I’m just recovering from a killer flu that had me wheezing and miserable for 5 days. I have a whole backlog of rants and vents but no time this morning to even start, so instead let me suggest you read this article (hat tip Chris Wiggins) about a New York Times reporter who crashed the yearly party of Kappa Beta Phi, a Wall Street secret society. Pretty amazing, if true.
I’m really proud of my Occupy group, Alt Banking. We continue to meet every Sunday at Columbia and we welcome new members. I wanted to throw down a few reasons you might consider coming to our meetings.
If you’re interested, please email email@example.com and ask to be added to the google group. Emails go out Saturday about details on Sunday meetings. And if you’re passing through New York on a Sunday, please consider just joining for one day!
An amazing team of activists have been making the Alt Banking website better and better every week. It’s pretty much up to date and contains real resources for people who can’t come to the meetings, as well as for people who want to continue the conversation between meetings.
Please take a look and give us suggestions to make it even better.
We’ve had some amazing speakers come to Alt Banking in the past – including Neil Barofsky, Sheila Bair, Merlyna Lim, Tom Adams, Moe Tkacik, and most recently Stanley Aronowitz – and many more coming up soon. I’d say it’s a great group to know about for the speaker list alone. The speakers come from 2-3pm before the regular 3-5 meeting on Sundays.
As I’ve mentioned before on mathbabe, we wrote a pretty cool book called Occupy Finance, and we recently got a second printing made since the first printing went so quickly. If you’d like a physical copy, please email firstname.lastname@example.org with your address. A free pdf is available here.
But that’s not all. Last week we decided to start our next big project, which is likely going to be some combination of a book and a movie, or a series of videos, or possibly a series of animated shorts, or something along those lines (still under consideration!). The content of the project is centered around three topics and their intersections, and we already have a cool “first iteration” visual due to Laminated Lychee (note the nerdy use of the Venn Diagram):
We’re also looking to have a cool roll-out for that project, possibly next September, possibly with a day-long conference of activists and lectures and activities. We could really use some help!
I also wanted to mention that we have a blast every week, and we often go out for dinner and/or a glass of wine or beer after the regular meeting. It’s really a great group of fun people.
This coming Friday will be a coordinated day of action against the Trans Pacific Partnership Agreement (TPP). Actions will take place all over the world with the New York version taking place at noon in Queens (details below).
Why anti-TPP? Isn’t “free trade” a good thing? The word “free” is in it!
Language is a tricky thing, and people choose the names of their initiatives to make them sound good. We know that from the “pro life” and “pro choice” debate.
Turns out that, in this case, “free trade” is a weird phrase to describe a campaign that increases the legal power of corporations (ex: tobacco companies) against governments (ex: Namibia).
I’ve written about it here, but if you haven’t seen this Huffington Post video (h/t Matt Stoller) then please take the time. It’s funny and it’s an amazingly clear and beautiful explanation of the dangers of TPP, and especially the so-called “Fast Tracking” of that international agreement.
Details for the Queens anti-TPP rally on Friday
- TUG O’ JOE- a street theater performance where Crowley will be pulled by characters on both sides of the issues – corporate monsters on the one and the defenders of our jobs, health and environment on the other!
- CROWLEY – STOP BEING SPEECHLESS! – another street theater bit, satirizing Crowley’s “Speechless” presentation on the floor of Congress!
- NEW TPP SONGS by the NYC Raging Grannies!
- ROUSING SPEECHES by Mimi Rosenberg (WBAI’S Building Bridges: Your Community and Labor Report), Malú Huacuja del Toro (anti-NAFTA and Zapatista solidarity activist, acclaimed author), Corrine Rosen (Food and Water Watch), Freddy Castiblano (Latin America solidarity activist and small business owner), and others!
- Time: 10am – noon
- Location: Rep. Crowley’s Queens Office, 82-11 37th Ave between 82th and 83rd Streets, Jackson Heights, Queens. Please arrive on time as we may march! If you’re late and can’t find us, call Wendy at (347) 881-5635 or Carlos at (646) 416-3440.
- Directions: Take the 7 train to 82nd Street-Jackson Heights
- Additional Info: Phone: (718) 218-4523 Email: email@example.com Web: http://tradejustice.net/tpp
Crossposted on the Alt Banking blog, the below reflects a discussion at Alt Banking from last Sunday’s meeting.
People have been making a big fuss about JP Morgan Chase CEO Jamie Dimon’s recent raise. They seem to think that, what with all the lawsuits that JP Morgan Chase has been involved in this past year, exposing so much fraudulent behavior which directly contributed to so much human suffering, the guy should be somewhat humbled and punished. They even wanna question his right to stock options he shoulda had way back in 2008, when the world was on fire. The nerve!
I mean, maybe by some definition of “earned” he doesn’t deserve those 20 sticks. Maybe they think they have better plans for the bonus money. But from where I sit, the guy should have gotten way more, considering he set the price of fraud by big banks so low and in so many different ways.
I estimate that he should have gotten at least $100 million, using a very basic fact that the regulatory arbitrage which he displayed, and which now exists as a precedent for all bankers for the rest of eternity, benefitted not just him, not just JP Morgan Chase, but all the Too-Big-To-Fail banks. For that reason, every TBTF bank should give him at least $20 million as a reward for their future profitable fraudulent earnings. Since there are at least 5 TBTF banks, I’m just scaling up in a super reasonable way.
I know that might sound weird, for Bank of America and Goldman Sachs, which are generally speaking competitors to JP Morgan, to give Jamie Dimon cash money. And they might want to keep it on the DL for that matter, for the sake of appearances.
