naked capitalism

It should come as no surprise that those at the top of the food chain get preferential treatment on all levels. But this still stinks to high heaven. Employees of the Goldman, the Fed, Citigroup, and other banks are getting H1N1 vaccine allotments out of proportion to what can be justified from a public health standpoint. In particular, Goldman has gotten more than Lenox HIll hospital, which needs it not just for the sick but more important, for workers (not only does the public need to keep front-line health care workers in as good shape as possible, but if they get the infection, they become disease vectors fast, given the number of people they see).

Then again, banks have become parasitic, so why should we expect anything different? And although Business Week broke the story, it did it press release style:

To the list of hundreds of schools, hospitals, and community health centers that have received limited allocations of the H1N1 swine flu vaccine, you can now add some of New York’s largest employers. In the past week or so 13 companies, including Citigroup (C) and Goldman Sachs (GS), have begun receiving small quantities of the vaccine, according to city health authorities.

Citigroup has been supplied with 1,200 units and Goldman with 200, says Jessica Scaperotti, press secretary for the Department of Health & Mental Hygiene. The agency has so far approved orders by 29 employers—including 16 that have yet to receive any vaccine—after they were cleared by the U.S. Centers for Disease Control & Prevention (CDC). Big employers that have received or are scheduled to receive vaccine so far include Time Warner (TWX), JPMorgan Chase (JPM), Memorial Sloan-Kettering, New York Presbyterian Healthcare System, and New York University.

Health-care workers at those employers are bound by the CDC to distribute the vaccine only to populations deemed to be at high risk of developing serious complications from swine flu: pregnant women, children and young people aged 6 months to 24 years, people who live with or provide care for infants under 6 months (who cannot be vaccinated), people aged 24 to 64 with medical conditions that put them at higher risk for flu-related complications, and health-care workers and emergency medical personnel.

Yves here. Welcome to the class system in action. If you don’t work for a big, influential company, go to the back of the queue. Why should companies be the nexus of distribution for vaccines? I guarantee no Goldman MD gets much of his routine medical treatment from the GS health workers on staff (emergencies or a fast diagnostic like a strep test are different). But if you work for a less privileged employer or are self-employed or between jobs, tough luck, go to the back of the queue, you have to try to get yours (assuming you can) from vaccination centers in New York City. How easy do you think that will be? The difficulty and queuing are certain to be much worse than for any of the big financial players.

And please, it strains credulity to think that someone on the payroll at these companies won’t bend to pressure to make allotments at the margin according to who is most powerful. Do you think if Lloyd Blankfein or another member of the management committee was in a risk category that he would be denied it, assuming the firm did not have enough to go around? (and that is likely). Now given the brouhaha, Goldman may bend over backwards not to abuse this overmuch now that there is media pushback. But this serves to illustrate how the system has been suborned on just about every front. To wit, Goldman is getting 200 doses of the vaccine, the same number as Lenox Hill Hospital.

The Treasury invited a small group of bloggers for a “discussion” with senior officials on Monday. Initially, the meeting was to be background, which is a sort of journalistic “FYI but you can’t use it” but we were told at the meeting that we could discuss the meeting as long as remarks were not attributed to particular individuals.

None of us knew in advance how many attendees there would be; there were eight of us at a two-hour session, Interfluidity, Marginal Revolution, Kid Dynamite’s World, Across the Curve, Financial Armageddon, Accrued Interest, and Aleph (and of course, others may have been invited who had scheduling conflicts). There was a place card for Megan McArdle as well.

I was surprised that the powers that be would bother with financial bloggers, and I wondered at the decision rule behind the selection (besides wanting a mix, particularly from a political standpoint). This was also not an anonymous briefing of the sort that has come under criticism (but the anonymity request is still peculiar; is this a Team Obama fixation?) Given that the efforts have Administration has been made efforts to bring critics from the left into the fold, I was wary of attending (I’m not keen about the idea of being propagandized) and expected a higher control format (10-15 people, which would have limited the opportunity to interact).

It wasn’t obvious what the objective of the meeting was (aside the obvious idea that if they were nice to us we might reciprocate. Unfortunately, some of us are not housebroken). I will give them credit for having the session be almost entirely a Q&A, not much in the way of presentation. One official made some remarks about the state of financial institutions; later another said a few things about regulatory reform. The funniest moment was when, right after the spiel on regulatory reform, Steve Waldman said, “I’ve read your bill and I think it’s terrible.” They did offer to go over it with him. It will be interesting to see if that happens.

Four of us had a drink afterward and none of us felt that we learned anything (not that we expected to per se; if the ground rules are “not for attribution” in an official setting, we are certainly not going to be told anything new or juicy). But my feeling, and it seemed to be shared, was that we bloggers and the government officials kept talking past each other, in that one of us would ask a question, the reply would leave the questioner or someone in the audience unsatisfied, there might be a follow up question (either same person or someone interested), get another responsive-sounding but not really answer, and then another person would get the floor. The fact that the social convention of no individual hogging air time meant that no one could follow a particular line of inquiry very far.

My bottom line is that the people we met are very cognitively captured, assuming one can take their remarks at face value. Although they kept stressing all the things that had changed or they were planning to change, the polite pushback from pretty all the attendees was that what Treasury thought of as major progress was insufficient. It was instructive to observe that Tyler Cowen, who is on the other side of the ideological page from yours truly, had pretty much the same concerns as your humble blogger does.

It was also striking to see that the Treasury officials did not articulate vision for a banking system for the 21st century that was materially different that the one we have now. The flip side is if they did, stating that publicly might get them accused of doing Communist central planning, but I didn’t hear second level arguments that said they had considered the issue in a serious way, save not winding the clock back to much more on balance sheet intermediation, aka traditional banking, as opposed to “market based credit”. Nevertheless, at a McKinsey alumni meeting months ago, a partner who has been advising the Treasury and Fed told the group that the Administration wants to make being systemically important very costly to force firms to do what is necessary to get out of that category. That of course is structural reform, but we got no acknowledgment of that as an aim. And aside from raising capital requirements more for big firms than smaller ones, it is not clear how far Treasury could go down that path on its own (and strictly regulatory measures can be rolled back by a new Adminisitration).

