naked capitalism

By Michael Crimmins, who has worked on risk management and Sarbanes Oxley compliance for major banks

As more news comes to light about JPMorgan’s inadequate supervision of its CIO desk, the source of its multi-billion-dollar losses, it’s clear an investigation of violations of Sarbanes Oxley (SOX) is warranted.  At a minimum, Congressmen and the public should demand that the SEC and/or the DOJ owe it to us to pursue a SOX-related enforcement action. SOX was passed in the wake of Enron to end the all-too-common “I’m the CEO and I know nothing” defense, and the CIO operation is looking more and more Enron-like with every passing day.

By way of background, here’s the certification that’s at the heart of Sarbanes-Oxley. A false certification carries civil penalties against the signators and criminal penalties if the certification is fraudulent.

JPMorgan’s SOX Certification for 2011.

Management has completed an assessment of the effectiveness of the Firm’s internal control over financial reporting as of December 31, 2011. In making the assessment, management used the framework in “Internal Control — Integrated Framework” promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO” criteria.

Based upon the assessment performed, management concluded that as of December 31, 2011, JPMorgan Chase’s internal control over financial reporting was effective based upon the COSO criteria. Additionally, based upon management’s assessment, the Firm determined that there were no material weaknesses in its internal control over financial reporting as of December 31, 2011.

The effectiveness of the Firm’s internal control over financial reporting as of December 31, 2011, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Signed Jamie Dimon, CEO and Douglas Braunstrein CFO

The certification also contains this qualifier.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

At first glance the qualifier looks like fair warning that the inherent limitations in designing an internal control framework may not work perfectly. But JPM has designed its internal control system to meet the COSO standards, which are pretty comprehensive, There shouldn’t be much risk  that internal control inadequacies can be attributed to poor design (or they would not have met the COSO criteria, making the certification invalid) so the disclaimer should be considered boilerplate.

What Risk Management Failures Should the SEC Investigate?

People Risks

One key element of an effectively operating internal control system is having the people and systems in place to operate the controls. There were some critical staffing gaps in the CIO group at the time the 2011 certification was signed, which should make the SEC skeptical that the internal control processes dependent on these people were operating effectively.

The head of the CIO group was working from home, the CIO treasurer’s office was vacant (a fact which hadn’t been publically disclosed), limits procedures and controls were reportedly revised by staff that normally wouldn’t have that authority. The unit was apparently exposed to the classic ‘Key man risk’ problem we witnessed with Jon Corzine at MFGlobal. If the risk committee didn’t acknowledge this particular risk and design a process to mitigate it then the risk committee’s role in the internal control framework is also up for review. The fact that the former AIG risk head was a member of JPM’s risk oversight committee raises some eyebrows. Given that in 2011 the CIO contributed over 20% of the bank’s profit, that meant it was a significant operation and warranted close monitoring.  It would constitute an egregious internal control breakdown, NOT an egregious ‘mistake’ if any of these people risks were not adequately mitigated.

Modeling Risks

There has been a lot of reporting regarding the replacement of the Value at Risk model after the disclosure of the London Whale’s position in March 2012. I’d like to focus on two areas where the VaR restatement impacts SOX.

If the model was replaced in 2011, then the adequacy of the model review process impacts  the 2011 internal controls certification. The pricing and risk model review process is a key internal control. If it turns out that the replacement model was implemented before December 31, 2011, then the controls certification will need to be reviewed in light of the events of April. Note that JPM may try to point to the disclaimer, but I’d doubt they could successfully argue that the VaR models inadequacy only came to light as a result of subsequent events, without looking incompetent.

The second issue is that VaR by design does not measure tail risk. Yet  JPM Morgan has said that the CIO’s role was hedging tail risk. Thus VaR would be incapable of measuring the riskiness of the bets the CIO was taking.  Any references to the Var for this portfolio by JPM are misleading and disingenuous. As a result it is hard to accept that publishing a VaR for the portfolio would satisfy the SEC’s risk disclosure requirements.

If JPM’s explanation that the CIO portfolio was designed to hedge tail risk is true, then the hedges against those risks would presumably be way out of the money, low volatility hedges. The risk estimation of a portfolio like that would not be captured in the VaR. The likelihood of a significant price change on the hedge would be a rare occurrence. VaR only captures the risk expected under normal market conditions.

Since the loss was announced and JPM reinstated the original model JPM has made reassuring comments that even though the old model produced a risk figure that was twice the size of the new model, none of the losses it experienced in the first quarter exceeded the VaR. However they also announced that in the first 13 days of April they experienced $2 billion of losses. If by some miracle those losses are distributed in such a way that they fall below the VaR on each day they experienced a loss, JPM may be able to avoid explaining to its investors that VaR is inherently incapable of measuring the risk of tail hedges in the CIO portfolio.

The SEC should immediately demand that JPM publicly disclose a risk estimate of the underlying tail risks these ‘hedges’ are designed to offset. Presumably these estimates are provided to the risk oversight committees, so they should be available to the regulators.

Truthiness  Risks

The overarching key control SOX imposes on corporations is honest disclosure.

Since the CIO losses were disclosed Dimon has taken a lot of liberties with the English language. He has repeatedly described these positions as hedges, yet the accounting rules JPM is obliged to use for their public reporting and disclosures emphatically define the transactions as NOT hedges. The accountants at JPM have to report these transactions as trading positions, in spite of their chief’s mischaracterizations in his public comments. Dimon’s gotten around this conflict by coining a fictional financial term, an economic hedge. I haven’t seen anyone call him on the use of this bogus term, but the SEC should be pointing out that no such term exists in their vocabulary. Doubly so since Dimon apparently interprets the Volcker rule’s hedging exemption to apply to these undefined ‘economic hedges’.

He also avoids labeling these transactions as trading positions by referring to them as ‘economic hedges’ to

manage structural and other risks including interest rate, credit and mortgage risks arising from the Firm’s ongoing business activities. ( Per the March 30, 2012. 10Q)

Yet there is no definition of ‘structural risks” anywhere in the 10Q. Again the SEC seems strangely incurious about the definition of the term even though everyone is dying to know just what risks he’s talking about.

The poor language choice that I think is going to give JPM the most trouble is Dimon’s reassuring statements to the markets that the reserves that have built up in the Investment portfolio have been and will continue to be mined to cover the losses in the CIO trading portfolio. These positions are reported in the financial statements as Investments and receive favorable accounting treatment because they are meant to provide liquidity protection for depositors in the event of a market shock.

From a SOX perspective the financials have been misstated for the entire period the firm viewed these as part of the CIO trading portfolio. From a depositor’s or regulator’s perspective the intended use of that portfolio is alarming.

Rakoff Gets Amicus Support from Occupy Wall Street in Citi Appeal American Lawyer

The Philanthropic Complex, Jacobin Magazine

Is Europe Ready for Banking Union? Vox

Data, Drugs, and Deception Get ‘Em

War-Gaming Greek Euro Exit Shows Hazards In 46-Hour Weekend Bloomberg

Obama Campaign Ads Focus On President’s Work With Veterans, Seniors Huffington Post  … Another ad about killing Bin Laden.  Blech.

Shale gas boom helps slash US emissions FT

Elizabeth Warren-Scott Brown Poll: Still Deadlocked Huffington Post

Mitt Romney in Massachusetts.: The lost years Politico

Spain struggles to meet regions’ 36 billion-euro debts Reuters

Senator admits: SOPA “really did pose some risk to the Internet” Ars Technica

Groups Concerned Over Arming Of Domestic Drones CBS DC

Rickroll Meme Destroyed By Copyright Takedown Torrent Freak

Iran Navy Helps U.S. Ship Attacked By Pirates In Middle East Bloomberg

Rather: 2012 ‘Worst’ Campaign Politico

Euro Zone Crisis Boils as Leaders Argue, Failing at Pact New York Times

Kolko: Dissecting the House Price Indices Calculated Risk

* * *
D – 107 and counting. *

Lambert here:

“Are you better off now than you were four years ago?” –Ronald Reagan, 1980 Presidential campaign

Occupy. Occupy Frankfurt: The German police take off their helmets (image; image) and escort marching occupiers. (Not the same as joining them (FB link), but still a powerful symbolic act. (This would be method 147 of Gene Sharp’s 198 Methods of Non-Violent Protest and Persuasion, “… selective noncooperation by enforcement agents.”)

Occupy The Wall: “How Pink Floyd’s Album Became Political Theater in 2012.” A really excellent piece from Occupy Oakland Media Collective. I had no idea that Roger Waters was a vocal Occupy supporter.

Montreal. Crowd estimates for yesterday’s 100th-day anniversay march range from 100,000 to 250,000. Leaders being anointed. The Beeb: “Mr Nadeau-Dubois [of Classe (80,000)], a 21-year-old history student at the University of Quebec in Montreal, has shot to prominence with his fiery rhetoric and bad-boy intransigence.” Jeanne Reynolds, also of Classe, “is the recipient of a lieutenant-governor’s medal because of her high marks and hundreds of hours of volunteer work.” Trade unions based outside Quebec send $36,000 to Quebec student organizations. Betting site sets odds on martial law in Quebec by the end of 2012: 5.5 to 1.

CA. Tinpot Tyrant Watch: County grand jury investigating San Diego’s police citizen review board uncovered an atmosphere rife with “prejudice, fear and intimidation.”

CO (Swing State). Denver Post runs story headlined “Political billboards in Colorado use energy policy to fuel debate” without covering the debate; instead, they went meta on the billboards. Longmont City Council postpones fracking regulations 45 days after veiled threat from state of lawsuit (speaking of energy policy).

IL. DOJ Prosecutor Patrick Fitzgerald resigns, giving no reason. “No future employment plans.” Decision came as “surprise” to DOJ, who learned of it this morning. Hey, I wonder if Schneiderman’s Mortgage Task Force needs a prosecutor? Of course, they’d need to set up an office. With a phone.

NC. Environmental impacts, gas reserves close to groundwater, scaled back reserves “should be the death knell for fracking” in NC. Should.

NV. Record 30 tribal leaders issue statement opposing controversial Las Vegas groundwater pumping pipeline, cite “lack of required government-to-government consultation required by [Bush] Executive Order 13175.”

OH (Swing state). Kasich allows oil and gas industry to write portions of fracking legislation.

VT. Leahy, Sanders, Welch, Shumlin, and Dubie form a “Vermont Military Mafia” to bring defense spending to Northeast (here, F-35s replacing F16s for Vermont Air National Guard).

WI (swing state). DNC email blast: “It’s up to Democrats across the country [and not the DNC] to help win this thing.” DNC not cutting that $500K check to the WI State Ds for GOTV reminds me of Stalin halting his troops so the Nazis could crush the Warsaw Uprising. Ilya Sheyman’s BFFs, the PCCC, cancel “a big buy in Wisconsin, according to data provided by SMG Delta” (Politico “Morning Score,” unsourced and unlinkable). Madison West High School activists form Students for Wisconsin political action committee to take on Walker (video). Milwaukee violent crime rate lowered based on faulty data. JS’s timing sure is coincidental, given D Barret is mayor of Milwaukee. Product endorsements of R Walker’s “Deer Czar,” James Kroll.

Green Party. Stein leading, but not clinched.

Ron Paul. College senior spends $1.3 million inherited from banker grandfather to form Ron Paul SuperPAC. MN GOP activist John Gilmore: “…a Jew-hating, fringe cult political figure who speaks to alienated, fairly ignorant and frequently unwashed lost souls….” Say what you feel, John! Lawyerly adverbs and all! OK challenge: “Any other people who claim they were elected as delegates in the parking lot after we adjourned at 5 p.m. are not delegates and will not be certified to the RNC.”

Ladies of Negotiable Affection. Sen. Collins: “This was not a one-time event. The circumstances unfortunately suggest an issue of culture,” noting that two participants were Secret Service supervisors (see). SS head Sullivan: “I’m confident this is not a cultural issue.” SS accused to fight dismissals. Pass the popcorn!

Inside Baseball. “At roughly $40 per person on average, high tea in D.C. is not an inexpensive endeavor. But when done right, it can be a revitalizing experience that goes way beyond a standard meal.” Only 33% of respondents believe the economy will get better in the next year, down five points from April and seven points from March. “The unemployment rates in a majority of the 2012 battleground states are lower than the national average as those economies improve.” From the Barcalounger: OHQ “visionary minimalism.” They want to win by the smallest margin possible, so they owe the voters as little as possible. “Campaign workers gather up donors’ mobile phones in plastic bags at some fundraisers.” That’s the lesson the campaigns drew from “bitter/cling to….”