But after all, this is the guy who called Attorney General Eric Holder on the phone and negotiated a settlement, for christ’s sake! Who DOES that? That’s really above and beyond the chutzpah of even the most criminal of masterminds. Only the creamiest of the crop, only the most devoted of banker psychopaths can get away with that shit. That is to say, Jamie Dimon, and maybe Lloyd Blankfein (Dear Lloyd: I don’t doubt for a minute that you will have your day too, very soon, and then all the big boys will pitch in for your supersized bonus).
So what are you waiting for, Citigroup? Wells? When are you guys ponying up what we all know Dimon deserves from all of the elite institutions protected from prosecution? I say you guys perform the equivalent of a kowtow in Wall Street terms, which is of course monetized, in the form of a check. Send it on over.
Come to think of it we should also offer extra cash to HSBC’s legal team, and for that matter Eric Holder himself. If it hasn’t already been done.
This coming Sunday we’re having a special Alt Banking meeting where, instead of having our usual format, we’re all watching Four Horsemen, a recent documentary film put out by Renegade Economists (on twitter as @RenegadeEcon). We’ll first watch the film and then have a discussion about it.
The entire film is available on youtube here, although I paid 5 bucks to download it from this website in preparation for this coming Sunday’s viewing and discussion. Here’s the trailer, it looks amazing:
Feel free to come to Sunday’s meeting, it starts at 2pm and is uptown at Columbia University. Send an email to firstname.lastname@example.org and ask to be added to the email list for details, or go to the alt banking webpage for details.
United States District Judge Jed S. Rakoff is already kind of a hero to me, given that he’s the guy who rejected a “do not admit wrongdoing” settlement between Citigroup and the SEC over mortgage-backed securities fraud because, according to Rakoff, the proposed settlement was “neither fair, nor reasonable, nor adequate, nor in the public interest.”
More recently Rakoff has written a fine essay in the New York Review of Books entitled The Financial Crisis: Why Have No High-Level Executives Been Prosecuted? which I will summarize below but is well worth your time to read.
First Rakoff made the point that if there was no intentional fraud we should not scapegoat people and put them to jail. But on the other hand, if there was intentional fraud, then it’s a reflection on a dysfunctional justice system that nobody has gone to jail.
Then he examined that first possibility and found it unlikely, given that “… the Financial Crisis Inquiry Commission, in its final report, uses variants of the word “fraud” no fewer than 157 times in describing what led to the crisis…” In fact, fraud permeated at every level.
The Department of Justice (DOJ) has focused on explaining why nobody has gone to jail in spite of the existence of fraud. They have three reasons.
First, the DOJ claims it’s hard to prove intent for high-level management. But Rakoff demurs on this point, explaining that in cases of accounting fraud, “willful blindness” or “conscious disregard” is a well-established basis on which federal prosecutors have asked juries to infer intent.
Second, since many counterparties were “sophisticated,” it’s difficult to prove “reliance“. Again Rakoff demurs, pointing out that “In actuality, in a criminal fraud case the government is never required to prove—ever—that one party to a transaction relied on the word of another.”
Third, because of the “Too Big To Jail” problem, namely that prosecuting fraud would kill the economy. To this, Rakoff points out what that means in terms of class: that poor people can be prosecuted but the rich are protected.
Next, Rakoff says what he thinks is actually happening. First he discounts the revolving door: he thinks lawyers are thoroughly incentivized to make a name for themselves. Then what? He’s got three reasons.
Well, first, people were distracted. The FBI was distracted by terrorists, and the SEC was focused on Ponzi schemes and insider trading. The DOJ was inexperienced and the Southern District US Attorney’s Office was also focused on insider trading. And given the complexity and incentives, it’s hard for a given lawyer to decide to go with an MBS case instead of insider trading.
Second, the government had direct conflict in the fraud, given that the Fed and the regulators had deregulated everything in sight and then kept interest rates low to keep the mortgage machine going. They also meddled a lot during the crisis, deciding which failing bank should be taken over by whom. It made it hard for them to admit shit went wrong.
Finally, it’s because it’s now in vogue to prosecute corporations instead of people, but that really doesn’t work. Here’s Rakoff on this prosecutorial method:
Although it is supposedly justified because it prevents future crimes, I suggest that the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing. Just going after the company is also both technically and morally suspect. It is technically suspect because, under the law, you should not indict or threaten to indict a company unless you can prove beyond a reasonable doubt that some managerial agent of the company committed the alleged crime; and if you can prove that, why not indict the manager? And from a moral standpoint, punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.
And then his final conclusion:
So you don’t go after the companies, at least not criminally, because they are too big to jail; and you don’t go after the individuals, because that would involve the kind of years-long investigations that you no longer have the experience or the resources to pursue.
First, I am super grateful for Judge Rakoff’s essay, because as an experienced lawyer he has way more ammunition than I do to explain this stuff from the perspective of what is actually done in law. The “willful blindness” issue is particularly ridiculous. I’m glad to hear that courts have a way to deal with that problem, even if they aren’t using their tools against Jamie Dimon.
I am also grateful to hear him make the point that widespread fraud, unprosecuted, is not simply a theoretical issue. It exposes the dysfunctionality of our justice system and it exposes basic unfairness in society, where depending on how rich you are and how complicated your crime is, you can avoid going to jail. Personally, in the past few months I’ve gone from being angry at the bankers to being angry at the prosecutors.
