"Salem, Massachusetts, Essex Street, looking north from town square"
Ilargi: Before I hand you to Ashvin for the third article in his series on "the psychology of losing", I want to point out what I see as the perfect way to describe the decay of your societies, in two simple headlines:
From Becky Barrow in the Daily Mail:
The rising cost of living revealed: How young need 'twice the salary to match parents' lifestyle'Young workers would need to earn twice as much to have the lifestyle their parents enjoyed at the same age, research reveals today. The dramatic salary increase would make it easier for them to marry, buy a home and have children – choices within easier reach of earlier generations. The report said the average twenty-something earns about £21,000 – but would require £40,000 to match their parents.
Ilargi: The article has an interesting sidebar segment entitled:
Older Workers Stripped Of Benefits
Millions of older workers will be robbed of crucial insurance benefits under a rule change quietly announced by the Government yesterday. From April, bosses will be allowed to axe perks such as private medical cover, death-in-service benefits and life insurance for over-65s.
Ilargi: And then there's this by E.S. Browning in the Wall Street Journal:
Boomers Find 401(k) Plans Fall ShortThe 401(k) generation is beginning to retire, and it isn't a pretty sight. The retirement savings plans that many baby boomers thought would see them through old age are falling short in many cases.
The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement
Ilargi: It really is our world today in a nutshell. Kids can't match their parents' salaries and lifestyle. And neither can those very same parents. Everybody's a lot worse off. And we're still only in the first stages of this. If you look at things from this vantage point, it matters little that, as Angela Moon writes for Reuters,
Wall Street's 'Buy Everything' Sentiment ContinuesInvestors will continue to ride the speediest rally in U.S. stocks since the Great Depression despite growing concerns that the market is overbought and due for a correction. Wall Street posted its third consecutive week of gains with the S&P 500 now up 6.8 percent for the year and more than 20 percent in just six months.
"I've never seen a market like this," said Paul Mendelsohn, [..] a market watcher for 35 years. "I'm showing, by every technical and quantitative standard I have, this market is at extreme levels. But no matter where we start out in the morning, buyers come in."
Ilargi: And make no mistake about it, there's a direct link between the impoverishment on Main Street and the return of the party on Wall Street. The money one side loses is the same that the other one gains, even if that is just fleeting.
More on that another day. First, Ashvin:
"Lions and tigers used to be kings of the jungle and then one day they wound up in zoos - I suspect we're on the same track."
- Josh Harris
I recently wrote two brief articles outlining the psychology of irrational financial decisions made by individuals in developed societies, or "fish",and their disproportionately negative reactions to financial loss (as opposed to financial gain). The analogy to "fish" in poker, in A Glimpse Into the Stubborn Psychology of Fish, was used to highlight the general mass psychology underlying a decades-long credit bubble and persistently stubborn expectations of never-ending growth, while the second concept of "myopic loss aversion" in The Short Story of How We Lose, illustrated the frightening scale of systemic frustration and displeasure most likely to result from the bubble's implosion. Yet, both of these concepts seem to beg a more profound question about the underlying psychological states they reflect:
Why do individuals in the developed world find it so difficult to, first, understand that these psychological states exist and, second, take some degree of personal control over them before it's too late to make a difference?
The general answer to this question may be simple, but its supporting framework is anything but and requires a sharp detour through the looking glass, away from our personal perspectives and into the arena of systemic, "big picture"analysis. The thought patternsand reactions associated with financial investment and loss may occur within the minds of specific individuals, but they are broadly structured and re-enforced by the human systems in which these individuals exist (economic, social, cultural, political). These evolved systems exhibit an emergent psychology that may not necessarily manifest itself within the minds of isolated individuals, or even small groups.
In that sense, we are living in an environment where the traits most critical for maintaining a healthy financial psychology, one detached from desires to "win every pot" or "chase every loss" and capable of emotionally handling short-term loss, are nowhere to be found.
These traits include patience, discipline and self-confidence, and more specifically, an ability to sacrifice personal pleasure or egoistic pride in the short-term for long-term stability and prosperity. Those values may resonate with first-world, middle-class citizens in the abstract or in a work of fiction, but practically we are no more familiar with them than we are with ideals of loyalty, selflessness and courage.
Every aspect of our lives, from our days as young children playing games in elementary school to those as young professionals investing money in an asset market, has been conditioned on the premise that faster is not only better, but it is absolutely necessary for any degree of material success. We cannot afford to have patience or discipline, because we will miss out on all of the phenomenal returns casually tossed forth from the new hot thing in the technology sector or the new guaranteed play in the commodity space. Objective research and analysis is tolerated only to the extent that it does not stray too far from the conventional wisdom - growth and greed are always good.
If, somehow, we do actually lose a bit of money in our speculative investments, then we surely cannot afford to let that prevent us from watching our favorite daily line-up of mindless 30-minute prime time television shows, as they comfortably numb the pain of our loss. As long as we can hold on to our investment assets for dear life while the markets chaotically gyrate upwards, they will eventually regain their former value and it will be as if nothing ever happened in the first place. There is no apparent sensible reason for the average financial consumer to acquire and maintain discipline in their financial decisions, when investors with no such discipline continually stack their hands on top of their fists and watch truckloads of money materialize in the space between.
If your goal is to become materially wealthy and successful in a matter of months or years, then you had better not fold any potential winners. No, you must listen to a few short clips on CNBC, in which Jim Cramer spouts off buy/sell recommendations at madhouse velocity, and then immediately turn your money over to a brokerage firm which can allocate it (- commissions) towards the recommended equities and high-yield bonds. Personally, I recommend sub-prime mortgage-backed securities, because even though they may walk, talk, act and smell like human excrement, they have been officially rated AAA. If you get "scared" and end up selling these assets to cut your losses, then you will no longer be a loser on a piece of paper, but an officially-confirmed one in real life.
The human brain is a highly efficient machine (not to be confused with rational), and it will not adapt itself to incentives that simply do not exist. Policymakers and authority figures at every level of society would not have dared to incentivize values of patience or short-term sacrifice, because these traits did not help maintain the financial system of perpetual growth which effortlessly kept them in power. They immediately recognized the new financial reality that was rapidly spreading like cancer throughout much of the world, and they jumped on board before it left them behind. Our world had been defined by networked systems of material and intellectual production that communicate information within and between themselves at break-neck speed - our minds could not help but thoroughly condition themselves to desperately try and keep pace. That is, at least, until the "lactic acid" builds up and it's no longer physically possible for them to do so.
Josh Harris, a notorious pioneer of the Internet Age, ran a surprisingly little-known experiment in Manhattan at the end of the 1990s, ironically called "Quiet: We Live in Public". It consisted of 100 artists living in a basement "hotel" that was outfitted with pod rooms, and it lasted for one month before being shut down on the first day of the new millennium. The hotel offered "free" food, drinks and entertainment for the duration of a person's stay, but it charged an extremely hefty price in return.
Each pod contained a video camera and monitor system that was networked to those in every other pod, so that each person could observe what any other person was doing when he/she was no longer in one of the communal areas. The artists could not eat, shower, sleep, use the bathroom or engage in sexual activity without someone potentially watching them do it.
Harris designed the experiment to showcase the Orwellian future he envisioned for our technocratic network society, and the ways in which people will react to this new reality. As one may expect, many of the self-proclaimed "open-minded" artists, who initially jumped at the opportunity to "live in public", quickly devolved into little more than territorial animals. The situation would have most likely resulted in deadly violence if it had not been stopped by the police and fire department, especially since the hotel contained a shooting range and a cadre of guns.
It was not really the loss of privacy that spurred this rapid social deterioration, but the loss of any meaningful control over one's ability to remain private. Harris himself had a partial "mental breakdown" after he continued the panoptic experiment for six more months with his girlfriend in their loft apartment.
"Quiet" has become both symbolic and a literal representation of developed societies, where people lack any control over the material conditions of their existence and relations with others. The ability to control such conditions was almost always illusory, but the illusion had worked extremely well for many years. Now, our expectations of privacy have exponentially diminished since the turn of the millennium, just as Harris predicted, but so have our expectations of financial stability and prosperity.
Networked computers determine just how quickly our private lives become discrete packets of public information, and our financial portfolios become electronic heaps of worthless rubble. We "volunteered" to participate in this grand experiment, allured by promises of cheap food (energy) and unique entertainment, and so we will follow its dictated psychology to the bittersweet end, when it is finally shut down and our minds are left with scattered memories of a dark and regrettable time in the collective history of mankind.
For a detailed look into Josh Harris' "Quiet" experiment and other aspects of his life, I highly recommend the award-winning documentary, We Live in Public.
Wall Street's 'Buy Everything' Sentiment Continues
by Angela Moon - Reuters
Investors will continue to ride the speediest rally in U.S. stocks since the Great Depression despite growing concerns that the market is overbought and due for a correction. Wall Street posted its third consecutive week of gains with the S&P 500 now up 6.8 percent for the year and more than 20 percent in just six months.
"I've never seen a market like this," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont, a market watcher for 35 years. "I'm showing, by every technical and quantitative standard I have, this market is at extreme levels. But no matter where we start out in the morning, buyers come in."
The trend of stocks starting off lower in the morning session but ending higher by the afternoon has been ongoing for weeks as investors view the small dips as reasons to buy. But there is a perceptible level of anxiety in the market. Trading volume has been exceptionally low recently and the CBOE Volatility Index .VIX, Wall Street's so-called fear gauge, is up on the week despite the gains in stocks.
The index is usually inversely correlated to the S&P 500, and a rise in the VIX typically means a drop in the stock market. The VIX, which ended at 16.43, up 4.7 percent on the week, is still historically low but substantially higher than in recent months. That suggests investors see more share gyrations ahead.
The driving force behind the rally is the money that poured into riskier assets like stocks in the last quarter of 2010 after the U.S. Federal Reserve pledged to keep interest rates low. "With so much momentum in the market, we are likely to see some sideways consolidation next week but nothing more than that," said Ryan Detrick, technical analyst at Schaeffer's Investment Research in Cincinnati, Ohio.
About 7.13 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq on Friday, below last year's estimated daily average of 8.47 billion. Stocks have been struggling to match last year's trading levels, hovering in the 7 billion range this week. On Thursday, the volume was the second-lowest of the year at 6.7 billion shares, and Monday's session was the lowest of the year with a mere 6.6 billion shares.
"This is a sign that the market is tired, and unless we see an uptick in this volume," the level of investor anxiety will not retreat, Detrick said. U.S. markets are closed on Monday for the Presidents Day holiday.
We All Work at Enron Now
by Umair Haque - Harvard Business Review
Remember Enron? That paragon of turn-of-the-century new-economy triumphalism, gushed over by pundits, lauded by investors, celebrated by the cognoscenti — until it turned out to be a roadside bomb in disguise? The cause of its demise, ultimately: overstating benefits and understating costs. The result, of course, was a spectacular flameout, today the stuff of legend.
So here's a question. Is the global economy going Enron? Just like Enron, does it systematically and chronically overstate real benefits (consider just how vanishingly little "profit" reflects trust, happiness, joy, delight, inspiration, passion, wisdom, or a sense of meaning) and understate real costs (like damage to nature, the future, communities, society, or human achievement itself)? And is that, perhaps, the prime mover of what both Tyler Cowen and I have termed a Great Stagnation?
You might say, "Well, if it does I can see how it's unfair, but so is life, you big girl's blouse. Grow up!!" So here's why I ask. The Enron effect is highly hazardous because it lethally poisons incentives. Incentives shape human behavior — and overcounting benefits and undercounting costs is a surefire way to blunt our incentives to innovate, to take on ambitious goals, and create real value. In fact, understating costs and overstating benefits creates disincentives to do that, and creates, instead, incentives to at best rest on your fading laurels forever — and at worst, extract, exploit, purloin, loot, glad-hand, and pass the buck.
Let's take a moment and imagine what might happen in an economy that consistently, chronically undercounted real costs and overcounted real benefits, poisoning the incentives for the creation of authentic, enduring wealth. Let's call it Enronia, for short.
- Innovation atrophy. In Enronia, companies would tend to produce mediocre products and services, if not downright self-destructive, harmful ones. You know how your mobile operator manages to slyly slide hidden costs past you — and the service you get is patchy and unpredictable? That's the Enronian economy in a microcosm. When an economy undercounts costs and overcounts benefits, the result is a surfeit of fundamentally uninspiring, drab uncompetitive stuff.
- Unemployment. Enronian companies would be chronically unable to create jobs (especially higher quality jobs). "Jobs" ignite when there are costs to be paid: one party's "expenditure" is another's "work". When capital circulates amongst economic actors, jobs result. But in an economy where costs aren't priced or paid, capital fails to circulate, and the result must be growing unemployment (think back a few centuries: when companies didn't have to "pay" for "labour," and economies had a lot fewer "jobs" — and a lot more indentured servitude and slavery). Once companies have to account for the costs they've been externalizing, new jobs to manage new competencies will emerge. But in Enronia, companies don't have to pay 21st century costs — nor does any other industry — and the result is a lack of 21st century jobs.
