Bank Rescue Programs: Setting the Stage for More Looting?

We have sometimes pointed to a paper by Nobel prize winner George Akerlof (of “markets for lemons” fame) and Paul Romer on the phenomenon of looting. Forgive us for repeating ourselves, but this paper was written in the wake of the savings and loan crisis, and was clearly ignored, because if anyone had heeded their message, we wouldn’t be in the mess we are in.

Akerlof and Romer define looting as an upscale version of bankruptcy fraud, except that bankruptcy fraud gets prosecuted (in theory) but the white collar rent seeking version, where executives and staff pay and perk themselves to the point where it derails the business, somehow never is pursued in the US. From their abstract:

Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

Bankruptcy for profit occurs most commonly when a government guarantees a firm’s debt obligations. The most obvious such guarantee is deposit insurance, but governments also implicitly or explicitly guarantee the policies of insurance companies, the pension obligations of private firms, virtually all the obligations of large or influential firms. These arrangements can create a web of companies that operate under soft budget constraints. To enforce discipline and to limit opportunism by shareholders, governments make continued access to the guarantees contingent on meeting specific targets for an accounting measure of net worth. However, because net worth is typically a small fraction of total assets for the insured institutions (this, after all, is why they demand and receive the government guarantees), bankruptcy for profit can easily become a more attractive strategy for the owners than maximizing true economic values…

Unfortunately, firms covered by government guarantees are not the only ones that face severely distorted incentives. Looting can spread symbiotically to other markets, bringing to life a whole economic underworld with perverse incentives. The looters in the sector covered by the government guarantees will make trades with unaffiliated firms outside this sector, causing them to produce in a way that helps maximize the looters’ current extractions with no regard for future losses….”

Now sensible people might assume, with the government (and therefore the public at large) having been taken for a ride by issuing guarantees to people who proceeded to abuse the protection given them, that they would therefore be a lot more careful about issuing guarantees. The authorities could become more stringent about issuing them, provide for tougher oversight (including being able to restrict activities in case of violation; there should be a quid pro quo in return for the subsidy), criminalizing certain types of violations. Commonwealth countries have another remedy: directors of companies found to be “trading insolvent”, that is, continuing to operate when they cannot pay their creditors, are PERSONALLY liable.

But as Simon Johnson points out in his Baseline Scenario, with hastily enacted and often muddy rescue programs, the opportunities to loot are increasing. The public’s skepticism of these hasty and desperate measures is warranted.

From Johnson (hat tip reader Richard):

Emerging market crises are marked by an increase in tunneling – i.e., borderline legal/illegal smuggling of value out of businesses…

Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt. Confusion helps the powerful, he argued. When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms. The result, if taken to an extreme, is looting: the collapse of banks, industrial firms, and other entities because the insiders take the money (or other valuables) and run.

This is the prospect now faced by the United States.

Treasury has made it clear that they will proceed with a “mix-and-match” strategy, as advertized. And people close to the Administration tell me things along the lines of ”it will be messy” and “there is no alternative.” The people involved are convinced – and hold this almost as an unshakeable ideology – that this is the only way to bring private capital into banks.

This attempt to protect shareholders and insiders in large banks is misguided. Not only have these shareholders already been almost completely wiped out by the actions and inactions of the executives and boards in these banks (why haven’t these boards resigned?), but the government’s policy is creating toxic financial institutions that no one wants to touch either with equity investments or – increasingly – further credit.

Policy confusion is rampant. Did the government effectively sort-of nationalize Citigroup last Thursday when it said Vikram Pandit will stay on as CEO? If that wasn’t a nationalization moment (i.e., an assertion that the government is now the dominant shareholder), what legal authority does the Treasury have to decide who is and is not running a private company?

Will debtholders be forced to take losses and, if so, how much and for whom? As part of last week’s Citigroup deal, preferred shareholders – whose claims had debt-like characteristics – were pressed into converting to common stock. You may or may not like forced debt-for-equity swaps, but be aware of what the prospect of these will do to the credit market. Junior subordinated Citigroup debt (securities underlying enhanced trust preferred shares) were yesterday yielding 26%….

What do rapidly widening credit default spreads for nonbank financial entities (such as GE Capital and many insurance companies) signify? Is it something about expected behavior by the insiders or by government, or by some combination of both?

