Friday, August 31, 2012


Perhaps the most offensive US government bailouts during 2008-2009 were the billions and billions spent keeping foreign megabanks afloat. The foreign megabanks benefited from two major government bank welfare programs that collectively dwarf any prior government spending program with the possible exception of World War II ($3.9 trillion in 2008 dollars): i) secret Fed loans ultimately uncovered by Bloomberg pursuant to a FOIA lawsuit; and, ii) the huge bailout of AIG which then turned around and paid 100 cents on the dollar to counterparties around the world on the infamous AIG credit default swaps.

Let's start with the secret emergency loans. In late 2008 and early 2009 the Fed (backed by the US taxpayer) lent a total of $16 trillion to save the global financial sector pursuant to seven publicly-announced programs. Until Bloomberg sued under FOIA, the identity of the borrowers under these programs was a closely guarded Fed secret. According to Bloomberg: "Almost half of the Fed’s top 30 borrowers, measured by peak balances, were European firms. They included Edinburgh-based Royal Bank of Scotland Plc, which took $84.5 billion, the most of any non-U.S. lender, and Zurich-based UBS, which got $77.2 billion. Germany’s Hypo Real Estate Holding AG borrowed $28.7 billion, an average of $21 million for each of its 1,366 employees." Without these loans, which peaked on December 5, 2008 at $1.2 trillion, the entire global economy likely would have collapsed. These amounts boggle the mind. With virtually zero democratic negotiation (no congressional vote, no election outcome, etc.) the Fed rescued the entire European financial sector, through trillions in outlays. Outrageous!

Next, the government paid billions more than necessary, much of it to foreign banks, when it jumped in and rescued AIG. None of the beneficiaries of that bailout bargained for a US government guarantee on the obligations that AIG owed--yet, the government made good on all of AIG's commitments. So, counterparties to AIG enjoyed a government guarantee for free. In all, foreign megabanks took in at least $50 billion in taxpayer supplied funds (according to this spreadsheet compiled by the Guardian) courtesy of the Federal Reserve.

So, next time, and there will be a next time, would a President Romney put a stop to US funded bailouts of foreign banks? I highly doubt it.

First, take another look at the OpenSecrets data on his top supporters: Credit Suisse gave $427,560; Barclay's gave $349,400; and UBS gave $259,200. These firms do not just give money away. And a President Romney simply would not have any incentive for turning on such major donors. To the contrary, he would need these kind of massive donations to fund his re-election campaign.

Second, Romney has sought out this source of donors; indeed, the global megabanks are his base. For example, he hosted a fundraiser just last month in London. Tickets to the fundraiser cost up to $75,000 a plate. According to the Washington Post, attendees included the CEO of Credit Suisse, a managing director of London-Based HSBC, a lobbyist for Barclay's, and a managing director from Deutsche Bank.

Finally, consider Romney's relationship with Barclay's, the London-based megabank. Barclay's received $8.5 billion in taxpayer funds as part of the AIG bailout. In 2011, Barclay's paid Romney a $50,000 speaker's fee. According to the London Telegraph, Barclay's raised so much money for Romney ($1 million) that members of Parliament signed a motion demanding that Barclay's stop spending so much on supporting Romney and instead focus on resolving the bank's troubles related to rigging Libor.

It is simply inconceivable that Romney would ever stop any bailout of banks, foreign or otherwise.

Monday, August 27, 2012


According to a recent poll, 84 percent of Americans oppose any more bank bailouts. Yet, Mitt Romney appears to be the candidate most likely to shower billions or even trillions on the megabanks at the first sign of trouble. Indeed, it is fair to say that Mitt Romney is the candidate of, by, and for, the megabanks.

For example, according to Romney's top contributors are all megabanks: Goldman gave $676,080; JP Morgan gave $520,299; Morgan Stanley gave $513,647; BOA gave $510,728; Credit Suisse gave $427.560; Citi gave $363,015; Barclays gave $349,400; and so on and so forth.  Amazingly, the top eight Romney contributors are all global megabanks.

The same source, however, shows that the megabanks have abandoned President Obama. Not a single megabank has given his campaign more than $200,000 and only megabank appears among his top 15 contributors.

It is easy to see why the megabanks love Romney. His own campaign website claims he will seek to repeal Dodd-Frank (a rather mild regulatory initiative given the woeful misconduct of the megabanks in trashing our economy). His website does not even mention the TBTF problem or bank bailouts. According to American Banker magazine (published by the American Bankers Association) Romney is a free market believer who is against regulation and intervention except when the whole banking sector faces collapse; then, he favors (pragmatic) bailouts. I kid you not--just watch the video above. And, in this campaign Romney was the only GOP candidate who did not rule out future bailouts. Again, watch the video.