- Deep debts. The more Enronian GDP "grows," the steeper the eventual bill of underpaid costs and overbought benefits to be paid. In an economy with undercounted costs and overcounted benefits, growth in "output," instead of reflecting tangible gains to people, communities, society, and nature, merely reflects costs shifted to — or benefits borrowed from — them. It resembles a zero-sum game, empty of real prosperity. In such an economy, GDP might "recover" from a "recession" (over and over again) even as the average household watches its income, net worth, and opportunities flatline or plummet. And as the costs shifted away from businesses accumulate, the costs born by society increase. In Enronia, the food industry reduces their own costs by making food with ever cheaper — and less nutritious — inputs, while consumers become less and less healthy, and taxpayers and the federal government pay ever more for health care.
- Megafailure. What might ultimately happen to the Enronian economy? Markets would fail at allocating capital — and misallocate and malinvest it in low-worth stuff instead. Corporations would fail at innovating, creating, and engaging. Governments would fail at fiscal rectitude. Currencies would fail at storing value. People would fail at making wealth maximizing decisions. Prices would fail at carrying meaningful information. Investors would fail at seeding tomorrow's disruptive companies and disruptive technologies. Banks would fail at lending and borrowing. Communities and ultimately society might even fail — and grow more polarized, riven, and fractious.
Here's Enronia's really big problem. It's an economy plagued by more violent and more harmful vicious cycles. The more its corporations "profit", the emptier prosperity becomes. The more "shareholder value" is "created," the more people, communities, society, nature, and the future struggle to flourish. The more intense and fierce "competition" gets, the less awesome, inspiring, compelling, and meaningfully better stuff becomes. The more it "grows," the less that growth matters in human terms: the more trust, happiness, shared values, bigger purpose, and a sense of meaning dry up and stagnate — and the more social and political tensions boil and bubble, as squabbles over dividing up a shrinking pie flare into full-blown fistfights.
That sounds less and less like some Twilight Zone counterfactual and more and more like our own Great Stagnation. The global economy as we know it systemically, chronically undercounts real costs, and overcounts real benefits. As a result, the global economy's incentives are broken; the incentives to take on the challenges of authentic prosperity, to create stuff of enduring worth, to ignite real, lasting value — all are distorted. The real crisis isn't a transient, passing event ("the great crash of 2008"), but a persistent, enduring, deeply flawed relationship that produces crashes ever faster, and ever more violently.
All of which might just hold a powerful lesson for the future of advantage — national organizational, and personal. Industrial-age advantage was about understating costs or overstating benefits slightly harder and faster than the next guy. But in a tiny, fragile, crowded world, yesterday's paths to advantage might just be sources of disadvantage. It's not just that in a hypercompetitive world, yesterday's competitive edges are as dull as a plastic spork. Rather, it's what Hosni Mubarak just learned the hard way: that in a hyperconnected world, the people formerly known as "consumers," "employees," "investors," and "subjects" have rarely been more powerful — and more unpredictable, critical, or exacting.
The bogus prosperity that imbalanced institutions create never lasts forever — and in a hyperconnected world, where people can not only instantly pierce the shabby veil of empty promises, glib spin, and cheap talk, but also actively, furiously besiege yesterday's most imperiously powerful institutions and oust their so-called leaders, it's probably worth less than a three dollar bill. Sure, you can continue to (or at least try to) overstate your real benefits, and understate your real costs — but today anyone with a Twitter account and a conscience more highly developed than Hannibal Lecter's probably won't buy it. Instead, they might just revolt against it. Sure, you can stay put in dismal, decrepit Enronia — but today, the rest of the world's probably itching to tear down the iron curtains and move out.
Think it's impossible? Think again. Wal-Mart's pioneered a ground-breaking Sustainability Index. UK Uncut is self-organizing demonstrations against mobile operators and banks. The Acumen Fund is investing to make a difference, not merely a "profit." Pepsi's aiming for water-neutrality. Unilever, to make micronutrient-enriched food that helps end global malnutrition. Nike's shooting not just to manufacture shoes — but to remanufacture them. They're just a small smattering of a larger movement: a cadre of radical innovators taking the first tiny steps to healing our imbalanced economy by living and breathing real costs and real benefits.
Sure: you can probably earn a near-term profit this year by becoming, metaphorically, the latest dismal denizen of Enronia — and, ultimately, going down with that listing global economic ship. Or you can take a deep breath, steel yourself, and learn to swim. I don't think the world's going to get less connected, competitive, critical, emancipated, sophisticated, self-aware, or demanding — it's my bet that it's going to get (much) more so.
That's why the future of advantage hinges on discovering the full weight of your real costs, and the meanness of your real benefits — because that brutal self-honesty is the only way to reboot yesterday's self-destructive, stulltifying incentives, transcend the banal, trivial, tedious, pifflingly mediocre — and do better.
The rising cost of living revealed: How young need 'twice the salary to match parents' lifestyle'
by Becky Barrow - Daily Mail
Young workers would need to earn twice as much to have the lifestyle their parents enjoyed at the same age, research reveals today. The dramatic salary increase would make it easier for them to marry, buy a home and have children – choices within easier reach of earlier generations. The report said the average twenty-something earns about £21,000 – but would require £40,000 to match their parents.
Struggle: Research has revealed that huge financial deficits facing young couples are resulting in them delaying key stages in life, such as buying a home The massive financial deficit is forcing young people to delay key life stages, according to First Direct, the bank which commissioned the report. ‘Three in ten of their parents were married and on the property ladder by the age of 25,’ it said. ‘But money worries mean the average young Briton today does not expect to pass these milestones until their mid-30s.’
Three in four of the 3,000 polled for the study agreed with the contention that today’s young people ‘are the most financially pressured in history’. One in five has postponed, or feels they should postpone, marriage plans. One in four is delaying having children. Nearly a third are even considering not having children at all ‘because they cannot afford to do so’, according to First Direct which calls them ‘Generation Gap’.
By contrast the report suggested that most of their own parents had delayed no major life stages. One of the biggest problems for twenty-somethings is the enormous cost of buying a property. A couple who married in 1985 could have picked up a home for just £35,000 – the average price at the time and four times the average salary. A child born to the couple two years later would now be 24 and need to find £163,000 for a similar house – eight times the average salary.
To make matters worse, the study shows that a university education would have left them with debts averaging £11,500. Taken together the financial pressures can make it all but impossible to buy a house or have a child. Salaries are also under great pressure with a typical private sector worker able to expect a pay rise of only 1.7 per cent. State workers who get paid £21,000 or more are facing a two-year pay freeze.
The consequences for women can be devastating if money problems make them delay trying for children until they are in their late 30s and even 40s. By then, their chances of having a healthy baby have declined dramatically. The research also showed that a typical parent, aged over 45, would have married around the age of 26, had their first child at the same time and bought their first home at the age of 27. Housing minister Grant Shapps said this week that he was shocked by the revelation that the average age of a first-time buyer stands at 37 for those who do not receive financial help from their parents.Older Workers Stripped Of Benefits
Millions of older workers will be robbed of crucial insurance benefits under a rule change quietly announced by the Government yesterday. From April, bosses will be allowed to axe perks such as private medical cover, death-in-service benefits and life insurance for over-65s.
The Department for Business says the ‘get-out clause’ is necessary because more workers will carry on into their 70s following a rule change, also in April, that stops employers getting rid of workers at 65. Older staff are much more expensive, because they are more likely to call on a private medical insurance policy and lodge bigger claims. A healthy 20-year-old might pay a monthly premium of £28 compared with £88 for a 65-year-old, according to medical insurance firm Bupa.
Daniel Barnett, an employment law barrister, said withdrawing benefits made business sense, but left employees at risk of losing their insurance benefits at the time they need them most. Neil Duncan-Jordan, of the National Pensioners Convention, said: ‘The default retirement age was hailed by many as a step forward. ‘But when you look at the small print, it is not nearly so good. In a way, these insurance changes are a way of forcing out older people.’
A Department for Business spokesman said the exemption ensured group insurance schemes didn’t become too risky or expensive for firms.
Boomers Find 401(k) Plans Fall Short
by E.S. Browning - Wall Street Journal
The 401(k) generation is beginning to retire, and it isn't a pretty sight. The retirement savings plans that many baby boomers thought would see them through old age are falling short in many cases.
The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal. Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings. Data from other sources also show big gaps between savings and what people need, and the financial crisis has made things worse.
This analysis uses estimates of 401(k) balances from the end of 2010 and of salaries from 2009. It assumes people need 85% of their working income after they retire in order to maintain their standard of living, a common yardstick. Facing shortfalls, many people are postponing retirement, moving to cheaper housing, buying less-expensive food, cutting back on travel, taking bigger risks with their investments and making other sacrifices they never imagined.
"Inevitably, we find that, for the average person, there is not enough there," says financial adviser Paul Merritt of NTrust Wealth Management in Virginia Beach, Va., who has found himself advising many retirement-age people with too little savings. "The discussion turns out to be: What kind of part-time work do you want to do after you retire?" He has clients contemplating part-time work into their 70s, he says.
Tax-deferred 401(k) retirement accounts came into wide use in the 1980s, making baby boomers trying to retire now among the first to rely heavily on them. The problems are widespread, especially among middle-income earners. About 60% of households nearing retirement age have 401(k)-type accounts, according to government data, and those represent the majority of most people's savings. The situation is less dire for those in a higher income bracket, who tend to save more outside their 401(k) accounts and who have more margin for error if their retirement returns fall below the recommended 85% figure.
Steven Rutschmann, 60 years old, manages the buildings and grounds at a Midwest research facility. His employer recently offered him a bonus if he retired early. Mr. Rutschmann's 401(k) is well into six figures. His wife has a 401(k) and expects a small pension from her nursing job. An outdoorsman, he dreams of spending time hunting, fishing and hiking. So he consulted a financial planner at Ernst & Young and learned that even with the bonus, his savings could run out before he turns 85. Now he expects to work for several more years. "I was disappointed," says Mr. Rutschmann, whose 401(k) balance was damaged by the financial crisis and who still has a large mortgage.
In general, people facing problems today got too little advice, or bad advice. They didn't realize that a 6% annual contribution, with a 3% company match, might not be enough. Some started saving too late or suspended contributions when they or their spouses lost jobs. Others borrowed against 401(k) accounts for medical emergencies or ran up debts too close to their planned retirement dates.
In the stock-market collapses of 2000-2002 and 2007-2009, many people were over-invested in stocks. Some bailed out after the market collapse, suffering on the way down and then missing the rebound. Initially envisioned as a way for management-level people to put aside extra retirement money, the 401(k) was embraced by big companies in the 1980s as a replacement for costly pension funds. Suddenly, they were able to transfer the burden of funding employees' retirement to the employees themselves. Employees had control over their savings, and were able carry them to new jobs.
They were a gold mine for money-management firms. In 30 years, the 401(k) went from a small program to a multi-trillion-dollar industry supporting thousands of financial planners and money managers. But a 401(k) also requires steady, significant savings. And unlike corporate pension plans, which are guaranteed by the U.S. government, 401(k) plans have no such backstop.
The government and employers aren't going to pay more for people's retirements. Unless people begin saving earlier and contributing more to their 401(k) plans, advisers say, they are destined to hit retirement age with too little money.
Vanguard Group, one of the biggest providers of 401 (k) plans, has changed its advice on how much people should save. Vanguard long advised people to put 9% to 12% of their salaries—including the employer contribution—in their 401(k) plans. The current median amount that people contribute is 9%, counting the employer contribution, Vanguard says. Recently, Vanguard has begun urging people to contribute 12% to 15%, including the employer contribution, because of the stock market's weak returns and uncertainty about the future of Social Security and Medicare.
Plans of younger people have been affected too. Of those 45 to 59 who had substantial retirement assets prior to the downturn, 40% planned to work longer, according to a study by the Center for Retirement Research. Gloria Moss has been contributing to a 401(k) since 1985, when she went back to work after having children. Especially after divorcing, she wasn't able to contribute as much as she wished and when her children finished college, she focused on repaying college loans. She says she lost more than half her savings in the recent financial crisis, then shifted heavily to bonds and missed the stock rebound.
"I thought I was doing the right thing, and found out otherwise," she says. When she consulted a financial adviser, "I got a report that said, 'You have a 5% chance of reaching your retirement goal'." In her early 60s, she is ready to retire, but if she does that now, "I will have $25,000 to $30,000 a year less than I anticipated having," she says. To retire at her current standard of living, she figures, she needs nearly twice the savings she has now.
