Sunday, February 28, 2010
We are also out of fiscal policy ammunition. Credit markets are wary of sovereign debt, and as Martin Wolf (Chief Economics Commentator at the Financial Times) points out it seems that a sovereign debt crisis is inevitable. Frankly, we wasted our fiscal stimulus on ineffective tax cuts instead of massive investment, as I argued in late 2008. Political support for a timely stimulus is wanting to say the least.
So with no monetary policy solution and no fiscal policy solution any kind of crisis will not be met with appropriate government action. We seem destined to face the next major downdraft without hope of government rescue.
Will there be such a downdraft? Well, spring is just around the corner, and in Chicago during the spring even the thought that the Cubs could win the World Series seems plausible.
But, the economy is facing severe headwinds. One excellent summary of the problems (with some level of excessive pessimism) can be reviewed here. Everyone should look at the gory facts--all 15 of them. They fully support dre's point. Any one of these problems could cause a repeat of the nightmare of late 2008; in fact, our government has done virtually nothing to assure that such a repeat does not occur. As Noble prize winning economist Joseph Stiglitz puts it:
"On regulatory issues, almost nothing has been done. The structure of the banking sector is worse. The too-big-to-fail banks are bigger. Of the smaller banks, 181 went bankrupt since 2008. In the bailout, the banks didn't do what they were supposed to do, which was to restart lending."
Stiglitz also maintains that US standards of living now have nowhere to go but down. We have been living from bubble to bubble, consuming more than we produce for too long. Now we are indebted and need to tighten our belts not just to live within our means but to pay off excessive debt. Indeed, as the chart to the left shows, our debt situation has worsened through the present crisis, as our wealth has shrunk, our incomes are declining, and our debt is therefore more unsustainable now than it was at the beginning of this nightmare.
To sum up: we still have way too much debt in our economy; the banks still seem insolvent, terrified of their balance sheets and unable to lend; our regulatory system is a proven catastrophe; and we must under go a painful deleveraging that is just getting started because we missed our opportunity for massive government led investment. And, we have reached the point of both monetary and fiscal (or at least political) impotence--something that has never before happened in the history of modern capitalism.
The question I have is this: if we do experience another downturn and government is unable to respond in force, what does that reality look like?
Saturday, February 27, 2010
As the economy stares new challenges in the face, the new financial regulation proposed by the Obama Administration recently, known as the “Volcker Rule,” that aims to regulate some investment banking areas that led to this financial crisis is finding tough sledding in Congress. On Thursday, Fed Chair Ben Bernanke testified before the Senate Banking Committee and expressed skepticism about the Volcker Rule, saying “If you go about imposing the Volcker Rule, I think it would be difficult to do it on a purely legislative basis, because of the potential for having unintended consequences.” This comes after the Senate Banking committee members have discussed scrapping the Volcker rule, which would completely ban proprietary trading at commercial banks, for regulation on a “case-by-case” basis. The President, however, still vigorously backs the Volcker Rule, according to senior White House advisor David Axelrod. Any new financial regulation of Wall Street will take a steel backbone we have not seen from this Congress. According to TARP director Professor Elizabeth Warren, the financial industry has flooded Capital Hill with lobbyists in unprecedented fashion. Members of Congress are receiving visits from Wall Street lobbyists up to three and four times a day as Congress debates re-regulating the financial sector.
Thursday, February 25, 2010
Wednesday, February 24, 2010
I assured her this type of financial fraud is very very common and the FBI has been looking into these types of financial frauds for years. I was rather surprised that she had never heard of these investigations. What happened to my cousin has happened to many many people. What I was more interested in determining was how a college-educated, well-experienced, accessories merchandise buyer for some of the most renowned fashion designer houses for more than 15 years, became the victim of a internet financial fraud scheme. She admitted that with the financial crisis, her job is not as secure as it used to be, and she was looking on the Internet, primarily on Hispanic-focused Internet websites for ways to make a little extra cash by working as a translator.
Last week, she responded to an email that offered her the opportunity to be a “secret shopper,” which required her to evaluate customer service procedures of local retailers in her community. This sounded right up her alley. The email suggested that the “Company” was looking for a “few secret shoppers in her area, and they would only select a few local residents.” She immediately, filled out an on-line form, which requested her personal data such name, address, and description of local community in particular types of retail stores. No credit card or banking information was requested. (I gather that would have triggered a red flag for potential victims.) A few days later she received a cashiers check for $3,800. The instructions required her to cash the check at “her local bank,” go to Western Union (WU) evaluate how well her local WU representative handled transactions with the public, in particular she should evaluate the level of courtesy, language ability, and efficiency displayed by WU representative. Once she had observed the WU representative she should conduct her own transaction and wire $3,600 (she should retain $200 as payment for her services) from the cashiers check that she had cashed at her local bank to the Company, which was located in Dubai, United Arabs Emirate.
My cousin immediately sent an email to the company and pointed out that $3,800 was a great deal of money for an initial customer service assignment, and whether there was anything “underhanded or potentially illegal” regarding the nature of the assignment. She received an immediate email response that assured her that the assignment was “100% LEGAL” and the amount of the cashiers check was the Company’s way of determining whether they were dealing with “honest secret shoppers.” My cousin’s fears were alleviated, and she performed her assignment as requested within approximately two hours of receiving the cashiers check including sending an evaluation report to the Company. She did not receive a response email from the Company. A few hours later, having heard nothing from the Company, she called me frantically, and shared this disturbing story.