Several of us raised questions about whether what their vision for the industry’s structure was and that the objective seemed to be to restore the financial system that got us in trouble in the first place. The answers instead focused on more stringent regulations, higher capital levels, and of course the derivatives regulation bill. I tried twice to engage them on how the bill has so many loopholes that it is not going to make any difference as far as the real problem is concerned (the out for customized derivatives, in the Administration proposal, gave the industry an easy and obvious way to evade the rules; the House pretty much gutted what was left) but I was not specific enough in saying what “loophole” constituted and was basically deflected (and was also told the derivatives on balance sheet would be subject to tougher capital requirements, and the industry was complaining that the bill would make things more costly for them. Ahem, it has become standard practice of all the powerful lobbies to make a great deal of noise about any change on principle, so the level of complaining is not a valid indicator of the efficacy of reform).

I also asked about the size of the financial services industry (as in one of the distortions that resulted from deregulation and rates being too low was that the financial sector had grown too large, which by implication means it needed to shrink. I was told it had shrunk and that the Fed was winding down its programs. Yes, but the expectation is that as the Fed winds down, the private markets will step into be breach, which means more credit private credit extension. There was no acknowledgment of the issue raised by Joseph Stiglitz, that if credit intermediaries are making too much money, the banking system tail is wagging the economic dog. Another argument was that our financial system had not gotten to be there, five, or eight times the size of GDP. Again, while narrowly true, it finesses the fact that those European banks absorbed a lot of toxic US paper, and perhaps more important, the US has for the last 15 years actively pushed deregulated financial markets (a US financial firm friendly policy) so our hands are not exactly clean here either.

They also defended the stress tests as being serious, and again did not seem to win converts.

One area that we didn’t get into was the special resolution regime, which is receiving considerable pushback from Congress. Treasury has asked for open-ended authority to resolve large financial institutions, which is pretty much a blank check. That’s a breathtaking power grab by the Executive and should not be acceptable in a democracy. It wasn’t surprising that post the TARP that Congress would be completely unwilling to go there. Any decision to wind up a large bank is going to require Congressional authorization; the amounts at stake are too large for this not to be a political decision. The Resolution Trust Corporation working capital needs ($50 billion, if I recall correctly) were authorized by Congress, and Congress also became impatient and called for it to be wrapped up sooner than Treasury wanted (some studies have argued that the faster sales that resulted gave the taxpayer a lower return than the RTC would have gotten otherwise). And even if you could solve the political impasse (remember, Bear failed in ten days; think Congress could agree to a big backstop in that short a period of time?) I am not certain this change will be salutary in the absence of trading counterparties knowing exactly what would happen to them while an organization was being wound down. One of the things that makes securities firms decay quickly is that no one wants to have their accounts frozen, as happens now in a bankruptcy. You need considerable detail on mechanics, and it does not appear to have been disclosed yet (my buddies at the Roosevelt Institute conference on Monday said Rodgin Cohen, who was presenting and advocating the Administration plans, was also scarce on details).

But the other fact is that these guys are very smooth, very smart, and seemed quite sincere, which made it difficult to discern how much they really did believe and how much of what they said they had to say because they need to defend official policy and maintain confidence. Let’s face it, they get prodded and roughed up by big dogs with some frequency. There was nothing we asked that would be new. They’ve covered this ground with other people of more consequence and therefore have answers ready. We are a pretty unimportant audience (yes, they did bother making time for us, but let us not kid ourselves on how far down the food chain bloggers are) and we cannot argue from a position of advantaged information, so it was inevitable that we would not get beyond standard responses.

By George Washington of Washington’s Blog.

Financial insider and commentator Yves Smith wrote an essay last week entitled “MSM Reporting as Propaganda” arguing that the government has been using propaganda to make people think that things are getting better, no one is angry, and – therefore – no one should get upset:

The message, quite overtly, is: if you are pissed, you are in a minority. The country has moved on. Things are getting better, get with the program…

Per the social psychology research, this “you are in a minority, you are wrong” message DOES dissuade a lot of people. It is remarkably poisonous. And it discourages people from taking concrete action.

Is Smith right? And even if she is, isn’t “propaganda” too strong a word?

Think Positive

Sure, William K. Black – professor of economics and law, and the senior regulator during the S & L crisis – says that that the government’s entire strategy now – as during the S&L crisis – is to cover up how bad things are (”the entire strategy is to keep people from getting the facts”).

Admittedly, 7 out of the 8 giant, money center banks went bankrupt in the 1980’s during the “Latin American Crisis”, and the government’s response was to cover up their insolvency.

It’s true that Business Week wrote on May 23, 2006:

President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations.

I can’t deny that the Tarp Inspector General said that Paulson and Bernanke falsely stated that the big banks receiving Tarp money were healthy, when they were not.

Okay, the government and Wall Street have traditionally tried to dispense happy talk when there is an economic crash, and Arianna Huffington recently pointed out:

And I’ll give you that a recent Pew Research Center study on the coverage of the crisis found that the media has largely parroted what the White House and Wall Street were saying.

But that’s not propaganda . . . its just positive thinking, right?

The Other Guy

And the whole word propaganda is a Nazi, communist kind of thing which has no place in the same sentence as America. Right?

Granted, famed Watergate reporter Carl Bernstein says the CIA has already bought and paid for many successful journalists.

And sure, the New York Times discusses in a matter-of-fact way the use of mainstream writers by the CIA to spread messages.

True, a 4-part BBC documentary called the “Century of the Self” shows that an American – Freud’s nephew, Edward Bernays – created the modern field of manipulation of public perceptions, and the U.S. government has extensively used his techniques (but the BBC isn’t American, so it doesn’t count).