Dr. Moss, who has a Ph.D. in education, also made good decisions along the way. She saw trouble coming at the educational software company where she worked and found a new job a week after losing hers. Now she has sold the condominium she loved, near the Atlantic Ocean, and moved to a cheaper house. She cut back on vacations and meals out. She adores the theater but hasn't been to a play in at least a year.
She works extra hours each week and contributes to her employer's version of a 401(k), but doesn't feel financially able to contribute the maximum amount. "I am going to probably have to work considerably longer than I anticipated," she says. "It is a nice job but I had not planned to be working well into my sixties," she says. "A lot of people are doing that. They need the money."
It isn't possible to calculate precisely how many people are able to cover the recommended 85% of their pre-retirement income, but Federal Reserve data suggest that many people can't. Consider households headed by people aged 60 to 62, nearing retirement, with a 401(k)-type account at their jobs. Such households had a median income of $87,700 in 2009, according to data from the Center for Retirement Research at Boston College, which derived this and other numbers by updating Fed survey data, at The Journal's request. The 85% needed for retirement would be $74,545 a year.
Experts estimate Social Security will provide as much as 40% of pre-retirement income, or $35,080 a year for that median family. That leaves $39,465 needed from other sources. Most 401(k) accounts don't come close to making up that gap. The median 401(k) plan held $149,400, including plans from previous jobs, according to the Center for Retirement Research. To figure the annual income from that, analysts typically look at what the family would get from a fixed annuity.
That $149,400 would generate just $9,073 a year for a couple, according to New York Life Insurance Co., the leading provider of such annuities— less than one-quarter of the $39,465 needed. Just 8% of households approaching retirement have the $636,673 or more in their 401(k)s that would be needed to generate $39,465 a year. Some families do have other income. Just under half expect pension income of a median $26,500 a year. Added to the $9,073 in 401(k) income, that still falls short. Some families have other savings, but Federal Reserve and other data suggest that those don't fill the gap for most people.
These data don't even include people who are in the direst situations: Those who have lost their jobs, stopped contributing to 401(k) plans or shifted to jobs without 401(k) plans. The numbers also don't account for inflation, which would further eat into income from a 401(k). Some researchers question the Fed numbers because they are based on surveys rather than on records of actual contributions.
Jack VanDerhei, head of research at the Employee Benefit Research Institute, a group supported by 401(k) providers, estimates the median person actually has about $158,754, based on data from 401(k) providers. That is based on individuals in their 60s who have been at the same company for more than 30 years, a somewhat different group than that measured by the Fed data. Even that amount of 401(k) savings generates much less than what is needed.
The difficulties have been worsened by the 2007-2009 financial crisis. Since the housing and financial markets began to collapse, about 39% of all Americans have been foreclosed upon, unemployed, underwater on a mortgage or behind more than two months on a mortgage, says Michael Hurd, director of the Rand Corporation's Center for the Study of Aging.
In 2008, when he was 59, John Mastej figured he was on track to retire in his early 60s. He and his wife both were working, with 401(k) plans. Counting all their savings, they had close to $200,000. Mr. Mastej was putting 20% of his salary into his 401(k). The financial collapse cut their savings in half and left Mr. Mastej out of work for two years, with no 401(k) contributions. He had to dip into other savings and use up an inheritance to pay the mortgage. He found a new job in a specialty food store, but it paid much less than his old one in a plastics factory.
Today, Mr. Mastej figures he has about $90,000 in savings left, including about $50,000 from the two 401(k)s, now mostly in a fixed annuity that isn't affected by the stock market. He and his wife have canceled their satellite television and drive 11-year-old cars to work. They buy some food at discounted prices through their church, but are proud they have remained current on their mortgage, home-equity loan, insurance and property taxes. "We don't go out to dinner. We don't do much entertaining," Mr. Mastej says. "I will probably end up having to work for another 10 years."
Carol Dailey is continuing to work at age 71. Ms. Dailey spent 10 years as an executive assistant at America Online and had stock options she figures were once worth $1.7 million. The options' value collapsed with the company's stock. Now she relies on her 401(k), which took a hit in the 2008 market plunge. She has cut back spending for entertainment and organic food, and continues to work three days a week as an office manager for an Internet security company. "At AOL, we were buying $60 bottles of wine and not blinking. Now I drink box wine," she says.
Eventually, she wants to retire completely. Then, to make ends meet, she plans to take bigger investment risks. Her financial adviser then will shift some of her savings out of an annuity and into high-yielding bonds and real-estate investment trusts, aiming to double the return on that money to 10% a year.
Some people were done in by the twin collapses of the housing and stock markets. Patti and Bob Webster had accumulated a six-figure balance in their 401(k) accounts and were building a dream house in North Carolina in 2007. They planned to retire there in about a year. Then their builder went out of business and the stock collapse knocked 40% off their savings. They temporarily suspended 401(k) contributions.
"We thought we had the perfect plan," says Patti Webster. "When the bottom fell out of the market, it kind of fell out of our perfect plan as well." Today in their mid-60s, they have completed the house but have worked two years longer than planned and expect to work two years more. "We are having to spend another two years in just trying to catch up with what the market did to us," Ms. Webster says.
Number of new homes built in Britain lowest since 1923
The number of new homes completed in England last year fell to its lowest level since 1923, Government figures showed on Thursday. Just 102,570 properties were built in 2010, 13pc less than in the previous 12 months, and the lowest level during peacetime since 1923, according to Communities and Local Government.
There were double digit falls in the number of homes both started and finished during the final quarter of the year, as the construction industry was hit by bad weather. Only 23,000 homes were started in the three months to the end of December, 11pc fewer than during the previous quarter, while the number completed fell by 13pc to 23,190.
Within the total, the fall in completions was greatest among private developers, with the number of properties they finished diving by 18pc, compared with a 3pc rise for housing associations. The annual level of completions is well below the 232,000 properties it is estimated need to be built in England each year to keep pace with rising demand.
Stewart Baseley, executive chairman of the Home Builders Federation, said: "Today's figures reveal the extent of the housing crisis and we need real action now to prevent the crisis deepening. "The problem is that we have a planning system in the midst of radical change, expensive and unnecessary red tape and a shortage of mortgage availability. "If we are going to weather this perfect storm, tackle the housing shortage and produce growth across the country we need early action to resolve and simplify planning, reduce regulation and encourage lenders to lend again."
The figures came as the Government announced the first £200m of a new scheme to encourage local communities to build more homes has been allocated to councils. It has set aside nearly £1bn to kick-start its New Homes Bonus initiative, which will see local authorities given extra cash for every new home built in their area.
Under the scheme, the Government will match the council tax raised through new homes for the first six years, with councils receiving up to 36pc more for affordable homes. Money will also be paid for empty homes brought back into use. As a result, councils will get an average of more than £9,000 for every band D home built, or nearly £11,000 for an affordable property, during the six years.
The Government estimates that a community that builds an additional 1,000 properties could earn up to £10m. The money will be paid to councils, who will be encouraged to consult their local community on how it is spent. Possible uses for the cash range from council tax discounts for local residents, to boosting frontline services, such as rubbish collections, to providing facilities, such as swimming pools and leisure centres.
The Government estimates the scheme will lead to an additional 140,000 new homes being built in the coming 10 years. Housing minister Grant Shapps said: "Telling communities what homes they need and where they should be built has had catastrophic consequences. "To kickstart a housebuilding revolution, development needs to be backed by local communities rather than opposed by them."
Around 326 local authorities will share the first £200m, with Tower Hamlets getting the most at £4.3m, followed by Islington at £3.7m and Birmingham at £3.2m. Other councils making the top 10 that will receive the most from the first payout include Manchester, Leeds, Bristol, Bradford and Milton Keynes.
This Isn't Deficit Control. It's Assault.
by Richard Trumka - Huffington Post
No job safety inspections while inspectors are furloughed for up to three months. No food safety inspections while inspectors are off the job for more than a month. Ten thousand teachers and aides cut from struggling schools and 7,000 special education teachers and staff gone. State and local job training and employment services phased out for up to 8 million workers. Medicare and Social Security operations crippled. Fewer local police officers. Wall Street reform stymied. Policing of the financial practices that sank our economy gutted. More than 340,000 transportation jobs killed.
I could go on and on and on for a dozen pages listing the real-world effects of the outrageously unworkable FY 2011 budget cuts House Republicans are trying to pass right now. This isn't "fiscal responsibility" or "deficit control." It's about the most bald-faced assault on America's middle class I've ever seen -- and clear political payback to CEOs who poured millions into the 2010 elections. CEOs don't like job safety regulations, so the politicians they elected are trying to cut the funding and fire the inspectors. CEOs don't want environmental safeguards, energy improvements or curbs on health insurance companies, so their politicians are pushing to just defund the programs.
The team of Wall Street CEOs and the politicians they support dug a massive deficit hole by tanking the economy and handing massive tax cuts to the very rich. Now they're throwing the middle class into that hole and shoveling on the dirt. To the voting public, the 2010 election was about one thing: Jobs. And jobs are still their top concern. But instead of creating jobs, the House Republicans' slash-and-burn campaign would cost hundreds of thousands of jobs and destroy services ordinary Americans rely on every day. Meanwhile, CEOs who enjoy record profits and huge bonuses aren't being asked to sacrifice a damn thing--and the politicians pushing these cuts are secure in their taxpayer-funded pay and benefits.
Cuts of the magnitude the House Republicans propose for the remainder of this fiscal year would propel us squarely in the wrong direction -- toward an America we do not want to be. This federal budget madness echoes pound-foolish actions we're seeing in state after state, where Republican legislators and governors elected with lucrative CEO support are ignoring the jobs crisis and playing politics as usual with the lives of working families.
Govs. Scott Walker in Wisconsin and John Kasich in Ohio are determined to end collective bargaining for public employees and deflate good middle-class jobs -- Walker is so determined he's threatened to call out the National Guard to enforce his will. It doesn't matter that definitive studies have shown public employees are paid less than comparable private-sector workers. It doesn't matter that we rely on public employees to care for us when we're ill or in danger, teach our children and keep our communities running. Reality doesn't seem to matter to any of these characters.
The attack on public employees in Indiana actually would make it illegal for them to try to organize unions. The Indiana politicians aren't just after government workers -- they've also got it in for building trades workers. You know -- the people whose skills and training means they build offices and highways and bridges that are safe for you. State attacks on building trades workers aim to allow unscrupulous contractors to get richer by low-balling bids for government projects and using less-qualified workers to do the job.
How far will this craziness go? How about repealing child labor laws? A Missouri state senator, Jane Cunningham (R), has introduced a bill to eliminate prohibitions on employing children younger than 14 and end limits on the hours a child may work. The most frightening thing about these radical proposals may be that they move the bar on reasonable political action. In today's atmosphere of bipartisan compromise at any cost, even the most outrageous assault on working people makes it more likely we'll see a final "compromise" that's devastating.
If there ever was a time for working men and women to become politically active at every level of government, it's now. If there ever was a time to do all we can to save this fragile economic recovery, it's now. And if there ever was a time to fight against wrong-headed, scorched-earth attacks and for good jobs, investments in our future, the basic health and safety protections we rely on and the Social Security and Medicare our seniors worked a lifetime to earn, it's now.
Protesters continue to flood Wisconsin Capitol amid budget impasse
by Brady Dennis and Karen Tumulty - Washington Post
With tens of thousands of protesters jamming the Capitol and many Wisconsin schools closed for a third day, state troopers were enlisted Friday in the hunt for 14 Democratic state senators whose disappearance has prevented a vote on the new governor's controversial budget proposal.
Republican Gov. Scott Walker's plan seeks to save the state money by curbing state employee benefits and putting tight restrictions on their collective bargaining rights. Wisconsin's deficit is projected at $30 million for the remainder of the current year; a far greater shortfall of $1.5 billion is expected next year, according to state figures.
"We're here today because we were elected to make tough decisions," Walker said at a news conference late Friday afternoon. He insisted that what he is asking is "a very modest request of our government workers." He acknowledged, however, that he will not be able to do anything until the absent Democrats return. "You can't operate in a democracy if people don't show up," he said.
Senate Majority Leader Scott Fitzgerald (R) said he asked Walker to send two state troopers to Democratic leader Mark Miller's home. But the senators appear to have decamped to Illinois - putting them out of the troopers' reach. One of those missing senators, Robert Jauch, spoke via cellphone from "someplace in the Land of Lincoln." He said he and his colleagues understood the need for budget cuts.
"We can vote for the budget in 30 minutes," Jauch said. "This is all about the rest of the bill, which eliminates 50 years of collective bargaining law in Wisconsin." Walker scorned the lawmakers for their absence, saying, "You can't participate in democracy if you're not in the arena. The arena is not in Rockford, Illinois. The arena is in Madison, Wisconsin, and it's time for those state senators to come home."