The unfortunate reality is that the “cashiers check” is a fraudulent check. It was drawn on the United Federation of Teacher's Credit Union in Washington, D.C. A brief conversation with their Legal Department confirmed that they do not have a “secret shopper” pilot program nor do they have any representative or independent contractor that is located in Dubai, United Arabs Emirate. The check will not clear the inter-bank clearing process, which takes 2-3 days for in-state-checks and 3-5 days for out-of-state checks to clear. The account that the “cashiers check” is drawn on is not an active account. My cousin has been told that her local bank will withdraw the $3,800 funds from her personal account once the inter-bank clearing process rejects the cashiers check. I have advised my cousin to file a financial fraud affidavit with her local police department, which will permit her to file a theft and casualty loss on her itemized tax return for 2010. I also advised her to forward all correspondence to and from the Company to the FBI Criminal Investigation Division unit including the envelope in which the cashiers check was sent to her for forensic testing. The FBI Financial Crimes Report to the Public is available here. It really should be translated into multiple languages especially Spanish and French.
My cousin has learnt an expensive lesson. However, her experience has galvanized her to create an Internet Financial Fraud brochure in Spanish, which she will share with primarily Spanish speaking community groups in South Florida. I am a strong believer that all things no matter how demoralizing and painful they may be, happen for a higher purpose. Hopefully, my cousin’s unfortunate experience will prove to be a learning experience for many many people.
Lydie Nadia Cabrera Pierre-Louis
Monday, February 22, 2010
I suggested in 2007 that a major problem is corporate governance, and cited evidence in support of inferior corporate governance standards. There is little doubt that some of the prime movers in the recent financial meltdown suffered from very weak boards. And a major problem with weak boards is that they are stacked with the CEO's cronies. Distinguished commentators such as Stephen Bainbridge long ago recognized the problems with CEO cronies populating many boards.
So, here is an idea: instead of having vast amounts of social wealth controlled by the CEOs' cronies, and dedicated to the infinite enrichment of CEOs, why not legally mandate that those governing the modern corporation do so professionally in accordance with professional standards similar to lawyers, doctors, stockbrokers, and any other number of regulated professions.
Recently, two Harvard Business School professors proposed just that. Their proposed code of conduct would require, among other things, that: managers "enhance the value of the enterprise to create wealth for society in the long term;" "uphold laws and contracts;"and "do not allow gender or race to influence decisions." All of these professional standards would be enforced through professional sanctions imposed through judgment of peers. In other words, directors could be disbarred. In 2005, I argued for a model based upon stock broker regulation including entry examinations and continuing education requirements. The essential point is that only those professionally qualified to be directors would be directors.
As I have written on this blog earlier, I believe that the Citizens United case makes corporate governance more important than ever. I have also written about the myth of the American meritocracy in light of the financial crisis--I posited that our corporate leaders lack ability as well as character. I also argued that all members of traditionally oppressed groups should be suspect of Citizens United because it shifts power from a more diverse body politic to a culturally monolithic group of corporate elites.
This all suggests a potential interest convergence among those in favor of superior corporate governance and those currently excluded from the ranks of board directors and officers. Both of these groups should be interested in a legally mandated regime of professionalization of corporate governance. This would open board membership to all comers based upon merit--and eliminate the need to be a crony of the CEO.
Sunday, February 21, 2010
Still, some evidence exists that suggests when shareholders are primarily institutional investors, there is no incentive to pressure executives when a firm’s compensation plan seems entirely disconnected from a “current economic environment.” The case of Lazard Ltd.’s executive compensation for 2009, seems to indicate that when “shareholder ire” is not a consideration for executive’s awarding themselves compensation, that in an environment when profits are down 95%, that it is still fine to increase executive compensation significantly. Lazard’s 2009 profits were way down, but its executives and employees were compensated at a rate that required payout of more than 72% of total annual revenue, up from 56% of annual revenue being earmarked to compensating employees in 2008.
“I don’t think it’s a coincidence that the short-term profit drive of corporate America happened at the same time that mutual funds became the major owners of these companies,” says Russel Kinnel the director of fund research at Morningstar Inc. If institutional investors are content to quietly watch executives increase compensation remarkably in the face of dreadful performance, can we really expect a “bonus based on performance” system to take root on Wall Street?
