The Show Must Not Go On

Asking those responsible why it happened won't get answers. Only the retrieval of documents and other true investigative procedures will. I hope these folks have those skills.

New York Times Editorial, Jan. 17, 2010

Political theater and public scolding are good ways to draw attention to important issues and bad behavior, and Phil Angelides, chairman of the Financial Crisis Inquiry Commission, made use of both last week. As he swore in four of the nation’s top bankers, it was impossible not to think of that famous scene with executives from the tobacco industry. During the questioning, he rebuked Lloyd Blankfein, head of Goldman Sachs, for his firm’s practice of selling mortgage-related securities and at the same time betting they would fall in value.

Now that he has everyone’s attention, Mr. Angelides and his fellow commissioners can get to the hard part.

Inconclusive sparring at hearings will not fulfill the mandate Congress gave the panel to investigate the causes of the crisis. Indeed, the bankers who testified last week did not say much they had not said before.

The commission must uncover what bankers, investors, government officials and other people in positions of power, past and present, would prefer not to say — or perhaps do not know or understand — about the crash and the bailouts. The primary aim is not to air issues and foster debate, but to test views, resolve contradictions and arrive at evidence-based conclusions.

Yet the commission — which is supposed to file a final report by Dec. 15 — has not issued a single subpoena for documents. Instead, investigators have apparently been relying on voluntary cooperation, public records and information-sharing agreements that have been negotiated with federal agencies. A thorough investigation requires source documents that reveal what people were thinking and doing at the time of the events and that illuminate, buttress or contradict testimony.

Take, for example, Mr. Blankfein’s explanation that the clients Goldman bet against were sophisticated investors who demanded the doomed securities that Goldman sold them. Apart from the fact that the notion of “sophisticated investors” has been discredited by the crisis, does that explanation go far enough?

Without peering into the internal workings of Goldman and other financial firms that engaged in similar practices, it is hard to know how far bankers went in creating demand rather than responding to it, or if the securities were purposely designed to perform poorly.

The answers could cast light on when Wall Street practices cross the line from prudent hedging to excessive speculation.

A crucial related issue is whether Wall Street’s role as the underwriter of securities, which implies a level of approval of the investments being offered for sale, misled investors into buying questionable securities, and thus contributed to the credit bubble. If so, that would make the argument for barring too-big-to-fail banks from operating hedge funds all the more compelling.

Given the stakes, the chances seem remote that Wall Street will voluntarily hand over the papers that could get to the bottom of it all.

The inquiry is getting under way at a critical moment. The House has passed a financial regulatory reform bill that was enfeebled in important respects by bank lobbyists. The Senate banking committee recently rejected a generally robust proposal by Senator Christopher Dodd. It has yet to produce an alternative, but it is likely that lobbying and partisan politics will generate a weak bill. President Obama’s call for a new tax on big banks is a good idea, but must not pre-empt other needed changes, including a tax on bankers’ bonuses and more direct regulation to limit the size of financial firms.

Serious investigative work is the only way to counter the banks’ political power and alter the course of a reform effort that is headed in the wrong direction.

Former Tennessee congressman Harold Ford Jr.'s northern exposure

Ford's investor-friendly positions as chairman of the centrist Democratic Leadership Council make him an ideal vehicle to protest Obama's "fat cat" insults and Schumer's post-crisis interest in financial regulation. Is that what you're looking for, New York?

By Jason Horowitz
Washington Post Staff Writer
Friday, January 15, 2010; C01

Harold Ford Jr. has gone viral.

"You can judge from the editorials in the city, and just the response in the city and in the state that people don't want party bosses telling anyone that you can't run," Ford said in a phone interview between meetings in New York on Thursday afternoon. "People want an independent strong voice representing New York in the Senate."

The former Tennessee congressman has reintroduced himself as public muller of a primary challenge against New York's low-polling junior senator, Kirsten Gillibrand (D). Ford has resided in New York for less time than many of the grad students taking his "political reality" class at New York University and he has no discernible support from the Democratic establishment. His conservative record on gay rights, abortion and gun control is so out of step with the party's primary voters that it makes Gillibrand's right-leaning record look progressive. Ford, the son of Tennessee's first black congressman, took a job as a Bank of America Merrill Lynch executive, and has cultivated a core constituency of Wall Street donors, many of whom are frustrated with President Obama's regulatory crackdown and what they see as a sudden cold shoulder from Sen. Chuck Schumer. Yet for all those moneyed ties, Ford has raised nothing -- literally, zilch -- to rival the millions of dollars in Gillibrand's coffers.

But as a shoestring publicity campaign for the Harold Ford brand, his 2010 media blitz has all been something to behold.

The New York political media, famished for a competitive political contest, has been more than willing to entertain this outsider as a potential contender for Gillibrand's seat. Ford, a talented 39-year-old with a book, titled "More Davids Than Goliaths," coming out a few weeks before the U.S. Senate primary this September, has cast his nascent primary challenge as that of a principled Democratic insurgent, staring down Schumer and Obama administration officials who have protected Gillibrand from opponents in the party.

In the interview, Ford said that the notion that he was doing this for publicity was "insulting to voters."

New Yorkers, he said, deserve a candidate who would fight for their interests, tax breaks and a health-care overhaul beneficial to the state, which he believes is not being done now. "Independence and jobs" were his echoing watchwords. "That's not about publicity," Ford said "That's real."

So, too, is the tacit approval of New York Mayor Michael Bloomberg, who privately boosted Caroline Kennedy's Senate bid after Hillary Clinton was appointed secretary of state. A year later, Bloomberg appears less invested though decidedly comfortable with letting his loyal operatives make a few bucks; his pollster Doug Schoen and campaign manager Bradley Tusk are advising Ford.

Like Bloomberg, Ford defends Wall Street bonuses as critical to the city's tax base. When asked in the interview whether he himself had received a bonus from his employer, his spokesman, Davidson Goldin, interrupted, as he did on other topics not related to Ford's rationale for running, which the media handler understood to be the sole focus of the interview. At that point in the interview, Ford stayed silent, but Goldin later offered that Ford's "salary is set by contract."

While Ford refused to compare himself to politicians who ultimately dropped their primary bids against Gillibrand, he acknowledged that his has been received differently.

"Maybe it's the benefit of time. People have had the opportunity to experience some of the policies passed in Washington," said Ford, adding, "and there is dissatisfaction with Senator Gillibrand."

Gillibrand, who has sat back and waited for intervention on her behalf from Schumer or the White House, is getting more involved.

"The notion that 'Tennessee' Harold Ford is an independent outsider is completely contrived," said Jefrey Pollock, Gillibrand's political adviser. "But his extreme views against reproductive rights, against marriage equality and against immigration are all too real. Kirsten Gillibrand is not backing down from this fight."

* * *

For Ford's rebel rationale to have any credibility, he needed a villain. He found one in Schumer, his former benefactor who raised money and campaigned for Ford during his narrow defeat to Bob Corker in the 2006 U.S. Senate race in Tennessee. Schumer has successfully swatted away Gillibrand's would-be primary challengers, and Ford argued that party pressure on him not to run "exacerbated" the situation and sped up his timetable.

"The only person Chuck Schumer has to blame is himself and his fellow Washington insiders for having the gall to interfere with a free election," said Goldin, Ford's spokesman. "And for blocking an independent Democrat from running."

But according to a source in Schumer's office familiar with conversations between Schumer and Ford, the senator called Ford after a November Politico story reported that the Memphis native was exploring his chances against Gillibrand. They agreed to a face-to-face meeting to discuss Ford's New York political future. But on the morning of the meeting, the New York Times reported that Ford was "weighing" a challenge to Gillibrand. In the days that followed, the Times reported the substance of the meeting under the headline "Schumer Urges Ford Not to Run."

"The only person the senator has talked to about Ford not running was Ford himself," said a person close to Schumer, who was granted anonymity to discuss the private conversations. The Schumer intimate suggested that Ford exploited his meeting with Schumer to build up his insurgent story line.

