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Sam Pizzigati

By Sam Pizzigati
Editor, on line weekly Too Much

Wall Streeters made fortunes, the new official report on America’s 2008 economic meltdown charges, defrauding the American public. They’re still making fortunes — and this new official report is already sinking out of sight.

A quarter-century ago, in 1986, the biggest Wall Street banker paycheck went to John Gutfreund, the Salomon Brothers CEO. Gutfreund pulled in $3.2 million. Two decades later, in 2006, Merrill Lynch CEO Stanley O’Neal pocketed $91 million.

To understand the 2008 Wall Street meltdown that cratered the U.S. economy, suggests the new final report from the panel Congress appointed to probe the causes of that crater, you need to understand this enormous pay explosion — and the fierce incentive this explosion created for reckless and fraudulent behavior.

How reckless and fraudulent? In the years that led up to the 2008 meltdown, the Financial Crisis Inquiry Commission report released late last month details, Wall Street’s top bankers and financiers “made, bought, and sold mortgage securities they never examined, did not care to examine, or knew to be defective.”

These same bankers borrowed, based on these securities, tens of billions of dollars “that had to be renewed each and every night” and then traded these billions in totally unregulated, semi-secret, financial “derivative” gambles.

This frenetic financial folly would eventually leave four million homes lost to foreclosure and another four and a half million American families either ensnared in the foreclosure process or seriously behind on their mortgage payments. (more…)

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.

Leo W. Gerard

By Leo W. Gerard
International President

President Bush took to the TV Friday to announce that he wouldn’t walk past the financial crash of America’s Big Three automakers and do nothing to save their lives.

Refusing resuscitation, Bush said, would be irresponsible during the worst economic crisis since the Great Depression.

A week earlier, 31 GOP Senators, mostly from Southern states, voted to avert their eyes and allow American auto companies to die. They opposed $14 billion in federal loans for GM and Chrysler, revealing that their loyalty lies not with America, not even with their own states, but with South Korea and Germany and Japan.

They are Toyota Republicans.

Toyota has non-union manufacturing plants in Alabama, Kentucky, Mississippi and Texas – states whose senators led the GOP quest to slay the Big Three American auto manufacturers – Richard Shelby, R-Ala.; Mitch McConnell, R-Ky, and John Cornyn, R-Tx. Here’s the Republican from Mississippi, Sen. Thad Cochran, explaining why he’d vote against the loans, “Things have changed. It’s not just the Big Three anymore,” he said, pointing out that Nissan and Toyota employ more Mississippians than General Motors, Ford and Chrysler. But, he said, the foreign companies would not share “in the benefits of that automobile bailout program.”

No. But Mississippi did give Nissan and Toyota more than $650 million to entice them to locate in the state. GM, Ford and Chrysler didn’t share in those benefits, Sen. Cochran.

The Toyota Republicans are all for helping the rich with tax breaks and shelters, and they’re all for aiding foreign auto manufacturers with billions worth of tax forgiveness and government-paid infrastructure improvements.

But their disdain for the working class couldn’t be clearer as they organized defeat of loans to the Big Three under this command: “Republicans should stand firm and take their first shot against organized labor.”

They haven’t gotten the message sent out by the electorate in November. Voters rejected politicians prolonging the same old policy of protecting themselves and the rich. The nation’s voters want selfless leaders who will perform in the best interests of the entire country. They want change.

Clearly the allegiance of the 31 Republicans who opposed the loan to save GM and Chrysler is not with the United States of America, which would lose 900,000 jobs if just GM closed, and more than 2.1 million if the Big Three did. Those job losses would occur during the worst economic downturn since the Great Depression. In November, the 11th consecutive month of job losses, another 533,000 people were thrown out of work, swelling the pool of unemployed to 10.3 million. The Toyota Republicans were willing to increase that.

They voted against the interests of their own states as well. Consider what would happen in a few of those Southern States whose senators led the charge against preserving the Big Three. If just GM collapsed, Kentucky would lose 20,000 jobs; Alabama, 21,000; Georgia, 23,000, and Tennessee, 29,400, according to calculations by the Economic Policy Institute.

Sen. Cochran just didn’t think it was right for the U.S. government to aid its auto industry. But apparently he’s fine with foreign governments providing subsidies to the transplant automakers in his state. And, apparently, he’s okay with spending state and federal money to help foreign automakers locate manufacturing plants in the U.S.

Korean and Japanese automakers – including Nissan and Toyota with plants in Cochran’s Mississippi – benefit from manipulation of currencies by their governments, a factor that, according to EPI estimates, reduces their costs by between 10 and 20 percent. In addition, nationalized health care in countries such as Japan and Germany serves as a subsidy.

Also, the Toyota Republican opposed federal money for American companies but supported state and federal money for foreign auto makers estimated at $3.6 billion.
Shelby, for example, got $3 million in federal funds to improve roads near the Hyundai plant in Alabama after the state gave $250 million to the Korean automaker.

Shelby opposed loaning one federal cent to the U.S. automakers, though, telling “Face the Nation” that they should die: “Companies fail every day and others take their place. . . There’s not a bank in this country that would loan a dollar to these companies.”

But for foreign auto companies, his home state of Alabama couldn’t provide enough taxpayer cash – more than three quarters of a billion. In addition to the quarter billion it gave the Korean automaker, it handed another quarter billion to German Daimler for a Mercedes-Benz plant, nearly a quarter billion to Japanese Honda and $29 million to Japanese Toyota.

Similarly, Jim DeMint, another senator who led the Toyota Repubicans’ rebellion against the loans to GM and Chrysler, told the “National Review” recently, “Government should not be in the auto industry.” Yet, his state, South Carolina, got into the auto industry with nearly a quarter billion — $230 million – in gifts to a German auto company – BMW.