Confusion in policy breeds disorder in companies, and disorder leads to the loss of value. This is the reality of severe crises wherever they unfold; we have not yet reached the worst moment. And, of course, there are many more shocks heading our way – mostly from Europe, but also potentially from Asia.

The course of policy is set. For at least the next 18 months, we know what to expect on the banking front. Now Treasury is committed, the leadership in this area will not deviate from a pro-insider policy for large banks; they are not interested in alternative approaches (I’ve asked). The result will be further destruction of the private credit system and more recourse to relatively nontransparent actions by the Federal Reserve, with all the risks that entails.

The road to economic hell is paved with good intentions and bad banks.

Print Friendly
Tweet about this on TwitterDigg thisShare on Reddit0Share on StumbleUpon0Share on Facebook0Share on LinkedIn0Share on Google+0Buffer this pageEmail this to someone

33 comments

  1. Anonymous

    The 160 billion dollars that’s been shoveled into the black hole that is AIG is more than the GDP of Israel, Chile, Singapore, Philippines, Pakistan, Ukraine, Hungary, Algeria, or New Zealand.

  2. Anonymous

    “Bankruptcy for profit occurs most commonly when a government guarantees a firm’s debt obligations.”

    Does this sound familiar?

    “The course of policy is set. For at least the next 18 months, we know what to expect on the banking front. Now Treasury is committed, the leadership in this area will not deviate from a pro-insider policy for large banks; they are not interested in alternative approaches (I’ve asked). The result will be further destruction of the private credit system and more recourse to relatively nontransparent actions by the Federal Reserve, with all the risks that entails.

    The road to economic hell is paved with good intentions and bad banks.”

    I liken the government and Fed, at this point in time, to be like a gigantic Hoover, sucking up all the wealth of this country unto themselves, until America truly becomes a shell of its former self.

  3. alex black

    Actually, America’s former self was a bunch of homeless pioneers with crude tools. I think we can make it back to that, rather than just a shell of that.

  4. alex black

    The article is an excellent, insightful analysis of the problem with government guarantees, and the moral hazard they create. Unfortunately, shouting “moral hazard” at the players involved only gets blank stares in return when the target audience is an institution of sociopaths. The most one can hope for is that after a moment’s pause in filling their wheelbarrows full of cash, as they return to their task, one is curious enough to ask another, “What is a moral?”

  5. mmckinl

    Without transparency there could be a lot of shenanigans happening, heavy gambling to recover losses risking even larger losses, insider trading benefiting themselves, other banks or personal friends.

    The Clearing House LLC handles all the largest and most Zombified banks … Citi, Wells, JPM, US Bank, and BAC all do their business there. Could there be mutually agreed sales at mutually agreed prices creating valuations through transaction trails that are cooked?

    Is Citi or BAC being used as a “bad bank” by the other banks? Is AIG being used this way?

  6. d4winds

    The excerpt from Akerlof and Romer is unnervingly apropos the big banks. As for your comment on the personal liability of directors of looting companies in commonwealth countries, “touche.”

  7. brushes9

    The non-event, once our refuge, is now our curse and cage. The non-event is the meeting in which nothing happens,..it can be PTA, at work, at church,.even, with the family. No one says anything of significance,..so nothing goes on the record,..so nothing happens.

    The apple cart is tipped just right, everyone benefits so, the meat of the subject is perfectly avoided.

    Today, we need eventful meeting where things happen. The apple cart needs tipping, but sorry, that art has been forgotten.

    Again, it will take trauma to move the ball,..and trauma is coming.

  8. Swedish Lex

    I fear that you are right, i.e. the tone has been set and insiders believe that they can continue to game the system because the Government lacks the courage to go in and make a clean sweep.

    The argument that the financial system is too complex for the state to get control of it that is at par with its current commitment to finance the wreck, is just silly.

    Furhter, I believe that the U.S. economy a couple of major bankruptcies further down the road (GM, GE, etc.) perhaps will have the chance of making the same mistake over again, as with the banks. State control of larger parts of the economy, thus in addition to banks, may well become a reality before summer (e.g. Government finance of GM Chapter 11).

    That would mean not only zombie banks but a zombie economy. The U.S. would be more like France than France ever has been, however without the checks and balances imposed by on France by Brussels regarding anti-trust, open markets, anti subsidies, etc.

  9. Anonymous

    “Commonwealth countries have another remedy: directors of companies found to be “trading insolvent”, that is, continuing to operate when they cannot pay their creditors, are PERSONALLY liable.”