The governor's plan to restrict collective bargaining rights is a key piece of his budget-cutting strategy. With nearly half of the state budget going toward aid to counties, cities and school districts, Walker argues that those localities must be allowed to cut the compensation of their unionized workers. The legislation eliminates the rights of most government workers to negotiate for anything but wages.
The repercussions, both sides agree, could spread as other states grapple with growing deficits and taxpayer anger, and as President Obama and Congress consider how to deal with the forces that are driving up federal spending.
Public employee unions and their Democratic allies accuse Walker of exploiting Wisconsin's fiscal problems to weaken both the bargaining leverage and the political clout of organized labor. Union membership in the United States has been on the decline for decades; last year, for the first time, government workers, rather than those in the private sector, accounted for a majority of all union members.
AFL-CIO President Richard Trumka stood near the entrance of the state Capitol on Friday and said Walker is "standing in the doorway of our country's most basic values and cherished aspirations. Governor Walker, you're asking too much. We won't give it to you, and you can't take it away from us."
Some of the protesters' signs pictured Walker alongside Adolf Hitler and Egypt's ousted dictator Hosni Mubarak. "I certainly acknowledge their right to be heard," Walker said in his office, adding, "I particularly want to thank the 300,000 state and local workers from across Wisconsin who, unlike those here today, didn't skip out on work and showed up at their jobs."
Republicans say that public-sector employees have become a privileged class that overburdened taxpayers - including many working in the private sector who have seen their own salaries and benefits shrinking - can no longer afford to subsidize. The Wisconsin standoff quickly became a national debate, drawing in politicians from around the country. "The big public employee unions have just run the table. It is outrageous and the gig is up," said former Minnesota governor Tim Pawlenty, who tangled with his state's employees when he was in office and who is now considering a bid for the GOP presidential nomination.
With President Obama's political operation lending support to the protesters, House Speaker John A. Boehner (R-Ohio) accused the president's team of "colluding with special-interest allies across the country to demagogue reform-minded governors who are making the tough choices that the president is avoiding." In Richmond, Gov. Robert F. McDonnell (R) released a video of solidarity with Walker. "I know it's tough to tell hardworking state employees they've got to do more with less," McDonnell said. "I've done it in Virginia, and Scott Walker has had the fortitude early in his term to tell that to the people of Wisconsin."
McDonnell has recommended requiring employees to start kicking in for their retirement. Employee opposition is one reason why the legislature has so far balked at enacting the change. Virginia public employees are not unionized.
Meanwhile, smaller protests are also stirring in Ohio, where another new Republican governor, John Kasich, has proposed limiting collective bargaining rights for state employees. "I don't favor the right to strike of any public employee, okay?" Kasich said in December. "They've got good jobs, high pay, good benefits, a great retirement. What are they striking for?"
This kind of protest was not entirely unexpected. During last year's elections, Walker and other Republican candidates - and even some Democrats, such as New York's new governor, Andrew M. Cuomo - made it clear that curbing public employee compensation would be a priority as they seek to deal with their states' fiscal crises.
After the Republicans made big gains in November up and down the ballot, former House speaker Newt Gingrich went so far as to predict on NBC's "Meet the Press" that "the scale of change coming to government workers is going to be so great that you may well see, in places like Sacramento or Albany, New York, very serious unrest by union members who are offended at the idea that they should actually earn in proportion to the taxpayer and not be the new special class in America, which is what they've become over the last 20 years."
But that it would have happened first in Madison is, in many ways, both unlikely and ironic. The city was the birthplace in 1932 of what would become the American Federation of State, County and Municipal Employees, the largest public employee union; in 1959, Wisconsin was the first state government to give its workers collective bargaining rights.
Florida might try to withdraw from Medicaid
by Brandon Larrabee - Jacksonville.com
The lead author of a proposal to overhaul the state Medicaid program said Tuesday that if the federal government rejects the plan, Florida might become the first state to withdraw from the program and instead craft its own, pared-down alternative. The statement by Sen. Joe Negron, R-Stuart, underscored how serious members of the Senate say they are about reining in costs of the program, which provides health-care for low-income patients. Medicaid is expected to cost the state more than $22 billion in the coming fiscal year, which begins July 1.
While Negron shied away from the phrase "opt out," he was apparently referring to a provision of the federal law that allows states to leave the program altogether. "If the federal government elects not to allow us to manage the program the way we believe is in Florida's best interests, then we'll operate our Medicaid program with our resources," Negron said.
If the state were to leave the Medicaid program, it would lose all federal funding, which covers more than half of the current system's bills. Negron said the state would use its own portion of projected Medicaid spending to provide what benefits it could, giving priority to "those on Medicaid that we believe are the most vulnerable and need the most assistance from us."
Negron stressed that he believes it was unlikely that the federal government would reject a waiver to institute the new plan. But he said the bill set to be rolled out Thursday would contain provisions that would limit the program to the what the state could fund if the federal government said no. "We can't allow the federal government to commandeer our budget," he said.
But it's not clear that the state would actually be willing to leave the program, said Karen Woodall, interim executive director of the Florida Center for Fiscal and Economic Policy, a think tank in Tallahassee that focuses on issues for low- and middle-income families. Woodall said that move would cause an uproar among medical-care providers that count on Medicaid dollars to help fund their operations. "We're not going to make that up somewhere else," she said. "That would be a very ridiculous thing to do."
Assuming the federal government did agree, the Medicaid overhaul Negron pitched Tuesday would replace the reform pilot program in place in Baker, Clay, Duval, Nassau and Broward counties while trimming managed-care profits, boosting payments to doctors and squeezing savings out of the program. The plan would trade out the managed-care pilot in those counties for a statewide system and make several changes to the five-county program, including:
- Increasing the amount of funding that managed-care organizations have to devote to patient care from 85 percent in the current reform counties to 90 percent statewide.
- Almost doubling the payments to primary-care doctors under the program, paying 100 percent of Medicare reimbursement rates to doctors, up from slightly more than 50 percent today.
- Requiring the plans to guarantee the state that they will save money over the current system.
The new Senate plan would also allow patients to get a voucher to buy private insurance if they chose to do so and provide new protections from medical-malpractice lawsuits for doctors who treat Medicaid patients.
Assuming the federal government agrees, Negron said the state would save about $1 billion in the first year and $4.3 billion over the first three years of the plan. Even before Negron's presentation, Medicaid reform was expected to be one of the marquee issues of the legislative session. The program is consuming an ever-greater share of the state's revenue as health-care costs continue to skyrocket and lawmakers reduce funding in other areas.
"Medicaid has literally hijacked our budget," said Senate President Mike Haridopolos, R-Merritt Island, who vowed that a bill would get done this year after House and Senate negotiations broke down last year. Woodall said she agreed with the ideas of boosting state payments to doctors in principle but said it depended on how the move was achieved. "If they're going to raise all physicians to 100 percent of Medicare," she said, "they're not going to be able to have savings unless they're whacking the heck out of benefits."
Making Fortune on Poverty: JP Morgan's Big Food Stamp Business
JPMorgan says Lehman called assets "goat poo"
by Caroline Humer - Reuters
Lehman Brothers and Barclays deceived JPMorgan Chase & Co. with bad assets that the failed investment bank's own employees dubbed "goat poo," according to new court papers that escalate a legal battle between the financial firms. JPMorgan filed new court claims in the case, contending that Lehman left it with $25 billion in unpaid loans secured by undesirable assets like those left out of the sale to Barclays.
Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15, 2008 and then quickly sold its prize investment banking assets to Barclays Bank. JPMorgan had been Lehman's banker. The court papers, filed in U.S. Bankruptcy Court in Manhattan on Thursday, said that Barclays and Lehman called certain Lehman assets "toxic waste" and "goat poo" and knowingly excluded them from their sale agreement.
A Lehman spokeswoman declined to make an immediate comment on the lawsuit. JPMorgan declined comment. A spokesman for Barclays declined to comment. Thursday's filing revised a lawsuit that was first filed in December in response to Lehman's own $8.6 billion suit against JPMorgan. Lehman's suit, filed last May, accused JPMorgan of siphoning off collateral ahead of Lehman's bankruptcy filing.
Lehman employees wrote in emails that contrary to Lehman's and Barclays' portrayal of their deal to bankruptcy court as including all related assets, Barclays did not have to purchase certain "toxic waste" securities, JPMorgan contends. Those securities included certain Lehman commercial paper known as "RACERS" -- restructured asset certificates with enhanced returns. Lehman employees also called these assets "goat poo" in emails, JPMorgan said in the lawsuit.
According to the emails cited by JPMorgan, Lehman employees also said the balance sheet that the company had sent to bankruptcy court was wrong because it showed that Barclays was buying all of Lehman Brothers' positions. The revised lawsuit added an additional allegation of fraudulent inducement to lend, saying that when JPMorgan made Lehman a $70 billion intraday loan on Sept. 18, 2008 -- three days after the bankruptcy filing -- Lehman knew that JPMorgan would not be able to recover any claims through the collateral.
Bernanke says foreign investors fuelled crisis
by Robin Harding - Financial TImes
Foreign investors’ hunger for safe US assets helped to cause the 2007-2009 crisis by encouraging banks to turn risky mortgages into AAA rated bonds, Ben Bernanke, US Federal Reserve chairman, argued in Paris on Friday. "The preference by so many investors for perceived safety created strong incentives for US financial engineers to develop investment products that ‘transformed’ risky loans into highly rated securities," said Mr Bernanke, presenting a new research paper that he co-wrote with other Fed economists.
Mr Bernanke has previously argued that a "global savings glut" led emerging markets to send large amounts of capital to the US in the 2000s, pushing down US interest rates. His new paper says that those emerging markets wanted safe assets – and US regulators failed to keep the financial system from creating them. "In analogy to the Asian crisis, the primary cause of the breakdown was the poor performance of the financial system and financial regulation in the country receiving the capital inflows, not the inflows themselves," Mr Bernanke said, adding that the US crisis had given him new sympathy for developing countries that have to manage large capital inflows.
This argument supports Mr Bernanke’s view that low Fed interest rates did not make an important contribution to the financial crisis and the main errors were in regulation. According to the paper, more than 75 per cent of investment from "savings glut" countries was in AAA rated US assets in 2007, whereas such assets accounted for only 36 per cent of total US securities.
Some economists have argued that developing countries have a particularly strong demand for safe and liquid foreign assets because their own financial systems struggle to produce them. But Mr Bernanke argued that rich countries, especially in Europe, also increased their holdings of AAA rated US assets from 2003-2007. They were more willing to buy a range of assets such as the subprime mortgage bonds that eventually led so many European banks to disaster.
Although Europe did not have excess savings, and it was borrowing in order to buy more US assets, Mr Bernanke said that this still increased demand for safe assets in the US. "To bolster our individual and collective ability to manage and productively invest capital inflows, we must continue to increase the efficiency, transparency and resiliency of our national financial systems, and to strengthen financial regulation and oversight," Mr Bernanke said.
GOP Budget Plan Would Cut Consumer Financial Protection Bureau Funding Nearly In Half
by Zach Carter - Huffington Post
A new federal budget proposal from House Republicans would dramatically restrict the budget of the new Consumer Financial Protection Bureau during its first year of operation. No House Republicans voted for the Wall Street reform bill that created the CFPB, which is currently being set up by consumer watchdog Elizabeth Warren. Several House Republicans have suggested cutting the agency's budget, however, as a method of restricting its capacity to regulate.
The language included in the House GOP's budget proposal for 2011 would restrict the CFPB's annual budget to $80 million-- a major cut from the $143 million the agency expects to spend as it hires staff and implements new systems to get off the ground. Warren warned Congress against creating a weak agency last summer, as lawmakers sought to placate Wall Street lobbyists. She insisted that the new CFPB must be given the authority and resources to prevent bank abuses. "My first choice is a strong consumer agency," Warren said in an interview with the Huffington Post last year. "My second choice is no agency at all and plenty of blood and teeth left on the floor."
The Republican attack on the CFPB's funding would only apply to this year, but would make launching the new agency very difficult, and send a very aggressive signal about Congress' intent to follow through on the bill it passed in July. Regulations cannot be enforced if regulators do not have the budget to hire staff.
Rep. Barney Frank (D-Mass.), the top Democrat on the House Financial Services Committee, told HuffPost that Democrats would be offering an amendment to strip the CFPB language from the GOP budget plan. The amendment will likely come up for a vote on Thursday. "When you're talking about $143 million or $80 million you're talking about several multiples of a bank bonus," Frank said. "It just shows the disproportion between what the banks have and what they have."
