I just heard the President say that the recession is over and everything is getting better. Either he is using controlled substances or the job is giving him delusions.
Here are the real facts. 15 Million Americans remain unemployed. Another, probably, 15 Million are working short hours, or have given up looking.
Joe Biden said yesterday that the Government has done an outstanding job by creating 175,000 new jobs. He didn't mention that 100,000 of them are temporary Census jobs, nor did he mention part time jobs are the only ones growing.
Small businesses, the real source of new jobs, are going broke at record numbers. There is no real way to know how many small businesses just shut down.
Yes, there has been a recent uptick in GDP, but part of it has been inventory replacement since businesses cut back extremely deeply at the beginning of the recession. The uptick in consumer spending, if there was one, seems to have come from reduced savings.
But here is the DISASTER just ahead. The Los Angeles Times today reports that about 100,000 Californians are at the end of their 99 weeks of unemployment benefits. Since California accounts for about 10% of the U.S. population, you can expect about ONE MILLION Americans are now going to have ZERO income! Each following month will just add to that total.
This government appears to refuse to take sensible actions to reduce unemployment. But Obama's economic guru, Larry Summers thinks that people who are unemployed are just too lazy to work. He thinks that the government's trivial unemployment benefits are so large that no one receiving them will go to work.
What a jerk!! I can promise you two things; 1) crime will go up, and 2) suicides will increase. Thanks, Larry.
Friday, April 30, 2010
Tuesday, April 27, 2010
You Better Pay Attention To Bill Gross
washingtonpost.com
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The national debt and Washington's deficit of will
By Joel Achenbach
Sunday, April 25, 2010; B01
Bill Gross is used to buying bonds in multibillion-dollar batches. But when it comes to U.S. Treasury bills, he's getting nervous. Gross, a founder of the investment giant Pimco, is so concerned about America's national debt that he has started unloading some of his holdings of U.S. government bonds in favor of bonds from such countries as Germany, Canada and France.
Gross is a bottom-line kind of guy; he doesn't seem to care if the debt is the fault of Republicans or Democrats, the Bush tax cuts or the Obama stimulus. He's simply worried that Washington's habit of spending today the money it hopes to collect tomorrow is getting worse and worse. It even has elements of a Ponzi scheme, Gross told me.
"In order to pay the interest and the bill when it comes due, we'll simply have to issue more IOUs. That, to me, is Ponzi-like," Gross said. "It's a game that can never be finished."
The national debt -- which totaled $8,370,635,856,604.98 as of a few days ago, not even counting the trillions owed by the government to Social Security and other pilfered trust funds -- is rapidly becoming a dominant political issue in Washington and across the country, and not just among the "tea party" crowd. President Obama is feeling the pressure, and on Tuesday he will open the first session of a high-level bipartisan commission that will look for ways to reduce deficits and put the country on a sustainable fiscal path.
It's a tough task. The short term looks awful, and the long term looks hideous. Under any likely scenario, the federal debt will continue to balloon in the years to come. The Congressional Budget Office expects it to reach $20 trillion over the next decade -- and that assumes no new recessions, no new wars and no new financial crises. In the doomsday scenario, foreign investors get spooked and demand higher interest rates to continue bankrolling American profligacy. As rates shoot up, the United States has to borrow more and more simply to pay the interest on its debt, and soon the economy is in a downward spiral.
Of course, at least in theory, this problem can be fixed. Unlike a real Ponzi scheme, which collapses when no new suckers offer money that can be used to pay off earlier investors, the government can restore fiscal sanity whenever our leaders decide to do so.
But that premise is what has people like Gross worried. In addition to running a budget deficit, Washington for years has had a massive deficit of political will.
Over the past decade, lawmakers have avoided the kind of unpopular decisions -- tax increases, spending cuts or some combination -- needed to keep the debt under control. Federal Reserve Chairman Ben Bernanke testified recently that, for investors, the underlying problem with the debt isn't economic. "At some point, the markets will make a judgment about, really, not our economic capacity but our political ability, our political will, to achieve longer-term sustainability," he said.
The economic recovery has been picking up steam in recent weeks -- "America's Back!" trumpets Newsweek -- but the political recovery has been feeble. Whether on taxes, entitlements, military retooling, financial reform, energy policy or climate change, Washington is mired in a political enmity that makes tough decisions nearly impossible.
In the fiscal debate, the default position, as it were, is to do nothing. Debt is the grease of Washington legislation; for short-sighted leaders, it is less a political problem than a political solution. As long as the government can continue borrowing at reasonable rates, citizens can have their tax cuts and government services, and eventually the growing debt becomes someone else's problem.
"This is all an exercise in current generations shifting burdens on future generations," Brookings Institution economist William Gale says. "Future generations don't vote, of course."
Many careers in Washington have come to an end as casualties of the long battle to restore fiscal balance. President George H.W. Bush in 1990 went back on his "no new taxes" pledge and lost much of his political base. By the narrowest of margins -- with Vice President Al Gore breaking a tied vote in the Senate -- President Bill Clinton raised taxes again in 1993, and House Democrats were pummeled in the following year's midterm elections, giving up control of the chamber to the GOP for the first time in 40 years.
But then, after two decades of deficits, the fiscal picture brightened unexpectedly. The peace dividend at the end of the Cold War combined with the booming economy of the 1990s (and some tech-bubble tax receipts) to create an unexpected dilemma in 2000: what to do with the budget surpluses that were forecast for years to come? One obvious idea was to pay down the existing publicly held debt, then hovering around $3.4 trillion.
But a decade later, we're back in debt madness. The causes of this reversal are not a mystery: tax cuts, two wars, a new Medicare drug benefit, two recessions, massive bailouts and a huge stimulus package -- very little of it paid for in any conventional sense. Obama never misses a chance to remind the public that he inherited an enormous deficit, but as a purely political matter he still needs to persuade the public that he's a prudent fiscal steward.
To that end, the president has proposed a freeze on most nonmilitary discretionary spending. Obama also insisted that the health-care overhaul not add to the deficit, and it won't, according to the CBO. But no one would confuse the health-care law with a deficit-reduction package. Critics say the law worsens the fiscal outlook because its spending cuts and new taxes could have been used to reduce the deficit -- which may run at about $1.3 trillion for 2010 -- instead of being an offset for an entitlement expansion.
Beyond the simplicity of the problem -- the Treasury spends more than it collects -- is a thorny mess of policy options. Conservatives fear that liberals want to expand government by imposing a European-style value-added tax, in which the government sips revenue at multiple stages in the production and sale of goods and services. But a VAT is regressive, would hit the middle class in the teeth and is probably too politically radical to survive beyond the haven of a few Washington think tanks.
Obama's vow not to raise taxes on the middle class -- meaning he's extending George W. Bush's tax cuts for everyone except the most affluent -- eliminates a lot of revenue options. "The Republican view is no new taxes, and the Democratic view is no new taxes on 95 percent of the population. Both of those are so far from reasonable starting points that it's astonishing," Gale argues.
Obama and his fellow Democrats may also be shy of substantial Pentagon cuts, lest they be pegged as weak-kneed liberals. Some of the easiest Medicare cuts have already been made. That leaves Social Security, and such options as postponing the retirement age or means-testing benefits. But recipients figure they paid into Social Security and it's their money, not to be taken away. And they vote -- and live by the millions in swing states such as Florida.
With so many unpleasant options, everyone is looking to Obama's new bipartisan commission for some kind of miracle solution. The 18-member panel, headed by former Clinton White House chief of staff Erskine Bowles and retired Republican senator Alan Simpson, is charged with producing recommendations by Dec. 1, after the midterm elections. Congressional leaders say they'll vote on the recommendations, but the commission has no real clout. A panel proposed by Senate colleagues Kent Conrad (N.D.), a Democrat, and Judd Gregg (N.H.), a Republican, would have had more teeth, but the idea died in the ideological crossfire early this year.
Even before the commission's first meeting, the body is already in the thick of the political battle, with antitax advocate Grover Norquist suggesting that Simpson has a history as a tax hiker. The retired senator struck back in a statement: "This 'Mr. Tax Hike' business is garbage, and is intended to terrify people and at the same time make money for the groups who babble it."
In an interview, Simpson said the capital has an aversion to dealing with debt. "It makes all sorts of sense if you're worshiping the great god hiding behind the screen, which is called reelection," he told me.
The latest news from the Treasury is hopeful: Tax revenues are slightly higher than anticipated so far this year. The TARP program to bail out financial firms has proved far less costly than expected. Investors from around the world still eagerly bid on Treasury notes at auction. During this global recession, the U.S. Treasury has been a safe port in the storm.
When I spoke to Peter Orszag, the director of the Office of Management and Budget, he expressed optimism that the administration can balance the primary budget -- not including interest payments -- by 2015. The longer-term deficits are his bigger worry. Asked if the political process in Washington is broken, he answered: "I think it's too soon to know whether the system's broken. The problem is not what happened last year or this year. The real issue is when we move forward in time, something has to give."
The danger is that what "gives" will be investors' confidence in the United States. Bill Gross told me that Pimco still has $150 billion in Treasuries, but that's seriously "underweight" given that the company controls $1 trillion in assets.
"It's becoming immediately apparent that some countries will not do especially well and may not escape the debt trap from the recent financial crisis, Greece and Iceland being the most prominent cases," Gross said. "But now investors are even looking at the best of the best, including the United States."
That's also the concern of Michael Burry, the investment guru who predicted Wall Street's meltdown and made millions by placing bets against (or "shorting") the financial sector. Burry, one of the protagonists in Michael Lewis's account of the financial crisis, "The Big Short," believes the federal government is behaving like the companies that lost billions in mortgage-backed securities. He told me he sees the common mistake of focusing on short-term benefits -- whether quarterly earnings or the next election.
The world doesn't want America to go broke, he points out. Americans are the planet's greatest consumers. But if this is a bubble, it will burst with little warning, Burry said.
"Strictly looking at the monthly Treasury statement of receipts and outlays," Burry said, "as an 'investor,' you see a company you might want to short."
Joel Achenbach is a reporter and blogger on the national staff of The Washington Post. He will be online on Monday, April 26, to chat with readers at 11 a.m. Submit your questions or comments before or during the discussion.
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The national debt and Washington's deficit of will
By Joel Achenbach
Sunday, April 25, 2010; B01
Bill Gross is used to buying bonds in multibillion-dollar batches. But when it comes to U.S. Treasury bills, he's getting nervous. Gross, a founder of the investment giant Pimco, is so concerned about America's national debt that he has started unloading some of his holdings of U.S. government bonds in favor of bonds from such countries as Germany, Canada and France.
Gross is a bottom-line kind of guy; he doesn't seem to care if the debt is the fault of Republicans or Democrats, the Bush tax cuts or the Obama stimulus. He's simply worried that Washington's habit of spending today the money it hopes to collect tomorrow is getting worse and worse. It even has elements of a Ponzi scheme, Gross told me.
"In order to pay the interest and the bill when it comes due, we'll simply have to issue more IOUs. That, to me, is Ponzi-like," Gross said. "It's a game that can never be finished."
The national debt -- which totaled $8,370,635,856,604.98 as of a few days ago, not even counting the trillions owed by the government to Social Security and other pilfered trust funds -- is rapidly becoming a dominant political issue in Washington and across the country, and not just among the "tea party" crowd. President Obama is feeling the pressure, and on Tuesday he will open the first session of a high-level bipartisan commission that will look for ways to reduce deficits and put the country on a sustainable fiscal path.
It's a tough task. The short term looks awful, and the long term looks hideous. Under any likely scenario, the federal debt will continue to balloon in the years to come. The Congressional Budget Office expects it to reach $20 trillion over the next decade -- and that assumes no new recessions, no new wars and no new financial crises. In the doomsday scenario, foreign investors get spooked and demand higher interest rates to continue bankrolling American profligacy. As rates shoot up, the United States has to borrow more and more simply to pay the interest on its debt, and soon the economy is in a downward spiral.
Of course, at least in theory, this problem can be fixed. Unlike a real Ponzi scheme, which collapses when no new suckers offer money that can be used to pay off earlier investors, the government can restore fiscal sanity whenever our leaders decide to do so.
But that premise is what has people like Gross worried. In addition to running a budget deficit, Washington for years has had a massive deficit of political will.
Over the past decade, lawmakers have avoided the kind of unpopular decisions -- tax increases, spending cuts or some combination -- needed to keep the debt under control. Federal Reserve Chairman Ben Bernanke testified recently that, for investors, the underlying problem with the debt isn't economic. "At some point, the markets will make a judgment about, really, not our economic capacity but our political ability, our political will, to achieve longer-term sustainability," he said.
