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.

            ***

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.

***

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.

Tom Croft and Leo Gerard

Leo W. Gerard: Tom, your new book, Up From Wall Street: The Responsible Investment Alternative, provides both cautionary tales for those responsible for investing workers’ pension funds and a field guide of practical assistance for institutional investors who want to use responsible investing (RI) techniques. Let’s start with the caution. Why should workers care how their pension funds are invested?

Thomas Croft:  As we discovered when we pulled together the original Heartland Labor/Capital Working Group in 1995, it’s incredible how much we don’t know when it comes to the investment practices and trends that affect workers’ retirement assets and other institutional savings.  Before the crash, workers owned over $9 trillion in pension trusts, and, if we added it all up, working families owned $24 trillion in all institutional savings.  So, steelworkers, teachers, insurance holders, students and college endowments, and the vast majority of our population have an interest in how these funds are invested.   

Since these funds control a majority of public stocks, we have an interest in how those corporations are governed.  In terms of the general economy, we have an interest in the general direction of investment flows.  The historian Kevin Phillips has written about the growing power of the financial services industry.  In the 1970s, manufacturing led financial services by a two-to-one margin.  By 2006, goods production had shrunk to just 12% of GDP while financial services jumped to a “swollen 20-21% of GDP.”   So, financial sector profits, as a percent of domestic corporate profits, rose from 16% in 1973 to 41% in 2000s.   That means that vast waves of our savings and assets—our money—has increasingly disappeared into a dark hole called financialization.  I’ll come back to financialization.

So, what it means in terms of the economy is that the country doesn’t build things anymore.  Remember Allentown, and the song by Billy Joel that described the shutdown of Beth Steel?  Bethlehem Steel was originally constructed to build the nation’s rail systems. And those workers helped build the skyscrapers in New York City, and they helped win WWII.   After the Beth Plant was closed, a new Las Vegas Casino was to be built on the former steel site.  Well, the casino couldn’t find the structural steel, at first, to build the casino.  Kind of ironic, but also tragic 

If we can’t find enough steel to build casinos today, how in the world will we build the green jobs industries of the future?   We need steel to build the Obama administration’s proposed new high-speed rail system, right?   And how will the Allentowns and Homesteads and Youngstowns and Flints of this country, and all of our other rust-towns ever fully recover?  We can’t depend on casino jobs, eds and meds, tourist and service jobs alone to replace the lost manufacturing jobs.   We need a robust domestic manufacturing economy if we are going to benefit from the green jobs boom.

As Lynn Williams once said, “The pension savings of American workers should not only guarantee good pensions.  They should guarantee American workers jobs to retire from.”  Beyond that, pension trusts were collectively bargained benefits that are long-term promises to workers so that they can retire with comfort and dignity.  People gave up wage increases and other current benefits to pay for that promise.  Before pensions, and before FDR created Social Security, older workers might be found scrounging through trash bins in the alley or living in poor houses.  Along with Social Security, pension funds are part of a three-legged stool, as it’s called, so that workers can retire without the constant fear of deprivation.   Do we want to go back to the days of the poor house? 

Gerard:  You documented here, and in your earlier work, Working Capital: The Power of Labor’s Pensions, that workers’ pension money could cruelly be used to injure them. Isn’t that investment practice perverse?

Croft:  It’s not only perverse, it should be illegal.  First, as our colleagues put it, there is a gigantic pension industrial complex that is centered on Wall Street that takes hundreds of billions of dollars in fees out of pension funds just to manage our pension funds.  Then, time after time, our money have been sucked and suckered into risky financial schemes that are unsustainable, and eventually crash, destroying the hard-earned savings of tens of millions of workers and their families.  As you have pointed out, before this crash, the country suffered through the savings and loans debacle and the dot-com bust, and similar made-on-Wall-Street catastrophes.  When we come to learn that the CEOs and other financial geniuses who devised these crash schemes all made off with billions in CEO compensation and bonuses, then it’s apparent that we are putting the wrong kind of people in jail.

I’d like to return to the concept of financialization.  A large driver of financialization is the shadow bank system.  The shadow banks include the large banks and investment houses that utilize un-regulated trading and derivative schemes to make immense profits.  They also include the largely unregulated investment funds that invest in the private economy, such as real estate funds, the mega-private equity funds and hedge funds.  These systems became so inter-related that the collapse of one sector then brought down many others.  For instance, when Lehman Brothers went under, the credit default insurance plans that theoretically insured the hedge funds vanished, and the hedge fund market tanked.  After AIG was nationalized, its business continued cratering due to its business selling these default swaps to Lehman and others.  And the pension funds that had invested in these massive hedge funds and the AIGs, etc., then lost tons 

Our pension funds were siphoned into these shadow bank markets.  When pensions invest in alternative investments—not stocks and bonds—there is a term for the ancillary benefits that might result from the investment.  For instance, if a pension fund invests in affordable or workforce housing, the main reason is to achieve a good return on the investment.  But the housing that is also built might be called a collateral benefit.  In Working Capital, Dean Baker and a co-author discovered how hundreds of billions of our trust funds were invested in schemes that caused “collateral damages” for pension beneficiaries, other workers and our society.  For example, our pensions were invested in off-shore sweat-shop corporations—many American owned — that not only exploited third-world workers but also then shipped cheap products back into the country, causing jobs to be ultimately lost here.  And the lure of investing in the dot-coms that never had realistic business plans contributed to the last crash.  