"He has not talked to anyone else because he has no interest in feeding this David-versus-Goliath fairy tale that seems to be the only thing the Ford campaign has going for it right now," the person close to Schumer said.

The Ford camp denies any such setup.

The White House and leaders in Washington have been less careful about fueling the Ford phenomenon. During a White House briefing on Jan. 11, press secretary Robert Gibbs reiterated the administration's support for Gillibrand. But then by telling reporters to "stay tuned" for administration efforts to knock Ford out, Gibbs may have unwittingly boosted Ford's status as an anti-establishment comer.

On Jan. 12, Ford sat down again for dinner with Schoen, the Bloomberg pollster, at the apartment of Richard Plepler, an HBO executive who is taking a leading role in promoting Ford's potential candidacy, according to a source with knowledge of the dinner who was granted anonymity to speak of the private meeting. Ford has also kept in daily touch with Tusk, Bloomberg's reelection manager.

"I'm involved a lot and Mayor Bloomberg is not," said Tusk, who said he is providing free advice for now but would sign on with Ford if he runs. As might be expected in New York politics, Tusk is himself a former aide to Schumer. "I deeply admire and respect Chuck and always have," he said. "But Gillibrand is her own entity."

Tusk argued that while Ford is not a household name among regular New York voters yet, he "has the ability to be known. The ability to raise money and the ability, clearly, to do press."

* * *

The one constituency with whom Ford does have high name-recognition is the city's top Democratic bundlers. "At least among my friends, Harold has an extremely strong base," said Orin Kramer, an investor at Boston Provident whose early support for Obama imbued him with gravity in the New York donor firmament. While Ford has yet to raise a cent for the race, Kramer said he would have financial support if he in fact ran.

"People regard him quite properly as an extraordinary political talent," Kramer said.

"We bonded with him years ago and he is one of our friends," said Robert Zimmerman, another influential fundraiser and Democratic National Committeeman. But according to several of these bundlers, it's not all about friendship. A show of support for Ford's potential candidacy also sends a message to Washington.

Ford's investor-friendly positions as chairman of the centrist Democratic Leadership Council make him an ideal vehicle to protest Obama's "fat cat" insults and Schumer's post-crisis interest in financial regulation.

"Mr. President, you did what you need to do, we now have to do what we have to do," said one prominent member of New York's Democratic donor universe, who was granted anonymity to freely reflect the sentiments of his peers. The donor said Wall Street needed to elect Ford as a "champion for New York's economy and financial services sector," because Schumer "is preoccupied with being majority leader and a national leader, and our junior senator is a second vote for Chuck."

("Nobody stands up for New York's economy more than Senator Schumer," said Schumer spokesman Brian Fallon. "But that doesn't mean doing whatever the banks want even when they're wrong.")

Many of these donors are simply underwhelmed by Gillibrand, whose garrulousness is much noted, and have not embraced her as they did Clinton before her. Gillibrand has expressed irritation at her inability to crack into the uppermost echelons of the fundraising circuit, namely into the sprawling Fifth Avenue apartment of the first couple in Democratic Party fundraising, Steven Rattner and Maureen White.

Rattner, the Bloomberg confidant and money manager, former Obama car czar and Times reporter who remains close with the paper's owner, Arthur Sulzberger, has gushed about Ford in print. According to one Gillibrand supporter, the senator has ascribed the reason for her discord with the couple to a broken-off relationship with White's younger brother more than a decade ago.

"If I got mad at every girlfriend one of my five brothers ever dated, I'd be mad at a lot of people," White said. "The only relevant part of that story is I've known her longer than most people.

"I'm not enthusiastic about Kirsten for a very simple reason," White continued, "New York State needs someone great. It's not clear to me that she has the talent to follow in the footsteps of Robert Kennedy, Daniel Patrick Moynihan or Hillary Clinton."

If Ford gets elected, White said, "he'll be a national presence for New York State from day one."

* * *

In 2006, Schumer, then chairman of the Democratic Senatorial Campaign Committee and architect of the Democratic takeover of the chamber, recruited Ford as the nominee to fill the seat vacated by Tennessee's Bill Frist. Schumer called him "a great candidate" and helped Ford raise millions of dollars for a bruising and tight contest against Corker, a Republican. The contest is perhaps most remembered for a racially charged ad aired by the Republican Party at the end of the election, in which a winking blonde said she met the unmarried Ford at a Playboy party. Schumer released funds to keep Ford ads airing on television until Election Day. But he fell just short.

Soon after his defeat, Ford started spending substantial time in New York City and became an official resident in 2008. Like Bloomberg, he got to know the benefit circuit, squiring around his now-wife, Emily Threlkeld, an executive with the fashion designer Carolina Herrera and the stepdaughter of Wall Street grandee Anson Beard -- as well as the table-hopping nightspots, like Graydon Carter's Waverly Inn.

An interview in the New York Times on Jan. 13 revealed the chasm between Ford and his recession-weary constituents more starkly. He preferred the Giants over the Jets because he was closer to their owner. He had been to Staten Island only by helicopter. He got pedicures.

For now, at least, Ford is counting on media interest in a competitive race and the strength of his anti-establishment message to keep his campaign going, whatever the ultimate goal.

"I'm considering it more and more seriously every day," he said.

The Other Plot to Wreck America

By FRANK RICH, NY Times

Published: January 9, 2010

THERE may not be a person in America without a strong opinion about what coulda, shoulda been done to prevent the underwear bomber from boarding that Christmas flight to Detroit. In the years since 9/11, we’ve all become counterterrorists. But in the 16 months since that other calamity in downtown New York — the crash precipitated by the 9/15 failure of Lehman Brothers — most of us are still ignorant about what Warren Buffett called the “financial weapons of mass destruction” that wrecked our economy. Fluent as we are in Al Qaeda and body scanners, when it comes to synthetic C.D.O.’s and credit-default swaps, not so much.

What we don’t know will hurt us, and quite possibly on a more devastating scale than any Qaeda attack. Americans must be told the full story of how Wall Street gamed and inflated the housing bubble, made out like bandits, and then left millions of households in ruin. Without that reckoning, there will be no public clamor for serious reform of a financial system that was as cunningly breached as airline security at the Amsterdam airport. And without reform, another massive attack on our economic security is guaranteed. Now that it can count on government bailouts, Wall Street has more incentive than ever to pump up its risks — secure that it can keep the bonanzas while we get stuck with the losses.

The window for change is rapidly closing. Health care, Afghanistan and the terrorism panic may have exhausted Washington’s already limited capacity for heavy lifting, especially in an election year. The White House’s chief economic hand, Lawrence Summers, has repeatedly announced that “everybody agrees that the recession is over” — which is technically true from an economist’s perspective and certainly true on Wall Street, where bailed-out banks are reporting record profits and bonuses. The contrary voices of Americans who have lost pay, jobs, homes and savings are either patronized or drowned out entirely by a political system where the banking lobby rules in both parties and the revolving door between finance and government never stops spinning.

It’s against this backdrop that this week’s long-awaited initial public hearings of the Financial Crisis Inquiry Commission are so critical. This is the bipartisan panel that Congress mandated last spring to investigate the still murky story of what happened in the meltdown. Phil Angelides, the former California treasurer who is the inquiry’s chairman, told me in interviews late last year that he has been busy deploying a tough investigative staff and will not allow the proceedings to devolve into a typical blue-ribbon Beltway exercise in toothless bloviation.

He wants to examine the financial sector’s “greed, stupidity, hubris and outright corruption” — from traders on the ground to the board room. “It’s important that we deliver new information,” he said. “We can’t just rehash what we’ve known to date.” He understands that if he fails to make news or to tell the story in a way that is comprehensible and compelling enough to arouse Americans to demand action, Wall Street and Washington will both keep moving on, unchallenged and unchastened.