Last year's Wall Street reform legislation tied the CFPB's budget to the Federal Reserve's operations, requiring 12 percent of all funding for the central bank to be diverted to the CFPB. The new House GOP budget proposal, known as a continuing resolution, or CR, would block the Fed from disbursing more than $80 million during fiscal year 2011, which ends in October.
Some estimates suggest that the CFPB could receive as much as $550 million a year under the existing funding structure-- less than half of the Securities and Exchange Commission's current budget. That funding will be needed as the new agency staffs up-- the CFPB is tasked with regulating a broad array of consumer lending, from payday lending to credit cards to mortgages, many of which have been prone to abuses in recent years.
"Remember, the consumer bureau doesn't just deal with credit cards, it's a major way to go after all these unregulated financial industries, payday lenders, check cashers, etcetera," Frank told HuffPost. Connecting the CFPB's budget to the Fed was a move that consumer advocates hoped would protect the new agency from this type of appropriations gamesmanship. If any new budget law can direct the Fed how to spend its resources, Wall Street-friendly Republicans are likely to continue trying to restrict the CFPB's budget.
Other bank regulators are funded by special taxes they levy against the banks they regulate, known as "assessments," which are not subject to the Congressional appropriations process. In a speech yesterday before the Consumer's Union, Warren warned that, "Politicizing the funding of bank supervision would be a dangerous precedent, and it would deprive the CFPB of the predictable funding it will need to examine large and powerful banks consistently."
Portugal Under Euro-Zone Pressure To Seek Bailout
by Costas Paris - Dow Jones Newswires
The Portuguese government is being pressured by fellow euro-zone members to follow Greece and Ireland in seeking a bailout from the European Union and the International Monetary Fund, according to a senior euro-zone government official. A separate euro-zone official confirmed that there has been a consensus among other euro-zone members that Portugal will need help ever since Ireland sought a bailout in December.
"For the past months the belief in the euro-zone is that Portugal will eventually seek a bailout," the senior euro-zone government official said. "This belief has not changed and the pressure is still on by countries like Germany for this to happen. The consensus is that unless there is a dramatic upturn in Portugal's finances, they will likely follow the path of Greece and Ireland."
However, the officials said that Portugal will soon have to raise new debt, and could face sharply higher borrowing costs, making it impossible for the government to continue without loans from the EU and IMF. "There is no set date for this," the senior euro-zone government official said. "The markets will determine it. But one thing is certain. The markets don't believe the measures that the government in Lisbon has taken are enough. So, yes I expect it to happen, sooner rather than later."
One official said that should Portugal seek a bailout soon, it would help reduce uncertainty about the euro zone's fiscal outlook around the time in late March that EU leaders are set to agree a package of measures designed to convince bond investors that they are addressing their financial problems. The other official said that should Portugal seek a bailout, it would increase pressure on Germany to agree to boost the lending capacity of the European Financial Stability Facility, the euro zone's main bailout fund.
Germany’s Banks Face a Grim Future
by Jack Ewing — New York Times
Want to buy a money-losing bank with a damaged business model in an overcrowded market? Neither, it seems, do many other people.
Germany may have Europe’s largest and most robust economy, but investors are not clamoring for a piece of its banking market. An auction for WestLB, a publicly owned institution in Düsseldorf that was once Germany’s third-largest lender, has attracted just two bidders, a lawyer hired to sell the bank said on Wednesday.
The woes of WestLB, which has received $11 billion in taxpayer support since 2009, are symptomatic of a larger problem in the German economy. Many of its biggest banks are still on government life support after making bad lending bets during the bubble years. And with their access to cheap capital long gone, their prospects of becoming profitable again are dubious.
"The fragility of the German banking sector poses a substantial threat to sustained economic recovery in Germany," said Jörg Rocholl, a professor at the European School of Management and Technology in Berlin. "The excellent economic situation is not mirrored by the banking system."
The European Union authorities, openly frustrated with the pace at which Germany has dealt with sick institutions, have warned that a day of reckoning is coming. "We simply cannot afford to leave the issue for another day," Joaquín Almunia, the vice president of the European Commission responsible for competition policy, said in a speech in Frankfurt this month. Mr. Almunia, who must approve government aid for banks, added, "We will not approve subsidies that keep unviable businesses artificially on the market."
The German banking market is notoriously difficult because commercial banks must compete with the landesbanks, banks typically owned by state governments and local savings banks, and sparkassen, quasi-public thrift institutions that dominate consumer banking. The landesbanks lost their only clear competitive advantage in 2005 after European regulators banned the government guarantees that had allowed them to raise money cheaply.
Before their guarantees expired, the landesbanks raised far more money than they could deploy profitably, causing them to speculate in American real estate assets. "This yield-chasing reflected the fact they didn’t have a business model," said Mr. Rocholl, who has studied how the landesbanks got into trouble.
Now the question remains how the banks, which typically do not have branches to generate deposits, will raise money at reasonable rates that they can then lend to customers at a profit. So far the European regulators have been focusing on WestLB. But Mr. Almunia has warned that other banks were under scrutiny, including two landesbanks, HSH Nordbank in Hamburg and BayernLB in Munich, as well as Hypo Real Estate, a commercial lender now owned by the German government after receiving a bailout.
There is also no sign that buyers are lining up for IKB Deutsche Industriebank, a commercial institution that specializes in lending to midsize companies. Lone Star Funds, an American private equity company, announced in October that it was trying to sell IKB, which it acquired from the German government in 2008. But now Lone Star has gone quiet on the status of the sale, saying in an e-mail that it could not comment because some shares of IKB were still publicly traded.
IKB has the dubious distinction of being the first bank rescued by the German government, receiving a bailout of 9 billion euros, or about $12.2 billion at current exchange rates, before being sold to Lone Star. Like WestLB and most other German banks that got in trouble, IKB had loaded up on assets tied to the American real estate market.
WestLB, already forced to shrink by half after losses in 2009, faces a breakup unless a buyer can be found. The lender is in talks with two unidentified bidders interested in the whole bank, Friedrich Merz, a lawyer in Berlin representing the bank’s shareholders, said Wednesday. "The divestment process continues to have sustainable momentum and offer concrete prospects for the future of WestLB," Mr. Merz, a former leader of Chancellor Angela Merkel’s Christian Democratic party, said in a statement.
A third bidder often mentioned in the German press, the Blackstone Group, based in New York, is interested only in WestLB’s real estate subsidiary, according to a person close to the firm who was not authorized to speak publicly. The subsidiary, WestImmo, accounts for about one-tenth of the 5,000 jobs at stake at WestLB.
In a tacit acknowledgment that finding a buyer for the whole bank might be difficult, the German government said in a report to the European Commission on Tuesday that WestLB would further reduce the size of its financial activities and break into smaller units. The move will "structurally increase the possibility of transactions with possible partners," WestLB said in a statement.
Still, the government expressed optimism that WestLB could survive in one form or another. "The stability of WestLB is secured," Steffen Kampeter, an under secretary in the German Finance Ministry, said by e-mail on Wednesday. The ministry is acting as a go-between in negotiations with European regulators over WestLB’s fate.
German Banks' Debt Downgraded By Moody's on Restructuring Act
by Laura Marcinek and John Glover - Bloomberg
German banks’ subordinated debt securities valued at 24 billion euros ($33 billion) were downgraded by Moody’s Investors Service on the prospect that new legislation will increase the risk of losses among debt holders.
Moody’s cut the ratings of lower Tier 2 notes, a layer of debt that’s subordinated by coming behind senior bonds in the queue for repayment after a bank collapses. Like other governments seeking to ensure creditors pay up before taxpayers have to contribute, German law now removes the protection Tier 2 bonds enjoyed from the authorities’ preference for saving lenders before they fail.
"The new legislation materially reduces the likelihood of government support for LT2 securities and therefore took out the state support uplift," BNP Paribas SA analysts Olivia Frieser and Ivan Zubo wrote in a note to clients today. "The downgrades are as harsh as we had expected, which may weigh on sentiment."
The cost of insuring German bank debt rose, according to CMA prices for credit-default swaps. Contracts on the subordinated debt of Deutsche Bank AG jumped 12 basis points to 160, the highest in five weeks. Swaps linked to Commerzbank AG’s junior debt climbed 25 basis points to 450 and senior contracts rose 10 to 190.
Lawmakers throughout Europe are toughening rules governing bank failures. Danish regulators wiped out the stock and subordinated bonds of Amagerbanken A/S when it failed this month, and are going further than that by inflicting losses -- expected to be about 41 percent -- on senior bondholders and depositors with more than the insured maximum in their accounts. "Bondholders have to be prepared for losses," Bjoern Skogstad Aamo, head of Norway’s Financial Supervisory Authority in Oslo, said Feb. 10.
In Ireland, where the state has put 46.3 billion euros into its debt-laden banks after property prices collapsed, the Credit Institutions (Stabilization) Bill gives the government the power to force subordinated bondholders to take losses. Junior creditors of Anglo Irish Bank Corp. were obliged to sell back their notes at an 80 percent discount. Germany’s Bank Restructuring Act was approved by Parliament on Nov. 2 and allows regulators to transfer the assets and liabilities of a failing bank while permitting the government to write down debt.
"The new regulatory tools allow authorities to impose losses on debt holders without necessarily placing the entire bank into liquidation," the ratings firm said yesterday in a statement. "Moody’s considers subordinated debt to be most at risk under the new law." The ratings downgrades apply to 248 subordinated securities together with portions of debt programs issued or backed by 24 banks. The average reduction was 2 1/2 levels, Moody’s said.
Deutsche Bank AG, Commerzbank AG, Munich-based Bayerische Landesbank and DekaBank Deutsche Girozentrale, the fund manager for Germany’s state-owned savings banks, were among lenders whose securities were downgraded. "The regulatory tools provided by the Bank Restructuring Act are broad enough to allow the imposition of losses on senior unsecured and subordinated bondholders," Moody’s said.
Paddy Meet Ponzi: Irish Banks Lend Billions To Each Other For Use As ECB Collateral
by Tyler Durden
When about six months ago we noted that the European ponzi is in full force, courtesy of banks using any toxic assets as collateral to the ECB, little did we know just to what heights this scheme would reach. Today we get our answer.
The Irish Times writes that Irish Banks are issuing billions in bonds to themselves under the Government guarantee to borrow cheaply from the European Central Bank and to avoid drawing more heavily on emergency lending from the Irish Central Bank. Four banks issued bonds worth €17 billion to themselves last month under the Government’s extended guarantee, the Eligible Liabilities Guarantee, to use as collateral to borrow from the ECB.
"What you have here is micro-quantitative easing, or money printing," said Cathal O’Leary, head of fixed-income sales at NCB Stockbrokers. "The banks are issuing unsecured loans to themselves." And since this is happening in Ireland, it is most certainly happening everywhere in Europe.
And yes - this is the pinnacle of a pyramid scheme - this is about a thousand times worse than what US banks did when they purchased CDO tranches from each other, as the risk in the Irish case is ultimately borne by the European taxpayer. But such is life when the entire financial system continues to be massively insolvent, and only openly Ponzi schemes of this nature allow the system to continue operating on a day to day basis.
From IT:All the bonds mature in April and May when the details of the banks’ plans to sell off assets and shrink the size of their businesses must be agreed under the EU-IMF bailout deal.
Bank of Ireland issued the largest amount, €9 billion, on four bonds on January 26th. AIB issued €2.63 billion on January 25th, Irish Life and Permanent €3.1 billion the following day and EBS building society €1.7 billion on January 28th. Bank of Ireland raised a further €980 million on another bond on February 10th.
The bank said that the issuing of the bonds represented "a technical adjustment" replacing sterling bonds backed by UK mortgages as the ECB stopped accepting sterling loans as collateral from the start of the year. AIB said that "own-used" bank bonds could be used as collateral from the ECB if Government guaranteed. The banks have leaned more heavily on central bank funding from Frankfurt and Dublin due to the loss of deposits and the closure of the markets to Irish-issued debt.
The Central Bank said that access to ECB operations allows the banks obtain funding that is not available in "the continued stressed market conditions". The Government is in talks with the ECB, EU Commission and the IMF about the pace and timing of asset disposals by the banks aimed at reducing their reliance on
central bank funding so they can fund themselves on their own.
Banks in Ireland had borrowed €126 billion from the ECB at January 28th, representing almost a quarter of all borrowings drawn from Frankfurt by euro zone banks. The Central Bank in Dublin has provided a further €51.1 billion to the Irish banks through exceptional liquidity assistance (ELA) at this date on ineligible ECB collateral.
Yet is this really surprising? After all, with the Fed as ultimate backstop to Europe, as has been the case ever since the advent of the FX swaps, which are still being used to this day, and with Illinois relying on Europe of all place to funds its pension funds, and with everyone relying on everyone else for a continued "funding" circle jerk, it is now clear that the entire global financial system is and has been for two years one massive ponzi scheme.