True, the Independent discusses allegations of American propaganda (but that’s a British paper, doesn’t count).

And (ho hum) one of the premier writers on journalism says the U.S. has used widespread propaganda.

And (are we still talking about this?) an expert on propaganda testified under oath during trial that the CIA employs THOUSANDS of reporters and OWNS its own media organizations (the expert has an impressive background).

And (I can’t believe we’re still talking about this) while the U.S. government has repeatedly claimed that it was launching propaganda programs solely at foreign enemies, it has actually used them against American citizens. For example:

• In 2002, the Pentagon announced that it was considering spreading false propaganda in the foreign press. However, the military has spread propaganda within the U.S. in an operation so aggressive that one participant, a military analyst, called it “psyops on steroids“

• Raw Story confirmed yesterday the use of propaganda on Americans

• The U.S. government long ago announced its intention to “fight the net”.

• As revealed by an official Pentagon report signed by Rumsfeld called “Information Operations Roadmap”:

The roadmap [contains an] acknowledgement that information put out as part of the military’s psychological operations, or Psyops, is finding its way onto the computer and television screens of ordinary Americans.”Information intended for foreign audiences, including public diplomacy and Psyops, is increasingly consumed by our domestic audience,” it reads.

“Psyops messages will often be replayed by the news media for much larger audiences, including the American public,” it goes on.***

“Strategy should be based on the premise that the Department [of Defense] will ‘fight the net’ as it would an enemy weapons system”.

And (when’s the next episode of American Idol on?) CENTCOM announced in 2008 that a team of employees would be “[engaging] bloggers who are posting inaccurate or untrue information, as well as bloggers who are posting incomplete information.”

And (who do you think will win the playoffs?) the Air Force is also engaging bloggers. Indeed, an Air Force spokesman said:

“We obviously have many more concerns regarding cyberspace than a typical Social Media user,” Capt. Faggard says. “I am concerned with how insurgents or potential enemies can use Social Media to their advantage. It’s our role to provide a clear and accurate, completely truthful and transparent picture for any audience.”

And (did you see that crazy photo?) it is well known that certain governments use software to automatically vote stories questioning their interests down and to send letters favorable to their view to politicians and media (see – as just one example – this, this, this, this and this). The U.S. government is very large and well-funded, and could substantially influence voting on social news sites with very little effort, if it wished.

The Bottom Line

Yeah yeah, people say this or that, whatever, I’m too busy to think about it.

Even if true, propaganda is too strong a word for attempts to convince people that important issues are boring, that no one else is angry about them, and that everything is normal.

Perhaps “herding the wayward sheep” would be better . . .

I was on the Andrew Hall/Phibro beat for a while and must confess I dropped it in the finish-the-book crunch. I neglected to follow up on and important aspect of the story that is still germane.

Readers may recall the brouhaha: Hall, a high stakes oil trader, had received nearly $100 million in 2008 at Citigroup (Phibro, his unit, was a subsidiary) and had the potential to earn that much this year. His pay deal looked unseemly even by Wall Street standards. As we noted in our first post on this matter (where we took issue with the Wall Street Journal’s posture):

No where is the asymmetry of this arrangement mentioned: that Hall and his team get the upside (30%, more than a hedge fund success fee, more than even LTCM in its glory days, which got a 25% upside fee), but the taxpayer gets stuck with the losses. Hall and his bunch have the richest option deal going. Nor does it bother to point out that Hall would find it hard to get access to as much capital as Citi provides him on such rich terms from the outside. Citi not only provides him with more equity than he is likely to be able to raise (certainly for a 30% upside fee) and his cost of funding is sure to be considerably lower than if he were to operate on his own.

The indefensible aspect in our new bailout era was that taxpayers should be backstopping or funding activities only if they are essential parts of the financial infrastructure. Principal trading is not on the list.

What was intriguing was as things rolled forward was that is was increasingly obvious that Hall would not be able to replicate the conditions he had at Citi anywhere else. After some initial resistance to the pay czar pressure, Hall started negotiating with Citi. Huh? If he was such a hot item, he should have been able to decamp and raise money, or find a happy home in another bank. Contrary to conventional wisdom, not all banks in the world are walking wounded. The Japanese, who are keenly interested in oil thanks to their need to import a ton, would be candidates. Some Eurobanks are not on the government drip feed (Sandater, Deutschebank, although their regulators could have curbed a deal). And there was always the option of a joint deal, say a bank plus a deep pockets investor, private equity firm, or sovereign wealth fund (they took a hit, but should be showing some improvement as equity markets rebound).

But what did we see? Hall wound up at….Occidental Petroleum. Maybe the company has changed, but I had some very limited dealings with them in the 1980s (they were pedaling an utter garbage barge of an oil shale deal, and were so eager to foist it on the chump Japanese that I got to meet all the top brass. To put it politely, they were not nice people, and I see that some that I met are, ahem, still in positions of considerable influence. My dim views then were confirmed by commodity traders).

Now the Journal in particular put up a series of articles that finger wagged at government interference (see here, here, and here for a few examples, with a qualified exception here).

Whoa. Phibro earned an average of $351 million a year for the last 5 years. Oxy paid $250 million, the current value of Phibro’s trading positions. There was NO premium, zero, zip, nada, for the earning potential of the business. Zero. Oxy bought the business for its liquidation value.

Hall’s travails had been in the paper for months. The usual routine if you want to get offers for a division is to let the world know it is for sale (the usual code is “exploring strategic options” but more blatant forms like front page business section stories work fine too). Hall most certainly would have put out feelers; presumably Citi did as well. This was the best deal they could scrounge up.

So what does that say?

A LOT of Hall’s performance was due to cheap funding from Citi, and probably massive leverage too, conditions he could not replicate anywhere else. A risky, highly geared operation should pay an interest rate appropriate to the hazards it is taking, not the borrowing costs of its parent (this basic premise is widespread in financial firms, embodied in approaches like RAROC (Risk Adjusted Return on Capital), the Basel I and II rules, and Economic Value Added models.