There’s lots of examples, but collateral damage investing continued after the crash.  We all know about the sub-prime mortgage and the housing bubble disasters.  Well, CalPERS, the California public employees pension fund, along with many other state pensions, lost $1 trillion in one case alone by investing in securities backed by sub-prime mortgages. 

A lot of my research went into hedge funds and mega-buyout funds.  Hedge funds were originally designed as an investment program for wealthy investors.   Then hedge assets boomed over the last decade, growing ten-fold from 1998 to 2008 (to over $2 trillion).  From 2002 to 2007, the share of dollars in hedge assets coughed up by institutional investors—including pensions, university endowments, foundations, and insurance funds, etc.–jumped from 2% to 50%.   That’s a lot of money for what became, in essence, a Wall Street game to short markets and firms.  

And the money pouring into private equity, climbing by 2006-2007 to $301 billion, came disproportionately from institutional investors.  In the case of the mega-private equity funds—which in reality looked like the large LBO funds in the 1980s—there’s ample evidence that many of the funds over-leveraged their portfolio firms, leading to firm failures and bankruptcies.  Or worse, they stripped and flipped their acquisitions.  That includes Simmons Bedding, a Steelworker-represented company that just filed for bankruptcy and closed plants.  That includes Mervyn’s, Linens ‘n Things, and many others.  The money that the Boston mega-fund used to destroy Simmons came from pension funds.   Why?

In addition, they have been privatizing many our longest-standing companies—firms that often had good labor relations.  These new Wall Street barons—like KKR, Blackstone Partners and Apollo Partners–now own many of the largest employers in America and Europe; in essence, they have achieved a new stage in corporate ownership.  What does that mean for those workers, communities and our economies?  We should be investing our money to build up companies, not tear them down.

They’ve also damaged many of our civic institutions.  I don’t have to look far to see the damage.  Here in Pittsburgh, CMU and the University of Pittsburgh recently filed fraud lawsuits against Westwood Capital —ostensibly a hedge fund– after their $114 million investment vanished.  And the Pennsylvania public pension fund lost an additional $2.5 billion (than they would have otherwise, according to some estimates) by betting on an extremely large hedge fund gamble (almost 1/3 of total portfolio).  Colleges, states and municipal pension funds are cash-strapped.  That’s no reason to bet the farm. 

Worse, Congress and the White House have not passed meaningful financial reforms that might have prevented or moderated the 2008 crash and the ones before it.  The author Tom Wolfe dubbed these new corporate owners the “New Masters of the Universe.”  I call them the Shadow Bank Robbers.   Not only should government and institutional investors force transparency, reasonable fees and prohibitions against practices that harm workers, companies and communities, we should re-regulate, bring back the New Deal protections that were discarded.  And it wouldn’t hurt if we put the shadow bank robbers behind bars.  Bernie Madoff got caught running what he called a hedge fund; thousands of uber-financiers are making off with billions running an even larger ponzi scheme that is perfectly legal.  It’s crack finance, and it should be illegal.

Gerard: What struck me in your book is these two sentences:

“This book tells the story of a group of responsible enterprise and real estate investors who are profitably investing pension and similar assets in good jobs, affordable housing, and a green future. This book shows how workers’ capital, endowments, and other institutional investors, through responsible investment principles, can do well and do good at the same time.”  

My emphasis added because I think most people would not believe you could do both. They would think that if you made socially-correct investments, you would lose money. What did your research show?

Croft:   When I started writing the book, I traveled to towns and cities all over North America.  I came to know some remarkable and innovative stewards of our capital…worker-friendly investors who have built projects and invested in ventures and companies in ways that make you proud.   These investors were managing about $35 billion.  And, in fund after fund, investment after investment, these responsible fund managers have been—for the most part–financially successful. 

None of the real estate funds that I surveyed in this field guide were investing in sub-prime scams.  And none of the private enterprise investors were investing, as far as I know, in the LBO over-leveraging strategies that failed so dramatically.  So, the book shows you can do well and do good.   How?  They’re making honest profits (for our pension funds) but also treating workers with respect, investing in affordable and multi-family housing, advanced manufacturing and green jobs. 

In Pittsburgh, for example, pensions invested some $3/4 billion in worker-friendly real estate funds that successfully built multi-family housing, revitalized brownfields and re-built new commercial workplaces all over the region.  And worker-friendly enterprise funds have, in fact, saved steelworker jobs of two manufacturing firms that were bankrupt.  So, thousands of jobs were created or saved just in this area.  And these investments were the tip of the iceberg, as I’m sure many of the large redevelopment investors in the region were capitalized by institutional investors.

So, my book shows that worker-friendly investment funds have indeed had singular and significant impacts on the regions, economic sectors, companies and projects in which they invest.  Most of the funds met or bested their respective investment benchmarks.  The portfolio investments showcased in the field guide yielded not just good returns-on-investment, but also collateral benefits for working people and the environment. 

Gerard:  So that is terrific news for workers. You’ve given me the big numbers. In the book, though, you provide specific examples where these investments worked out both for the investors and workers. Would you give one here?