Finally, I disagree with Rakoff on one point. Namely, his argument against the negative effect of the revolving door. His argument, I stipulate, only works for lawyers in a US Attorney’s office. I don’t think the average SEC lawyer or economist, or for that matter an employee at any captured regulator, has that much incentive to take on a big MBS case and be hard-assed. I think we would have seen more cases if that were true.
Written by the Alternative Banking group of Occupy Wall Street.
Compiling a list of the 10 Worst Wall Street Actions of 2013 should be easy–there are so many to choose from! The problem is, it often takes years to see which financial activities and innovations have been the most destructive and destabilizing. Therefore, the following should be considered merely a sample of the ways Wall Street has maneuvered, manipulated, defrauded and deceived us during the past year.
Bottom 10 things we found out about Wall Street in 2013
In Washington, It’s a Wash
One of the most obvious examples of Wall Street influence on Congress was HR 992 to roll back some of the derivatives restrictions on banks. The NY Times discovered that Citigroup had drafted most of the language, some of which was accepted almost word-for-word. The House passed it with bipartisan support. Meanwhile, bank lobbyists had excessive influence on the agencies writing and enforcing the Volcker rule.
Still Too Big to Jail
The financial system in general, and the mammoth banks in particular, are still just too damn big. In 2013, JP Morgan Chase was the poster child for this problem, with its numerous legal problems, for which they set aside on the order of $28 billion dollars just to pay legal fees. The London Whale debacle, which involved Dimon lying to shareholders and Congress, showcased both how banks make their biggest money from pure speculation, and how they are enabled by lawmakers and regulators through their “Too Big To Fail” status.
Banks Manipulate Commodities, Fed OKs It
Banks like JP Morgan Chase and Goldman Sachs have manipulated access to commodities such as aluminum and electricity in order to increase their profits. The Federal Reserve has permitted the biggest banks to postpone complying with such regulations as still exist to limit banks’ involvement in commodities, or to ignore them altogether. Minimal fines the banks have paid are simply the cost of doing business and are far outweighed by the money they’ve made.
The banks continued to exploit underwater homeowners. One of the worst abuses is called “zombie foreclosures” where the bank pretended to foreclose — evicting the owner — but then didn’t file legal papers. This allowed the banks to continue to rack up interest, fees and penalties because the homeowners, reasonably, stopped making payments because they thought the homes were no longer theirs. To add insult to injury, when the banks sent out checks to homeowners in restitution for past misdeeds, they bounced.
Pillaging of Detroit
Detroit’s largest creditors, UBS and Bank of America, made it clear just how far they’re willing to go to collect on debts from highly-risky interest rate swap deals they made with Detroit’s leaders before the 2008 financial collapse: they’re coming for the art! Creditors, led by Detroit’s imposed “Emergency Manager” Kevyn Orr, sent Christie’s auction house to the Detroit Institute of Arts to valuate the works, which are all held tightly in public trust by the city. It still remains to be seen whether the approximately $900 million works – we think they’re priceless! – will be sold off to pay off debts or in some hostage deal to pay threatened but constitutionally-protected city worker pensions.
Killing Credit Unions
According to MSN.com, credit unions offer low rates on loans, higher rates on savings, better credit cards deals, and lower fees. Perhaps because of these competitive benefits, the American Banking Association ran an ad campaign to revoke the tax exempt status for America’s credit unions.
There’s a familiar yet still outrageous lack of criminal prosecution for (pick your favorite settlement). But let’s concentrate on an exception that proved the rule, specifically what has been termed the “Bank of America/ Countrywide hustle”. Here Countrywide deliberately and desperately gamed underwriting standards to dump loans on Fannie and Freddie, and got caught. Worst of all, jury found defendants guilty in about 3 hours. If only more cases had been brought to trial: juries are chomping at the bit to find banks guilty. Which is probably why more weren’t.
Never on Hold
U.S. Attorney General Eric Holder was an egregious case study in how Washington kowtows to Wall Street. When JPMorgan Chase wanted to settle their many legal difficulties, CEO Jamie Dimon had a private meeting with Holder to negotiate; the final settlement involved admission of illegal activity by JPMorgan but no criminal charges — just fines mainly paid by shareholders. Holder also admitted to Congress in March that the megabanks were too big to prosecute. While he later retracted the statement, his actions — never bringing criminal charges despite admitted criminal activities — speak louder than his words.
Writing the Rules
The banks, among other corporations, pushed for the Trans Pacific Partnership (TPP) treaty that will greatly constrain efforts by the U.S. and other countries to regulate. For instance, it would prevent the imposition of a “Robin Hood Tax” on stock trading, it would roll back some of Dodd-Frank and prevent a return to Glass-Steagall. TPP would also forbid public banks such as the Bank of North Dakota or a return of the Post Office Bank. No wonder we aren’t hearing more details.
Ongoing cultural confusion
AIG’s President and CEO Robert Benmosche compared criticism of AIG bonuses to lynchings in the Jim Crow South. Mistaking a papercut for a crucifixion is the inevitable delusion of a pampered and under-prosecuted criminal upper class.
5 Silver Linings
Occupy the SEC Gains Ground
Occupy the SEC‘s impact on the Volcker Rule (which originally aspired to banning proprietary trading and ownership of hedge funds by banks) could not be more evident. When the Volcker Rule was finalized in December, the hard work Occupy the SEC did writing a 325-page comment letter on paid off. The letter was cited 284 times by the regulators. In some cases, the final rule adopted their recommendations while in others the rule was modified in the direction of Occupy’s suggestions.