Angelides gets it. But he has a tough act to follow: Ferdinand Pecora, the legendary prosecutor who served as chief counsel to the Senate committee that investigated the 1929 crash as F.D.R. took office. Pecora was a master of detail and drama. He riveted America even without the aid of television. His investigation led to indictments, jail sentences and, ultimately, key New Deal reforms — the creation of the Securities and Exchange Commission and the Glass-Steagall Act, designed to prevent the formation of banks too big to fail.

As it happened, a major Pecora target was the chief executive of National City Bank, the institution that would grow up to be Citigroup. Among other transgressions, National City had repackaged bad Latin American debt as new securities that it then sold to easily suckered investors during the frenzied 1920s boom. Once disaster struck, the bank’s executives helped themselves to millions of dollars in interest-free loans. Yet their own employees had to keep ponying up salary deductions for decimated National City stock purchased at a heady precrash price.

Trade bad Latin American debt for bad mortgage debt, and you have a partial portrait of Citigroup at the height of the housing bubble. The reckless Citi executives of our day may not have given themselves interest-free loans, but they often walked away with the short-term, illusionary profits while their employees were left with shredded jobs and 401(k)’s. Among those Citi executives was Robert Rubin, who, as the Clinton Treasury secretary, helped repeal the last vestiges of Glass-Steagall after years of Wall Street assault. Somewhere Pecora is turning in his grave

Rubin has never apologized, let alone been held accountable. But he’s hardly alone. Even after all the country has gone through, the titans who fueled the bubble are heedless. In last Sunday’s Times, Sandy Weill, the former chief executive who built Citigroup (and recruited Rubin to its ranks), gave a remarkable interview to Katrina Brooker blaming his own hand-picked successor, Charles Prince, for his bank’s implosion. Weill said he preferred to be remembered for his philanthropy. Good luck with that.

Among his causes is Carnegie Hall, where he is chairman of the board. To see how far American capitalism has fallen, contrast Weill with the giant who built Carnegie Hall. Not only is Andrew Carnegie remembered for far more epic and generous philanthropy than Weill’s — some 1,600 public libraries, just for starters — but also for creating a steel empire that actually helped build America’s industrial infrastructure in the late 19th century. At Citi, Weill built little more than a bloated gambling casino. As Paul Volcker, the regrettably powerless chairman of Obama’s Economic Recovery Advisory Board, said recently, there is not “one shred of neutral evidence” that any financial innovation of the past 20 years has led to economic growth. Citi, that “innovative” banking supermarket, destroyed far more wealth than Weill can or will ever give away.

Even now — despite its near-death experience, despite the departures of Weill, Prince and Rubin — Citi remains as imperious as it was before 9/15. Its current chairman, Richard Parsons, was one of three executives (along with Lloyd Blankfein of Goldman Sachs and John Mack of Morgan Stanley) who failed to show up at the mid-December White House meeting where President Obama implored bankers to increase lending. (The trio blamed fog for forcing them to participate by speakerphone, but the weather hadn’t grounded their peers or Amtrak.) Last week, ABC World News was also stiffed by Citi, which refused to answer questions about its latest round of outrageous credit card rate increases and instead e-mailed a statement blaming its customers for “not paying back their loans.” This from a bank that still owes taxpayers $25 billion of its $45 billion handout!

If Citi, among the most egregious of Wall Street reprobates, feels it can get away with business as usual, it’s because it fears no retribution. And it got more good news last week. Now that Chris Dodd is vacating the Senate, his chairmanship of the Banking Committee may fall next year to Tim Johnson of South Dakota, home to Citi’s credit card operation. Johnson was the only Senate Democrat to vote against Congress’s recent bill policing credit card abuses.

Though bad history shows every sign of repeating itself on Wall Street, it will take a near-miracle for Angelides to repeat Pecora’s triumph. Our zoo of financial skullduggery is far more complex, with many more moving pieces, than that of the 1920s. The new inquiry does have subpoena power, but its entire budget, a mere $8 million, doesn’t even match the lobbying expenditures for just three banks (Citi, Morgan Stanley, Bank of America) in the first nine months of 2009. The firms under scrutiny can pay for as many lawyers as they need to stall between now and Dec. 15, deadline day for the commission’s report.

More daunting still is the inquiry’s duty to reach into high places in the public sector as well as the private. The mystery of exactly what happened as TARP fell into place in the fateful fall of 2008 thickens by the day — especially the behind-closed-door machinations surrounding the government rescue of A.I.G. and its counterparties. Last week, a Republican congressman, Darrell Issa of California, released e-mail showing that officials at the New York Fed, then led by Timothy Geithner, pressured A.I.G. to delay disclosing to the S.E.C. and the public the details on the billions of bailout dollars it was funneling to its trading partners. In this backdoor rescue, taxpayers unknowingly awarded banks like Goldman 100 cents on the dollar for their bets on mortgage-backed securities.

Why was our money used to make these high-flying gamblers whole while ordinary Americans received no such beneficence? Nothing less than complete transparency will connect the dots. Among the big-name witnesses that the Angelides commission has called for next week is Goldman’s Blankfein. Geithner, Henry Paulson and Ben Bernanke should be next.

If they all skate away yet again by deflecting blame or mouthing pro forma mea culpas, it will be a sign that this inquiry, like so many other promises of reform since 9/15, is likely to leave Wall Street’s status quo largely intact. That’s the ticking-bomb scenario that truly imperils us all.

How the Scapegoats Escaped

Prosecutors made two big errors in the federal criminal trial of two former Bear Stearns hedge fund managers. Where is the accountability for the biggest financial crash in modern times?

By WILLIAM D. COHAN, NY Times, Published: November 11, 2009

THE quick “not guilty” verdict reached Tuesday afternoon by a Brooklyn jury in the federal criminal trial of two former Bear Stearns hedge fund managers was at once surprising — for its failure to comport with the zeitgeist — but also entirely understandable, based on a close reading of the prosecution’s arguments and the evidence the judge allowed to be introduced. “There was a reasonable doubt on every charge,” one juror told The Times afterward. “We just didn’t feel that the case had been proven.”

In short, the prosecution blew it — on two counts. First, in devising the original indictment for conspiracy and securities fraud against the two defendants, Ralph Cioffi and Matthew Tannin, it relied on damning snippets of lengthy e-mail messages that when viewed in their entirety proved to be highly ambiguous. Second, the prosecution made a reductionist opening argument claiming the men were nothing more than out-and-out liars, needlessly raising the bar in terms of what it had to prove to jurors.

In that opening speech, Patrick Sinclair, the assistant United States attorney for the Eastern District of New York, tried to head off all the confusing Wall Street jargon soon to be unleashed by claiming the defendants had simply been deceitful. He accused them of lying about the size of their personal investments in the funds and in their dealings with nervous investors who were considering getting out when subprime mortgages — in which the funds had invested heavily — began to rapidly lose value in March 2007.

“They did the best thing that they could think of to keep those investors in the fund and with any luck keep their bonuses coming: they lied,” Mr. Sinclair told the jury. “They lied over and over again to lull those investors into a false sense of confidence and make them think that these failing funds continued to be a good investment when the exact opposite was true.”

Unfortunately for the government, the evidence was not nearly as clear-cut as Mr. Sinclair portrayed it to be, and his strategy to make it seem so backfired. Consider the e-mail messages the prosecution placed at the center of its case.

In the indictment, the prosecution quoted from a note Mr. Tannin sent in April 2007 from his personal Gmail account to Mr. Cioffi’s wife. The government made much of the fact that Mr. Tannin chose not to send it to Mr. Cioffi himself or from his Bear Stearns’ e-mail account, suggesting he was trying to hide something. “The subprime market looks pretty damn ugly,” Mr. Tannin wrote, adding that if a recent financial report was correct, “I think we should close the funds now .... The entire subprime market is toast.”

But the jury eventually saw the entire message, in which Mr. Tannin ruminated at length about various courses of action and seemed to be striving to make the soundest financial choice. In other words, it was just what you would hope your fund manager would be worrying about in a precarious time. In the end, he concluded he was feeling “pretty damn good” about what was happening at the funds and that “I’ve done the best possible job that I could have done.” Any wonder the jurors came away with reasonable doubt?