This is how the American Banker put it: "In the 2012 campaign, Romney has not spoken as forcefully against bailouts as some of his GOP rivals. During an October 2011 debate, Romney said he didn't like the idea of another Wall Street bailout, but he did leave the door open to that possibility." Or, in Romney's own words: "There's no question … that the action that President Bush and that Secretary Paulson took was designed to keep not just a collapse of individual banking institutions, but to keep the entire currency of the country worth something and to keep all the banks from closing and to make sure we didn't all lose our jobs. . . .Was it perfect? No. . . .But … this approach of saying, 'Look, we're going to have to preserve our currency and maintain America and our financial system' … is essential."

So, it makes sense that the entire megabank sector (even foreign megabanks like Credit Suisse, Barclay's and UBS) are backing Romney. He will let them run wild again and bail them out again.

Friday, August 17, 2012

Judicial Elections and Citizens United

With record spending expected in the 2012 election cycle, what impact is Citizens United having on electioneering and influencing the electorate?  Two state supreme court judges believe that it is having a deleterious effect on the election of state judges. From the National Law Journal: "Speaking at an August 13[, 2012] panel on corporate spending in judicial elections, Montana Supreme Court Justice James Nelson and former Mississippi Supreme Court Justice Oliver Diaz Jr. warned that the growth of corporate interest spending is hurting public confidence in the courts, scaring lawyers away from seeking judgeships and raising the specter of corruption"

In an article I wrote for the Iowa Law Review called "Procuring Justice: Citizens United, Caperton and Partisan Judicial Elections," I detailed recent empirical evidence that judges elected in partisan judicial elections are significantly more likely to favor employers in employer/employee disputes than are appointed judges, or judges elected in non-partisan campaigns. In that article I asked the question:  "Will judges who are elected in a partisan manner, where corporations can now more directly influence the result of judicial elections by contributing large cash electioneering outflows, manufacture outcomes that are biased toward those contributing corporations?"

My article answers:  "The early returns are not good.  That is to say, contemporary empirical evidence suggests that the answer to the inquiry posed above is “yes.” Apparently partisan elected judges are unable to sit neutrally when large corporate expenditure ushered them to the bench. Or stated differently, when corporations are able to manipulate the judicial election process through significant cash disbursement, a judge that is unfriendly, if not hostile, to employee rights will be the likely result.  The Supreme Court’s decision[] in Citizens United . . . stand[s] poised to exacerbate this disheartening empirical implication."

Others share this concern.  In an Op-Ed for the Washington Post, E.J. Dionne, Jr. wrote the following about Citizens United:

"If ever a court majority legislated from the bench (with Bush’s own appointees leading the way), it was the bunch that voted for Citizens United. Did a single justice in the majority even imagine a world of super PACs and phony corporations set up for the sole purpose of disguising a donor’s identity? Did they think that a presidential candidacy might be kept alive largely through the generosity of a Las Vegas gambling magnate with important financial interests in China? Did they consider that the democratizing gains made in the last presidential campaign through the rise of small online contributors might be wiped out by the brute force of millionaires and billionaires determined to have their way?"

The 2012 election cycle will prove to be a fascinating one as Citizens United will carry full sway during a presidential election.

Friday, August 10, 2012

Citizens United and the 2012 Presidential Election

For the second month running, Mitt Romney has raised more than $100 million for his Presidential Campaign bid, thanks in large part to conservative leaning Super PACs (political action committees) and individual donors.  President Obama raised $75 million in July where 98% of his donors contributed less than $250 per contribution (average donation $53).

United States Supreme Court
With the Citizens United case squarely on point in this 2012 presidential election, several stories of note have emerged in recent weeks.  Citizens United, a U.S. Supreme Court case decided in 2010, provides first amendment free speech protections to corporations allowing unfettered electioneering contributions to specific candidates or causes directly from a corporation's general treasury funds.  As we watch the November 2012 election unfold, it will be very interesting to see whether Citizen's United ushers in an era of unprecedented election spending and negative campaigning, which many have predicted.

Two excellent articles showcase Citizens United and its apparent impact on the 2012 election.  The first is an exposé on the behind the scenes maneuvering engaged in primarily by Chief Justice John Roberts in getting the Citizens United result he sought in 2010:

Money Unlimited:  How Chief Justice Roberts Orchestrated the Citizens United Decision, by Jeffrey Toobin in The New Yorker.