    Once upon a time in the US shareholders of banks and bank holding companies were personally liable for a certain amount of bank losses. Directors also were liable.

  10. Anonymous

    Maybe we are creating a Chinese model with dual economies. As China
    has its legacy state owned enterprises so too the US seems to be creating its own version of these.

    China would seem to have the upper
    hand in this game however as when the corruption gets to blatant it can shoot managers and directors of its state owned enterprises.

    This seems to mollify public opinion but I rather doubt the US government is prepared to place Rick Wagonner or Ken Lewis before a firing squad.

  11. Anonymous

    :This seems to mollify public opinion but I rather doubt the US government is prepared to place Rick Wagonner or Ken Lewis before a firing squad.:

    If the cabal of bank execs, fed, and treasury continue to rape the taxpayer to give handouts to bank bondholders and counterparties, the public will elect new politicians that are extreme enough to jail or execute the old regime. It’ll be like the McCarthy or Pecora Hearings. Except tougher because RICO laws can be used against bank executives.

  12. Anonymous

    Here is my version of ‘economic hell.’ Usgov’s negative net worth, including the present value of unfunded future promises, is north of $60 trillion, and rising by more than $5 trillion a year.

    Merely to pay current finance charges on this sum, so as to keep it from rising, would cost over $3 trillion a year as an assumed 5 percent rate.

    Yet the entire household income of the U.S. was only $4.3 trillion in 2005. Since there is no possibility of people handing over three-fourths of their income just to tread water on their government’s obligations, the national negative net worth clearly has made the transition into self-reinforcing, exponential growth. Each year, we’re going to have to borrow or print the sums needed to service the accumulated debt, making it grow all the faster.

    This is not to say that several more business cycles can’t be manufactured — after all, Usgov can still borrow at a cheap 4 percent. But the long-term prospects are exceedingly bleak.

    It doesn’t require advanced math to see that the U.S. and other advanced economies have dug themselves into a hole from which they can’t possibly emerge. Why do so few ‘economists’ point this out? Evidently it’s more expedient, career-wise, not to focus on the fact that we’re freaking doomed.

    Or as swedish lex sez, ‘plus français que les français;’ mon dieu …

    — Juan Falcone

  13. sbarrkum

    I saw this article on the NY Times
    The G.O.P. wants to rid itself of Senator Jim Bunning, who has what one senator calls “behavior issues.”

    and recalled this from
    Senators Ask Who Got Money From A.I.G.
    to identify all the parties made whole by the bailout of the American International Group or forget about coming back to ask Congress for more rescue money.
    “You will get the biggest no you ever got,” Senator Jim Bunning, Republican of Kentucky, warned Donald L. Kohn, vice chairman of the Fed board of governors, in a hearing on Thursday. “I will hold up the bill.”

    and this
    Pressure Grows To Reveal AIG’s Major CDS Counterparties
    Since then, AIG and the Federal Reserve Bank of New York have unwound most of these contracts. To do this, they offered to buy the CDOs that were originally insured by the agreements. The counterparties sold these assets at a discount, but were compensated in full in return for allowing AIG to extricate itself from the obligations. The counterparties also got to keep the $37.3 billion in collateral, according to The Wall Street Journal.

    The counterparties have never been disclosed publicly. However, banks that sought and received collateral from AIG included Goldman Sachs (GS) , Merrill Lynch, UBS AG (UBS) and Deutsche Bank AG (DB) , The Wall Street Journal said in November.

     

  14. Anonymous

    Short economic theorem: "The Looting ACCELERATES on the way down."

    Anyone who has read about S&L could see this coming. S&L was the testing ground for the current Disaster. The Criminals went to school on the system, looted it then and then took the profits to begin again.

    The US Treasury now has numerous US Corporations directly plugged into it and looting it. Very simple.

    The War Racket and its easy, unquestioned access to the Treasury was the model Wall Street aspired to and now they have reached their goal, along with the Healthcare, Auto and other American Rackets.

    And, for the TRILLION$ being looted nary a PROSECUTION in sight. Our Society is now run by Criminals and there are no Good Guys in sight.

    At the core of this is a rotten, irredemably corrupt political system. The Justice Department is rather the contrary an institution which delivers Injustice.

    "invest' accordingly.