The prosecution’s misjudgments are doubly vexing because there was other evidence around which it might have built a stronger case. The prime example was a “talking points” memo in June 2007, sent by Bear Stearns’s senior management to its brokers for use in discussions with hedge fund investors worried about a meltdown. The episode raised pretty clear doubts about whether Mr. Cioffi and Mr. Tannin had told investors the truth.

According to the memo, one of the questions deemed likely to be asked was: “I thought the fund was diversified, and now it turns out it seems to have had a fair amount of exposure to the subprime mortgage market. What exactly was the exposure?” The answer: “60 percent.” The problem was that in all previous communications to the investors, the two fund managers had suggested that only about six percent of the funds were invested in subprime mortgages.

During the trial, a prominent former Bear Stearns broker, Shelly Bergman, testified about the damning nature of this talking points memo, which was as close to a smoking gun as prosecutors could have hoped for. Yet the prosecution never made much use of his testimony, and it did a poor job of rebutting the defense’s claims that Mr. Bergman had a conflict of interest in testifying against the two fund managers.

So where does the verdict leave us? Word is that three federal grand juries are still investigating what went wrong at Lehman Brothers in 2007, but those prosecutors may be forced to tread lightly in the wake of what happened this week. Even though the facts and circumstances of the Lehman matter are very different from the Cioffi/Tannin episode, Tuesday’s verdict may be the best news in more than a year for Richard Fuld, the former Lehman chief executive.

For now, Mr. Cioffi and Mr. Tannin remain the only bankers indicted for their professional behavior in what became one of the worst financial crises in our history. They became a symbol of greedy carelessness for a public intent on blaming someone — anyone — for Wall Street’s folly. There must be some accountability for the Bear Stearns calamity, to say nothing of the $12 trillion of taxpayer money used to prop up capitalism, right? Not so fast, this Brooklyn jury declared. “The entire market crashed,” one juror explained. “You can’t blame that on two people.”

William D. Cohan, a contributing editor at Fortune and a former Wall Street banker, is the author of “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.” In January, he will begin a regular column on business at nytimes.com/opinion.

Why the White House and Congress won't break up the banks

There are plenty of good reasons to break up the behemoth banks -- just not good enough for Obama

By Robert Reich

Oct. 26, 2009

And now there are five -- five Wall Street behemoths, bigger than they were before the Great Meltdown, paying fatter salaries and bonuses to retain their so-called"talent," and raking in huge profits. The biggest difference between now and last October is these biggies didn't know then that they were too big to fail and the government would bail them out if they got into trouble. Now they do. And like a giant, gawking adolescent who's just discovered he can crash the Lexus convertible his rich dad gave him and the next morning have a new one waiting in his driveway courtesy of a dad who can't say no, the biggies will drive even faster now, taking even bigger risks.

What to do? Two ideas are floating around Washington, but only one is supported by the Treasury and the White House. Unfortunately, it's the wrong one.

The right idea is to break up the giant banks. I don't often agree with Alan Greenspan but he was right when he said last week that "[i]f they're too big to fail, they're too big." Greenspan noted that the government broke up Standard Oil in 1911, and what happened? "The individual parts became more valuable than the whole. Maybe that's what we need to do." (Historic footnote: Had Greenspan not supported in 1999 Congress's repeal of the Glass Stagall Act, which separated investment from commercial banking, we wouldn't be in the soup we're in to begin with.)

Former Fed Chair Paul Volcker, whose only problem is he's much too tall, last week told the New York Times he'd like to see the restoration of the Glass-Steagall Act provisions that would separate the financial giants' deposit-taking activities from their investment and trading businesses. If this separation went into effect, JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. And Goldman Sachs could no longer be a bank holding company.

But the Obama Administration doesn't agree with either Greenspan or Volcker. While it says it doesn't want another bank bailout, its solution to the "too big to fail" problem doesn't go nearly far enough. In fact, it doesn't really go anywhere. The Administration would wait until a giant bank was in danger of failing and then put it into a process akin to bankruptcy. The bank's assets would be sold off to pay its creditors, and its shareholders would likely walk off with nothing. The Treasury would determine when such a "resolution" process was needed, and appoint a receiver, such as the FDIC, to wind down the bank's operations.

There should be an orderly process for putting big failing banks out of business. But this isn't nearly enough. By the time a truly big bank gets into trouble -- one that poses a "systemic risk" to the entire economy -- it's too late. Other banks, competing like mad for the same talent and profits, will already have adopted many of the excessively-risky banks techniques. And the pending failure will already have rocked the entire financial sector.

Worse yet, the Administration's plan gives the big failing bank an escape hatch: The receiver might decide that the bank doesn't need to go out of business after all -- that all it needs is some government money to tide it over until the crisis passes. So the Treasury would also have the authority to provide the bank with financial assistance in the form of loans or guarantees. In other words, back to bailout. (Historical footnote: Summers and Geithner, along with Bob Rubin, while at Treasury in 1999, joined Greenspan in urging Congress to repeal Glass-Steagall. The four of them -- Greenspan, Summers, Rubin and Geithner also refused to regulate derivatives, and pushed Congress to stop the Commodity Futures Trading Corporation from doing so.)

Congress is cooking up a variation on the "resolution" idea that would give the Federal Deposit Insurance Corporation authority to trigger and handle the winding-down of big banks in trouble, without Treasury involvement, and without an escape hatch.

Needless to say, Wall Street favors the Administration's approach -- which is why the Administration chose it to begin with. If I were less charitable I'd say Geithner and Summers continue to bend over bankwards to make Wall Street happy, and in doing so continue to risk the credibility of the President, as well as the long-term financial stability of the system.

Wall Street could live with the slightly less delectable variation that Congress is coming up with. But Congress won't go as far as to unleash the antitrust laws on the big banks or resurrect the Glass-Steagall Act. After all, the Street is a major benefactor of Congress and the Street's lobbyists and lackeys are all over Capitol Hill.

The Street obviously detests the notion that its behemoths should be broken up. That's why the idea isn't even on the table. But it should be. No important public interest is served by allowing giant banks to grow too big to fail. Winding them down after they get into trouble is no answer. By then the damage will already have been done.

Whether it's using the antitrust laws or enacting a new Glass-Steagall Act, the Wall Street giants should be split up -- and soon.

-- By Robert Reich

Safety Nets for the Rich

By BOB HERBERT, NY Times, October 20, 2009

The headlines that ran side by side on the front page of Saturday’s New York Times summed up, inadvertently, the terrible fix that we’ve allowed our country to fall into.

The lead headline, in the upper right-hand corner, said: “U.S. Deficit Rises to $1.4 Trillion; Biggest Since ’45.”

The headline next to it said: “Bailout Helps Revive Banks, And Bonuses.”

We’ve spent the last few decades shoveling money at the rich like there was no tomorrow. We abandoned the poor, put an economic stranglehold on the middle class and all but bankrupted the federal government — while giving the banks and megacorporations and the rest of the swells at the top of the economic pyramid just about everything they’ve wanted.

And we still don’t seem to have learned the proper lessons. We’ve allowed so many people to fall into the terrible abyss of unemployment that no one — not the Obama administration, not the labor unions and most certainly no one in the Republican Party — has a clue about how to put them back to work.

Meanwhile, Wall Street is living it up. I’m amazed at how passive the population has remained in the face of this sustained outrage.

Even as tens of millions of working Americans are struggling to hang onto their jobs and keep a roof over their families’ heads, the wise guys of Wall Street are licking their fat-cat chops over yet another round of obscene multibillion-dollar bonuses — this time thanks to the bailout billions that were sent their way by Uncle Sam, with very little in the way of strings attached.

Nevermind that the economy remains deeply troubled. As The Times pointed out on Saturday, much of Wall Street “is minting money.”

