Obama, Romney and Mancur Olson

I posit that today in America the debates, the stump speeches and the TV ads all have almost nothing to do with how a given candidate actually governs. The stakes are simply so high that one should expect that what is really important is not the hyper-marketing that each candidate projects (now very often differing from audience to audience) but rather commitments made to those expending large sums to propel "their" candidate into office. The voting public has no ability to force elected officials to respect campaign rhetoric and promises. In today's money driven political system the best way to determine what a candidate intends to do if elected is to focus on the money behind the candidate. Large contributors hold enforcement mechanisms that the public does not.

First, almost always politicians must return to the money trough again and again. On the other hand, the public has a notoriously short memory and 85-90 percent of the vote is locked-in to either the GOP or the Dems. So, most voters will stick with their guy regardless of whether the candidate is an etch-a-sketch.

Second, over time these candidates become more dependent upon big money interests than mere campaign contributions may reveal. Their entire social and professional network will ultimately consist of those who will help them most--and that inevitably means well-connected wealthy people like CEOs. After all, its fun to hob-knob with wealthy folks, and who wants to alienate their rich friends?

Third, it hard to overstate the impact of the Citizens United decision. For example, Chevron just gave a pro-GOP Super PAC $2.5 million. Corporate titans can now make or break politicians, their friends, their family and their followers. Few would risk the wrath of the new potentates.  They now have the power to crush opponents right up to election day.

All of this gives our so-called leaders powerful incentives to tell the voting public whatever they want to hear while doing what is needed to assure the continue flow of corporate patronage for themselves and their pals.

Rather than thinking of politicians as autonomous agents with the power to unilaterally change the fundamentals of our society, we should understand that the higher they reach on the political ladder the more likely it is that they succumb to clear incentives to guard the interests of the most privileged in our society, especially under conditions of high inequality. This is the basic teaching of Mancur Olson. As more wealth is concentrated in fewer hands the costs of organizing politically plunge because fewer numbers means lower organizational costs and less temptation toward free riding. Notably, Olson suggested that in a democracy the voters can resist the tendency of special interests to subvert law and regulation for profit (and incidentally destroy capitalism by rigging the system). Voters need only to recognize the negative economic influence of concentrated interests, and vote against the candidate most beholden to such interests.

We live in the age of a new corporatocracy dominated by CEOs. And, as the chart below makes clear, today CEOs of large public firms make more money and control more wealth than any class of royalty from our feudalist past:

Basically since the mid-1980s, CEO compensation has increased by a factor of 10 in real terms. In 2011, executive compensation set new records. So, the real question facing voters today s whether they vote for candidates supported more by big money or candidates supported less by big money. Or, stated differently, the question is which candidate is beholden to which CEOs.

I made this very argument on the NYU Press blog where I tied my forthcoming book, Lawless Capitalism, in a concrete way into the election. My argument there focused on the financial sector which expended $52,000,000 to elect Mitt Romney (compared to $19 million for Obama). So, big finance is behind Romney loud and clear. All voters in favor of more lax financial regulation and letting the megabanks run amok again should definitely vote for Romney.

The next most important difference in funding sources is Big Oil. Here, Romney holds a 5 to 1 fundraising advantage. So what would Big Oil CEOs want? High gasoline prices lead to high CEO compensation. Naturally then CEOs of big oil companies want price spikes in gasoline.

Obama's number one industry is education where he holds a 6 to 1 fundraising advantage over Romney. Both Harvard and the University of California rank on Obama's top 5 sources of support. (Romney's top 5 supporters are all megabanks). Does this mean more money for basic research, more financial aid for students, loan forgiveness programs or something else? Hard to say. It could just be a bunch of professors expressing their own political preferences.

But one thing is certain. Romney is funded more by large contributors and Obama is funded more by small individual contributors, as is clear from this Opensecrets.org webpage.

Further, it is certain that President Obama will not need to raise any more money after November 6.

It is therefore fair to say that Governor Romney is the candidate of big corporate money, especially the megabanks and Big Oil. He is the candidate of the CEOs.

