abu Dhabi Investment Authority, accused the firm of misleading them over a $7.5 billion investment. Plus, in order to come up with the money to pay back the government, they had to raise it in the markets, thus diluting their stock – all to keep their petulant star employees happy at bonus time.
The Citigroup story should be examined for the other big banks. They may talk tough about paying back the government, but underneath they are hurting. And their pain will become our cost again – because nothing fundamental has changed this year, and that means – floating on our public money, these banks are actually still ticking time bombs.
Bonus Lie: Goldman Sachs is sorry.
On November 17, Lloyd C. Blankfein said he was sorry about his firm’s role in the financial crisis. "We participated in things that were clearly wrong and have reason to regret, we apologize." He didn’t say he was sorry the firm is still floated on $43 billion of total subsidies including FDIC guarantees for debt it raised, that were logically supposed to aid consumer oriented banks, and the $12.9 billion it got through the AIG bailout.
Yet the firm has the highest percentage of trading revenue of all the banks that got assistance; in other words, the revenue most linked to risk-taking, at 79 percent, or $38 billion out of $47 billion for annualized 2009. This is up from 41 percent, or $9 billion in 2008, and 68 percent in 2007 and 2006. And as noted before, Goldman leads the bonus sweepstakes for 2009. The firm is probably not very sorry about all of that.
Maybe I’m being too hard on everyone. Maybe all those toxic assets we all forgot about have value now. Maybe bank profits are based on something real. Maybe the increasing reserves against increasing credit losses aren’t happening. Maybe those foreclosures aren’t really happening. Maybe banks aren’t sitting on homes because they don’t want to dump them into the market and ruin the fantasy that prices have hit bottom. Maybe eight million jobs are waiting on the other side of 2010. Maybe I should just send a holiday card to Goldman saying thanks for everything. I’m sorry I ever quit. Maybe Lloyd Blankfein really is God.
Or maybe, the next mammoth pillage will be the one that makes a difference. But I truly don’t want us to have to find out. May 2010 be the start of a more insightful decade.
Bankers Get $4 Trillion Gift From Barney Frank
Original Link: http://www.bloomberg.com/apps/news?pid=20601039
By David Reilly
To close out 2009, I decided to do something I bet no member of Congress has done -- actually read from cover to cover one of the pieces of sweeping legislation bouncing around Capitol Hill.
Hunkering down by the fire, I snuggled up with H.R. 4173, the financial-reform legislation passed earlier this month by the House of Representatives. The Senate has yet to pass its own reform plan. The baby of Financial Services Committee Chairman Barney Frank, the House bill is meant to address everything from too-big-to-fail banks to asleep-at-the-switch credit-ratings companies to the protection of consumers from greedy lenders.
I quickly discovered why members of Congress rarely read legislation like this. At 1,279 pages, the “Wall Street Reform and Consumer Protection Act” is a real slog. And yes, I plowed through all those pages. (Memo to Chairman Frank: “ystem” at line 14, page 258 is missing the first “s”.)
The reading was especially painful since this reform sausage is stuffed with more gristle than meat. At least, that is, if you are a taxpayer hoping the bailout train is coming to a halt.
If you’re a banker, the bill is tastier. While banks opposed the legislation, they should cheer for its passage by the full Congress in the New Year: There are huge giveaways insuring the government will again rescue banks and Wall Street if the need arises.
Nuggets Gleaned
Here are some of the nuggets I gleaned from days spent reading Frank’s handiwork:
-- For all its heft, the bill doesn’t once mention the words “too-big-to-fail,” the main issue confronting the financial system. Admitting you have a problem, as any 12- stepper knows, is the crucial first step toward recovery.
-- Instead, it supports the biggest banks. It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for “no-more-bailouts” talk. That is more than twice what the Fed pumped into markets this time around. The size of the fund makes the bribes in the Senate’s health-care bill look minuscule.
-- Oh, hold on, the Federal Reserve and Treasury Secretary can’t authorize these funds unless “there is at least a 99 percent likelihood that all funds and interest will be paid back.” Too bad the same models used to foresee the housing meltdown probably will be used to predict this likelihood as well.