  15. fresno dan

    pretty much reminds me of the FHA and their 3% down loans for people in “rural” areas – the Feds trying to emulate Countrywide to solve the problem.

  16. DownSouth

    Do I not discern echoes of Thorstein Veblen here?

    The machine was not concerned with values and profits; it ground out goods. Hence the businessman would have no function to perform–unless he turned engineer. But as a member of the leisure class he was not interested in engineering; he wanted to accumulate. And this was something the machine was not set up to do at all. So the businessman achieved his end, not by working within the framework of the social machine, but by conspiring against it! His function was not to help make goods, but to cause breakdown in the regular flow of output so that values would flucturate and he could capitaize on the confusion to reap a profit. And so, on top of the machinelike dependability of the actual production apparatus in the world, the businessman built a superstructure of credit, loans, and make believe capitaliztions. Below, society turned over in its mechanical routine; above the strucutre of finance swayed and shifted. And as the financial counterpart to the real world teetered, opportunities for profit constantly appeared, disappeared, and reappeared. But the price of this profit seeking was high; it was the constant disturbing, undoing, even conscious misdirecting of the efforts of society to provision itself.

    –Robert L. Heilbroner, The Worldly Philosophers

  17. Anonymous

    Swedish Lex says – “I fear that you are right, i.e. the tone has been set and insiders believe that they can continue to game the system because the Government lacks the courage to go in and make a clean sweep.”

    That’s because they are and they own the government. They will continue with the ruse.

    The credit bubble and securitization have intentionally provided the confusion.

    Scamericans, now trained to shame, dare not question something that they do not understand and that might make them look the least bit silly or ignorant in doing so.

    The apple cart will tip right over on their heads and they will not say jack shit.

    They are only smart and brave when the man provides the target – like one million Iraqis.

    Otherwise they are cowards afraid to threaten their ever diminishing individual crumb supplies. They will hang on until the last crumb is gone, all the while engaging in avoidance behavior acts of denial and then have no resources for retaliation.

    This has been/is a long term, comprehensive and well orchestrated neocon plan begun in the Reagan era.

    Evolution periodically provides political ideologues who get the ear of the wealthy elite and appeal to their dark sides. Such a time is now. Full spectrum dominance means ‘full spectrum’, that includes ‘you’.

    Deception is the strongest political force on the planet.

    i on the ball patriot

    And forget all that voting crap, they have that locked down also.

  18. Anonymous

    One of my favorite books/films is Wiseguy/Goodfellas, the mob calls looting “busting out the joint”.

    There is a short section in Wiseguy where Pileggi/Hill describe how the mob stole bearer bonds which they sold to investment bankers who shipped them overseas for collateral on loans there (and no one bothered to check whether they were stolen). Henry Hill complained how the mob didn’t realize how valuable those bonds were and how they were ripped off by wall street. Even the profession criminals got taken.

  19. Don

    A Fable:

    There was an even called the S & L Crisis:

    http://www.uwsa.com/issues/cfr/quicksandl.html

    "The S&L crisis was caused by economic factors but was greatly exacerbated by five specific policy decisions:

    * Lending requirements were loosened as described above.
    * Deposit Insurance was raised from $40,000 to $100,000.
    * Enforcement of the law by banking regulators was decreased.
    * Politicians actively interfered in investigations of failing thrifts on behalf of specific S&L owners .
    * Implementation of the solution was delayed until the industry itself couldn't possibly pay for it and taxpayers were stuck with the bill."

    And then:

    http://www.washingtonpost.com/wp-dyn/content/article/2008/11/24/AR2008112402593_pf.html

    "Looser enforcement of banking laws would eventually allow Citi to expand into other forms of banking. And when regulations got in the way, Wriston, like Mitchell before him, found ways around them.

    At the time, national banking regulations kept Citi out of the market for commercial paper — a form of debt sold by companies to help meet short-term credit needs. Citi figured out that those restrictions applied only to multi-bank holding companies and set up Citicorp as a single-bank holding company, with Citibank as its subsidiary.

    In the 1980s, Citi and other banks ran into trouble over loans made to developing countries in Latin America on the assumption that sovereign nations don't go bankrupt. Citi and other banks faced billions of dollars in potential losses when Mexico became insolvent in 1982. The government stepped in with the Brady Plan to help sell Latin American nations' debt and have the banks write off some of it.