Private Prison Industry Shenanigans in Florida

Protesting private prison profiteering

The Corporate Justice Blog has taken up the issue of the privatization of the U.S. prison industry repeatedly in the past several months.  Now news from Florida, as lawmakers and private prison company executives together have attempted to circumvent the law in order to see a massive privatization effort expand to many more of the state's prisons.  In a wide-ranging and lengthy exposé, David Reutter on Prison Legal News has painstakingly detailed the incredible conflict between private prison companies CCA and the GEO Group together with Florida lawmakers, and the public prison union as they grapple furiously in state court seeking control over the state's prisoners.

Sadly, no party to these proceedings seems to be advocating on behalf of ending the failed system of mass incarceration in the nation or in Florida in particular, as all involved parties seek their own economic interests above all else.

Essentially, Florida lawmakers, bankrolled by the private prison lobby, attempted to massively privatize the prison system in Florida by quietly attaching a prison proviso to an appropriations bill, efforts which were recently found to be against the law by a state trial court judge.  Why attempt to hugely increase the percentage of private prisons in Florida in the dark of the night?

From the article, several very unsettling themes emerge:

First, the privatization attempt was manufactured without careful Florida legislature consideration:

"State Senator Mike Fasano, who chairs a Senate Budget Subcommittee in charge of prison spending, applauded the court’s decision striking down the wholesale prison privatization plan. 'This is a perfect example of why we should not be making major policy changes in provision language that did not go through substantive committees, debated, and taken testimony pro and con,' he stated.  'It didn’t go through the appropriate committee process. It wasn’t heard in criminal justice committee in the Senate. It wasn’t heard in my committee that oversees the Department of Corrections budget,' Fasano noted. 'You would think that if we were doing such a major policy change, it would have gone through those two committees. It wasn’t a stand-alone bill and that’s what, if I’m not mistaken, the court has said, that it should have been a stand-alone bill because it’s a single subject issue.'

Second, claims that private prisons save taxpayer money in the long run have proven false or elusive:

"Senate Budget Committee Chairman J.D. Alexander responded to criticism about the failure to perform due diligence and follow proper legislative procedures regarding the prison privatization plan by saying his committee had received testimony that the plan would save around $22 million annually. That estimate was based on the minimum 7% cost savings required by statute for private prison contracts, though such savings have not been proven. . . . Despite being almost two decades into its prison privatization experiment, Florida has been unable to show that private prisons have been a solution to the state’s ever-expanding prison system. 'Florida’s experience with privatized prisons raises serious questions about whether the taxpayers are getting their money’s worth,' concluded an April 2010 report by the Florida Center for Fiscal and Economic Policy (FCFEP), an independent research organization. . . .  'The FCFEP found there was no evidence that prison privatization had saved Florida taxpayers money, as required by law, because “the procedure to establish a 7% cost savings is flawed.' Additionally, there is virtually no difference in recidivism rates of prisoners released from private or public prisons, so savings have been elusive in that respect as well."

Third, prison privatization efforts simply function as a lawmaker channeling of taxpayer funds from the public sector into the hands of private prison executive friends and donors:

"Prior to representing FDOC employees, on September 12, 2011 the Teamsters filed an ethics complaint against Governor Scott. The complaint alleged that the prison privatization plan was tainted by almost $1 million in political contributions from CCA and GEO Group that went to Scott, state lawmakers and the Republican Party.  According to the Teamsters, during the last election cycle GEO and its executives gave $829,665 to political parties and candidates in Florida, while CCA donated $138,494. Additionally, both CCA and GEO made contributions to Governor Scott’s inaugural fund in the amounts of $5,000 and $25,000, respectively. GEO had also paid its team of Florida lobbyists between $220,000 and $360,000 to influence state officials, and the company reportedly said it would spend $3 million to compete for the Region IV private prison contract.  'The governor’s privatization scheme smacks of political payback, pure and simple,' said Wood.  'It all comes down to politics and the big donors,' noted Senator Fasano. 'GEO and the other private companies that run prisons are very big donors to the party here in Florida and to the elected officials, both past and present.'