Romney. Rs think Romney can win: “[D]ramatic shift from … mere weeks ago.” A week is a long time in politics! Romney in Time, serviced by Mark Halperin: “I can tell you that over a period of four years, by virtue of the policies that we’d put in place, we’d get the unemployment rate down to 6%, and perhaps a little lower.” So, the 4% really was merely aspirational?

Uncle Karl’s in the house with “Basketball” from Crossroads PAC. The focus-grouped message “is frustrated hopes, mingled with a pervasive dread about the ongoing economic crisis.” Woman character: “It’s funny, [my kids] can’t find jobs to get their careers started and I can’t afford to retire.” True, dat. Beats the stuffing out of Obama’s Julia ad, too. After all, actual women trump composite cartoon character women, eh? More: “[T]he woman admits she supported Obama because “he spoke so beautifully. He promised change.” Ouch! Crossroads is running “Basketball” in CO, FL, IA, MI, NC, NH, NV, OH, PA, and VA. “Obama carried all of those states in 2008 and needs to win more than half of them in order to be re-elected.”

Obama. Obama at the Air Force Academy: “No other nation has sacrificed more—in treasure, in the lives of our sons and daughters—so that these freedoms could take root and flourish around the world.” “More?” What’s the discount on the the 100K+ Iraqi civilian dead, then? Anyhow, shorter Obama: I whacked OBL. Count of MA supporters contributing maximum falls almost 50 percent over 2008. In shocker, Obama supporters blame somebody else: “Elizabeth Warren has sucked a lot of air out of the room.”

The normally astute Pierce: “Another reason the left should just suck it up.” Huh? Why is OK for gays to muscle Obama and not the left? Pierce is the last person I’d expect to start punching the hippies, but we live in interesting times.

Booker/Bain flap. Black Agenda Report’s Glen Ford calls his shot on Corey Booker. In 2002. (hat tip alert reader G3). Reader Klassy: “It’s too bad that Glen Ford is right about pretty much everything.” Yeppers.

* 107 days ’til the Democratic National Convention ends with on the floor of the Bank of America Stadium, Charlotte, NC. 107 is the police “10 code” for a suspicious person.

A la prochaine fois!

* * *

Here’s Bank of America CEO Brian Moynihan, defending Jamie Dimon.

Asked about JPMorgan’s trading loss and trading risks in the market Moynihan said, “Jamie has the skill to get out of it. The loss concerned the market but did not disrupt it.”

Moynihan is the CEO of a major competitor to JP Morgan Chase, but when it comes to regulations and the government, they are as brothers.

And then there’s this.

This afternoon Moynihan was asked to defend the universal banking model which marries retail banking with investment banking. The CEO of the nation’s second largest bank said the model is the “most important” model there is because it gives consumers access to global information, capital markets, investment advice and basic banking all in one place.

“We can’t be competitive if we can’t provide all those services to our consumers,” he says.

Moynihan argued that the dialogue on banking has gone from concerns about “too big to fail to too big to manage.” He noted that regulations brought forth by Dodd-Frank have addressed the former and added that BofA has dramatically narrowed down the scope of its business to address the later.

“Three years ago when we merged [with Merrill Lynch] our balance sheet was $2.7 billion. Now we are down to a $2.18 billion balance sheet, and we’ve doubled liquidity and capital,” he says.

He pointed out that the bank no longer has a private equity business and that it wound down its prop trading business in the second quarter of last year.

Pretty much everyone, even its proponents, admits that Dodd-Frank has not yet fixed our banking system.  Everyone, that is, except Bank of America CEO Brian Moynihan.  For him, Dodd-Frank is just fine.

As our political system sputters, a wave of innovative thinking and bold experimentation is quietly sweeping away outmoded economic models. In New Economic Visions, a special five-part AlterNet series edited by economics editor Lynn Parramore in partnership with political economist Gar Alperovitz of the Democracy Collaborative, creative thinkers come together to explore the exciting ideas and projects that are shaping the philosophical and political vision of the movement that could take our economy back.

In September 2011, two Appalachian women traveled to Delaware to deliver a petition to the state’s Attorney General Beau Biden. Betty Harrah and Lorelei Scarbro represented thousands who believed that the business charter for coal-mining company Massey Energy should be repealed. The company, mostly operating in Appalachia but incorporated in Delaware, has violated the Clean Water Act 60,000 times. An investigation commissioned by the governor of West Virginia found Massey could have prevented the explosion that claimed the lives of 29 miners, among them Harrah’s brother, at the Upper Big Branch Mine in 2010.

Massey, they contended, was simply too dangerous to be in business. But their pleas fell on deaf ears. The company plugs along, despite its shoddy environmental and safety records, churning out profits for its parent company, Alpha Natural Resources.

To many, Massey is not simply one bad apple, but part of an economic system heavy with rotten fruit. Companies like Lehman Brothers, Bank of America, Countrywide, BP, and Walmart epitomize the relentless drive of corporations to maximize profit above everything else, including safety, fair working conditions, clean air and water, healthy communities, and common decency. In doing so, the very word “corporation” has become a dirty word.

Forget bad apples, perhaps we should just raze the entire orchard, right?

Our economy, like our environment, is in trouble. Limitless growth that drives the profit-hungry corporate model today is ecologically impossible. We simply cannot sustain business as usual and the cracks in our system are showing.

“You look at the Arab Spring … what looked like very stable regimes across the Arab world were suddenly shown to be completely vulnerable and brittle and I think that we may see the same kind of thing in our economy,” said Marjorie Kelly, a fellow at the Tellus Institute and author of the new book Owning Our Future: The Emerging Ownership Revolution. “What looks massive and permanent and invulnerable, may show itself quite suddenly to be brittle.”

Maybe this doesn’t sound heartening but it should. The corporate model we have today hasn’t always been around and it doesn’t need to remain the dominant way we do business. There is no reason we should be swabbing the decks of a sinking ship — alternatives already exist and they are flourishing.

“What’s underway is an ownership revolution. It’s about broadening economic power from the few to the many and about changing the mindset from social indifference to social benefit,” Kelly writes. “We’re schooled to fear this shift, to think there are only two choices for the design of an economy: capitalism and communism, private ownership and state ownership. But the alternatives being grown today defy those dusty 19th-century categories. They represent a new option of private ownership for the common good. This economic revolution is different from a political one. It’s not about tearing down but about building up. It’s about reconstructing the foundation of ownership on which the economy rests.”

Better Business

A common complaint in today’s world is one of disconnection. Our industrialized world has resulted in less contact with community — we don’t know our neighbors or who grows our food. In the same way that we’ve lost touch with a deeper sense of belonging and place, many of us have become disconnected from the soul of our work. The corporation-worker structure today is a master-servant relationship. We’re slaves to the company, working longer hours for less wages.

“Now mass layoffs to boost profits are the norm, while the expectation of a career with one company is long gone,” William Lazonick wrote. “This transformation happened because the U.S. business corporation has become in a (rather ugly) word ‘financialized.’ It means that executives began to base all their decisions on increasing corporate earnings for the sake of jacking up corporate stock prices. Other concerns — economic, social and political — took a backseat. From the 1980s, the talk in boardrooms and business schools changed. Instead of running corporations to create wealth for all, leaders should think only of ‘maximizing shareholder value.’”

Our economy is dominated by a monoculture business model, Kelly says, driven largely by publicly traded corporations that have built in pressure from Wall Street for maximum short-term earnings. But a healthy, living economy needs biodiversity. We can find this if we begin to look around — across the U.S. and the world — where there are businesses designed not for maximum profit, but with a mission-driven social and economic architecture. One of these models is the “social enterprise.”

The Social Enterprise Alliance defines these organizations as “businesses whose primary purpose is the common good. They use the methods and disciplines of business and the power of the marketplace to advance their social, environmental and human justice agendas.” And one of the defining characteristics is that “The common good is its primary purpose, literally ‘baked into’ the organization’s DNA, and trumping all others.”

Here’s an example. Remember Working Assets? Starting out as a progressive-minded credit card company in the ’80s, it added phone service — first long-distance in the ’90s, then cellular in 2000 — and now it has created the subsidiary CREDO Mobile. The company operates as a for-profit business, which is privately owned, with most of the employees owning the stock, so it doesn’t have to bow to Wall Street pressures. They use their profits to help support causes they believe in — so far the amount of money donated is $70 million and counting.

Social enterprises can also be nonprofits, like Goodwill Industries, which last year turned donations from 79 million people into revenue that provided job training to 4.2 million people. And by reselling donated clothing, furniture and household goods, they divert an estimated 2 billion pounds from landfills every year.

The idea of social enterprises is catching on in the business world in the U.S. with the emergence of Benefit Corporations, also known as B Corps, which are designed, “to create a new sector of the economy which uses the power of business to solve social and environmental problems.” B Corps are all for-profit companies that have legal structures mandating that the company is designed to work not for maximum shareholder gain, but for the good of society and the environment.

Currently there are more than 500 companies that have become approved B Corps and legislation has been passed in seven states (Maryland, New Jersey, Vermont, Virginia, California, Hawaii and New York) making them official entities. Some are larger corporations, such as Method Products and Patagonia, but many are also smaller companies and business-to-business operations.

B Corps are similar in design to another kind of company called L3Cs. “The L3C is a hybrid between the nonprofit and for-profit models in that it is essentially a profit-generating entity with a socially beneficial mission,” writes Ashley Holmes for GreenBlue. “Like an LLC corporation, L3Cs have the same liability protection and are not tax-exempt; however L3Cs have access to forms of capital that traditional corporations don’t qualify for, all in order to further social and environmental goals. Americans for Community Development describe the L3C as a company that ‘combines the best features of a for-profit LLC with the socially beneficial aspects of a nonprofit… the for-profit with a nonprofit soul.’”

It’s About the Workers

B Corps and L3Cs create a legal foothold for a more sustainable kind of business. But other models get to the heart of the new economy as well and take up the important ideas of ownership and governance. Who gets to make decisions about how our companies are run and who gets to share in the wealth that’s created?

The U.S. helped create a system in post-war Germany for works councils, where workers are elected from companies to help manage how the business is run. “That means the councils help determine core issues, like when to open and close the store or office, who gets what shift, and who gets laid off or fired,” wrote Jeremy Gantz in a review of Thomas Geoghegan’s book Were You Born on the Wrong Continent? How the European Model Can Help You Get a Life. Germany also has co-determined boards, which give workers a voice in governance — companies with more than 2,000 employees have half of their boards composed of workers.

Empowering employees has proved a successful business model elsewhere. The John Lewis Partnership has been around in the UK since 1920 and has grown to over 30 department stores and more than 200 supermarkets, with a revenue of $13.4 billion. The business is employee-owned — all workers get to share the profits and vote for the governing council and company’s board.

“This firm has a written constitution, printed up and publicly available, which states that the company’s purpose is to support ‘the happiness of all its members,’” wrote Kelly. “Now, let me pause and note: this is the only major corporation I’ve found that declares its purpose is to serve employee happiness. This is so, at JLP, not because it boosts returns for shareholders. At the John Lewis Partnership, employee happiness isn’t a path to some other goal. It is the goal.”

Employee-owned companies aren’t just a British anomaly. “In the United States, the National Center for Employee Ownership reports that there are 11,300 employee-owned firms, with some 14 million participants,” Kelly found. “And in Europe, large companies have nearly 10 million employee-owners. Employee ownership has been increasing in such countries as Spain, Poland, France, Denmark, and Sweden.”

Organizations can be run with employee owners or other kinds of members. The London Symphony is owned by the musicians who play in it. Barcelona FC soccer team and the Green Bay Packers football team are community-owned. Mutual insurance companies are owned by policy holders and credit unions are owned by depositors.

Employee-owned businesses and cooperatives have emerged in the green business world with great success, as well. Community-owned forests in Mexico support indigenous people, protect the environment and prevent illegal logging. In Denmark community-owned wind farms have jumpstarted wind energy, supplying 20 percent of country’s power. In Minnesota, Minwind is a farmer-owned wind development company that’s grown to 350 members.

A New Vision

There are different legal and social structures that can help to feed this growing new economy. In Quebec, a “solidarity” or “social economy” was created to help nonprofits and cooperatives, and it gets popular and government support. Spain is home to Mondragon Cooperative Corporation, which is a network of more than 100 cooperatives, employing 100,000 workers. This cooperative model helps support new business ventures. If a firm is struggling in its first few years, interest rates are lowered to help it instead of flagging the business as high risk and then jacking up interest rates like we do here, says Kelly.

