Honest Answers about the Financial Collapse

Deregulation, Disaster, and What Happens Next

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Here’s some bad news for the many Americans who these days have to rely more than ever on their credit cards: the new ‘reforms’ passed by the U.S. Senate yesterday don’t address the most serious abuses of the greed-driven credit card industry.

Which is too bad, since if Congress doesn’t have the courage to stop credit card rip-offs now, in the middle of a financial catastrophe caused by these very companies, when will it? You know the answer.

Here are five fatal flaws in the Senate bill (which you can peruse for yourself):

There is no cap on credit card interest rates. Companies have raised interest rates for some consumers – even those with good credit – to over 30% in recent months. This is particularly outrageous in light of the trillion dollar taxpayer bailout of the credit card companies. These firms are borrowing our money from the US Treasury at a fraction of a percentage point and then turning around and loaning it to us at twenty to fifty times that rate. An amendment to cap credit card interest rates at 15% was overwhelmingly rejected by the Senate.

Companies can raise interest rates on future purchases at any time, so long as they give the cardholder 45 days notice. Consumers have the right to opt out – as they do now- but then the card cannot be used for future purchases. The bill only prevents companies from increasing interest rates on previous purchases.

Credit card companies can unilaterally changes the terms of the credit card contract. It is one of the inexplicable aspects of American law that contracts with consumers are a one-way agreement. Courts have routinely upheld the right of companies to alter the terms of fine print contracts with consumers at their leisure. How, you wonder, do they get away with that? Well, buried in the fine print when you sign up for a credit card is authorization for the company to change the deal at any time. (Try negotiating that clause out of the next credit card contract you sign.) The Senate bill allows companies to continue this ridiculous practice, again so long as they give you notice of the change.

Companies can still prevent consumers from suing them in court. Another clause buried in the fine print of credit card contracts bans consumers from suing the credit card company in court, particularly through a “class action” in which victims of the rip-off can join together rather than bring separate cases. Instead, cardholders must bring their dispute to an “arbitrator” – a private judge hired by the credit card company. By design, that system is co complex that almost no one bothers, and credit card companies evade accountability for their actions. This didn’t get fixed either.

State consumer protections laws do not apply. A series of court decisions have held that federal banking regulators supersede state consumer protection laws. The result is that consumers cannot go to court to sue banks that violate state law. This notorious obstacle should have been addressed but wasn’t.

As we noted in our March report on the causes of the current financial debacle, the nation is in the current mess because Wall Street showered Washington with over $5 billion in campaign contributions and lobbyists, and Washington did as it was told.

Despite the collapse of our economy, not much has changed. It was interesting to observe how the credit card industry tried to posture the bill as a huge defeat. But even that effort was half-hearted; a spokesperson for the American Bankers Association acknowledged as much when he told the New York Times the Senate plan was “tough, but workable.”

Scanning the web this morning, I couldn’t find anyone in D.C. suggesting that the bill did not go far enough to protect consumers.

Comments (5) Posted by Harvey Rosenfield on Wednesday, May 20th, 2009

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The AIG bonuses are a magnitude ten on the political Richter scale. And that has some folks worried. Some public officials, newspapers and Sunday talk shows are telling Americans it’s time to move on – that the uproar over the bonuses is a “distraction” that might interfere with the economic recovery itself.

They’re right, but for the wrong reason. They’re worried about Wall Street’s reaction to tight controls on how banks, hedge funds and insurance firms spend the bailout money. Better not offend Wall Street or they might stop lending our money to us.

What the commentariat really should be worried about is Main Street.

Every once in awhile, a moment arrives in our country where all those Founding Principles about Democracy rise beyond platitudes. This is one of those moments. Our government operates by the consent of those it governs. At any given time, there will always be people complaining – with some degree of truth – that the government is operating outside its authority. Some people who’ve lost faith just don’t vote. But most people maintain sufficient confidence in the system that they obey the laws, pay their taxes, etc.