Saturday, February 20, 2010
Lobbying Client (Total Amount Spent on Lobbying Efforts in 2009):
1. U.S. Chamber of Commerce ($144,496,000)
2. ExxonMobil ($27,430,000)
3. Pharmaceutical Research & Mfrs. Of America ($26,150,520)
4. General Electric ($25,520,000)
5. Pfizer Inc. ($24,619,268)
6. Blue Cross/Blue Shield ($22,715,439)
7. AARP ($21,010,000)
8. American Medical Association ($20,830,000)
9. Chevron Corp. ($20,815,000)
10. National Association of Realtors ($19,477,000)
11. American Beverage Association ($18,850,000)
12. American Hospital Association ($18,347,176)
13. ConocoPhillips ($18,069,858)
14. Verizon Communications ($17,820,000)
15. FedEx Corp. ($17,050,000)
16. Boeing Co. ($16,850,000)
17. BP ($15,990,000)
18. National Cable & Telecommunications Assoc. ($15,980,000)
19. Northrop Grumman ($15,180,000)
20. AT&T Inc. ($14,729,673)
Thursday, February 18, 2010
President Obama’s silence regarding the disparate impact the financial collapse has had on Americans of color is not likely attributable to his belief that racism and discrimination are no longer problems. He has made several comments that indicate otherwise. But his silence about racism’s link to economic discrimination based on race obscures a troubling irony relating to minority entrepreneurship. Intuitively, one would think that in the Obama era, the so-called “post-racial” era, it would be easier for Americans of color to establish and succeed in their own small businesses. The counterintuitive reality, however, is that it was easier for African Americans to become entrepreneurs and thrive in the twentieth century than it is in this second decade of the twenty-first century.
Ernesta Procope, an African American, is a twenty-first century businesswoman, who has headed Wall Street’s largest minority-owned firm for decades. Her story is a success story, but, it is a story about success achieved in spite of subtle and perhaps unconscious decision making that impedes the entrepreneurial achievement of twenty-first century African Americans. This twenty-first century narrative reveals the intractability of the problem of lack of access to opportunity for black entrepreneurs.
In the 21st century, black entrepreneurs encounter more difficulties in establishing businesses and getting credit than their white counterparts. African American entrepreneurs frequently pay higher interest rates than similarly situated white businesspeople. It is more difficult for businesses owned by African Americans to remain viable. Black businesses’ sales and profits are typically lower than those of their white counterparts. Based on data gathered from the 1999 and 2001 U.S. Census Bureau, “…African American and Latino firms are less successful on average than are White or Asian firms. In particular, businesses owned by African Americans and Latinos have lower sales, hire fewer employees, and have smaller payrolls than White-owned businesses. African-American-owned firms also have lower profits and higher closure rates than White-owned firms”.
Mrs. Procope’s story reveals a counterintuitive proposition. The impediments to entrepreneurial success for 21st century black entrepreneurs are different from the obstacles their 20th century counterparts faced, but the obstacles are nevertheless as, and perhaps, even more serious. Minority entrepreneurs in the twenty-first century find themselves in a paradoxical situation. There are several federal, state and local programs in place designed to assist small minority-owned and women-owned businesses. These programs help small women and minority-owned businesses get loans and procure business from the federal government as subcontractors. In addition to these programs, many large public companies have diversity programs that attempt to ensure that the small business owners who supply them with goods and services are racially diverse. These programs, however, cannot resolve the problems that minority business owners face as a result of the subtle, often unconscious racism of the twenty-first century.
For example, because of federal and local programs, there is likely to be a perception that minority entrepreneurs have an unfair advantage. This perception may cause many of the decision makers at large publicly-held companies to overlook minority entrepreneurs and give business opportunities to white-owned firms who are seemingly disadvantaged by minority-business programs. This is likely to happen in spite of the public companies’ supplier diversity programs. This perception that people of color enjoy unfair advantages under programs designed to mitigate the effects of centuries of race discrimination fueled energetic anti-affirmative action efforts in recent decades.
Another obstacle to entrepreneurial success for minority business owners, particularly Black and Latino businesspeople, is best examined by understanding the subprime lending debacle that unfolded in the first decade of this century. There is irrefutable evidence that African Americans and Latinos were targeted by mortgage brokers and lenders for high-interest subprime loans even when the minority borrowers qualified for lower-interest prime loans. This discriminatory targeting occurred in consumer lending also. During the height of the subprime mortgage debacle, billions of dollars in wealth were drained from minority communities. This drain in wealth means that minority consumers have less wealth, resulting in a reduction in sales for many minority businesses. And, of course, discriminatory lending practices would impact minority entrepreneurs seeking capital to start or sustain their businesses.
In September, 2009, I visited The Museum of American Finance in New York City’s financial district. The museum is affiliated with the Smithsonian Institute and is the only public museum that focuses on entrepreneurship, money and the nation’s financial history. At the museum was an exhibit called “The Women of Wall Street” containing the stories of present-day and historical female icons in American finance and economic development. Incredibly, not one of the approximately ten narratives was about a woman of color.
The museum, located at 48 Wall Street, is just a few doors away from The E.G. Bowman, Co., Inc., the full-service commercial insurance brokerage and loss control firm founded by Ernesta Procope. Mrs. Procope, a renown and revered business icon, particularly in the African American community, is affectionately known as “The First Lady of Wall Street.”. I was stunned that Mrs. Procope’s story was not included in “The Women of Wall Street” exhibit. Hers is a compelling story of a brilliant and persistent entrepreneur who transformed the store-front homeowners and auto insurance company she founded into the commercial brokerage firm it is today. Her entry into the commercial market was not easy. She had to struggle to get major corporations to do business with her firm. Her struggle was successful, yielding a client list that has included PepsiCo Inc., General Motors Corp., International Business Machines Corp. and Time Warner Inc.
I spoke to Mrs. Procope about her exclusion from “The Women of Wall Street” exhibit a few days after I visited the museum. “I am not surprised”, she told me. I listened to her with quiet resignation as she told me about the racism and sexism she has faced for her entire professional life.