The economic recovery has been picking up steam in recent weeks -- "America's Back!" trumpets Newsweek -- but the political recovery has been feeble. Whether on taxes, entitlements, military retooling, financial reform, energy policy or climate change, Washington is mired in a political enmity that makes tough decisions nearly impossible.
In the fiscal debate, the default position, as it were, is to do nothing. Debt is the grease of Washington legislation; for short-sighted leaders, it is less a political problem than a political solution. As long as the government can continue borrowing at reasonable rates, citizens can have their tax cuts and government services, and eventually the growing debt becomes someone else's problem.
"This is all an exercise in current generations shifting burdens on future generations," Brookings Institution economist William Gale says. "Future generations don't vote, of course."
Many careers in Washington have come to an end as casualties of the long battle to restore fiscal balance. President George H.W. Bush in 1990 went back on his "no new taxes" pledge and lost much of his political base. By the narrowest of margins -- with Vice President Al Gore breaking a tied vote in the Senate -- President Bill Clinton raised taxes again in 1993, and House Democrats were pummeled in the following year's midterm elections, giving up control of the chamber to the GOP for the first time in 40 years.
But then, after two decades of deficits, the fiscal picture brightened unexpectedly. The peace dividend at the end of the Cold War combined with the booming economy of the 1990s (and some tech-bubble tax receipts) to create an unexpected dilemma in 2000: what to do with the budget surpluses that were forecast for years to come? One obvious idea was to pay down the existing publicly held debt, then hovering around $3.4 trillion.
But a decade later, we're back in debt madness. The causes of this reversal are not a mystery: tax cuts, two wars, a new Medicare drug benefit, two recessions, massive bailouts and a huge stimulus package -- very little of it paid for in any conventional sense. Obama never misses a chance to remind the public that he inherited an enormous deficit, but as a purely political matter he still needs to persuade the public that he's a prudent fiscal steward.
To that end, the president has proposed a freeze on most nonmilitary discretionary spending. Obama also insisted that the health-care overhaul not add to the deficit, and it won't, according to the CBO. But no one would confuse the health-care law with a deficit-reduction package. Critics say the law worsens the fiscal outlook because its spending cuts and new taxes could have been used to reduce the deficit -- which may run at about $1.3 trillion for 2010 -- instead of being an offset for an entitlement expansion.
Beyond the simplicity of the problem -- the Treasury spends more than it collects -- is a thorny mess of policy options. Conservatives fear that liberals want to expand government by imposing a European-style value-added tax, in which the government sips revenue at multiple stages in the production and sale of goods and services. But a VAT is regressive, would hit the middle class in the teeth and is probably too politically radical to survive beyond the haven of a few Washington think tanks.
Obama's vow not to raise taxes on the middle class -- meaning he's extending George W. Bush's tax cuts for everyone except the most affluent -- eliminates a lot of revenue options. "The Republican view is no new taxes, and the Democratic view is no new taxes on 95 percent of the population. Both of those are so far from reasonable starting points that it's astonishing," Gale argues.
Obama and his fellow Democrats may also be shy of substantial Pentagon cuts, lest they be pegged as weak-kneed liberals. Some of the easiest Medicare cuts have already been made. That leaves Social Security, and such options as postponing the retirement age or means-testing benefits. But recipients figure they paid into Social Security and it's their money, not to be taken away. And they vote -- and live by the millions in swing states such as Florida.
With so many unpleasant options, everyone is looking to Obama's new bipartisan commission for some kind of miracle solution. The 18-member panel, headed by former Clinton White House chief of staff Erskine Bowles and retired Republican senator Alan Simpson, is charged with producing recommendations by Dec. 1, after the midterm elections. Congressional leaders say they'll vote on the recommendations, but the commission has no real clout. A panel proposed by Senate colleagues Kent Conrad (N.D.), a Democrat, and Judd Gregg (N.H.), a Republican, would have had more teeth, but the idea died in the ideological crossfire early this year.
Even before the commission's first meeting, the body is already in the thick of the political battle, with antitax advocate Grover Norquist suggesting that Simpson has a history as a tax hiker. The retired senator struck back in a statement: "This 'Mr. Tax Hike' business is garbage, and is intended to terrify people and at the same time make money for the groups who babble it."
In an interview, Simpson said the capital has an aversion to dealing with debt. "It makes all sorts of sense if you're worshiping the great god hiding behind the screen, which is called reelection," he told me.
The latest news from the Treasury is hopeful: Tax revenues are slightly higher than anticipated so far this year. The TARP program to bail out financial firms has proved far less costly than expected. Investors from around the world still eagerly bid on Treasury notes at auction. During this global recession, the U.S. Treasury has been a safe port in the storm.
When I spoke to Peter Orszag, the director of the Office of Management and Budget, he expressed optimism that the administration can balance the primary budget -- not including interest payments -- by 2015. The longer-term deficits are his bigger worry. Asked if the political process in Washington is broken, he answered: "I think it's too soon to know whether the system's broken. The problem is not what happened last year or this year. The real issue is when we move forward in time, something has to give."
The danger is that what "gives" will be investors' confidence in the United States. Bill Gross told me that Pimco still has $150 billion in Treasuries, but that's seriously "underweight" given that the company controls $1 trillion in assets.
"It's becoming immediately apparent that some countries will not do especially well and may not escape the debt trap from the recent financial crisis, Greece and Iceland being the most prominent cases," Gross said. "But now investors are even looking at the best of the best, including the United States."
That's also the concern of Michael Burry, the investment guru who predicted Wall Street's meltdown and made millions by placing bets against (or "shorting") the financial sector. Burry, one of the protagonists in Michael Lewis's account of the financial crisis, "The Big Short," believes the federal government is behaving like the companies that lost billions in mortgage-backed securities. He told me he sees the common mistake of focusing on short-term benefits -- whether quarterly earnings or the next election.
The world doesn't want America to go broke, he points out. Americans are the planet's greatest consumers. But if this is a bubble, it will burst with little warning, Burry said.
"Strictly looking at the monthly Treasury statement of receipts and outlays," Burry said, "as an 'investor,' you see a company you might want to short."
Joel Achenbach is a reporter and blogger on the national staff of The Washington Post. He will be online on Monday, April 26, to chat with readers at 11 a.m. Submit your questions or comments before or during the discussion.
Economists are Idiots
It is my position that most economic theory is crap because economists don't live in the real world. They live in a fantasy called "academe". Here is an excellent example. This article by an economist appeared in the New York Times yesterday.
Your assignment is to make a list of all the reasons this foolishness posing as theory is just that, foolishness.
Economic View
The Tax Hiding in Your Paycheck
By ROBERT H. FRANK
Published: April 23, 2010
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EVERY year at tax time, libertarians indignantly denounce government income transfers from rich to poor. Society’s income distribution, they argue, should reflect as closely as possible what people would earn in unregulated private markets.
Enlarge This Image
David G. Klein
When critics on the left counter that income transfers are required in the name of social justice, libertarians yawn — and the debate goes nowhere.
There is a more fruitful way to look at the issue. Suppose, for the sake of discussion, that we grant the libertarian premise that private pay systems provide the best ethical template for society’s income distribution. As closer scrutiny of that premise will make clear, the libertarian denunciation of income transfers fails on its own terms.
The main problem is that private pay patterns embody an implicit tax that is actually far more progressive than the federal income tax. To understand why, first consider some background about the way these patterns work.
Economic theory holds that in competitive labor markets, workers are paid the market value of what they produce. In actual markets, pay does rise with productivity, but not by much. The most productive carpenter in a framing crew, for example, might produce twice as much as his least productive colleague, but is rarely paid even 30 percent more.
To see the pattern at first hand, consider groups of co-workers who perform similar tasks in your own company. In one case, suppose that your two most productive co-workers leave the job; in the other, suppose that the three least productive leave. Which group’s departure causes a greater loss of value? Most people would answer that losing the top two hurts more.
If so, economic theory holds that their combined salaries should be higher than the combined salaries of the bottom three. Yet the typical pattern is the reverse: any three workers in a group performing similar tasks earn substantially more than any other two.
In short, the startling fact is that private businesses typically transfer large amounts of income from the most productive to the least productive workers. Because labor contracts are voluntary under United States law, it would be bizarre to object that these transfers violate anyone’s rights.
But they do raise an interesting question: If the most productive workers in a group are paid less than the value of what they produce, why don’t rival employers just lure them all away?
One answer is that these employees may care, often subconsciously, about things besides pay. The most productive workers in a group, for example, often appear to value their status, perhaps because they enjoy greater self-esteem and respect than the least productive workers. To bid successfully for the high achievers, a rival employer might not only have to increase their pay, but also place them in a group where they continue to enjoy a high ranking.
In a free market, however, no one can be in the top half of any group unless others agree to be in the bottom half. And if people prefer not to occupy low-ranking positions, filling these positions would require extra compensation. The rival’s offer, then, would resemble the original pay pattern.
The upshot is that top-ranked workers may well stay put. The high ranking they enjoy is more than enough to offset their sacrifice in pay. Similarly, their less productive co-workers may find it onerous to be at the bottom of the ladder, but they are compensated for that fact by their premium wages.
So, in effect, private markets are already applying an implicit progressive tax in the way they pay workers. And, in the process, they serve the interests of everyone in the hierarchy. The alternative would be costly social fragmentation.
CAN anyone doubt that high rank has value, not just among groups of co-workers but also in society? For starters, high-ranking members of society, who also tend to have the highest incomes, know they will be able to send their children to the best schools and have access to the best health care. Low-ranking members enjoy no such confidence.
It’s much harder, of course, to organize new societies than to start new businesses. But that doesn’t mean high-ranking positions in the real world should be available at no cost. They are possible only when others bear the costs associated with a low social ranking.
Tax systems that transfer income from rich to poor, thus mimicking the implicit transfers in virtually every private labor contract, reflect the costs and benefits of different rungs on the social ladder. They help make stable, diverse societies possible.
Enlightened libertarians believe that the best social institutions mimic the agreements people would have negotiated among themselves, if free exchange had been practical. Private pay patterns suggest that our current tax code meets that test.
Robert H. Frank is an economics professor at the Johnson Graduate School of Management at Cornell University.
A version of this article appeared in print on April 25, 2010, on page BU4 of the New York edition.
Your assignment is to make a list of all the reasons this foolishness posing as theory is just that, foolishness.
Economic View
The Tax Hiding in Your Paycheck
By ROBERT H. FRANK
Published: April 23, 2010
* Sign in to Recommend
* Sign In to E-Mail
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Reprints
* ShareClose
o Linkedin
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EVERY year at tax time, libertarians indignantly denounce government income transfers from rich to poor. Society’s income distribution, they argue, should reflect as closely as possible what people would earn in unregulated private markets.
Enlarge This Image
David G. Klein
When critics on the left counter that income transfers are required in the name of social justice, libertarians yawn — and the debate goes nowhere.
There is a more fruitful way to look at the issue. Suppose, for the sake of discussion, that we grant the libertarian premise that private pay systems provide the best ethical template for society’s income distribution. As closer scrutiny of that premise will make clear, the libertarian denunciation of income transfers fails on its own terms.
The main problem is that private pay patterns embody an implicit tax that is actually far more progressive than the federal income tax. To understand why, first consider some background about the way these patterns work.
Economic theory holds that in competitive labor markets, workers are paid the market value of what they produce. In actual markets, pay does rise with productivity, but not by much. The most productive carpenter in a framing crew, for example, might produce twice as much as his least productive colleague, but is rarely paid even 30 percent more.
To see the pattern at first hand, consider groups of co-workers who perform similar tasks in your own company. In one case, suppose that your two most productive co-workers leave the job; in the other, suppose that the three least productive leave. Which group’s departure causes a greater loss of value? Most people would answer that losing the top two hurts more.
If so, economic theory holds that their combined salaries should be higher than the combined salaries of the bottom three. Yet the typical pattern is the reverse: any three workers in a group performing similar tasks earn substantially more than any other two.
In short, the startling fact is that private businesses typically transfer large amounts of income from the most productive to the least productive workers. Because labor contracts are voluntary under United States law, it would be bizarre to object that these transfers violate anyone’s rights.
But they do raise an interesting question: If the most productive workers in a group are paid less than the value of what they produce, why don’t rival employers just lure them all away?