    Citi needed help again during the recession of the early 1990s. It accumulated $10 billion in bad loans, many related to leveraged buyouts or commercial real estate. Its stock price fell, and rumors of bankruptcy began to circulate. The Federal Reserve came to the rescue with several interest rate cuts.

    To weather future crises better, Citi executives believed the company needed to become even larger and more diversified, a true one-stop financial services firm where consumers could go for checking, brokerage and insurance services."

    And then:

    http://www.gao.gov/archive/2000/gg00067r.pdf

    11. Did the Federal Reserve’s intervention create new incentives
    for other large financial institutions to take huge financial market
    risks in the future?
    Any type of intervention creates the potential for increased moral hazard;
    however, the long-term implications of FRBNY’s involvement in the
    recapitalization are unknown. Although the FRBNY stressed that its
    actions were dictated by the state of worldwide financial markets at that
    time, its actions raised concerns among some industry officials about
    moral hazard. Some industry officials said that FRBNY’s involvement in
    the rescue, however benign, would encourage large financial institutions to
    assume more risk, in the belief that the Federal Reserve would intervene
    on their behalf. According to FRBNY officials, it is unlikely LTCM’s
    creditors would have been able to work together to avoid the rapid
    liquidation of the Fund if FRBNY officials had not intervened. Thus,
    FRBNY’s intervention probably affected the outcome in this case and, over
    time, such actions could increase moral hazard and potentially undermine
    the effectiveness of market discipline.
    12. Did the Federal Reserve’s intervention in the rescue of LTCM
    create unacceptable risks to the federal deposit insurance system
    or expose American taxpayers to a threat of future hedge fund
    bailouts?
    Enclosure
    Questions Concerning LTCM and Our Responses
    Page 15 GAO/GGD-00-67R Questions Concerning LTCM and Our Responses
    Although no federal dollars were involved in the recapitalization of LTCM,
    the Federal Reserve’s involvement has raised concerns among some that
    the “too big to fail” doctrine has been expanded to include hedge funds.
    Federal Reserve officials have testified that its facilitation of the
    recapitalization of LTCM was not an expansion of “too big to fail”13 and had
    the private-sector recapitalization not come together, LTCM would have
    been allowed to fail. However, if companies believe that the federal safety
    net has been expanded, it may encourage more risky business practices.
    Based on the LTCM experience, if problems surface during periods of
    market turmoil, regulators may decide that some form of federal
    intervention, albeit nonfinancial, may once again be necessary."

    And then, in 2005, this was not posted on the internet:

    http://www.msfinance.ch/pdfs/AnnelisLuescher.pdf

    "It should by now have become clear that the Gauss one factor model is not the
    right model to price CDOs and that we are in desperate need for a convincing
    alternative. In this thesis, three promising models for pricing synthetic CDOs
    were for the first time compared to each other and to the Gauss one factor
    model. Further tests using current market data are necessary before we can
    conclude on a superiority of any of the three models."

    These are things which couldn't have happened, since they show that moral hazard matters, and that there simply wasn't enough data, under the best of circumstances, to rely on CDO risk models. These are such obvious, prudent points, that, in the real world, where people aren't idiots, the current crisis couldn't have occurred. And you surely couldn't have had a housing bubble, following on a tech bubble. That would have shown that bubbles can still occur. And people couldn't have loaned money to the riskiest borrowers at the top of a market, with loans that didn't cement in low rates.

    This is all a fable. A counterfactual. Right? But I'm a Modal Realist, so, it did happen in some world, just not ours.

    Remember, I'm a novelist. In fact, I write horror and satire. I'll let the reader decide which this fable qualifies as.

    Don the libertarian Democrat

  20. Anonymous

    This will draw some criticism due to the controversial nature of those who proposed the ideas and their methods, but this point was made by the likes of Ayn Rand and Alan Greenspan. One of the points she tried to make in Atlas Shrugged and he tried to make in The Assault on Integrity is that those who believe they are personally responsible for their business concerns will never “loot” it. Placing government as the ultimate guarantor relieves the individual in charge of a business of this responsibility. No government should have to force people to live their lives with integrity if the pursuit of happiness for each individual is a commonly held goal. That being, said there are those among us who hold misery and suffering as a goal and the government does need to protect it’s people from those individuals, that is why we have courts.