Radical Eminent Domain
Richmond, California Mayor Gayle McLaughlin ignited a fury on Wall St and in Washington by employing an eminent domain threat to force intransigent banks to renegotiate – and reduce principal – for underwater homeowners. The move has sparked everything from lawsuits and threats of mortgage lenders leaving town to copycat actions in other underwater cities as far away as Irvington and Newark, New Jersey. Supporters of the promising tactic are calling it the Reverse Eminent Domain Movement and even Occupy 2.0.
No Highchair for Larry
Larry Summers did not become the new Fed Chair in 2013. It was a close call but Larry Summers may finally have made too many obvious and ridiculous mistakes – deregulating financial derivatives to pave the way for the financial crisis, for one, and aiding criminal fraud in Russia for another – to be made, once again, one of the most powerful people in the world.
Journalists Expose the Banks
Several journalists deserve extra praise this year for their coverage of Wall Street’s illegal and undemocratic behavior:: Matt Taibbi, Bill Moyers, Yves Smith, Gretchen Morgenson, the International Consortium of Investigative Journalism, ProPublica and Wikileaks. Taibbi alerted us to the HSBC settlement proving the drug war is a joke, Moyers highlighted how people can provoke change and, with Smith, exposed the dangers of the Trans-Pacific Partnership. Morgenson skewered payday lending and many other unsavory financial practices. The International Consortium of Investigative Journalism and WIkileaks exposed documents that the banks want to keep secret — for good reason — about enormous amounts held off-shore and TPP drafts..
Occupy Finance and Strike Debt
The OWS Alternative Banking Working group released Occupy Finance, a 100-page book explaining the financial crisis in layman’s terms on the second anniversary of Occupy, and supplies of the book were quickly exhausted (a new printing has been ordered for January 2014).
In the past two months alone, Strike Debt’s Rolling Jubilee has collected and abolished $14.7 million in debt, as a means of raising awareness about the personal debt crisis, and a step towards building a debt resistance movement.
Yesterday Russ Roberts had Dallas Federal Reserve President Richard Fisher as his guest on his podcast EconTalk to talk about Too-Big-To-Fail (TBTF) banks and the Fed’s monetary policy. It was a fantastic discussion and I’m grateful to Roberts for continuing to discuss this important and nonpartisan issue.
We in Alt Banking have been impressed by Fisher’s stance on TBTF and have thought about trying to get him to come visit us to talk, so this was a great opportunity to get a preview of what he’d likely say if he ever made it over. Given that he’s an active central banker, he’s refreshingly open and honest about stuff, even if every now and then he deliberately makes it seem like everything that happened was a mistake rather than a criminal act.
Fisher and Roberts on TBTF
You should listen to the entire podcast, it’s about an hour long but well worth the time. I will submit a short summary of their conversation here:
- First they discuss the problem of TBTF banks, that instead of failing, large banks were merged into even larger banks during the crisis, and now we have institutions that are too big to manage and are being backed by an implicit government guarantee that the Dodd-Frank regulation isn’t removing.
- Next, the discuss a takeaway in terms of community banks. Is it a problem that it’s not a level playing field for community banks? Or is it primarily a problem that any bank that should fail is being propped up?
- Roberts makes the point that he doesn’t care so much that the system isn’t fair, he cares only that this banking system isn’t effective. If the threat is that France might overtake us in an ineffective field such as finance, then so be it.
- Then Fisher started talking solutions. He has a two-part plan. The first part is to make very explicit which parts of a bank have deposit insurance and access to the Fed window, namely only the commercial bank part that accepts deposits, not any special investment vehicles or insurance subsidiaries etc.
- The second part is to hold a ritual signing of a contract among every bank customer, creditor, investor, and counter-party (but not depositor!) which states that they know their investment is not protected by a government guaranteed. Roberts suggested this might be done in a public ceremony and include a statement that people will refuse government support, so that there will be an added element of public shaming if people go back on this promise. Here’s an example of such a covenant available at the Dallas Fed webpage:
- Next Roberts pushes back: the institutions that got bailed out in 2008 didn’t have insurance, so why will this work?
- To this Fisher acknowledges that it’s all about beliefs and expectations of market participants, but he thinks that the simplicity of this, as well as the signing of the covenant, might be convincing enough. By contrast he mentions that the current system, where we have a Financial Stability Oversight Council that decides which institutions need closing, has a very low probability of working. In particular, Fisher points out that it will take 24 million man hours to simply interpret current law to break down a bank.
- Roberts then asks, what about larger capitalization requirements of banks, or capping the size of the banks? Turns out that Fisher wants to minimize government intervention and maximize “market driven approaches.” He’s a real free market lover. He also says that, in the case of a liquidity run, capital cushions, even big ones, will be insufficient if you’re dependent on short-term funding.
- One last thing. They both mention that TBTF will only be solved when a president wants it to be solved. But they also both agree that no politician wants to lose the money they get from Wall Street lobbyists.
- Next, on to monetary policy. Fisher points out that the dual mandate of the Fed is supposed to focus on long term issues, and that QE’s policy of cornering the market on treasuries and mortgage-backed solutions (MBS) is both unsustainable and doesn’t work well in a long term way.
- Fisher mentions that the Fed has made money on its enormous, $4.2 trillion portfolio, to the tune of $300 billion in the past few years, but on the other hand that’s partly because interest rates are so low. What will happen when that changes?
- He’s worried long-term about inflation, since the Fed is basically printing money, which is being stored by the banks (and hedge funds and private equity) and not lent out, at least for now.
- Finally, and this is where I care the most, this is a policy that benefits rich people and doesn’t do much at all for the rest of Americans. The balance sheets of big US companies look great now because of QE, but they largely don’t hire people because they’ve realized they don’t really need to – they’ve harnessed IT. So actually there’s less need for credit in the system altogether. Conclusion: we should reduce QE sooner rather than later.
