Blog

Michael Winship

By Michael Winship
Senior writer at Bill Moyers Journal on PBS

I attended a screening this week of Alex Gibney’s new documentary, Client 9. It’s the story of the rise and fall of New York State Governor Eliot Spitzer, brought down by imperial hubris and a reckless penchant for ladies of the evening.

Gibney, an Oscar-winning filmmaker, creates a fascinating narrative. Both he and Spitzer readily concede that it was the former governor who did himself in; he haplessly provided the guns and ammo that polished him off. But there is a compelling case made suggesting that there were plenty of enemies, both in politics and business, with a motive to see him destroyed, plus the wherewithal and contacts to help grease the skids.

After all, it was Spitzer who, as state attorney general and self-appointed “Sheriff of Wall Street,” went after corruption and greed in the finance industry, exposing investment bank stock inflation, securities fraud, predatory lending practices, exorbitant executive compensation and illegal late trading and market timing perpetrated by hedge funds and mutual fund companies. Some of these practices were, of course, major factors in the calamitous financial follies of 2008.

One of Spitzer’s targets was Maurice “Hank” Greenberg, former chair and chief executive officer of the gigantic insurance company AIG. He was forced to resign by the AIG board in March 2005 after Spitzer charged Greenberg and the company with manipulative behaviors in violation of insurance and securities laws. Ultimately, criminal charges were dropped but when AIG collapsed during the ’08 meltdown, ultimately receiving the largest of the Federal bailouts — 182 billion taxpayer dollars – Greenberg said he was “bewildered” that things could have gone so wrong.

In Client 9, I was struck by a statement attributed to Greenberg, who in his AIG heyday supposedly was fond of joking, “All I ask for is an unfair advantage.”

Just three days before the screening, The New York Times had reported that one of the largest donors to a foundation run by the US Chamber of Commerce is a charity run by Greenberg.

According to the Times, “The charity has made loans and grants [to the chamber's foundation] totaling $18 million since 2003. U.S. Chamber Watch, a union-backed group, filed a complaint with the Internal Revenue Service last month asserting that the chamber foundation violated tax laws by funneling the money into a chamber ‘tort reform’ campaign favored by AIG and Mr. Greenberg. The chamber denied any wrongdoing.

“The complaint, which the chamber calls entirely unfounded, raises the question of how the chamber picks its campaigns, and whether it accepts donations that are intended to be spent on specific issues or political races.” (more…)

When I grew up back in the 1950′s, the heart of the U.S. economy was Detroit and when my grandfather retired and moved to Florida in the late 50′s from Youngstown, Ohio, he and his friends had good pensions and health insurance and could enjoy life at the end.  Back then most Americans were union members and unions came about through battling corporations, company goons and police in the streets, They just didn’t hand us fair wages and benefits.

The reality today is they have chipped away at benefits, wages, pensions and unions, and that life back in the 50′s is gone.  The reality is they have even stolen the Social Security money and are trying to bankrupt Medicare, which LBJ gave us in the 60′s.  They say we have no money?  Gee, that’s ironic. They had $23.7 trillion to flush into the pockets of the bankers, GM, AIG and foreign banks. The 34,000 “lobbyists” on “K” St. in Washington don’t seem to run out of money paying off our graft-sucking politicians.

When the elite globalists like David Rockefeller pushed NAFTA, GATT and WTO and outsourced our real economy for cheaper labor costs. It destroyed whole cities in America along with unions.  I watched sadly when the Northwest Machinists union tried to strike here in Minnesota, and the company had already trained their replacements down in Arizona over a year ahead of time, and they told their members one man could hold a small sign by the airport in a specified location.  One man?  Says who?  The company and their police? Wow!  Times have changed and so have our lives, wages, benefits, and futures.  I recall when the Teamsters shut down Washington D.C.!  Say what you want about the Teamsters back then, but they got good contracts, pay, benefits and lives for their members, and that’s what counts — results.

American workers have become so beaten down and fooled into handing corporations just about everything so a few fat cat banksters and CEO’s can live billionaire lives and sell out the country they don’t even realize it.

In WWII, the first target in Germany was industry and they have enabled the Chinese to nuke our cities without firing a shot!  Sun Tzu wrote about this over 2,500 years ago.

The globalists have everyone fooled and dumbed down so much that most people just think it’s for the best.  Well, if you want to be serfs maybe. Only with the people forming in union against this nonsense can we save not only ourselves but our very nation.  The politicians, CEOs, police, Wall Street will not.  It’s our choice.  Separated, we are easy to intimidate, terrorize and break. But together?  God bless whatever is left of America.

Karl Hodgson
Eagan, Minn.

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Sen. Russ Feingold, D-Wis., is defending his decision to vote against the Wall Street reform bill on the grounds that it is simply too weak to prevent future crises, and Tim Fernholz is crying foul.

On policy substance, Feingold is undoubtedly correct. From Feingold:

At the start of this process I made clear that I had a simple test for financial reform — will it stop another financial meltdown? This bill fails that test.

Fernholz claims, to the contrary:

The bill will make bailouts very unlikely and bring derivatives out of the shadows.

