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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…)

Robert Kuttner

By Robert Kutner
Co-Founder and Co-Editor of The American Prospect

If Democrats can start sounding like Democrats again, they’ll have a better shot at holding onto their majority in Congress next November. And if they do keep their majority, they should do two things to turn themselves into a legislative party that can actually do the people’s business.

First, scrap the filibuster rule. It isn’t written into the Constitution, and in its modern form it only dates to 1975, when the Senate changed the rules to permit a single senator to require a supermajority of 60 votes on a given measure simply by threatening to hold the floor indefinitely, even if the senator couldn’t be bothered to show up.

Before that rule change, you actually had to keep talking and tie up the Senate in order to filibuster. Today, you need only to declare your intent to filibuster, and any measure can be made to require 60 votes. As a consequence, the number of filibustered bills every session has risen from around 7 before 1975 to about 100.

And second, dump committee chairmen who are laws unto themselves. One good candidate would be Max Baucus, who just did it again, with a pitiful bipartisan $85 billion “jobs” bill, which is mainly a tax cut bill that will produce scarcely any new jobs. Its proposed $15 billion payroll tax holiday for newly created positions would create precious few new jobs because the incentive is too small. Employers would mainly get a tax break for jobs they planned to fill anyway.

Baucus had asserted his prerogative that the Senate Finance Committee should take the lead in the Senate’s response to the House, which narrowly passed a $154 billion jobs bill in December. But so feeble was Baucus’s handiwork that last week Senate Democratic Leader Harry Reid refused to accept most of it, and turned the project of fashioning an actual jobs bill (as opposed to tax cuts) back to senators Dick Durban and Byron Dorgan.

In the next Congress, unless the Democrats lose their majority, somebody other than Baucus should chair the Finance Committee. And what’s in store at the Banking Committee if the usual seniority rules apply is even worse.

There, Banking Committee Chair Chris Dodd is retiring. There is a lot to criticize in Dodd’s leadership — in fashioning a financial reform package, he goes back and forth between sounding like a Democrat and trying to work out a bipartisan reform bill with the committee’s ranking Republican, Dick Shelby of Alabama, a fool’s errand if ever there was one. But Dodd is Franklin Roosevelt compared to his likely successor, Tim Johnson of South Dakota.

Johnson is often known as the senator from Citigroup. That’s because his state, back in the late 1970s, relaxed its usury laws in order to attract back-office jobs from large banks, starting with Citi. It was a sweetheart deal made by a Republican governor. Citigroup is now the fourth largest employer in South Dakota, with some 3,200 mostly clerical jobs.

In the Marquette decision of 1978, the Supreme Court held that state anti-usury laws cannot be enforced against banks based in other states. So a bank can sell and service credit cards nationwide, relying on the laws of the state in which it is incorporated and violating the consumer laws of the states where the cardholder resides. South Dakota became to credit card companies what Delaware was to corporations generally. It led the race to the bottom, making sure that it remained the nation’s worst when it comes to protecting consumers.

Johnson, in toadying to Citi and other banks, has outdone even the usual South Dakota standard. When Congress passed the rare bipartisan bill to crack down on credit card abuses last May, Johnson was one of just five senators, and the only Democrat, to vote against it. He was also one of 12 Senate Democrats to oppose giving bankruptcy judges the authority to modify the terms of mortgages threatened with foreclosure. He is flatly opposed to even the somewhat weakened Consumer Financial Protection Act which passed the house. If he becomes Banking Committee chairman, forget any serious version of financial reform.

For more detail on Johnson’s long record of defending payday lenders, credit card usurers, and rapacious bankers, see Ryan Grim’s definitive post from January 2009.

Unlike the more delicate case of Baucus, the Senate Democrats don’t need to dump Tim Johnson because he’s not chairman yet. The just need to make sure someone else gets the job next January.

But isn’t this a little utopian? Not at all. Back in 1975, I was once involved in a similar progressive coup. In those years, racist southern Democratic committee chairmen still dominated House committees. The incoming “Watergate” class of Democrats was committed to small-D democratic process reforms. As part of the coup, I was hired to write a report co-sponsored by Common Cause and Public Citizen scoring how committee chairmen voted on major legislation — how often they voted against the Democratic majority position. We worked closely with the legendary Dick Conlon, then the director of the Democratic Study Group, which functioned as the progressive caucus in the House in those years.

That year, the Democrats changed the rules to provide that committee chairs should be named by a majority vote of the House Democratic caucus. Armed with the study’s results, they promptly dethroned and replaced three of the leading faithless House committee chairs. If the House can elect committee chairs by majority vote, so can the Senate.

House Blue Dogs and pro-Wall Street “New Democrats” in the House, as well as individual turncoats in the Senate like Joe Lieberman, Ben Nelson, Max Baucus, and Tim Johnson, have demonstrated that they can play hardball. Progressive Democrats are actually a majority of the Democratic caucus in both houses. It’s time they played a little hardball, too.