A couple of comments
I’m not as much of a fan of “free market solutions” as Fisher and Roberts. In particular I don’t think the influence of the Fed is going to be immediately forgotten, even if we scale it down, and the bailouts will take a while to forget as well. In other words I don’t think it will be realistic to think of our system as a free market any time soon. Plus I believe in good strong rules for the market to work well.
Having said that, I love the idea of implementing these two steps to end TBTF and then seeing how well they work. By all means protect only deposits and let everyone else risk their money. See if we can at least make a dent in the implicit government subsidy.
In terms of QE, there’s something to be said for everyone suffering together, and this policy is the opposite of that. Right now we see the GDP decoupled from the fate of the working man, and QE is a primary cause of that decoupling. Even so, we still use GDP as proxy for growth and success for our economy, even though the benefits are almost exclusively going to rich people. Here’s a chart showing what I mean, which I got here:
The New York Times just put out an amazing and outrageous story, entitled Tobacco Industry Tactics Limit Poorer Nations’ Smoking Laws and written by Sabrina Tavernise.
In it she describes the bullying tactics of tobacco companies to small countries over their internal health regulations aiming to protect their citizenry from cancer. From the article:
In Africa, at least four countries — Namibia, Gabon, Togo and Uganda — have received warnings from the tobacco industry that their laws run afoul of international treaties, said Patricia Lambert, director of the international legal consortium at the Campaign for Tobacco Free Kids.
“They’re trying to intimidate everybody,” said Jonathan Liberman, director of the McCabe Center for Law and Cancer in Australia, which gives legal support to countries that have been challenged by tobacco companies. In Namibia, the tobacco industry has said that requiring large warning labels on cigarette packages violates its intellectual property rights and could fuel counterfeiting.
A few comments about this outrage, only tangentially mathematical:
- This happens because, in order to protect companies from being taken over by foreign nations, and in the name of free trade, it’s now possible for companies to sue countries directly. That’s what the tobacco industry is doing to small countries without the means to fight back.
- This is exactly the kind of thing that some people like Yves Smith have warned the TPP is going to do with financial regulation and other stuff. So imagine large companies or industries suing the United States or other nations for regulation that would “harm trade” or “violate their intellectual property rights.”
- In fact, it’s not going too far to say that the proliferation of these kinds of treaties are a serious threat to national sovereignty. Yves makes this case here.
- Think about it this way. It’s kind of a supernational Citizen’s United, in that only companies and industries that have enough lawyer power can get their way. And many companies easily have more resources than many countries. Think about Facebook and Google and their lobbying efforts on behalf of data privacy laws in Europe already. Now think how that battle might look when it’s against Namibia.
- Already, from the article, we saw that Uruguay was only able to fight back against Philip Morris because Bloomberg’s foundation helped them with the legal battle. And I’m glad Bloomberg helped, but if you count up all the money that will go to bullying and compare that to all the money available to help out the bullied, you quickly come to a sad conclusion.
- Once again, we have to remember that the TPP is being negotiated in secret, among a bunch of nations many of whom claim to be democratic.
Today is a remarkably cold day in New York but that’s done nothing to dampen the spirits of the members and supporters of Occupy the SEC, which had a real influence on the final Volcker Rule, as reported by the Wall Street Journal and The Washington Post, among others.
I’m not saying the Volcker Rule is perfect – in fact Occupy the SEC gave it a C- grade overall. And it was maddeningly delayed. As I’ve mentioned before, Occupy the SEC sued the regulators for the delay, or tried to, but the judge found that they had no standing.
Even so, there’s a clear victory here for Occupy the SEC. The final rule, or at least its preamble, references Occupy the SEC’s public commenting letter 284 times. The rule could have been way worse, and probably would have been without OSEC’s contribution.
Just to get some idea of the other voices in this debate – i.e. the lobbyists – take a look at this graphic on access to the rule-writers by parties interested in influencing the final rule:
I remember those guys in the early days of Occupy, meeting in the cold, drafty, and noisy chambers of 60 Wall Street after work and sitting in a circle going through the proposed Volcker Rule line by line. Nothing could have been more workmanline or hopeful. It was a great example of an Occupy group that was all work and no talk. People who wanted to talk just left them alone. I talked to them briefly about some risk model details for the rules because of my background in portfolio risk.
I even remember talking to them about the chances anybody would even read their letter, never mind take it seriously. They knew the rules, though, and the rules were that the regulators would have to read all the letters, although how seriously they took them was a different matter. They were doing it because they knew it was one of the best shots at having their voices heard. It was an incredible commitment to that ideal.
- Those guys are awesome.
- Public commenting is a critical tool.
- This wouldn’t have worked without a receptive set of regulators.
- This is inspiring and will hopefully help my Occupy group, Alt Banking, plan our next project.
- I particularly like the idea of report cards, which Occupy has created for regulation.
Yesterday at our weekly Alt Banking meeting we had an extraordinary speaker, Merlyna Lim, come talk to us about social media and grass roots organizing.
Her story was interesting and nuanced; I won’t get everything down here. But there were quite a few sound byte takeaways I can express.
- The organizing which culminated in the Arab Spring started way before Facebook or Twitter came to the region.
- To a large extent social media has replaced chatting in the cafe, which we don’t do anymore.
- But that’s actually a good thing, since many regimes are so oppressive they won’t let large groups of people hold regular meetings (and large can mean 5 or more).