The second is an examination of Citizens United impact on the current election:

How Much Has Citizens United Changed the Political Game? by Matt Bai in The New York Times Magazine.

From Matt Bai's How Much Has Citizens United Changed the Political Game?:  "Conservative groups alone, including a super PAC led by Karl Rove and another group backed by the brothers Charles and David Koch, will likely spend more than a billion dollars trying to take down Barack Obama by the time November rolls around. The reason for this exponential leap in political spending, if you talk to most Democrats or read most news reports, comes down to two words: Citizens United. The term is shorthand for a Supreme Court decision that gave corporations much of the same right to political speech as individuals have, thus removing virtually any restriction on corporate money in politics. The oft-repeated narrative of 2012 goes like this: Citizens United unleashed a torrent of money from businesses and the multimillionaires who run them, and as a result we are now seeing the corporate takeover of American politics." 

But, according to Bai:  "Legally speaking, zillionaires were no less able to write fat checks four years ago than they are today. And while it is true that corporations can now give money for specific purposes that were prohibited before, it seems they aren’t, or at least not at a level that accounts for anything like the sudden influx of money into the system. According to a brief filed by Mitch McConnell, the Senate minority leader, and Floyd Abrams, the First Amendment lawyer, in a Montana case on which the Supreme Court ruled last month, not a single Fortune 100 company contributed to a candidate’s super PAC during this year’s Republican primaries. Of the $96 million or more raised by these super PACs, only about 13 percent came from privately held corporations, and less than 1 percent came from publicly traded corporations."

In what appears to be an unprecedented era of election spending, these two articles are interesting reads.

(photo is in the public domain)

Monday, August 6, 2012

Austerity Bites Big in Europe--With More to Come

The above photo (from the ECB website) shows the ECB's Governing Council which just met to address the Eurozone crisis. Unfortunately, they clearly opted to impose more Eurozone austerity despite overwhelming evidence that austerity will not stem the crisis.
Austerity is failing all over the world now and is predictably wrecking economic havoc on the global economy. People are protesting the unlimited largesse shown the megabanks while ordinary citizens bear extraordinary unemployment and deep cuts to social services all at once. Thus, in Spain, where banks were recently bailed out to the tune of $120 billion, dozens of people were recently injured in Madrid while protesting the cuts and the bank bailouts. Spain has now endured an apparently endless economic contraction and unemployment of nearly 25 percent (over 50 percent for youths).

In the UK, where similar austerity measures took hold in the aftermath of the Great Recession the Brits have now suffered three straight quarters of economic recession. Austerity led directly to the worst four year economic performance in Britain in over 100 years.   A new study finds that UK suffered total output losses of about $400 billion from its excessive and ill-timed austerity.

Now this misguided and dogmatic austerity has infected the Eurozone generally, Unemployment for the entire Eurozone now exceeds 11 percent, a Euro era record. Unemployment now has expanded for 14 months in a row since the onset of austerity. Manufacturing is contracting throughout Europe. It has now contracted for 11 consecutive months. Indeed, even Germany is now seeing the most dramatic contraction of manufacturing in three years.

No let-up is in sight. According to the BBC, Spain is slated to slash spending by another 16.9 percent across the board going forward on top of an 8 percent cut from last year. In the UK "at the start of its term in 2010, the Conservative-Liberal Democrat coalition government announced the biggest cuts in state spending since World War II." These cuts are slated to peak in the next few years amounting to a 19 percent across the board cut. These are indeed savage cuts in the pipeline. 

Then, last week ECB President Mario Draghi, after the meeting of the Governing Council, announced that the ECB "may undertake outright open market operations of a size adequate to reach its objective" of stemming the crisis but only if Spain and Italy agree to bailouts with accompanying "strict and effective conditionality." In other words, the ECB will not act without more austerity.

This puts Spain and Italy in an impossible dilemma. They either cede sovereignty and submit to a Greek economic tragedy or they face a high risk of default due to spiraling interest costs. The first choice may well be politically impossible as growing resentment in the south may simply lead to political repudiation of the Euro. In Italy they already are referring to Germany as the "Fourth Reich." The second choice will make Lehman look like a warm-up act. Either way it will be ugly.

One fact is clear: regardless of the outcome in Spain and Italy, the ECB's insistence on more austerity before it acts will certainly feed the deflationary fire spawned by austerity. As I have argued for years only debtor relief and rapid growth will relieve a debt crisis.