Supporting these new ventures is important, but so is holding the companies accountable to their missions. For cooperatives and employee-owned companies, like the John Lewis Partnership, where members get a vote and can elect those who make governing decisions (or run for the positions themselves), there is more power to make sure the company is keeping its word. With privately held businesses, accountability can be much harder. The B Corp certification process is one way that helps get around the blind spots — certified B Corps have to prove themselves to a third-party organization — creating accountability and transparency.

So what can we do in the U.S. to spur the development of socially and ecologically conscious business? “I used to think we needed new federal legislation and corporate chartering and that we could drive change with state and federal law,” Marjorie Kelly said. “And I do think we do need an articulation of what a company ought to be in law.” But we have to go beyond that, she insists.

“A teacher at Schumacher College posed a question: What kind of economy is suited for living inside a living being?” Kelly said. “It’s not an endlessly expanding economy, it’s not an economy that’s designed to serve the few, at the expense of the many, it is an economy that is generative; that is life-serving in its purposes. How do we generate the conditions for life to continue and to thrive?”

The answer will likely be not one thing, but a compilation and diversity of different business models that are consistent with supporting workers, protecting the environment, and serving the broader social good.

Matt Stoller is a fellow at the Roosevelt Institute.  You can follow him on twitter at http://www.twitter.com/matthewstoller

In a hearing last week titled “Examining the Settlement Practices of U.S. Financial Regulators”, various regulators tried to justify their practice of settling with financial firms and not requiring them to admit wrongdoing. In that hearing, Federal Reserve General Counsel Scott Alvarez, stated that only seven of the roughly one thousand enforcement actions taken in the last decade were resolved without consent.

The vast majority of the Federa Reserve’s formal enforcement actions are resolved upon consent, which is fully consistent with the goal of resolving supervisory concerns with bank management quickly and firmly. In crafting enforcement actions that are entered by consent, the Federal Reserve typically sets out summary recitations of the relevant facts in “Whereas” clause provisions; however, like our fellow banking regulators, it has not been our practice to require formal admissions to the misconduct addressed in our enforcement orders given the remedial nature of our enforcement program. Requiring admission of fact and legal conclusions as a condition of entering into a consent action is likely to have a deleterious effect on our supervisory efforts by causing more institutions and individuals to challenge the requested relief in contested administrative proceedings, which typically takes years to reach final resolution, and which could delay implemenattion of necessary corrective action.

In other words, the Federal Reserve will only punish banks who break the rules if those banks consent to punishment.  This attitude is pervasive among all regulators.  Here’s the Office of the Comptroller of the Currency, which regulates among other banks JP Morgan Chase.

Obtaining an institution’s consent to an immediately effective order helps ensure that its problems are addressed at a stage when rehabilitation is still possible, thus helping the bank avoid failure…

The longstanding practice of permitting the bank or individual to neither admit nor deny wrongdoing allows the OCC to get an enforceable order in place at an early stage of the proceeding, and encourages compliance with the enforcement action and immediate correction of any deficiencies that need to be addressed. Because consent orders are made available to the public, requiring an admission of wrongdoing would prolong settlement negotiations and increase the number of respondents who choose to litigate the merits of the action.

Of all the regulators testifying, the Securities and Exchange Commission’s enforcement chief, Robert Khuzami, was the most embarrassing, announcing the SEC would be making a change to its practice of not forcing corporate actors to admit wrongdoing.

In light in the special situation where an SEC civil action may also involve a parallel criminal action, senior officials in the Division of Enforcement recently undertook a review of the “neither-admit-nor-deny” settlement policy. While reaffirming the policy more generally, as a result of this review, the Division, after consulting with the Commission, modified its policy to eliminate “neither-admit-nor-deny” language that could be construed as inconsistent with admissions or findings made in a parallel criminal proceeding.  In other words, it seemed unwarranted for there to be a “neither-admit-nor-deny” provision in those cases where a defendant had already admitted to, or been criminally convicted of, conduct that formed the basis of a parallel civil enforcement proceeding.

In other words, if the company has already admitted guilt in a criminal proceeding, where the evidence required is usually much heavier, then the SEC will ask the company to admit guilt in a civil proceeding.  Khuzami spent most of the hearing talking about how the SEC was getting most of what it wanted out of these settlements, anyway, without an admission of guilt.  This is, of course, nonsense.  I pinged Bill Black about why it’s important to make companies admit wrongdoing, and here’s what he said.

(1)  It demonstrates that what has occurred was a fraud (otherwise they deny it after the fact and insist they were simply being extorted), (2) the plea of guilty (as opposed to nolo contender) can be used by civil plaintiffs (and in administrative enforcement actions) to invoke “collateral estoppel.””  The defendant is estopped from denying their guilt in the civil action.  This makes it immensely easier for victims to recover, (3) offenders, particularly multiple offenders, are treated differently under the laws and rules.  The pleas can be used under RICO to establish a pattern of racketeering, under the sentencing guidelines to secure a tougher prison sentence, and to argue in favor of punitive damages and asset freeze orders.

The hearing was about District Court Judge Jed Rakoff’s refusal to sustain the Citigroup settlement with the SEC.  What was interesting about it, from a political standpoint, is that all three witnesses, including the witness brought in by the Democrats, opposed Rakoff’s move and supported the SEC’s position.  And one of the top Democrats on the committee, Carolyn Maloney, gave a long-winded opening statement in which she basically took the position that forcing an admission of wrongdoing was just too hard.  In other words, many high-level Democratic politicians, for all their gnashing of teeth about the need for regulation, aren’t being truthful.  They don’t want regulation, they want to be seen as wanting regulation.  And the Republicans, while they want to be seen as the party against regulation, are actually quite happy having regulators they can work with, regulators who protect the banks from state or local level action.

The argument over regulation or deregulation, in some sense, misses the point.  We need regulation, obviously.  But we also need strongly principled regulators.  And neither Barack Obama nor Mitt Romney has any appetite for that.

The Egyptian election is today.

Harvard team cracks the code for new drug resistant superbugs Earthsky (h/t fuzzy mouse)

Toxic mortgage bonds flourish as other sectors slump  CNBC

Israel: Iran deal doesn’t rule out possible strike AP

Facebook advised analysts to cut forecasts before float Reuters

Hollande set for EU summit showdown with Merkel Reuters

Housing chief leaves Morgan Stanley to launch buy-to-rent fund Housing Wire

Greenlight’s Einhorn sees housing rebound Reuters

Top Obama Officials, Secretive Process Create ‘Assassination List’ Common Dreams

Germany rules out common euro bonds FT

Tsipras Says Berlin Must Back Down on Austerity  Spiegel

Greek Leftist Reaches Out, to Little Avail  New York Times

Obama’s Big Lie Abigail Field

The Chinese Stimulus Bull Trap Macrobusiness

Bill Targets Fed Conflict Politico

The Final Days of the Office of Thrift Supervision RegBlog

Chicago History Repeats Itself As Cops and Protesters Clash Rolling Stone (h/t martha)

Revenge of the Weeds The Scientist

* * *
D – 108 and counting. *

Lambert here:

Why, man, they did make love to this employment. William Shakespeare, Hamlet, Act V, Scene 2

NATO summit. Bridgeport Raid marks the first time state prosecutors have used the Illinois Terrorism law to prosecute individuals. Never let a crisis go to waste. “Were the three Bridgeport suspects targeted because of a candid video they shot and released the previous week, showing CPD officers searching their car and intimidating them as they entered Chicago”?

Montreal. Protests and Marches on Day 100 of the Quebec student protests (red square movement). “Our streets!” Montreal represents (picture). “A river of red-clad protesters” (remarkable, since Quebec’s national color is blue.)

Bill 78, provincial law suppressing student protest increased civil resistance, as all walks of life join. “Coalition of 140 community groups and unions encouraged people to join the demonstration to denounce the tuition increases and the legislation” (italics mine). “People in central Montreal neighbourhoods appeared on their balconies and in front of their houses to defiantly bang pots and pans in a clanging protest every night at 8 p.m.” (Pots and pans as in Argentina.) “We are all criminals,” crowd chants. Arrêtez-moi, quelqu’un! (Note red squares on the site.) “I’ve lived through a lot of big moments in Quebec history, this one feels like it ranks near the top a middle aged woman says.” “Montreal transit union announces they will no longer drive buses being used to transport police.” “Dramatic video circulating online of police pepper spraying protesters and bar patrons likely didn’t help matters.” Bar patrons?! Good one, SPVM!

Interestingly, Montreal is a leader in one central cultural tendency: Indie music. So I can’t help but think the impact of the Montreal red square movement will leap the border, heading south. For example: A bolt of crimson felt used to make red squares rolled out, red-carpet style, in Washington Square, Manhattan (picture).

For students, the issue is “not tuition, but debt”; “tuition” is the mainstream frame (good overview from reader Francois). So, jubilee?

AR. D primary: Obama 60%, Wolfe [Unknown] 39% (40 of 75 counties reporting). Wolfe web site: “Peace and Prosperity, Not War and Austerity.” Ds: “Mr. Wolfe has been completely non-compliant with Arkansas’s Delegate Selection Plan.”

CA. May 22, U.S. District Court Judge Percy Anderson grants injunction against California’s January deadline for newly-qualifying parties to get on the ballot, for Constitution Party and Justice Party.

CO (Swing State). Microcosm of Obama coalition: “[Y]oung people, minorities, and socially liberal upscale whites, especially suburban women” (Axelrod). “A small group of mothers and children from Erie, CO [presented] a petition [to Encana] signed by 21,000 people demanding that the energy giant forgo a planned natural gas drilling site near elementary schools and an adjoining neighborhood.”

KY. D primary: Obama 58%, Uncommitted 42%.

MI (Swing State). State Court of Appeals rules that the review teams that recommended Emergency Managers for Detroit and Flint were not subject to the Open Meetings Act. The court ruled that they are not a “governing body” so they are exempt from the requirement. Click through and read on ’til you get to “clown show.”

NY. Review of Under the Surface: “[G]as companies try to be nice at the beginning of the process but the rest of their story is pretty completely about power. The regulators may come off even worse… It’s less that they’re personally evil, but more that they largely fail to do their job.” Or not!

OH (Swing state). R Senate passes House Bill 473 to comply with the Great Lakes Compact, puts in place a permitting program and sets withdrawal limits for businesses wishing to draw Ohio water from the lake’s watersheds. D amendments to give plain citizens standing rejected.

PA (Swing state). Fracking backgrounder: I, II, III.

RI. Jamestown Op-Ed on local police: “We do not want to be motivated by fear…. Officer Ted Hebert: “It can be stressful because you want to bring violations back to the station.” Indeed! Outlier, or zeitgeist indicator?

WI (swing state). WI crude oil pipeline would increase flow 40% under Enbridge Inc. proposal. Enbridge’s announcement “reveals their true plans – to bring tar sands to Montreal, Quebec where tar sands can easily be shipped southward into New England” (Trailbreaker). Walker’s Deer Trustee: “Public Game Management Is The Last Bastion Of Communism” (he runs “deer parks” in TX).

Ladies of Negotiable Affection. Not just the SS. DEA. Sen. Susan Collins: “It’s disturbing that we may be uncovering a troubling culture that spans more than one law enforcement agency.” So how about the supervisors and department heads?

Inside Baseball. Hillary veep trial balloons: “If Obama were to attempt this, how would he explain it?” (Her polls.) Anatomy of an Ad: “Basketball.” A “delicate balance….” Oh noez! News apps. Sigh. Why not reporting instead of gimmicks?

Romney. Ann Romney on dressage: “When I was so fatigued that I couldn’t move, the excitement of going to the barn and getting my foot in the stirrup would make me crawl out of bed.” This is good! [Adding, I'm not being ironic!] But here’s a proposition: “Like some other good things, it only remains good if it is not possessed by too many people” (Terry Pratchett, The Fifth Elephant). Does our political class agree, or disagree? There are a great many people in the world who are fatigued, after all. Are they somehow lesser humans than Anne Romney?

Obama. “The Obama campaign says a surrogate’s use of the word “raping” to describe Mitt Romney’s actions at his private-equity firm, Bain Capital, is inappropriate.” Sure, say it then walk it back. Pierce inside OHQ in Chicago’s Prudential Center: “We live garrisoned lives, so why should our politics be any different?” Important, atmospheric post from a keen observer. (I won’t use the word “bunker,” but feel free to think it.)