- Whereas social media is pretty good at energizing people to “get rid of their enemy” at a given critical moment, and mobilize on the street, it’s not that great at nuanced discussions for how to build something permanent and lasting afterwards.
One other thing I wanted to mention was Merlyna’s work on Mohamed Bouazizi, the Tunisian street vendor who self-immolated after getting into a dispute with a police officer.
The original story that got people mobilized in Tunis and out on the street, was that the police officer was a woman, that she slapped him, and that he was a college educated street vendor. It turns out these were white lies – he never finished high school, the police officer may have been a man, and there was probably no slap – but they built a narrative that people really loved. Merlyna wrote a paper about this available here if you want to know more.
That brings us to the question of why this particular framing was so appealing. Merlyna put it this way: plenty of other people had self-immolated under similar circumstances in Tunisia in the past 6 months alone. But they didn’t start a revolution because they were just very poor and didn’t have this story with extra (made-up) humiliating details. Killing yourself because you are frustrated at not having enough to eat just isn’t as compelling.
It reminds me of this Bloomberg View piece I’ve been chewing on for a couple of week, written by Peter Turchin and entitled Blame Rich, Overeducated Elites as Our Society Frays. He studies conditions for revolution as well, and claims that having a large unemployed but highly educated population – the “lawyer glut” we’re seeing today – is asking for trouble. From his article:
Elite overproduction generally leads to more intra-elite competition that gradually undermines the spirit of cooperation, which is followed by ideological polarization and fragmentation of the political class. This happens because the more contenders there are, the more of them end up on the losing side. A large class of disgruntled elite-wannabes, often well-educated and highly capable, has been denied access to elite positions.
Food for thought. Does one have more sympathy for people whose foodstamps have been recently cut or for someone who got a law degree and can’t find a job? Or is the real outrage when both happen (or at least are said to happen)? Personally, and this is maybe because I’ve been reading Jonathan Kozol’s Savage Inequalities, I’m not as worried about the lawyer.
I’m looking forward to protesting in front of JP Morgan with my #OWS Alt Banking group this Wednesday at noon. The exact location is 270 Park Avenue, near 48th Street.
It’s part of a “Week of Action” being put together by a broad coalition of activist and labor groups here in New York. The overall theme of the week is to try to communicate to New Yorkers, in this time of transition from Bloomberg to de Blasio, that we can effect positive change in our city. The theme of the day on Wednesday, at least for us, is to “be in the know,” which makes it a bit more positive than other protests we’ve been part of.
I think this makes sense. There’s so much widespread distrust and hatred of the big banks at this point that I feel like Occupy’s role has gone from provoking people to be outraged to provoking people to be hopeful. Hopeful about the fact that things could be a whole lot better than this, if we work together.
Anyhoo, we spent yesterday planning the action, and made some signs. Here’s one based on an idea we borrowed from Alexis Goldstein from her recent twitter war with JPMorgan:
and here’s a sign we’ll hold up while playing a “rigged game” with props:
I also made a sign that referenced the London Whale and the risk model, but someone said we might need to give people a copy of our recent book, Occupy Finance, just to understand that sign. Sigh.
The facebook page is here, please share it with people who may be able to join us Wednesday!
The first myth, and the one we spent the most time on, is the idea that people “deserve” the money they earn because it is an accurate measure of their “added value” to society.
There are two parts of this, or actually at least two parts.
First, there’s the idea that you can even dissect the meaning of one person’s value. And if you can, it’s likely a question of a marginal value: what does our society look like without Steve Jobs, and then with him, and what’s the difference between the two worlds? As soon as you say it, you realize that such a thought experiment is complicated, considering the extent to which Steve Jobs’ journey intersected with other people’s like Steve Wozniak and a huge crowd of Chinese workers.
If you think about it some more, you might conclude that the marginal value of a single person is impossible to actually measure, at least with any precision, and not just because of the counterfactual problem, i.e. the problem that we only have one universe and can’t run two parallel universes at the same time. It’s really because any one person succeeds or fails, or more generally contributes, within a context of an entire culture. Even Mozart wrote his symphonies within a cultural context. In another context he would have been a kid who hums to himself a lot.
Second, there’s the assumption that people who earn a lot of money are actually adding value at all. This isn’t clear, and you don’t need to refer to formally criminal acts to make that case (although of course there are plenty of rich people who have committed criminal acts).
In many examples of super rich people, they got that way through not paying for negative externalities like polluting the environment, or because they had control of the legal mechanisms to reap profits off of other peoples’ work. Not technically illegal, then, but also not exactly a fair measure of their added value.
Or, of course, if they worked in finance, they might have made money by keeping stuff incredibly complicated and opaque while providing liquidity to the credit markets. It’s not clear that such work has added any value to society, or if it has, whether it’s balanced the good with the bad.
Some observations about this myth that were brought up include:
- There’s a deep belief in “the markets” at work here which is rather cyclical. The market values you more than other people which is why you’re paid so well for whatever it is you do. Other people who have less to offer the market are get paid less. Anyone who doesn’t have a job doesn’t deserve a job since the market isn’t offering them a job, which must mean they are adding no value.
- There are exceptions where people add obvious value – caretakers of our children for example – but aren’t paid well. This is because of a different mechanism called supply and demand. For whatever reason supply and demand isn’t at work at high ends of the market.
- Or maybe it is and there’s really only one possible person who could do what Steve Jobs did. Personally I don’t buy it. And I chose Steve Jobs because so many people love that guy, but really he’s one of the best examples of someone who might have had a unique talent. Most rich people are generically good at their job and not all that unique.