Croft:   There are so many important examples.  The AFL-CIO Investment Trusts worked on efforts to rebuild New Orleans, including a factory making sustainable manufactured housing.  The MEPT Fund rebuilt a burned down hospital on the north tip of Roosevelt Island, New York, and converted it into an award-winning green housing community with 500 units, plus a daycare center and essential amenities.  The KPS Capital Partners Fund restructured a bankrupt transportation company with factories in towns like St. Cloud and Crookston, Minnesota, and Winnipeg, Manitoba, now employing 1,800 union workers making hybrid busses. 

And, let’s take a really big case that helped Steelworkers.  On May 14, 1999, in the largest union-led buyout in the country since 1994, KPS Special Situations Fund partnered with other investors and a minority ESOP formed by employees to buy a pulp and paper mill, an extruding plant, and five converting plants from Champion International (for $200 million), which was distressed.  The new company, Blue Ridge Paper Products, was launched with 2,200 new employee owners.  Blue Ridge is a leading integrated manufacturer of liquid packaging, envelope paper and coated bleachboard used in food service packaging. The Company also produces specialty uncoated and extrusion coated papers. 

The Company had eight manufacturing facilities located in seven states, including the paper mill in Canton, North Carolina, the extruding mill in Waynesville, North Carolina, and in five Dairy Pak converting plants in Georgia, Iowa, Texas, New Jersey & Olmsted Falls, Ohio. Blue Ridge subsequently acquired another Dairy Pak plant in Richmond, Virginia from MeadWestvaco.

And, this company became greener.  The Canton mill became a charter member of the EPA National Achievement Track Program in 1999.  Due to a $400 million investment in new technology over a decade, the facility is one of the most efficient and environmentally-friendly pulp mills in the world.

In July 2007, Blue Ridge was sold to Packaging Holdings Corp.  KPS returned approximately 2.5 times its invested capital to its investors—including pension funds– and employee-stockholders had approximately $30 million of cash deposited into their ESOP accounts.  What a huge success!

Gerard:  Let me press you a little bit, though, because everyone will be asking this question when pension funds have suffered so badly during this downturn in the economy.  Would responsible investing have made a differenc 

Croft:  In my travels, I watched as great states and communities buckled from the weight of the Great Recession: Downstate New York.  The auto towns of the Great Lakes states.  The strapped communities of California.  From years of working in Pennsylvania, I’ve come to understand what happens when investment markets red-line communities.   Boom towns go bust, and rust towns take their place.  When the economy falls as rapidly as it did, most sectors of the economy get dragged down.

This was the largest market crash and recession since the 1930s.  So, many of the investments by even good investors were bound to be weighed down.  But my point has been that irresponsible investment practices—using our money—were a large factor in the crash, as they have been over and over.  

Some of the worker-friendly investors will inevitably suffer because the firms they’ve invested in are now having a hard time.  Some of the real estate funds have suffered redemptions from pension funds having to re-balance their assets (since pension funds lost so much in the general markets).  But as I said, the responsible funds did more due diligence, so their investments were not as risky.  If they’ve had trouble, they’ll likely recover quickly. And some funds have actually done pretty well since the downturn started.

So, we also know that it’s time that our assets are put to work for the long-term, and not in ways to destroy our economy.  With the Obama Administration’s help and guarantees, for instance, we could co-invest real money to re-build our cities and towns, and re-grow and re-shape this economy.   And our money should be invested so that markets serve society—community, in other words– and not the other way around.   We indeed have the capacity to construct infrastructure, reinvigorate our cities, and create those highly-anticipated green jobs for our children.   We just have to re-claim control of our money.

Gerard:  Well, let’s talk for a minute about California Public Employees Retirement System, then, the nation’s largest pension fund. CalPERS did engage in some responsible investing, as noted in your book. But it has suffered terribly and is expected to fire some of its real estate investment managers. Is that simply a result of the market and could not have been avoided?  Or should they really, in your estimation, have been doing something else.

Croft:   For all the things that CalPERS did right in terms of double-bottom line investing, as it’s called—investing in green housing and buildings, urban investments, and clean technology– it may have been overly aggressive in alternative investments.  And CalPERS was caught up in the sub-prime and real estate bubble markets.  CalPERS is, in fact, suing Moody’s and other ratings agencies because the pension fund claims that it did not know that a $1 trillion investment in securities (that I mentioned earlier) were in fact backed by sub-prime mortgages.  And some of their high profile investments in large real estate projects and overly-risky private equity have been slammed.  But CalPERS has recovered to the $200 billion level, and, given the fiscal crisis in California, we’re all hopeful that recovery will continue.  Some of my labor friends are now concerned that CalPERS is going back into the “dark pool,” doubling down in hedge funds and the mega-LBO funds to make up for the losses.

Gerard: What kind of response have you gotten to the book and what do you hope will happen as a result. 

Croft:   It’s really been great.  We’ve started to get a lot of coverage, and the book is making the rounds.  I’d like to see Heartland be able to create an ongoing “Center for Responsible Capital” so that we can continue to push responsible investments and act as a watchdog for union members and communities against investment abuses.