Booker/Bain flap. Obama team probably figured on a fundraising backlash from some private-equity donors. However, D “lawmakers have noted that Obama’s campaign has not yet committed to transferring money to Democratic congressional campaign committees.” So Booker wasn’t an outlier, but a wannabe factional leader? Then again, “Jonathan Lavine is a long-time Bain Capital executive and co-owner of the Boston Celtics. He is also one of President Obama’s most prolific fundraisers.” Obama: “My job is to take into account everybody, not just some.” Well, for some definition of “everybody.”

* 108 days ’til the Democratic National Convention ends with a feast of oysters, bread, and butter garnished with pepper and vinegar on the floor of the Bank of America Stadium, Charlotte, NC. The number 108 is used in Islam to refer to God.

A la prochaine fois!

* * *

As our political system sputters, a wave of innovative thinking and bold experimentation is quietly sweeping away outmoded economic models. In ‘New Economic Visions’, a special five-part AlterNet series edited by Economics Editor Lynn Parramore in partnership with political economist Gar Alperovitz of the Democracy Collaborative, creative thinkers come together to explore the exciting ideas and projects that are shaping the philosophical and political vision of the movement that could take our economy back.

Just beneath the surface of traditional media attention, something vital has been gathering force and is about to explode into public consciousness. The “New Economy Movement” is a far-ranging coming together of organizations, projects, activists, theorists and ordinary citizens committed to rebuilding the American political-economic system from the ground up.

The broad goal is democratized ownership of the economy for the “99 percent” in an ecologically sustainable and participatory community-building fashion. The name of the game is practical work in the here and now—and a hands-on process that is also informed by big picture theory and in-depth knowledge.

Thousands of real world projects — from solar-powered businesses to worker-owned cooperatives and state-owned banks — are underway across the country. Many are self-consciously understood as attempts to develop working prototypes in state and local “laboratories of democracy” that may be applied at regional and national scale when the right political moment occurs.

The movement includes young and old, “Occupy” people, student activists, and what one older participant describes as thousands of “people in their 60s from the ’60s” rolling up their sleeves to apply some of the lessons of an earlier movement.

Explosion of Energy

A powerful trend of hands-on activity includes a range of economic models that change both ownership and ecological outcomes. Co-ops, for instance, are very much on target—especially those which emphasize participation and green concerns. The Evergreen Cooperatives in a desperately poor, predominantly black neighborhood of Cleveland, Ohio are a leading example. They include a worker-owned solar installation and weatherization co-op; a state-of-the-art, industrial-scale commercial laundry in a LEED-Gold certified building that uses—and therefore has to heat—only around a third of the water of other laundries; and a soon-to-open large scale hydroponic greenhouse capable of producing three million head of lettuce and 300,000 pounds of herbs a year. Hospitals and universities in the area have agreed to use the co-ops’ services, and several cities—including Pittsburgh, Atlanta, Washington, DC and Amarillo, Texas are now exploring similar efforts.

Other models fit into what author Marjorie Kelly calls the “generative economy”–efforts that inherently nurture the community and respect the natural environment. Organic Valley is a cooperative dairy producer in based in Wisconsin with more than $700 million in revenue and nearly 1,700 farmer-owners. Upstream 21 Corporation is a “socially responsible” holding company that purchases and expands sustainable small businesses. Greyston Bakery is a Yonkers, New York “B-Corporation” (a new type of corporation designed to benefit the public) that was initially founded to provide jobs for neighborhood residents. Today, Greystone generates around $6.5 million in annual sales.

Recently, the United Steelworkers union broke modern labor movement tradition and entered into a historic agreement with the Mondragón Cooperative Corporation and the Ohio Employee Ownership Center to help build worker-owned cooperatives in the United States along the lines of a new “union-co-op” model.

The movement is also serious about building on earlier models. More than 130 million Americans, in fact, already belong to one or another form of cooperative—and especially the most widely known form: the credit union. Similarly, there are some 2,000 municipally owned utilities, a number of which are ecological leaders. (Twenty-five percent of American electricity is provided by co-ops and public utilities.) Upwards of 10 million Americans now also work at some 11,000 employee-owned firms (ESOP companies).

More than 200 communities also operate or are establishing community land trusts that take land and housing out of the market and preserve it for the community. And hundreds of “social enterprises” use profits for social or community serving goals. Beyond these efforts, roughly 4,500 Community Development Corporations and 1.5 million non-profit organizations currently operate in every state in the nation.

The movement is also represented by the “Move Your Money” and “bank transfer day” campaigns, widespread efforts to shift millions of dollars from corporate giants like Bank of America to one or another form of democratic or community-benefiting institution. Related to this are other “new banking” strategies. Since 2010, 17 states, for instance, have considered legislation to set up public banks along the lines of the long-standing Bank of North Dakota.

Several cities—including Los Angeles and Kansas City— have passed “responsible banking” ordinances that require banks to reveal their impact on the community and/or require city officials to only do business with banks that are responsive to community needs. Other cities, like San Jose and Portland, are developing efforts to move their money out of Wall Street banks and into other commercial banks, community banks or credit unions. Politicians and activists in San Francisco have taken this a step further and proposed the creation of a publicly owned municipal bank.

There are also a number of innovative non-public, non-co-op banks—including the New Resource Bank in San Francisco, founded in 2006 “with a vision of bringing new resources to sustainable businesses and ultimately creating more sustainable communities.” Similarly, One PacificCoast Bank, an Oakland-based certified community development financial institution, grew out of the desire to “create a sustainable, meaningful community development bank and a supporting nonprofit organization.” And One United Bank—the largest black-owned bank in the country with offices in Los Angeles, Boston and Miami—has financed more than $1 billion in loans, most in low-income neighborhoods.

Ex-JP Morgan managing director John Fullerton has added legitimacy and force to the debate about new directions in finance at the ecologically oriented Capital Institute. And in several parts of the country, alternative currencies have long been used to help local community building—notably “BerkShares” in Great Barrington, Massachusetts, and “Ithaca Hours” in Ithaca, New York.

Active protest efforts are also underway. The Occupy movement, along with many others, has increasingly used direct action in support of new banking directions—and in clear opposition to old. On April 24, 2012 over 1,000 people protested bank practices at the Wells Fargo shareholder meeting in San Francisco. Similar actions, some involving physical “occupations” of bank branches, have been occurring in many parts of the country since the Occupy movement started in 2011. Large-scale demonstrations occurred at the Bank of America’s annual shareholder meeting in May 2012.

What to do about large-scale enterprise in a “new economy” is also on the agenda. A number of advocates, like Boston College professor Charles Derber, contemplate putting worker, consumer, environmental, or community representatives of “stakeholder” groups on corporate boards. Others point to the Alaska Permanent Fund which invests a significant portion of the state’s mineral revenues and returns dividends to citizens as a matter of right. Still others, like David Schweickart and Richard Wolff, propose system-wide change that emphasizes one or another form of worker ownership and management. (In the Schweickart version, smaller firms would be essentially directly managed by workers; large-scale national firms would be nationalized but also managed by workers.) A broad and fast-growing group seeks to end “corporate personhood,” and still others urge a reinvigoration of anti-trust efforts to reduce corporate power. (Breaking up banks deemed too big to fail is one element of this.)

In March 2012, the Left Forum held in New York also heard many calls for a return to nationalization. And even among “Small is Beautiful” followers of the late E. F. Schumacher, a number recall this historic build-from-the-bottom-up advocate’s argument that “[w]hen we come to large-scale enterprises, the idea of private ownership becomes an absurdity.” (Schumacher continuously searched for national models that were as supportive of community values as local forms.)

Theory and Action

A range of new theorists have also increasingly given intellectual muscle to the movement. Some, like Richard Heinberg, stress the radical implications of ending economic growth. Former presidential adviser James Gustav Speth calls for restructuring the entire system as the only way to deal with ecological problems in general and growth in particular. David Korten has offered an agenda for a new economy which stresses small Main Street business and building from the bottom up. (Korten also co-chairs a “New Economy Working Group” with John Cavanagh at the Institute of Policy Studies.) Juliet Schor has proposed a vision of “Plentitude” oriented in significant part around medium-scale high tech industry. My own work on a Pluralist Commonwealth emphasizes a community-building system characterized by a mix of democratized forms of ownership ranging from small co-ops all the way up to public/worker-owned firms where large scale cannot be avoided.

Writers like Herman Daly and David Bollier have also helped establish theoretical foundations for fundamental challenges to endless economic growth, on the one hand, and the need to transcend privatized economics in favor of a “commons” understanding, on the other. The awarding in 2009 of the Nobel Prize to Elinor Ostrom for work on commons-based development underlined recognition at still another level of some of the critical themes of the movement.

Around the country, thinkers are clamoring to meet and discuss new ideas. The New Economy Institute, led primarily by ecologists and ecological economists, hoped to attract a few hundred participants to a gathering to be held at Bard College in June 2012. The event sold out almost two months in advance! An apologetic email went out turning away hundreds who could not be accommodated with the promise of much bigger venue the next year.

And that’s just one example. From April to May 2012, the Social Venture Network held its annual gathering in Stevenson, Washington. The Public Banking Institute gathered in Philadelphia. The National Center for Employee Ownership met in Minneapolis—also to record-breaking attendance. And the Business Alliance for Local Living Economies (BALLE) held a major conference in Grand Rapids, Michigan. Other events planned for 2012 include the Consumer Cooperative Management Association’s meeting in Philadelphia; the U.S. Federation of Worker Cooperatives’ gathering in Boston; a Farmer Cooperatives conference organized by the University of Wisconsin Center for Cooperatives; and meetings of the National Community Land Trust Network and the Bioneers. The American Sustainable Business Council, a network of 100,000 businesses and 300,000 individuals, has been holding ongoing events and activities throughout 2012.

Daunting Challenges

The New Economy Movement is already energetically involved in an extraordinary range of activities, but it faces large-scale, daunting challenges. The first of these derives from the task it has set for itself—nothing less than changing and democratizing the very essence of the American economic system’s institutional structure.

Even viewed as a long-range goal, the movement obviously confronts the enormous entrenched power of an American political economic system dominated by very large banking and corporate interests—and bolstered by a politics heavily dependent on the financial muscle of elites at the top. (One recent calculation is that

400 individuals at the top now own more wealth than the bottom 160 million.)

A second fundamental challenge derives from the increasingly widespread new economy judgment that economic growth must ultimately be reduced, indeed, even possibly ended if the dangers presented by climate change are to be avoided—and if resource and other environmental limits are to be responsibly dealt with.

Complicating all this is the fact that most labor unions—the core institution of the traditional progressive alliance—are committed to growth as absolutely essential (as the economy is now organized) to maintaining jobs.

History dramatizes the implacable power of the existing institutions—until, somehow, that power gives way to the force of social movements. Most of those in the New Economy movement understand the challenge as both immediate and long-term: how to put an end to the most egregious social and economically destructive practices in the near term; how to lay foundations for a possible transformation in the longer term.

And driving the movement’s steady build up, day by day, year by year, is the growing economic and social pain millions of Americans now experience in their own lives—and a sense that something fundamental is wrong. The New Economy Movement speaks to this reality, and just possibly, despite all the obstacles—as with the civil rights, feminist, environmental and so many other earlier historic movements—it, too, will overcome. If so, the integrity of its goals and the practicality of its developmental work may allow it to help establish foundations for the next great progressive era of American history. It is already adding positive vision and practical change to everyday life.

On Sunday, roughly one thousand people from liberal community organizing group National People’s Action showed up at Tim Geithner’s house to ask that he investigate the banks.  ”Are you with the people”, asked these activists.  In response to this exceptionally mild pressure, the administration and New York “Attorney General” Eric Schneiderman have decided that they have no choice but to do a bit more PR around the task force.  They have doubled its size, and they have appointed a coordinator.

Senior administration officials and New York Attorney General Eric Schneiderman said they’re busy behind the scenes doubling their team to more than 100 federal and state financial experts and drawing on staff in 10 U.S. attorneys offices around the country. Matthew Stegman, an assistant U.S. attorney, has been tapped as the group’s lead coordinator, according to three sources familiar with the task force’s work.

The unit has also delivered more than 20 civil subpoenas, collected more than a million documents and deposed many witnesses as it digs through the work of bankers, mortgage brokers, appraisers and others who from about 2004 to 2007 helped millions of Americans buy homes they couldn’t afford at prices that didn’t match their property values — all while bundling the mortgages into securities for sale to investors.