Hall could not have been a balance sheet hero unless his pay deal did not adjust for the riskiness of his borrowings. Since Phibro acquired Salomon Brothers (which then came out on top in a palace coup) which was later acquired by Travelers and then merged into Citi, it is possible that Hall’s arrangement was grandfathered and the internal accounting made to correspond to it rather than the conventional metrics in use today.

It is impossible to know for certain, but the deal Citi cut with Oxy struck strongly suggests that Phibro’s preformance was in large measure the result of amped up leverage that no one outside Citi was able or willing to provide. Future financial reports from Oxy may shed more light.

I’m of two minds about taking up this theme, since stating what ought to be obvious but is nevertheless unpleasant and inconvenient is apt to get one branded as lunatic fringe.

Access journalism has created what is in many respects a controlled press. And that matters because people are far more suggestible than most of us wants to admit to ourselves.

Let us start with the cheerleading in the media over Wall Street, and in particular, Goldman earnings. Matt Taibbi, in “Good News on Wall Street Means… What Exactly?,” tells us why this is so distorted:

It’s literally amazing to me that our press corps hasn’t yet managed to draw a distinction between good news on Wall Street for companies like Goldman, and good news in reality.

I watched carefully the reporting of the Dow breaking 10,000 the other day and not anywhere did I see a major news organization include a paragraph of the “On the other hand, so fucking what?” sort, one that might point out that unemployment is still at a staggering high, foreclosures are racing along at a terrifying clip, and real people are struggling more than ever. In fact the dichotomy between the economic health of ordinary people and the traditional “market indicators” is not merely a non-story, it is a sort of taboo — unmentionable in major news coverage.

The press has been on a downslope for at least a decade, as a result of strained budgets and vastly more effective government and business spin control (and it was already pretty good at that, see the BBC series, The Century of the Self, via Google video, for a real eye-opener). I met a reporter who had been overseas for six years, opening an important foreign office for the Wall Street Journal. He was stunned when he came back in 1999 to see how much reporting had changed in his absence. He said it was impossible to get to the bottom of most stories in a normal news cycle because companies had become very sophisticated in controlling their message and access.

I couldn’t tell immediately, but one of my friends remarked in 2000 that the reporting was increasingly reminiscent of what she had grown up with in communist Poland. The state of the US media became evident to me when I lived in Australia during the run-up and the first two years of the Gulf War. I would regularly e-mail people in the States about stories I thought were important and I suspected might not be getting much play in the US. My correspondents were media junkies. 85% of the time, a story that had gotten widespread coverage in Australia appeared not to have been released in the US. And the other 15%, it didn’t get much attention (for instance, buried in the middle of the first section of the New York Times). And remember, Australia was an ally and sent troops to the Iraq.

Why does this matter? Because influence via the adept packaging of information and images is very effective. The creator of the public relations industry, Edward Bernays, was the nephew of Freud and set about to use the subconscious to shape public opinion. His books included This Business of Propaganda and Manipulating Public Opinion. But it doesn’t fit our self image of being masters of our own view to recognize that we might be swayed.

In his classic, Influence: The Art of Persuasion, Robert Cialdini describes how salesmen can adeptly use social conditioning and norms to elicit favorable responses. Cialdini, a social psychologist, notes that even though he is aware of these techniques, he is unable to resist them.

One experiment from cognitive bias research assembles a number of people in a room together, but all save one are actors. Everyone in the room is shown a series of lines and asked to say out loud which is the shortest (the background design makes it a bit difficult to discern without concentrating a bit). For the first five or six rounds, the actors (and the lone experiment subject) pick the shortest one. Then, the actors start calling the LONGEST line the shortest one. After a few round s of this (and inevitably, the one not in on the game looks puzzled) about one-third of the experiment subjects start agreeing with the crowd, even though that answer is clearly incorrect. And there is boatloads of other evidence of suggestibility. For instance, numerous studies have found that if a number of people tell an individual he looks tired or sick, he will start feeling tired or sick, as the case may be.

Back to the main theme: the media dares not say anything too negative about financial services firms or their government operatives lest they lose access. The private sector has learned the lesson of the Bush Administration, that the threat of freezing a reporter out is a powerful weapon. I have had some well connected readers tell of story ideas that they served up in some detail that the media would not touch out of fear of alienating their sources. This is the sort of thing that one associates with banana republics, but we have been operating on that level for quite some time.

Not surprisingly, the government and large corporations were firmly in charge of the message during the crisis (remember the gap between the MSM reporting and the anger in the populace over the TARP, which was finally noted ONLY when Congress responded to a barrage of calls and e-mails and voted down TARP v. 1.0?) and perhaps more important, in pushing the, “move past that car wreck, things are really better” message. From the Pew Research Center:

Three storylines have dominated: efforts to help revive the banking sector, the battle over the stimulus package and the struggles of the U.S. auto industry. Together they accounted for nearly 40% of the economic coverage from February 1 through August 31. Other topics related to the crisis have been covered much less. As an example, all the reporting of retail sales, food prices, the impact of the crisis on Social Security and Medicare, its effect on education and the implications for health care combined accounted for just over 2% of all the economic coverage.

Actions by government officials and business leaders drove much of the coverage. The White House and federal agencies alone initiated nearly a third (32%) of economic stories studied through July 3. Business triggered another 21%. About a quarter of the stories (23%) was initiated by the press itself and did not rely on an external news trigger. Ordinary citizens and union workers combined to act as the catalyst for only 2% of the stories about the economy.

Fully 76% of the datelines on economic stories studied during the first five months of the Obama presidency were New York (44%) or metro Washington D.C. (32%). Only about one-fifth (21%) of the stories originated in any other city in the U.S., and about a quarter of those emanated from two other major media centers: Atlanta and Los Angeles…

Once the economic situation showed some signs of improvement—and the political fights over legislative action subsided—media coverage began to diminish. After accounting for 46% of the overall news coverage in February and March, for instance, coverage of the economic crisis dropped by more than half (to 21% of the newshole studied) from April through June. And in July and August, it fell even further (to 16%). The clearest example came in cable news. Once the political battles subsided, coverage fell by about two-thirds from March to April.