I just can’t see how Fernholz can believe that line. Megabanks have spent the past two years “earning” their way back to health with the riskiest businesses—derivatives operations and proprietary trading. They’ve managed to make enormous profits from these trading operations even as the global economy has crumbled. At some point, the economy is going to catch up with the trading, and there is going to be a problem. But it will be seven to 12 years before the critical reforms reining in these activities will actually take effect (and for the most part, those reforms have been gutted). Blanche Lincoln’s derivatives language has a seven-year phase-in, and will not apply to the vast majority of derivatives currently being traded. The Volcker Rule ban on prop trading still allows banks to gamble with hedge funds, and this rule will take a dozen years to implement. (more…)

The BP oil spill disaster in the Gulf of Mexico and the 2008 collapse of Wall Street may not be identical twins, but they are siblings. Both are the children of unrestrained corporate recklessness — recklessness that was made possible by a fifty-year corporate conservative campaign to prevent government from holding corporations accountable to the public interest.

The recklessness of Wall Street banks cost eight million Americans their jobs, and millions more their pensions. All of those unemployed Americans and under-utilized plants, stores and warehouses cost us trillions of dollars in lost economic output that we will never recover. It cost governments tax dollars that could have been used to educate children, build new roads, find cures for disease. It cost us hundreds of millions in interest to borrow the money we needed to jump-start the economy and provide basic services.

The Goldman Sachs emails published by Senator Levin’s Committee on Investigations brought Wall Street recklessness into clear focus. There was nothing there about the consequences of their actions for the society or economy at large — only how the trader who referred to himself as “Fabulous Fab” could make millions for himself at the expense of anyone who happened to be gullible enough to buy his worthless investments.

The oil company BP — and the entire global oil industry — have been no less reckless in their unquenchable thirst for profits. It doesn’t take a genius to predict that when you start drilling thousands of wells in mile-deep water in the middle of the economically and ecologically critical Gulf Coast, something might go terribly wrong.

Of course we’ve seen what might go wrong up close and personal before. The Exxon Valdez disaster resulted in incalculable loss to the environment, billions in loss to fishermen and the Alaska economy, and billions more for a cleanup that lasted over three years.

The Santa Barbara oil spill despoiled miles of beaches, and for a time put the brakes on some forms of reckless oil exploration.

We don’t yet know the full consequences of the BP Gulf of Mexico oil disaster for the economy or environment — nor do we know the full range of preparations that BP made in the event of a catastrophe. But the proof of the pudding is in the eating. Whatever preparations they made were obviously far from adequate to stop what may become a cataclysmic event.

One thing we do know for sure: left to themselves, giant international corporations will always be reckless in their pursuit of more and more profit.

These international corporations have no loyalty whatsoever to our country or its welfare. They are huge, free-floating international organizations dedicated to only one goal: making as much money as possible for themselves. Remember that BP is British Petroleum. When it comes to Wall Street, its own advertisements remind us that “Citi Corp never sleeps” — it does business in every corner of the globe. The trading group that sank AIG was based in London. And Goldman Sachs makes its billions from deals and trades in every corner of the world. These companies have no loyalty to the people or interests of the United States.

The cultures of these organizations reward short-term profit. They do nothing to punish employees or leaders for global economic or environmental catastrophe.

There is only one brake on this recklessness. That would be us — in the form of our government.

For the last four decades the Conservative Movement and its corporate backers have promoted the notion that the private sector can and should be left alone to do whatever it wants, since only the private sector (meaning international banks and corporations) can create innovation and economic growth. To facilitate this, conservative leader Grover Norquist says that government should be shrunk so much that it could be “drowned in a bathtub.”

After the Great Depression, we created the Security and Exchange Commission to oversee the stock market, the FDIC to guarantee ordinary depositors against bank failures, and passed the Glass-Steagall Act that prevented banks from engaging in reckless speculative activities that would endanger the economy. As a result there was no “credit crisis” in America for over half a century – and also the greatest period of long-term economic growth on record – the period that led to the birth of the American Middle Class. The first major American credit crisis following the Great Depression happened when the Reagan Administration deregulated the Savings and Loan industry.

And then the Big Wall Street Banks, and their conservative and Republican enablers — convinced Congress to “deregulate” Wall Street and repeal the Glass-Steagall Act in the 1990′s and the results are there for everyone to see. Now they are fighting tooth and nail to kill or weaken legislation that would begin, once again to hold Wall Street Banks accountable.

The big oil companies and Republicans have done exactly the same thing when it comes to weakening regulations, allowing oil companies to drill in riskier and riskier environments. Just as importantly, so far they have blocked passage of legislation to develop clean energy that would threaten the profits of Big Oil but would make it unnecessary for our society to risk the Gulf Coast to get our energy from dirty fuels like oil in the first place.

To prevent future economic and environmental disasters, Progressives have to stand up straight and demand strong, forceful action by government to hold big international corporations accountable. Government is not the problem — in this case it is the solution.

And we have to assert once again that government is not some far off entity that orders us around and intrudes into our lives. As President Obama said last weekend in Ann Arbor — in a democratic society, the government is us. Or as Congressman Barney Frank puts it: “Government is the name of the things we choose to do together.”

We know how to use government to rein in the natural recklessness of huge corporations. Take commercial aviation. In spite of some periodic lapses in government oversight, the generally tough regulation of aviation by the FAA has turned commercial aviation into the safest mode of transportation in human history. It is safer to fly somewhere on an airplane than to take a train, drive, horseback ride, bike or even walk there.

In 2009, there were only three commercial aviation accidents classified as serious by the National Transportation Safety Board over the course of 18 million hours flow. The probability of a passenger being killed on a single flight is approximately eight million-to-one. In other words, if a passenger boarded a flight at random once a day, everyday, statistically it would take over 21,000 years before he or she would be killed.