The confidence of the average American has been badly shaken lately. The destruction of our economy by those who called the shots on Wall Street and in Washington has delivered pain and hardship to Americans, who, on top of that, are being told that trillions of their taxpayer dollars have to be given to the greed-driven money-worshippers who did this to us. That the Treasury, the Congress and the White House did nothing to stop AIG from handing our taxpayer money over to those who don’t deserve it (or even need it) is a profound betrayal of the People of the United States. True, the bonuses are symbolic. But so’s the American flag.

The gravest threat to our country today is not an economic depression. It’s the possibility that Americans will lose their trust in the institutions of our Democracy.

Comments (1) Posted by Harvey Rosenfield on Monday, March 23rd, 2009

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Geez – has our outrage gone too far? Two separate articles in the New York Times report that the beneficiaries of our taxpayer-funded bonuses are really upset. An AIG exec “looked as if he was fighting back tears” describing how his privacy had been invaded over the last few days. Fear of losing their bonuses had sent employees “into his office in tears,” according to an unnamed bank executive.

It seems that things could get pretty bad for these folks. “Bank executives… said their employees were on edge and many would face severe financial hardship if they were severely taxed on money already paid,” the Times reported.

How bad? “‘It’ll impact tens of thousands or maybe hundreds of thousands of people,’ said Alan Johnson, managing director at Johnson Associates, a compensation consulting firm in New York, noting that the tax would apply to a bonus recipient with family income of more than $250,000. ‘If you’re a receptionist and your husband is a doctor, your $5,000 bonus just vaporized.’”

I guess we are supposed to feel bad for some of these people. Not me. I look around at what has happened to this country over the last six months – people’s jobs lost, life savings slashed, dreams of a home, a college education and a better life gone – and I really can’t muster a lot of sympathy for the folks who worked at the firms that turned our economy into a casino by speculating in “credit default swaps” and mortgage backed securities.

I felt the same way when Enron went bust after pillaging California’s economy by manipulating the price of electricity back in 2001. Once the company’s phony accounting practices became public and it went into bankruptcy, a lot of the mid-level execs became indignant victims, going public with behind-the-scenes stories of financial corruption at the firm. I thought it ludicrous that these people were being hailed as “heroes.” Why didn’t they come forward before it was too late, I wondered at the time. Answer: because they were too busy partaking in the riches generated by Enron’s fraudulent behavior.

Comments Off on Tears on Wall Street Posted by Harvey Rosenfield on Saturday, March 21st, 2009

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As explained in Sold Out, our economy is in the toilet today because Wall Street invested $5 billion in Washington and got a gambling license in return. But now Wall Street has burned Washington: the AIG fiasco ignited a public firestorm of outrage over the weekend. What should Washington do? Here are a few suggestions:

• Seize control. Americans own AIG – but, apparently in order not to offend Wall Street, we do not control the company. This charade has got to stop. The federal government should take control over AIG, through the exercise of the government’s power of eminent domain, if necessary.

• Cancel the employment contracts. No one knows the terms of the compensation contracts between the company and its executives, including the speculators who now demand to be paid $165 million in bonuses, apparently part of a $600 million “retention pay” program. However, it is highly unlikely that there are no conditions to these contracts. (Would AIG employees who stole from the company or committed arson still be guaranteed payment?) The government should abrogate all such compensation contracts of AIG executives and speculators, not just the bonus deals. If necessary, the government can negotiate new contracts with employees who are truly essential. Let the rest sue the United States for the money and let a jury decide whether despite their catastrophic mistakes they deserve compensation.