Notice even Pew has fallen for the party line a bit. The stock market rally started in March. That is not a sign of economic improvement (Krugman has said something along the lines of “The stock market has predicted 20 of the past 9 recoveries.”).

So what do we have? A media that predominantly bases its stories on what it is fed because it has to. Ever-leaner staffing, compressed news cycles, and access journalism all conspire to drive reporters to focus on the “must cover” news, which is to a large degree influenced by the parties that initiate the story. And that means they are increasingly in an echo chamber, spending so much time with the influential sources they feel they must cover that they start to be swayed by them. It is less intense, but not dissimilar to the effect achieved when reporters are embedded in military units. The journalists often wind up adopting the views of the people they associate with frequently (I am sure readers will add more nefarious theories in comments, but the point here is a simple: an up the center description of what has happened to the media shows it has fallen under the sway of powerful interests).

Now how do we get to the propaganda part? Not only, per Taibbi, are we getting the view of the economy from the vantage of the bankers, as opposed to a broad swathe of the population, but we now we have the media (well, this example is that odd hybrid, an MSM blog) telling us there is no outrage. From the Los Angeles Times (hat tip JohnD):

Except for Michael Moore, whose new movie posits that capitalism is one big Ponzi scheme, the news Wednesday that banks are thriving and that Wall Street analysts are in line for big bonuses this year seemed to land with all the political weight of a dull thud.

Oh sure, the chairman of the House Oversight and Government Reform Committee said he’ll soon hold hearings on executive pay at firms that got taxpayer bailout money, like AIG and Bank of America….

But with the Dow Jones hitting 10,000 and the economy stepping back from the precipice of last fall’s collapse, there was little of that tea-party outrage that might have been expected.

Have we moved on? Arguing that the country is now more concerned with Afghanistan and healthcare, the Wall Street Journal said of bonus outrage: “That’s so last March.”

Maybe taxpayers have simply given up on Washington’s efforts to corral Wall Street.

Now why is this sort of thing (and the media was full of more subtle versions, of happy talk re Dow 10,000 and Goldman earnings) more pernicious than it might appear?

The message, quite overly, is: if you are pissed, you are in a minority. The country has moved on. Things are getting better, get with the program. Now I saw the polar opposite today. There is a group of varying sizes, depending on the topic, that e-mails among itself, mainly professional investors, analysts, economists (I’m usually on the periphery but sometimes chime in). I never saw such an angry, active, and large thread about the Goldman BS fest today. Now if people who have not suffered much, and are presumably benefitting from the market recovery are furious, it isn’t hard to imagine that what looks like complacency in the heartlands may simply be contained rage looking for an outlet.

But per the social psychology research, this “you are in a minority, you are wrong” message DOES dissuade a lot of people. It is remarkably poisonous. And it discourages people from taking concrete action. I was surprised that some people bothered to comment on a post I put up yesterday, calling on people in the Chicago area to attend some peaceful demonstrations against the banking industry during the American Bankers Association national meeting, October 25 through 27. Some people weighed in, saying (basically) “don’t bother”.

I suppose it makes a difference whether one is old enough to remember the 1960s. Because people in large numbers got out and protested, two sets of changes that seemed impossible came about: civil rights for blacks and an end to the US involvement in Vietnam (if you read the histories, the military and intelligence experts were on the whole persuaded it was an unwinnable war, but it was seen as too costly to US prestige for America to withdraw).

And even if the effort you make narrowly is not successful (does any one person’s effort have much impact?) it breeds apathy and cynicism to suggest that doing nothing is the best course of action. If nothing else, it is better for one’s psyche to do what one can, however small, to make a difference.

Now America does not have a tradition of taking to the streets; demonstrations and rallies historically are working class affairs. But the middle class is on a path of downward mobility while the elites continue to take the cream. The widening gap might waken some impulses that have been dormant in the American psyche.

Quelle horreur, some smart people are starting to question whether banking serves a redeeming social function.

Of course, in the abstract, it does. Banking (or more accurately, extending credit) is essential for commerce. But any essential support function, if it overpriced in relationship to its true value, becomes a drag on the productive economy. And our modern system is extracting a very large toll relative to its actual worth.

One argument against banking comes from Roger Bootle at the Telegraph (hat tip Swedish Lex); the other from Bill Black. Bootie makes a broader, philosophical argument, starting by distinguishing activities as creative (making something out of nothing and increasing net enjoyment) versus distributive (something that merely shifts benefits from one party or group to another). Activities fall along a spectrum, and Bootle asserts:

Successful societies maximise the creative and minimise the distributive. Societies where everyone can only achieve gains at the expense of others are by definition impoverished. They are also usually intensely violent.

He assesses modern finance against this standard and not surprisingly, finds it sorely wanting:

A leading British journalist recently decried the widespread condemnation of bankers’ and hedge fund executives’ high remuneration on the grounds that these people, it said, were “the wealth creators”…This completely misses the point….the question is, what has the process that generated this money contributed to the common weal?

Much of what goes on in financial markets belongs right at the purely distributive end. The gains to one party reflect the losses to another, and the vast fees and charges racked up in the process end up being paid by Joe Public…

Even what the great investors do belongs at the distributive end of the spectrum. The genius of the great speculative investors is to see what others do not, or to see it earlier. That’s all. This is a skill…I am not convinced, though, of the social worth of such a skill, still less of the wisdom of encouraging society’s brightest and the best to try to perfect it.

This distinction between creative and distributive goes some way to explaining why the financial sector has become so large in relation to GDP – and why those working in it get paid so much. Even when a certain sort of financial activity is purely distributive, the returns to the winning parties are so enormous that the activity is immensely seductive – and the professionals who appear to be responsible for securing these gains are highly sought after and highly rewarded….