One answer is that these employees may care, often subconsciously, about things besides pay. The most productive workers in a group, for example, often appear to value their status, perhaps because they enjoy greater self-esteem and respect than the least productive workers. To bid successfully for the high achievers, a rival employer might not only have to increase their pay, but also place them in a group where they continue to enjoy a high ranking.
In a free market, however, no one can be in the top half of any group unless others agree to be in the bottom half. And if people prefer not to occupy low-ranking positions, filling these positions would require extra compensation. The rival’s offer, then, would resemble the original pay pattern.
The upshot is that top-ranked workers may well stay put. The high ranking they enjoy is more than enough to offset their sacrifice in pay. Similarly, their less productive co-workers may find it onerous to be at the bottom of the ladder, but they are compensated for that fact by their premium wages.
So, in effect, private markets are already applying an implicit progressive tax in the way they pay workers. And, in the process, they serve the interests of everyone in the hierarchy. The alternative would be costly social fragmentation.
CAN anyone doubt that high rank has value, not just among groups of co-workers but also in society? For starters, high-ranking members of society, who also tend to have the highest incomes, know they will be able to send their children to the best schools and have access to the best health care. Low-ranking members enjoy no such confidence.
It’s much harder, of course, to organize new societies than to start new businesses. But that doesn’t mean high-ranking positions in the real world should be available at no cost. They are possible only when others bear the costs associated with a low social ranking.
Tax systems that transfer income from rich to poor, thus mimicking the implicit transfers in virtually every private labor contract, reflect the costs and benefits of different rungs on the social ladder. They help make stable, diverse societies possible.
Enlightened libertarians believe that the best social institutions mimic the agreements people would have negotiated among themselves, if free exchange had been practical. Private pay patterns suggest that our current tax code meets that test.
Robert H. Frank is an economics professor at the Johnson Graduate School of Management at Cornell University.
A version of this article appeared in print on April 25, 2010, on page BU4 of the New York edition.
The Phony Wall Street Fix
Over 200 lobbyists and hundred's of million dollars have done their job. The Republicans defeated a bill to regulate Wall Street's crooks.
It was a very complicated bill that did a lot to establish even more intrusion of government into private business. The past fifty years is great evidence that regulation doesn't work very well (see the SEC and Bernie Madoff). So what is to be done?
Actually, it is quite simple. Consider this; all of the problems we have just lived through have been caused by leverage, e.g., that is the Wall Street term for borrowing money. Because big banks can borrow huge amounts of money, if one of them goes broke because of their lousy management, a huge amount of money goes out of the financial system.
But banks are required to hold back some "assets" to cover possible losses on the investments they made and paid for with borrowed money. The fundamental problem has been (and still is) that banks were only required to with hold only a tiny amount of money to cover their huge bets financed with borrowed money. Some big banks borrowed as much as forty times (40)the amount of money they kept as "reserves".
So here is how we solve the financial problem without government regulators meddling very much.
We create a set of bank sizes measured by assets. As banks grow larger with increasing assets, the reserves they must keep on their books also increase.
For example, JPMorganChase, Bank of America and Wells Fargo now hold a full 30% of all U.S. banking assets. Suppose we make them hold 25% of their assets to cover loans they have made already. The next smallest tier would have to hold 20%, the next 15%, etc. That is compared to 5% (or less now).
First thing this solves is the Too Big Too Fail problem. If the management allows the bank to grow into a higher tier, they automatically become less of a threat to the overall economy. Actually, managements will most likely manage their businesses not to grow larger since higher reserves limit their profitability.
All the government has to watch is manipulation of the definition of assets. Now that is not a minor problem, e.g., see how Lehman Brothers managed their phony assets, but it should be manageable if the government is ever going to be serious about managing Wall Street excesses.
This rule would cover commercial banks, investment banks and hedge funds. Thus, the "shadow" banking system gets regulated.
The first thing you can expect is that existing big banks will set up new banks, overseas for instance, in which they will hold substantial ownership positions. That's O.K. since each new bank will be subject to the same rules and none of them can get so big they risk the whole U.S. economic system.
Occam said it best centuries ago, "The simplest explanation is usually the best one."
It was a very complicated bill that did a lot to establish even more intrusion of government into private business. The past fifty years is great evidence that regulation doesn't work very well (see the SEC and Bernie Madoff). So what is to be done?
Actually, it is quite simple. Consider this; all of the problems we have just lived through have been caused by leverage, e.g., that is the Wall Street term for borrowing money. Because big banks can borrow huge amounts of money, if one of them goes broke because of their lousy management, a huge amount of money goes out of the financial system.
But banks are required to hold back some "assets" to cover possible losses on the investments they made and paid for with borrowed money. The fundamental problem has been (and still is) that banks were only required to with hold only a tiny amount of money to cover their huge bets financed with borrowed money. Some big banks borrowed as much as forty times (40)the amount of money they kept as "reserves".
So here is how we solve the financial problem without government regulators meddling very much.
We create a set of bank sizes measured by assets. As banks grow larger with increasing assets, the reserves they must keep on their books also increase.
For example, JPMorganChase, Bank of America and Wells Fargo now hold a full 30% of all U.S. banking assets. Suppose we make them hold 25% of their assets to cover loans they have made already. The next smallest tier would have to hold 20%, the next 15%, etc. That is compared to 5% (or less now).
First thing this solves is the Too Big Too Fail problem. If the management allows the bank to grow into a higher tier, they automatically become less of a threat to the overall economy. Actually, managements will most likely manage their businesses not to grow larger since higher reserves limit their profitability.
All the government has to watch is manipulation of the definition of assets. Now that is not a minor problem, e.g., see how Lehman Brothers managed their phony assets, but it should be manageable if the government is ever going to be serious about managing Wall Street excesses.
This rule would cover commercial banks, investment banks and hedge funds. Thus, the "shadow" banking system gets regulated.
The first thing you can expect is that existing big banks will set up new banks, overseas for instance, in which they will hold substantial ownership positions. That's O.K. since each new bank will be subject to the same rules and none of them can get so big they risk the whole U.S. economic system.
Occam said it best centuries ago, "The simplest explanation is usually the best one."
Wednesday, April 21, 2010
The Recession Is Over!! Don't believe it for a minute
The cover of this week's Business Week announces the Recession is Over. And that is the foolish fantasy of economists who don't really understand how Business Cycles work. You can understand Business Cycles by reading The Great Recession Conspiracy at www.scribd.com/doc/16864582/The-Great-Recession-Conspiracy, at Lulu.com and as a Kindle book.
The Business Cycle is driven by psychology, not finance, so a little bump in manufacturing output to re-stock shelves does not signal the end of the recession. Here are the facts that actual Americans are facing.
*Fifteen million Americans are completely unemployed.
*Six million have been unemployed for over six months.
*Seven million are working forced shorter hours.
*Unknown millions are saving, not spending, because they don't know how long they will have jobs.
*And virtually all Americans are extremely worried and angry.
Here are some of the measures of that unhappiness.
In 1958, 73% of all Americans said that they trusted the Federal government to do the right thing most of the time. Today, only 22% say the same thing.
39% of all Americans think they have less opportunity than their parents.
50% of all Americans think that the next generation will have a lower standard of living than they do today.
The typical American families income today is actually less than it was in 2000.
The richest 10% of all Americans earn 50% of all income in the U.S. and the other 90% know it.
Teachers, firemen, librarians, policemen and others are losing their jobs.
Small businesses are going bankrupt in record numbers because of a lack of business.
Consumer expenditures account for 70% of the U.S. economy, government about 20% and business the remaining 10%.
The recession will be over when the unemployed go back to work, when those working short hours go back to full time, and when the remainder stop worrying about losing their jobs, and when they re-gain their trust in the government.
When Americans change their minds and start spending again, then the recession will be over. And not one minute sooner.
The Business Cycle is driven by psychology, not finance, so a little bump in manufacturing output to re-stock shelves does not signal the end of the recession. Here are the facts that actual Americans are facing.
*Fifteen million Americans are completely unemployed.
*Six million have been unemployed for over six months.
*Seven million are working forced shorter hours.
*Unknown millions are saving, not spending, because they don't know how long they will have jobs.
*And virtually all Americans are extremely worried and angry.
Here are some of the measures of that unhappiness.
In 1958, 73% of all Americans said that they trusted the Federal government to do the right thing most of the time. Today, only 22% say the same thing.
39% of all Americans think they have less opportunity than their parents.
50% of all Americans think that the next generation will have a lower standard of living than they do today.
The typical American families income today is actually less than it was in 2000.
The richest 10% of all Americans earn 50% of all income in the U.S. and the other 90% know it.
Teachers, firemen, librarians, policemen and others are losing their jobs.
Small businesses are going bankrupt in record numbers because of a lack of business.
Consumer expenditures account for 70% of the U.S. economy, government about 20% and business the remaining 10%.
The recession will be over when the unemployed go back to work, when those working short hours go back to full time, and when the remainder stop worrying about losing their jobs, and when they re-gain their trust in the government.
When Americans change their minds and start spending again, then the recession will be over. And not one minute sooner.
Monday, April 19, 2010
Out of the Mouth of a Rocker
Deer Hunting Story
Even if you don't care about hunting, Gotta Love Ted!
Ted Nugent, rock star and avid bow hunter from Michigan, was being interviewed by a liberal journalist, an animal rights activist. The discussion came around to deer hunting.
The journalist asked, 'What do you think is the last thought in the head of a deer before you shoot him? Is it, 'Are you my friend?' or is it 'Are you the one who killed my brother?'
Nugent replied, 'Deer aren't capable of that kind of thinking. All they care about is, what am I going to eat next, who am I going to screw next, and can I run fast enough to get away. They are very much like ALL MEMBERS OF CONGRESS.'
The interview ended.
Even if you don't care about hunting, Gotta Love Ted!
Ted Nugent, rock star and avid bow hunter from Michigan, was being interviewed by a liberal journalist, an animal rights activist. The discussion came around to deer hunting.
The journalist asked, 'What do you think is the last thought in the head of a deer before you shoot him? Is it, 'Are you my friend?' or is it 'Are you the one who killed my brother?'
Nugent replied, 'Deer aren't capable of that kind of thinking. All they care about is, what am I going to eat next, who am I going to screw next, and can I run fast enough to get away. They are very much like ALL MEMBERS OF CONGRESS.'
The interview ended.
How this plays out will set the economic policy for years to come
April 18, 2010
A Glare on Goldman, From U.S. and Beyond
By GRETCHEN MORGENSON and LANDON THOMAS Jr.
Calls for increased scrutiny of Goldman Sachs emerged on Sunday as two congressmen pressed for investigations into possible taxpayer losses generated in securities sold by the firm, and the British prime minister also asked his nation’s securities regulator to investigate the Wall Street powerhouse because of losses suffered by a major British bank.
The German government, too, said it was considering taking legal action against Goldman because of a German bank’s losses, a spokesman said.
A civil lawsuit filed against Goldman last Friday contained damaging allegations whose reverberations are just beginning to be felt. In the lawsuit, the Securities and Exchange Commission contends that Goldman misled investors who bought a mortgage-related instrument known as Abacus 2007-AC1 by not disclosing that the security was devised to fail.
Goldman has denied the allegations and says it will fight them.
The Abacus transaction cited in the S.E.C. case is just one of 25 such securities worth $10.9 billion that Goldman issued during the mortgage mania. Investors in the Abacus 2007-AC1 security lost $1 billion, regulators said.
The beleaguered American International Group also lost money in its dealings with Goldman on other Abacus securities. A.I.G. insured $6 billion of Abacus securities issued by Goldman; since the government rescued the insurer in September 2008, it has posted $2 billion in losses on these securities. A.I.G. received a taxpayer commitment of $180 billion to keep it from failing and causing havoc in markets worldwide.
Because the government has committed so much money to A.I.G., Representatives Elijah E. Cummings, Democrat of Maryland, and Peter DeFazio, Democrat of Oregon, are asking the S.E.C. to investigate all the Abacus deals issued by Goldman, and especially those insured by A.I.G.
The congressmen want regulators to determine whether fraudulent conduct by the investment firm contributed to billions of dollars in losses. If such conduct is found, the congressmen are urging the S.E.C. to recoup payments made by A.I.G. to Goldman.
Mr. Cummings and Mr. DeFazio are also asking the S.E.C. to refer matters that appear to involve criminal misconduct on the part of Goldman Sachs to the Justice Department.