Luckily, this time it is different, and whereas Madoff ended up in jail, Bernanke will soon receive the Congressional Medal of Freedom from the master puppet of it all.
U.S. drops criminal probe of former Countrywide chief Angelo Mozilo
by E. Scott Reckard - Los Angeles Times
Mozilo's actions in the mortgage meltdown — which led to $67.5-million settlement against him — did not amount to criminal wrongdoing, federal prosecutors have determined.
Federal prosecutors have shelved a criminal investigation of Angelo R. Mozilo after determining that his actions in the mortgage meltdown — which led to $67.5-million settlement against him — did not amount to criminal wrongdoing. As the former chairman of Countrywide Financial Corp., Mozilo helped fuel the boom in risky subprime loans that led to the crippling of the banking industry and the near-collapse of the financial system.
A federal grand jury in Los Angeles began probing Mozilo in 2008, and four months ago he agreed to pay a $22.5-million fine and to repay $45 million in what the government said were ill-gotten gains to former Countrywide shareholders. The payments settled a civil action by the Securities and Exchange Commission. But the criminal investigation has wound down without indictments of Mozilo or others at his Calabasas company, according to people familiar with both the prosecution and the defense teams, all of whom spoke on condition of anonymity because they were not authorized to discuss the matter.
"Sometimes the public thinks all you have to do is to indict someone and that's it," one of the federal sources said. "But you have to be able to prove your case, and it can be worse losing a case than not bringing one at all."
The 72-year-old Mozilo hung up the phone when contacted for comment at his home in the Lake Sherwood golf community of Ventura County. The criminal investigation into Mozilo was never announced publicly, and as a rule federal prosecutors make no formal announcement when such cases are closed.
One defense attorney, however, said the government would probably keep a close watch on civil litigation by Countrywide shareholders against Mozilo and could still decide to bring charges depending on what develops in those cases. "He may have to testify, and you never know what may come up," the attorney said.
Asst. U.S. Atty. Stephen A. Cazares, who spearheaded the Countrywide criminal probe, could not be reached for comment. A spokesman for U.S. Atty. Andre Birotte Jr. said the office would have no comment "at this time." Countrywide, at one time the nation's top mortgage company, collapsed under the weight of soured loans and was acquired by Bank of America Corp. — which also has suffered heavy financial damage from Countrywide loans.
Mozilo and others involved in the mortgage boom "should go to jail," said Bruce Marks, founder of the nonprofit Neighborhood Assistance Corp. of America, which provides counseling to homeowners facing foreclosure. "And they should throw away the keys," Marks added. "By not prosecuting them you have blessed their activities and allowed them to continue," he said, contending that many former originators of abusive loans are now buying up foreclosed properties for cash.
Along with avoiding criminal charges, Mozilo also escaped paying two-thirds of the SEC settlement. Though he was required to come up with the $22.5-million fine himself, Bank of America and insurance companies covered the $45 million in restitution to shareholders.
The SEC accused Mozilo and former Countrywide executives David Sambol and Eric P. Sieracki of downplaying the risks of subprime and other high-risk mortgages they were writing to homeowners and selling to investors. E-mails released by the SEC quoted Mozilo denigrating various risky loans that Countrywide and other lenders provided, especially subprime mortgages that didn't require down payments from borrowers who had abysmal credit.
"In all my years in the business, I have never seen a more toxic product," Mozilo said in one message.
Defense attorneys said the comments were part of an internal corporate debate and had been taken out of context. They said the financial markets were well aware of Countrywide's products and their risks. Columbia University law professor John Coffee said mortgage cases like Mozilo's were muddied by the numerous parties involved, unlike Enron and other "cook the books" cases in which executives were convicted.
Countrywide's model was to make or buy mortgages only to sell them off immediately to Fannie Mae or Wall Street as fodder for securities. Given that model, Coffee said, blame could be assigned to an entire chain of players: mortgage brokers who falsified applications; investment bankers who concocted complex and "opaque" mortgage bonds; rating firms that provided high ratings on the bonds but said they were lied to; and institutional investors that relied on dubious ratings because the securities carried above-market interest while promising to be risk-free.
"All share responsibility, but none are culpable enough by themselves to compare with [Enron's] Ken Lay, Jeff Skilling or the WorldCom CEO," Coffee said. Los Angeles defense lawyer Jan Handzlik agreed, saying it was easier to prove greed and negligence against mortgage and Wall Street executives than criminal intent. He noted that federal prosecutors have convicted "some of the low-hanging fruit," such as mortgage brokers, appraisers, lending officers and individual borrowers — people who "directly defrauded a bank for personal gain."
Civil cases, such as those brought by the SEC, carry a lower burden of proof, noted Jacob S. Frenkel, a former SEC enforcement lawyer and white-collar fraud prosecutor. Criminal cases require a much higher burden — beyond a reasonable doubt — to win convictions, he said. "It exposes the tension between the public clamoring for punishment after a major economic calamity and the reality that criminal cases are based on evidence, of which criminal intent is the fundamental piece," he said.
The criminal investigation came to light in mid-2008 as grand jury subpoenas were served to executives with Countrywide and two other failed lenders, New Century Financial Corp. of Irvine and IndyMac Bank of Pasadena. No criminal charges have been filed in any of those cases, and it was not known whether they are still active, although defense attorneys described New Century's as dormant.
Prosecutors were trying to determine whether fraud or other crimes contributed to the mortgage debacle. But they pointed out even then that such cases were complex, difficult to prove and likely to take years to develop. In recent testimony before the Financial Crisis Inquiry Commission and in a civil lawsuit in Los Angeles County Superior Court, Mozilo defended Countrywide as an all-American success story.
In the court case, a wrongful-dismissal suit brought by a former executive, Mozilo said the goal for him and Countrywide's co-founder, the late David Loeb, was "changing the lives of the American people" by making home loans to customers who could not have qualified for them through other lenders. "It was founded by two people driven ... to make a difference," Mozilo said.
Mozilo and Loeb founded Countrywide in 1969 as a Federal Housing Administration and Veterans Administration lender. The company became the largest supplier of loans to government-sponsored mortgage financing company Fannie Mae.
Cocky, flashy and always tan, Mozilo was the face of the mortgage industry to many Americans, chatting with CNBC anchor Maria Bartiromo even as competitors collapsed and reassuring analysts that his company would weather the storm and emerge stronger. Mozilo still faces several civil suits, including actions filed by investors in Countrywide mortgage-backed securities.
On another front, a congressional committee has reopened an investigation of whether Countrywide's VIP lending program, nicknamed "Friends of Angelo," provided improper favors to legislators and their staffs, other public officials and business associates.
Rep. Darrell Issa (R-Vista), chairman of the House Oversight Committee, issued a subpoena to Bank of America for all materials related to the VIP program, saying he believed Countrywide "orchestrated a deliberate and calculated effort to use relationships with people in high places in order to manipulate public policy and further their bottom line."
Why Isn't Wall Street in Jail?
by Matt Taibbi - Rolling Stone
Financial crooks brought down the world's economy — but the feds are doing more to protect them than to prosecute them
Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer. "Everything's fucked up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that." I put down my notebook. "Just that?" "That's right," he said, signaling to the waitress for the check. "Everything's fucked up, and nobody goes to jail. You can end the piece right there."
Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world's wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people.
The rest of them, all of them, got off. Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked, fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Bank of America and Morgan Stanley.
Most of these firms were directly involved in elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it was selling. What's more, many of these companies had corporate chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured investors they would not lose even "one dollar" just months before his unit imploded, to the $263 million in compensation that former Lehman chief Dick "The Gorilla" Fuld conveniently failed to disclose. Yet not one of them has faced time behind bars.
Instead, federal regulators and prosecutors have let the banks and finance companies that tried to burn the world economy to the ground get off with carefully orchestrated settlements — whitewash jobs that involve the firms paying pathetically small fines without even being required to admit wrongdoing. To add insult to injury, the people who actually committed the crimes almost never pay the fines themselves; banks caught defrauding their shareholders often use shareholder money to foot the tab of justice. "If the allegations in these settlements are true," says Jed Rakoff, a federal judge in the Southern District of New York, "it's management buying its way off cheap, from the pockets of their victims."
To understand the significance of this, one has to think carefully about the efficacy of fines as a punishment for a defendant pool that includes the richest people on earth — people who simply get their companies to pay their fines for them. Conversely, one has to consider the powerful deterrent to further wrongdoing that the state is missing by not introducing this particular class of people to the experience of incarceration. "You put Lloyd Blankfein in pound-me-in-the-ass prison for one six-month term, and all this bullshit would stop, all over Wall Street," says a former congressional aide. "That's all it would take. Just once."
But that hasn't happened. Because the entire system set up to monitor and regulate Wall Street is fucked up. Just ask the people who tried to do the right thing.
Here's how regulation of Wall Street is supposed to work. To begin with, there's a semigigantic list of public and quasi-public agencies ostensibly keeping their eyes on the economy, a dense alphabet soup of banking, insurance, S&L, securities and commodities regulators like the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency (OCC) and the Commodity Futures Trading Commission (CFTC), as well as supposedly "self-regulating organizations" like the New York Stock Exchange. All of these outfits, by law, can at least begin the process of catching and investigating financial criminals, though none of them has prosecutorial power.
The major federal agency on the Wall Street beat is the Securities and Exchange Commission. The SEC watches for violations like insider trading, and also deals with so-called "disclosure violations" — i.e., making sure that all the financial information that publicly traded companies are required to make public actually jibes with reality. But the SEC doesn't have prosecutorial power either, so in practice, when it looks like someone needs to go to jail, they refer the case to the Justice Department.
And since the vast majority of crimes in the financial services industry take place in Lower Manhattan, cases referred by the SEC often end up in the U.S. Attorney's Office for the Southern District of New York. Thus, the two top cops on Wall Street are generally considered to be that U.S. attorney — a job that has been held by thunderous prosecutorial personae like Robert Morgenthau and Rudy Giuliani — and the SEC's director of enforcement.
The relationship between the SEC and the DOJ is necessarily close, even symbiotic. Since financial crime-fighting requires a high degree of financial expertise — and since the typical drug-and-terrorism-obsessed FBI agent can't balance his own checkbook, let alone tell a synthetic CDO from a credit default swap — the Justice Department ends up leaning heavily on the SEC's army of 1,100 number-crunching investigators to make their cases. In theory, it's a well-oiled, tag-team affair: Billionaire Wall Street Asshole commits fraud, the NYSE catches on and tips off the SEC, the SEC works the case and delivers it to Justice, and Justice perp-walks the Asshole out of Nobu, into a Crown Victoria and off to 36 months of push-ups, license-plate making and Salisbury steak.
That's the way it's supposed to work. But a veritable mountain of evidence indicates that when it comes to Wall Street, the justice system not only sucks at punishing financial criminals, it has actually evolved into a highly effective mechanism for protecting financial criminals. This institutional reality has absolutely nothing to do with politics or ideology — it takes place no matter who's in office or which party's in power. To understand how the machinery functions, you have to start back at least a decade ago, as case after case of financial malfeasance was pursued too slowly or not at all, fumbled by a government bureaucracy that too often is on a first-name basis with its targets.
Indeed, the shocking pattern of nonenforcement with regard to Wall Street is so deeply ingrained in Washington that it raises a profound and difficult question about the very nature of our society: whether we have created a class of people whose misdeeds are no longer perceived as crimes, almost no matter what those misdeeds are. The SEC and the Justice Department have evolved into a bizarre species of social surgeon serving this nonjailable class, expert not at administering punishment and justice, but at finding and removing criminal responsibility from the bodies of the accused.
The systematic lack of regulation has left even the country's top regulators frustrated. Lynn Turner, a former chief accountant for the SEC, laughs darkly at the idea that the criminal justice system is broken when it comes to Wall Street. "I think you've got a wrong assumption — that we even have a law-enforcement agency when it comes to Wall Street," he says.
In the hierarchy of the SEC, the chief accountant plays a major role in working to pursue misleading and phony financial disclosures. Turner held the post a decade ago, when one of the most significant cases was swallowed up by the SEC bureaucracy. In the late 1990s, the agency had an open-and-shut case against the Rite Aid drugstore chain, which was using diabolical accounting tricks to cook their books. But instead of moving swiftly to crack down on such scams, the SEC shoved the case into the "deal with it later" file.
"The Philadelphia office literally did nothing with the case for a year," Turner recalls. "Very much like the New York office with Madoff." The Rite Aid case dragged on for years — and by the time it was finished, similar accounting fiascoes at Enron and WorldCom had exploded into a full-blown financial crisis. The same was true for another SEC case that presaged the Enron disaster. The agency knew that appliance-maker Sunbeam was using the same kind of accounting scams to systematically hide losses from its investors.