And we need to consider the identity of the investors who are making a lower return to make it possible for hedge funds and their like to make a higher return. They are the investors in slow-moving and restricted institutions such as pension funds and insurance companies, or central banks whose market activities are dictated by some objective of public policy, rather than private gain.

Yet there are reasons why we should want such institutions to be this way. Pensioners do not want their pension funds to be run like hedge funds – or their insurance companies, or their central banks. So we have allowed, and even encouraged, a system to develop in which clever people make huge amounts of money out of institutions that, for reasons of public policy, we constrain in a way that allows scope for such profits to be made. Is that clever or what?

Perhaps the greatest problems are caused by the interaction between financial markets and the real economy. There, time horizons are longer, price adjustments are more sluggish, and motivations less single-mindedly selfish. And so much the better – for them and for us. But how are they able to withstand the onrush of supercharged greed that floods out at them from the financial markets? If we think that it is right and proper – and economically advantageous – that some parts of the economic system should not be organised like investment banks, then we should make sure that they are protected from those parts of the system that are organised like investment banks.

Bill Black, in “How the Servant Became a Predator: Finance’s Five Fatal Flaws,” at New Deal 2.0 is far more casutic. He starts by taking a position near and dear to the Japanese, that financial firms should not be very profitable, because high profits mean they were operating at the expense of the “real” economy (of course, the Japanese bank managed to wreck the economy anyhow, but that was partly if not largely the result of rapidly deregulating a very primitive banking sector. And I am not exaggerating in my characterization; recall I consulted to them in the mid-1980s. They had NO concept of cash flow based lending, for instance).

Black’s key arguments:

….the finance sector is worse than parasitic. In the title of his recent book, The Predator State, James Galbraith aptly names the problem. The financial sector functions as the sharp canines that the predator state uses to rend the nation. In addition to siphoning off capital for its own benefit, the finance sector misallocates the remaining capital in ways that harm the real economy…:

• Corporate stock repurchases and grants of stock to officers have exceeded new capital raised by the U.S. capital markets this decade. That means that the capital markets decapitalize the real economy….

• The U.S. real economy suffers from critical shortages of employees with strong mathematical, engineering, and scientific backgrounds. Graduates in these three fields all too frequently choose careers in finance rather than the real economy because the financial sector provides far greater executive compensation….

• The financial sector’s fixation on accounting earnings leads it to pressure U.S manufacturing and service firms to export jobs abroad, to deny capital to firms that are unionized, and to encourage firms to use foreign tax havens to evade paying U.S. taxes.

• It misallocates capital by creating recurrent financial bubbles. Instead of flowing to the places where it will be most useful to the real economy, capital gets directed to the investments that create the greatest fraudulent accounting gains…. Unless there is effective regulation and prosecution, this misallocation creates an epidemic of accounting control fraud that hyper-inflates financial bubbles….

• Because the financial sector cares almost exclusively about high accounting yields and “profits”, it misallocates capital away from firms and entrepreneurs that could best improve the real economy (e.g., by reducing short-term profits through funding the expensive research & development that can produce innovative goods and superior sustainability) and could best reduce poverty and inequality (e.g., through microcredit finance that would put the “Payday lenders” and predatory mortgage lenders out of business).

• It misallocates capital by securing enormous governmental subsidies for financial firms, particularly those that have the greatest political power and would otherwise fail due to incompetence and fraud.

The remarkable thing is that despite the ample evidence of the damage wrought by the financial sector, it has managed to secure even greater rewards for its predation and incompetence. But that is largely a function of media coverage, which has presented a picture flattering to the Obama Administration and and the perps. A Pew Research Center study on the coverage of the crisis concluded:

The gravest economic crisis since the Great Depression has been covered in the media largely from the top down, told primarily from the perspective of the Obama Administration and big business, and reflected the voices and ideas of people in institutions more than those of everyday Americans…

Citizens may be the primary victims of the downturn, but they have not been not the primary actors in the media depiction of it.

A PEJ content analysis of media coverage of the economy during the first half of 2009 also found that the mainstream press focused on a relatively small number of major story lines, mostly generating from two cities, the country’s political and financial capitals.

A companion analysis of a broader array of media using new “meme tracker” technology developed at Cornell University finds that phrases and ideas that reverberated most in the coverage came early on, mostly from government, particularly from the president and the chairman of the Federal Reserve, and that few Republicans in Congress articulated any memes that got much traction.

As the story moved away from Washington—and the news about the economy seemed to improve—the amount of coverage of the economy also dropped off substantially.

So with vested interests firmly in control of spin, is it any wonder that most people have been lulled into complacency, or at worst, sullen resignation?

In the early days of this blog, I would often wind up comparing coverage of news between the Financial Times and the Wall Street Journal because the offender (almost without exception the Journal) had done a job so poor or misleading that it merited comment. Then the credit crisis forced the Journal to up its game, and the FT appeared to slip a bit (I wondered if it was catering, as in pandering, to US readers).

This time, the dubious reporting object lesson is the New York Times, on what is supposedly its most prized beat: Washington DC political reporting. The Times ran two articles that verged on sycophantic in its coverage of the health insurance industry as it moved its chess pieces on the health care reform game board. The Times acted as close to a PR outlet. From an early August post:

A similar charade is in motion on the health care front. My bullshit meter went into high alert earlier this week with this New York Times story, “For Health Insurers’ Lobbyist, Good Will Is Tested,” which was clearly a PR plant. It featured Karen Ignagni, a $1.6 million-a-year earning lobbyist to the health insurance industry as a heroine (I started getting nauseaous as soon as I saw the deliberately low-key picture of her in her office). And why should we see a representative of one of the biggest forces undermining democracy in America, the usually-successful efforts of well-funded industry groups to steam-roll legislative process, as a good guy, or in this case, gal? Because she supposedly talked a mean and obstructionist industry into playing nice.