More Bailouts
-- The bill also allows the government, in a crisis, to back financial firms’ debts. Bondholders can sleep easy -- there are more bailouts to come.
-- The legislation does create a council of regulators to spot risks to the financial system and big financial firms. Unfortunately this group is made up of folks who missed the problems that led to the current crisis.
-- Don’t worry, this time regulators will have better tools. Six months after being created, the council will report to Congress on “whether setting up an electronic database” would be a help. Maybe they’ll even get to use that Internet thingy.
-- This group, among its many powers, can restrict the ability of a financial firm to trade for its own account. Perhaps this section should be entitled, “Yes, Goldman Sachs Group Inc., we’re looking at you.”
Managing Bonuses
-- The bill also allows regulators to “prohibit any incentive-based payment arrangement.” In other words, banker bonuses are still in play. Maybe Bank of America Corp. and Citigroup Inc. shouldn’t have rushed to pay back Troubled Asset Relief Program funds.
-- The bill kills the Office of Thrift Supervision, a toothless watchdog. Well, kill may be too strong a word. That agency and its employees will be folded into the Office of the Comptroller of the Currency. Further proof that government never really disappears.
-- Since Congress isn’t cutting jobs, why not add a few more. The bill calls for more than a dozen agencies to create a position called “Director of Minority and Women Inclusion.” People in these new posts will be presidential appointees. I thought too-big-to-fail banks were the pressing issue. Turns out it’s diversity, and patronage.
-- Not that the House is entirely sure of what the issues are, at least judging by the two dozen or so studies the bill authorizes. About a quarter of them relate to credit-rating companies, an area in which the legislation falls short of meaningful change. Sadly, these studies don’t tackle tough questions like whether we should just do away with ratings altogether. Here’s a tip: Do the studies, then write the legislation.
Consumer Protection
-- The bill isn’t all bad, though. It creates a new Consumer Financial Protection Agency, the brainchild of Elizabeth Warren, currently head of a panel overseeing TARP. And the first director gets the cool job of designing a seal for the new agency. My suggestion: Warren riding a fiery chariot while hurling lightning bolts at Federal Reserve Chairman Ben Bernanke.
-- Best of all, the bill contains a provision that, in the event of another government request for emergency aid to prop up the financial system, debate in Congress be limited to just 10 hours. Anything that can get Congress to shut up can’t be all bad.
Even better would be if legislators actually tackle the real issues stemming from the financial crisis, end bailouts and, for the sake of my eyes, write far, far shorter bills.
By David Reilly
To close out 2009, I decided to do something I bet no member of Congress has done -- actually read from cover to cover one of the pieces of sweeping legislation bouncing around Capitol Hill.
Hunkering down by the fire, I snuggled up with H.R. 4173, the financial-reform legislation passed earlier this month by the House of Representatives. The Senate has yet to pass its own reform plan. The baby of Financial Services Committee Chairman Barney Frank, the House bill is meant to address everything from too-big-to-fail banks to asleep-at-the-switch credit-ratings companies to the protection of consumers from greedy lenders.
I quickly discovered why members of Congress rarely read legislation like this. At 1,279 pages, the “Wall Street Reform and Consumer Protection Act” is a real slog. And yes, I plowed through all those pages. (Memo to Chairman Frank: “ystem” at line 14, page 258 is missing the first “s”.)
The reading was especially painful since this reform sausage is stuffed with more gristle than meat. At least, that is, if you are a taxpayer hoping the bailout train is coming to a halt.
If you’re a banker, the bill is tastier. While banks opposed the legislation, they should cheer for its passage by the full Congress in the New Year: There are huge giveaways insuring the government will again rescue banks and Wall Street if the need arises.
Nuggets Gleaned
Here are some of the nuggets I gleaned from days spent reading Frank’s handiwork:
-- For all its heft, the bill doesn’t once mention the words “too-big-to-fail,” the main issue confronting the financial system. Admitting you have a problem, as any 12- stepper knows, is the crucial first step toward recovery.
-- Instead, it supports the biggest banks. It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for “no-more-bailouts” talk. That is more than twice what the Fed pumped into markets this time around. The size of the fund makes the bribes in the Senate’s health-care bill look minuscule.