Your earlier support and that of the union has allowed me to write this book.   And, your leadership in capital strategies, rebuilding manufacturing, and kicking off the green economy has provided a lot of inspiration for the book, and we actually quoted you a couple of times—simply because it could not have been stated better.   We’ve now come to understand that responsible investors have been, profitably, creating hundreds of thousands of good jobs, building hundreds of thousands of living spaces, and helping to rebuild cities and communities.  So, as you said, our capital stewards can indeed invest in a responsible future—our future, and that of our children—and invest in a vision of the economy that’s more humane and sustainable.

***

Thomas Croft is an international expert on innovative capital strategies and jobs-oriented economic revitalization policies. He serves as executive director of the Steel Valley Authority, a regional economic development organization for Pittsburgh and 11 municipalities in the Mon Valley. The authority uses creative techniques to preserve and revitalize companies in crisis. Croft also is director of the Heartland Network, a working group of responsible pension investment advocates in the U.S. and Canada. Croft was commissioned by the Heinz Endowments to write Up From Wall Street.

Robert Reich

By Robert Reich
Former U.S. Secretary of Labor, Professor at Berkeley

One out of four homeowners is now under water, owing more on their homes than the homes are worth. Why? The biggest single factor behind the housing crisis is rising unemployment. According to the latest ABC-Washington Post poll, one out of every three Americans has either lost their job or lives in a household with someone who has lost a job. Today it takes two and sometimes three incomes to buy the groceries and pay the mortgage or the rent. So if one of those incomes is gone, a homeowner can’t make the payment.

The scourge of unemployment is splitting America into three groups: (1) the third just mentioned, whose households are in danger of losing their homes and whose kids are surviving on food stamps (that’s up to one in four children in America today); (2) the vast majority of Americans who are managing but worried about keeping their jobs and homes; and (3) a small number who are taking home even more winnings than they did in the boom year 2007.

Prominent among category (3) are Wall Street bankers, many of whom are now concluding their most profitable year ever. Goldman Sachs is so flush it’s preparing to give out bonuses in a few weeks totaling $17 billion. That will mean eight-figure compensation packages for lots of Goldman executives and traders. JPMorgan Chase is rumored to have a bonus pool of around $5 billion. The three other major Wall Street banks are ratcheting up their compensation packages so their “talent” won’t be poached by Goldman or JPMorgan.

Wall Street is booming again in large part because the rest of America — categories (1) and (2), above — bailed it out to the tune of $700 billion last year. The Street has repaid some of that but, according to the bailout program’s inspector general, much of it is gone forever. For example, the taxpayer money that bailed out giant insurer AIG went directly through AIG to its “counterparties” like Goldman Sachs — to whom Tim Geithner, according to the inspector general, gave away the store. As Goldman Sachs prepares to dole out some $17 billion to its executives and traders, it’s worth noting that Goldman received $13 billion a year ago from the rest of us via AIG and Geithner, no strings attached.

Which brings us back to homeowners who are falling further behind. The $75 billion federal program designed to bribe banks to modify mortgages has been a bust. No one knows the exact number of mortgages that have been modified (that will be reported next month) but housing experts I’ve talked with say it’s a tiny fraction of the number of homeowners in trouble. Seems that the big banks can’t be bothered. “Some of the firms ought to be embarrassed,” Michael Barr, the assistant Treasury secretary for financial institutions told the New York Times. Barr says the government will try to use shame as a corrective, publicly naming institutions that have moved too slowly.

Shame? If we’ve learned anything over the last year, it’s that Wall Street has none. Eight months ago Wall Street lobbyist beat back a proposal to give bankruptcy judges the right to amend mortgages in order to pressure lenders to reduce principle owed, just like Wall Street lobbyists are now beating back tough regulations to prevent the Street from causing another meltdown. Goldman Sachs, attempting to preempt a firestorm of public outrage when it dispenses its $17 billion of bonuses, is setting up a crudely conceived $500 million PR program to help Main Street.

Shame won’t work. Only political muscle and courage will. Congress and the Obama administration should give homeowners the right to go to a bankruptcy judge and have their mortgages modified.

And while they’re at it, resurrect the Glass-Steagall Act that used to separate investment from commercial banking, so Wall Street can’t continue to use other people’s money to gamble.

Finally, before Goldman hands out $17 billion in bonuses, claw back the $13 billion Goldman took from AIG and the rest of us and add it to the pool of money going for mortgage relief.

***

Cross-posted from Robert Reich’s Blog

***

Robert Reich served as the nation’s 22nd Secretary of Labor and now is a professor of public policy at the University of California at Berkeley. His latest book, “Supercapitalism,” is out in paperback. For copies of his articles, books, and public radio commentaries, go to www.robertreich.org.

Leo W. Gerard

By Leo W. Gerard
USW International President

In New York, the oldest and snobbiest financial and advising ventures are called “white shoe” firms.

This, they say, arose from the days when their hoity-toity employees wore white bucks to work. 

These days, white shoe firms bear names notorious outside New York, like Goldman Sachs and Morgan Stanley. That’s because their arrogance, risky investments and confounding dealing in derivatives caused last fall’s Wall Street meltdown, slaughtered white shoe firms like Lehman Brothers, froze credit nationwide, and threw the rest of us into the Great Recession. 