Towards the end of August, in “New York Times Runs Yet Another Fawning Story on Health Insurance Industry,” I noted:

The latest salvo in the health care industry charm offensive is another story humanizing the health insurance industry, this one on the front page of the New York Times website, “Dealing With Being the Health Care ‘Villains’”

So what is the story about? The author, Kevin Sack, interviewed a bunch of employees at Humana, the fourth-largest insurance company.

Let’s start with the basics. Why is this even a reasonable premise for a story? This is a perverse twist on a type of story the Times runs periodically, of dropping into a particular community, often in the heartland, to get the populace’s view on a pressing political or social issue.

Since when is it legitimate, much the less newsworthy, to get a company’s perception on its embattled status, at least without introducing either some contrary opinion or better yet, facts, to counter the views of people who will inevitably see what they are doing as right? I hate to draw an extreme comparison to make the point, but staff in Nazi concentration camps also thought they were good people. It is well documented that for all save the depressed, people’s assessments of their own behavior is biased in their favor.

Similarly, I don’t recall many examples of industries under attack having prominent members get flattering front page pieces. The now-famous AIG Financial Products “I Quit” letter was an op-ed. I will admit I could have missed it, but I did not see any New York Times front page pieces during the auto bailouts featuring GM or Chrysler execs and workers saying they were misunderstood. and were being maligned.

So what do we have here? You have a bunch of people whose livelihood depends on Humana. Of course they are gong to see the industry as benign.

And nowhere in this fawning piece do you see mention made of the ugly fact that as recently as the early 1990s, 95% of every dollar spent on insurance claims went to medical care. It is now only 80%. That is a simply stunning change, and shows how completely fact free the industry’s defenses are. The insurers are a major culprit in America’s high medical costs.. But no, we are supposed to take the mere opinion of employees who are deeply vested in the current system as views worth considering.

Back in the days when I did M&A, one of my clients was a frighteningly good negotiator. He knew part of his reason for success was that he did not look the part: he was short, genial, a bit rotund, and bespectacled. He would (to those who he was certain would not spill the beans on him) describe himself as the Antichrist and say things like ” I rub their bellies and only years later do they realize what I have done to them.” And I have to say, he was masterful in getting people to think his self serving view of things was the only sensible way to see a situation.

The insurance industry is not so adept, or more accurately, is less concerned about appearances than my old client. The Financial Times reports tonight that the health insurance industry, after its great show of making nice to the Obama administration, backstabbed it on the eve of a key vote. Do we see any coverage of this duplicity in the US media, much less the New York Times?

From “Health insurance lobby attacks reforms” in the Financial Times:

The White House and the health insurance industry on Monday descended into open conflict on the eve of a critical Senate vote that could determine the fortunes of Barack Obama’s healthcare reform plans.

Supporters of President Obama accused the health insurance industry of attempted “sabotage” after it issued a report by PwC, which estimated that premiums would rise much faster under the proposed reforms than they would have done otherwise.

The 26-page report marked an abrupt end to the unlikely alliance between Mr Obama and America’s Health Insurance Plans – the main industry lobby group, which has spent about $100m on advertising to support the reforms….

A spokesman for Max Baucus, chairman of the Senate finance committee, which is to hold a key vote on Tuesday on its $829bn 10-year healthcare reform plan, described the report as a “hatchet job, pure and simple”.

The Wall Street Journal did report on the insurer “push back” and indicated that the industry had cooperated earlier, ” attracted to the effort, in part, by the prospect of gaining millions of new customers.” So the Journal’s staff recognized this as a mere marriage of convenience from the get-go.

Update 4:30 AM: Robert Reich is more optimistic about the implications than I am, see “The Audacity of Greed: How Private Health Insurers Just Blew Their Cover.”

I will confess I missed a post opportunity Thursday AM, when an alert reader sent a link to a USA Today story, “34 banks don’t pay their quarterly TARP dividends, ” but I decided to return to it precisely because it has gotten little attention:

The U.S. taxpayers’ investments in smaller banks are increasingly at risk.

In a sign that more banks are under great pressure from the recession, 34 financial institutions did not pay their quarterly dividends in August to the Treasury on funds obtained under the Troubled Asset Relief Fund (TARP). The number almost doubled from 19 in May when payments were last made, and also raised questions about Treasury’s judgment in approving these banks as “healthy,” a necessary step for them to get TARP funding.

“The banks are not paying their dividends because they are worried about preserving capital,” says Eric Fitzwater, associate director of research at SNL Financial.

Of the 34 miscreants, two are pretty large, namely AIG and CIT, But the next on the list is First Bancorp, which received a mere $400 million from the TARP. Probably more important than the number is the trend, since the number of institutions that skipped dividends nearly doubled. In a supposedly improving economy and with a steep yield curve (at least until very recently), things appear to be getting worse rather than better.

I didn’t post on this because I assumed the MSM would be all over it. So I am pretty surprised to see it has gotten very little coverage. The usual suspects (Bloomberg, Financial Times, Wall Street Journal, New York Times) were silent. Huffington Post linked to the USA Today story. Reuters featured it only via Rolfe Winkler, who had some useful commentary:

When stronger banks including Goldman Sachs, Morgan Stanley and American Express repurchased warrants at modest premiums after paying back TARP, most news reports suggested that taxpayers were profiting from the bailout. But those reports didn’t tell the whole story.

For one, they ignored adverse selection, the propensity for the best borrowers to exit the program first, leaving Treasury holding the poorest performing investments. According to the latest data from Treasury, 42 banks have paid back some or all of the cash they got from TARP’s Capital Purchase Program, $70.7 billion in total. But more than 600 banks remain in the CPP program. Together, they still owe $134 billion.

And this excludes other TARP bailout programs that are likely to cost billions. The automotive industry owes TARP $80 billion. And AIG owes TARP $69.8 billion. Much of that isn’t coming back.