-- Oh, hold on, the Federal Reserve and Treasury Secretary can’t authorize these funds unless “there is at least a 99 percent likelihood that all funds and interest will be paid back.” Too bad the same models used to foresee the housing meltdown probably will be used to predict this likelihood as well.
More Bailouts
-- The bill also allows the government, in a crisis, to back financial firms’ debts. Bondholders can sleep easy -- there are more bailouts to come.
-- The legislation does create a council of regulators to spot risks to the financial system and big financial firms. Unfortunately this group is made up of folks who missed the problems that led to the current crisis.
-- Don’t worry, this time regulators will have better tools. Six months after being created, the council will report to Congress on “whether setting up an electronic database” would be a help. Maybe they’ll even get to use that Internet thingy.
-- This group, among its many powers, can restrict the ability of a financial firm to trade for its own account. Perhaps this section should be entitled, “Yes, Goldman Sachs Group Inc., we’re looking at you.”
Managing Bonuses
-- The bill also allows regulators to “prohibit any incentive-based payment arrangement.” In other words, banker bonuses are still in play. Maybe Bank of America Corp. and Citigroup Inc. shouldn’t have rushed to pay back Troubled Asset Relief Program funds.
-- The bill kills the Office of Thrift Supervision, a toothless watchdog. Well, kill may be too strong a word. That agency and its employees will be folded into the Office of the Comptroller of the Currency. Further proof that government never really disappears.
-- Since Congress isn’t cutting jobs, why not add a few more. The bill calls for more than a dozen agencies to create a position called “Director of Minority and Women Inclusion.” People in these new posts will be presidential appointees. I thought too-big-to-fail banks were the pressing issue. Turns out it’s diversity, and patronage.
-- Not that the House is entirely sure of what the issues are, at least judging by the two dozen or so studies the bill authorizes. About a quarter of them relate to credit-rating companies, an area in which the legislation falls short of meaningful change. Sadly, these studies don’t tackle tough questions like whether we should just do away with ratings altogether. Here’s a tip: Do the studies, then write the legislation.
Consumer Protection
-- The bill isn’t all bad, though. It creates a new Consumer Financial Protection Agency, the brainchild of Elizabeth Warren, currently head of a panel overseeing TARP. And the first director gets the cool job of designing a seal for the new agency. My suggestion: Warren riding a fiery chariot while hurling lightning bolts at Federal Reserve Chairman Ben Bernanke.
-- Best of all, the bill contains a provision that, in the event of another government request for emergency aid to prop up the financial system, debate in Congress be limited to just 10 hours. Anything that can get Congress to shut up can’t be all bad.
Even better would be if legislators actually tackle the real issues stemming from the financial crisis, end bailouts and, for the sake of my eyes, write far, far shorter bills.
Health Insurance Monopolies Are Illegal. There Is No Insurance Antitrust Exemption
Original Link: http://www.opednews.com/articles/Health-Insurance-Monopolie-by-Jerry-Policoff-091228-669.html
By Jerry Policoff
One of the more under-reported aspects of the healthcare reform efforts currently making their way through the Senate and House of Representatives in Washington is the antitrust exemption conferred upon the insurance industry sixty-four years ago with the enactment of the McCarran-Ferguson Act of 1945. The Act fostered the growth of giant health insurance monopolies whose Wall Street driven for-profit corporate culture has produced a dysfunctional American healthcare system where profit takes precedence over health care.