  21. Anonymous

    One of the points she tried to make in Atlas Shrugged and he tried to make in The Assault on Integrity is that those who believe they are personally responsible for their business concerns will never "loot" it. Placing government as the ultimate guarantor relieves the individual in charge of a business of this responsibility. No government should have to force people to live their lives with integrity if the pursuit of happiness for each individual is a commonly held goal. That being, said there are those among us who hold misery and suffering as a goal and the government does need to protect it’s people from those individuals, that is why we have courts.

    As tempting as it is to resort to "those me are bad, so they loot us," it is critical to insist that Greenspan and Rand are simply wrong to align self-interest with law-abiding and morally upright behavior. Reality demonstrates that is, at best, a hopelessly naive myth, at worst, a malicious deception.

    The S&L crisis and the present crisis demonstrate that management can and will use companies and the legal system as weapons to loot. They do this because they can, and because they are aided and abetted by government. It is difficult to know how many of those involved in enabling this in government are simply cognitive captives, and how many are simply fellow criminals – there is clearly a grey area.

    But it is telling that modern economics deals with the question of looting by explaining that it can't happen because looting doesn't align with the CEOs Randian self interests. The canard that the large stock grants to CEOs create this morally upright incentive has been clearly demonstrated to be an utter lie. We saw this indisputably in the S&L crisis and we see it now.

    I therefore have to conclude that the blindness of modern economic theory to crime is willful. Most are paid to lend august ceremony and lay down a confusing smokescreen to the wheelbarrow parade.

  22. DownSouth

    David Sloan Wilson identifies Ayn Rand as the latest in a long line of prophets of what he calls the “New Atheism,” a “stealth religion” that has been around for many moons. He dubs her a “religious zealot” and intones that “if you look at her creative objectivism you will find that it is like religous fundamentalism in every way.” Her take on natural selection is like “professional wrestling,” he says. “Great fun, but don’t mistake it for a real contest.”

    My main complaint about the New Atheism is that it’s not offensive or any of that, it’s just bad science.

    http://thesciencenetwork.org/programs/beyond-belief-enlightenment-2-0/david-sloan-wilson

  23. Anonymous

    “To attain all this (universal republicanism), however, rivers of blood must yet flow, and years of desolation pass over; yet the object is worth rivers of blood, and years of desolation.” – September 4, 1823 Thomas Jefferson

    Bankruptcy for profit occurs because we are cowards. Although over 2.4 million people have Googled the phrase “Thomas Jeferson and Revolutions” so maybe things will change?

  24. Stephen

    There is a fundamental mistake in the Romer/Akerlof analysis. It is not the owners who are incentivized to loot. It is the management. (By the time the government guarantees are drawn on, the owners, themselves, have been wiped out.) The problem is fundamentally one of corporate governance.

    Not only in the Commonwealth Countries, but in the US as well, Boards of Directors are personally liable for their malfeasance. But there is a wrinkle here that requires attention. You may recall that after the Enron debacle, Treasury Secretary Paul O'Neill urged that Congress pass legislation to outlaw the virtually universal practice of corporations purchasing Errors & Omissions Insurance for their officers and directors (usually called O&D Insurance). Such insurance covers any legal settlements and court costs if officers and directors are found to have harmed stockholders by their malfeasance. Incredibly stockholders are thus put in the position of paying for the damage that irresponsible management inflicts upon them. Moreover, almost no one who is not an corporate officer or director is even aware of this insurance. Alas, Mr. O'Neill was quickly dismissed from his post.

    Unfortunately whenever legislation is proposed to improve corporate governance, an army of lobbyists descends upon Congress to stymie the effort. While this lobbying advances the interests of corporate management, it is certainly not being advancing the interest of the stockholders on whose behalf the management is supposed to be acting. It is time for prosecutors to treat such corporate lobbying expenditures for what they are: employee theft.

  25. Eric L. Prentis

    More trillions of dollars for the rich, no way! The Geithner/Summers/Bernanke “public-private partnership” trial balloon is just another example of the plutocracy trying to loot as much taxpayer money as possible before, hopefully, they no longer have control of the Federal Reserve and Treasury. The newly proposed $1 trillion dollar giveaway to the hedge fund and private equity crooks confirms yet again that Washington D.C., overflowing with venal congressional hacks, i.e., Schumer/Dodd/Frank, is a stinking cesspool of corruption.