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Robert Kuttner’s forthcoming book on the Obama Administration is A Presidency in Peril (Chelsea Green publishers, March 2010). He is founding co-editor of The American Prospect, and a senior fellow at Demos.

Leo W. Gerard

By Leo W. Gerard

International President

Congress drove the Big Three CEOs out of Washington, D.C. last week, ordering them not to return with their tin cups until they could guarantee their companies would be viable after a $25 billion bailout.

Just days later, Citigroup, a bank that had already received a $25 billion bailout in October, held its hands out for more. Within 48 hours, federal officials approved giving the bank another $20 billion and providing backing for $306 billion in its risky loans and securities. Even though Citigroup was failing just weeks after getting its first government bailout, Congress didn’t subject its CEO to the public lecturing and demands for business plans that it did the Big Three.

The message here could not be more clear: Washington will bailout out those who shower before work but not those who shower afterwards.

Washington, D.C. is a white collar town. President Bush and members of Congress understand their suited counterparts on Wall Street. In fact, several prominent figures in the banking industry – including Citigroup’s Robert Rubin, a former Secretary of the Treasury, and UBS Investment Bank’s Phil Gramm, a former Texas Senator, – worked in Washington first, aiding and abetting the current crisis by de-regulating the financial markets and everything else they could.

Detroit, by contrast, is a blue collar town. It’s a place where workers at the Big Three earn thousands of dollars — the average production employee making $67,480 last year — not hundreds of thousands, and certainly not Wall Street’s millions. The Citigroup CEO credited with overseeing the bank’s ill-fated investments, Charles O. Prince III, was forced out a year ago as the bank’s massive sub-prime losses began mounting but the board of directors still gave him a $12.5 million bonus, $68 million in salary and accumulated stockholdings, a $1.7 million pension, an office, and a car and driver for up to five years. Heading the board executive committee at that time was Rubin, who would briefly serve as chairman and receive $17 million in compensation as the bank declined further into financial ruin.

Detroit is a place where workers are unionized; Wall Street is not. And right-wing Republicans and conservative pundits have made it clear they want the union workers to suffer. They want federal aid denied to the Big Three so that the firms go bankrupt. Then the companies can renege on pensions they guaranteed to retirees and can break salary and benefit promises to workers in current contracts.

Senate Minority Whip Jon Kyl writes on his web site that Chapter 11 bankruptcy would be best for the Big Three because it would enable them to break their pledges to retirees receiving health care and other benefits earned over decades of service, what he calls “legacy debts”: “Like many other industries, including the airlines, the goal under Chapter 11 is to gain temporary protection, reorganize in a way to reduce legacy debts, and emerge as a more viable and competitive company.”

Conservative columnist George Will, similarly, wrote: “Do nothing that will delay bankrupt companies from filing for bankruptcy protection, so that improvident labor contracts can be unraveled. . .” Will’s fellow Washington Post Columnist Martin Feldstein blamed all of Detroit’s problems on the unions, writing that the basic reason the Big Three can’t compete: “is labor costs imposed by union contracts.” He said if Congress gives the Big Three a loan, it must require “that the unions accept reductions in wages and benefits to levels that allow the firms to compete with imports and with non-union U.S. auto firms. The trustees of retiree benefits should be required to accept reductions in those benefits.”

They want the unions broken. They want retirees’ benefits slashed and union workers’ wages and benefits cut, which, of course, will enable the foreign auto makers – whose U.S. plants are non-union – to reduce their wages. It’ll be an all-American race to the bottom, rather than the preferable opposite, where workers and retirees are treated with dignity and respect for their hard labor.

None of those conservatives, however, is calling for Citigroup’s Charles O. Prince III, who took down Citigroup at a cost of untold billions to taxpayers, to return his $1.7 million pension, office and car and driver.

Unlike Citigroup and the other Wall Street banks, which have their very own inside-the-beltway apologists in the form of Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson to argue their case before Congress, the Big Three CEOs had to appear before Congress to plead for themselves.

There, legitimately, lawmakers grilled them about flying to the hearings in expensive private jets and about their multi-million dollar compensation packages. Still, none of the lawmakers has asked Citigroup’s CEO, Vikram S. Pandit, to take $1 for next year’s compensation, as they did the auto executives. Nor have they asked any of the CEOs from the nine banks that shared $125 billion in bailout money in October to sell their private jets, as they did the auto executives.

Conservatives also argued that the Big Three should be left to die because in a free market, that’s what happens to poorly operated companies offering inferior products.

Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, said, for example, “I do not support the use of U.S. taxpayer dollars to reward the mismanagement of Detroit-based auto manufacturers.”

Shelby made this accusation while part of the Congress that ran up the largest federal deficits known to man and allowed Paulson to broker a deal to sell troubled Wachovia bank to troubled Citigroup – a bank that so far got two bailouts, the first of which arriving within weeks of the failed Wachovia marriage.