One of the most troubling aspects of Mrs. Procope’s exclusion from the exhibit is that it results from the type of racism and discrimination that cannot be legislated away because it is subtle and perhaps unconscious. The museum’s all-white “Women of Wall Street” exhibit is a type of denial of access to opportunity that is just as harmful to minority business owners as a Fortune 500 company’s refusal to do business. This denial of access renders minority firms invisible to potential clients. This is a problem that lingers in the twenty-first century. It is a problem that cannot be resolved by federal or local programs designed to assist small and minority businesses, nor can it be resolved by supplier diversity programs in the private sector.
“As far back as 1978, the federal government mandated that federal agencies – as well as corporations that do business with them – award roughly 8 percent of the value of their contracts to small, disadvantaged and minority-owned businesses, including those that are black-owned.” Most large public corporations have created programs designed to increase the likelihood that they will do business with minority suppliers. But, “[c]ontracts frequently get awarded to suppliers that the functional manager already knows – which according to the numbers, very likely don’t include any that are black-owned.”
The museum’s failure to include Ernesta Procope’s successful business story may also be attributable to unexpressed, perhaps even unconscious attitudes that perceive minorities in general, and the businesses they own in particular, as inferior. This unconscious bias is likely to be shared by the major corporations with whom Procope’s company seeks to do business. In fact, her company has been asked on several occasions to sign a contract with a major company as a supplier. The major company is fulfilling a requirement that it do business with a certain percentage of minority firms in order to procure government contracts that impose such requirements. But, the deal suggested by some major companies did not include the actual provision of services from Procope’s firm. The only thing the companies required was that Procope’s firm say it was a supplier, even though it had to provide no services at all. Mrs. Procope and her managers have consistently refused to participate in these arrangements.
Tuesday, February 16, 2010
The Swiss principle of bank secrecy is derived from statutorily enforced privacy laws. Swiss law strictly limits any information shared with third parties, including tax authorities, foreign governments or Swiss authorities, except when requested by a Swiss judge's subpoena. The law only permits a bank to share information with third parties in cases of severe criminal acts, such as identifying a terrorist's bank account or tax fraud, but not simply for non-reporting of taxable income, otherwise known as tax evasion. A bank employee who violates a banking client's privacy is subject to severe punishment under Swiss law. Recent bilateral treaties negotiated between Switzerland and a number of countries are designed to weaken Swiss law privacy protections related to tax evasion. The bilateral treaties are analogous to the disclosure provisions contained in the special agreement between the U.S. and Switzerland concerning the disclosure of American UBS clients.
However, last month a Swiss Court, the Federal Administrative Court in Switzerland, ruled that Swiss authorities may not disclose the bank account details of a wealthy American who used UBS’ private bank to evade American taxes. Some commentators believe that the Swiss Court’s ruling may nullify the special agreement between the U.S. and Switzerland regarding the disclosure of American UBS clients. In the ruling, the Swiss Court noted that Switzerland is an independent democratic country with a clear separation of powers, and it is the court’s responsibility to maintain said independence by adhering to Swiss national law, and not provide confirmation of external political pressures. As such, the Swiss Court issued a ruling forbidding UBS to disclose information to the U.S. or the IRS regarding approximately 4,500 American UBS clients. Furthermore, the Swiss Court ruled earlier last month that Switzerland's financial regulator violated Swiss law when it turned over data regarding 255 UBS American clients last year. The Swiss Court’s decision cannot be appealed. The ruling has placed the special arrangement between the U.S. and Switzerland regarding American UBS clients in jeopardy. It is unlikely that the Swiss Government wants a confrontation with the U.S. One possible remedy would be an emergency decree by the Swiss Government to enforce the original special agreement between the U.S. and UBS. The decree would arguably be beyond the scope of the Swiss Court’s jurisdiction. However, this all remains to be negotiated or it may all lead to an international legal battle.
Sunday, February 14, 2010
I will present a paper entitled The Myth of the American Meritocracy: From Crony Capitalism to Professionalized Corporate Governance. The paper is premised on the highly dysfunctional allocation of opportunities and responsibility within current America, as evidenced by the recent financial meltdown. Ideally, a rational system of advancement operates to allocate opportunities and responsibility in accordance with capabilities, skills, dedication and character. Such a system of advancement will promote macroeconomic growth by assuring that the most talented and responsible have the most power and responsibility. I have written much about the need for the law to cabin economic power and assure it is applied to socially beneficial ends. Less focus has been placed upon our system of advancement.
Appropriate disincentives and incentives mark of a system of a well functioning system of advancement. Consider what our so-called meritocracy has wrought: billions in losses at virtually every major bank, trashed communities all across the country, financial sector insolvency, trillions expended in government support of elites, an historic credit crunch/liquidity trap, skyrocketing unemployment, and a global recession leading to trillions in foregone GDP. For this, financial elites suffer little loss in wealth, huge bonus and compensation payments, and continued control of our financial sector. Some meritocracy!
Even before the financial crisis right of center voices such as The Economist suggested that higher inequality threatened to render the American meritocracy a myth. Since then study after study finds that economic mobility in the U.S. is lower than practically any other developed nation. Moreover, there is good reason to think mobility is declining in the U.S., with less mobility to come as a result of the disproportionate impact of this economic downturn--unemployment is highly concentrated among the bottom 20% of the income distribution.