Now unemployment is up to 9.8 percent, a 26-year high. Banks repossessed 88,000 homes in September and filed foreclosure notices on another 344,000, according to RealtyTrac. Suicide hotlines report increases in calls, and a study released in July by researchers at several universities including the University of California documented the connection between unemployment, suicide and murder. Each percent increase in unemployment raised suicide rates by .8 percent and homicide rates by .8 percent, the research team found.

There’s blood on those white bucks. But the guys wearing them don’t seem to notice.

When bankers’ backs were up against the wall, the taxpayers of the United States bailed them out to the tune of $700 billion. Some, like Bank of America, took the welfare then repaid that generosity by doling out billions in bonuses. BofA got $45 billion from taxpayers, then gave $3.6 billion in bonuses to Merrill Lynch workers, just as BofA bought Merrill — which lost $25 billion in 2008. 

Banksters always argue that they must pay massive bonuses to reward and retain their best and brightest. Yet the best and brightest had managed to undermine Wall Street and lose $100 billion at the nine firms that received government welfare in 2008.  Realistically, finding lower-cost replacements for them shouldn’t be a problem since lots of unemployed bankers are pounding New York streets. The New York City Office of Management and Budget determined that Wall Street banks cut 30,000 jobs in 2008.

Still, Wall Street continues to reward incompetence. Morgan Stanley, for example, increased the proportion of its revenues to be paid as compensation and benefits – to total a whopping $6 billion by September — despite three straight losing quarters this year. This is how the London Telegraph characterized the decision in an Oct. 21 story:

“Investment bank Morgan Stanley has more than doubled the share of revenues it will hand out in pay and bonuses to its 62,000-strong army of bankers and brokers despite a 91 pc drop in profits last quarter.”

Right now, they’d each get $96,774, but Morgan Stanley has another quarter to add to that pool of pay.

Investment house Goldman Sachs has set aside $11.4 billion so far for compensation, setting a pace for an average Goldman worker to get $773,000. That would more than double last year’s earnings for the average Goldie.

Contrast that with the U.S. Census report that the typical worker nationwide lost $1,860 for a reduced wage of $50,303. Or compare it to the experience of the woman in the Oct. 21 New York Times story who competed with 500 other applicants for one $13-an-hour clerk job opening at an Indiana trucking company.

When America’s median income workers paid to bail out those white shoe swells, they thought something would change. “There is some failure in the finance industry to appreciate the level of public antagonism toward whatever Wall Street symbolizes,” Orin Kramer, a Democratic fund-raiser who is a partner in an investment firm, told the New York Times’ David D. Kirkpatrick earlier this month.

Dr. Daniel E. Fass, who was chairing a Democratic fundraising event with Kramer, told the Times’ Kirpatrick, “The investment community feels very put-upon. They feel there is no reason why they shouldn’t earn $1 million to $200 million a year, and they don’t want to be held responsible for the global financial meltdown.”

And, indeed, they’re acting like it never happened. JPMorgan Chase & Co. went out this year and made billions doing exactly what caused the crash last year – trading like crazy in derivatives. 

So a parent figure had to step in. The Obama Administration acted this week. The Federal Reserve announced it would crack down on pay packages at the nation’s 28 largest banking companies in ways intended to discourage risky practices. And the Treasury Department announced that it will order pay cuts and perk limitations for top officials at the firms still on welfare. They are Citigroup, Bank of America, American International Group, General Motors, Chrysler and the automakers’ financing agencies.

This new lifestyle will be devastating for some of those on welfare. Their perks could be limited to $25,000 – only half of a typical American worker’s annual salary. And the cash portion of their salaries could be slashed by 90 percent and replaced by stock that cannot be sold for years. The point is to align their personal interests to the firm’s long-term financial health.  It is an attempt to discourage risky investments that seemed profitable for the purpose of immediate bonus payments but later exploded like the AIG derivatives scandal. 

The white shoe crowd, failing to understand that the president was trying to help them clean up the mess at their feet, immediately started whining and complaining. It just wouldn’t work, they said, because pay-pinched executives would run to firms unrestricted by the government. That’s all for the good because, again, there are 30,000 Wall Streeters searching for jobs.

The pay restrictions will set a proper tone. Perhaps Wall Street will hear it before, as the New York Times described it, “populist animosity toward Wall Street and corporate America” grows too great.

If that happened, the blood on their white bucks might be their own.

Leo W. Gerard

By Leo W. Gerard
International President

Randel K. Johnson, vice president of that esteemed group, the U.S. Chamber of Commerce, recently revealed a corporate-squelched truth in a slip of the tongue.

During a debate on May 15 with Stewart Acuff of the AFL-CIO about the Employee Free Choice Act, Johnson admitted – finally – that the act preserves secret ballot elections for unions. The act would allow workers – rather than employers – to decide whether to form a union by conducting a secret ballot election or by collecting signed membership cards from a majority of workers.

Incredibly, for as much as unearned-bonus-grubbing-CEOs have lied about secret ballots in their relentless campaign against the Employee Free Choice Act, that was not Johnson’s revelation.

No, here’s what he disclosed: If the act passes, he said, “It would be a rare union that would decide to risk a normal secret ballot election.” 

Risk. Interesting word, Mr. Johnson.

The Chamber of Commerce knows there’s a huge risk to secret ballot elections. And the Chamber likes it that way. Employers stack the deck against workers in secret ballot elections. They don’t publicly admit it though. That’s why Johnson’s use of the word “risk” was so surprising.