That record of safety is not because people who go into the airline business are any less interested in making money than people who go into the oil business or Wall Street trading. It is because the public demanded strong government regulation of the safety of commercial aviation. That in turn has created a culture inside aviation companies that makes safety a primary value and actually ostracizes reckless behavior.

Left to its own devices the “invisible hand of the market” will not create that kind of culture. It never has, it never will. That is particularly true where the activities of companies are hidden from view of average citizens and consumers. Even the most sophisticated customers on Wall Street didn’t have a clue how to evaluate the risks associated with the collateralized debt obligations being sold by Goldman Sachs. The electricity consumers whose power is made with coal haven’t got an inkling about the working conditions of the miners that dig out that coal. And the everyday consumers of gasoline sure don’t know what kind of risks BP is taking 5000 feet below the surface of the Gulf of Mexico as it drills for oil.

We can’t just sit by and allow these huge private actors to threaten the well-being and future of our society just because they want to be free to make as much money as they can.

On last Sunday’s “This Week” former Bush adviser Matthew Dowd kept repeating the new Republican mantra: “Washington doesn’t work.” Now there is the ultimate in Republican chutzpa. The modern Republican Party has done everything it can to prevent “Washington” from working. It diverted hundreds of billions of government revenue into tax breaks for the wealthiest Americans. It gutted regulations that held Wall Street and the oil companies accountable. It is blocking clean energy legislation that would free us from the stranglehold of Big Oil. It tried, unsuccessfully, to prevent passage of desperately-needed health care reform that would for the first time hold the private insurance companies accountable – companies that have driven American health care costs to the point where they are 50% higher than any other nation.

Ignoring the fact that Republicans have fought on behalf of big mine owners for years to weaken mine safety oversight, Dowd actually had the gall to say that the mine disaster in West Virginia was an example of how “Washington doesn’t work.”

He correctly pointed out that the draconian Arizona anti-immigrant “papers please” law was a response to the failure of Washington to take action to fix the broken immigration system. But he conveniently forgot that it is the Republicans who refuse to allow action to go forward to pass comprehensive immigration reform.

And, of course, he actually argued that the Gulf oil spill was yet another indication that “Washington doesn’t work.” This, from the party of the now-silent cries of “drill, baby, drill.”

The Republicans and their corporate patrons will do everything in their power to get America to forget the iconic symbols of their failures. They will try to convince us that Barack Obama and the Democrats are somehow responsible for the collapse of Wall Street and the Great Recession – even though it all happened on the Republican watch and because of the failure of their policies and the bankruptcy of their economic philosophy.

But Dowd’s audacity needs to remind progressive Democrats that people across America want action. They want Washington to work. And to make Washington work, we need to demand that Congress reassert the power of government to hold mine owners, Wall Street banks, Big Oil — and all of the most powerful international corporations – accountable to the interests of everyday Americans. 

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Mr. Creamer is the author of the book, Stand Up Straight: How Progressives Can Win.  His firm, the Strategic Consulting Group, works with many of the country’s most significant issue campaigns. He was one of the major architects and organizers of the successful campaign to defeat privatization of Social Security. He is a consultant to campaigns to end the war in Iraq, pass universal health care, change America’s budget priorities and enact comprehensive immigration reform. He has also worked on hundreds of electoral campaigns at the local, state and national level. Mr. Creamer is married to Congresswoman Jan Schakowsky from Illinois.

Richard Eskow

By Richard (RJ) Eskow
Senior Fellow, Campaign for America’s Future

It’s looking like the SEC/Goldman Sachs lawsuit could open up a whole new can of worms — one that Tim Geithner and some bank executives aren’t likely to be very happy about. The story’s about AIG and I used to work there so, as much as I like to stay out of the story, a little personal background is in order. We’ll do the story first and then get to the personal stuff.

The story is this: As almost everyone knows by now, the SEC filed a suit against Goldman over a program called Abacus. The suit alleges that Goldman didn’t tell Abacus investors that the bonds they were essentially insuring were being picked by a firm (Paulson) which was betting that they’d fail. Remember that Twilight Zone episode called “To Serve Man,” where the aliens promised to help everybody but were really just getting ready to eat them? In this story the investors are the humans and Goldman’s execs are the aliens.

The slide show Goldman used to pitch Abacus is pretty damning. It starts with so many pages of fine-print “disclaimers” and “risk factors” that it seems like a Viagra ad (“call your doctor if …”). There’s a lot in there about well-respected (but at best gullible) ACA, this firm that Goldman claimed was picking the bonds. About half of the 66 slides sing ACA’s praises, but there’s no mention of Paulson. There are long descriptions of ACA’s capabilities, their “internal” and “external data sources,” and their “defensive trading” designed to “minimize real market value exposure.”

To serve man. “It’s a cookbook!”

Here’s where it gets uncomfortable for Geithner and some executives. Remember all that criticism of the taxpayer-funded AIG bailout, and how under Tim Geithner’s direction (he was running the New York Fed then) AIG paid 100 cents on the dollar to Goldman and other “counterparties” for its debts? It turns out that AIG insured seven Abacus deals, and the debts they were ordered to pay may have included payoffs on some of these deals. It turns out that AIG reportedly wanted to pay 60 cents on the dollar, but Geither’s New York Fed directed them to pay the full amount.