The irony is that the McCarran-Ferguson Act was never intended to exempt the insurance industry from antitrust law or to protect it from strong regulation and enforcement. In fact it was designed to do exactly the opposite. The Act came about as a result of a Supreme Court decision, United States v South-Eastern Underwriters Assn., which found that insurance companies that sell policies across state lines are engaged in interstate commerce, and are thus subject to federal antitrust law. Up until that decision regulation of the insurance industry was the responsibility of the respective states. Many states were concerned that they no longer had that authority, and McCarran-Ferguson was designed to restore the power to regulate insurance to the states while also empowering the federal government. The Act permitted the federal government to regulate insurance, but it also stipulated that only the states have broad authority to regulate the insurance industry unless the federal government enacts specific legislation intended to regulate insurance and displace state law. In plain English that means that the states have the power to regulate the insurance industry but so does the federal government if it enacts specific laws directed at the industry. McCarran-Ferguson also unambiguously stipulated that the Sherman Anti-Trust Act of 1890 (which prohibits abusive monopolies) and the Clayton Act of 1914 (passed by the U.S. Congress as an amendment to clarify and supplement the Sherman Anti-Trust Act by prohibiting exclusive sales contracts, local price cutting to freeze out competitors, and in general prohibiting abusive monopolies), apply to the business of insurance to the extent that such business is not regulated by state law. In short, McCarran-Ferguson was designed to empower both the federal government and the individual states so that they could act to prevent insurance companies from becoming abusive monopolies. How ironic that it has instead enabled the health insurance industry to achieve exactly the opposite result because the federal government has chosen not to pass legislation targeting insurance monopolies and the states have, for the most part, shirked their regulatory responsibilities. It is time to restore the original intent of McCarran-Ferguson by subjecting the insurance industry to state and/or federal regulation and through vigorous enforcement of federal antitrust law.
House Speaker Nancy Pelosi apparently saw it that way. The House bill specifically subjects the health insurance industry to antitrust law, stripping it of any perceived exemption. Not so with the Senate Finance Committee chaired by Senator Max Baucus and his special interest-friendly gang of three, which produced a bill reportedly written by one Elizabeth Fowler. Fowler, no stranger to Baucus, had worked for him from 2001 to 2005 as Chief Health and Entitlements Counsel for the Democratic Staff of the Senate Finance Committee. She returned to the Senate in February of 2008 as Senior Counsel to Senator Baucus. In between she served as Vice President of Public Policy and External Affairs for insurance giant WellPoint, Inc., a small detail left out of the February 26, 2008 Max Baucus press release announcing her return to his staff where her portfolio would "include the panel's yearlong preparation for broad-based health care reform."
Apparently Baucus, Fowler, and WellPoint saw no need to strip the insurance industry of its antitrust exemption, so they didn't even though it was never intended to actually be an anti-trust exemption.
Senator Patrick Leahy had other ideas. He proposed an amendment to the Baucus Finance Committee Senate bill that would subject health and medical malpractice insurers to federal laws forbidding price-fixing, bid-rigging, or the dividing up of markets, an amendment favored by Senate Majority Leader Harry Reid, who maintained that a repeal of the anti-trust exemption would produce more competition and better prices for consumers. President Obama also implied support for the Leahy amendment when he voiced criticism of the antitrust exemption in his weekly radio address, complaining that the health insurance industry is "earning these profits and bonuses while enjoying a privileged exemption from our antitrust laws."
The final word on the Senate bill belonged not to Max Baucus, but to Harry Reid, so one might have expected the removal of the antitrust exemption to make its way into the Senate bill that was finally passed last week. The media has largely ignored the fact that the final Reid bill never did address the anti-trust issue, thus leaving the perceived exemption intact, and at odds with the House bill. The obvious question is why, and the answer would be Nebraska Senator Ben Nelson. Nelson, a former insurance industry executive (He served as CEO of the Central National Insurance Group, as chief of staff and executive vice president of the National Association of Insurance Commissioners, and as director of the Nebraska Department of Insurance), took issue with the Senate bill depriving his insurance industry friends of the right to legally defy federal anti-trust law. The insurance industry had also lobbied to keep the Leahy anti-trust provision out. Harry Reid, desperate for Ben Nelson's vote which would give him a 60-vote filibuster-proof majority, went along, and out it went.
Does the continuation of the insurance anti-trust exemption really make a difference? In a word, absolutely!
Both the Senate and House bills leave regulation of the insurance industry to the states which have never been known for holding the industry's feet to the fire. A recent study by The Center for American Progress found that State regulatory authorities rarely bring consumer protection suits against insurance companies and that is especially true in the states most dominated by one or two insurance companies that enjoy virtual monopoly status. In fact in the five states with the least competition four of the five had brought no such suits in the past five years. The report suggested that most states are stretched too thin, and lack the resources to enforce antitrust laws, citing Congressional testimony by Georgetown health policy professor Karen Pollitz's pointing out that "In four states, the Insurance Commissioner is also the fire marshal." Senator Leahy cited the study in support of his effort to repeal the antitrust exemption for health and medical malpractice insurers. "If we remove it, they will have to compete," Leahy saidin a conference call with reporters.