The Chamber and big corporations like Wal-Mart are intent on defeating the act because it would remove from employers the power to force workers to conduct secret ballot elections.  It would strip from employers that ability to generate risk, to defeat unions, and thus to further shrink wages and the American middle class.

A Cornell University professor, Kate Bronfenbrenner, who has researched labor issues for a quarter century, issued a new study last week that clearly illustrates the risk of secret ballot elections and how employers have labored long and hard to increase that risk in recent years. It’s called, “No Holds Barred: The Intensification of Employer Opposition to Organization.”

Among the tactics she documents employers using in the weeks before the “secret ballot” election to thwart unionization are firing of union organizers, threats to close the plant or cut wages and benefits, and forcing workers to meet one-on-one with supervisors who intimidate and interrogate them to determine whether they support the union.

Bronfenbrenner concluded, “This combination of threats, interrogation, surveillance, and harassment has ensured that there is no such thing as a democratic ‘secret ballot’ in the NLRB (National Labor Relations Board) certification election process. The progression of actions the employer has taken can ensure that the employer knows exactly which way every worker plans to vote long before the election takes place.”

Her study showed employers implementing these tactics more frequently than in the past. When she compared organizing campaigns in this five-year period to those in the studies over the previous 20 years, she discovered two disconcerting facts: the cases in which employers used 10 of these threatening techniques in the run-up to elections more than doubled. And employers focused much more on coercive and punitive methods rather than positive procedures such as unscheduled raises and promotions.

Not surprisingly, she also found that as employers exploited harsher tactics and intensified their attacks in the weeks before “secret balloting,” the union was more likely to lose. And, conversely, she found that in campaigns where public sector workers tried organizing and government agencies refrained from coercive and illegal tactics, the union was significantly more likely to win.

If it weren’t so easy for employers to create risk for workers, millions more could get the union protection they want. Surveys show an increasing number of American workers desire a union. In the mid 1990s, it was 40 percent. Now it’s 53 percent. Yet only 12.4 percent of American workers have that protection – and the better wages and benefits that go with it.

Bronfenbrenner addressed this issue in her report: “Our findings suggest that the aspirations for representation are being thwarted by a coercive and punitive climate for organizing that goes unrestrained due to a fundamentally flawed regulatory regime that neither protects their rights nor provides any disincentive for employers to continue disregarding the law.”

She continues: “Unless serious labor law reform with real penalties is enacted, only a fraction of the workers who seek representation under the National Labor Relations Act will be successful.”

That reform is the Employee Free Choice Act, and there’s the point of Johnson’s use of the word risk. The Chamber of Commerce intends to kill the act and leave risk fully on the shoulders of workers. As Bronfenbrenner showed, that would mean fewer will be unionized. Middle class wages and benefits would continue to decline.

It is time for American workers to stop bearing all of the risk. They’re working for less and bailing out the very people who are obstructing their ability to fairly bargain for more.

In October, Bank of America, which has received more than $45 billion in taxpayer bailout money, hosted a conference call with conservatives and business officials, including a representative of AIG, which has received more than $100 billion in taxpayer bailout money, to organize opposition to the Employee Free Choice Act. Then in March, just days after the act was introduced, Citigroup Inc., which got $50 billion in bailout money, hosted a similar conference call, this one led by Glenn Spencer of the U.S. Chamber of Commerce.

During the October call, Bernie Marcus, co-founder of Home Depot, said he should be on a 350-foot boat in the Mediterranean, but he thought fighting the Employee Free Choice Act was more important because, “This is the demise of a civilization. . . This is how a civilization disappears.”

Yes, the Employee Free Choice Act could contribute ever so slightly to dissipation of a decadent class. Unionization is how the middle class re-emerges. America could do without a few filthy-rich boys lolling on yachts in the Mediterranean. At the heart of America, however, must be a strong and broad middle class.

David Sirota

By David Sirota
Author of “The Uprising: An Unauthorized Tour of the Populist Revolt”

In 2006, journalist Christopher Hayes wrote a little-noticed article for In These Times magazine about a proposal in Oregon to crack down on predatory lending. The initiative had become so popular that conservative legislators supported it fearing that if it were put on the state’s ballot, the resulting gusher of grassroots support would not only ratify the measure, but depose the bank-allied Republican Party, too.

Hayes’ piece was titled “Economic Populism Proves Popular,” the headline a sarcastic middle finger flashed at a political and media Establishment that portrays policies “supporting the rights and power of the people” — i.e., the dictionary definition of “populism” — as somehow anathema to the people. 

That depiction, of course, continues today. But now, populism isn’t just popular in America; it is becoming the dominant paradigm, and that has the Establishment frightened.

For years, the country watched its populist desire for health care, tax, trade and financial reform run into the reality of elite politicians handing out trillions of dollars worth of corporate welfare and bank bailouts as the economy collapsed. Not surprisingly, a new Rasmussen poll on attitudes toward government and corporations shows 75 percent of the country “can be classified on the populist or Mainstream side of the divide” while just 14 percent “side with the political class.”

As if to confirm the chasm, this “political class” — consultants, politicians, lobbyists and commentators — has been denigrating populism as too overwrought to be taken seriously. Listen to a typical pundit defending AIG’s bonuses or criticizing demands for a new trade policy, and you will inevitably hear the word “populist” accompanied by the word “rage” and/or “dangerous,” followed by tributes to the status quo. 