• Suspend payments for credit default swaps. So far, the Treasury has committed $170 billion of public money to AIG, without disclosing to the public what AIG is doing with it. Thanks to AIG’s hasty move over the weekend to deflect attention from the bonuses, we now know that former Treasury Secretary Paulson’s investment firm got over $10 billion from AIG, but it is not clear whether the information AIG has disclosed so far constitutes the complete list of recipients. So we have no way to judge whether taxpayers must continue to bail out AIG in order to avoid a collapse of the entire system, as now Treasury Secretary Geithner has contended since he helped arrange the first AIG bailout last year. Once in control of AIG, the federal government should publish the complete list of “counter-parties” – the “insurance” buyers on the other end of AIG’s swaps. The “systemic risk” can then be assessed accurately and honestly. Threats from Wall Street that taxpayers must continue to bail out AIG and (many other financial firms) in perpetuity are economic extortion. The cost of this fiasco to the American people has grown so large that it’s time to determine what will hurt our economy more: tens of trillions of taxpayer dollars going into the vaults of a few firms and their executives, or the bankruptcy of those firms?

Comments Off on Seize AIG & Open the Files Posted by Harvey Rosenfield on Tuesday, March 17th, 2009

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The federal government bailed out Citigroup for the third time a few weeks ago, and bailouts 4, 5 and 6 could be just around the corner. At this point, the US government has already put more public money into Citigroup then it is worth. Yet American taxpayers now own only about 36% of the company’s common stock.

There’s another blatantly bogus aspect of the latest deal the US government has made with Citi: apparently under pressure from the US Treasury, the firm has promised to reconstitute its board of directors so that a majority of its members are “independent.” But Citi execs are picking the new members, not the government.

Citi execs says they’re having a hard time finding people to serve – even though board members are paid $75,000 per year (plus stock).

What that tells you is that the Citi fat cats are looking for other fat cats. And these days most fat cats are fat enough that they can afford not to serve on companies whose stock is trading at $1 a share.

Boards aren’t really independent if they’re made up of wealthy corporate types who do business the Wall Street Way. The government’s “independent majority” requirement is a kabuki dance designed to placate the American public without upsetting Citi or its shareholders.

Here’s a better idea: why not put regular Americans on the board? Say, a few folks from Main Street, maybe a couple of small business people. Maybe they could be chosen by lottery. I’m betting there’s a lot of citizens in this country who’d serve for a fraction of the pay the board members get right now.

“Nationalized” or not, Americans own Citigroup, and to restore public confidence in the firm – and what it is doing with our money – it ought to be supervised by people who bring to it good old fashioned American values.

Comments Off on Sack the Fat Cats & Put Taxpayers on the Citigroup Board Posted by Harvey Rosenfield on Wednesday, March 11th, 2009

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Four months ago, it became clear to me that blogging about the financial calamity wasn’t going to cut it. We needed to do something about it.

It was clear even then – just days after the presidential election – that the Money Industry was still conducting business as usual on Wall Street and in Washington. There was a great danger that those with a vested interest in the status quo – the people whose greed caused this mess, and those who could have stopped them, but looked the other way – would hide the truth from the American people about how we ended up in this economic disaster. The commentators were already starting to blame average Americans – as if the entire financial system collapsed because we used our credit cards or tried to buy a nicer home. I could already see that they were rewriting history.

And if no one knows the truth about how we got into this mess, then there’s no way we’re going to figure out how to get out of it.

So I got in touch with the hard-working, smart people at Essential Information, a Washington, D.C. non-profit that’s been investigating and educating people, the press and policymakers about complex issues for more than two decades. We came up with a plan:

First, convene a conference of experts – economists and advocates independent of the government and the Money Industry – and spend a day discussing solutions to the crisis.

Next, research and write a report on exactly what caused this economic disaster.

Then start pushing for solutions that will work.

We moved very fast.

The conference was held on January 9th, nearly a week before the Inauguration of President Obama. The economic crisis had grown significantly worse since November, and the experts foresaw even tougher times ahead. But the most troubling news was that President-elect Obama was relying almost exclusively on people from within the institutions that were responsible for the debacle to advise him on how to fix it. You can watch videos of the speakers and conference panels at the special web page we’ve set up: WallStreetWatch.org.