But in the end, the SEC's punishment for Sunbeam's CEO, Al "Chainsaw" Dunlap — widely regarded as one of the biggest assholes in the history of American finance — was a fine of $500,000. Dunlap's net worth at the time was an estimated $100 million. The SEC also barred Dunlap from ever running a public company again — forcing him to retire with a mere $99.5 million. Dunlap passed the time collecting royalties from his self-congratulatory memoir. Its title: Mean Business.
The pattern of inaction toward shady deals on Wall Street grew worse and worse after Turner left, with one slam-dunk case after another either languishing for years or disappearing altogether. Perhaps the most notorious example involved Gary Aguirre, an SEC investigator who was literally fired after he questioned the agency's failure to pursue an insider-trading case against John Mack, now the chairman of Morgan Stanley and one of America's most powerful bankers.
Aguirre joined the SEC in September 2004. Two days into his career as a financial investigator, he was asked to look into an insider-trading complaint against a hedge-fund megastar named Art Samberg. One day, with no advance research or discussion, Samberg had suddenly started buying up huge quantities of shares in a firm called Heller Financial. "It was as if Art Samberg woke up one morning and a voice from the heavens told him to start buying Heller," Aguirre recalls. "And he wasn't just buying shares — there were some days when he was trying to buy three times as many shares as were being traded that day." A few weeks later, Heller was bought by General Electric — and Samberg pocketed $18 million.
After some digging, Aguirre found himself focusing on one suspect as the likely source who had tipped Samberg off: John Mack, a close friend of Samberg's who had just stepped down as president of Morgan Stanley. At the time, Mack had been on Samberg's case to cut him into a deal involving a spinoff of the tech company Lucent — an investment that stood to make Mack a lot of money. "Mack is busting my chops" to give him a piece of the action, Samberg told an employee in an e-mail.
A week later, Mack flew to Switzerland to interview for a top job at Credit Suisse First Boston. Among the investment bank's clients, as it happened, was a firm called Heller Financial. We don't know for sure what Mack learned on his Swiss trip; years later, Mack would claim that he had thrown away his notes about the meetings. But we do know that as soon as Mack returned from the trip, on a Friday, he called up his buddy Samberg. The very next morning, Mack was cut into the Lucent deal — a favor that netted him more than $10 million. And as soon as the market reopened after the weekend, Samberg started buying every Heller share in sight, right before it was snapped up by GE — a suspiciously timed move that earned him the equivalent of Derek Jeter's annual salary for just a few minutes of work.
The deal looked like a classic case of insider trading. But in the summer of 2005, when Aguirre told his boss he planned to interview Mack, things started getting weird. His boss told him the case wasn't likely to fly, explaining that Mack had "powerful political connections." (The investment banker had been a fundraising "Ranger" for George Bush in 2004, and would go on to be a key backer of Hillary Clinton in 2008.)
Aguirre also started to feel pressure from Morgan Stanley, which was in the process of trying to rehire Mack as CEO. At first, Aguirre was contacted by the bank's regulatory liaison, Eric Dinallo, a former top aide to Eliot Spitzer. But it didn't take long for Morgan Stanley to work its way up the SEC chain of command. Within three days, another of the firm's lawyers, Mary Jo White, was on the phone with the SEC's director of enforcement. In a shocking move that was later singled out by Senate investigators, the director actually appeared to reassure White, dismissing the case against Mack as "smoke" rather than "fire." White, incidentally, was herself the former U.S. attorney of the Southern District of New York — one of the top cops on Wall Street.
Pause for a minute to take this in. Aguirre, an SEC foot soldier, is trying to interview a major Wall Street executive — not handcuff the guy or impound his yacht, mind you, just talk to him. In the course of doing so, he finds out that his target's firm is being represented not only by Eliot Spitzer's former top aide, but by the former U.S. attorney overseeing Wall Street, who is going four levels over his head to speak directly to the chief of the SEC's enforcement division — not Aguirre's boss, but his boss's boss's boss's boss. Mack himself, meanwhile, was being represented by Gary Lynch, a former SEC director of enforcement.
Aguirre didn't stand a chance. A month after he complained to his supervisors that he was being blocked from interviewing Mack, he was summarily fired, without notice. The case against Mack was immediately dropped: all depositions canceled, no further subpoenas issued. "It all happened so fast, I needed a seat belt," recalls Aguirre, who had just received a stellar performance review from his bosses. The SEC eventually paid Aguirre a settlement of $755,000 for wrongful dismissal.
Rather than going after Mack, the SEC started looking for someone else to blame for tipping off Samberg. (It was, Aguirre quips, "O.J.'s search for the real killers.") It wasn't until a year later that the agency finally got around to interviewing Mack, who denied any wrongdoing. The four-hour deposition took place on August 1st, 2006 — just days after the five-year statute of limitations on insider trading had expired in the case.
"At best, the picture shows extraordinarily lax enforcement by the SEC," Senate investigators would later conclude. "At worse, the picture is colored with overtones of a possible cover-up."
Episodes like this help explain why so many Wall Street executives felt emboldened to push the regulatory envelope during the mid-2000s. Over and over, even the most obvious cases of fraud and insider dealing got gummed up in the works, and high-ranking executives were almost never prosecuted for their crimes. In 2003, Freddie Mac coughed up $125 million after it was caught misreporting its earnings by $5 billion; nobody went to jail. In 2006, Fannie Mae was fined $400 million, but executives who had overseen phony accounting techniques to jack up their bonuses faced no criminal charges. That same year, AIG paid $1.6 billion after it was caught in a major accounting scandal that would indirectly lead to its collapse two years later, but no executives at the insurance giant were prosecuted.
All of this behavior set the stage for the crash of 2008, when Wall Street exploded in a raging Dresden of fraud and criminality. Yet the SEC and the Justice Department have shown almost no inclination to prosecute those most responsible for the catastrophe — even though they had insiders from the two firms whose implosions triggered the crisis, Lehman Brothers and AIG, who were more than willing to supply evidence against top executives.
In the case of Lehman Brothers, the SEC had a chance six months before the crash to move against Dick Fuld, a man recently named the worst CEO of all time by Portfolio magazine. A decade before the crash, a Lehman lawyer named Oliver Budde was going through the bank's proxy statements and noticed that it was using a loophole involving Restricted Stock Units to hide tens of millions of dollars of Fuld's compensation. Budde told his bosses that Lehman's use of RSUs was dicey at best, but they blew him off. "We're sorry about your concerns," they told him, "but we're doing it." Disturbed by such shady practices, the lawyer quit the firm in 2006.
Then, only a few months after Budde left Lehman, the SEC changed its rules to force companies to disclose exactly how much compensation in RSUs executives had coming to them. "The SEC was basically like, 'We're sick and tired of you people fucking around — we want a picture of what you're holding,'" Budde says. But instead of coming clean about eight separate RSUs that Fuld had hidden from investors, Lehman filed a proxy statement that was a masterpiece of cynical lawyering.
On one page, a chart indicated that Fuld had been awarded $146 million in RSUs. But two pages later, a note in the fine print essentially stated that the chart did not contain the real number — which, it failed to mention, was actually $263 million more than the chart indicated. "They fucked around even more than they did before," Budde says. (The law firm that helped craft the fine print, Simpson Thacher & Bartlett, would later receive a lucrative federal contract to serve as legal adviser to the TARP bailout.) Budde decided to come forward. In April 2008, he wrote a detailed memo to the SEC about Lehman's history of hidden stocks. Shortly thereafter, he got a letter back that began,
"Dear Sir or Madam." It was an automated e-response. "They blew me off," Budde says.
Over the course of that summer, Budde tried to contact the SEC several more times, and was ignored each time. Finally, in the fateful week of September 15th, 2008, when Lehman Brothers cracked under the weight of its reckless bets on the subprime market and went into its final death spiral, Budde became seriously concerned. If the government tried to arrange for Lehman to be pawned off on another Wall Street firm, as it had done with Bear Stearns, the U.S. taxpayer might wind up footing the bill for a company with hundreds of millions of dollars in concealed compensation. So Budde again called the SEC, right in the middle of the crisis. "Look," he told regulators. "I gave you huge stuff. You really want to take a look at this."
But the feds once again blew him off. A young staff attorney contacted Budde, who once more provided the SEC with copies of all his memos. He never heard from the agency again. "This was like a mini-Madoff," Budde says. "They had six solid months of warnings. They could have done something."
Three weeks later, Budde was shocked to see Fuld testifying before the House Government Oversight Committee and whining about how poor he was. "I got no severance, no golden parachute," Fuld moaned. When Rep. Henry Waxman, the committee's chairman, mentioned that he thought Fuld had earned more than $480 million, Fuld corrected him and said he believed it was only $310 million.
The true number, Budde calculated, was $529 million. He contacted a Senate investigator to talk about how Fuld had misled Congress, but he never got any response. Meanwhile, in a demonstration of the government's priorities, the Justice Department is proceeding full force with a prosecution of retired baseball player Roger Clemens for lying to Congress about getting a shot of steroids in his ass. "At least Roger didn't screw over the world," Budde says, shaking his head.
Fuld has denied any wrongdoing, but his hidden compensation was only a ripple in Lehman's raging tsunami of misdeeds. The investment bank used an absurd accounting trick called "Repo 105" transactions to conceal $50 billion in loans on the firm's balance sheet. (That's $50 billion, not million.) But more than a year after the use of the Repo 105s came to light, there have still been no indictments in the affair. While it's possible that charges may yet be filed, there are now rumors that the SEC and the Justice Department may take no action against Lehman. If that's true, and there's no prosecution in a case where there's such overwhelming evidence — and where the company is already dead, meaning it can't dump further losses on investors or taxpayers — then it might be time to assume the game is up. Failing to prosecute Fuld and Lehman would be tantamount to the state marching into Wall Street and waving the green flag on a new stealing season.
The most amazing noncase in the entire crash — the one that truly defies the most basic notion of justice when it comes to Wall Street supervillains — is the one involving AIG and Joe Cassano, the nebbishy Patient Zero of the financial crisis. As chief of AIGFP, the firm's financial products subsidiary, Cassano repeatedly made public statements in 2007 claiming that his portfolio of mortgage derivatives would suffer "no dollar of loss" — an almost comically obvious misrepresentation. "God couldn't manage a $60 billion real estate portfolio without a single dollar of loss," says Turner, the agency's former chief accountant. "If the SEC can't make a disclosure case against AIG, then they might as well close up shop."
As in the Lehman case, federal prosecutors not only had plenty of evidence against AIG — they also had an eyewitness to Cassano's actions who was prepared to tell all. As an accountant at AIGFP, Joseph St. Denis had a number of run-ins with Cassano during the summer of 2007. At the time, Cassano had already made nearly $500 billion worth of derivative bets that would ultimately blow up, destroy the world's largest insurance company, and trigger the largest government bailout of a single company in U.S. history. He made many fatal mistakes, but chief among them was engaging in contracts that required AIG to post billions of dollars in collateral if there was any downgrade to its credit rating.
St. Denis didn't know about those clauses in Cassano's contracts, since they had been written before he joined the firm. What he did know was that Cassano freaked out when St. Denis spoke with an accountant at the parent company, which was only just finding out about the time bomb Cassano had set. After St. Denis finished a conference call with the executive, Cassano suddenly burst into the room and began screaming at him for talking to the New York office. He then announced that St. Denis had been "deliberately excluded" from any valuations of the most toxic elements of the derivatives portfolio — thus preventing the accountant from doing his job. What St. Denis represented was transparency — and the last thing Cassano needed was transparency.
Another clue that something was amiss with AIGFP's portfolio came when Goldman Sachs demanded that the firm pay billions in collateral, per the terms of Cassano's deadly contracts. Such "collateral calls" happen all the time on Wall Street, but seldom against a seemingly solvent and friendly business partner like AIG. And when they do happen, they are rarely paid without a fight. So St. Denis was shocked when AIGFP agreed to fork over gobs of money to Goldman Sachs, even while it was still contesting the payments — an indication that something was seriously wrong at AIG.
"When I found out about the collateral call, I literally had to sit down," St. Denis recalls. "I had to go home for the day." After Cassano barred him from valuating the derivative deals, St. Denis had no choice but to resign. He got another job, and thought he was done with AIG. But a few months later, he learned that Cassano had held a conference call with investors in December 2007. During the call, AIGFP failed to disclose that it had posted $2 billion to Goldman Sachs following the collateral calls. "Investors therefore did not know," the Financial Crisis Inquiry Commission would later conclude, "that AIG's earnings were overstated by $3.6 billion."