20 civil subpoenas on appraisers and brokers?  How… adorable!  And they finally tapped a coordinator, an assistant US Attorney based in eastern California.  That’s a clear tell, appointing someone far from a place where they could easily coordinate among multiple agencies.

The truth is, there is no task force.  Obama is lying.  Schneiderman is lying.  The Department of Justice simply took various individuals already working on cases involving foreclosure rescue scams and petty mortgage fraud, and designated them a new task force. It’s absurd.  The reality is that Obama and Schneiderman are both working on behalf of financial elites who will fund their campaigns and pay them a lot of money when they are out of office.  That’s the game, as I noted this morning in discussing Bill Clinton’s $80 million payday from banks (among other entities).

If you look at the video above, you’ll see that protesters are asking the question of whether Geithner is with the banks or with the people.  Um, he’s with the banks.  That’s been clear for years now.  The real question is why protesters are even bothering to ask.  And I suspect the answer is that no matter how many times Barack Obama proves himself to be a corrupt and dishonest politician, it’s too painful to concede that those who want social justice in America are truly without representation.

“There was a kind of inflection point during the five-year period between 1997 and 2003 — the late Clinton and/or early Bush administration — when all the rules just went away. You went from a period, a regime, where people did have at least some concern about going to jail, to a point where everything is legal, and derivatives couldn’t be regulated at all and nobody went to jail for anything. And looking back I would say that this period definitely started under Clinton. You absolutely cannot blame this on George W. Bush.” – Charles Ferguson of Inside Job

“I never had any money until I got out of the White House, you know, but I’ve done reasonably well since then.” Bill Clinton

On December 21, 2000, President Bill Clinton signed a bill called the Commodities Futures Modernization Act. This law ensured that derivatives could not be regulated, setting the stage for the financial crisis.  Just two months later, on February 5, 2001, Clinton received  $125,000 from Morgan Stanley, in the form of a payment for a speech Clinton gave for the company in New York City.  A few weeks later, Credit Suisse also hired Clinton for a speech, at a $125,000 speaking fee, also in New York.  It turns out, Bill Clinton could make a lot of money, for not very much work.

Today, Clinton is worth something on the order of $80 million (probably much more, but we don’t really know), and these speeches have become a lucrative and consistent revenue stream for his family. Clinton spends his time offering policy advice, writing books, stumping for political candidates, and running a global foundation.  He’s now a vegan. He makes money from books. But the speaking fee money stream keeps coming in, year after year, in larger and larger amounts.

Most activists and political operatives are under a delusion about American politics, which goes as follows.  Politicians will do *anything* to get reelected, and they will pander, beg, borrow, lie, cheat and steal, just to stay in office.  It’s all about their job.

This is 100% wrong.  The dirty secret of American politics is that, for most politicians, getting elected is just not that important.  What matters is post-election employment.  It’s all about staying in the elite political class, which means being respected in a dense network of corporate-funded think tanks, high-powered law firms, banks, defense contractors, prestigious universities, and corporations.  If you run a campaign based on populist themes, that’s a threat to your post-election employment prospects.  This is why rising Democratic star and Newark Mayor Corey Booker reacted so strongly against criticism of private equity – he’s looking out for a potential client after his political career is over, or perhaps, during interludes between offices.   Running as a vague populist is manageable, as long as you’re lying to voters.  If you actually go after powerful interests while in office, then you better win, because if you don’t, you’ll have basically nowhere to go.  And if you lose, but you were a team player, then you’ll have plenty of money and opportunity.  The most lucrative scenario is to win and be a team player, which is what Bill and Hillary Clinton did.  The Clinton’s are the best at the political game – it’s not a coincidence that deregulation accelerated in the late 1990s, as Clinton and his whole team began thinking about their post-Presidential prospects.

Corruption used to be more overt.  Lyndon Johnson made money while in office, by illicitly garnering lucrative FCC licenses.  It was the first neoliberal President, Jimmy Carter, who began the post-career payoff trend in the Democratic Party.  In 1978, Archer Daniels Midland CEO Dwayne Andreas convinced Carter to back ethanol subsidies.  After Carter lost to Reagan, he faced financial problems, as his peanut warehouse had been mismanaged and was going bankrupt.  AMD stepped in, overpaying for the property.  But Carter wasn’t nearly as skilled as Clinton, because he didn’t stay in the club.

Over the course of the next ten years after his Presidency, Clinton brought in roughly $8-10 million a year in speaking fees.  In 2004, Clinton got $250,000 from Citigroup and $150,000 from Deutsche Bank.  Goldman paid him $300,000 for two speeches, one in Paris.  As the bubble peaked, in 2006, Clinton got $150,000 paydays each from Citigroup (twice), Lehman Brothers, the Mortgage Bankers Association, and the National Association of Realtors.  In 2007, it was Goldman again, twice, Lehman, Citigroup, and Merrill Lynch.  He didn’t just reap speaking fee cash from the financial services sector – corporate titans like Oracle and outsourcing specialist Cisco paid up, as did many Israel-focused groups, Middle Eastern interests, and universities.  Does this explain the finance-friendly, oil-friendly and Israel First-friendly policies pursued by the State Department under Hillary Clinton?  Who knows?  But if you could legally deliver millions in cash to the husband of a high-level political official, it wouldn’t hurt your policy goals.

Speaking fee money isn’t just money, it is easy money.  In one appearance, for one hour, Clinton can make $125,000 to $500,000.  At an hourly rate, that’s between $250 million to $1 billion annually.  It isn’t the case that Clinton is a billionaire, but it is the case that Clinton can, whenever he wants, make money as quickly and as easily as a billionaire.  He is awash in cash, and cash is useful.  Cash finances his lifestyle.  Cash helped backstop his wife’s Presidential campaign when it was on the ropes.

And these speaking fees aren’t the only money Clinton got, it’s just the easiest cash to find because of disclosure laws.  Apparently, Clinton’s firm apparently had a paid $100k+ a month consulting relationship with MF Global, and Clinton and Tony Blair have teamed up to help hedge funds raise money.  His daughter worked for a giant hedge fund and political ally (Avenue Capital).  And Clinton has unusual relationships with billionaires and Dubai-based investors.

Bill and Hillary Clinton are the best at what they do, but they aren’t the only ones who do it.  In fact, this is what politics is increasingly about, not elections, but staying in the club.  Erskine Bowles, former White House Chief of Staff, lost two Senate elections.  But he’s on the board of Facebook and Morgan Stanley, as well as authoring the highly influential Simpson-Bowles plan to gut Social Security and Medicare.  Tom Daschle, who lost a Senate race in 2004, is a millionaire who in large part crafted Obama’s health care plan.  Former Senator Judd Gregg is now at Goldman Sachs.  Current Chicago Mayor Rahm Emanuel made $12 million in between his stint at the Clinton White House which ended in 2000 and his election to Congress in 2002.  Former Congressman Harold Ford, now at Morgan Stanley, is routinely on TV making political claims.  Larry Summers is on the board of the high-flying start-up Square.  Meanwhile, Russ Feingold, a Senator who did go after Wall Street, is a professor in the Midwest.  Eliot Spitzer is a struggling TV host and writer.

In other words, Barack Obama and his franchise are emulating the Clinton’s, and are speaking not to voters, but to potential post-election patrons.  That’s what their policy goals are organized around.  So when you hear someone talking about how politicians just want to be reelected, roll your eyes.  When you hear an argument about the best message or policy framework to use for reelection, stop listening.  That’s not what politicians really care about.  Elections in many ways are just like regular season games in basketball – they are worth winning, but it’s not worth risking an injury.  The reason Obama won’t prosecute bankers, or run anything but a very mild sort of populism, is because he’s not really talking to voters.  He just wants to be slightly more appealing than Romney.  He’s really talking to the people who made Bill and Hillary Clinton a very wealthy couple, his future prospective clients.  We don’t call it bribery, but that’s what it is.  Bill Clinton made a lot of money when he signed the bill deregulating derivatives and repealed Glass-Steagall.  The payout just came later, in the form of speaking fees from elite banks and their allies.

Ironically, Clinton has come to express regret about deregulating derivatives.  He has not given the money back.

This is by Yves Smith, cross-posted from the New York Times Room for Debate…

Preventing blow-ups like the JPMorgan “hedge” that bears no resemblance to any known hedge isn’t difficult. What makes preventing it difficult is that banks that exist only by virtue of state-granted charters — and more recently, huge transfers from the public — have persuaded public officials and regulators that they have a God-granted right not just to high levels of profit but also high levels of employee and executive compensation.

Banks enjoy state support because they provide essential services, like a payments system and a repository for deposits. One proposal to limit them to these vital services is “narrow banking,” or requiring that deposits be invested in only safe and liquid instruments. This idea was put forward by Irving Fisher and Henry Simons in the 1930s, and has been championed by the right (Milton Friedman), the left (James Tobin) and banking experts (Lowell Bryan of McKinsey).

A less radical idea would be to eliminate credit default swaps over time (they are too embedded in current practice to ban them; banks need to be weaned off them). There are no socially valuable uses for the product. Contrary to defenders’ claims, they aren’t a good way to short bonds (not only does it deal with only one attribute of bond risk, it does so badly: payouts in actual credit events on credit default swaps vary considerably, and are generally less than payouts to holders of real bonds). These swaps were the driver of the crisis. They were the mechanism that allowed real economy exposures to risky subprime bonds to be multiplied well beyond the number of actual borrowers and thus cause vastly more damage.

Another route would be to implement the Volcker Rule as Paul Volcker envisaged, meaning without the portfolio hedging exemption that JPMorgan relied on. Or officials could enforce Sarbanes Oxley, which has the chief executive officer certify the adequacy of internal controls, which for a major financial firm includes risk controls. Had any chief executives been targeted for Sarbanes Oxley violations for the massive risk management failures during the financial crisis, it’s pretty likely thatJamie Dimon, head of JPMorgan, would have thought twice before giving the chief investment officer both the mandate and the rope to enter into risky trades.

Maybe it’s time to recognize that these firms are too big and in too many complex businesses to be managed. Jamie Dimon was touted as a star who could supervise a sprawling firm running huge risks, and he fell short because no one can do the job adequately. A less disaster-prone financial system requires more simplicity and redundancy. Re-instituting Glass-Steagall or other variants on the narrow banking theme isn’t a full solution, but it would make for a good start.

Update by Yves: I’m not happy with the headline the Times put on this piece. The article did not say implementing Glass Steagall would have stopped Dimon’s losses but was an example of the sort of step that could help make the financial system less crash prone.

Cory Booker’s Political Career Guided By Top Wall St Donors To Romney’s Super PAC, Republic Report

In Spain, Jobless Find a Refuge Off the Books, New York Times (h/t Martha)

J.P. Morgan Suspends Share Buyback Wall Street Journal

Wall Street Should Stop Trying to Gut Financial Reform, by Rep. Maxine Waters in The Hill.  Also, zombies should stop eating brains.  And scorpions should stop stinging frogs.  And drug addicts should just say no.  And yada yada.

Railroad worker crushed by roll of newsprint at Inquirer printing plant, Philadelpha Inquirer

Europe is driving full-tilt, foot on the pedal, into a brick wall, by conservative London Mayor Boris Johnson

Not so organic – USDA accused of conspiracy with agribusiness insiders RT

The Obama Administration and Chutzpah Info/Law… shocker that Obama lied about his transparency agenda.

A Different Take on Facebook, PIMCO CEO Mohamed El Erian… Hey are you bored running a trillion plus dollar bond fund or something?

JPMorgan Counterparty Platt Says Bank’s Loss May Widen Bloomberg

Double trouble at JP Morgan: trader’s losses could exceed $7bn The Independent

Secret Central Bank Aid Props Up Greek Banks CNBC

LPS: Mortgage delinquencies increased slightly in April Calculated Risk (Jaws theme…)

Facebook 11% Drop Means Morgan Stanley Gets Blame Bloomberg

* * *

D – 109 and counting. *

Lambert here:

Chaos is defined not so much by its disorder as by the infinite speed with which every form taking shape in it vanishes. – Gilles DeLeuze and Felix Guattari, What Is Philosophy?

NATO summit. Obama: “And the Chicago police — Chicago’s finest did a great job under, you know, some significant pressure and a lot of scrutiny.” “My Kind of Town”: image (via). “‘Get the old lady to the back!’ someone yells (:40). ‘She wants to be in the front!’ comes the reply.” What we need! “I am returning my medal today because I want to live by my conscience, rather than be a prisoner of it.” And what we need, too.