Finally, fourth, why privatize an industry that is clearly a governmental function?  For efficiency?  Cost saving due to competition?  Hardly.  Not in the prison industry:

"Considering there is scant evidence that private prisons in Florida have saved the state money, and that prisoners released from privately-operated facilities have the same or higher recidivism rates as those released from public prisons, the repeated efforts by the state legislature to privatize FDOC Region IV can best be explained as political payback for campaign contributions from private prison firms.  While companies like CCA and GEO Group will profit from expanded prison privatization contracts, and politicians will benefit from those companies’ continued lobbying efforts and financial largess, should the legislature prevail in its private prison plan the loser will be Florida’s taxpayers, as public funds will be diverted from the FDOC into the coffers of for-profit prison firms with no discernable benefit to the state.  As the battle to expand prison privatization in Florida continues, one expert has recommended that everyone slow down. 'In what will be the largest correctional privatization contract in U.S. history, a more deliberate process would be prudent,' said Professor Hallett. 'Assuming you accept the logic of market forces controlling costs, then why would you bias the process in favor of an already monopolized industry, which itself lowers cost efficiency and accountability?"

The privatization of the prison industrial complex has been and will continue to be a terrible failure, for all parties involved, except perhaps, for the executives and shareholders of the private prison companies.

Justice Department Sues Bank of America for $1 Billion

The Department of Justice announced today that it is suing Bank of America for fraud.  In seeking $1 billion from BofA, Justice claims that the bank (and predecessor Countrywide Financial before it) engaged in widespread mortgage fraud through a program known inside the banks as "The Hustle."  The Hustle references Bank of America and Countrywide's effort to fraudulently sell streamlined mortgages to Fannie Mae and Freddie Mac, which were originated through the banks on a streamlined basis, wherein common banking procedures and regulations were ignored.

According to CNN:  "The suit alleges that 'the Hustle' was a nickname for the bank's 'High-Speed Swim Lane' or HSSL program, designed to streamline the mortgage origination process. But the government alleges it was 'intentionally designed to process loans at high speed and without quality checkpoints, and which generated thousands of fraudulent and otherwise defective residential mortgage loans.' The government says the program was started by mortgage lender Countrywide Financial, but continued after it was purchased by Bank of America in 2008."

As the nation continues to struggle under the burden of the mortgage crisis of 2008, the Justice Department in 2012, four years later, is still attempting to sort through the banking fraud that seized the industry during the run-up to the mortgage meltdown.  That a program designed by bankers to streamline the mortgage origination process was nicknamed "The Hustle" by the very bankers that engaged the process is telling.

According to the charge, The Hustle led to "widespread falsification" of mortgage numbers and data by Countrywide Financial.  Further, top federal prosecutor Preet Bharara described the practices of Countrywide executives as "spectacularly brazen in scope."


(photo courtesy of Senseiich, Wikimedia Commons)

University of Washington Hosts Risk Management Symposium

On October 5, 2012, the University of Washington School of Law hosted an outstanding symposium entitled Managing Risk in a Complex World. The program provided the broadest overview of business risks conceivable. The keynote speaker, Bill Ayer, Chairman, Alaska Air Group, articulated a rationalized vision of risk-management that should be a model for CEOs. Professor Anita Krug organized this excellent and timely program.

My contribution focused on risk management failures in the financial sector leading to the financial crisis. More specifically, I focused on whether the Fed's new proposed rules requiring enterprise-wide risk management committees (promulgated under the Dodd-Frank Act) address the underlying causes of those risk management failures. (See video above).

In general, the Fed's rules are a positive step. Nevertheless, the rules would benefit from improvements such as a more robust definition of independence for members of the new risk management committee required for all systemically important firms. I argue that the board of every systemically important firm should certify (under penalty of SEC disbarment from service on boards) that the members of the risk management committee have no substantial personal, familial, social or business relationship with senior management or the firm (other than serving as director). I expand on these points in a forthcoming law review article entitled Enterprise-Wide Risk Management after the Financial Crisis, which is outlined in this PowerPoint presentation.  

Given the role of risk mismanagement in driving and amplifying the financial crisis, Dodd-Frank lights the way for superior corporate governance outcomes in the future (both within and outside the financial sector). Unfortunately, the proposed Fed rules are still suboptimal.