AIG paid $13 billion from its bailout to Goldman at Geithner’s direction. And now, as the Wall Street Journal reports, the SEC “is investigating whether other mortgage deals arranged by some of Wall Street’s biggest firms may have crossed the line into misleading investors.” And, while “It isn’t known what deals the SEC is investigating,” the Journal adds that “among the firms that created mortgage deals that soon went sour were Deutsche Bank AG, UBS AG and Merrill Lynch & Co., now owned by Bank of America Corp.”

Who were some of the other counterparties paid by AIG under Geithner’s direction? Deutsche Bank, UBS, Merrill Lynch, and Bank of America. This is already a big story, and it could get much bigger. None of those firms can be happy today, knowing that they’re being drawn into the firestorm surrounding Goldman Sachs. And Geithner can’t be happy that his handling of AIG is once again in the news. He took a beating for it back then (including from right-leaning Forbes, the self-described “capitalist tool”), and the NY Fed’s eventual defense of its own actions was ineffectual. Among other things, it claimed that the counterparties’ “contractual rights were well-protected.”

Not if they lied, they weren’t. Nobody has a “well-protected right” to enforce contracts made under false pretenses. It looks now as if the New York Fed didn’t try hard enough.

It’s not as if people weren’t objecting at the time. Eliot Spitzer was all over the issue. Former AIG CEO Hank Greenberg, who had been forced out by Spitzer, wrote that “the federal government is using AIG as a conduit to pump massive sums to the counterparties of AIG’s credit default swaps.” Spitzer, along with William Black and Frank Portnoy, had a very reasonable request: Release AIG’s emails from that period so we can get to the bottom of the situation. That’s a good idea today, too – no matter who it might make uncomfortable.

Now AIG is considering a lawsuit to get some of that money back from Goldman. Two members of Congress want to collect the money, too. Good idea. If it embarrasses some people in high places, there’s a solution for that too: They can push for aggressive derivatives reform, which is something Geithner’s reportedly been resisting up to now. None of us can change our past actions, but we can all vow to do better in the future.

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I can’t write about AIG without disclosing the fact that I used to be an executive there. Not that I’ve been hiding it — I’ve mentioned it in interviews and elsewhere — but I didn’t cover the last AIG crisis so I never had to address the conflict of interest issue directly. Now I do, so here’s the deal:

I worked for a health care company that was acquired by AIG, and wound up staying there for about seven years. I was well-liked at AIG, and I liked working there. I wasn’t involved with financial products. I worked in risk management and property/casualty, focusing on workers’ compensation and health issues. Then I became President of an AIG subsidiary and joint venture that did international health projects and some investment work. I never worked directly for Hank Greenberg, although I had several meetings with him and was the target of his well-known interrogative wrath at least once.

I was still working on Wall Street, though not at AIG, when “quants” became trendy and financial products really began taking off. (We had an all-Wall Street rock and roll band in those days. I still wonder what became of the keyboard player from Merrill Lynch.) Regarding financial products: Some of us thought we saw thunderclouds forming, but everyone told us that these guys knew what they were doing. It turned out there were thunderclouds.

There’s a lot more to the story than that, but for now I’ll just say that my opinion of AIG is this: It was a good company when I worked there. Many people found the aggressive culture hard to handle, but I didn’t. (God knows what that says about me.) It had some real flaws – it was notoriously slow to pay claims, for example. Still, I had many friends there, some of whom caught undeserved flack for what the financial products people did. AIG contained many different companies, but it appears that the 200 employees of the financial products group operated by a completely different set of rules.

The insurance and risk management operations were essentially sound and well-run, and from everything I know they still are. Nobody got rich from bonuses — certainly not me. And the sooner those sound businesses can get out from under the wreckage wrought by the financial products group and its enablers, the better off everybody will be — including the American taxpayer.

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Richard (RJ) Eskow is a consultant and writer. This post was produced as part of the Curbing Wall Street project. Richard blogs at Campaign for America’s Future’s: No Middle Class Health Tax and A Night Light. His website is Eskow and Associates.

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

In the middle of the worst downturn since the Great Depression, with unemployment projected to remain at elevated levels for most of the next decade, we have the bizarre spectacle of a presidential commission on the deficit. The commission is supposed to issue a report to Congress by the end of the year on how to get the long-term deficit under control.

This commission contains more than a bit of the theater of the absurd. At the moment, the only force sustaining the economy and keeping unemployment from rising further is the large deficit being run by the government. If we snapped our fingers and eliminated the deficit tomorrow, we would see the unemployment rate rise well into the double digits. The deficit creates demand in the economy. It is really simple; if the government spends more money, then it will employ more people. If we cut back this support for the economy, fewer people would be employed.

But Washington politicians have trouble saying what is obviously true. So, instead of talking about putting 15 million people back to work, we are talking about curbing the deficit. This would be like creating a commission on water conservation as we struggle to get enough water to quench a fire threatening the capital. But that’s where politics in the United States is right now.

The deficit commission’s co-chairs, former Wyoming Sen. Alan Simpson and Erskine Bowles, a former chief of staff to President Clinton, insist that everything is on the table. In particular, they have both touted their willingness to support cuts in Social Security. It is always impressive to see wealthy and well-connected people who have the courage to take away benefits for which middle-income people have worked and paid.

As the Social Security trustees report shows, Social Security benefits will be fully funded by its designated tax through 2037. The Congressional Budget Office projects that the payroll taxes will be sufficient to pay full benefits through 2044. So, when Simpson and Bowles say that they are anxious to cut workers’ Social Security benefits, they are pledging to take away benefits that these workers have already paid for with their taxes. These guys probably rip off employees on their wages too.