All of this suggests real problems facing the American economy: we do not have the best and brightest running things, instead we are plagued by the pretense of privilege and the dullness of hereditary entitlements.
In my next post, I will suggest a potential solution, which forms part II of the paper I will present at MWPOC 20. That solution will build upon a proposal I made in 2005 for the professionalization of corporate governance.
Saturday, February 13, 2010
For example, companies and special interest groups spent a record $3.47 billion on federal lobbying efforts in 2009, this amount represented a 5% increase over statistics reported in 2008. Lobbyists were not deterred by the Great Recession, the decline of the dollar, bank failures, TARP bailouts, or near 10% unemployment nationally and far worse unemployment rates in a number of individual states. One lesson learned: lobbying appears to be a growth industry heading into the future if you are seeking employment and job security. In other words, lobbying appears to be a recession-proof industry.
The Obama Administration and Congress were busy over the past year pushing forward a number of hot-button issues like health care reform, financial regulatory reform, climate-change and other controversial legislation. In a year when Congress was busy debating such wide-ranging ideological issues lobbyists were paying close attention on the sidelines.
A number of industry sectors notably stand-out as the deep pocket and influential lobbyists. The pharmaceutical and health industry spent an estimated $266.8 million lobbying on health care reform—this happens to be the largest amount ever spent by a single industry in a one year period of time. Business associations spent $183 million on federal lobbying. Oil and gas lobbyists spent $168.4 million. The insurance industry spent $164.2 million. At the end of the day, all of these industry sectors that I mention spent more in 2009 than they did in 2008. However, the electric utility industry spent $144.4 million, slightly off the 2008 pace for that industry segment. To recap, the top five industry sectors in terms of spending were the following:
1. Pharmaceutical and Healthcare Industry ($266.8 million)
2. Business Associations ($183 million)
3. Oil and Gas Industry ($168.4 million)
4. Insurance Industry ($164.2 million)
5. Electric Utility Industry ($144.4 million)
The single largest institutional lobbyist was the U.S. Chamber of Commerce, an association that represents roughly 3 million businesses in various industries, which distributed $145 million for lobbying activities at the federal level. The Chamber of Commerce has consistently held the top spot as the largest single spender over the past nine (9) years. 2009’s figure of $145 million spent on lobbying activity by the Chamber of Commerce marks a 6% increase over 2008 figures.
I promise you that I’m not making these figures up. You can see them for yourself. A wonderful website www.opensecrets.org compiles and breaks down the numbers that I’ve just shared with you. As a citizen, and probably thinking along the same lines as other citizens, when I come across data like this I’m left scratching my head and asking one simple and basic question. Has spending such vast sums on lobbying improved the quality, scope, and reach of legislation and policy emanating out of Washington to make the everyday lives of a greater multitude of citizens better and more productive? I have my own answer and opinion in response to the question that I pose. I can only imagine what your response would likely be in answering this question.
Friday, February 12, 2010
"The committee is pressing for details about deals that sent billions from AIG's bailout to big banks including Goldman Sachs Group Inc. Lawmakers want to know why the New York Fed pressed AIG to be more secretive about the 'backdoor bailouts' and other aspects of AIG's management."
The following questions are expected to be addressed during the inquiry:
How was the Treasury’s decision to fully compensate the counterparties of AIG in its 182 billion dollar bailout reached?
Why was the decision made by then New York Fed Chair and now Treasury Secretary Timothy Geithner and Paulson to refuse to name those counterparties that were paid off in full?
The Committee on Oversight and Government will also be asking the GAO to examine the payments and inquire into the source of the direction to pay the counterparties in full and what steps were taken thereafter to block disclosure of those payments.
Tuesday, February 9, 2010
This is all very fascinating to me, because the U.K. “officially” came out of a recession in the fourth quarter of 2009 (December 2009), which ended six consecutive quarters (1.5 years) of economic decline in the U.K. Economic growth for the U.K. during the last year was a mere 0.1%, which is much less than economists expected, and more analogous to the growth rate of a developing country. Typically when a country is in an economic slowdown, the government increases spending to give the country an economic boost. This is classic Keynesian economics that was applied during the Great Depression by President Roosevelt in the United States under the New Deal Programs, and fiscally analogous to President Obama's current U.S. economic stimulus package. However, one of the major concerns about a country having large budget deficits is that it cannot spend sufficiently to boost its economy. This is precisely the issue that certain commentators have raised about President Obama’s economic stimulus plan; the plan needs to be more aggressive—more money needs to be spent to really jumpstart the U.S. economy.
A spokesman for the U.K. Treasury stated, "it is right that borrowing has been allowed to rise so that the [U.K.] government has been able to protect the economy from the global downturn.” Additionally, a representative from the British Chamber of Commerce (BCC) stated that “despite the U.K. coming out of a recession, there is still a long way to go to economic recovery.” Ironically, despite the British government’s fiscal plan to jumpstart the U.K. economy, last week the Euro reached a seven month low against the U.S. dollar. The drop in the Euro’s value could not have occurred at a worst time for two reasons. First, it made traders worry that Greece's huge government debt problems could spread to other European countries such as Spain, Portugal, and the U.K. Second, it motivated Mr. Johnson, the former chief economist for the IMF, to describe the G7 group of leading economies as "fundamentally useless." Mr. Johnson criticized the G7 organization because it “did not react quickly enough” to the global economic problem, and for “remaining in an out-of-date mindset.” He continued that "the financial markets are taking a long hard look at the fiscal accounts of all these [Euro zone] countries and they don't like what they see." I previously commented on the G20's need to require member countries to implement fiscal monetary policies in September 2009. Mr. Johnson further noted that the "[the G7] seem to show no awareness at all that much of Europe is facing a serious crisis and it's not limited to Spain, Greece and Portugal, it's also going to include Ireland. I think Italy is also very much in the line of fire. There's a very serious crisis inside the Euro zone," Johnson warned.