Shelby, of course, has a lot to lose if Michigan does well. His home state of Alabama gave tax breaks to foreign car companies Mercedes-Benz, Honda and Hyundai to locate factories there – hardly a free market approach.

So, like many conservatives, he twists reality to suit his circumstances. He’s right that American car companies made mistakes. In October, GM’s sales were off 45 percent from the year before, Chrysler 35 percent and Ford 30. But he’s wrong about that being a result of mismanagement alone, well, unless he thinks his precious foreign car companies made the same mistakes. Toyota was down 23 percent, Honda 25 and Nissan 33 for the same month.

And if aid denial is based on bad products, Wall Street definitely should be the first refused. Its firms built and sold what are now being called “toxic securities,” products so defective that they took down banks, the U.S. economy and international financial stability – creating the deepest economic crisis since the Great Depression. Now that’s mismanagement for you!

When the representatives of blue collars went to Congress hat in hand, lawmakers insisted that to get loans automakers would have to present viable business plans. Congress didn’t impose similar conditions, however, when Bernanke and Paulson went to Congress seeking grants for reckless white collar firms.

In fact, they gave $125 billion to nine big Wall Street banks in October, contending the direct infusion of money would melt frozen credit. It didn’t. The firms apparently didn’t lend the money, and the deal didn’t require them to. There’s a viable business plan for you!

Paulson and Bernanke gave insurance giant AIG $85 billion. And when that didn’t work, they forked over more until it all added up to $150 billion. Now, it’s not clear that will be enough to resolve AIG’s problems. Sen. Jon Kyl, the Republican from Arizona who voted for the Wall Street bailout, didn’t demand a viable business plan for AIG or Citigroup, yet said this about the auto industry request: “There’s no reason to throw money at a problem that’s not going to get solved.”

This year, as Wall Street’s recklessness destroyed the American economy, a million Americans lost their jobs. It’s no wonder no one is buying cars. It’s not just that they can’t get credit. It’s also that they don’t have money to spend or they’re afraid to spend the money they have.

Some of those furloughed had been on Wall Street. Citigroup announced recently it would cut 52,000 jobs by early next year. But of the million jobs lost so far, 100,000, or one in ten, have been auto workers or employees of auto suppliers. Unemployment in Michigan is 9.3 percent – while in the rest of the nation it is 6.5.

Just like Paulson who couldn’t see that Citigroup was too weak to buy Wachovia, the conservatives intent on denying the Big Three loans are shortsighted. They don’t see that 2.3 million jobs in and dependent on the auto industry could be lost. They don’t see the effect of slashing the wages and benefits of people who get their hands dirty for a living.

It would mean even more mortgage foreclosures and even more credit card debt unpaid to those struggling banks. It would mean the Big Three defaulting on the $100 billion they owe to those weak banks and bondholders, some of which is secured, some not.

It’s the big circle of economic life. If Congress spits on the autoworkers and the millions whose jobs depend on the Big Three, the lawmakers may find themselves using more and more taxpayer dollars to scrub new blood off Wall Street.

Mortgages may be underpriced today, but they retain some value on banks’ books. So rather than purchasing mortgages (a capital-neutral transaction), Paulson could buy bank stock, infusing banks with new capital on top of their mortgages. That would exponentially increase lending capacity, prevent taxpayers from buying toxic assets, give the public a share of future profits, and grant regulators ownership leverage to restructure bank management.

This is where Paulson’s personal proclivities come in.

A crony communist looking to socialize risk and privatize gain would consider these options and choose to buy mortgages – that is, choose to ignore the credit crisis, reward discredited executives and permit banks to keep any subsequent profits – all while inhibiting a potential government-mandated housecleaning of Wall Street. Indeed, the Financial Times’ Wolfgang Munchau says Paulson’s mortgage-buying program is driven by “a wish to benefit the investment banks he once chaired, and which stand to gain handsomely from such a package.”

A businessman, by contrast, would limit taxpayers’ exposure, give us a stake in future gains and demand management control. He would, in short, treat taxpayers like Warren Buffett treats his Berkshire Hathaway shareholders when buying banks with their money.

This is how Sweden successfully confronted its banking crisis in 1992, and how England is addressing its own meltdown today. In fact, world leaders are citing our crony communism as a cautionary tale. “This is not the American plan,” said British Prime Minister Gordon Brown in announcing his bank rescue. “We will have a stake in the banks – we are not simply giving money.”

The bailout bill’s failure to make this course of action mandatory should have killed the legislation in Congress. But banking CEOs and their lobbyists turned “should have” into “didn’t.” They love crony communism and hate government ownership stakes because, as financial analyst Luigi Zingales says, “Nobody likes to pay for their own mistakes – it is much better to have the taxpayers pay.”

Considering the opposition, then, it is a miracle any ownership stake language slipped into law. Whether Paulson now uses that language will signal how deep Washington corruption runs.