Of course we have come to learn that the minority, not the majority, rules, if the minority bears the name of Ben Nelson or Joe Lieberman (sometimes referred to as the Senator from Aetna).
There are some serious reformers who find much to fault in the healthcare reform bill just passed by the Senate, but who think it is time to hold our collective noses and pass this bill. I respect their opinions, but unless this bill undergoes some serious revision during the House/Senate reconciliation process I fear dreadful consequences if this bill becomes law. First and foremost, it is absolutely essential that federal antitrust law be recognized as something that applies to the health insurance industry, and the time is long past due for it to be utilized to strip the industry of the monopolistic power it both enjoys and abuses. I don't see the insurance companies mending their ways, and now, armed with mandates, they will have even more power and more money with which to thwart any attempt to enforce regulations that already exist, or that may be enacted in the future. To the extent the insurance industry has attained its exempt antitrust status; it is because the states and the federal government never exercised the regulatory authority that McCarren-Ferguson explicitly granted them. Any effort to reform health care has to start with reigning in and dismantling the health insurance monopolies. We need no laws empowering the government to do this, just an acknowledgement that present law allows it and always has.
By Jerry Policoff
One of the more under-reported aspects of the healthcare reform efforts currently making their way through the Senate and House of Representatives in Washington is the antitrust exemption conferred upon the insurance industry sixty-four years ago with the enactment of the McCarran-Ferguson Act of 1945. The Act fostered the growth of giant health insurance monopolies whose Wall Street driven for-profit corporate culture has produced a dysfunctional American healthcare system where profit takes precedence over health care.
The irony is that the McCarran-Ferguson Act was never intended to exempt the insurance industry from antitrust law or to protect it from strong regulation and enforcement. In fact it was designed to do exactly the opposite. The Act came about as a result of a Supreme Court decision, United States v South-Eastern Underwriters Assn., which found that insurance companies that sell policies across state lines are engaged in interstate commerce, and are thus subject to federal antitrust law. Up until that decision regulation of the insurance industry was the responsibility of the respective states. Many states were concerned that they no longer had that authority, and McCarran-Ferguson was designed to restore the power to regulate insurance to the states while also empowering the federal government. The Act permitted the federal government to regulate insurance, but it also stipulated that only the states have broad authority to regulate the insurance industry unless the federal government enacts specific legislation intended to regulate insurance and displace state law. In plain English that means that the states have the power to regulate the insurance industry but so does the federal government if it enacts specific laws directed at the industry. McCarran-Ferguson also unambiguously stipulated that the Sherman Anti-Trust Act of 1890 (which prohibits abusive monopolies) and the Clayton Act of 1914 (passed by the U.S. Congress as an amendment to clarify and supplement the Sherman Anti-Trust Act by prohibiting exclusive sales contracts, local price cutting to freeze out competitors, and in general prohibiting abusive monopolies), apply to the business of insurance to the extent that such business is not regulated by state law. In short, McCarran-Ferguson was designed to empower both the federal government and the individual states so that they could act to prevent insurance companies from becoming abusive monopolies. How ironic that it has instead enabled the health insurance industry to achieve exactly the opposite result because the federal government has chosen not to pass legislation targeting insurance monopolies and the states have, for the most part, shirked their regulatory responsibilities. It is time to restore the original intent of McCarran-Ferguson by subjecting the insurance industry to state and/or federal regulation and through vigorous enforcement of federal antitrust law.