"I remember thinking, 'Wow, they're just not telling people,'" St. Denis says. "I knew. I had been there. I knew they'd posted collateral." A year later, after the crash, St. Denis wrote a letter about his experiences to the House Government Oversight Committee, which was looking into the AIG collapse. He also met with investigators for the government, which was preparing a criminal case against Cassano. But the case never went to court. Last May, the Justice Department confirmed that it would not file charges against executives at AIGFP. Cassano, who has denied any wrongdoing, was reportedly told he was no longer a target.
Shortly after that, Cassano strolled into Washington to testify before the Financial Crisis Inquiry Com mission. It was his first public appearance since the crash. He has not had to pay back a single cent out of the hundreds of millions of dollars he earned selling his insane pseudo-insurance policies on subprime mortgage deals. Now, out from under prosecution, he appeared before the FCIC and had the enormous balls to compliment his own business acumen, saying his atom-bomb swaps portfolio was, in retrospect, not that badly constructed. "I think the portfolios are withstanding the test of time," he said. "They offered him an excellent opportunity to redeem himself," St. Denis jokes.
In the end, of course, it wasn't just the executives of Lehman and AIGFP who got passes. Virtually every one of the major players on Wall Street was similarly embroiled in scandal,
yet their executives skated off into the sunset, uncharged and unfined. Goldman Sachs paid $550 million last year when it was caught defrauding investors with crappy mortgages, but no executive has been fined or jailed — not even Fabrice "Fabulous Fab" Tourre, Goldman's outrageous Euro-douche who gleefully e-mailed a pal about the "surreal" transactions in the middle of a meeting with the firm's victims. In a similar case, a sales executive at the German powerhouse Deutsche Bank got off on charges of insider trading; its general counsel at the time of the questionable deals, Robert Khuzami, now serves as director of enforcement for the SEC.
Another major firm, Bank of America, was caught hiding $5.8 billion in bonuses from shareholders as part of its takeover of Merrill Lynch. The SEC tried to let the bank off with a settlement of only $33 million, but Judge Jed Rakoff rejected the action as a "facade of enforcement." So the SEC quintupled the settlement — but it didn't require either Merrill or Bank of America to admit to wrongdoing. Unlike criminal trials, in which the facts of the crime are put on record for all to see, these Wall Street settlements almost never require the banks to make any factual disclosures, effectively burying the stories forever. "All this is done at the expense not only of the shareholders, but also of the truth," says Rakoff.
Goldman, Deutsche, Merrill, Lehman, Bank of America ... who did we leave out? Oh, there's Citigroup, nailed for hiding some $40 billion in liabilities from investors. Last July, the SEC settled with Citi for $75 million. In a rare move, it also fined two Citi executives, former CFO Gary Crittenden and investor-relations chief Arthur Tildesley Jr. Their penalties, combined, came to a whopping $180,000.
Throughout the entire crisis, in fact, the government has taken exactly one serious swing of the bat against executives from a major bank, charging two guys from Bear Stearns with criminal fraud over a pair of toxic subprime hedge funds that blew up in 2007, destroying the company and robbing investors of $1.6 billion. Jurors had an e-mail between the defendants admitting that "there is simply no way for us to make money — ever" just three days before assuring investors that "there's no basis for thinking this is one big disaster." Yet the case still somehow ended in acquittal — and the Justice Department hasn't taken any of the big banks to court since. All of which raises an obvious question: Why the hell not?
Gary Aguirre, the SEC investigator who lost his job when he drew the ire of Morgan Stanley, thinks he knows the answer. Last year, Aguirre noticed that a conference on financial law enforcement was scheduled to be held at the Hilton in New York on November 12th. The list of attendees included 1,500 or so of the country's leading lawyers who represent Wall Street, as well as some of the government's top cops from both the SEC and the Justice Department.
Criminal justice, as it pertains to the Goldmans and Morgan Stanleys of the world, is not adversarial combat, with cops and crooks duking it out in interrogation rooms and courthouses. Instead, it's a cocktail party between friends and colleagues who from month to month and year to year are constantly switching sides and trading hats. At the Hilton conference, regulators and banker-lawyers rubbed elbows during a series of speeches and panel discussions, away from the rabble. "They were chummier in that environment," says Aguirre, who plunked down $2,200 to attend the conference.
Aguirre saw a lot of familiar faces at the conference, for a simple reason: Many of the SEC regulators he had worked with during his failed attempt to investigate John Mack had made a million-dollar pass through the Revolving Door, going to work for the very same firms they used to police. Aguirre didn't see Paul Berger, an associate director of enforcement who had rebuffed his attempts to interview Mack — maybe because Berger was tied up at his lucrative new job at Debevoise & Plimpton, the same law firm that Morgan Stanley employed to intervene in the Mack case. But he did see Mary Jo White, the former U.S. attorney, who was still at Debevoise & Plimpton. He also saw Linda Thomsen, the former SEC director of enforcement who had been so helpful to White. Thomsen had gone on to represent Wall Street as a partner at the prestigious firm of Davis Polk & Wardwell.
Two of the government's top cops were there as well: Preet Bharara, the U.S. attorney for the Southern District of New York, and Robert Khuzami, the SEC's current director of enforcement. Bharara had been recommended for his post by Chuck Schumer, Wall Street's favorite senator. And both he and Khuzami had served with Mary Jo White at the U.S. attorney's office, before Mary Jo went on to become a partner at Debevoise. What's more, when Khuzami had served as general counsel for Deutsche Bank, he had been hired by none other than Dick Walker, who had been enforcement director at the SEC when it slow-rolled the pivotal fraud case against Rite Aid. "It wasn't just one rotation of the revolving door," says Aguirre. "It just kept spinning. Every single person had rotated in and out of government and private service."
The Revolving Door isn't just a footnote in financial law enforcement; over the past decade, more than a dozen high-ranking SEC officials have gone on to lucrative jobs at Wall Street banks or white-shoe law firms, where partnerships are worth millions. That makes SEC officials like Paul Berger and Linda Thomsen the equivalent of college basketball stars waiting for their first NBA contract. Are you really going to give up a shot at the Knicks or the Lakers just to find out whether a Wall Street big shot like John Mack was guilty of insider trading? "You take one of these jobs," says Turner, the former chief accountant for the SEC, "and you're fit for life."
Fit — and happy. The banter between the speakers at the New York conference says everything you need to know about the level of chumminess and mutual admiration that exists between these supposed adversaries of the justice system. At one point in the conference, Mary Jo White introduced Bharara, her old pal from the U.S. attorney's office.
"I want to first say how pleased I am to be here," Bharara responded. Then, addressing White, he added, "You've spawned all of us. It's almost 11 years ago to the day that Mary Jo White called me and asked me if I would become an assistant U.S. attorney. So thank you, Dr. Frankenstein."
Next, addressing the crowd of high-priced lawyers from Wall Street, Bharara made an interesting joke. "I also want to take a moment to applaud the entire staff of the SEC for the really amazing things they have done over the past year," he said. "They've done a real service to the country, to the financial community, and not to mention a lot of your law practices."
Haw! The line drew snickers from the conference of millionaire lawyers. But the real fireworks came when Khuzami, the SEC's director of enforcement, talked about a new "cooperation initiative" the agency had recently unveiled, in which executives are being offered incentives to report fraud they have witnessed or committed. From now on, Khuzami said, when corporate lawyers like the ones he was addressing want to know if their Wall Street clients are going to be charged by the Justice Department before deciding whether to come forward, all they have to do is ask the SEC.
"We are going to try to get those individuals answers," Khuzami announced, as to "whether or not there is criminal interest in the case — so that defense counsel can have as much information as possible in deciding whether or not to choose to sign up their client."
Aguirre, listening in the crowd, couldn't believe Khuzami's brazenness. The SEC's enforcement director was saying, in essence, that firms like Goldman Sachs and AIG and Lehman Brothers will henceforth be able to get the SEC to act as a middleman between them and the Justice Department, negotiating fines as a way out of jail time. Khuzami was basically outlining a four-step system for banks and their executives to buy their way out of prison. "First, the SEC and Wall Street player make an agreement on a fine that the player will pay to the SEC," Aguirre says. "Then the Justice Department commits itself to pass, so that the player knows he's 'safe.' Third, the player pays the SEC — and fourth, the player gets a pass from the Justice Department."
When I ask a former federal prosecutor about the propriety of a sitting SEC director of enforcement talking out loud about helping corporate defendants "get answers" regarding the status of their criminal cases, he initially doesn't believe it. Then I send him a transcript of the comment. "I am very, very surprised by Khuzami's statement, which does seem to me to be contrary to past practice — and not a good thing," the former prosecutor says.
Earlier this month, when Sen. Chuck Grassley found out about Khuzami's comments, he sent the SEC a letter noting that the agency's own enforcement manual not only prohibits such "answer getting," it even bars the SEC from giving defendants the Justice Department's phone number. "Should counsel or the individual ask which criminal authorities they should contact," the manual reads, "staff should decline to answer, unless authorized by the relevant criminal authorities." Both the SEC and the Justice Department deny there is anything improper in their new policy of cooperation. "We collaborate with the SEC, but they do not consult with us when they resolve their cases," Assistant Attorney General Lanny Breuer assured Congress in January. "They do that independently."
Around the same time that Breuer was testifying, however, a story broke that prior to the pathetically small settlement of $75 million that the SEC had arranged with Citigroup, Khuzami had ordered his staff to pursue lighter charges against the megabank's executives. According to a letter that was sent to Sen. Grassley's office, Khuzami had a "secret conversation, without telling the staff, with a prominent defense lawyer who is a good friend" of his and "who was counsel for the company." The unsigned letter, which appears to have come from an SEC investigator on the case, prompted the inspector general to launch an investigation into the charge.
All of this paints a disturbing picture of a closed and corrupt system, a timeless circle of friends that virtually guarantees a collegial approach to the policing of high finance. Even before the corruption starts, the state is crippled by economic reality: Since law enforcement on Wall Street requires serious intellectual firepower, the banks seize a huge advantage from the start by hiring away the top talent. Budde, the former Lehman lawyer, says it's well known that all the best legal minds go to the big corporate law firms, while the "bottom 20 percent go to the SEC." Which makes it tough for the agency to track devious legal machinations, like the scheme to hide $263 million of Dick Fuld's compensation.
"It's such a mismatch, it's not even funny," Budde says.
But even beyond that, the system is skewed by the irrepressible pull of riches and power. If talent rises in the SEC or the Justice Department, it sooner or later jumps ship for those fat NBA contracts. Or, conversely, graduates of the big corporate firms take sabbaticals from their rich lifestyles to slum it in government service for a year or two. Many of those appointments are inevitably hand-picked by lifelong stooges for Wall Street like Chuck Schumer, who has accepted $14.6 million in campaign contributions from Goldman Sachs, Morgan Stanley and other major players in the finance industry, along with their corporate lawyers.
As for President Obama, what is there to be said? Goldman Sachs was his number-one private campaign contributor. He put a Citigroup executive in charge of his economic transition team, and he just named an executive of JP Morgan Chase, the proud owner of $7.7 million in Chase stock, his new chief of staff. "The betrayal that this represents by Obama to everybody is just — we're not ready to believe it," says Budde, a classmate of the president from their Columbia days. "He's really fucking us over like that? Really? That's really a JP Morgan guy, really?"
Which is not to say that the Obama era has meant an end to law enforcement. On the contrary: In the past few years, the administration has allocated massive amounts of federal resources to catching wrongdoers — of a certain type. Last year, the government deported 393,000 people, at a cost of $5 billion. Since 2007, felony immigration prosecutions along the Mexican border have surged 77 percent; nonfelony prosecutions by 259 percent. In Ohio last month, a single mother was caught lying about where she lived to put her kids into a better school district; the judge in the case tried to sentence her to 10 days in jail for fraud, declaring that letting her go free would "demean the seriousness" of the offenses.
So there you have it. Illegal immigrants: 393,000. Lying moms: one. Bankers: zero. The math makes sense only because the politics are so obvious. You want to win elections, you bang on the jailable class. You build prisons and fill them with people for selling dime bags and stealing CD players. But for stealing a billion dollars? For fraud that puts a million people into foreclosure? Pass. It's not a crime. Prison is too harsh. Get them to say they're sorry, and move on. Oh, wait — let's not even make them say they're sorry. That's too mean; let's just give them a piece of paper with a government stamp on it, officially clearing them of the need to apologize, and make them pay a fine instead. But don't make them pay it out of their own pockets, and don't ask them to give back the money they stole. In fact, let them profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year. What's next? Taxpayer-funded massages for every Wall Street executive guilty of fraud?
The mental stumbling block, for most Americans, is that financial crimes don't feel real; you don't see the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than common robberies. They're crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let's steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy. They're attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone's claims of ownership equally. When that definition becomes tenuous or conditional — when the state simply gives up on the notion of justice — this whole American Dream thing recedes even further from reality.