  26. Anon1

    Tis a small thing, really, but all this criminality from the big bankers has made me decide to jump out of Bank of America, not as a shareholder mind, just as one of the people that REALLY matter (or should): a depositor.

    BoA is as insolvent as Citi and they are crooked at BoA as they are at Citi (and JPMorgan). I cannot stop the government from taking my tax dollars and giving them to the crooks at BoA, etc, but I can close out my accounts at BoA so that the funds no longer exist as part of their capital. I’ve been with that bank since 1985, but now I am bailing out forever and going 100% credit union. No more focus on “shareholder value” at the expense of everyone else: as a depositor, I AM a shareholder.

    They also tend NOT to have greedy CEOs that seek to pad their nests or decorate their arms with high-priced callgirls, and pay out big bonuses regardless of actual performance.

    I would encourage EVERYONE and ANYONE with money in accounts with any of these zombie banks to BAILOUT and help sink them faster.

  27. Waldo

    “The machine was not concerned with values and profits; it ground out goods. Hence the businessman would have no function to perform–unless he turned engineer. But as a member of the leisure class he was not interested in engineering; he wanted to accumulate. And this was something the machine was not set up to do at all. So the businessman achieved his end, not by working within the framework of the social machine, but by conspiring against it! His function was not to help make goods, but to cause breakdown in the regular flow of output so that values would flucturate and he could capitaize on the confusion to reap a profit. And so, on top of the machinelike dependability of the actual production apparatus in the world, the businessman built a superstructure of credit, loans, and make believe capitaliztions. Below, society turned over in its mechanical routine; above the strucutre of finance swayed and shifted. And as the financial counterpart to the real world teetered, opportunities for profit constantly appeared, disappeared, and reappeared. But the price of this profit seeking was high; it was the constant disturbing, undoing, even conscious misdirecting of the efforts of society to provision itself.”

    Very insightful but we must not confuse profit for stealing. Confusion (fear) is the strongest reagent to facilitate stealing. Much like when a felon points a gun before robbing a 7-11 convenience store. This is not profit he possesses but stolen assets of the business.

    Confusion designed for abetting theft has been elevated to a global scale. The aforementioned theft being perpetrated by the oil thugs. They gained access to our White House and we lived through 9-11, Iraq War, and continuous threats (Cheney, Rumsfeld) orated by the Administration of possibilities of more terrorism on US soil to a panicked American citizenry. Add to this the system of high alert alarms sounded by the Department of Homeland Security. Now Bush, Jr. is being credited with preventing more attacks here in the States (such sh*t).

    I saw through the plan then and I still see through it now. For those (Republican or Democrat) who did not see the crime you are a fool (less free; dumbed down).

    A functioning Justice Department and a character driven President can establish ‘rule of law’ again. If they do former President(s) will be prosecuted. A long order but necessary. We must punish these crimes and start anew.

    American Poet

    The great genius Emerson wrought this:
    “Where is the American poet?”
    Walt Whitman guided by cowardice
    Responded by composing free verse (don’t covet)!
    Contemporary America’s literature is weaker
    Because of free verse: our literary canker.

    Today I read abundant poetic failure.
    A poetic character of least resistance.
    Reminds me of our past abuse of color,
    Only recently truly feeling repentance.
    We must cease this poetic illusion.
    Begin anew and drive away the confusion.

    The American Poet – literary leader.
    The American Poet – literary rhyme.
    The American Poet – truest dreamer.
    The American Poet – the new global sign.
    We will again create a national literature
    That will respect, inspire, and satiate Nature.

    Free, adventurous, rugged, and beautiful souls.
    The nation of many nations.
    English, German, African, Asian, and Aboriginals
    Our melting pot of relations.
    We fought tyranny to find our truest selves
    And forged a nation where the free man dwells.

    A national republic and a free society.
    A national genius vested in our courage (to again appear).
    A genius that is guided with truth and piety
    Igniting a torch of Liberty for all to see and revere.
    Reach back America to understand and to inspire.
    Surge forward to mend and extinguish our tyrannical fire.

    The great economist Friedman authored this:
    “Free to Choose”
    The power of choice from education to cannabis.
    Free to win and free to loose.
    A man who revered fierce debate and criticism.
    Who expounded the critical value of capitalism.

    This thinker understood the supreme economic value of labor.
    Fought all takers with intellectual breadth and stamina.
    A champion of the free market that always wants more
    That transcended the towering thinkers of Vienna.
    A Jew of anemic physical stature.
    A scholar finished; the rarest creature.