Mr. Johnson’s comments occurred just hours after the G7 finance ministers held a meeting in northern Canada, at which the European countries had to reassure their counterparts from the US, Canada and Japan over the deteriorating state of the public finances in some Euro zone countries. The G7 finance ministers agreed, not to involve the IMF and to leave the matter to the European Union to resolve. UK chancellor, Alistair Darling, who was at the G7 meeting, commented that the world was set for a steady but slow recovery and that the various governments' economic stimulus packages should remain in place until the recovery was assured. His final words at the meeting ended on a hopeful note, "the important thing is that we all are absolutely committed to maintaining the support for our economies until we make sure we have recovered….” The same can be said for the U.S.
Sunday, February 7, 2010
Paul Krugman warned in 2002 that crony capitalism took root during the Bush Administration. Crony capitalism means that connections (particularly government connections) matter more than merit. Obama economic Czar Lawrence Summers is the epitome of crony capitalism: after making millions with his Wall Street Connections he has successfully burrowed himself into the highest echelons of the Obama Administration where he now dictates Wall Street Policy. In part because of Summers, I posit that things worsened recently and the Obama Administration failed to turn back to a merit based economy. Can we really tell the difference between the Bush-Paulson-Geithner-Bernanke Wall Street policies and the Obama-Geithner-Summers-Bernanke policies?
In terms of gentleness towards Wall Street elites the policies seem identical. For example, would it surprise you to learn that despite the government's massive bail outs in the financial sector, and despite its massive ownership positions, as well as the massive losses brought on by massive incompetence (or worse), 9 out of ten senior bank executives retained their positions, and the only ones leaving either retired or died? Or, "92 percent of the directors who approved the dramatically flawed compensation policies and ineffectual risk management practices that led to global financial failure are still in place and have received $12 trillion of taxpayer support." Where is the great American meritocracy? Wall Street incumbents remain incumbents under both administrations, regardless of ineptitude.
Alternatively, consider this: Goldman Sachs, Citigroup, and JP Morgan Chase gave the Obama campaign about $2.5 million. McCain's top contributors include Merrill Lynch, Citigroup, Morgan Stanley, Golden Sachs, and JP Morgan Chase, giving a total of $1.5 million. I suppose on Wall Street that would be termed a political straddle or hedge.
This has been the case for years. The charts at left show contributions for the five years leading up to the election. The same banks are supporting both candidates.
Citizens United will greatly exacerbate this problem. That decision creates a new corporate free fire zone during the last 60 days of every campaign. Hedges can be adjusted, and straddles can be lifted or put on up to the very end, limited only by the time available to produce commercials and buy air time. Moreover, by waiting until the last minute the campaigns will frequently be deprived of an effective rebuttal.
Think about financial and economic theory: would a trader in global markets be more or less effective if there were a no trade zone of 60 days prior to release of, say, GDP numbers? If you could spend money on the weekend prior to an election, knowing that the opposing campaign could not effectively respond prior to polls opening, would you increase your bets or decrease them? Simple logic thus suggests that the numbers shown above will increase and that our political leaders must be more attentive to the corporate leaders sitting atop mountains of wealth.
So, what to do? Well, first reformers must recognize what we are up against and match their tactics. It is a political monolith. The two parties are now one. If the most sophisticated financial traders in the world recognize this (just follow the Goldman Sachs and JP Morgan money) it is time for sophisticated reformers to recognize this central truth. The financial sector wins no matter which candidate is elected. Right now, I feel reform loses no matter which candidate prevails.
There is a third way. I argued in 2004 (in the Washington & Lee Law Review) that reform wins only when backed by sufficient political and economic power, and that reform in the corporate sector is no different than racial reform generally. There is only one way to break up crony capitalism and it is diversity. Citizens United means corporate governance must now reflect America generally. I will blog on that fact next. But today, the point I am trying to make is that the goal of diversifying corporate America must be pursued without any partisan pretense, with any support necessary from either party. With the election looming, a bi-partisan coalition must be marshaled now.
Perhaps, the Civil Rights Act of 1964, when more Democratic senators than GOP senators voted against the bill, furnishes the model for real reform in this environment. As GOP Senator Dirksen from Illinois then stated: "I trust that the time will never come in my political career when the waters of partisanship will flow so swift and so deep as to obscure my estimate of the national interest. . . . I trust I can disenthrall myself from all bias, from all prejudice, from all irrelevancies, from all immaterial matters, and see clearly and cleanly what the issue is and then render an independent judgment." Ultimately, the Senate Minority Leader mustered 27 0f 33 GOP votes in favor of cloture, shutting down the filibuster of the southern Democrats.