- It’s mostly the people that benefit from the market system that believe in it. That kind of reminds me of the marshmallow study, or rather one of the many re-interpretations of the marshmallow study. See the latest one here.
- It’s patently difficult to believe in the market system if you consider a lack of equality of opportunity in this country due to extreme differences in school systems and the like. I’m about to start reading this book which explains this issue in depth.
- For other evidence, look at Pimco’s Bill Gross’s recent confessions about being born at the right time with easy access to credit.
- The unequal access of opportunities in this country is becoming increasingly entrenched, and as it does so the myth of the market giving us what we deserve is becoming increasingly difficult to swallow.
I don’t usually shill for companies but this morning I’m completely into how much of a circus my Twitter feed became yesterday when JP Morgan Chase’s PR team decided to open up to the public for questions. You can see from the immediate replies how this was going to go:
The questions asked which were tagged with #AskJPM are stunning and constitute a well-deserved public shaming of JP Morgan.
My friend and co-occupier Alexis Goldstein was absolutely killing it on Twitter, as usual. Here’s just a snippet from her feed:
See also Dave Dayen’s choice question:
Update: Watch #AskJPM tweets read by Stacy Keach live on CNBC!!
This is super cool. Occupy Wall Street’s Strike Debt group has bought up almost $15 million dollars worth of mostly medical debt which was owned by 2,700 people across 45 states and Puerto Rico. They used donations they’ve been collecting over the last year. There’s more information about this action in this Guardian piece.
Here’s what I like about this. By freeing people of medical debt in particular, which is the biggest cause of bankruptcy filings, it emphasizes the lie of the “moral sin” often associated with crushing debt.
In other words, instead of imagining poor and debt-ridden people as lazy and glibly unable to keep their promises, the Rolling Jubilee action bestows a much-needed act of compassion for some of the millions of the unlucky people in this country caught in a dysfunctional health and credit system.
And while it’s true that it is making a small dent in the debt problem, in dollars and cents terms, I think the Strike Debt’s debt action, and its Debt Resistors’ Operation Manual, has made huge strides in how people think about debt in this country, which is tremendously important.
Yesterday I read Alan Greenspan’s recent article in Foreign Affairs magazine (hat tip Rhoda Schermer). It is entitled “Never Saw It Coming: Why the Financial Crisis Took Economists By Surprise,” and for those of you who want to save some time, it basically goes like this:
I’ll admit it, the macroeconomic models that we used before the crisis failed, because we assumed
people financial firms behaved rationally. But now there are new models that assume predictable irrational behavior, and once we add those bells and whistles onto our existing models, we’ll be all good. Y’all can start trusting economists again.
Here’s the thing that drives me nuts about Greenspan. He is still talking about financial firms as if they are single people. He just didn’t really read Adam Smith’s Wealth of Nations, or at least didn’t understand it, because if he had, he’d have seen that Adam Smith argued against large firms in which the agendas of the individuals ran counter to the agenda of the company they worked for.
If you think about individuals inside the banks, in other words, then their individual incentives explain their behavior pretty damn well. But Greenspan ignores that and still insists on looking at the bank as a whole. Here’s a quote from the piece:
Financial firms accepted the risk that they would be unable to anticipate the onset of a crisis in time to retrench. However, they thought the risk was limited, believing that even if a crisis developed, the seemingly insatiable demand for exotic financial products would dissipate only slowly, allowing them to sell almost all their portfolios without loss. They were mistaken.
Let’s be clear. Financial firms were not “mistaken”, because legal contracts can’t think. As for the individuals working inside those firms, there was no such assumption about a slow exhale. Everyone was furiously getting their bonuses pumped up while the getting was good. People on the inside knew the market for exotic financial products would blow at some point, and that their personal risks were limited, so why not make systemic risk worse until then.
As a mathematical modeler myself, it bugs me to try to put a mathematical band-aid on an inherently failed model. We should instead build a totally new model, or even better remove the individual perverted incentives of the market using new rules (I’m using the word “rules” instead of “regulations” because people don’t hate rules as much as they hate regulations).
Wouldn’t it be nice if the agendas of the individuals inside a financial firm were more closely aligned with the financial firm? And if it was over a long period of time instead of just until the bonus day? Not impossible.
And, since I’m an occupier, I get to ask even more. Namely, wouldn’t it be even nicer if that agenda was also shared by the general public? Doable!
Mr. Greenspan, there are ways to address the mistake you economists made and continue to make, but they don’t involve fancier math models from behavioral economics. They involve really simple rule changes and, generally speaking, making finance much more boring and much less profitable.
Last night I watched this interview by Yves Smith and Dean Baker on billmoyers.com. I recommend it for everyone interested in learning about the secret “free trade” agreement currently under negotiation between the U.S. and a bunch of other countries which touch the Pacific Ocean.
The interview will explain why “free trade” is in quotes, because it’s really more about protecting corporate interests and extending patents than about reducing obstacles to trade:
As a member of Alt Banking, I’m particularly outraged by the financial regulation part of the treaty, which sound like a race to the bottom in terms of common laws between the countries. But probably the worst part of the treaty is related to pharmaceutical protectionism.
Near the end of the interview there’s an appeal, involving a monetary award, for people on the inside to come out and show the world exactly what the contents of the treaty contain. The award is sponsored by WikiLeaks and is crowdsourced: it currently stands at $61,252. So you can add to it if you want to sweeten the pot.
Yesterday we had a great discussion in our Alternative Banking Book Club about municipal financing, based on the sixth chapter in our book Occupy Finance called A Civics Lesson: Wall Street Feasts on the Commons. The conversation was kindly led by Tom Sgouros, a policy analyst and author from Rhode Island, which seems to be a hotbed of super terrible muni financing.