House Speaker Nancy Pelosi apparently saw it that way. The House bill specifically subjects the health insurance industry to antitrust law, stripping it of any perceived exemption. Not so with the Senate Finance Committee chaired by Senator Max Baucus and his special interest-friendly gang of three, which produced a bill reportedly written by one Elizabeth Fowler. Fowler, no stranger to Baucus, had worked for him from 2001 to 2005 as Chief Health and Entitlements Counsel for the Democratic Staff of the Senate Finance Committee. She returned to the Senate in February of 2008 as Senior Counsel to Senator Baucus. In between she served as Vice President of Public Policy and External Affairs for insurance giant WellPoint, Inc., a small detail left out of the February 26, 2008 Max Baucus press release announcing her return to his staff where her portfolio would "include the panel's yearlong preparation for broad-based health care reform."
Apparently Baucus, Fowler, and WellPoint saw no need to strip the insurance industry of its antitrust exemption, so they didn't even though it was never intended to actually be an anti-trust exemption.
Senator Patrick Leahy had other ideas. He proposed an amendment to the Baucus Finance Committee Senate bill that would subject health and medical malpractice insurers to federal laws forbidding price-fixing, bid-rigging, or the dividing up of markets, an amendment favored by Senate Majority Leader Harry Reid, who maintained that a repeal of the anti-trust exemption would produce more competition and better prices for consumers. President Obama also implied support for the Leahy amendment when he voiced criticism of the antitrust exemption in his weekly radio address, complaining that the health insurance industry is "earning these profits and bonuses while enjoying a privileged exemption from our antitrust laws."
The final word on the Senate bill belonged not to Max Baucus, but to Harry Reid, so one might have expected the removal of the antitrust exemption to make its way into the Senate bill that was finally passed last week. The media has largely ignored the fact that the final Reid bill never did address the anti-trust issue, thus leaving the perceived exemption intact, and at odds with the House bill. The obvious question is why, and the answer would be Nebraska Senator Ben Nelson. Nelson, a former insurance industry executive (He served as CEO of the Central National Insurance Group, as chief of staff and executive vice president of the National Association of Insurance Commissioners, and as director of the Nebraska Department of Insurance), took issue with the Senate bill depriving his insurance industry friends of the right to legally defy federal anti-trust law. The insurance industry had also lobbied to keep the Leahy anti-trust provision out. Harry Reid, desperate for Ben Nelson's vote which would give him a 60-vote filibuster-proof majority, went along, and out it went.
Does the continuation of the insurance anti-trust exemption really make a difference? In a word, absolutely!
Both the Senate and House bills leave regulation of the insurance industry to the states which have never been known for holding the industry's feet to the fire. A recent study by The Center for American Progress found that State regulatory authorities rarely bring consumer protection suits against insurance companies and that is especially true in the states most dominated by one or two insurance companies that enjoy virtual monopoly status. In fact in the five states with the least competition four of the five had brought no such suits in the past five years. The report suggested that most states are stretched too thin, and lack the resources to enforce antitrust laws, citing Congressional testimony by Georgetown health policy professor Karen Pollitz's pointing out that "In four states, the Insurance Commissioner is also the fire marshal." Senator Leahy cited the study in support of his effort to repeal the antitrust exemption for health and medical malpractice insurers. "If we remove it, they will have to compete," Leahy saidin a conference call with reporters.
Of course we have come to learn that the minority, not the majority, rules, if the minority bears the name of Ben Nelson or Joe Lieberman (sometimes referred to as the Senator from Aetna).
There are some serious reformers who find much to fault in the healthcare reform bill just passed by the Senate, but who think it is time to hold our collective noses and pass this bill. I respect their opinions, but unless this bill undergoes some serious revision during the House/Senate reconciliation process I fear dreadful consequences if this bill becomes law. First and foremost, it is absolutely essential that federal antitrust law be recognized as something that applies to the health insurance industry, and the time is long past due for it to be utilized to strip the industry of the monopolistic power it both enjoys and abuses. I don't see the insurance companies mending their ways, and now, armed with mandates, they will have even more power and more money with which to thwart any attempt to enforce regulations that already exist, or that may be enacted in the future. To the extent the insurance industry has attained its exempt antitrust status; it is because the states and the federal government never exercised the regulatory authority that McCarren-Ferguson explicitly granted them. Any effort to reform health care has to start with reigning in and dismantling the health insurance monopolies. We need no laws empowering the government to do this, just an acknowledgement that present law allows it and always has.
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