Our famously free press propagates the CPD’s crowd estimate: 2,000. Pictures say that’s low. (Interestingly, CPD estimate derived from surveillance cameras. If the estimate — incredible as this may seem — is actually honest, that means camera coverage is lousy.) OccupyChicago: 3,000- 5,000. The Guardian cites the density-based Jacobs multiplier, then splits the difference between CPD and organizers: 3,500 – 6000. The Guardian’s first commenter was there, and does the multiplication: 7,600 – 13,800.

Montreal. Photos: “Tuitiion [sic] fee protests – May 21.” If “tuition fee protests” is the frame, that’s a loser. However, Gazoo columnist Peggy Curran uses “red square” movement, which is much fuller of win, red squares being a wearable, non-mask article of clothing, a color (as in “color revolution”), and a useful symbolic geometry. It also has an unmistakable (if virtual) Occupy connotation, since Occupations tend to take place in city squares. Squares are also fractal. “When Arcade Fire [Yo! Professor!] backed Mick Jagger for three songs on SNL…, those red patches the band were wearing weren’t fashion statements, but very pointed acts of protest.” (Gotta say I prefer this icon to a 60s-style clenched fist — even if Otpor did use it.) “Yesterday’s unrest reached a climax with a blaze of [half-a-dozen] plastic traffic cones and construction materials lit Saturday during a melee on a busy downtown street.” Teh stupid, so but and Timothy McVeigh (or, for that matter, clinic violence) we’re not talking here. Today: Students march peacefully in holiday protest. Holiday? Probably no police over-time, so there weren’t any agent provocateurs to set traffic cones on fire or demolish the pavement. Remember: Always check their shoes!

1300 arrests over the life of the red square movement so far (United States: 7,223 for Occupy).

I’m just one of the tourists: “We didn’t actually know what was going on really at the start because…we didn’t actually understand the banners and stuff.”

CA-2. Congressional Candidate Andy Caffrey: “If I have to do it, I’ll smoke a joint on the Capitol steps and get arrested to draw national attention to what’s going on.” Obama’s lawyerly wording on marijuana. As ever: “I know that you believe you understand what you hope I said, but I’m not sure you realize that what you heard is not what I meant.”

OH (Swing state). During the referendum, Romney came out in favor of SB5. Intriguingly, “On the same day last November when 62 percent of voters stood up for collective bargaining [and voted in SB-5], an even larger number—66 percent—backed a referendum item that was widely seen as a symbolic rebuke to Obamacare. ” Well, there’s no reason why support for unions should translate into support for a mandate to purchase a defective product (private health insurance) with money people don’t have.

MI (Swing State). “Green” Mayor’s Parkland-for-Train station scheme underwritten in part by slush fund. A D, if that makes a difference at this point.

MV (Swing state). Kirtland Air Force Base jet fuel spill 3 times larger at 24,000,000 gallons?

WI (swing state). “For fraud to equal “one or two points” in that election [as Walker says] you’d have needed 30,000-60,000 phony ballots. The proven fraud actually amounted to 0.0007 percent of all votes.” I wish the Rs would stop lying about this. Peirce: “If the Democrats can’t recall a governor of Wisconsin who breaks unions, wrecks public education, bleeds the state white on jobs and messes around with deer-hunting [!!], they’re more hopeless than I thought.” Has L’il Debbie kicked in that $500K yet?

Inside Baseball. “And those on the political extremes, especially those on the far right, tend to have the most simple speech patterns.” Indubitably! Joshua Green proffers shop-worn filibuster alibi: “Had the filibuster not applied [from 2009 on], the United States would have a market-based system to control carbon emissions … a public option … [Women] would have broader legal recourse against their employers. Billionaires would not be able to manipulate the political system from behind a veil of anonymity.” Well, when Obama had a mandate, and the Ds had control of the Senate, they could have used the “nuclear option” to abolish the filibuster with a simple majority vote. So that means Obama didn’t want any of those things. Right, Joshua? “Indeed, the irony of the [winger] race war narrative’s latest flare-up is that it comes at a time when national crime rates have reached historic lows — including reported hate crimes against whites.” Auctioning a vial of Reagan’s blood: “I was a real fan of Reaganomics and felt that Pres. Reagan himself would rather see me sell it rather than donating it.”

Elizabeth Warren. Pierce on the Cherokee flap: “There is something grim and nasty at work here that she cannot be too nice to see. And there is something grim and nasty at work here that local Democrats ought to recognize before they start sniping at her, and something national Democrats ought to recognize as a force to be defeated. Yeah, right.”

Green Party. Jill Stein: “[S]uch a thing as ending unemployment would never occur to Washington politicians because their corporate backers depend on the threat of unemployment to keep wages down.” Conor Friedersdorf’s response, in toto: “It’s a deeply confused claim.” Which is why he’s got a job, I guess.

Libertarian Party. LP of Delaware applauds Ron Paul, endorses Green Party candidate for Senate.

Robama vs. Obomney. “Jobs!!” and WaPo’s Fact Checker: “There’s no doubt that Bush owns an unimpressive record on job creation. But Obama comes in either last, second-to-last or in the bottom half among presidents since the Great Depression, depending on which way you look at the number.” “White House counterterror chief John Brennan has seized the lead in guiding the debate on which terror leaders will be targeted for drone attacks or raids.” Of course, Brennan served Bush, he’s pro-torture, and he lies about drones. Meaning he’s well within Obama’s comfort zone. And Pierce, because the man invects with a passion: “Zombie-eyed granny starver.” No, he doesn’t mean Obama.

Romney. “Romney will need to figure out how closely he aligns himself with George W. Bush and other members of his administration, including Mr. Cheney. … [T]he campaign was downright buoyant to announce the Cheney fund-raiser.” So Voldemort will get to speak at the RNC after all?

Obama. Fighting Romney on economy “[I]s what this campaign is going to be about.”

Booker on Bain. The Booker quote: “This kind of stuff is nauseating to me on both sides. It’s nauseating to the American public. Enough is enough. Stop attacking private equity [Bain], stop attacking Jeremiah Wright.” (This is a “Kinsley gaffe,” wherein Booker uttered an unspeakable truth about who owns him, and who owns the Ds.) Anna Marie Cox: “This is a little like saying vampires have done a lot to support the coffin industry; it’s not wrong but it misses the point.” So why’d Booker say it? “[Bain] were among his earliest and most generous backers.” Axelrod slaps Booker down: “In this particular instance, he was just wrong. There were specific instances here that speak to an economic theory that isn’t the right theory for the country.” What, neo-liberalism? RNC launches ‘I Stand With Cory’ petition. Cheeky! Booker to Maddow: “I’m very upset that I’m being used by the GOP.” Well, Corey, if you didn’t want to go to Milwaukee, why did you get on the train?

* 109 days ’til the Democratic National Convention ends with a chocolate-covered insect eating contest on the floor of the Bank of America Stadium, Charlotte, NC. Yes, JFK’s boat.

* * *

Antidote du jour:

Matt Stoller is a fellow at the Roosevelt Institute.  You can follow him on twitter at http://www.twitter.com/matthewstoller

Austerity doesn’t just lead to unemployment and misery.  If it goes on long enough, it will inevitably lead to the emergence of “swamp thing” extremists into positions of power.  Take the situation in Greece, a country which until recently was a wealthy Western democracy with a relatively stable political system.  After five years of depression, voters in Greece just fired their equivalent of the Democrats and Republicans, and replaced them with anti-bailout groups, mostly on the left (Syriza and Communists), but also with the neo-Nazi group Golden Dawn on the right.

This should be a wake-up call to political elites globally, because Greece could simply be the start of a trend of collapsing centrist politics and the rise of dangerous political actors.  7% of Greeks, including a substantial number of the police, voted for a fascist anti-immigrant party whose platform is a mixture of economic populism and xenophobic racist lunacy.  21 Golden Dawn members were elected to Parliament.  Golden Dawn political machine includes roving gangs of thugs that routinely beat up immigrants, and its political platform includes placing mines on the border between Greece and Turkey to prevent immigrants from coming into the country.

This is what austerity produces – extremism.  Fortunately, Golden Dawn only got 7% of the vote, and only 21 seats in Parliament.  And mostly, the Greeks voted for parties on the left who reject austerity.  Greeks don’t want neo-Nazi groups running the country, they just don’t want corrupt bankers running it either.  The man who garnered the most power from the election, leftist Alexis Tsipras of Syriza, has called the situation in Greece a “humanitarian crisis”.  That’s just reality.  Greece has a large, untouchable patronage system, a big defense sector, wealthy who escape from taxation – and yet international bankers are demanding radical cuts in wages, pensions, and jobs for honest workers.

So people voted for the political parties who rejected the banks.  Greek leftist leader Alexis Tsipras is proposing to actually deal with the country’s problems head-on.

By not paying its debts, the country would have enough cash to pay its workers and retirees, he said. He also proposes cuts in defense spending, cracking down on waste and corruption, and tackling tax evasion by the rich.

“Whatever we do, things will be difficult. But it will also be difficult at the same time for all of Europe because the euro will collapse” if Greece’s funding is cut off, said Mr. Tsipras. Both sides should step back “before we reach that point,” he said, and find a “European solution.”

…

Mr. Tsipras, an engineer by training, recommends a stimulus package to boost the Greek economy and has called for tearing up the country’s existing austerity-for-loans program. He has suggested scrapping plans to lay off 150,000 public-sector workers by 2015, and repealing recent measures to push down private-sector wages. He favors nationalizing the banking system so as to better direct lending policies, and speaks favorably of Franklin Delano Roosevelt’s Depression-era New Deal program and President Barack Obama’s stimulus package—something Mr. Tsipras said is lacking in Europe.

Given the dire situation in the country, this is a sensible, even moderate, set of proposals.  And in fact, all of the anti-bailout parties, from Golden Dawn to Independent Greeks (right-wing but not fascist) to Syriza, share the goal of having the Greek state take control of its political order and move on a populist economic platform.

It is telling that Kammenos, despite his origins on the right, praised the economic program of SYRIZA in the run-up to the election—a program which calls for bank nationalization, a repeal of wage and pension cuts and of new, more flexible labor laws undermining collective bargaining. In fact, Golden Dawn’s anti-immigrant venom aside, its economic proposals are often hard to distinguish from those of SYRIZA and Independent Greeks.

The Greeks think that the system is rigged against them, which it is.  It was German and French banks who lent Greece huge sums of money, and Goldman Sachs that helped the government lie about its debt load.  Bailing out Greece is really just bailing out these German and French banks.  Even as Germans demand cuts in social spending, German leader Angela Merkel isn’t calling for the Greeks to cut defense spending, because Germany sells Greece lots of weapons.

That said, a Greek exit of the Euro would be chaotic – devaluations aren’t pleasant, and this one would be worse because there isn’t a currency in place to devalue.  But endless austerity is a hopeless path.  With the state collapsing (that’s what the rise of Golden Dawn vigilantism is really about), the prospects are pretty frightening either way.

Hopefully, the European elites will decide to give Tsipras a chance to govern.  At this point, it looks like Greece will muddle along, inside the Euro, with a better deal than it has right now, in a still unsustainable though less dire situation.  In the medium term, a stronger fiscal union or a Eurozone dissolution will happen.  But if the European elites do what they can to kneecap a truly non-austerity based governance posture, Golden Dawn is waiting in the wings.  Greeks are voting for political parties that are reasonable and anti-bailout, because they think that they are getting a raw deal.  But if it becomes clear that the choice is between an endless and hopeless humanitarian crisis, where the rich do fine and everyone else suffers, and roving gangs of neo-Nazis who promise to restore Greece to greatness while giving the finger to bankers, well, we’ve seen that movie before.

By Marshall Auerback, a hedge fund manager and portfolio strategist. Cross posted from New Economic Perspectives

Given the German electorate’s long standing aversion to “fiscal profligacy” and soft currency economics (said to lead inexorably to Weimar style hyperinflation), one wonders why on earth Germany actually acceded to a “big and broad” European Monetary Union which included countries such as Greece, Portugal, Spain and Italy.  Clearly, this can be better understood by viewing the country through the prism of the Three Germanys, which we’ve discussed before:Germany 1 is the Germany of the Bundesbank: the segment of the country which to this day retains huge phobias about the recurrence of Weimar-style inflation, and an almost theological belief in sound money and a corresponding hatred of inflation. It is the Germany of “sound finances” and “monetary discipline”. In many respects, these Germans are Austrian School style economists to the core. In their heart of hearts, many would probably love to be back on an international gold standard system.