My point is simply that the battle against crony capitalism must disenthrall itself from the premise that the path to reform lies with either party.
Saturday, February 6, 2010
In recent days, international financial leaders, including Obama administration financial advisor Larry Summers and British Prime Minister Gordon Brown, met in Davos, Switzerland to openly debate the need for global regulatory solutions. George Soros's proposal of the need for a “global sheriff,” gained currency in Davos, while Howard J. Davies of the British Financial Services Authority proposed a “financial WTO.” That these talks have occurred and are being taken seriously reflects the continuing global outrage over the bailed out investment banks in the United States and those banks’ continuing refusal to break from “business as usual” in connection with executive compensation and freeing up restricted credit flow.
Just as Wall Street promises to mightily resist the proposed “bank tax” and the recently announced “Volcker Rule,” these banks appear determined to fight against a new global regulatory regime. To avoid new U.S. financial regulation, “too big to fail” banks have threatened to move operations to countries with less restrictive financial regulations. This move toward “regulatory arbitrage” would allow banks to structure their businesses in ways that avoid or circumvent particularized regulation and make real the “fiction” that the United States regulatory tradition forces capital out of the U.S. To wit, Goldman Sachs has threatened to abandon its “bank holding company” status in order to circumvent the Volcker Rule’s sufficient deposits requirement. Recall that Goldman was able to survive the financial crisis because the Government bestowed “bank holding company” status upon Goldman.
The arrogance of Wall Street banks (through their leadership) is laid bare by their furious resistance to new financial regulation as announced by the Obama administration. It is now clear that many of the enormous gains made by Wall Street financial institutions during the past decade were ill-gotten. Left to their own devices, Wall Street leaders (amongst many other culprits) allowed greed, reckless decision making, irresponsible risk modeling, and rating agency capture to drive the economy to the brink of disaster. That they now resist new U.S. regulation and the potential adoption of global sheriffing is astonishing. When President Obama announced his potential bank tax, he suggested to U.S. investment banks that rather than spending millions of dollars resisting and sending scores of lobbyists to Washington, D.C. Congressional offices, perhaps the banks “might want to consider simply meeting your responsibilities.”
Friday, February 5, 2010
In the Complaint, Cuomo alleges that Bank of America’s management team, namely Lewis and Price, understated losses at Merrill Lynch to get shareholders to approve of the transaction. Further, the Complaint alleges that the pair, Lewis and Price, overstated Bank of America’s desire to terminate the merger to federal regulators weeks later in order to force the federal government to offer Bank of America $20 billion in additional TARP aid. The Complaint makes the following specific allegations:
- Shortly before the shareholder vote, Price ignored a warning from the bank’s Corporate Treasurer, Jeffrey Brown, who told Price that, “I didn’t want to be talking [about Merrill’s losses] through a glass wall over a telephone.”
- The bank’s management failed to tell shareholders that it was allowing Merrill to pay $3.57 billion in bonuses. The amount, criteria, and timing of the bonus payments were omitted from the proxy. The bonuses were distributed in a manner that was completely inconsistent with Merrill’s prior practice, and in the worst year in Merrill’s history.
- The bank’s management did not tell the bank’s lawyers about the full extent of Merrill’s losses before the shareholder vote. For example, the bank’s former General Counsel, Timothy Mayopoulos, was intentionally mislead about the size and nature of Merrill’s losses. After the shareholder vote, when Mayopoulos learned of the actual losses, he attempted to confront Price but was summarily terminated.
- In the course of the Attorney General’s investigation, Lewis and other executives misled investigators about their conduct during and after the shareholder vote.
This will be an interesting and intriguing case to watch. I’ll keep you posted.
Thursday, February 4, 2010
On Thursday, February 2, 2010, Bank of America agreed to pay a settlement of $150 million to the SEC to dispose of claims that Bank of America misled shareholders in relation to bonuses and losses at Merrill Lynch. Again, this settlement is subject to the approval of United States District Court Judge Jed Rakoff. Recall, that in September 2009 Judge Rakoff rejected a proposed $33 million settlement between Bank of America and the SEC as unfair and unreasonable.
As part of the settlement, Bank of America would have to take a number of steps over the course of the next three (3) years to reinforce corporate governance and internal control measures. In a court filing on Thursday, in seeking Judge Rakoff’s support the SEC noted: “The relief contemplated by the proposed order is fair, reasonable, adequate and in the public interest…” Certainly, Judge Rakoff will have the final word. It will be interesting to see if Judge Rakoff decides to approve this current settlement proposal.
Tuesday, February 2, 2010
During the next few months, the principal focus on Ayiti will be survival. As we look further down the time-line to many many months, to one year to two years, and beyond, the focus on Ayiti will shift to re-building or in development parlance—nation building. The re-building will not only be in-terms of adequate construction that complies with hurricane and earthquake codes, but also in-terms of industry, trade, education, and tourism. Ayiti in recent history has had a limited industrial base, but that has not always been the case.
Prior to Ayiti’s Revolution in 1804, which resulted in Ayiti’s independence from France, Ayiti at the time called Saint-Domingue, was the most prized colony in the New World. Sainte-Domingue was often called the "Pearl of the Antilles," because it was the richest and most prosperous colony in the French empire, and one of the wealthiest colonies in the world. Sainte-Domingue was the most important trading port in the Americas because of the sheer volume of trade that flowed to and from Europe. By 1780, Saint-Domingue produced about 40 percent of all the sugar and 60 percent of all the coffee consumed in Europe. This single tiny island, roughly the size of Maryland or Belgium, produced more sugar and coffee than all of the British West Indies colonies combined.