Judge Decertifies Class of African-American Borrowers

A federal judge recently decertified a previously certified class action based on the Supreme Court's Wal-Mart opinion that we've discussed previously on the Corporate Justice Blog.  In a real opportunity to examine predatory lending in the wake of the mortgage crisis of 2008, the Supreme Court's limiting Wal-Mart holding has now made it much more difficult for plaintiffs to proceed on claims of discriminatory and predatory lending.

From the National Law Journal:

"A Boston federal judge has decertified a class of African-American mortgage borrowers, finding that evidence of their statistically higher payments isn't enough to establish commonality in light of the Supreme Court's ruling in Wal-Mart v. Dukes.  On September 18, [2012], Judge Rya Zobel of the District of Massachusetts granted the defendants' motion to decertify the class in Barrett v. Option One Mortgage Corp.  [Judge] Zobel had previously certified the plaintiff class of African-American borrowers who obtained a mortgage loan from one of the defendants, in March 2011.

Three months later, in June 2011, the Supreme Court ruled in Wal-Mart. In its 5-4 ruling, the high court held that the plaintiffs in a class action on behalf of more the 1 million female current and former workers failed to prove a companywide policty of discrimination.  Justice Antonin Scalia, writing for the court, found that evidence of such a policy was necessary for the plaintiffs to show the commonality needed to certify a class under Federal Rule of Civil Procedure 23(a)(2).

The borrowers in Barrett sued H&R Block Mortgage Corp. and subsidiaries Option One, Ada Services Corp. and San Canyon Corp. They claimed the defendants' policy, which gave brokers the discretion to add charges unrelated to a borrower's creditworthiness, had a disparate impact on African-American borrowers. Brokers could set a higher interest rate than a borrower's minimum based on creditworthiness and charge loan origination and processing fees."

Fisher v. Texas: Affirmative Action for Whites Only?

On September 19, I had the great privilege of speaking at Kansas State University as the Dorothy L. Thompson Lecturer on Civil Rights. KSU is one of the finest universities in the nation (with one of the most attractive college campuses I have seen). KSU students are simply top-notch. So, it was a great opportunity to have a serious conversation about civil rights in America today, with a more conservative audience than the norm in Chicago.

My topic was Fisher v. Texas, the upcoming Supreme Court Case re-addressing affirmative action programs designed to achieve a diverse learning environment. The Supreme Court settled this issue in 1978, in Board of Regents of the Univ. of California v. Bakke, and again in 2003, in Grutter v. Bollinger. In both cases, conservative appointees ruled that diversity in higher education is a compelling state interest justifying narrowly-tailored measures that consider race or ethnicity, in careful and balanced decisions. Justice Powell wrote the key opinion in Bakke and Justice O'Connor wrote the key opinion in Grutter.

The video of my lecture is available here, and includes shots of my entire PowerPoint presentation.

Here is a summary of my key points:

1) The drafters of the Equal Protection Clause of the Fourteenth Amendment, which the Supreme Court uses to limit affirmative action, intended to protect former slaves, not to protect those with the resources to attain equal protection on their own. According to the Supreme Court in 1880 the purpose of the clause was:

"to assure to the colored race the enjoyment of all the civil rights that under the law are enjoyed by white persons, and to give to that race the protection of the general government, in that enjoyment, whenever it should be denied by the States."

It is historically incorrect to read the clause to limit the power of the government to address continuing racial oppression in our country. For example, 40 percent of African American children live in poverty as do 35 percent of Hispanic children.

2) The meritorious contributions diverse students make to a diverse learning environment constitutes a compelling state interest as demonstrated by the continuing accumulation of empirical data of the educational benefits of diversity, as well as the manifest needs of our business sector and military for more diverse leaders. Because we still live in a highly racialized society, using race as one factor (in accordance with the Grutter mandate of an individualized and holistic analysis of diversity contributions) for unlocking those diverse contributions is a narrowly tailored means of achieving the compelling state interest in diverse leadership and diverse educational environments.