If Simpson and Bowles really gave a damn about the deficit, they would look to where the money is and support a tax on financial speculation. A modest set of financial transactions could easily raise more than $100 billion a year. A modest tax on trades (e.g. 0.5 percent on stock trades and 0.02 percent on trades of futures and credit default swaps) would have almost no impact on ordinary investors. In fact, such taxes would just raise transactions costs back to where they were in the late 80s or early 90s, years when the United States certainly had a vibrant capital market. However, even these modest taxes would impose substantial costs on traders who are actively speculating in these markets, and they could raise lots of money.

The United Kingdom raises the equivalent of $40 billion a year in the United States by just taxing stock trades. Applying the tax to trades of futures, options, credit default swaps, and other derivative instruments traded by banks would substantially increase this amount.

The opponents of this tax insist that it will not raise much revenue and that it is not possible to do without an international agreement. These objections are just excuses to protect Wall Street. The experience of the UK shows that the claims are not true (i.e. lies). The UK shows that it is possible to have the tax in one country and that it can raise plenty of revenue. When people tell us otherwise, we should just tell them to go collect their paycheck from Goldman Sachs and stop bothering us with nonsense.

So, when the deficit commission issues its report, if it comes with a recommendation to cut Social Security and without a recommendation for a FTT, we know what to do with it. Such a report would be worth as much as one of Lehman’s Repo 105′s or a credit default swap from AIG. Congress should send this deficit commission report back to Wall Street and tell them where to put it.

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Dean Baker is author of the new book, “Plunder and Blunder: The Rise and Fall of the Bubble Economy,” PoliPoint Press, LLC. This piece was first published on Truthout.

Robert Kuttner

Robert Kuttner
Co-Founder and Co-Editor of The American Prospect

We have just witnessed what could be a turning point in the Obama presidency. In many respects we can thank Scott Brown. For it took the humiliating loss of Ted Kennedy’s senate seat, and the even deeper incipient humiliation of lost health reform, for Obama to be reborn as a fighter. It remains to be seen whether he will match the resolve that he finally summoned on health reform with comparable leadership on all of the other challenges he yet faces.

But even those of us who were lukewarm on this bill should savor the moment and honor Obama’s odyssey. His Saturday speech was simply the greatest of his presidency. It reminded us of the inspirational figure in whom so many of us invested such hopes last summer and fall. If you have been on Jupiter and somehow missed the speech, you owe it to yourself to watch it.

Visit msnbc.com for breaking news, world news, and news about the economy

At long last, we saw this president leading, as only a president can. And we saw him leading as a progressive Democrat, finally admitting that no common ground with today’s Republicans is possible, narrating stories we all can recognize about the human tragedy that is our current health care system.

We saw him reminding Democratic congressmen and women why progress on health reform is good politics. We saw him using gentle ridicule on the Republicans, who have suddenly become oddly solicitous of the Democrats’ congressional majority.

I noticed that there’s been a lot of friendly advice offered all across town. (Laughter.) Mitch McConnell, John Boehner, Karl Rove — they’re all warning you of the horrendous impact if you support this legislation. Now, it could be that they are suddenly having a change of heart and they are deeply concerned about their Democratic friends. (Laughter.) They are giving you the best possible advice in order to assure that Nancy Pelosi remains Speaker and Harry Reid remains Leader and that all of you keep your seats. That’s a possibility. (Laughter.)
But it may also be possible that they realize after health reform passes and I sign that legislation into law, that it’s going to be a little harder to mischaracterize what this effort has been all about.

We watched Obama master the mechanics of legislative politics, cobbling together a majority one vote at a time. And we observed the Republican right reduced to sputtering frustration.

What a splendid shift from the Obama who less than a month ago went imploringly to reason with the House Republican Caucus.

Until very recently, the press treated this battle as a symmetrical stand-off. Now, with the president at last regaining control of the narrative, the Republicans are revealed as pure obstructionists. As the bill takes effect and citizens actually experience benefits (and as Obama said, “Lo and behold, nobody is pulling the plug on Grandma,”) the Republicans will lose both as the party of No, and as a party that tried and failed to block a beneficial reform that citizens will come to value.

It has taken more than fourteen months for Obama to vindicate as president the leadership potential that we saw on the campaign trail; fourteen months to give up on the fantasy of bipartisanship; fourteen months to start truly inspiring ordinary people as he did as a candidate.

House Speaker Nancy Pelosi deserves to share this moment. She never gave up on this legislation, and she kept after Obama and his aides to be tougher, smarter, and unapologetically partisan. She as much as Obama did the hard work of pulling together a majority, and kept Obama from caving in to Rahm Emanuel’s advice to seek a puny bill that the Republicans might support.

The media is notorious for exaggerating the ups and downs of a president. A few weeks ago, Obama and health reform were doomed and Obama was not up to the job. In the coming days, we will see a jubilant Obama on the cover of newsmagazines. He will be lionized as a giant-killer. His approval ratings will rise, both because more Americans are paying attention to the beneficial features of the bill as opposed to the Republican caricatures and because Americans love a winner.

Whether he continues to earn these accolades depends on what he does next, now that the long distraction of health reform is finally behind us. For this come-from behind victory is only the first step in a long road back to the presidency we thought we were getting when we voted for Barack Obama.

The financial system is setting itself up for a second collapse, as new speculative maneuvers make insiders rich and add risks to the rest of the system. The bill working its way through the Senate is far too weak to fix what is broken. We are inviting new scandals, even before we get to the bottom of what really happened at Lehman Brothers and at AIG.