“We request that S.E.C., with all due haste, pursue investigations into the remaining 24 Abacus transactions for securities fraud, evaluate the extent of any receipt, by Goldman Sachs, of fraudulently generated A.I.G.-issued credit default swap payments, and vigorously pursue the recovery of such payments on behalf of the U.S. taxpayer,” the representatives wrote to Mary L. Schapiro, the head of the commission, in a letter dated April 19. Mr. Cummings and Mr. DeFazio are still gathering signatures from other members of Congress to add to their letter, so it has not yet been sent.
A.I.G. collapsed in the fall of 2008 after the mortgage market plummeted. The company was imperiled when it was unable to supply billions of dollars in collateral to its trading partners as required under the insurance it had written on complex mortgage-related securities like Abacus. Goldman Sachs was one of its biggest trading partners.
The Abacus securities insured by A.I.G. were not among those that the Federal Reserve unwound in late 2008, paying the insurer’s trading partners 100 cents on the dollar for what they were owed.
A.I.G.’s participation was crucial to the success of many Abacus securities issued by Goldman Sachs. In the Abacus deals, a type of derivative known as credit default swaps were linked to mortgage bonds; those firms underwriting the swaps, like A.I.G., were essentially insuring that the mortgage bonds would perform well. When they did not, the swaps created enormous losses for those who sold them.
“We’ve got to look into every aspect of these deals and figure out exactly what went wrong,” Mr. Cummings, a senior member of the House Committee on Oversight and Government Reform, said in an interview on Sunday.
“And if people were participating in any type of fraudulent activity we need to expose it and they need to be brought to justice and we need to get our money back.”
Anger over Goldman’s dealings also surfaced Sunday in Britain, where Prime Minister Gordon Brown accused the firm of “moral bankruptcy.” He said that British regulators should investigate, and that he believed banks themselves would be considering legal action, without specifying which banks.
“We need a global financial levy for the banks,” he said in a television interview Sunday. “We have to quash remuneration packages such as Goldman Sachs’s. I cannot allow this to continue.”
The Royal Bank of Scotland and IKB Deutsche Industriebank of Germany lost just less than $1 billion after buying the Abacus investment vehicle constructed by Goldman. The Royal Bank of Scotland inherited a loss of $841 million after taking over the Dutch bank ABN Amro.
During the financial crisis, each bank was saved from collapse by their home governments. Together, Germany and Britain pumped about $83 billion into the Royal Bank of Scotland and IKB. Because of those bailouts, and with anti-banker sentiment on the rise as Mr. Brown and Chancellor Angela Merkel of Germany face political challenges, the complaint against Goldman will most likely serve as fodder not only for lawsuits but for proponents of tougher financial regulation.
As Britain prepares for a national vote on May 6 and the German state of North Rhine-Westphalia follows three days later with local elections that will have national implications, politicians in both countries were quick to join the chorus of condemnation against Goldman.
The German government has asked the S.E.C. for more information regarding IKB’s part in the scandal and might take legal steps, a spokesman said.
Legal experts said the potential liability of Goldman for losses suffered in the Abacus investments was an issue of debate.
Marcel Kahan, a law professor at New York University, said he suspected that much of the story had not yet been told concerning the strength of the S.E.C. charge. But based on what he has read, he said, the allegations against Goldman look bad but might not be illegal.
For instance, he said that those who lost money in the deal were sophisticated investors who knew what was in the financial instruments and could check them out for themselves. As such, Goldman may argue that there was no material misstatement or omission in the documents and statements that it provided investors.
Peter J. Henning, a law professor at Wayne State University and a former S.E.C. attorney, said he too believed that Goldman might mount a “blame the victim defense.”
“To fight the case, they have to focus on the investors,” he said. “These were very sophisticated investors who weren’t fooled by these transactions.”
Adam Pritchard, a law professor at the University of Michigan who teaches securities law, said the S.E.C.’s inclusion of IKB, the German bank, was important. “I think the S.E.C. has a pretty good argument here,” he wrote. “Conflicts are presumed, so the fact that Goldman had clients that were betting against these C.D.O.’s is scarcely material. The facts alleged here are different. It is one thing to know that there are others betting against you; it is quite another to know that the people betting against you are selecting the bets.”
A spokeswoman for Britain’s financial regulator, the Financial Services Authority, declined to say whether it would start its own investigation into Goldman. It is in contact with the S.E.C. regarding its investigation, she said.
Whether the British regulator begins its own investigation would depend on whether the agency came to believe any of the suspect activity took place in Britain or had an effect there.
Graham Bowley and Andrew Martin contributed reporting.
A Glare on Goldman, From U.S. and Beyond
By GRETCHEN MORGENSON and LANDON THOMAS Jr.
Calls for increased scrutiny of Goldman Sachs emerged on Sunday as two congressmen pressed for investigations into possible taxpayer losses generated in securities sold by the firm, and the British prime minister also asked his nation’s securities regulator to investigate the Wall Street powerhouse because of losses suffered by a major British bank.
The German government, too, said it was considering taking legal action against Goldman because of a German bank’s losses, a spokesman said.
A civil lawsuit filed against Goldman last Friday contained damaging allegations whose reverberations are just beginning to be felt. In the lawsuit, the Securities and Exchange Commission contends that Goldman misled investors who bought a mortgage-related instrument known as Abacus 2007-AC1 by not disclosing that the security was devised to fail.
Goldman has denied the allegations and says it will fight them.
The Abacus transaction cited in the S.E.C. case is just one of 25 such securities worth $10.9 billion that Goldman issued during the mortgage mania. Investors in the Abacus 2007-AC1 security lost $1 billion, regulators said.
The beleaguered American International Group also lost money in its dealings with Goldman on other Abacus securities. A.I.G. insured $6 billion of Abacus securities issued by Goldman; since the government rescued the insurer in September 2008, it has posted $2 billion in losses on these securities. A.I.G. received a taxpayer commitment of $180 billion to keep it from failing and causing havoc in markets worldwide.
Because the government has committed so much money to A.I.G., Representatives Elijah E. Cummings, Democrat of Maryland, and Peter DeFazio, Democrat of Oregon, are asking the S.E.C. to investigate all the Abacus deals issued by Goldman, and especially those insured by A.I.G.
The congressmen want regulators to determine whether fraudulent conduct by the investment firm contributed to billions of dollars in losses. If such conduct is found, the congressmen are urging the S.E.C. to recoup payments made by A.I.G. to Goldman.
Mr. Cummings and Mr. DeFazio are also asking the S.E.C. to refer matters that appear to involve criminal misconduct on the part of Goldman Sachs to the Justice Department.
“We request that S.E.C., with all due haste, pursue investigations into the remaining 24 Abacus transactions for securities fraud, evaluate the extent of any receipt, by Goldman Sachs, of fraudulently generated A.I.G.-issued credit default swap payments, and vigorously pursue the recovery of such payments on behalf of the U.S. taxpayer,” the representatives wrote to Mary L. Schapiro, the head of the commission, in a letter dated April 19. Mr. Cummings and Mr. DeFazio are still gathering signatures from other members of Congress to add to their letter, so it has not yet been sent.
A.I.G. collapsed in the fall of 2008 after the mortgage market plummeted. The company was imperiled when it was unable to supply billions of dollars in collateral to its trading partners as required under the insurance it had written on complex mortgage-related securities like Abacus. Goldman Sachs was one of its biggest trading partners.
The Abacus securities insured by A.I.G. were not among those that the Federal Reserve unwound in late 2008, paying the insurer’s trading partners 100 cents on the dollar for what they were owed.
A.I.G.’s participation was crucial to the success of many Abacus securities issued by Goldman Sachs. In the Abacus deals, a type of derivative known as credit default swaps were linked to mortgage bonds; those firms underwriting the swaps, like A.I.G., were essentially insuring that the mortgage bonds would perform well. When they did not, the swaps created enormous losses for those who sold them.
“We’ve got to look into every aspect of these deals and figure out exactly what went wrong,” Mr. Cummings, a senior member of the House Committee on Oversight and Government Reform, said in an interview on Sunday.
“And if people were participating in any type of fraudulent activity we need to expose it and they need to be brought to justice and we need to get our money back.”
Anger over Goldman’s dealings also surfaced Sunday in Britain, where Prime Minister Gordon Brown accused the firm of “moral bankruptcy.” He said that British regulators should investigate, and that he believed banks themselves would be considering legal action, without specifying which banks.
“We need a global financial levy for the banks,” he said in a television interview Sunday. “We have to quash remuneration packages such as Goldman Sachs’s. I cannot allow this to continue.”
The Royal Bank of Scotland and IKB Deutsche Industriebank of Germany lost just less than $1 billion after buying the Abacus investment vehicle constructed by Goldman. The Royal Bank of Scotland inherited a loss of $841 million after taking over the Dutch bank ABN Amro.
During the financial crisis, each bank was saved from collapse by their home governments. Together, Germany and Britain pumped about $83 billion into the Royal Bank of Scotland and IKB. Because of those bailouts, and with anti-banker sentiment on the rise as Mr. Brown and Chancellor Angela Merkel of Germany face political challenges, the complaint against Goldman will most likely serve as fodder not only for lawsuits but for proponents of tougher financial regulation.
As Britain prepares for a national vote on May 6 and the German state of North Rhine-Westphalia follows three days later with local elections that will have national implications, politicians in both countries were quick to join the chorus of condemnation against Goldman.
The German government has asked the S.E.C. for more information regarding IKB’s part in the scandal and might take legal steps, a spokesman said.
Legal experts said the potential liability of Goldman for losses suffered in the Abacus investments was an issue of debate.
Marcel Kahan, a law professor at New York University, said he suspected that much of the story had not yet been told concerning the strength of the S.E.C. charge. But based on what he has read, he said, the allegations against Goldman look bad but might not be illegal.
For instance, he said that those who lost money in the deal were sophisticated investors who knew what was in the financial instruments and could check them out for themselves. As such, Goldman may argue that there was no material misstatement or omission in the documents and statements that it provided investors.
Peter J. Henning, a law professor at Wayne State University and a former S.E.C. attorney, said he too believed that Goldman might mount a “blame the victim defense.”
“To fight the case, they have to focus on the investors,” he said. “These were very sophisticated investors who weren’t fooled by these transactions.”
Adam Pritchard, a law professor at the University of Michigan who teaches securities law, said the S.E.C.’s inclusion of IKB, the German bank, was important. “I think the S.E.C. has a pretty good argument here,” he wrote. “Conflicts are presumed, so the fact that Goldman had clients that were betting against these C.D.O.’s is scarcely material. The facts alleged here are different. It is one thing to know that there are others betting against you; it is quite another to know that the people betting against you are selecting the bets.”
A spokeswoman for Britain’s financial regulator, the Financial Services Authority, declined to say whether it would start its own investigation into Goldman. It is in contact with the S.E.C. regarding its investigation, she said.
Whether the British regulator begins its own investigation would depend on whether the agency came to believe any of the suspect activity took place in Britain or had an effect there.
Graham Bowley and Andrew Martin contributed reporting.
Sunday, April 18, 2010
Thought for the Day
"I sincerely believe that banking institutions are more dangerous than standing armies."
Thomas Jefferson, 1816
Jefferson has always been my hero.
(Thanks to Simon Johnson for pointing this one out.)
Thomas Jefferson, 1816
Jefferson has always been my hero.
(Thanks to Simon Johnson for pointing this one out.)
What the anti-immigration nuts don't understand
There is some sort of insanity running loose in the country, led by the likes of Tom Tancredo, that says all immigrants to the U.S. are criminals from Mexico. Last week, the government released a study showing the majority of immigrants to major U.S. cities are involved in high paying white collar and professional jobs, and that many of them have brought substantial amounts of money with them. Of course, this leaves out agricultural areas that are totally dependent on immigrant labor. Still, it makes the point that, as usual, the issue in nuanced.
But best of all, today, Tom Friedman describes a start up company in St. Louis that make the same point. The story also illustrates Tom's major idea, The World Is Flat.
Enjoy Tom Friedman at his best.
April 18, 2010
Op-Ed Columnist
Just Doing It
By THOMAS L. FRIEDMAN
St. Louis
You’ve heard that saying: As General Motors goes, so goes America. Thank goodness that is no longer true. I mean, I wish the new G.M. well, but our economic future is no longer tied to its fate. No, my new motto is: As EndoStim goes, so goes America.