After the Ayitian Revolution, trade with Ayiti ended abruptly, in large part because the world’s nations (the United States included) did not recognize the former slave colony that had defeated Napoleon’s army, as a legitimate government. The Republik d’Ayiti was ignored by the world for approximately one century. The richness of the Ayitian Revolution and the aftermath is a wonderful story, and has been written by a number of historians, political economists, novelists, and journalists. Time and space does not permit me to retell the story now. However, I encourage you to read the works of C.L.R. James, Robert Heinl, Paul Farmer, Hans Schmidt, and Edwidge Danticat.
Since the 1990s, Ayiti’s coffee industry has experienced a stop and go paradigm. U.S. Agency for International Development sponsored the Haiti's Coffee Planting Project to help local Ayitian planters meet the standards of gourmet coffee drinkers in the United States. The project spent $5.8 million to help 20,000 farmers belonging to 24 local cooperatives. Haiti's Coffee Planting Project united the farmers into a single federation, which acquired an export license in order to sell the coffee directly to customers abroad. However, it has been a struggle to market Haitian coffee not because Ayitian coffee is not delicious or in gourmet parlance--yummy, rather because the Haiti's Coffee Planting Project did not including roasting plants. The project helped the farmers set up 23 processing plants to wash the beans, sort out only the ripe beans, and then sun-dry them on clean, cement drying beds. However, the coffee beans would then be sold to U.S. companies, which would ship the coffee beans to their own roasting plants and then market the coffee to U.S. gourmet retailers.
The project had minimal success. In South Florida for a few years in the early 1990s, an Ayitian coffee called Haitian Bleu was available in 14 Barnie's Coffee & Tea Company stores. ''When we first started purchasing it, we didn't know how it would sell. Then it took off,'' says Scott Young, who managed the Barnie's store in Plantation, FL. ''We have carried it a little over a year, and it's just a delicious coffee,'' Young added. Haitian Bleu has the same type of coffee plant and grown in the same region as the wildly successful Jamaican Blue Mountain bean. In the end, as a matter of practicality U.S. coffee retailers do not want to surrender precious retail shelf space to unknown coffee growers from a country that is known primarily for its poverty, and dictators rather than its agricultural acumen. Unfortunately, due to political and economic unrest in Ayiti, the foreign investment capital needed to build the infrastructure necessary to grow, cultivate, process, roast, market, ship, and sell Ayiti’s coffee never materialized.
Over time, many Ayitians farmers lost the skills needed to grow, harvest, and process coffee. Ayiti’s neighbors in South America, in particular Brazil eventually cornered the regional coffee market. Brazil’s coffee industry was aided by foreign investment to modernize its facilities including processing and roasting facilities. As a result, between 1998 and 2002, annual coffee exports from Ayiti fell to a mere four million dollars, less than one sixth its former sales volume in early 1990s. Ayitian coffee export industry has declined during the past century because of infrastructure issues more so than concerns regarding the quality of the coffee or Ayitian politics. The principal reason for the decline of Ayitian coffee industry has been a lack of investment in processing facilities needed to process quality coffee beans, and roast the coffee beans to provide the quality assurance to sell Ayitian coffee to U.S. gourmet market. However, that may be changing. The devastating Ayitian earthquake a few weeks ago, may have assisted Ayiti's potential as a coffee exporter, to turn the proverbial corner.
A few years ago St. Thomas University in cooperation with the Archdiocese of Miami’s sister Archdiocese in Port-de-Paix, Ayiti located on the northwest Atlantic coast of the island, entered into collaboration with COCANO fair trade coffee cooperative that received support from the Catholic Relief Services Fair Trade Fund. Tommy Bassett of the Just Trade Center is a seasoned fair trade expert who is providing guidance to the COCANO fair trade cooperative, and has accompanied members of St. Thomas University on several trips to Ayiti. Bassett believes that growing coffee in an environmentally and economically depressed landscape like Ayiti is not easy. However, the success of the cooperative lies with the spirit of Ayitian coffee farmers who are intrinsically connected to the land. “They have a rural existence that’s very much in tune with nature,” Basset stated. Poets have referred to the connection as symbiotic. Bassett recalls his own symbiotic moment as he stood on the edge of a mountainside in Port-de-Paix, under a leafy tree sipping velvety smooth chocolate infused locally grown coffee with Ayitian farmers, he turned and with a bit of surprise and elation in his voice stated “man we can see the ocean.” That is the beauty of the land and the magic of Ayiti.
As Ayiti struggles to rebuild herself yet again, I have no doubt that she will rise from the ashes, the pain, and the suffering with a deeper understanding of herself and stronger spirit. In the interim, Ayiti will need the help of every person who believes in the right of self determination and the unfailing power of the human spirit. If you wish to purchase one-can-or-two-or-three of the COCANO Ayitian coffee, please contact me via email. It is a tax deductible contribution and proceeds are sent to the coffee farmers in Ayiti. With your help Ayiti will rise again.
Lydie Nadia Cabrera Pierre-Louis