Mortgage foreclosures continue to increase far faster than the Administration’s feeble program of subsidizing the banks can provide relief to homeowners. Credit is still very tight because of the administration’s strategy of putting Wall Street bank balance sheets ahead of recovery on Main Street.

Last week’s signing ceremony in the Rose Garden for a pitifully small jobs bill was enough to wilt the roses. It was a relic of what we get when we strive for bipartisanship. With the economy short at least eleven million jobs, Obama himself has appointed a bipartisan deficit-reduction commission stacked with members who are almost certain to call for massive cuts in social investment that America needs.

And the health bill itself only begins the long task of wresting control of the health care system from callous insurance and drug companies. We still have to fight for a real public option that is the first step towards national health insurance.

But in the springtime of March 2010, we have seen a president who evidently has learned how to lead, who relishes winning, and who is primed to become a more effective progressive. For that we should be grateful. It should whet his appetite as a fighter — and ours.

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Robert Kuttner’s new book is A Presidency in Peril. He is co-editor of The American Prospect and a senior fellow at Demos. In addition, he is the author Obama’s Challenge.

Leo W. Gerard

By Leo W. Gerard
USW International President 

Tricky auto loans didn’t cause the financial meltdown on Wall Street. Unscrupulous payday lenders didn’t cost taxpayers a $700 billion “troubled asset” bailout. 

So fussing about whether U.S. Sen. Chris Dodd’s financial reform legislation contains an independent Consumer Financial Protection Agency is like worrying about whether you’ll lose your tool shed as a conflagration consumes your home. 

Sure, shielding consumer borrowers would be nice. But safeguarding the entire economy from another collapse is essential. 

Preserving the economy requires limiting, regulating and exposing derivative trading.  That’s because derivatives – those credit default swaps – took down Wall Street. 

Neither the House of Representatives’ version of financial reform nor Dodd’s proposal adequately deals with derivatives. In fact, the language for derivative regulation isn’t even complete in Dodd’s bill. That is to say, it’s unfinished two years after Bear Stearns toppled onto Wall Street, triggering domino disasters at Lehman Brothers, Merrill Lynch and AIG, and warnings from regulators and politicians of a financial doomsday if taxpayers didn’t hand over their hard-earned cash to save financial institutions accustomed to bonus payments in the billions.   

In the Alice-in-Wonderland world of Wall Street, derivatives were designed to make investing safer. Instead, in the hands of speculators, they became a form of betting that nearly destroyed the financial world. 

Conservatives have repeatedly tried to blame the financial collapse on homeowners defaulting on mortgages. That’s ridiculous. That’s blaming the victim of a crime. Wall Street committed the crime. It went like this: Financial wizards on Wall Street created “securities” out of mortgages. They bought a bunch of mortgages, then sold what were supposed to be high yield bonds based on the future income from the mortgage payments. These were called Mortgage Backed Securities. That worked fine as long as the mortgages were solid – in the sense that the homeowner had income and assets sufficient to make the monthly mortgage payments. In the good old days, when banks didn’t sell off mortgages to Wall Street, they had a vested interest in accurately determining whether the applicant really could pay. So they required proof of income and assets. 

But as these Mortgage Backed Securities became overwhelmingly popular investments, and pressure increased to produce more and more mortgages to create these securities, the standards for investigating mortgage applicants slipped. That’s how no-income, no-asset verification loans – known as a liar’s loans – came to be. It wasn’t necessarily the applicant who was lying. Frequently it was the mortgage broker, who exaggerated income numbers to give loans to unqualified applicants so that the broker could reap a big commission for producing a new mortgage. Brokers and banks didn’t care if the loans were so dicey that applicants weren’t able to make even the first month’s payment because the brokers and banks didn’t keep them. They quickly sold them to those Wall Street wizards who were making “securities” out of them. 

Investors could buy what Wall Street calls derivatives — credit default swaps — to “insure” the “securities.” So, for example, if an investor began to feel a little queasy about his “security” paying off because it might be filled with liar loans, then the investor could “insure” it. For an annual premium of a small percent of the face value of the security, the investor got a credit default swap — assurance of payment in full in case of default.   

Unlike insurance, however, derivatives like credit default swaps aren’t regulated. So the “insurance company,” like AIG or a bank or a hedge fund needn’t bother keeping collateral on hand to pay its contractual obligations should a tornado of defaults or a hurricane named Bear Stearns occur. Credit default swap issuers are like lotteries collecting bets but not reserving money to pay winners. 

The derivative market differs from the legitimate insurance market in another important way. The derivative market allows speculators to purchase insurance on securities they don’t own. These are called naked credit default swaps. NPR’s Planet Money reporters explained it like this: it’s like buying insurance on your neighbor’s house. The buyer of that policy has a vested interest in your home burning down. And the more “derivative insurance” speculators buy, the greater the interest in your home’s demise. 

Many financial analysts believe derivative buyers have used naked credit default swaps in deliberate campaigns of destruction — like, for example, to take down Lehman Brothers or the country of Greece. 

If you tried to buy real insurance on your neighbor’s car or house, the broker would turn you away when you couldn’t prove ownership. That’s because states regulate real insurance. And those insurance watchdogs see the inherent problem with speculators placing bets that will pay off if catastrophe befalls the real asset owner. That would, of course, encourage arson. 