The same is true in Kentucky, home of Sen. Mitch McConnell, who said of loans for the Big Three, “Government help is not the only option. It’s not even the best option.” But government help was fine when Kentucky was providing grants for Toyota, which got $371 million from taxpayers since 1986.

It’s clear that the real problem was not a philosophical one. All of these lawmakers were willing to flick free market capitalism out the car window like a cigarette butt if their states could use taxpayer dollars to buy a foreign auto plant. No, what really gags them about the Big Three is that they pay good, middle class wages and benefits as a result of contracts with the United Autoworkers.

Repeatedly, the Toyota Republicans insisted that UAW members bear the brunt of the cost of the bailout. The senators insisted that UAW wages be lowered to match those of non-union auto workers at foreign-owned manufacturers. Toyota Republican Sen. Bob Corker of Tennessee, wrote an amendment to the bailout bill that would have required UAW members to accept pay cuts by a specific date in 2009. When Republicans defeated the bailout, DeMint blamed that on the union, saying, “It sounds like the UAW blew up the deal.”

The Toyota Republicans then conferred the American auto industry to bankruptcy. They said they favored bankruptcy because it would enable the Big Three to break pledges made in labor contracts and promises for health care and pensions made to retirees. The Toyota Republicans want the wages of American workers pulled down. To them, UAW members making an average of $28 an hour, accounting for less than 10 percent of the cost of a car, are earning just too much money.

The Toyota Republicans did not, however, make that claim about the white collar workers on Wall Street who got this country into the financial fiasco that led to the dire circumstances for automakers. And not just for American ones. Domestic car sales declined by 40 percent last month, but Asian producers’ sales dropped too – by 35 percent.

The average salary of white collar, Wall Street employees — workers in “securities, commodity contracts and investments” — is four times that of those laboring in the rest of the economy. Remember, these are the guys who are so smart that they took down Bear Stearns, Fannie Mae, Freddie Mac, Washington Mutual, AIG and Lehman Brothers – in less than a year – and ultimately required $700 billion from taxpayers to bail them out.

The top executives of Wall Street banks receive billions of dollars in year-end bonuses. The New York Times detailed those at Merrill Lynch in a story Dec. 17 entitled “On Wall Street, Bonuses, Not Profits Were Real.” In 2006, the firm gave its top executives between $5 billion and $6 billion in bonuses, which means, for example, a trader earning $180,000 a year got a $5 million bonus.

Merrill’s $7.6 billion earnings that year turned out to be bogus. The company’s losses now have exceeded all of the profits it earned over the previous 20 years. To prevent collapse, it sold itself to Bank of America in September. But then, Bank of America took $15 billion of that $700 billion in bailout money. Despite the gift of taxpayer dollars, the CEO of Bank of American has not publicly announced that he will decline a bonus, and Bank of America plans to tell Merrill Lynch workers the amounts of their bonuses beginning Friday, the New York Times reported Thursday.

When those Toyota Republicans voted in favor of providing $700 billion for Wall Street — including both of Tennessee’s senators, Bob Corker and Lamar Alexander; Kentucky’s Mitch McConnell; Georgia’s Saxby Chambliss and Johnny Isakson; South Carolina’s Lindsey Graham, and Texas’ Kay Bailey Hutchinson and John Cornyn – none asked for high-paid white collar workers to take pay cuts or give up their million dollar bonuses. There was a feeble attempt to limit the pay of chief executives, but that applied only to firms that received federal money under one particular method, and the treasury decided not to hand out the $700 billion that way.

And no lawmaker asked white collar workers or executives who got billions in bonuses based on false profits to return them.

But those Toyota Republicans want middle class, blue collar workers who don’t get year end bonuses, who don’t celebrate with five-figure dinners, to take wage cuts. They want autoworker pensioners to lose the monthly benefits they earned with a lifetime of labor.

And at no time did those Toyota Republicans suggest that they should cut their own salary or top-notch, government-paid health benefits or pensions. Like the reckless speculators on Wall Street, Congress bears responsibility for the crisis condition of the American economy because it deregulated financial markets.

In 2002, during a downturn in Japan, the House of Councillors reduced the pay of Diet lawmakers by 10 percent, and ended the transportation allowance, portrait-painting and  pension given senior lawmakers.

If the Toyota Republicans believe the Japanese way of pay is so great for autoworkers, they should first impose it on themselves.

By Leo W. Gerard
International President

21st century slavery
The Government Accountability Office reported to Congress this week that, under the Bush administration, the Labor Department determined that what amounted to a 21st century case of slavery was just fine with the U.S. government.
A Labor Department investigator told the slave, a night attendant at an assisted living facility in Ohio, to file a civil suit to seek redress if she was aggrieved by her lot. And then he closed the case. With no action against the employer who had neglected to pay the woman any wages for an entire year.
Yep, that’s your U.S. Labor Department working for you, the very Labor Department charged with the duty of protecting 100 million workers, the very Labor Department responsible for ensuring employers pay workers, at the very least, the federal minimum wage, and for overtime hours, under the provisions of the Fair Labor Standards Act.
The GAO report arrived in Congress in the midst of high unemployment and inflation, the subprime mortgage crisis spreading like, well, just like fear of bank failure, taking down homeowners; the former global investment bank Bear Stearns, and now IndyMac Bancorp, the second largest financial institution to fail in U.S. history. Meanwhile, the nation’s two largest mortgage finance companies, Fannie Mae and Freddie Mac, are stumbling, causing havoc on the stock market. The dollar’s value continues to fall, which, of course, forces the price of gasoline in the opposite direction. (more…)