Germany 2 is the internationalist wing of the country, led by Helmut Kohl. Kohl and his successors are probably the foremost exponents of the idea that Europe can rid itself of the “German problem” once and for all if Germany firmly binds itself to a “United States of Europe” and continues to construct institutions that broadly move the EU in this direction. It is questionable whether this vision has survived significantly beyond the tenure of Helmut Kohl himself.

One can see the inherent tension between these two Germanys. Bundesbank Germany would never allow vague, internationalist aspirations to dilute the goal of sound money, low inflation and fiscal discipline. One could envisage most looking askance at the Treaty of Maastricht and the corresponding threats to these ideals.

Which brings us to the key third variable in German politics: Germany 3, Industrial Germany, the Germany of Siemens, Daimler, Volkswagen, the great steel and chemical companies, the capital goods manufacturers. Clearly, these companies benefited substantially from the economic stewardship provided by institutions such as the Bundesbank, along with the broad adherence to Erhard’s social market economy. But they also recognized the benefits entailed by a completely open and integrated European market (still the largest component of their sales). Currency union, even if it meant admission of fiscal profligates such as Italy and Spain, also minimized the threat of competitive currency devaluation, given the implementation of a European wide euro (as opposed to the narrow currency zone which represented the limits of the Bundesbank’s internationalism). Industrial Germany rightly perceived that a broadly based euro zone which incorporated chronic currency devaluers such as Italy, permanently entrenched their competitive advantage. And with the support of this key component of German society, Chancellor Kohl, was able to embark on the huge institutional transformation embodied in the Maastricht Treaty.

One could argue that “Germany #3″ made a bad bet, but is this really so?

A few months ago it appeared that the German sentiment data taken in aggregate showed that German domestic demand was turning up and the risk of a German recession was behind us. This was corroborated by truly powerful increases in total German employment, which now stands at a 20 year low.

To be sure, since then we received some weak data on industrial production and real retail sales. This coupled with the big down-tick in the manufacturing PMI rekindled recession fears.

But the previous worrying data about the German economy appears to have been removed with the latest round of positive data with upward revisions. We now have much better data on factory orders and real retail sales. A few weeks ago Germany’s March industrial production was released. It showed industrial production rising a large 2.8% in March; additionally, there was more than a one percentage point upward revision to prior months.

Taking the constellation of German economic data in aggregate – real retail sales, factory orders, industrial production, total employment and the services PMI (which remains well above 50) – it is unsurprising that Germany’s preliminary 1st quarter GDP subsequently came in at 2%.Yes, the periphery remains a disaster, but Germany is still growing. It is also the case that the slowdown in Europe could eventually reach the core and China’s worrying loss of economic momentum and dent Germany’s growth momentum in the future.  But for now, there is no significant fiscal restriction to speak of (unlike, say, Spain or Greece), domestic interest rates are super low, employment has been expanding rapidly. In short, it appears that, having absorbed a trade related and sentiment shock emanating from the European periphery, a domestic demand led expansion has probably resumed.

The point is not to celebrate the German economic model per se, but merely to highlight that for all of the gnashing of teeth and whining about “the cost” to Berlin of perpetually “bailing out” the “profligate periphery”, the reality is that Germany has done exceptionally well out of the euro zone and continues to do so.

“Germany #3″ in effect placed the right bet: by locking in chronic devaluers to a currency union (thereby precluding the traditional expedient of currency devaluation to regain export competitiveness), Berlin in effect entrenched Germany’s mercantilist model and consolidated the country’s dominance as the trade superpower of Europe. The benefits are self-evident, given the contrasting data between Germany and the PIIGS.

Of course, one can already hear Germany’s apologists proclaiming that this success is the product of taking “hard decisions” in the earlier part of this century, in particular, the so-called “Hartz reforms”. The Germans have always been obsessed with export competitiveness. In the period before the euro, they would devalue the Deutschmark so that they could increase the sales of their products to their neighbors. Once the Germans lost control of the exchange rate by signing up to the Economic and Monetary Union (EMU), they couldn’t perform this trick anymore. They had to manipulate other “cost” variables in order to sell goods cheaply. So starting in 2002, they focused on wage suppression and cutting into the social safety net for workers through something called the Hartz package of “welfare reforms,” named after Peter Hartz, a key executive from German car manufacturer Volkswagen.

Unlike the American Henry Ford, who created good, well-paying jobs because he knew that having a secure middle class was essential to having a market for his cars, Peter Hartz regarded the relationship between wages and the economy very differently. In his view, squeezing workers was the way to keep a country “competitive”, which is precisely what his “reforms” did. And it had disastrous consequences for the rest of the eurozone – (See here - http://www.slideshare.net/mobile/MitchGreen/how-germanys-labor-market-reforms-crushed-the-french-and-the-piigs)

[As an aside, the other inconvenient little truth is that the much vaunted Hartz "reforms" themselves are really devoid of any kind of democratic legitimacy. It was subsequently discovered that Peter Hartz himself had only secured the acquiescence of Germany's workers by sanctioning illegal payments to Germany's powerful works council (see here - http://news.bbc.co.uk/2/hi/business/6299597.stm) for which he was given a 2 year suspended sentence.]

The Hartz measures have been extremely far reaching in terms of the labor market policy that had been stable for several decades. Bill Mitchell and Ricardo Welters noted (http://e1.newcastle.edu.au/coffee/pubs/wp/2007/07-16.pdf) that while the reforms appeared to be successful in early 2003, with lots of jobs created, there was a downside: “From the bottom of the cycle, in mid-2003, employment grew much less quickly than in previous upturns. And much of the rise took the form of ‘mini jobs’ – part-time posts paying no more than €400 a month, regardless of hours.”As Mitchell and Welters pointed out, the “reforms” actually decreased regular employment. Workers got stuck with so-called “mini/midi” jobs – a new form of low wage part-time employment. Such jobs were hailed as “flexible” and “efficient” by their champions, while detractors such as Mitchell noted that they were part-time jobs characterized by heightened insecurity, lower wages, and poorer working conditions.

More to the point, Germany benefited from “first mover advantage”: they initiated these reforms in the context of a growing global economy. Demanding such wage repression in the context of a global recession makes such “reform” virtually impossible, to say nothing of the fallacy of composition problems, when all other countries seek to deflate their wages in order to gain the elusive export competitiveness.

All of this is now coming under threat, given the renewed perturbations afflicting the euro zone. Greece’s inconvenient outbreak of democracy has created a new wild card: a new Greek party, Syriza, head of the coalition of the radical left, has vaulted to prominence. Its new leader Alexis Tsipras, a previously obscure left-wing member of Parliament. led his grouping to second place in the recent national elections with the promise of repudiating the loan agreement Greece’s previous leaders signed in February.

From the birthplace of democracy, then, comes this horrible outbreak of genuine democracy. Naturally, in typical Brussels fashion, eurocrats are decrying this development. They are once again whipping up the “Greece to exit” frenzy and wheeling out all manner of mainstream economists who are issuing the most strident warnings that Greece needs the Euro and will walk the plank if it exits. Their earnest hope is that the new elections will result in the emergence of a new Greek Quisling, who will happily implement the Troika’s incredibly destructive austerity package, reforms which provide no hope of recovery for Athens or the rest of the euro zone.  By contrast, Syriza represents a real threat to the current thrust of fiscal policy.

Alexis Tsipras is a good man. At least he’s a very good poker player. He hasn’t yet capitulated to this massive orchestrated pressure and made it clear up front in the Wall Street Journal Germany that there are options for the Greek people which the Germans won’t like: He is, in short, the first Greek politician to use the his country’s leverage over creditors.

Rule #1 in negotiations: You must demonstrate to your counter-party that you have credible options to walk away from the table/deal. He has, amongst other things, simply pointed out that the Greek state is quite close to a primary surplus. All that is needed are a few small reductions wages and pensions, and the Greek public sector could finance itself for the foreseeable future. Were it to exit the euro, all of a sudden Athens’s problem becomes the eurozone’s problem.

Yes, Greece only constitutes a mere 2% of Europe’s GDP. And yes, the eurozone authorities are said to be “making preparations” in the event of a “Grexit”. But then again, Lehman was a tiny investment bank which almost brought down the entire global banking system when it was allowed to go bust. And recall that Lehman’s bankruptcy occurred several months after the rescue of Bear Stearns. In theory, the authorities had ample time to construct back-stops to prepare for this eventuality, as is now being said in regard to Greece’s potential exit from the euro zone.

Would a firewall today be any more effective in “cauterising” the Greek wound and preventing the contagion from extending to Portugal, Spain, Italy and then to the core? Tsipras clearly understands this, and he could well be Greece’s next Prime Minister. It would entail massive firepower from the ECB, a “bazooka” that the ECB has hitherto been loath to supply.

In the meantime, the Greek election result has resulted in an acceleration of massive bank runs within the eurozone. There has been a steady flight of deposit funds from the PIIGS into German and other northern European banks (and perhaps to some banks outside Europe) for some time now. Data on the Target 2 financing of these deposit runs by the recipient countries apparently accelerated in the first four months of this year prior to the French and Greek elections. A recent statement by the Greek authorities suggests that the deposit run from Greek banks has accelerated, perhaps hugely, since the Greek elections. This has been denied, but under such circumstances one should never believe official denials.

Indeed, late last week, El Mundo reported that depositors had withdrawn one billion euros from the Spanish bank Bankia since its takeover by the government on May 9th. The odds are that this deposit run may have as much to do – or more to do – with a flight out of Spanish bank deposits in general that it has to do with any fears about holding deposits in a bank taken over by the Spanish government. In other words, this may be a sign that a deposit run caused by fears about euro exit has now spread in a significant way to Spain. Of course, the authorities are denying such, but under such circumstances one can never believe such denials.

Paradoxically, the very existence of a monetary union facilitates bank runs. If you’re a depositor at a Spanish bank in Barcelona, there is nothing stopping you from withdrawing that money and re-depositing it in at a local German bank down the street. There are no capital controls or border controls in effect. With no exchange rate risk! Bank depositors in all of the periphery countries now fear they will wind up with the old currencies which will be worth much less than the euro. These deposit funds go into German and other core European banks who then recycle the funds through the ECB and the national central banks back into the banks of the PIIGS that are experiencing the deposit runs.

Apparently this deposit run and its reflux back into the imperiled banks on the periphery accelerated in the early months of this year before the French and Greek elections. It apparently has accelerated further since.  In effect, the System of European Central Banks is involved in an ever growing and massive bailout exercise which they are not publicly acknowledging.

The German response so far? “Oops. This guy is blackmailing us. What shall we do?” Because Germany as a creditor nation faces huge losses if the entire banking system starts to come under pressure, to say nothing of the end of their vaunted “wirtschaftwunder” as the entire eurozone implodes. Greece, by contrast, has already experienced 5 years of unremitting economic austerity. The country has been virtually reduced to the state of a barter economy. What has it got to lose at this juncture by refusing to roll over to the Troika?

To be sure, the Germans might well say, “Enough is enough” and leave the euro zone (which would probably destroy the currency union). The likely result of a German exit would be a huge surge in the value of the newly reconstituted DM. In effect, then, everybody would devalue against Berlin, shifting the onus for fiscal reflation on to the most vociferous opponent of fiscal activism. Germany would likely have to bail out its banks (particularly the Landesbanken). This might well be more politically palatable than, say, bailing out the Greek banks (at least from the perspective of the German populace), but it would not be without significant short term economic cost for Berlin. And in the interim, the likely currency shock would put an immediate halt to its export machine, as the built-in conferred by the euro zone would be dissipated in the event that Germany reverts to a newly reconstituted DM.

By accounting identity, a fall in Germany’s external surplus would mean a large increase in the budget deficit (unless the private sector begins to expand rapidly, which is doubtful under the scenario described above), so Germany will find itself experiencing much larger budget deficits. It will become a ‘profligate’ if it wishes to mitigate the effects of a collapse in its current account surplus. Quite a reversal in fortune.

So who holds the gun now?