If derivatives like credit default swaps were traded on public exchanges, investors could at least see orchestrated efforts to take down a firm. But derivatives are traded behind closed doors, in secret deals between speculators and unregulated “insurers” that Wall Street calls “over the counter” but which should really be called “under the table.” AIG provided $440 billion worth of this “insurance” without any regulator knowing, without sufficient collateral to back up those deals, and without anyone questioning why the buyer needed insurance on something he didn’t own. 

The secrecy also enabled Goldman Sachs to sell subprime mortgage backed securities to investors with a straight face, and then turn around and buy credit default swaps that bet those securities would fail – and thus pay Goldman big bucks. Greg Gordon of McClatchy Newspapers detailed this duplicitous scheme by Goldman in a story last fall entitled, “How Goldman Sachs secretly bet on the housing crash.”

Goldman made out, as its name says, like gold, in this dealing. Goldman announced record earnings during 2009 and distributed  $16 billion in year end bonuses, enough to pay each of its 32,500 workers $498,000. That accomplishment, of course, was aided and abetted by $23 billion in direct and indirect federal aid given to Goldman. It also helped that AIG paid off Goldman bets dollar for dollar – for a total of $12.9 billion from the $180 billion taxpayers gave to rescue AIG. 

In the mean time, the individuals and agencies that Goldman sold those crappy mortgage backed securities to, well, they’re not so golden. For example, California’s public employees’ retirement system, called CALPERS, bought $64.4 million in mortgage-backed securities from Goldman on March 1, 2007, Gordon noted in his story for McClatchy. A little more than two years later, Gordon wrote, they were worth $16.6 million – only 25 percent of their original value. Goldman, by contrast, banked on such losses and won big. It earned $13.4 billion last year. 

Goldman distributed those big bonuses while Main Street continued to reel from the effects of the Wall Street melt down. The financial collapse reverberated through the economy, causing high unemployment – which meant, of course, that many mortgage holders who had legitimately qualified under old stringent bank rules could no longer make their payments. Now they’re unemployed and homeless – while those wizards at Goldman are sipping champagne on those bonuses. Meanwhile, Gordon showed in his story, Goldman is aggressively seizing the homes of delinquent mortgage holders. 

Yet, Congress has failed to act. This is at the same time that European Union officials are considering restricting the trade of derivatives linked to government debt – like those believed to have worsened the economic crisis in Greece. 

Wall Streeters who get millions in bonuses to know better are still trading in derivatives. Nothing is preventing another financial collapse, another day when Wall Street comes crying to Washington for a new $700 billion troubled asset bailout.

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

Last week, when President Obama was asked about the $9 million bonus for Goldman Sachs CEO Lloyd Blankfein, he described Blankfein as a savvy businessman, adding that Americans don’t begrudge people being rewarded for success. While the White House later qualified Obama’s comment about Blankfein and his fellow bank executives, it’s worth examining more closely some of the ways in which Blankfein and the Goldman gang were “savvy.”

Perhaps the Goldman gang’s best claim to savvy was in buying up hundreds of billions of dollars of mortgages and packaging them into mortgage backed securities, and more complex derivative instruments, and selling them all over the world. Blankfein and Goldman earned tens of billions of dollars on these deals. The great trick was that many of the loans put into these securities were issued by banks filling in phony information so that borrowers could get loans that they would not be able to repay. But this was not Goldman’s concern. They made money on the packaging and the selling of the securities.

In fact, Goldman actually recognized that many of these loans would go bad. So they went to the insurance giant AIG and got them to issue credit default swaps against many of the securities it had created. In effect they were betting that their own securities were garbage. Now that is savvy. (It says something else about the highly paid executives at AIG.)

Goldman doesn’t just confine its savvy to the US economy; it shares it with the rest of the world as well. According to the New York Times it worked closely with the Greek government over the last decade to help it conceal its budget deficit. The trick was to construct complex financial arrangements that appeared on the books as “swaps,” even though they were in fact loans. Greece was adding billions of dollars to its debt, and thanks to the ingenuity of the Goldman crew, no one knew about it until now.

But Goldman’s greatest triumph was to get the government to come to its rescue when the financial sector was melting down in the fall of 2008 as the housing bubble that they had helped to fuel began to collapse. The treasury secretary and former Goldman CEO Henry Paulson rushed to Congress and demanded $700 billion for the banks, no questions asked. He dragged along Federal Reserve Board chairman Ben Bernanke for support, along with Timothy Geithner, then the important head of the New York Federal Reserve Bank and now President Obama’s treasury secretary.

This triumvirate somehow managed to convince Congress that we would have a second Great Depression if it didn’t cough up the money immediately with no conditions. At that point Goldman, Morgan Stanley, Citigroup, and most of the other major banks were staring at bankruptcy. While this cascade of bank failures would have been bad news for the economy, there was no plausible scenario in which it would have led to a second Great Depression.

There was also no reason that Congress could not have put conditions on its money. For example, Congress could have dictated that as a condition of getting the money that bankers would get the same sort of paychecks as other workers, that they would get out of highly speculative activity, that the largest banks would be downsized and that the principle would be written down on bad mortgages. At that point, Congress could have told the bank honchos that they had to run around Wall Street naked with their underpants on their head. The bankers had no choice; their banks would crash and burn without government support.

But the savvy Mr. Blankfein and the other bankers got the money no questions asked. In fact, Goldman even got the government to pick up the bankrupt AIG’s debts. Thanks to the government’s intervention, Goldman got paid every penny on its bets with AIG. This came to $13 billion, enough money to pay for 4 million kid-years of health care under the Children’s Health Insurance Program.