    These Jews who earn great scholarly respect.
    True as the fox has learned to be cunning.
    Grand stewards of America’s national intellect!
    America’s future depends on their creating.
    These little people think for today’s Hollywood
    Because of this we all can learn and be understood.

    The great capitalist Gates gained this:
    “America’s greatest and fairest personal fortune”
    A gift which adds to America’s bliss.
    The entrepreneur of historic opportune.
    This economist with ambitions of much
    Created an empire inaccessible to the human touch.

    America’s past happiness rested with these
    Astor, Stanford, Carnegie, Morgan, and Rockefeller.
    An animal not bent to help or to please.
    Their determination to create their reputations of grandeur.
    These men we needed to think, to lead, and to create stability.
    Our wise Sherman Act completed them and staved the monopoly.

    The great actor Hanks orated this:
    “To contribute today you must help”
    An overture as critical as a lover’s kiss.
    A message for his daughter (us) I deeply felt.
    A platform stationed at a colloquium of scholars (college).
    A place devoted to our past utterances and our homage.

    We now are entering our greatest adult season.
    A time of fear and actions with reason.
    We have seen this before: the civil war of treason.
    Our Creator readied us then with literary cohesion.
    Whitman, Thoreau, Longfellow, Poe, Field, and Dickinson.
    Today’s cause is a war of greed and of confusion.
    We must come together to again create poetic unison.

  28. Blissex

    «Actually, America’s former self was a bunch of homeless pioneers with crude tools. I think we can make it back to that, rather than just a shell of that.»

    No you cannot. It was a “bunch of homeless pioneers with crude tools” and a large amount of oil in the ground, ample water in the acquifers and lots of ready-for-the-taking fertile land.

    Those things are gone. The difference between Depression 1 and Depression 2 is that in 1929 there was still a chance of an oil fueled productivity boom left underground in Texas. That’s gone.

  29. Blissex

    «One of my favorite books/films is Wiseguy/Goodfellas, the mob calls looting “busting out the joint”.»

    There is looting an looting; bustout/takeout is a particular form of nonviolent looting, or fraud, based on agent-principal conflict of interest and early recognition of income and late recognition of expenses.

    It is the principal and subtlest form of the common technique called “tunneling”; and the “Capital Decimation Partners” strategy is another variant identified by Taleb and others.

    I have called it for many years the age old sharecropper problem, because it is age old, and it is about share cropping.

    Whether the crop is cash/securities or corn.

    The general idea is that a sharecropper is given control of a productive asset for a fixed period of time in exchange for a share of the proceeds.

    Given this, the overriding self interest of the sharecropper is to “mine” the asset by overexploiting it and/or underproviding against future losses, so as to liquidate as much as possible of the capital value of the asset into profits, as the sharecropper gets a share of the profits but 100% of the asset equity stays with the owner.

    This can be done in a number of different ways; for example the mob typically does it where the beneficial asset owner is not the ostensible owner of the asset, but the creditors; for example create a shell company, buy a lot on credit, tunnel that out by selling it cheap to another shell company, and then declare bankruptcy. Here the real asset owner are the creditors.

    If you see a resemblance between mobsters doing bustout fraud above and upright middle class smarties “buying” houses with 0% down loans…

  30. Blissex

    «A functioning Justice Department and a character driven President can establish ‘rule of law’ again.»

    Regrettably this is one of the stupidest, most damaging arguments that one can make.

    It is the argument that if only the USA were ruled by wise philosopher-kings, they would run it better than the USA electorate.

    Which is ridiculous. The problem with the USA is not that the ruling class is corrupt instead of being wise ehtical philosopher-kings, but that the USA voters and in particular the campaign donors are even more corrupt than those they elect or nominate.

    USA voters and campaign donors have enthusiastically endorsed by convincing majorities all the abuses of the law, all the scams and frauds, of the past 25-35 years, and the more corrupt has the government and the business community been, the more enthusiastically it has been endorsed.

    When the majority of USA (and UK) voters have seen scamming and looting going on, they have admired it, and just hoped that they would get their chance too.

    People like Mozillo, Fuld, Cayne, Prince, Greenberg are celebrated as role models, people who got theirs by doing whatever it takes, and their admirers just wanted a chance to do the same, and make money fast too.

Comments are closed.