It was explained that shady deals in muni finance is all over the map, from price fixing in municipal bond deals, which is corruption strictly on the side of the big banks who finance the town’s deals to accounting tricks, where it takes the collusion of town officials to enter into shady and inappropriate contracts.
The thing I’d never really understood until yesterday was how people used Capital Appreciation Bonds to play tricks with their accounting, and specifically with their town’s debt limits.
Context around muni financing
A little more context, although I’m no expert (experts, please add details or correct me if I’ve misrepresented anything). Please also read the chapter, which is excellent and much broader.
First of all, by “municipalities” we mean towns and cities (actually, states and counties, too, not to mention water authorities, economic development agencies, school departments, and all the rest of the “not-federal-not-corporate”). So a town needs to borrow money for something, maybe to pay its workers, maybe to build something or maintain its roads. It borrows money from investors by issuing a muni bond, and the big banks help set that up. Investors invest in these bonds because they have special tax treatment, because they rarely default, and because they want to support their local communities.
But as you can imagine, the big banks have much more expertise on what kind of prices to expect and the level of sophistication it requires to do due diligence, and then if you add into that mix the fact that local town officials are often temporary, ignorant, and desperate, we get a toxic environment. There are lots of examples of this problem, and often they are covered up by the local towns because of associated embarrassment, complicity, and shame. Seriously, it’s awful, and we only hear about some of them like in Detroit and Stockton, when things are incredibly awful. Matt Taibbi has done an amazing job chronicling this stuff.
Anyhoo, with that backdrop, you can imagine that there are bad situations handed to town officials when they enter office, and they are confronted with a major league problem: they need to come up with money now to pay something basic like school teachers or firemen, but there’s no cash. And plus there’s a debt limit which they’re already pushing up against.
Enter the Capital Appreciation Bond (CAB). It’s a zero-coupon bond, which is already weird. For most muni bonds, towns regularly – quarterly or annually – pay interest or so-called amortizing sums, very much as an individual homeowner might pay monthly for their mortgages, where most of it goes to interest but every month a little bit of the principal is paid off too.
But for CABs, you get some money now and you pay nothing at all until it’s due, at which point you pay it all back at once.
Very very long term debt
You may have even forgotten about it by then, though, because the second weird thing about CABs is that the loans are often very very long term – as in 30 or 40 years. So, given the nature of the set-up and the nature of compound interest, you can end up paying something like 7 times the original amount after that much time.
For example, we see a school district like San Mateo in California borrowing $190 million recently that, when the bond comes due, will owe $1 billion. And it’s widespread in California: according to this article, 200 California school and community college districts issuing these bonds will end up paying 10 to 20 times more than they borrowed.
Accounting practices and CABs
That brings me to the third weirdest property of CABs, namely how they look on balance sheets for accounting purposes.
Namely, and here I need to confess that I’ve been a very bad accounting student, the towns only have to write the original loan down on the balance sheet as a liability, not the eventual pay-out. This is in contrast with other kinds of very similar zero-coupon bonds where you have to write down the eventual payment you will owe, not the amount you start with.
Someone please explain this discrepancy in the field of accounting!! It makes no sense to me. If the cash flows are the same for two different kinds of bonds, how do you get to account for them differently?
In any case, the consequences of this accounting trick are real. In particular it means that, for desperate town officials trying to pay their workers, or even shady town officials trying to get away with stuff, CABs are very attractive indeed, because it looks kind of innocuous and their overall debt limits don’t get breached even though they’ve essentially sold the future of the town to a big Wall Street bank. Plus they won’t be in office when that bill comes due, and they might well be dead.
Some California officials are trying to make CABs illegal or at least restricted, and some states like Michigan and Ohio have already passed laws against them. But given how much money they make for big banks, there are serious headwinds for reasonable rules.
I’m too angry today to dole out advice.
Instead I think I’ll join a revolution. This one, that Russell Brand is talking about.
I wanted to mention an important action that’s happening today at 5:00pm in Herald Square (34th Street and 6th Avenue) in case you are nearby and can join us.
The action is focused on raising the minimum wage. It was planned by OccuEvolve in conjunction with other Occupy groups, including Alternative Banking which made a bunch of signs this past weekend, in solidarity with the 75th Anniversary of the passing of the minimum wage law. The idea is to demand raising the minimum wage to at least 15 dollars a hour.
For a little context, here’s a chart showing the history of the U.S. Federal minimum wage since it began:
Many states have their own minimum wage laws that are either higher of lower than the federal law, and some cities have even more local minimum wages as well. Since federal law supersedes state law, I’m going to assume these guys are just behind recent increases in federal rates. Here’s a picture of the state-by-state minimum wage landscape:
I’ve never done the math on how it would be even close to possible to live on an hourly wage of $7.25 but it’s clearly not possible to, say, budget for emergencies even in the most frugal of approaches.
That general fact is embedded in this Bloomberg Businessweek article which argues that Walmart is subsidized by taxpayers and is a drag on growth. The article refers to a report put out by the Democratic staff of the U.S. House Committee on Education and the Workforce entitled The Low-Wage Drag on Our Economy: Wal-Mart’s low wages and their effect on taxpayers and economic growth. It contains this excerpt:
While employers like Wal-Mart seek to reap significant profits through the depression of labor costs, the social costs of this low-wage strategy are externalized. Low wages not only harm workers and their families—they cost taxpayers.
Here’s a graphic showing which big employers are the worst culprits:
Let’s demand better tonight at 5:00pm in Herald Square.