EndoStim is a little start-up I was introduced to on a recent visit to St. Louis. The company is developing a proprietary implantable medical device to treat acid reflux. I have no idea if the product will succeed in the marketplace. It’s still in testing. What really interests me about EndoStim is how the company was formed and is being run today. It is the epitome of the new kind of start-ups we need to propel our economy: a mix of new immigrants, using old money to innovate in a flat world.
Here’s the short version: EndoStim was inspired by Cuban and Indian immigrants to America and funded by St. Louis venture capitalists. Its prototype is being manufactured in Uruguay, with the help of Israeli engineers and constant feedback from doctors in India and Chile. Oh, and the C.E.O. is a South African, who was educated at the Sorbonne, but lives in Missouri and California, and his head office is basically a BlackBerry. While rescuing General Motors will save some old jobs, only by spawning thousands of EndoStims — thousands — will we generate the kind of good new jobs to keep raising our standard of living.
It all started by accident. Dr. Raul Perez, an obstetrician and gynecologist, immigrated to America from Cuba in the 1960s and came to St. Louis, where he met Dan Burkhardt, a local investor. “Raul was unique among doctors,” recalled Burkhardt. “He had a real nose for medical investing and what could be profitable in a clinical environment. So we started investing together.” In 1997, they created a medical venture fund, Oakwood Medical Investors.
Perez had a problem with acid reflux and went for treatment to the Mayo Clinic in Arizona, where he was helped by an Indian-American doctor, V. K. Sharma. During his follow-ups, Dr. Sharma mentioned those four words every venture capitalist loves to hear: “I have an idea” — use a pacemaker-like device to control the muscle that would choke off acid reflux.
Burkhardt, Perez and Sharma were joined by Bevil Hogg — a South African and one of the early founders of the Trek Bicycle Corporation — who became C.E.O. Together, they raised the initial funds to develop the technology. Two Israelis, Shai Pollicker, a medical engineer, and Dr. Edy Soffer, a prominent gastroenterologist, joined a Seattle-based engineering team (led by an Australian) to help with the design. A company in Uruguay specializing in pacemakers is building the prototype.
This kind of very lean start-up, where the principals are rarely in the same office at the same time, and which takes advantage of all the tools of the flat world — teleconferencing, e-mail, the Internet and faxes — to access the best expertise and low-cost, high-quality manufacturing anywhere, is the latest in venture investing. You’ve heard of cloud computing. I call this “cloud manufacturing.”
“In the aftermath of the banking crisis, access to public markets is off-limits to start-ups,” explained Hogg, so start-ups now have to be “much leaner, much more capital-efficient, much smarter in accessing worldwide talent and quicker to market in order to do more with less.” He added, “$20 million is the new $100 million.”
And technology is making this all possible. Chris Anderson of Wired Magazine pointed this out in a smart essay in February’s issue, entitled “Atoms Are the New Bits.”
“ ‘Three guys with laptops’ used to describe a Web startup,’ ” he wrote. “Now it describes a hardware company, too” thanks to “the availability of common platforms, easy-to-use tools, Web-based collaboration, and Internet distribution. ... Global supply chains have become scale-free, able to serve the small as well as the large, the garage inventor and Sony.”
The clinical trials for EndoStim are being conducted in India and Chile. “What they have in common,” said Hogg, “is superb surgeons with high levels of skill, enthusiasm for the project, an interest in research and reasonable costs.” This is also part of the new model, said Hogg: Invented and financed in the West, further developed and tested in the East and rolled out in both markets.
What’s in it for America? As long as the venture money, core innovation and the key management comes from here — a lot. If EndoStim works out, its tiny headquarters in St. Louis will grow much larger. St. Louis is where the best jobs — top management, marketing, design — and shareholders will be, said Hogg. Where innovation is sparked and capital is raised still matters.
You don’t hear much about companies like this. Our national debate today is dominated by the ignorant ramblings of Sarah Palin, talk-show lunatics, tea parties and politics as sports — not ESPN but PSPN. Fortunately, though, we still have risk-takers who are not paying attention to any of this nonsense, who know what world they’re living in — and are just doing it. Thank goodness!
But best of all, today, Tom Friedman describes a start up company in St. Louis that make the same point. The story also illustrates Tom's major idea, The World Is Flat.
Enjoy Tom Friedman at his best.
April 18, 2010
Op-Ed Columnist
Just Doing It
By THOMAS L. FRIEDMAN
St. Louis
You’ve heard that saying: As General Motors goes, so goes America. Thank goodness that is no longer true. I mean, I wish the new G.M. well, but our economic future is no longer tied to its fate. No, my new motto is: As EndoStim goes, so goes America.
EndoStim is a little start-up I was introduced to on a recent visit to St. Louis. The company is developing a proprietary implantable medical device to treat acid reflux. I have no idea if the product will succeed in the marketplace. It’s still in testing. What really interests me about EndoStim is how the company was formed and is being run today. It is the epitome of the new kind of start-ups we need to propel our economy: a mix of new immigrants, using old money to innovate in a flat world.
Here’s the short version: EndoStim was inspired by Cuban and Indian immigrants to America and funded by St. Louis venture capitalists. Its prototype is being manufactured in Uruguay, with the help of Israeli engineers and constant feedback from doctors in India and Chile. Oh, and the C.E.O. is a South African, who was educated at the Sorbonne, but lives in Missouri and California, and his head office is basically a BlackBerry. While rescuing General Motors will save some old jobs, only by spawning thousands of EndoStims — thousands — will we generate the kind of good new jobs to keep raising our standard of living.
It all started by accident. Dr. Raul Perez, an obstetrician and gynecologist, immigrated to America from Cuba in the 1960s and came to St. Louis, where he met Dan Burkhardt, a local investor. “Raul was unique among doctors,” recalled Burkhardt. “He had a real nose for medical investing and what could be profitable in a clinical environment. So we started investing together.” In 1997, they created a medical venture fund, Oakwood Medical Investors.
Perez had a problem with acid reflux and went for treatment to the Mayo Clinic in Arizona, where he was helped by an Indian-American doctor, V. K. Sharma. During his follow-ups, Dr. Sharma mentioned those four words every venture capitalist loves to hear: “I have an idea” — use a pacemaker-like device to control the muscle that would choke off acid reflux.
Burkhardt, Perez and Sharma were joined by Bevil Hogg — a South African and one of the early founders of the Trek Bicycle Corporation — who became C.E.O. Together, they raised the initial funds to develop the technology. Two Israelis, Shai Pollicker, a medical engineer, and Dr. Edy Soffer, a prominent gastroenterologist, joined a Seattle-based engineering team (led by an Australian) to help with the design. A company in Uruguay specializing in pacemakers is building the prototype.
This kind of very lean start-up, where the principals are rarely in the same office at the same time, and which takes advantage of all the tools of the flat world — teleconferencing, e-mail, the Internet and faxes — to access the best expertise and low-cost, high-quality manufacturing anywhere, is the latest in venture investing. You’ve heard of cloud computing. I call this “cloud manufacturing.”
“In the aftermath of the banking crisis, access to public markets is off-limits to start-ups,” explained Hogg, so start-ups now have to be “much leaner, much more capital-efficient, much smarter in accessing worldwide talent and quicker to market in order to do more with less.” He added, “$20 million is the new $100 million.”
And technology is making this all possible. Chris Anderson of Wired Magazine pointed this out in a smart essay in February’s issue, entitled “Atoms Are the New Bits.”
“ ‘Three guys with laptops’ used to describe a Web startup,’ ” he wrote. “Now it describes a hardware company, too” thanks to “the availability of common platforms, easy-to-use tools, Web-based collaboration, and Internet distribution. ... Global supply chains have become scale-free, able to serve the small as well as the large, the garage inventor and Sony.”
The clinical trials for EndoStim are being conducted in India and Chile. “What they have in common,” said Hogg, “is superb surgeons with high levels of skill, enthusiasm for the project, an interest in research and reasonable costs.” This is also part of the new model, said Hogg: Invented and financed in the West, further developed and tested in the East and rolled out in both markets.
What’s in it for America? As long as the venture money, core innovation and the key management comes from here — a lot. If EndoStim works out, its tiny headquarters in St. Louis will grow much larger. St. Louis is where the best jobs — top management, marketing, design — and shareholders will be, said Hogg. Where innovation is sparked and capital is raised still matters.
You don’t hear much about companies like this. Our national debate today is dominated by the ignorant ramblings of Sarah Palin, talk-show lunatics, tea parties and politics as sports — not ESPN but PSPN. Fortunately, though, we still have risk-takers who are not paying attention to any of this nonsense, who know what world they’re living in — and are just doing it. Thank goodness!
Finally!! It is beginning to happen
For Goldman, a Bet’s Stakes Keep Growing
By LOUISE STORY and GRETCHEN MORGENSON
For Goldman Sachs, it was a relatively small transaction. But for the bank — and the rest of Wall Street — the stakes couldn’t be higher.
Accusations that Goldman defrauded customers who bought investments tied to risky subprime mortgages have only just begun to reverberate through the financial world.
The civil lawsuit that the Securities and Exchange Commission filed against Goldman on Friday seemed to confirm many Americans’ worst suspicions about Wall Street: that the game is rigged, the odds stacked in the banks’ favor. It is the first big case — but probably not the last, legal experts said — to delve into a Wall Street firm’s role in the mortgage fiasco.
It is a particularly sensitive time for Wall Street. Washington policy makers are hotly debating a sweeping overhaul of the nation’s financial regulations, and the news could embolden those seeking to rein in the banks. President Obama on Saturday stepped up pressure for financial reform by accusing Republicans of “cynical and deceptive” attacks on the measure.
The S.E.C.’s action could also hit Wall Street where it really hurts: the wallet. It could prompt dozens of investor claims against Goldman and other Wall Street titans that devised and sold toxic mortgage investments.
On Saturday, several European banks that lost money in the deal said they were reviewing the matter. They could try to recoup the money from Goldman.
And it raises new questions about Goldman, the bank at the center of more concentric circles of economic and political power than any other on Wall Street. Goldman — whose controversial success has leapt from the financial pages to the cover of Rolling Stone — has fiercely defended its actions before, during and after the financial crisis. On Friday, it called the S.E.C.’s accusations “unfounded.”
Wall Street played a complex and, at times, seemingly conflicted role in the mortgage collapse. Goldman and others worked behind the scenes, bundling home loans into investments for sale to investors the world over. Even now, more than 18 months after Washington rescued the teetering financial system, no one knows for sure how much money was lost on those investments.
The public outcry against the bank bailouts was driven in part by suspicions that a heads-we-win, tails-you-lose ethos pervades the financial industry. To many, that Goldman and others are once again minting money — and paying big bonuses to their employees — is evidence that Wall Street got a sweet deal at taxpayers’ expense. The accusations against Goldman may only further those suspicions.
“The S.E.C. suit against Goldman, if proven true, will confirm to people their suspicions about the total selfishness of these financial institutions,” said Steve Fraser, a Wall Street historian and author of “Wall Street: America’s Dream Palace.” “There’s nothing more damaging than that. This is way beyond recklessness. This is way beyond incompetence. This is cynical, selfish exploiting.”
On Friday, Goldman’s stock took a beating, falling 13 percent and wiping out more than $10 billion of the company’s market value. It was a possible sign that investors fear that the S.E.C. complaint will damage Goldman’s reputation and its ability to keep its hands on so many sides of a trade — a practice that is immensely profitable for the firm.
It is unclear whether the S.E.C. can prevail against Goldman. The bank has long maintained that it puts its clients first and, in a letter in its latest annual report, it reiterated that position. Goldman said it never “bet against our clients” in its trades but rather was trying to hedge against other trading positions.
The transaction cited in the S.E.C. complaint cost investors just over $1 billion, relatively small by Wall Street standards.
Still, Wall Street analysts said Goldman and other banks, having navigated the financial crisis, might now face a new kind of risk: angry investors. Most major Wall Street banks also created collateralized debt obligations, which are at the heart of the Goldman case. C.D.O.’s, which are essentially bundles of securities backed by mortgages or other debt securities, turned out to be among the most toxic investments ever devised.
“Any investor who bought these C.D.O.’s and lost a significant amount of money is probably looking at their investment and wanting to know: what were the details behind the sale?” said William Tanona, an analyst at Collins Stewart. “Will they contact the S.E.C. and say, ‘Here’s the transaction we participated in, and we’d love to know who is on the other side of it?’ ”
The biggest victim among investors, the S.E.C. complaint said, was the Royal Bank of Scotland, which inherited a loss of $841 million after it took over the Dutch bank ABN Amro. According to a person briefed on the matter, the Royal Bank, now controlled by the British government, is studying the documents but is not ready to decide whether to try to recoup money from Goldman.