This elite propaganda, says Georgetown University’s Michael Kazin, dismissively implies “that anger from ordinary people is emotional, coming from people who don’t understand how the economy works and are just lashing out at their social betters.” 

The caricaturing cribs from Richard Nixon’s playbook. Whereas the 36th president got himself re-elected by steering the country’s anger at the Vietnam War into anger at countercultural war protestors, today’s political class portrays the public’s outrage as the nation’s biggest problem, rather than what the public is justifiably outraged at.

Today, though, Tricky Dick’s tactics aren’t working, and not just because 2009’s economy is far worse than 1972’s. 

This is the era when “You” are Time magazine’s person of the year — an era whose information and interactivity revolution now has us looking to ourselves for direction, not officialdom’s gatekeepers. Additionally, America has lately been taught to expect results from democracy. TV viewers get to decide “American Idol” winners, Facebookers get to change their site’s bylaws and voters get to autonomously use Obama campaign resources to win elections — and we get to do all this from outside the press clubs and smoke-filled rooms.

This profound rewiring of instincts and expectations is why the vilification of “populist rage” has failed as a political barbiturate, why the country still seethes, and why both parties are suddenly listening to “the people” instead of the Establishment. This is why, for instance, Republicans are staging “Tea Party” protests against federal spending and why Democrats are pushing bills to expand health care, re-regulate Wall Street and cap executive pay — because they know the political class, however offended, can no longer stop a voter backlash. 

Admittedly, contradiction is everywhere: Republican rallies bewail deficits the GOP manufactured, and Democrats lament deregulatory schemes they originally crafted. But no matter how hypocritical the response is, it is a response, and that represents change from decades of aloof government. It suggests a democratic renewal whereby populism — i.e., advocating what the public wants — isn’t merely one popular brand of politics, but is politics itself. 

David Sirota is the bestselling author of the books “Hostile Takeover” (2006) and “The Uprising” (2008). He is a fellow at the Campaign for America’s Future. Find his blog at OpenLeft.com or e-mail him at ds@davidsirota.com.

Robyn E. Blumner

By Robyn E. Blumner,
St. Petersburg Times Columnist

Let’s be frank. There are contracts and then there are contracts. Those retention bonus contracts held by American International Group executives in its financial products division were apparently inviolate. No matter how many smart lawyers Treasury Secretary Tim Geithner consulted, the contracts were bulletproof, and a default could lead to punitive damages.

Then there are the kind of employment contracts that most of the rest of us have. They’re not explicitly spelled out in a sign-on-the-dotted-line kind of way, and there are certainly many fewer zeros, but they are promises made in exchange for one’s labor nonetheless. The difference is that these “contracts” are eminently fluid and disposable.

Here’s the employment contract we all had in mind when joining the work force: Work hard, be loyal and in exchange you can expect job security, steady income gains, health insurance and a dignified retirement.

But those ideas are so nostalgic today as to be naive.  MORE

First Published in the St. Petersburg Times Sunday, March 29, 2009

David Sirota

By David Sirota
Author of “The Uprising: An Unauthorized Tour of the Populists Revolt”

United Steelworkers President Leo Gerard likes to say that Washington policymakers “treat the people who take a shower after work much differently than they treat the people who shower before they go to work.” In the 21st century Gilded Age, the blue-collar shower-after-work crowd is given the tough, while the white-collar shower-before-work gang gets the love, and never before this week was that doctrine made so clear.

Following news that government-owned American International Group (AIG) devoted $165 million of its $170 billion taxpayer bailout to employee bonuses, the White House insisted nothing could be done to halt the robbery. On ABC’s Sunday chat show, Obama adviser Larry Summers couched his passive-aggressive defense of AIG’s thieves in the saccharine argot of jurisprudence. “We are a country of law – there are contracts (and) the government cannot just abrogate contracts,” he said.

The rhetoric echoed John Adams’ two-century-old fairy tale about an impartial “government of laws, and not of men.” Only now, the reassuring platitudes can’t hide the uncomfortable truth.

Last month, the same government that says it “cannot just abrogate” executives’ bonus contracts used its leverage to cancel unions’ wage contracts. As the Wall Street Journal reported, federal loans to GM and Chrysler were made contingent on those manufacturers shredding their existing labor pacts and “extract(ing) financial concessions from workers.” In other words, our government asks us to believe that it possesses total authority to adjust contracts at car companies it lends to, and yet has zero power to modify contracts at financial firms it owns. This, even though the latter set of covenants might be easily abolished.

According to New York Attorney General Andrew Cuomo, these allegedly inviolate AIG agreements promised bonus money the company didn’t have and were crafted by executives who knew the firm was collapsing, meaning there is a decent chance these pacts could be invalidated under “fraudulent conveyance” statutes. They also might be canceled via force majeure clauses allowing one party to rescind a pact in the event of extraordinary circumstances – like, perhaps, the collapse of the world economy. (Note: Business Week reports that corporations are already citing the recession as reason to invoke such clauses and nix their business-to-business contracts.)