Today, Wednesday March 4, we completed the second step in our plan: we published a 231 report whose title explains it all: “Sold Out: How Wall Street and Washington Betrayed America.” After four months of exhaustive research, we came up with twelve things that Washington did – or failed to do – that led to the collapse of our economy. Then we figured out why: between 1998 and 2008, the Money Industry invested over $5 billion in Washington, in the form of campaign contributions and literally thousands of lobbyists. You can download the report at the WallStreetWatch site.

Now we need to take this information and insist that our elected officials sever their ties to the fat cats and start serving the needs of the voters who elected them.

This is going to require the support of the public. You can’t afford just to read this blog or the report. You need to join the fight and do something about it.

We turned our outrage into action. Now it’s your turn.

PS The blog is back. You can follow our work right here.

Comments (2) Posted by Harvey Rosenfield on Thursday, March 5th, 2009

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Imagine a clock that marks time not only in minutes and hours, but centuries and millennia. What would that tell you?

That it’s important to think beyond the immediate, for one thing.

The financial crisis, like the energy crisis and the climate crisis, arose because of short-term, get-rich now, pay later thinking. Apart from a general sense of greed that surrounds our culture, we have not developed the foresight, thoughtfulness and concern necessary to preserve and protect those who come after us. Last week, Barack Obama had to warn us that solving the problems we face might take longer than “one term,” as if fixing the many broken parts of our economy, not to mention the planet, isn’t going to take decades (once we actually start).

To illustrate the relationship between time and responsibility, a group of interesting folks are planning to build a “clock of the long now” in Nevada – it will tick once a year, and cuckoo every 1,000 years. The non-profit “Long Now Foundation” wants to “provide counterpoint to today’s “faster/cheaper” mind set and promote “slower/better” thinking.” As they explain, “we are trying to stretch out what people consider as now.”

In a book about the project, Stewart Brand proposes a 10,000 year library that would contain a “Responsibility Record” — to “make decision-makers accountable to posterity as well as to their present constituents.” But it’s hard to imagine our elected officials and corporate executives thinking beyond the next election or stockholder meeting. I can tell you from first hand observation that most members of the House of Representatives weren’t thinking beyond the end of the week when the bailout legislation was first sent to Capitol Hill in September.

What does a future produced by short-term thinking look like? Read the fascinating new novel Anathem, by Neal Stephenson. On a world much like Earth, all scientific knowledge is protected and advanced by people who live in secular monasteries. They are separated from the rest of the distracted and oblivious population by walls whose gates may open only once every year – or once every thousand years – to seed the inhabitants of the planet with the knowledge they had long ago forgotten.

Comments Off on Now v. Later Posted by Harvey Rosenfield on Monday, November 10th, 2008

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Once the euphoria subsides tomorrow, whoever is elected will have the deeply difficult task of rescuing our economy from a looming depression. Let’s see where we are nearly sixty days after the meltdown:

1. The $700 billion bailout has yet to lead to the kind of mortgage or credit card rate reductions needed to reboot the consumer economy.

2. Despite the bailout and at least a trillion dollars in taxpayer loans to corporations made by the federal government, banks are hoarding or merging rather than lending.

3. Lobbyists for the financial titans that got us into this mess – banks, hedge funds, private equity, etc – are hard at work protecting their interests in Washington, D.C. As usual, the interests of the average person have yet to be represented or even articulated by elected officials.

4. All economic indicators suggest further deterioration in the economy.

If Obama wins tonight, he will still face a Congress that has long been indentured to the financial industry. Even a landslide does not guarantee that members of the House and Senate will follow his plan to rescue our economy – a plan which has yet to be developed.

If McCain ekes it out, he will face the added complication of a Congress dominated by the other party, likely with greater numbers than at present.

My take: getting elected President was the easy part.