The German bank IKB Deutsche Industriebank, as well as the German government, which in 2007 put up billions to prevent IKB from collapsing, still seemed to be sorting out who might have legal standing to pursue a possible claim.
Goldman faces a dilemma in its response. Wall Street firms tend to settle cases like this one, but Goldman’s statement on Friday indicated it intended to dig in its heels and fight, perhaps in part to discourage suits by investors. That strategy could set it up for a long, messy and public battle.
The S.E.C. complaint named just one Goldman employee: Fabrice Tourre, a vice president in the bank’s mortgage operation who worked on the questionable transaction.
But securities lawyers say Mr. Tourre appears to be a small fish. Federal investigators may try to gain his cooperation and extend their investigation to other Goldman employees. On Friday, Mr. Tourre’s lawyer did not provide a comment on the complaint.
A big question is how far up this might go. The S.E.C. said the deal in its complaint had been approved by a panel at Goldman, the Mortgage Capital Committee.
“It’s typical that they’d start with someone lower down on the chain and try to exert pressure on that person,” said Bradley D. Simon of Simon & Partners, a white-collar defense lawyer in New York. “Is it really conceivable that no one else was involved in this?”
As the housing market began to fracture in 2007, senior Goldman executives began overseeing the mortgage department closely, said four former Goldman Sachs employees, who spoke on the condition they not be identified because of the sensitivity of the matter.
Senior executives routinely visited the unit. Among them were David A. Viniar, the chief financial officer; Gary D. Cohn, then the co-president; and Pablo Salame, a sales and trading executive, these former employees said. Even Goldman’s chief executive, Lloyd C. Blankfein, got involved.
Top executives met routinely with Dan Sparks, the head of the mortgage trading unit, who retired in spring 2008. Managers instructed several traders to sell housing-related investments. Indeed, they urged Mr. Tourre and a colleague, Jonathan Egol, to place more bets against mortgage investments, the former employees said.
A Goldman spokesman said Saturday that the top executives were not involved in the approval process for Abacus, the deal cited by the S.E.C., and that their involvement with the mortgage department in 2007 was related to their desire to counterbalance the positive bets on housing the banks had already made.
Mr. Blankfein has already been questioned by a Congressional commission about the toxic vehicles Goldman devised and sold, even as the bank realized the housing market was in trouble.
Recent public statements made by Mr. Blankfein seem to conflict with the S.E.C. account.
In testimony in January before the Financial Crisis Inquiry Commission, the panel appointed by Congress to examine the causes of the crisis, for example, he described Goldman’s approach to dealing with its clients: “Of course, we have an obligation to fully disclose what an instrument is and to be honest in our dealings, but we are not managing somebody else’s money.”
But the S.E.C. complaint says Goldman misled investors who bought one of the bank’s Abacus deals. The bank failed to tell them the mortgage bonds underpinning the investment had been selected by a hedge fund manager who wanted to bet against the investment, the S.E.C. says. Those bonds were especially vulnerable, the commission says.
Graham Bowley and Jack Ewing contributed reporting.
By LOUISE STORY and GRETCHEN MORGENSON
For Goldman Sachs, it was a relatively small transaction. But for the bank — and the rest of Wall Street — the stakes couldn’t be higher.
Accusations that Goldman defrauded customers who bought investments tied to risky subprime mortgages have only just begun to reverberate through the financial world.
The civil lawsuit that the Securities and Exchange Commission filed against Goldman on Friday seemed to confirm many Americans’ worst suspicions about Wall Street: that the game is rigged, the odds stacked in the banks’ favor. It is the first big case — but probably not the last, legal experts said — to delve into a Wall Street firm’s role in the mortgage fiasco.
It is a particularly sensitive time for Wall Street. Washington policy makers are hotly debating a sweeping overhaul of the nation’s financial regulations, and the news could embolden those seeking to rein in the banks. President Obama on Saturday stepped up pressure for financial reform by accusing Republicans of “cynical and deceptive” attacks on the measure.
The S.E.C.’s action could also hit Wall Street where it really hurts: the wallet. It could prompt dozens of investor claims against Goldman and other Wall Street titans that devised and sold toxic mortgage investments.
On Saturday, several European banks that lost money in the deal said they were reviewing the matter. They could try to recoup the money from Goldman.
And it raises new questions about Goldman, the bank at the center of more concentric circles of economic and political power than any other on Wall Street. Goldman — whose controversial success has leapt from the financial pages to the cover of Rolling Stone — has fiercely defended its actions before, during and after the financial crisis. On Friday, it called the S.E.C.’s accusations “unfounded.”
Wall Street played a complex and, at times, seemingly conflicted role in the mortgage collapse. Goldman and others worked behind the scenes, bundling home loans into investments for sale to investors the world over. Even now, more than 18 months after Washington rescued the teetering financial system, no one knows for sure how much money was lost on those investments.
The public outcry against the bank bailouts was driven in part by suspicions that a heads-we-win, tails-you-lose ethos pervades the financial industry. To many, that Goldman and others are once again minting money — and paying big bonuses to their employees — is evidence that Wall Street got a sweet deal at taxpayers’ expense. The accusations against Goldman may only further those suspicions.
“The S.E.C. suit against Goldman, if proven true, will confirm to people their suspicions about the total selfishness of these financial institutions,” said Steve Fraser, a Wall Street historian and author of “Wall Street: America’s Dream Palace.” “There’s nothing more damaging than that. This is way beyond recklessness. This is way beyond incompetence. This is cynical, selfish exploiting.”
On Friday, Goldman’s stock took a beating, falling 13 percent and wiping out more than $10 billion of the company’s market value. It was a possible sign that investors fear that the S.E.C. complaint will damage Goldman’s reputation and its ability to keep its hands on so many sides of a trade — a practice that is immensely profitable for the firm.
It is unclear whether the S.E.C. can prevail against Goldman. The bank has long maintained that it puts its clients first and, in a letter in its latest annual report, it reiterated that position. Goldman said it never “bet against our clients” in its trades but rather was trying to hedge against other trading positions.
The transaction cited in the S.E.C. complaint cost investors just over $1 billion, relatively small by Wall Street standards.
Still, Wall Street analysts said Goldman and other banks, having navigated the financial crisis, might now face a new kind of risk: angry investors. Most major Wall Street banks also created collateralized debt obligations, which are at the heart of the Goldman case. C.D.O.’s, which are essentially bundles of securities backed by mortgages or other debt securities, turned out to be among the most toxic investments ever devised.
“Any investor who bought these C.D.O.’s and lost a significant amount of money is probably looking at their investment and wanting to know: what were the details behind the sale?” said William Tanona, an analyst at Collins Stewart. “Will they contact the S.E.C. and say, ‘Here’s the transaction we participated in, and we’d love to know who is on the other side of it?’ ”
The biggest victim among investors, the S.E.C. complaint said, was the Royal Bank of Scotland, which inherited a loss of $841 million after it took over the Dutch bank ABN Amro. According to a person briefed on the matter, the Royal Bank, now controlled by the British government, is studying the documents but is not ready to decide whether to try to recoup money from Goldman.
The German bank IKB Deutsche Industriebank, as well as the German government, which in 2007 put up billions to prevent IKB from collapsing, still seemed to be sorting out who might have legal standing to pursue a possible claim.
Goldman faces a dilemma in its response. Wall Street firms tend to settle cases like this one, but Goldman’s statement on Friday indicated it intended to dig in its heels and fight, perhaps in part to discourage suits by investors. That strategy could set it up for a long, messy and public battle.
The S.E.C. complaint named just one Goldman employee: Fabrice Tourre, a vice president in the bank’s mortgage operation who worked on the questionable transaction.
But securities lawyers say Mr. Tourre appears to be a small fish. Federal investigators may try to gain his cooperation and extend their investigation to other Goldman employees. On Friday, Mr. Tourre’s lawyer did not provide a comment on the complaint.
A big question is how far up this might go. The S.E.C. said the deal in its complaint had been approved by a panel at Goldman, the Mortgage Capital Committee.
“It’s typical that they’d start with someone lower down on the chain and try to exert pressure on that person,” said Bradley D. Simon of Simon & Partners, a white-collar defense lawyer in New York. “Is it really conceivable that no one else was involved in this?”
As the housing market began to fracture in 2007, senior Goldman executives began overseeing the mortgage department closely, said four former Goldman Sachs employees, who spoke on the condition they not be identified because of the sensitivity of the matter.
Senior executives routinely visited the unit. Among them were David A. Viniar, the chief financial officer; Gary D. Cohn, then the co-president; and Pablo Salame, a sales and trading executive, these former employees said. Even Goldman’s chief executive, Lloyd C. Blankfein, got involved.
Top executives met routinely with Dan Sparks, the head of the mortgage trading unit, who retired in spring 2008. Managers instructed several traders to sell housing-related investments. Indeed, they urged Mr. Tourre and a colleague, Jonathan Egol, to place more bets against mortgage investments, the former employees said.
A Goldman spokesman said Saturday that the top executives were not involved in the approval process for Abacus, the deal cited by the S.E.C., and that their involvement with the mortgage department in 2007 was related to their desire to counterbalance the positive bets on housing the banks had already made.
Mr. Blankfein has already been questioned by a Congressional commission about the toxic vehicles Goldman devised and sold, even as the bank realized the housing market was in trouble.
Recent public statements made by Mr. Blankfein seem to conflict with the S.E.C. account.
In testimony in January before the Financial Crisis Inquiry Commission, the panel appointed by Congress to examine the causes of the crisis, for example, he described Goldman’s approach to dealing with its clients: “Of course, we have an obligation to fully disclose what an instrument is and to be honest in our dealings, but we are not managing somebody else’s money.”
But the S.E.C. complaint says Goldman misled investors who bought one of the bank’s Abacus deals. The bank failed to tell them the mortgage bonds underpinning the investment had been selected by a hedge fund manager who wanted to bet against the investment, the S.E.C. says. Those bonds were especially vulnerable, the commission says.
Graham Bowley and Jack Ewing contributed reporting.
Saturday, April 17, 2010
I Quit Redux
I found Shane's comment spot on and encouraging. We now have some Google metrics at work to see if Shane is the only loyalist. Until we get a better reading, I will continue to rant and rave about how Wall Street bankers, aided and abetted by the U.S. Government, is continuing to screw all of the rest of us.
P.S. Shane, thanks for buying the book. Pricing it at $4.95 was David's idea because he wanted to be sure everyone could afford it. Anyway, we were sure not in it to get rich. Break even would have been nice. And I expect a book review when you have had a chance to read The Great Recession Conspiracy. The point we are trying to make in the book gets more important by the day. Obama,et al, continue to talk about reaching some equilibrium point in the economy in spite of the fact that in 500 years, no one has ever found this magical place. Instead, they keep talking about some economic theory crap that we can get there with mathematical formulas. We have just seen how well those work!!
P.S. Shane, thanks for buying the book. Pricing it at $4.95 was David's idea because he wanted to be sure everyone could afford it. Anyway, we were sure not in it to get rich. Break even would have been nice. And I expect a book review when you have had a chance to read The Great Recession Conspiracy. The point we are trying to make in the book gets more important by the day. Obama,et al, continue to talk about reaching some equilibrium point in the economy in spite of the fact that in 500 years, no one has ever found this magical place. Instead, they keep talking about some economic theory crap that we can get there with mathematical formulas. We have just seen how well those work!!
This is too GOOD not to share!!
Goldman’s Stacked Bet
By TOBIN HARSHAW
The ThreadThe Thread is an in-depth look at how major news and controversies are being debated across the online spectrum.
Tags:
goldman sachs, mortgages, s.e.c., Wall Street
From Government Sachs to guest of the government?
Related
* Room for Debate: What Goldman’s Conduct Reveals April 16, 2010
“Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail,” report The Times’s Louise Story and Gretchen Morgenson. Release the schadenfreude!