No one should doubt that Blankfein is a very savvy banker. Without his ingenuity Goldman Sachs would likely be out of business, its component divisions being auctioned off to the highest bidder. Instead it is making record profits and paying out record bonuses.

But unlike the successful ballplayers to whom President Obama compared Blankfein, Goldman’s success is inherently parasitic. It comes at the expense of taxpayers and the productive economy. President Obama must decide whether he stands with the Wall Street banks or whether he stands with the workers and businesses who actually produce wealth.

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Dean Baker is author of the new book, “Plunder and Blunder: The Rise and Fall of the Bubble Economy,” PoliPoint Press, LLC. This piece was first published in The Guardian and on  Huffington Post.

Moshe Adler -- photo by Martin Gardlin

 By Moshe Adler
Director, Public Interest Economics 

A recent Time magazine poll found that 71% of Americans who responded want the government to place limits on the executive compensation at firms that received bailout money. Yet accomplishing this task selectively is impossible to do.

The government did appoint a czar of executive compensation for these corporations, but he approved a $7-million salary/$3.5-million bonus plan for the head of AIG, 80% of which is now owned by taxpayers. Few workers, executives included, would agree to work for less than the going rate. Executives are simply used to earning millions of dollars, and there is little that either the czar or shareholders can do about it unless Congress limits all executive compensation. But the chance of such legislation passing is slim.

Why is limiting executive compensation so difficult? Because executives have a seemingly unassailable argument — market forces — that University of Chicago professor Steven Kaplan defended in an October debate: “Market forces govern CEO compensation. CEOs are paid what they are worth.”

Of course, market forces are cited not only to justify outsized compensation for executives but also poverty wages for workers. Textbooks claim that minimum wage laws and union wages create unemployment. Just what are these market forces, and should we let them determine executive compensation and wages?

When British economists David Ricardo and Adam Smith examined this question 200 years ago, they concluded that what a person earns is determined not by what the person has produced but by that person’s bargaining power. Why? Because production is typically carried out by teams of workers, managers and machines, and the contribution of each member cannot be separated from that of the rest. A driver and a bus, for example, generate $100,000 of income a year. The driver is paid $25,000. Is this because the driver had transported 10 of the passengers without the bus while the bus had transported 30 of the passengers without the driver? The driver’s pay is so small only because the driver is so weak at the bargaining table.

It was Smith who explained that the bargaining power of each party is determined by the laws that the government passes and the way that it enforces them, and that, as a rule, the government sides with employers against employees. He was particularly concerned with anti-unionization laws. Had he witnessed the largesse that boards of directors are permitted to offer executives, and the government’s behavior toward executives in the current crisis, he probably would have added that the government also sides with executives against shareholders and taxpayers.

Despite the logic of Ricardo and Smith’s explanation that it is power, not productivity, that determines what people earn, the notion that people earn what they “deserve” persists. It dates to the Haymarket riot of 1886 in Chicago — in which police and labor protesters clashed and several policemen and demonstrators were killed — and the labor unrest that followed. Concerned about this unrest, John Bates Clark, a Columbia University professor, warned in an 1899 book: “The indictment that hangs over society is that of ‘exploiting labor.’ If this charge were proved, every right-minded man should become a socialist.”

It was thus with a clear political agenda that Clark took it upon himself to prove that the charge of exploitation of workers was dead wrong. Clark’s “proof” was to ignore the fact that production is carried out by teams and that individual contributions cannot be measured. He simply declared that the contribution of each individual worker and each machine could be measured, and that the earnings of either workers and executives or machines are simply the values of these contributions.

In this view, if the government were to raise wages by law, employers would have no choice but to fire workers, because no employer can pay out more than the worker puts in. And if the government were to set limits on executive compensation, the bright and the talented would choose to work less or limit the level of their performance.

Evidence that Clark’s theory is wrong — that production is carried out by teams and that astronomical compensation is not a requirement for good performance — can be found everywhere. In 1941, Wassily Leontief, a Nobel Prize-winning economist, tried to alert economists to the fallacy of Clark’s theory. But Leontief, like Ricardo and Smith, was ignored. And Clark’s tale that earnings are determined by productivity alone is still being taught around the globe.

Corporate executives take a different approach: picking the argument that suits them. When it comes to their workers’ wages, Clark’s theory rules: The wage of each worker is equal to the value of his or her product, and raising wages will cause unemployment. When it comes to the executives’ own compensation, however, they hide behind the idea that an individual’s contribution can’t be measured. So even when the corporations they run lose big and their stocks decline, they still collect millions in pay. Executive compensation is now so large that executives’ work effort no longer has any relation to the level of their compensation.

Adam Smith got it right: The remedy for the rule of power is the rule of law. We need new laws to check the unfair distribution of the fruits of our labor. One such law could set a maximum ratio at any given company between the highest executive compensation and the lowest worker’s wage. Another could set a minimum ratio for the division of income between labor and shareholders. Still another could raise the minimum wage and tie it to the median wage, which would make the minimum wage a consistent living wage.

Overpaid executives take more than their fair share and leave too little for the rest of us, threatening our health — and that of society.

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Moshe Adler teaches economics at Columbia University and is the author of,  “Economics for the Rest of Us: Debunking the Science That Makes Life Dismal.” He also directs  New York City-based Public Interest Economics, which provides economic consulting services to unions and other progressive organizations.