Matt Stoller is a fellow at the Roosevelt Institute.  You can follow him on twitter at http://www.twitter.com/matthewstoller

The Lehman Brothers bankruptcy is perceived of as the 9/11 of the financial crisis, the moment where liquidity problems that had been bubbling since late 2006 turned into a full-fledged panic and then economic collapse. The question American elites are pondering is, will a Eurozone break-up, or even Greece leaving the Euro, cause another such moment? Ben Bernanke has argued that Greece leaving wouldn’t, since domestic banks have reduced their exposure to problem countries. Paul Krugman agrees, and in a recent interview on Bloomberg, laid out his case.

Question: How interdependent right now, how linked is Europe to the United States?

Paul Krugman: The sheer, the trade linkage, the thing people think well we export to Europe, that’s a lot smaller than people imagine. We only sell 2% of our GDP to Europe, so even a serious European recession, it hurts, obviously, it’s not a good thing, but it’s not that big a deal. The real concern for this side of the Atlantic is financial. Do we see a blowup in European financial markets that spreads worldwide the way ours did? And you know it’s, maybe I ate the wrong thing for breakfast or something, but I’m fairly optimistic that that won’t happen…. Between Mario Draghi and Ben Bernanke, that they can throw enough money at the banking system to keep this thing from being a financial meltdown. I can believe that and believe at the same time that Greece is going to be out of the Euro fairly soon and that there’s a risk that the whole Euro will break up. I don’t think we’re looking at a Lehman style event, which means the impact on the US economy will be fairly limited. Famous last words, knock on wood.

Yet, a key dynamic in the Lehman situation was ignorance – no one quite knew how bad the problem really was.  Similarly, no one knows how bad this Eurozone problem will get, or what the linkages are to American banks. It’s possible the linkages are very very significant. Remember that Bloomberg story from last November, in which JP Morgan and Goldman disclosed to shareholders they have sold credit protection on $5 trillion of global debt? They wouldn’t disclose many details, but that’s a fairly large amount of credit protection.

A few days after Krugman’s Bloomberg interview, we began to learn a bit more about what JP Morgan is betting on, that led to a few billion dollars in losses (so far). And it has a direct bearing on the transmission of Eurozone problems to the US.

The unit, the chief investment office (CIO), has been the biggest buyer of European mortgage-backed bonds and other complex debt securities such as collateralised loan obligations in all markets for three years, more than a dozen senior traders and credit experts have told the Financial Times.

So, apparently, aside from trillions in sold credit protection on global debt, the biggest American bank by revenue and profit is deep into speculative investments on European housing bonds. What could possibly go wrong? What’s interesting about JP Morgan’s losing bet in a relatively placid environment is how shocked people on Wall Street and in DC were. This is worrisome, because it implies that market actors simply do not know that there are still severe risks in the banking system, just as they did not understand shadow banking vulnerabilities in 2007-2008. They believed Bernanke’s PR about the “great moderation”, that financial risk had been diversified and effectively managed away.

The cult of personality around Dimon is similar a testament to elite ignorance of possible risks in the banking system. The Dimon story is that JP Morgan escaped the subprime debacle because of the CEO’s wonderful risk-management skills. But one possible reason JP Morgan escaped some of the housing damage is because JP Morgan’s MBS team just wasn’t very good at originating loans and issuing securities. Dimon’s one superb skill is PR, so he turned this weakness into a message of prudence. In 2007-2008, as the crisis unfolded and banks began cutting back on spending, the rumors were that Dimon stepped up and funded very significant amounts of lobbying and PR in DC. Thus, “fortress balance sheet”. And now, there are laudatory stories in the Wall Street Journal about how Dimon “couldn’t breath” after he learned of possible losses, and how he admitted the problem is taking decisive action. Of course, the more likely story is that JP Morgan isn’t well-managed and has risks and interdependencies we don’t understand.

With this in mind, let’s look at whether the Eurozone crisis could turn into a financial panic in the US.

Lehman was the light-switch to full-fledged panic mode during the financial crisis. Investors, over the past thirty years, had moved their deposited money from the regulated banking system covered by deposit insurance to the shadow banking system, where returns were higher but there was no government insurance. One key area where this took place was in money market funds, which held roughly $4 trillion. While technically money market funds are not insured, in reality investors saw them as safe liquid deposits. While they weren’t backed by government guarantees, they were backed by unassailable triple A rated assets, such as, well, Lehman Brothers bonds. So when Lehman blew up, there was the beginnings of a bank run-style panic in the money market funds. Most normal people have their savings in the regulated banking system, so they weren’t in trouble, but wealthy people, foundations, and corporations were in panic-mode. The Federal Reserve eventually stepped in and backstopped the money markets.

Lehman’s bankruptcy had a tremendous psychological impact on the political officials who forced the investment bank to file for bankruptcy, such as Tim Geithner and Ben Bernanke, as well as the entire economics and financial establishment. Subsequently, their attitude became so risk-averse in restricting banks or financial elites, lest they trigger another Lehman-style situation. It was very much a “9/11 changed everything” attitude, except with a financial shock in place of 9/11.

But the real question with Lehman was political, not technocratic. Would the government force the wealthy to pay for their use of the shadow banking system by allowing a run in the money markets, or nationalizing the money markets and forcing haircuts on money market accounts? Would the voters prevent bailouts with deep rage once they realized what was going on? When the government allowed Lehman to fail, the answers seemed like they verged on yes. But as soon as the markets realized, over the course of the next year, that the government would do everything possible to ensure that the shadow banking system would function, with an effective backstop, and that the voters were powerless to act, the panic subsided.

The question of the Eurozone’s impact on the US financial system is similar. If the Eurozone breaks up, or even if Greece defaults, it is not obvious who is exposed, or by how much. It’s not clear if the credit protection sold on European bonds would have to be paid out, because there is now no standard for sovereign defaults. There’s also counterparty risk. The number of bets internally at any of our banks is also an unknown. And then there are the unknown unknowns. That Wall Street is shocked by Dimon’s incompetence is in itself an indication that the environment is well-designed for panic.

As Krugman notes, the question on the Eurozone is whether governments, international institutions and central banks will throw enough money at the various national banking system to prevent defaults. Since there are swap lines between the Federal Reserve and the European Central Bank, the ECB can get as many dollars as it wants, in return for colored pieces of paper known as the Euro. American politicians could begin to get edgy on Federal Reserve exposure to the Eurozone. And ultimately, the ECB must be backed by Germany, so the question of what happens will come back to the German political establishment and the politics of austerity. Will Germany pick up the tab for Italian, Spanish, and Greek debt, which is really just a bailout for its own (and French) banks? Will the Greeks vote for anti-bailout parties in the upcoming election?

What I find most disturbing about the question of Eurozone is how little we still know about our own banking system, and how sanguine we are about the extent of American exposure to another financial panic. The assumption that our banks are now well-capitalized, that they have been effectively stress-tested, is, while not completely pervasive, still accepted by a shockingly large number of market actors. It should be pretty clear that our banks are large, rogue, and fragile, and that we just don’t know what they are exposed to, or how their exposures could impact the real economy. Dodd-Frank was a missed opportunity to restructure our banking system to make it more resilient and less able to transmit financial shocks. We may soon get another one. I don’t know if the European establishment is going to prevent the dissolution of the Eurozone or keep Greece in the Euro, but I’m not confident that we can avoid a panic if it does.

Matt Stoller is a fellow at the Roosevelt Institute.  You can follow him at http://www.twitter.com/matthewstoller

Today, to approximately no one’s surprise, the Republicans in the House Financial Services Committee are going after the Consumer Financial Protection Bureau.  Congressman Barney Frank and Brad Miller, though, have introduced something pretty interesting into the mix.  They have struck back by using the same attacks the Republicans are making against the CFPB on the bank-friendly regulators at the Office of the Comptroller of the Currency and the Federal Reserve.  Specifically, Frank and Miller have proposed to make the OCC and the Federal Reserve, the most important bank regulators, subject to Congressional appropriations.  Right now, those two agencies fund themselves through money printing (the Fed) or assessments on the banks (OCC).  What Frank and Miller are doing would be a major step forward for democratic accountability over our bank regulators.

The full story is as follows.  The Republicans in the Financial Services Committee have recommended that the budget for the CFPB be cut to $200M total for 2012 and 2013 (see Section 331).  This is a substantial and unwarranted reduction in resources for an agency that is tasked with enforcing Federal consumer protection laws against financial misbehavior.  Much more significantly, the Republicans are going to stipulate that the budget for the Consumer Financial Protection Bureau be appropriated every year by Congress.  Right now, the CFPB gets an automatic amount from the Federal Reserve.  The Republican bill would basically say “Congress gets to give you an allowance every year, and you live on it.”  Once that happens, Congress can attach all sorts of strings to the money, like “you can enforce this rule but not that one”, or “no money for you if you go too hard on our campaign contributors.”  This is, over decades, one of the ways the SEC was culturally neutered.  It’s how the FCC is intimidated. These agencies have been asking for years to be able to get its own source of revenue, via fines or other mechanisms.

Interestingly, the CFPB isn’t the only Federal banking regulator that has its own dedicated revenue stream free from Congressional pressure.  In fact, they all do.  The Office of the Comptroller of the Currency, for instance, is funded via assessments on banks, or “clients”, as OCC Chief Counsel Julie Williams calls them (or so I’m told).  Williams is the key villain behind most bank-friendly regulatory decisions over the past two decades, but her general anti-consumer and predatory behavior is baked into the DNA of the regulator.  In the 19th century when it was first set up by Abraham Lincoln, the OCC used to allow its examiners to get an “honorarium” from the banks they supervised.  Now the OCC is responsible for, among other things, preventing state legislators from capping ATM fees, quashing state and local laws against predatory lending, allowing its supervised banks to expose themselves to a massive housing bubble, and pretty much letting banks to do anything they want to consumers with credit cards.  Obviously there’s also the foreclosure crisis nightmare, which you can really hang at the doorstep of the OCC (and I’m also told, Julie Williams).  Key to all of this is that the OCC is simply not subjected to budgetary pressures from Congress.  No elected member of Congress can say “if you don’t assess second liens accurately we’re going to cut your budget”.

And then there’s the big enchilada, the Federal Reserve, which is of course not subject to Congressional appropriations because of its vaunted “independence”.  Interestingly, the Fed, when it was officially controlled by Treasury in the 1930s and 1940s (up until the mostly unknown and critical fight with Truman that produced the Fed-Treasury Accord), financed the New Deal, World War II, and saw unemployment drop to 1% as inequality collapsed and America became a middle class nation.  The Fed finances itself through interest on the bonds in its portfolio, essentially printing money to do so.  The Fed’s reserve banks are still private entities, and they still pay dividends to member banks.  No member of Congress can do anything to the Fed, it’s an unaccountable set of quasi-private banks that often respond to Wall Street.

This can all change if Congress wants it to, and that process starts with the budgeting recommendations put out by the Financial Services Committee. Frank and Miller are responding to the Republicans in a partisan fashion – you want the CFPB funded by Congress?  Fine, we’ll put that on the OCC and the Fed, as well.  These proposals, while they are in some ways kabuki, are fundamentally getting at the undemocratic nature of our banking regulators.  The Republicans have a point – the CFPB shouldn’t be funded without guidance from Congress.  But there’s a much more significant problem here – the far more powerful and important OCC and Federal Reserve should also be subject to some sort of democratic check on their power.  I’d take the trade on all of these regulators – subject them all to Congressional appropriations.

It’s time for the public to start governing, and that means that institutions like Congress need to step up.  Most people at this point think so lowly of Congress that they want politicians to stay away from all power.  What they don’t recognize is that politicians have already done this, and have delegated all power to the banks and powerful interests.  Like any institution, though, when Congress is called upon to actually govern, when members are given responsibility, they take their job more seriously.  Right now, members have a limited set of job expectations, which range from whining to offering earmarks to doing legislative favors for campaign contributors to looking busy to protecting the shrinking set of existing programs for the poor and middle class.  That’s what the public expects.  Actually seizing the reigns of power over banking regulators, like starting to challenge the imperial Presidency on matters of war and peace, would change these expectations, and begin a shift in our culture.

We’ll see, later today, how the votes come down on Miller’s amendment on the OCC and Frank’s amendment on the Fed.  This is going to make it tough for the Republicans, because in order to defeat these amendments, they will have to vote to allow the Federal Reserve to fund itself with printed money, and the OCC with money it gets from banks.

Miller’s amendment on the OCC is below.  I called the Financial services Committee minority side, but I couldn’t get Barney’s amendment.  It should eventually be posted here.

UPDATE:  I’m pretty sure both amendments were defeated.  It was hard to tell because my stream was of a very poor quality.  The committee will have roll call votes posted on their website soon.

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