Simon Johnson: Private Gain, Public Loss--The Real Cost Of Too-Big-To-Fail

Simon Johnson is one of those rare economists who knows how to talk about economics in Plain English. He has a breathtakingly strong resume. He does not have any particular political axe to grind. And he pulls no punches. He draws the line of direct relationship between the reckless bankers, the complicit governments, and the miseries created by both on the ground around the world.

OS just encountered this recent address of Johnson, and it is well worth a few minutes spent viewing. He points out, for instance, that Citigroup has blown up three times in the past thirty years, each time rescued by the public sector in one way or another.

Johnson really gets going in his summation at about the 8:00 mark.

Angelo Codevilla: America's Ruling Class

Just to let ya'll know this gent is not a tea-bagger living in Momma's basement, as the folks in the White House tend to characterize any who dare disagree.

Angelo M. Codevilla, a professor of international relations at Boston University, a fellow of the Claremont Institute, and a senior editor of The American Spectator, was a Foreign Service officer and served on the staff of the U.S. Senate Intelligence Committee between 1977 and 1985. He was the principal author of the 1980 presidential transition report on intelligence. He is the author of The Character of Nations: How Politics Makes and Breaks Prosperity, Family, and Civility.

Codevilla weighs in this month with a long and thoughtful article on the American culture, which goes far in explaining what has happened to us.

His thesis is: America has been taken over by a ruling class, profoundly out of touch with the people they rule, and the strains are beginning to show.

As over-leveraged investment houses began to fail in September 2008, the leaders of the Republican and Democratic parties, of major corporations, and opinion leaders stretching from the National Review magazine (and the Wall Street Journal) on the right to the Nation magazine on the left, agreed that spending some $700 billion to buy the investors' "toxic assets" was the only alternative to the U.S. economy's "systemic collapse." In this, President George W. Bush and his would-be Republican successor John McCain agreed with the Democratic candidate, Barack Obama. Many, if not most, people around them also agreed upon the eventual commitment of some 10 trillion nonexistent dollars in ways unprecedented in America. They explained neither the difference between the assets' nominal and real values, nor precisely why letting the market find the latter would collapse America. The public objected immediately, by margins of three or four to one.

When this majority discovered that virtually no one in a position of power in either party or with a national voice would take their objections seriously, that decisions about their money were being made in bipartisan backroom deals with interested parties, and that the laws on these matters were being voted by people who had not read them, the term "political class" came into use. Then, after those in power changed their plans from buying toxic assets to buying up equity in banks and major industries but refused to explain why, when they reasserted their right to decide ad hoc on these and so many other matters, supposing them to be beyond the general public's understanding, the American people started referring to those in and around government as the "ruling class." And in fact Republican and Democratic office holders and their retinues show a similar presumption to dominate and fewer differences in tastes, habits, opinions, and sources of income among one another than between both and the rest of the country. They think, look, and act as a class.

It's a hefty read, but truly enlightening. Kudos to American Spectator for publishing it for our consideration.

The Steven Rattner Scandal And The Obama White House

It appears the man the Obama White House put in charge of the takeover of Chrysler and GM was already up to his hips in seriously unethical dealings with public pension funds.

It's a convoluted story, but at heart it was a 'pay-to-play' scheme, in which it is alleged Rattner obtained a $100 million dollar public pension fund investment for his firm by unethical means. He made a series of unrelated deals on behalf of people who made the decision to steer the investment in his direction. Wanna bet he landed a handsome bonus at year's end for his efforts?

He then went on to be put in charge of the 'rescue' of two dead auto firms, which by the way, are still....not viable. But tens of billions of dollars changed hands in the process, and deal after deal after deal were made along the way. That's what the man does, you know, make deals. It's his way of life, how he makes his living.

The obvious question has to be raised:  What sorts of deals were made, and what small slices of those tens of billions ended up flowing in his direction? It all happened very quickly, all very confused, lots of smoke and mirrors, and massive skirting of bankruptcy law occurred, if memory serves.

Another obvious question: Before assigning him to the task, didn't the Obama White House vet this guy? Or did the fact that he was a major Democrat fund-raiser help them decide? Did these things matter, or did they hire him because of who he was, knowing the manner of the man?

In the meantime, back to this week's account:

"Mr. Rattner does not agree with the characterization of events released today, including those contained in Quadrangle's statement," said Jamie S. Gorelick, an attorney for Rattner. "He looks forward to the full resolution of this matter."

Standard lawyer boilerplate. But the name of the lawyer rings a bell! Why, OS scratches his gray head in wonder? Where has he encountered the name of Jamie S. Gorelick?


Here's one place.  From the Washington Post, April 6, 2005:

Fannie Mae employees falsified signatures on accounting transactions that helped the company meet earnings targets for 1998, a "manipulation" that triggered multimillion-dollar bonuses for top executives, a federal regulator said yesterday.
 
Armando Falcon Jr., director of the Office of Federal Housing Enterprise Oversight, said the entries were related to the movement of $200 million in expenses from 1998 to later periods. The result of the changes was an increase in Fannie Mae's 1998 earnings per share and the release of a $27.1 million bonus pool for senior executives.