Call it déjà voodoo. I wrote a column that ran three days before Christmas in 2007 that focused on the deeply disturbing disconnect between Wall Streeters harvesting a record crop of bonuses — billions on top of billions — while working families were having a very hard time making ends meet.

We would later learn that December 2007 was the very month that the Great Recession began. I wrote in that column: “Even as the Wall Streeters are high-fiving and ordering up record shipments of Champagne and caviar, the American dream is on life support.”

So we had an orgy of bonuses just as the recession was taking hold and now another orgy (with taxpayers as the enablers) that is nothing short of an arrogantly pointed finger in the eye of everyone who suffered, and continues to suffer, in this downturn.

Whether P.T. Barnum actually said it or not, there is a sucker born every minute. American taxpayers might want to take a look in the mirror. If the epithet fits...

We need to make some fundamental changes in the way we do things in this country. The gamblers and con artists of the financial sector, the very same clowns who did so much to bring the economy down in the first place, are howling self-righteously over the prospect of regulations aimed at curbing the worst aspects of their excessively risky behavior and preventing them from causing yet another economic meltdown.

We should be going even further. We’ve institutionalized the idea that there are firms that are too big to fail and, therefore, “we, the people” are obliged to see that they don’t — even if that means bankrupting the national treasury and undermining the living standards of ordinary people. What sense does that make?

If some company is too big to fail, then it’s too big to exist. Break it up.

Why should the general public have to constantly worry that a misstep by the high-wire artists at Goldman Sachs (to take the most obvious example) would put the entire economy in peril? These financial acrobats get the extraordinary benefits of their outlandish risk-taking — multimillion-dollar paychecks, homes the size of castles — but the public has to be there to absorb the worst of the pain when they take a terrible fall.

Enough! Goldman Sachs is thriving while the combined rates of unemployment and underemployment are creeping toward a mind-boggling 20 percent. Two-thirds of all the income gains from the years 2002 to 2007 — two-thirds! — went to the top 1 percent of Americans.

We cannot continue transferring the nation’s wealth to those at the apex of the economic pyramid — which is what we have been doing for the past three decades or so — while hoping that someday, maybe, the benefits of that transfer will trickle down in the form of steady employment and improved living standards for the many millions of families struggling to make it from day to day.

That money is never going to trickle down. It’s a fairy tale. We’re crazy to continue believing it.

Wall Street Pursues Profit in Bundles of Life Insurance

Note from Greetings:

Many of these companies are also in the health insurance biz. I wonder just how hard they are going to work to keep their health insurance clients healthy? THEN you might see some of the "death panels" the anti-healthcare bill opponents are talking about... but from their backers!

By JENNY ANDERSON, NY Times, August 6, 2009

After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.

The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.

Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them. But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.

The idea is still in the planning stages. But already “our phones have been ringing off the hook with inquiries,” says Kathleen Tillwitz, a senior vice president at DBRS, which gives risk ratings to investments and is reviewing nine proposals for life-insurance securitizations from private investors and financial firms, including Credit Suisse.

“We’re hoping to get a herd stampeding after the first offering,” said one investment banker not authorized to speak to the news media.

In the aftermath of the financial meltdown, exotic investments dreamed up by Wall Street got much of the blame. It was not just subprime mortgage securities but an array of products — credit-default swaps, structured investment vehicles, collateralized debt obligations — that proved far riskier than anticipated.

The debacle gave financial wizardry a bad name generally, but not on Wall Street. Even as Washington debates increased financial regulation, bankers are scurrying to concoct new products.

In addition to securitizing life settlements, for example, some banks are repackaging their money-losing securities into higher-rated ones, called re-remics (re-securitization of real estate mortgage investment conduits). Morgan Stanley says at least $30 billion in residential re-remics have been done this year.

Financial innovation can be good, of course, by lowering the cost of borrowing for everyone, giving consumers more investment choices and, more broadly, by helping the economy to grow. And the proponents of securitizing life settlements say it would benefit people who want to cash out their policies while they are alive.

But some are dismayed by Wall Street’s quick return to its old ways, chasing profits with complicated new products.

“It’s bittersweet,” said James D. Cox, a professor of corporate and securities law at Duke University. “The sweet part is there are investors interested in exotic products created by underwriters who make large fees and rating agencies who then get paid to confer ratings. The bitter part is it’s a return to the good old days.”

Indeed, what is good for Wall Street could be bad for the insurance industry, and perhaps for customers, too. That is because policyholders often let their life insurance lapse before they die, for a variety of reasons — their children grow up and no longer need the financial protection, or the premiums become too expensive. When that happens, the insurer does not have to make a payout.

But if a policy is purchased and packaged into a security, investors will keep paying the premiums that might have been abandoned; as a result, more policies will stay in force, ensuring more payouts over time and less money for the insurance companies.

“When they set their premiums they were basing them on assumptions that were wrong,” said Neil A. Doherty, a professor at Wharton who has studied life settlements.

Indeed, Mr. Doherty says that in reaction to widespread securitization, insurers most likely would have to raise the premiums on new life policies.

Critics of life settlements believe “this defeats the idea of what life insurance is supposed to be,” said Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute, a trade group. “It’s not an investment product, a gambling product.”

After Mortgages

Undeterred, Wall Street is racing ahead for a simple reason: With $26 trillion of life insurance policies in force in the United States, the market could be huge.

Not all policyholders would be interested in selling their policies, of course. And investors are not interested in healthy people’s policies because they would have to pay those premiums for too long, reducing profits on the investment.

But even if a small fraction of policy holders do sell them, some in the industry predict the market could reach $500 billion. That would help Wall Street offset the loss of revenue from the collapse of the United States residential mortgage securities market, to $169 billion so far this year from a peak of $941 billion in 2005, according to Dealogic, a firm that tracks financial data.

Some financial firms are moving to outpace their rivals. Credit Suisse, for example, is in effect building a financial assembly line to buy large numbers of life insurance policies, package and resell them — just as Wall Street firms did with subprime securities.

The bank bought a company that originates life settlements, and it has set up a group dedicated to structuring deals and one to sell the products.

Goldman Sachs has developed a tradable index of life settlements, enabling investors to bet on whether people will live longer than expected or die sooner than planned. The index is similar to tradable stock market indices that allow investors to bet on the overall direction of the market without buying stocks.

Spokesmen for Credit Suisse and Goldman Sachs declined to comment.

If Wall Street succeeds in securitizing life insurance policies, it would take a controversial business — the buying and selling of policies — that has been around on a smaller scale for a couple of decades and potentially increase it drastically.

Defenders of life settlements argue that creating a market to allow the ill or elderly to sell their policies for cash is a public service. Insurance companies, they note, offer only a “cash surrender value,” typically at a small fraction of the death benefit, when a policyholder wants to cash out, even after paying large premiums for many years.

Enter life settlement companies. Depending on various factors, they will pay 20 to 200 percent more than the surrender value an insurer would pay.

But the industry has been plagued by fraud complaints. State insurance regulators, hamstrung by a patchwork of laws and regulations, have criticized life settlement brokers for coercing the ill and elderly to take out policies with the sole purpose of selling them back to the brokers, called “stranger-owned life insurance.”

In 2006, while he was New York attorney general, Eliot Spitzer sued Coventry, one of the largest life settlement companies, accusing it of engaging in bid-rigging with rivals to keep down prices offered to people who wanted to sell their policies. The case is continuing.

“Predators in the life settlement market have the motive, means and, if left unchecked by legislators and regulators and by their own community, the opportunity to take advantage of seniors,” Stephan Leimberg, co-author of a book on life settlements, testified at a Senate Special Committee on Aging last April.

Tricky Predictions

In addition to fraud, there is another potential risk for investors: that some people could live far longer than expected.

It is not just a hypothetical risk. That is what happened in the 1980s, when new treatments prolonged the life of AIDS patients. Investors who bought their policies on the expectation that the most victims would die within two years ended up losing money.

It happened again last fall when companies that calculate life expectancy determined that people were living longer.