“Oooh, things are starting to get interesting,” writes Yves Smith at Naked Capitalism. She explains what the bank may have done that crossed the fuzzy, fuzzy line between right and wrong on Wall Street:
A number of journalists and commentators (yours truly included) have taken issue with the fact that some dealers (most notably Goldman and DeutscheBank) had programs of heavily subprime synthetic collateralized debt obligations which they used to take short positions. Needless to say, the firms have been presumed to have designed these CDOs so that their short would pay off, meaning that they designed the CDOs to fail. The reason this is problematic is that most investors would assume that a dealer selling a product it had underwritten was acting as a middleman, intermediating between the views of short and long investors. Having the firm act to design the deal to serve its own interests doesn’t pass the smell test (one benchmark: Bear Stearns refused to sell synthetic CDOs on behalf of John Paulson, who similarly wanted to use them to establish a short position. How often does trading oriented firm turn down a potentially profitable trade because they don’t like the ethics?)
But she’s not sure how the federal action will play out: “Strange as it may seem, structured credit-related litigation is a new area of law, with few precedents. Until the credit crisis, unhappy investors seldom sued dealers and other key transaction participants.”
The S.E.C. says the bank defrauded clients on bundled mortgages. Will it lose its privileged position on Wall Street and in Washington?
For the handful of Americans who haven’t read this, here’s a good bare-bones explanation of what the firm allegedly did from Annie Lowrey of The Washington Independent: “The hedge fund Paulson & Co … handpicked mortgage-backed securities that were doomed to stop performing, being backed with subprime mortgages, and Goldman packaged them into a kind of bond. Paulson bet against the bond, with Goldman acting as the broker; at the same time, Goldman sold the bond to other clients without disclosing that Paulson had engineered the bond to fail. The S.E.C. filing notes that those other clients lost $1 billion. Goldman had no direct stake in the success or failure of the CDO. It made money either way.”
“Finally!!!!” adds Dakinikat at the Confluence. “The details of a S.E.C. lawsuit against Goldman Sachs basically confirms everything we’ve been saying for some time out here in the financial/economic blogosphere. GS basically let some of its hedge fund managers design CDO’s that were bound to fail, sold them as safe, and then placed sidebets knowing full well they would fail. My biggest hope is that this translates into tougher regulation and more transparency in the derivatives market. We’ve been seeing just the opposite as reform moves through committees. If more of this comes, it will be hard for Dodd to pass watered-down regulations while the focus on such antics is sharp.”
“This isn’t just about the fact that Goldman sold its clients some bonds and then later bet against them,” writes Stephen Spruiell at The Corner. “In my view, that wouldn’t be so bad.” So what’s the problem?
Goldman structured and sold a particular bond, a structured product known as a Collateralized Debt Obligation (CDO). … The outside consultant Goldman hired to select which mortgages would go into the CDO, a hedge-fund manager named John Paulson, is now known as one of the most famous housing shorts ever — he made an estimated $3.7 billion betting that these kinds of mortgage-backed bonds would go bad. So it is pretty disturbing that Goldman would bring him in as an “independent manager” to help it construct a CDO and not disclose this fact to the CDO’s buyers.
It would be like holding a basketball game, letting a Vegas sharp secretly select the players on one of the teams, and then presenting it to the public as a fair game. The sharp would have an incentive to select the worst players for his team and then bet against it. According to the SEC, that is exactly what Paulson and Goldman did.
“Knowing nothing other than what I am reading here, that sounds like a winnable suit for the S.E.C.,” adds Tom Maguire at JustOneMinute. “So why hasn’t Goldman settled? My current wild guess — a spate of private lawsuits will come in the wake of this action if it succeeds.”
He’s not the only raising questions about why the firm didn’t cut a deal with the feds. “Shares of Goldman Sachs fell as much as 15 percent on Friday, pulling down other financial stocks, after the Securities and Exchange Commission filed civil fraud charges against the firm, accusing it of creating subprime mortgage securities that were designed to fail,” writes Cyrus Sanati at The Times’s DealBook blog. “But while the charges are serious, there may be signs that the market is overreacting somewhat. The sell-off sliced about $13 billion off Goldman’s market value when it faces fines and penalties that are expected to be in the millions of dollars — most likely considerably less than $100 million. Indeed, by mid-afternoon, Goldman’s shares cut their losses somewhat.”
Not long after the charges became public, Clusterstock’s Henry Blodget, no stranger to fraud investigations himself, wondered about the lack of a settlement and Goldman’s failure to provide a quick response.
Normally, the SEC is in close communication with the targets of an investigation as the investigation progresses. This is why you often see SEC complaints filed at the same time that a settlement is announced. (Recall the Bank of America settlement last year, in which the charges and the settlement agreement were made public at the same time). In this case, however, Goldman appears to have been caught flat-footed. Not only was a settlement not announced, Goldman has not even issued a statement yet.
This suggests that the SEC wanted to maximize the headline value of this charge: For the past hour, the SEC and its allegations have consumed the financial press with no response from Goldman. It also suggests that the SEC may be trying to avoid the intense criticism it got when it filed the Bank of America charges last year.
A rebuttal from Lucas van Praag, Goldman’s supercilious spokesman, wasn’t long in coming — “The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation” but its brevity does lend credence to the idea that the firm was blindsided. (The firm, which has had a bad week, issued a longer explanation of its role in the mortgage markets earlier this month.)
James Kwak at Baseline Scenario has good explanation of the culpability question:
The problem is that the marketing documents claimed that the securities were selected by ACA Management, a third-party CDO manager, when in fact the selection decisions were influenced by Paulson’s fund. Goldman had a duty to disclose that influence, especially since Paulson was simultaneously shorting the CDO. (According to paragraph 2 of the complain, he bought the credit default swaps from Goldman itself. I used to wonder about this; if he bought the CDS from another bank, then Goldman could claim it didn’t know he was shorting the CDO, implausible as that claim might be. But in this case Goldman must have known.)
It seems like the key will be proving that Paulson influenced the selection of securities enough that it should have been in the marketing documents. Paragraphs 25-35 include quotations from emails showing that Paulson was effectively negotiating with ACA over the composition of the CDO, so it’s pretty clear he had influence. The defense will presumably be that ACA had final signoff on the securities, and Paulson was just providing advice, so Paulson’s role did not need to be disclosed. (I don’t know what kind of standard will be applied here.)
Clusterstock’s Joe Weisenthal listened in on an S.E.C. conference call on Friday, in which the agency said that not only did Goldman fail to reveal Paulson’s role in putting the package together, but that “Paulson was presented [to Goldman clients] as having gone long the CDO, when in fact he was short.” Weisenthal took a few other notes:
* The unit is still investigating. It’s possible other banks will be charged
* John Paulson is not included in the charge because he was not misrepresenting anything to anyone.
* If the SEC finds similar structures at other banks, there could be charges against them. But again, nothing official.
* Why aren’t there charges against the CEO? The SEC only goes as high as necessary.
Bloggers are also having fun depicting with a couple of e-mails sent by a Goldman executive with the priceless name Fabrice Tourre, who was at the center of the firm’s shenanigans. According to the S.E.C. complaint:
Portions of an email in French and English sent by Tourre to a friend on January 23, 2007 stated, in English translation where applicable: “More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”
Similarly, an email on February 11, 2007 to Tourre from the head of the GS&Co structured product correlation trading desk stated in part, “the cdo biz is dead we don’t have a lot of time left.”
Not so fab, Fab, writes Elie Mystal at Above the Law: “Giving voice to thought is never good when you are fleecing the masses ….”
To insiders, Goldman’s actions were apparently an open secret. Bloomberg’s Christine Harper reported a few days ago that disgraced former Washington Mutual C.E.O. Kerry Killinger smelled a rat long ago: “ “I don’t trust Goldy on this,’ Killinger wrote in an Oct. 12, 2007, e-mail reply to Todd Baker, Washington Mutual’s executive vice president for corporate strategy and development. ‘They are smart, but this is swimming with the sharks. They were shorting mortgages big time while they were giving CfC advice,’ he said, referring to Countrywide Financial Corp., the home lender that ran short of cash the same year.”
Newsweek’s Michael Hirsh is waiting for the other shoe to drop — or, more likely, an Imelda Marcos-style closetful. “Securities-fraud charges related to the subprime debacle have been few and far between until now (plenty of mortgage originators have been indicted, but Wall Street has remained mostly unscathed),” he points out. “By naming the most prestigious firm on Wall Street and a world-famous hedge fund — Paulson & Co.— known for making some of the biggest profits by shorting subprimes, the S.E.C. has signaled that there may be a lot more indictments to come. And there ought to be. All indications are that, in the late stages of the subprime-mortgage bubble, the kind of alleged fraud identified in the complaint was far more common than is typically acknowledged.”
So, where will things end up? The aforementioned Henry Blodget consulted his crystal ball:
Goldman Sachs will have to write a big check, and then it will be fine: Goldman will likely say the charges have no merit and then, in a month or two, settle with the SEC for a few hundred million dollars (chicken feed). Goldman will then defend itself against the civil lawsuits that arise from this and probably settle those as well…
Fabrice Tourre will be placed on administrative leave or fired (a.k.a., thrown under the bus). He will then spend the next couple of years testifying in this and other follow-on civil lawsuits. The SEC will probably demand a cash settlement from him, too, and boot him out of the industry. … Tourre will likely want to fight the charges … but it will be too risky and expensive for him to do so, so he’ll likely settle. Having made such public allegations, the SEC will make sure that any settlement produces an appropriately tough-looking headline (thus the fine and industry dismissal).
Looking beyond this specific suit, one wonders how this will affect Goldman’s close ties to the government. Interestingly, Timothy P. Carney of The Washington Examiner posted an article this morning on the firm’s efforts to become the good guy on Wall Street.
In his self-styled war against Wall Street, President Obama appears to have a powerful ally: Goldman Sachs…. The nation’s largest investment bank, famously cozy with top government officials in both parties, has tipped its hand to its shareholders, indicating that major financial “reform” proposals will help Goldman’s bottom line.
Goldman’s executives are calling for two regulations here. First, they want the federal government to restrict free-wheeling, heavily leveraged, high-stakes financial risk taking. Second, they want government to set more rules of the road for trading derivatives — financial products that are often complex.These are the very “fat cats” to whom Obama directed his trash talk in January: “If they want a fight, that’s a fight I’m willing to have.” Well, it looks like they don’t really want a fight. It looks like they want more regulation. The question is: What’s in it for Goldman?
Well, as the S.E.C. would like to make clear, that’s always the question, at least for Goldman Sachs.
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In a Rush to Judge Goldman?
Next post In a Rush to Judge Goldman? By WILLIAM D. COHAN
By TOBIN HARSHAW
The ThreadThe Thread is an in-depth look at how major news and controversies are being debated across the online spectrum.
Tags:
goldman sachs, mortgages, s.e.c., Wall Street
From Government Sachs to guest of the government?
Related
* Room for Debate: What Goldman’s Conduct Reveals April 16, 2010
“Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail,” report The Times’s Louise Story and Gretchen Morgenson. Release the schadenfreude!
“Oooh, things are starting to get interesting,” writes Yves Smith at Naked Capitalism. She explains what the bank may have done that crossed the fuzzy, fuzzy line between right and wrong on Wall Street:
A number of journalists and commentators (yours truly included) have taken issue with the fact that some dealers (most notably Goldman and DeutscheBank) had programs of heavily subprime synthetic collateralized debt obligations which they used to take short positions. Needless to say, the firms have been presumed to have designed these CDOs so that their short would pay off, meaning that they designed the CDOs to fail. The reason this is problematic is that most investors would assume that a dealer selling a product it had underwritten was acting as a middleman, intermediating between the views of short and long investors. Having the firm act to design the deal to serve its own interests doesn’t pass the smell test (one benchmark: Bear Stearns refused to sell synthetic CDOs on behalf of John Paulson, who similarly wanted to use them to establish a short position. How often does trading oriented firm turn down a potentially profitable trade because they don’t like the ethics?)
But she’s not sure how the federal action will play out: “Strange as it may seem, structured credit-related litigation is a new area of law, with few precedents. Until the credit crisis, unhappy investors seldom sued dealers and other key transaction participants.”
The S.E.C. says the bank defrauded clients on bundled mortgages. Will it lose its privileged position on Wall Street and in Washington?
For the handful of Americans who haven’t read this, here’s a good bare-bones explanation of what the firm allegedly did from Annie Lowrey of The Washington Independent: “The hedge fund Paulson & Co … handpicked mortgage-backed securities that were doomed to stop performing, being backed with subprime mortgages, and Goldman packaged them into a kind of bond. Paulson bet against the bond, with Goldman acting as the broker; at the same time, Goldman sold the bond to other clients without disclosing that Paulson had engineered the bond to fail. The S.E.C. filing notes that those other clients lost $1 billion. Goldman had no direct stake in the success or failure of the CDO. It made money either way.”