Fannie Mae reported paying the following executive bonuses in 1998: chairman and chief executive James A. Johnson received $1.932 million; Franklin D. Raines, chairman-designate, received $1.11 million; Chief Operating Officer Lawrence M. Small received $1.108 million; Vice Chairman Jamie S. Gorelick received $779,625; Chief Financial Officer J. Timothy Howard received $493,750; and Robert J. Levin, an executive vice president, received $493,750. 

That's one reference...there are more, not difficult to find.  

OS does not believe in conspiracy theories. No one was passing envelopes of cash to the President, or wiring vast sums to his offshore accounts. But the best thing one can say about having Rattner on board is that the White House staff were reckless and gullible.

This is not another Watergate.  But it is indicative of attitudes. And as businesses and families struggle through The Great Recession, stories like this are demoralizing.

The Greek Reverse Swan-Dive: Interest Rates Spiking On Greek Debt

Well, the fabulous graph posted on Calculated Risk won't come visit his page, but OS did find an image in the files that evokes the situation. The little 'There, I Fixed It' mark in the corner makes it all the better.

Now, ThePeopleInChargeOfSuchThings assure us there is no need for alarm. And, therefore, it must follow that we should all relax and feel assured.

After all, a couple of years ago, Hank Paulson asked for authority to bail out Fannie and Freddie, but he was sure he'd never actually have to do anything radical like that. That turned out ok, didn't it?.....Didn't it?

OS wonders if they are all so unruffled because they know the taxpayers in places like Athens, Georgia; and Athens, Alabama; and Nashville('The Athens of the South') Tennessee; and Athens, Ohio; and even Athens, Indiana, have already been placed on the hook for Athens, Greece.

ThePeopleInChargeOfSuchThings have just been too occupied keeping everyone else calm, and haven't gotten around to telling them...

Pshaw--they won't mind sending the Greeks a spare fifty billion, just to keep their welfare state in operation one more year. It'll all work out....won't it?

RBS and the British Taxpayer. Not A Love Story

The BBC's Robert Peston once again weighs in with that English dry humor:

In my wilder imaginings over the years about the future of the public sector, it never occurred to me that one day as a taxpayer I would be financially liable for the overdrafts on 3.2 million UK retail bank accounts, £10bn of loans to British small businesses and a further £10bn of UK residential mortgages provided to 70,000 home owners.

He goes on to detail how the taxpayers of the UK will be paying for RBS into the indefinite future.

It's not pretty.

I wonder if this was assembled in order to be inexorably in place before next year's elections. Brown and Labour must certainly know they are on the way out.

Which raises the next question: What else do they have under their sleeve?

Kyrie Eleison, Christe Eleison, Kyrie Eleison

I'm laboring away, getting projects out the door, getting ready to travel tonight, the usual stuff.

One last check-in with Jesse, and I see this:

$140 billion for the Wall Street investment bank employees.

This time last year, they swore their backs were against the wall, and Henry Paulson demanded the right to raid the US Treasury to save them. After one final brave last stand in the House, he triumphed, and the feeding frenzy began. I don't wear a tin hat, honestly, but I remember this 'crisis' felt so contrived...

We now have 20% unemployment, and true poverty and misery stalk much of the world, made worse by our recklessness.

$140 billion for the Wall Street investment bank employees.

I'm no socialist, and believe in compensation and incentives for achievement, but this time last year, these folks held a gun to our heads, and told us the world would end if they did not get their way.

Average compensation per employee at investment bank Goldman Sachs, is set to reach about $743,000 this year, double last year's $364,000 and up 12% from about $622,000 in 2007, according to the Journal analysis....

If you are reading this from somewhere overseas, I plead with you to understand that average citizens here do not support this, in no manner approve of this. We have been hijacked by a consortium of politicians and business elites, and we covet your prayers.

Lord have mercy upon us.
Christ have mercy upon us.
Lord have mercy upon us.

Welcome to the Future, Bailout Nation

Watching the Open this morning, and Tom Watson is inspiring! More on all that another time.

While surfing during ads, ran into the story on CBS about United Breaks Guitars.

It's one man's poetical revenge, posted on YouTube, on United Airlines, who negligently destroyed a prized guitar, and offered NO (that means ZERO) compensation.

With over three million views, and growing, this is a public relations disaster for United.

However, since it is one the growing number of zombie firms bailed out (during the Bush Administration), it can be confidently predicted that:

1. No one will be fired as a result of this humiliation.

2. The shareholders will not demand a change in management, even though it is patently incompetent.

3. When United bleeds more red ink(because the customers stay away in droves), Tim Geithner, with his $700 billion credit card, will send more money its way. After all, it's too big to fail, and it has a unionized work-force, whose votes need to be bought, and it's based in Chicago (now, who else do we know in Washington from Chicago?).

What this means, also, is that the 29-year-old lower-middle-management employees, who shake their heads in frustration at the stupidity of their employers at United, will not likely have the chance to create the next (functional!) incarnation of an airline, because Uncle Sam, Cousin Timmy, and Godfather Barack won't let United go under, as it should.

This is our future in Bailout America. The future is now, actually, since Flying Guitars are actually a common occurrence, and there are few victims of airline negligence and stupidity with the resources to push back with such imagination.

The airlines(and banks, and auto companies, and insurers, etc.) know this, and they know they have unlimited access to Federal largesse.

November 2010 is now fifteen months away. It's our first big opportunity to push back.