The challenge for Wall Street is to make securitized life insurance policies more predictable — and, ideally, safer — investments. And for any securitized bond to interest big investors, a seal of approval is needed from a credit rating agency that measures the level of risk.

In many ways, banks are seeking to replicate the model of subprime mortgage securities, which became popular after ratings agencies bestowed on them the comfort of a top-tier, triple-A rating. An individual mortgage to a home buyer with poor credit might have been considered risky, because of the possibility of default; but packaging lots of mortgages together limited risk, the theory went, because it was unlikely many would default at the same time.

While that idea was, in retrospect, badly flawed, Wall Street is convinced that it can solve the risk riddle with securitized life settlement policies.

That is why bankers from Credit Suisse and Goldman Sachs have been visiting DBRS, a little known rating agency in lower Manhattan.

In early 2008, the firm published criteria for ways to securitize a life settlements portfolio so that the risks were minimized.

Interest poured in. Hedge funds that have acquired life settlements, for example, are keen to buy and sell policies more easily, so they can cash out both on investments that are losing money and on ones that are profitable. Wall Street banks, beaten down by the financial crisis, are looking to get their securitization machines humming again.

Ms. Tillwitz, an executive overseeing the project for DBRS, said the firm spent nine months getting comfortable with the myriad risks associated with rating a pool of life settlements.

Could a way be found to protect against possible fraud by agents buying insurance policies and reselling them — to avoid problems like those in the subprime mortgage market, where some brokers made fraudulent loans that ended up in packages of securities sold to investors? How could investors be assured that the policies were legitimately acquired, so that the payouts would not be disputed when the original policyholder died?

And how could they make sure that policies being bought were legally sellable, given that some states prohibit the sale of policies until they have been in force two to five years?

Spreading the Risk

To help understand how to manage these risks, Ms. Tillwitz and her colleague Jan Buckler — a mathematics whiz with a Ph.D. in nuclear engineering — traveled the world visiting firms that handle life settlements. “We do not want to rate a deal that blows up,” Ms. Tillwitz said.

The solution? A bond made up of life settlements would ideally have policies from people with a range of diseases — leukemia, lung cancer, heart disease, breast cancer, diabetes, Alzheimer’s. That is because if too many people with leukemia are in the securitization portfolio, and a cure is developed, the value of the bond would plummet.

As an added precaution, DBRS would run background checks on all issuers. Also, a range of quality of life insurers would have to be included.

To test how different mixes of policies would perform, Mr. Buckler has run computer simulations to show what would happen to returns if people lived significantly longer than expected.

But even with a math whiz calculating every possibility, some risks may not be apparent until after the fact. How can a computer accurately predict what would happen if health reform passed, for example, and better care for a large number of Americans meant that people generally started living longer? Or if a magic-bullet cure for all types of cancer was developed?

If the computer models were wrong, investors could lose a lot of money.

As unlikely as those assumptions may seem, that is effectively what happened with many securitized subprime loans that were given triple-A ratings.

Investment banks that sold these securities sought to lower the risks by, among other things, packaging mortgages from different regions and with differing credit levels of the borrowers. They thought that if house prices dropped in one region — say Florida, causing widespread defaults in that part of the portfolio — it was highly unlikely that they would fall at the same time in, say, California.

Indeed, economists noted that historically, housing prices had fallen regionally but never nationwide. When they did fall nationwide, investors lost hundreds of billions of dollars.

Both Standard & Poor’s and Moody’s, which gave out many triple-A ratings and were burned by that experience, are approaching life settlements with greater caution.

Standard & Poor’s, which rated a similar deal called Dignity Partners in the 1990s, declined to comment on its plans. Moody’s said it has been approached by financial firms interested in securitizing life settlements, but has not yet seen a portfolio of policies that meets its standards.

Investor Appetite

Despite the mortgage debacle, investors like Andrew Terrell are intrigued.

Mr. Terrell was the co-head of Bear Stearns’s longevity and mortality desk — which traded unrated portfolios of life settlements — and later worked at Goldman Sachs’s Institutional Life Companies, a venture that was introducing a trading platform for life settlements. He thinks securitized life policies have big potential, explaining that investors who want to spread their risks are constantly looking for new investments that do not move in tandem with their other investments.

“It’s an interesting asset class because it’s less correlated to the rest of the market than other asset classes,” Mr. Terrell said.

Some academics who have studied life settlement securitization agree it is a good idea. One difference, they concur, is that death is not correlated to the rise and fall of stocks.

“These assets do not have risks that are difficult to estimate and they are not, for the most part, exposed to broader economic risks,” said Joshua Coval, a professor of finance at the Harvard Business School. “By pooling and tranching, you are not amplifying systemic risks in the underlying assets.”

The insurance industry is girding for a fight. “Just as all mortgage providers have been tarred by subprime mortgages, so too is the concern that all life insurance companies would be tarred with the brush of subprime life insurance settlements,” said Michael Lovendusky, vice president and associate general counsel of the American Council of Life Insurers, a trade group that represents life insurance companies.

And the industry may find allies in government. Among those expressing concern about life settlements at the Senate committee hearing in April were insurance regulators from Florida and Illinois, who argued that regulation was inadequate.

“The securitization of life settlements adds another element of possible risk to an industry that is already in need of enhanced regulations, more transparency and consumer safeguards,” said Senator Herb Kohl, the Democrat from Wisconsin who is chairman of the Special Committee on Aging.

DBRS agrees on the need to be careful. “We want this market to flourish in a safe way,” Ms. Tillwitz said.

Cramer v. Stewart, in person

Alex Koppleman, Salon.com, March 13, 2009

In the day leading up to Thursday night's face-to-face meeting between feuding cable hosts Jim Cramer and Jon Stewart, both men seemed to be trying to defuse tensions and downplay their very public spat. Stewart even told his audience on Wednesday that the interview, when it happened, was, "by all measure, bound to disappoint anyone that's been following."

He was wrong. What "Daily Show" viewers saw on Thursday night wasn't a boring love-in; it was a smackdown, or perhaps an homage to the human sacrifice scene from "Indiana Jones and the Temple of Doom" -- the one where they rip the victim's heart out and show it to him. At the very least, it was a riveting half-hour, something almost completely unlike anything else ever seen on television.

The clue that the interview wouldn't be rainbows and hugs came early on, when Stewart told his guest, "Look, we're both snake oil salesmen to a certain extent." Cramer, still eager to please, jumped in to say, "I'm not disagreei--" before being cut off by Stewart, who said, "But we do label the show as snake oil here." At this, the CNBC host visibly grimaced.

At points like that during the interview -- and there were many of them -- you almost had to feel sorry for Cramer. It was clear he'd come to the interview prepared to make nice, even desperate to. His voice was plaintive and cracking, his eyes were watery, he seemed willing and eager to agree with any and all of Stewart's criticisms in a futile effort to make the pain stop. Besides, just Wednesday night, the "Daily Show" host had been playing down the feud, and now here he was rolling numerous clips from a 2006 interview that shows Cramer discussing some unsavory practices from his hedge fund days, the kinds of things that could get the Securities and Exchange Commission involved.

And then, on the other hand, so much of the beating Stewart delivered felt deserved, especially when, towards the end, he started getting mad.

"I understand you want to make finance entertaining. But it's not a fucking game," he told Cramer. Then, referring to that video, he continued:

And I -- when I watch that, I get, I can't tell you how angry that makes me. Because what it says to me is that you all know. You all know what's going on. You can draw a straight line from those shenanigans to the stuff that was being pulled at Bear and at AIG and all this derivative market stuff that is this weird Wall Street side bet... Listen, you knew what the banks were doing and yet were touting it for months and months. The entire network was. And so now to pretend this was some crazy once-in-a-lifetime tsunami that no one could have seen coming is disingenuous at best and criminal at worst.

Stewart made clear, on more than one occasion, that it was really CNBC and financial journalism he was angry with, not just Cramer, but that the "Mad Money" host had become the symbol for his anger. And he took out after financial journalism generally.