“Finally!!!!” adds Dakinikat at the Confluence. “The details of a S.E.C. lawsuit against Goldman Sachs basically confirms everything we’ve been saying for some time out here in the financial/economic blogosphere. GS basically let some of its hedge fund managers design CDO’s that were bound to fail, sold them as safe, and then placed sidebets knowing full well they would fail. My biggest hope is that this translates into tougher regulation and more transparency in the derivatives market. We’ve been seeing just the opposite as reform moves through committees. If more of this comes, it will be hard for Dodd to pass watered-down regulations while the focus on such antics is sharp.”
“This isn’t just about the fact that Goldman sold its clients some bonds and then later bet against them,” writes Stephen Spruiell at The Corner. “In my view, that wouldn’t be so bad.” So what’s the problem?
Goldman structured and sold a particular bond, a structured product known as a Collateralized Debt Obligation (CDO). … The outside consultant Goldman hired to select which mortgages would go into the CDO, a hedge-fund manager named John Paulson, is now known as one of the most famous housing shorts ever — he made an estimated $3.7 billion betting that these kinds of mortgage-backed bonds would go bad. So it is pretty disturbing that Goldman would bring him in as an “independent manager” to help it construct a CDO and not disclose this fact to the CDO’s buyers.
It would be like holding a basketball game, letting a Vegas sharp secretly select the players on one of the teams, and then presenting it to the public as a fair game. The sharp would have an incentive to select the worst players for his team and then bet against it. According to the SEC, that is exactly what Paulson and Goldman did.
“Knowing nothing other than what I am reading here, that sounds like a winnable suit for the S.E.C.,” adds Tom Maguire at JustOneMinute. “So why hasn’t Goldman settled? My current wild guess — a spate of private lawsuits will come in the wake of this action if it succeeds.”
He’s not the only raising questions about why the firm didn’t cut a deal with the feds. “Shares of Goldman Sachs fell as much as 15 percent on Friday, pulling down other financial stocks, after the Securities and Exchange Commission filed civil fraud charges against the firm, accusing it of creating subprime mortgage securities that were designed to fail,” writes Cyrus Sanati at The Times’s DealBook blog. “But while the charges are serious, there may be signs that the market is overreacting somewhat. The sell-off sliced about $13 billion off Goldman’s market value when it faces fines and penalties that are expected to be in the millions of dollars — most likely considerably less than $100 million. Indeed, by mid-afternoon, Goldman’s shares cut their losses somewhat.”
Not long after the charges became public, Clusterstock’s Henry Blodget, no stranger to fraud investigations himself, wondered about the lack of a settlement and Goldman’s failure to provide a quick response.
Normally, the SEC is in close communication with the targets of an investigation as the investigation progresses. This is why you often see SEC complaints filed at the same time that a settlement is announced. (Recall the Bank of America settlement last year, in which the charges and the settlement agreement were made public at the same time). In this case, however, Goldman appears to have been caught flat-footed. Not only was a settlement not announced, Goldman has not even issued a statement yet.
This suggests that the SEC wanted to maximize the headline value of this charge: For the past hour, the SEC and its allegations have consumed the financial press with no response from Goldman. It also suggests that the SEC may be trying to avoid the intense criticism it got when it filed the Bank of America charges last year.
A rebuttal from Lucas van Praag, Goldman’s supercilious spokesman, wasn’t long in coming — “The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation” but its brevity does lend credence to the idea that the firm was blindsided. (The firm, which has had a bad week, issued a longer explanation of its role in the mortgage markets earlier this month.)
James Kwak at Baseline Scenario has good explanation of the culpability question:
The problem is that the marketing documents claimed that the securities were selected by ACA Management, a third-party CDO manager, when in fact the selection decisions were influenced by Paulson’s fund. Goldman had a duty to disclose that influence, especially since Paulson was simultaneously shorting the CDO. (According to paragraph 2 of the complain, he bought the credit default swaps from Goldman itself. I used to wonder about this; if he bought the CDS from another bank, then Goldman could claim it didn’t know he was shorting the CDO, implausible as that claim might be. But in this case Goldman must have known.)
It seems like the key will be proving that Paulson influenced the selection of securities enough that it should have been in the marketing documents. Paragraphs 25-35 include quotations from emails showing that Paulson was effectively negotiating with ACA over the composition of the CDO, so it’s pretty clear he had influence. The defense will presumably be that ACA had final signoff on the securities, and Paulson was just providing advice, so Paulson’s role did not need to be disclosed. (I don’t know what kind of standard will be applied here.)
Clusterstock’s Joe Weisenthal listened in on an S.E.C. conference call on Friday, in which the agency said that not only did Goldman fail to reveal Paulson’s role in putting the package together, but that “Paulson was presented [to Goldman clients] as having gone long the CDO, when in fact he was short.” Weisenthal took a few other notes:
* The unit is still investigating. It’s possible other banks will be charged
* John Paulson is not included in the charge because he was not misrepresenting anything to anyone.
* If the SEC finds similar structures at other banks, there could be charges against them. But again, nothing official.
* Why aren’t there charges against the CEO? The SEC only goes as high as necessary.
Bloggers are also having fun depicting with a couple of e-mails sent by a Goldman executive with the priceless name Fabrice Tourre, who was at the center of the firm’s shenanigans. According to the S.E.C. complaint:
Portions of an email in French and English sent by Tourre to a friend on January 23, 2007 stated, in English translation where applicable: “More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”
Similarly, an email on February 11, 2007 to Tourre from the head of the GS&Co structured product correlation trading desk stated in part, “the cdo biz is dead we don’t have a lot of time left.”
Not so fab, Fab, writes Elie Mystal at Above the Law: “Giving voice to thought is never good when you are fleecing the masses ….”
To insiders, Goldman’s actions were apparently an open secret. Bloomberg’s Christine Harper reported a few days ago that disgraced former Washington Mutual C.E.O. Kerry Killinger smelled a rat long ago: “ “I don’t trust Goldy on this,’ Killinger wrote in an Oct. 12, 2007, e-mail reply to Todd Baker, Washington Mutual’s executive vice president for corporate strategy and development. ‘They are smart, but this is swimming with the sharks. They were shorting mortgages big time while they were giving CfC advice,’ he said, referring to Countrywide Financial Corp., the home lender that ran short of cash the same year.”
Newsweek’s Michael Hirsh is waiting for the other shoe to drop — or, more likely, an Imelda Marcos-style closetful. “Securities-fraud charges related to the subprime debacle have been few and far between until now (plenty of mortgage originators have been indicted, but Wall Street has remained mostly unscathed),” he points out. “By naming the most prestigious firm on Wall Street and a world-famous hedge fund — Paulson & Co.— known for making some of the biggest profits by shorting subprimes, the S.E.C. has signaled that there may be a lot more indictments to come. And there ought to be. All indications are that, in the late stages of the subprime-mortgage bubble, the kind of alleged fraud identified in the complaint was far more common than is typically acknowledged.”
So, where will things end up? The aforementioned Henry Blodget consulted his crystal ball:
Goldman Sachs will have to write a big check, and then it will be fine: Goldman will likely say the charges have no merit and then, in a month or two, settle with the SEC for a few hundred million dollars (chicken feed). Goldman will then defend itself against the civil lawsuits that arise from this and probably settle those as well…
Fabrice Tourre will be placed on administrative leave or fired (a.k.a., thrown under the bus). He will then spend the next couple of years testifying in this and other follow-on civil lawsuits. The SEC will probably demand a cash settlement from him, too, and boot him out of the industry. … Tourre will likely want to fight the charges … but it will be too risky and expensive for him to do so, so he’ll likely settle. Having made such public allegations, the SEC will make sure that any settlement produces an appropriately tough-looking headline (thus the fine and industry dismissal).
Looking beyond this specific suit, one wonders how this will affect Goldman’s close ties to the government. Interestingly, Timothy P. Carney of The Washington Examiner posted an article this morning on the firm’s efforts to become the good guy on Wall Street.
In his self-styled war against Wall Street, President Obama appears to have a powerful ally: Goldman Sachs…. The nation’s largest investment bank, famously cozy with top government officials in both parties, has tipped its hand to its shareholders, indicating that major financial “reform” proposals will help Goldman’s bottom line.
Goldman’s executives are calling for two regulations here. First, they want the federal government to restrict free-wheeling, heavily leveraged, high-stakes financial risk taking. Second, they want government to set more rules of the road for trading derivatives — financial products that are often complex.These are the very “fat cats” to whom Obama directed his trash talk in January: “If they want a fight, that’s a fight I’m willing to have.” Well, it looks like they don’t really want a fight. It looks like they want more regulation. The question is: What’s in it for Goldman?
Well, as the S.E.C. would like to make clear, that’s always the question, at least for Goldman Sachs.
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Next post In a Rush to Judge Goldman? By WILLIAM D. COHAN
Friday, April 16, 2010
Letter to the Los Angeles Times
Remember the original TARP? Hank Paulson asked Congress for +$700 Billion to buy "toxic" bonds. Then, after only a couple of days, he said he couldn't identify toxic bonds so he diverted the money to other uses. What I could never understand is why he couldn't identify the bad bonds. All he had to do was look at the S&P and Moody's ratings. BBB rated bonds were mostly likely toxic. End of story. How easy could that be?
Well, I found the answer to my question in Michael Lewis's book, The Big Short. As I understand Michael, here is what happened. Wall Street banks took low risk mortgages (substantial down payment, good income, good credit, etc.) which should be rated AAA and mixed them with high risk mortgages (no down payment, no verified income, poor credit, etc.) which should have been rated BBB, and every kind in between. Then they talked the rating agencies into rating these new products AAA.
Next, they stripped all the BBB mortgages out of the original bonds and created new bonds stuffed with BBB mortgages. They convinced the rating agencies that these new bonds were also AAA bonds.
Then they created a new kind of bonds based solely on the cash flow from the BBB (but rated AAA) bonds, and convinced the ratings agencies to rate them AAA also. They were even given a new name, Sovereign Bonds, even though there was absolutely no real assets backing them.
No wonder poor Hank had such a problem. Wall Street banks, one of which he was just CEO, had turned all of Wall Street's innovations into AAA bonds, the garbage and the gold were indistinguishable. How could anyone know?
Apparently, none of this was illegal. Congress seems to believe that it should all remain legal in the future.
Well, I found the answer to my question in Michael Lewis's book, The Big Short. As I understand Michael, here is what happened. Wall Street banks took low risk mortgages (substantial down payment, good income, good credit, etc.) which should be rated AAA and mixed them with high risk mortgages (no down payment, no verified income, poor credit, etc.) which should have been rated BBB, and every kind in between. Then they talked the rating agencies into rating these new products AAA.
Next, they stripped all the BBB mortgages out of the original bonds and created new bonds stuffed with BBB mortgages. They convinced the rating agencies that these new bonds were also AAA bonds.
Then they created a new kind of bonds based solely on the cash flow from the BBB (but rated AAA) bonds, and convinced the ratings agencies to rate them AAA also. They were even given a new name, Sovereign Bonds, even though there was absolutely no real assets backing them.
No wonder poor Hank had such a problem. Wall Street banks, one of which he was just CEO, had turned all of Wall Street's innovations into AAA bonds, the garbage and the gold were indistinguishable. How could anyone know?
Apparently, none of this was illegal. Congress seems to believe that it should all remain legal in the future.
Tuesday, April 13, 2010
Time to quit
A total of 4,046 people have looked at The Great Recession Conspiracy at scribd.com since last July when it became available. Not one single person I do not know bothered to read the book.
In the past year, I have written 103 posts to this blog. As far as I can tell, nobody has read any of them.
There is a message in this massive indifference, and that is it is time to quit. So I will.
In the past year, I have written 103 posts to this blog. As far as I can tell, nobody has read any of them.
There is a message in this massive indifference, and that is it is time to quit. So I will.
Monday, April 12, 2010
It's Happening Right Now
26,292 The number of California business bankruptcy filing last year.
64% more bankruptcy filings in 2009 over 2008.
In the last three years, 50,000 California businesses were liquidated or re-organized.
Small businesses have been the source of over 70% of all new jobs over the last thirty years.
Small businesses are dying and the Administration is doing nothing to help them.
64% more bankruptcy filings in 2009 over 2008.
In the last three years, 50,000 California businesses were liquidated or re-organized.
Small businesses have been the source of over 70% of all new jobs over the last thirty years.
Small businesses are dying and the Administration is doing nothing to help them.
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