Comments (4) Posted by Harvey Rosenfield on Tuesday, November 4th, 2008

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In “Bailout: The Sequel,” the Bush Administration decided two weeks ago that the only way to convince banks and Wall Street to start lending again was to give U.S. banks a big hunk of the $700 billion in taxpayer money that Congress approved not even one month ago.

Unlike the original plan, under which the government would buy up “troubled assets” (a.k.a. “collateral debt obligations” and other byzantine Wall Street schemes with little connection to real world assets), the new strategy calls for public money to be showered on healthy banks so they will start to lend again, and, presumably, jump start the economy.

One problem: the banks aren’t lending. There’s been no significant decrease in mortgage or credit card interest rates. On October 9, a column in the Wall Street Journal noted that the banks had absorbed over $1.5 trillion in cash from the Fed, twice the estimated amount of bad mortgages, but seemed to preferred to hoard the funds rather than lend it out.

Then last Friday, PNC Financial spent $5 billion to buy National City Bank, a firm that’s been on the endangered list for months. The New York Times’ astute columnist Joe Nocera gave voice to the growing suspicion that “we’ve been sold a bill of goods.” Instead of using the money to reboot the economy, the banks are going to use it to do what they have done in the past: buy other banks. (Meanwhile, once it recovers, America’s financial marketplace will consist of a handful of big banks that have even less reason to compete with each other.) Or maybe boost their reserves. Or buy back their own stock. Etc.

When the British government bailed out its banks, it made sure it also got corporate voting rights in exchange. That gave the Brits the ability to order their banks to institute the necessary policies – even sack recalcitrant corporate executives and bring in people who would get the job done. But the Bush Administration couldn’t bring itself to demand voting rights from the U.S. banks it was bailing out. So, a few trillion dollars later, we’re still at the mercy of the same folks who caused this debacle.

Comments Off on No Sale Posted by Harvey Rosenfield on Monday, October 27th, 2008

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Barely two weeks after Congress agreed to the $700 billion bailout of Wall Street, the original plan is dead.

In fact, there never was a real plan to begin with. From the three-page legislation first proposed by the Bush Administration on September 19, to the bloated 442 page version passed by the House on October 3, the Administration’s strategy remained pretty simple: let Treasury Secretary Paulson have $700 billion in taxpayer money and hope that the sheer size of it would inspire Wall Street to go back to work.

It didn’t.

As it turns out, it wasn’t just Congress that had no idea how Paulson would use the money to rescue the financial system. The financial system couldn’t figure it out either.

The problem with the bailout was the same problem that got us into this mess: the regulators were clueless. As worshipers of the free market, they were happy to allow the titans of the financial system to invent ever more indecipherable schemes by which to speculate and earn billions. And when that house of cards collapsed, the regulators had no idea what to do because according to their religion, this could never happen.

So it took the British to come up with the answer: pour the billions into the banks so the banks would start lending to each other, to businesses and to consumers. In exchange for nationalizing the financial establishment, the banks were required to give the British government (a.k.a. taxpayers) shares in their firms. So someday, when the banks recover, the taxpayers will get a piece of what is called “the upside.”

Initially, the Bush Administration couldn’t stomach that approach: using hundreds of billions in public money to rescue private enterprise was one thing. But allowing the government to take an ownership stake in a private corporation? Heck, that’s communism.

That was before trillions of dollars of stock market value went into the toilet. And before America’s export of the financial meltdown to the rest of the world led angry heads of state to show up at the White House gates.

Just as seamlessly as the passage of the British Crown from one king to the next, the Bush Administration Bailout transformed itself from the vague and probably unworkable notion of buying the bad debts of banks, investment houses and who knows who else to investing in the banks.

Meanwhile, guess what? The price of the bailout is way, way more than $700 billion. Wait till you read what it’s really gonna cost us. I’m working on that now.

Comments (3) Posted by Harvey Rosenfield on Tuesday, October 14th, 2008