"Look, nobody's asking for them to be a regulatory agency. But can't -- whose side are they on?" Stewart asked Cramer at one point. "It feels like they have to reconcile: Is their audience the Wall Street traders... These guys at these companies were on a Sherman's March through their companies financed by our 401Ks... And they burned the fucking house down with our money and walked away rich as hell and you guys knew that that was going on."

It's hard to knock Stewart for this kind of thing, as he's absolutely right about what financial journalists should have been doing and about their failure to report a realistic picture of the big banks rather than the rosy one painted by their executives. But he did come across a little naïve, especially for someone who works in television. CNBC's audience is absolutely the traders -- they're the lifeblood of the network. Lay people don't watch business news 24 hours a day, but people in the field do, and so CNBC and plenty of other financial journalism is made by them and for them. Doing the kind of hard-hitting reporting Stewart is calling for would screw up the business model.

Still, it's a nice dream to have, and Stewart at least got his opponent to agree to try it his way.

"Maybe we could remove the financial expert and the 'In Cramer We Trust' and start getting back to fundamentals on the reporting as well and I can go back to making fart noises and funny faces," he said at the close of the interview.

"I think we make that deal, right here," Cramer responded, and the two men shook hands.

― Alex Koppelman

Wall Street’s Socialist Jet-Setters

By MAUREEN DOWD, NY Tiimes, January 28, 2009

WASHINGTON

As President Obama spreads his New Testament balm over the capital, I’m longing for a bit of Old Testament wrath.

Couldn’t he throw down his BlackBerry tablet and smash it in anger over the feckless financiers, the gods of gold and their idols — in this case not a gilt calf but an $87,000 area rug, a cache of diamond Tiffany and Cartier watches and a French-made luxury corporate jet?

Now that we’re nationalizing, couldn’t we fire any obtuse bankers and auto executives who cling to perks and bonuses even as the economy is following John Thain down his antique commode?

How could Citigroup be so dumb as to go ahead with plans to get a new $50 million corporate jet, the exclusive Dassault Falcon 7X seating 12, after losing $28.5 billion in the past 15 months and receiving $345 billion in government investments and guarantees?

(Now I get why a $400 payment I recently sent to pay off my Citibank Visa was mistakenly applied to my sister-in-law’s Citibank Mastercard account.)

The “Citiboobs” — as The New York Post, which broke the news, calls them — watched as the car chieftains got in trouble for flying their private jets to Washington to ask for bailouts, and the A.I.G. moguls got dragged before Congress for spending their bailout on California spa treatments. But the boobs still didn’t get the message.

The former masters of the universe don’t seem to fully comprehend that their universe has crumbled and, thanks to them, so has ours. Real people are losing real jobs at Caterpillar, Home Depot and Sprint Nextel; these and other companies announced on Monday that they would cut more than 75,000 jobs in the U.S. and around the world, as consumer confidence and home prices swan-dived.

Prodded by an appalled Senator Carl Levin, Tim Geithner — even as he was being confirmed as Treasury secretary — directed Treasury officials to call the Citiboobs and tell them the new jet would not fly.

“They woke up pretty quickly,” says a Treasury official, adding that they protested for a bit. “Six months ago, they would have kept the plane and flown it to Washington.”

Senator Levin said that the financiers will not be able to change their warped mentality, but will have to be reined in by Geithner’s new leashes. “I have no confidence that they intend or desire to change,” Levin told me. “These bankers got away with murder, and it’s obscene that close to nothing is being asked of financial institutions. I get incensed at the thought that a bank that’s getting billions of dollars in taxpayer money is out there buying fancy new airplanes.”

New York’s attorney general, Andrew Cuomo, always gratifying on the issue of clawing back money from the greedy creeps on Wall Street, on Tuesday subpoenaed Thain, the former Merrill Lynch chief executive, over $4 billion in bonuses he handed out as the failing firm was bought by Bank of America.

In an interview with Maria Bartiromo on CNBC, Thain used the specious, contemptible reasoning that other executives use to rationalize why they’re keeping their bonuses as profits are plunging.

“If you don’t pay your best people, you will destroy your franchise” and they’ll go elsewhere, he said.

Hello? They destroyed the franchise. Let’s call their bluff. Let’s see what a great job market it is for the geniuses of capitalism who lost $15 billion in three months and helped usher in socialism.

Bartiromo also asked Thain to explain, when jobs and salaries were being cut at his firm, how he could justify spending $1 million to renovate his office. As The Daily Beast and CNBC reported, big-ticket items included curtains for $28,000, a pair of chairs for $87,000, fabric for a “Roman Shade” for $11,000, Regency chairs for $24,000, six wall sconces for $2,700, a $13,000 chandelier in the private dining room and six dining chairs for $37,000, a “custom coffee table” for $16,000, an antique commode “on legs” for $35,000, and a $1,400 “parchment waste can.”

Does that mean you can only throw used parchment in it or is it made of parchment? It’s psychopathic to spend a million redoing your office when the folks outside it are losing jobs, homes, pensions and savings.

Thain should never rise above the level of stocking the money in A.T.M.’s again. Just think: This guy could well have been Treasury secretary if John McCain had won.

Bartiromo pressed: What was wrong with the office of his predecessor, Stanley O’Neal?

“Well — his office was very different — than — the — the general décor of — Merrill’s offices,” Thain replied. “It really would have been — very difficult — for — me to use it in the form that it was in.”

Did it have a desk and a phone?

How are these ruthless, careless ghouls who murdered the economy still walking around (not to mention that sociopathic sadist Bernie Madoff?) — and not as perps?

Bring on the shackles. Let the show trials begin.

Wall Street Voodoo

by Paul Krugman, NY Times, January 19, 2009

Old-fashioned voodoo economics — the belief in tax-cut magic — has been banished from civilized discourse. The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans.

But recent news reports suggest that many influential people, including Federal Reserve officials, bank regulators, and, possibly, members of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking.

To explain the issue, let me describe the position of a hypothetical bank that I’ll call Gothamgroup, or Gotham for short.

On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets — say, $400 billion worth — are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion.

So Gotham is a zombie bank: it’s still operating, but the reality is that it has already gone bust. Its stock isn’t totally worthless — it still has a market capitalization of $20 billion — but that value is entirely based on the hope that shareholders will be rescued by a government bailout.

Why would the government bail Gotham out? Because it plays a central role in the financial system. When Lehman was allowed to fail, financial markets froze, and for a few weeks the world economy teetered on the edge of collapse. Since we don’t want a repeat performance, Gotham has to be kept functioning. But how can that be done?

Well, the government could simply give Gotham a couple of hundred billion dollars, enough to make it solvent again. But this would, of course, be a huge gift to Gotham’s current shareholders — and it would also encourage excessive risk-taking in the future. Still, the possibility of such a gift is what’s now supporting Gotham’s stock price.

A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.

The current buzz suggests, however, that policy makers aren’t willing to take either of these approaches. Instead, they’re reportedly gravitating toward a compromise approach: moving toxic waste from private banks’ balance sheets to a publicly owned “bad bank” or “aggregator bank” that would resemble the Resolution Trust Corporation, but without seizing the banks first.

Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, recently tried to describe how this would work: “The aggregator bank would buy the assets at fair value.” But what does “fair value” mean?

In my example, Gothamgroup is insolvent because the alleged $400 billion of toxic waste on its books is actually worth only $200 billion. The only way a government purchase of that toxic waste can make Gotham solvent again is if the government pays much more than private buyers are willing to offer.

Now, maybe private buyers aren’t willing to pay what toxic waste is really worth: “We don’t have really any rational pricing right now for some of these asset categories,” Ms. Bair says. But should the government be in the business of declaring that it knows better than the market what assets are worth? And is it really likely that paying “fair value,” whatever that means, would be enough to make Gotham solvent again?

What I suspect is that policy makers — possibly without realizing it — are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as “fair value” purchases of toxic assets.

Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word — nationalization. The truth is that Gothamgroup and its sister institutions are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover. Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.

Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job.

Who Wants to Kick a Millionaire?

By Frank Rich, NY Times

DURING the Great Depression, American moviegoers seeking escape could ogle platoons of glamorous chorus girls in “Gold Diggers of 1933.” Our feel-good movie of the year is “Slumdog Millionaire,” a Dickensian tale in which we root for an impoverished orphan from Mumbai’s slums to hit the jackpot on the Indian edition of “Who Wants to Be a Millionaire.”

It’s a virtuoso feast of filmmaking by Danny Boyle, but it’s also the perfect fairy tale for our hard times. The hero labors as a serf in the toilet of globalization: one of those mammoth call centers Westerners reach when ringing an 800 number to, say, check on credit card debt. When he gets his unlikely crack at instant wealth, the whole system is stacked against him, including the corrupt back office of a slick game show too good to be true.

We cheer the young man on screen even if we’ve lost the hope to root for ourselves. The vicarious victory of a third world protagonist must be this year’s stocking stuffer. The trouble with “Slumdog Millionaire” is that it, like all classic movie fables, comes to an end — as it happens, with an elaborately choreographed Bollywood musical number redolent of “Gold Diggers of 1933.” Then we are delivered back to the inescapable and chilling reality outside the theater’s doors.

Just when we thought that reality couldn’t hit a new bottom it did with Bernie Madoff, a smiling shark as sleazy as the TV host in “Slumdog.” A pillar of both the Wall Street and Jewish communities — a former Nasdaq chairman, a trustee at Yeshiva University — he even victimized Elie Wiesel’s Foundation for Humanity with his Ponzi scheme. A Jewish financier rips off millions of dollars devoted to memorializing the Holocaust — who could make this stuff up? Dickens, Balzac, Trollope and, for that matter, even Mel Brooks might be appalled.

Madoff, of course, made up everything. When he turned himself in, he reportedly declared that his business was “all just one big lie.” (The man didn’t call his 55-foot yacht “Bull” for nothing.) As Brian Williams of NBC News pointed out, the $50 billion thought to have vanished is roughly three times as much as the proposed Detroit bailout. And no one knows how it happened, least of all the federal regulators charged with policing him and protecting the public. If Madoff hadn’t confessed — for reasons that remain unclear — he might still be rounding up new victims.

There is a moral to be drawn here, and it’s not simply that human nature is unchanging and that there always will be crooks, including those in high places. Nor is it merely that Wall Street regulation has been a joke. Of what we’ve learned about Madoff so far, the most useful lesson can be gleaned from how his smart, well-heeled clients routinely characterized the strategy that generated their remarkably steady profits. As The Wall Street Journal noted, they “often referred to it as a ‘black box.’ ”

In the investment world “black box” is tossed around to refer to a supposedly ingenious financial model that is confidential or incomprehensible or both. Most of us know the “black box” instead as that strongbox full of data that is retrieved (sometimes) after a plane crash to tell the authorities what went wrong. The only problem is that its findings arrive too late to save the crash’s victims. The hope is that the information will instead help prevent the next disaster.

The question in the aftermath of the Madoff calamity is this: Why do we keep ignoring what we learn from the black boxes being retrieved from crash after crash in our economic meltdown? The lesson could not be more elemental. If there’s a mysterious financial model producing miraculous returns, odds are it’s a sham — whether it’s an outright fraud, as it apparently is in Madoff’s case, or nominally legal, as is the case with the Wall Street giants that have fallen this year.

Wall Street’s black boxes contained derivatives created out of whole cloth, deriving their value from often worthless subprime mortgages. The enormity of the gamble went undetected not only by investors but by the big brains at the top of the firms, many of whom either escaped (Merrill Lynch’s E. Stanley O’Neal) or remain in place (Citigroup’s Robert Rubin) after receiving obscene compensation for their illusory short-term profits and long-term ignorance.

There has been no punishment for many of those who failed to heed this repeated lesson. Quite the contrary. The business magazine Portfolio, writing in mid-September about one of the world’s biggest insurance companies, observed that “now that A.I.G is battling to survive, it is its black box that may save it yet.” That box — stuffed with “accounting or investments so complex and arcane that they remain unknown to most investors” — was so huge that Washington might deem it “too big to fail.”

Sure enough — and unlike its immediate predecessor in collapse, Lehman Brothers — A.I.G. was soon bailed out to the tune of $123 billion. Most of that also disappeared by the end of October. But not before A.I.G. executives were caught spending $442,000 on a weeklong retreat to a California beach resort.

There are more black boxes still to be pried open, whether at private outfits like Madoff’s or at publicly traded companies like General Electric, parent of the opaque GE Capital Corporation, the financial services unit that has been the single biggest contributor to the G.E. bottom line in recent years. But have we yet learned anything? Incredibly enough, as we careen into 2009, the very government operation tasked with repairing the damage caused by Wall Street’s black boxes is itself a black box of secrecy and impenetrability.

Last week ABC News asked 16 of the banks that have received handouts from the Treasury Department’s $700 billion Troubled Asset Relief Program the same two direct questions: How have you used that money, and how much have you spent on bonuses this year? Most refused to answer.

Congress can’t get the answers either. Its oversight panel declared in a first report this month that the Treasury is doling out billions “without seeking to monitor the use of funds provided to specific financial institutions.” The Treasury prefers instead to look at “general metrics” indicating the program’s overall effect on the economy. Well, we know what the “general metrics” tell us already: the effect so far is nil. Perhaps if we were let in on the specifics, we’d start to understand why.

In its own independent attempt to penetrate the bailout, the Government Accountability Office learned that “the standard agreement between Treasury and the participating institutions does not require that these institutions track or report how they plan to use, or do use, their capital investments.” Executives at all but two of the bailed-out banks told the G.A.O. that the “money is fungible,” so they “did not intend to track or report” specifically what happens to the taxpayers’ cash.

Nor is there any serious accounting for executive pay at these seminationalized companies. As Amit Paley of The Washington Post reported, a last-minute, one-sentence loophole added by the Bush administration to the original bailout bill gutted the already minimal restrictions on executive compensation. And so when Goldman Sachs, Henry Paulson’s Wall Street alma mater, says that it is not using public money to pay executives, we must take it on faith.

In the wake of the Madoff debacle, there are loud calls to reform the Securities and Exchange Commission, including from the president-elect. Under both Clinton and Bush, that supposed watchdog agency ignored repeated and graphic warnings of Madoff’s Ponzi scheme as studiously as Bush ignored Al Qaeda’s threats during the summer of 2001.

But fixing that one agency is no panacea. All the talk about restoring “confidence” and “faith” in capitalism will be worthless if we still can’t see what’s going on in the counting rooms. In his role as chairman of the Federal Reserve Bank of New York, Timothy Geithner, Barack Obama’s nominee for Treasury secretary, has been at the center of the action in the bailout’s black box, including the still-murky and conflicting actions (and nonactions) taken with Lehman and A.I.G. His confirmation hearings demand questions every bit as tough as those that were lobbed at the executives from Detroit’s Big Three.

On Friday, Geithner’s partner in bailout management, Paulson, asked Congress to give the Treasury the second half of the $700 billion bailout stash. But without transparency and accountability in Washington’s black box, as well as Wall Street’s, there will continue to be no trust in the system, no matter how many cops the S.E.C. puts on the beat. Even the family-owned real-estate company of Eliot Spitzer, the former “Sheriff of Wall Street,” had entrusted money with Madoff.

We’ll keep believing, not without reason, that the whole game is as corrupt as the game show in “Slumdog Millionaire” — only without the Hollywood/Bollywood ending. We’ll keep wondering how so many at the top keep avoiding responsibility and reaping taxpayers’ billions while relief for those at the bottom remains as elusive as straight answers from those Mumbai call centers fielding American debtors.

This wholesale loss of confidence is a catastrophe that not even the new president’s most costly New Deal can set right.