But, then, those legal cases require a government that treats AIG’s shower-before-work employees with the same firmness that it treats the auto industry’s shower-after-work employees, not the government we have – the one that believes “the supreme sanctity of employment contracts applies only to some types of employees but not others,” as Salon.com’s Glenn Greenwald says.

Mind you, this double standard works the other way, too. Congressional Republicans have long supported the laws letting bankruptcy courts annul mortgage contracts for vacation homes. Those statutes help the shower-before-work clique at least retain their beachside villas, no matter how many of their speculative Ponzi schemes go bad. But for those who shower after work, it’s Adams-esque bromides against “absolving borrowers of their personal responsibility,” as the GOP announced it will oppose legislation permitting bankruptcy judges to revise mortgage contracts for primary residences.

Certainly, for all the connotations of fairness inherent in American politics’ “country of law” catchphrases, most of us know that the selective application of legal principles is as old as the Republic. However, lots of us are only now discovering that inequality is so pronounced that the time of day we bathe determines the enforcement and reliability (or lack thereof) of even the most basic contracts. We are just realizing that for all the parroting of America’s second president, we are ruled by a government of men, and not of laws.

David Sirota is a fellow at the Campaign for America’s Future. Find his blog at OpenLeft.com or e-mail him at dsdavidsirota.com.<–>

Leo W. Gerard

By Leo W. Gerard
International President

AIG Chairman Edward M. Liddy gets the Creep of the Week award for his stunning, overwhelming, dumbfounding display of cluelessness.

Liddy not only awarded $165 million in bonuses to the very AIG employees whose risky speculation in credit default swaps bankrupted the once-great insurance giant, forcing it to beg for $170 billion in taxpayer bailouts, he then claimed he was a helpless victim of retention bonus contracts written before he took over in September. Here’s exactly what he said: “Quite frankly, AIG’s hands are tied.”

No other contender for this week’s Creep prize awarded by the USW sunk close to those depths of obtuseness. And in so many diverse areas! Let’s count the ways:

First, there’s Liddy’s claim that he just can’t squirm out of contracts. Boy, he’d be the first CEO on God’s green earth to be too feeble to break a contract. Think about it: Congress insisted that the Big Three auto companies crack open their contracts with the United Auto Workers to qualify for federal bailout money. Union contracts at all sorts of companies across this country have been broken, bent, re-opened and renegotiated by cooperative labor organizations willing to accept a variety of cuts to preserve employment during an economic crisis caused by the likes of, well, let’s face it, reckless speculators at AIG! But, somehow, Liddy couldn’t find a way to break, bend, re-open or renegotiate contracts with the white collar workers who caused the mess taxpayers are both suffering and cleaning up.

Second, there’s Liddy’s claim that he had to honor the bonus contracts or he’d be sued by his employees. With a straight face, Liddy asserted that the employees in AIG’s Financial Products subsidiary who neglected to account for the possibility of a decline in real estate prices would actually list their names on court documents contending they deserved extra money after bankrupting the company. If Liddy thinks there’s a jury in America that would buy that argument and award the bonuses, I’ve got some credit default swaps I’d like to sell him. It’s clear, in fact, even Liddy doesn’t buy the argument since he’s declined to publicly release the names, though he has given a great deal of information – under duress – to New York Attorney General Andrew M. Cuomo who is working on a lawsuit to recover the bonuses for taxpayers.

Third, there’s Liddy’s failure to understand these simple facts: people who caused a company’s demise don’t get bonuses and neither do employees of companies getting bailouts with federal tax dollars. The average AIG bonus payment was $395,000 – though 51 employees got more than $1 million and the winner of the fattest bonus got $6.4 million. Liddy told Congress he has asked some of the 418 recipients to return half of their bumps. If all 418 complied, the average would decline to a mere $197,500. That may be chump change to a Wall Streeter, but it is a life-saving sum to a middle class worker who has lost his job or can’t pay his mortgage because of Wall Street’s greed and  recklessness. In addition, there’s an important reciprocal issue Liddy failed to understand: the fury he has provoked by paying those bonuses has made the middle class even less willing to invest their tax dollars in any future bailouts that Congress may claim AIG or Wall Street banks desperately need.

Fourth, there’s Liddy’s ability to treat with reverence those who caused the financial meltdown while regarding with disdain those who suffer as a result of it. It was Liddy’s contention that his white collar workers were special. He had to give them the bumps, or they would abandon AIG, refusing to clean up the mess they’d made. That didn’t apply to auto workers, though. No one cared what happened to them. They could be furloughed as a result of Wall Street’s misbehavior — and pay taxes to clean it up as their bonus. But what’s worse is the level of continued boldfaced, outright deception from Liddy and his like. The bumps were crucial for retention, he said, right? Wrong. Cuomo discovered that 11 big time bonus beneficiaries – those who got $1 million or more – had already left AIG.

Fifth, Liddy acted as if the American people didn’t already own 80 percent of his company. Earlier this month, after AIG reported a $61.7 billion quarterly loss, the largest in corporate history, the federal government promised to help prop it up by giving it another $30 billion in taxpayer dollars. The solution here is simple, as the Washington Post pointed out in a story last week. If the feds simply insist on a 100 percent share of the company, which, frankly, the American people deserve for that kind of investment, the bonuses stop.

In addition to Creep of the Week, Liddy gets a special bonus award: Clueless of the Week.