It’s also myopic to view TARP in isolation. Take Citigroup. After converting its preferred equity investment to 7.7 billion common shares at $3.25, Treasury is showing a paper profit of $11 billion. Sounds great, right?

But Citigroup’s common equity would long ago have fallen to zero if other bailouts, in particular FDIC’s debt guarantee program, weren’t insulating shareholders from losses.

Citigroup is the only large bank still using the FDIC’s program. Two weeks ago, the bank sold another $5 billion worth of guaranteed debt, bringing its total issued under the program to $49.6 billion.

The bottom line is that the government still stands behind the banking sector. While the cost of this “no more Lehmans” policy may not be known for years, our experience with Fannie Mae and Freddie Mac tells us that such implicit guarantees ultimately prove very expensive. The fact that more banks are falling behind on dividend payments reminds us the tab is growing.

Is this mere oversight? Financial crisis fatigue? Nary a bad word will be said about the TARP? Hard to say….

By George Washington of Washington’s Blog.

The talking heads say that financial blogs aren’t trustworthy.

But the whole debate about blogs versus mainstream media is nonsense.

In fact, many of the world’s top PhD economics professors and financial advisors have their own blogs. For example (in no particular order):

• Nouriel Roubini

• Paul Krugman
  

• Nassim Nicholas Taleb

• Simon Johnson

• Frank Shostak

• Willem Buiter
  

• Tyler Cohen
  

• Greg Mankiw
  

• Richard Baldwin
  

• Mark Thoma
  

• Michael Pettis
  

• Brad DeLong

• James Hamilton and Menzie Chinn

• Michel Chossudovsky

• Michael Hudson

• Yves Smith

• Rolfe Winkler

And the conclusions of economists who don’t have their own blogs are collected by other bloggers and on YouTube videos. For example, this blog rounds up everything Marc Faber says.

And you’ve got blogs like Zero Hedge that break stories about Goldman and high-frequency trading months before the mainstream media. And insightful commentators like Barry Ritholtz and Mish and many others.

So what is “news”? What the talking heads choose to cover? Or what various leading experts are saying – and oftentimes heatedly debating one against the other – on their blogs?

I would argue that mainstream newspapers haven’t just lost readers because of the Internet as an abstract new medium, but that they lost readers because they became – with some exceptions – nothing but official stenographers for the powers-that-be.  No wonder people have lost all faith in them.

Indeed, as of February, only 5% of the pundits discussing various government bailout plans on cable news shows are real economists. Why not hear what real economists and financial experts say?

To the extent that blogs offer actual news and the mainstream media does not, the latter will continue to lose eyeballs and ad revenues to the former.

Of course, many financial blogs are not very good.  The trick is to learn which are trustworthy and accurate.

And this is not to imply that all mainstream commentators are short on facts. Some are really good.  Once again, the trick is find the good ones.

The Financial Times tonight reports that Goldman CEO Lloyd Blankfein made “startling” remarks in Germany, for instance, that a lot of banking activity is rather thin on redeeming social value. Oh, and he admitted bankers might be paid too much, too.

Gee, with revelations like that, what might he to ‘fess up to next? That some employees have substance abuse problems? That bankers take clients to strip clubs? The mind simply boggles.

Admitting to something that everyone knows is hardly a confession. particularly when it is as watered down as this one:

Mr Blankfein said: “The industry let the growth and complexity in new instruments outstrip their economic and social utility as well as the operational capacity to manage them.”

One senior European banker said Mr Blankfein’s speech was clearly geared to his audience.

Many German banks filled their balance sheets with asset-backed securities bought with cheap short-term funding in a strategy that unravelled spectacularly when funding dried up last year. “Germany has an open wound,” said the banker.

“Blankfein was clearly trying to placate the locals and show some kind of contrition. But I agree with what he said – these were silly bets and they were absolutely useless.”

Acknowledging that some products had become too complex, Mr Blankfein said: “We have a responsibility to the financial system which demands that we should not favour non-standard products when a client’s objective and the market’s interests can be met through a standardised product traded on an exchange”….

The Goldman boss, who himself received total compensation of more than $70m in 2007, said multi-year bonuses should be outlawed and senior staff should receive large proportions of pay in stock, rather than cash.

These are all non-concession concessions. The idea of moving credit default swaps to exchanges (which is the candidate under consideration) is likely to prove to be a non-starter. I was initially a big fan of the idea of either shutting them down or moving CDS to exchanges, but the more I have had to look into them, neither looks like a good option so I am now leaning towards strangling them slowly by regulating them aggressively. It is disheartening that there is no good, simple, surgical solution.

There are very few CDS that trade actively, I am told only about 50 names, and even those are probably not traded enough on a daily basis for moving them to an exchange to be viable (the very fact that CDS aren’t even actively traded enough for them to be included in Bloomberg and Reuters feeds). Skeptics should read Donald MacKenzie’s An Engine, Not a Camera, on how much uneconomic activity by Chicago exchange members was required to get a some financial futures contracts going. And this was a business the community wanted to succeed. Conversely, the dealers have good reason not to make heroic efforts.

Second, even if an exchange were to get going, or ISDA did succeed in creating more standardized contracts, the fact that the reform proposals on the table allow dealers to trade OTC is an exception you can drive a truck through. The profit model is intact, and everyone understands that.

Recall also that Goldman, unlike JP Morgan, did not try renegotiating the repayment terms of its TARP warrants. So Goldman is now trying to play statesmanlike, and will let everyone else engage in more public piggy behavior. All Goldman has to do is look better than its peers, which isn’t hard (well, save the government capture bit, that is kind of hard to disguise).

Churchill once said, “In war, resolution; in defeat, defiance; in victory, magnanimity”. If there was any possibility of real reform, Blankfein would not even go as far as making gracious-sounding but empty concessions. By contrast, it’s cheap, easy, and prudent to make nice noises when you have nothing to lose. So all we have is clever posturing to diffuse some ire, and the FT is treating it with more dignity than it deserves.