3) The most non-meritorious and morally suspect affirmative action benefits rich and powerful whites. As The Economist states:

"No less than 60% of the places in elite universities are given to candidates who have some sort of extra “hook”, from rich or alumni parents . . . . The number of whites who benefit from this affirmative action is far greater than the number of blacks. The American establishment is extraordinarily good at getting its children into the best colleges. In the last presidential election both candidates—George Bush and John Kerry—were “C” students who would have had little chance of getting into Yale if they had not come from Yale families. Al Gore and Bill Frist both got their sons into their alma maters (Harvard and Princeton respectively), despite their average academic performances. Universities bend over backwards to admit “legacies” (ie, the children of alumni). Harvard admits 40% of legacy applicants compared with 11% of applicants overall. Amherst admits 50%. An average of 21-24% of students in each year at Notre Dame are the offspring of alumni. When it comes to the children of particularly rich donors, the bending-over-backwards reaches astonishing levels. Harvard even has something called a “Z” list—a list of applicants who are given a place after a year's deferment to catch up—that is dominated by the children of rich alumni."

This 60 percent set-aside does not contribute to enhanced learning environments but instead just populates our elite universities with scions of privilege--almost always white privilege.

If the Supreme Court overturns the affirmative action plan of the University of Texas (involving 3 percent of entering slots) while remaining willfully blind to the 60 percent of the slots that entrench white privilege at our elite universities, they will effectively re-write the Fourteenth Amendment to mean: "When it comes to affirmative action, whites only need apply." That would pervert the whole purpose of the Fourteenth Amendment.

4) While one may speculate that race neutral measures may suffice to secure classroom diversity (such as living in poverty or a low income household), such measures are virtually never implemented. Indeed, the fact that so many universities use race or ethnicity as a "plus factor" suggests that it holds some degree of political plausibility that other alternatives do not. Conjuring-up other mechanisms of achieving diversity when such mechanisms enjoy little or no political viability hardly furthers the compelling state interest identified in Grutter.

5) Stare Decisis matters. The principle that courts should be guided by precedent in resolving disputes (and therefore restrained from indulging their personal preference, political goals and ideological preferences) forms the bedrock of our common law system. Judges are appointed, not elected, and in a system that values democratic rule-making they should say what the law is, not rewrite the law. Bakke and Grutter extend back 35 years. Only an activist Court pursuing politics rather than law would reverse such longstanding precedents. In the end, it is not appropriate for unelected judges to destabilize the rule of law and render it up for grabs based upon transient political preferences of the judiciary, unless the precedent is egregiously wrong or times have changed to such an extent that the precedent is simply too costly to maintain. Bakke and Grutter do not fit that bill.

Consequently, it seems extreme to just reverse 35 years of precedent and eliminate all affirmative action seeking to diversify American universities through the consideration of race or ethnicity. The students at Kansas State largely agreed with the idea that expanded educational opportunity for disadvantaged students made sense; yet, they evinced real discomfort with the use of race to address this concern or as a means of achieving educational diversity. At the end of the evening an informal poll found support for continued affirmative action based upon race (but in accordance with Grutter) by nearly a two to one ratio.

As part of the lecture event, I also did an interview with Richard Baker of KSU, for his outstanding Perspective series on Kansas Public Radio, which also summarizes the key points of the lecture: Play Interview

Will Obama Finally Stop the Scourge of the Megabanks?

As I have long argued, the most important question of this election is who will stop the scourge of the megabanks. By any measure more money is at stake here than any other issue in this campaign, as evidenced by non-partisan tallies of the cost and damage of the last financial crisis--ranging from up to $13 trillion (primarily in lost GDP) to nearly $30 trillion (in government outlays).

As discussed in my last two posts Mitt Romney is the candidate of the megabanks, including the foreign megabanks. For Romney to stop the megabanks, he would need to turn on his base. But, he would need their continuing support for reelection. Romney cannot be expected to stop the megabanks. Simply put, Romney is no Jon Huntsman, who was the one major party candidate who got this issue right. Romney gets an "F" on likelihood of stopping the megabanks.

Historically, there is clear reason to be skeptical of President Obama. But, Obama has been cut off from Wall Street support this election cycle. Mr. Wall Street--Timothy Geithner--has already announced his expectation of exiting after the election. The President will be a lame duck, empowered to follow his instincts on the megabanks--and according to Ron Suskind in Confidence Men Obama ordered Geithner to bust up Citigroup. President Obama gets a "B-" and for the first time in years we may have a political  reality conducive to real reform in the financial sector.

Of course, much can change in the next 6 weeks, and the debates in particular will shed light on the position of Romney and Obama on this critical issue. Domestic issues will be the focus of the October 3rd debate.

Government guarantees for the megabanks guarantees failure. The megabanks become too insensitive to risk because their managers know that government will make good any losses. They will gorge on too much credit because creditors know that the government guarantees megabank debt. Thus, banks backed by the government will naturally take on too much leverage and too much risk at the same time, all but insuring their demise. Further their government guarantee makes them attractive derivative counter-parties. So they will naturally be tempted to push the envelope on the extent to which they can generate illusory profits and hide risks in fundamentally dark derivatives markets. For an excellent overview of the economic hazards of Too Big To Fail banks, see this outstanding publication from the Federal Reserve Bank of Dallas.

The stakes here could not be larger. It boils down to this: Is the USA prepared to once again transfer trillions in bank welfare to a handful of megabanks at the expense of all other government services ranging from fire protection to teachers to Pell Grants to Defense? We are one financial crisis away from such bailouts. This is the reality in the Eurozone today. The federal government would become a vassal state of the banks and state and local government would be consigned to an even more dramatic contraction in resources. We are literally talking a huge portion of American economic wealth.

How much money? Since the crisis began in late 2007, the US government debt to GDP ratio increased from under 60 percent of GDP to over 100 percent of GDP, or by about 45 percent of GDP--representing an additional debt burden of about $6.75 trillion. So, if we add the additional debt burden to the $7.6 trillion in forgone GDP, as quoted above, we end up pushing nearly $15 trillion in lost GDP plus additional debt burden. Then, US household net worth took an additional $7.7 trillion hit between its 2007 peak and the beginning of 2011. So the last crisis easily cost Americans $20 trillion.

We as a society simply cannot afford to spend another $20 trillion saving the megabanks.

Stout on "Increasing Shareholder Value" as Injurious

Professor Lynn Stout, Cornell Law School

Professor Lynn Stout at Cornell Law School argued last week in the Los Angeles Times, that the corporate law maxims of "profit maximization" and "increasing shareholder value" have taken on lives of their own in the past thirty years and in so doing have visited positive harm on corporations, employees, and the public at large.  In her Op-Ed "'Maximizing Shareholder Value' Is Ill-Conceived Concept," Stout essentially argues that prior to the 1980s, corporate leaders focused on promoting long-term growth for the benefit of employees, shareholders, the community at large and society as a whole.  But she posits, dating back to Milton Friedman and the rise of the Chicago School of free-market economists, the idea that shareholders "owned" corporations and that businesses existed solely to maximize shareholder profit began to take root.  Stout writes that the federal government has now embraced maximizing shareholder value as near religion today.  This embrace, per Stout, has led to calamity and disappointment:  "It's now become clear, however, that a relentless focus on share price can hurt not only employees, taxpayers and society, but shareholders too. Managers who are pressured to raise stock price quickly often resort to tricks — selling assets, cutting payroll and investment, draining cash through dividends and share repurchase programs — to bump up stock price for a year or two. But such strategies often hurt a company's long-term ability to grow and prosper."


Is it possible that the "profit maximization" maxim which has taken hold in corporate law can actually harm taxpayers, shareholders, employees and society in general?  Stout supports this by arguing that: "In 1993, Congress changed the tax code to require companies to link executive pay to 'performance' (typically stock price). The Securities and Exchange Commission over the last two decades has adopted rules to make corporate directors ever more 'accountable' to shareholders. And hedge funds have used these rules to harass companies into selling assets, cutting expenses and paying out large dividends to 'unlock shareholder value.'   How has this worked out for American investors and the American economy? Not well."

Stout continues:  "In the name of increasing shareholder value, public companies have sold key assets (Kodak's patents), outsourced jobs (Apple), cut back on customer service (Sears) and research and development (Motorola), cut safety corners (BP), showered CEOs with stock options (Citibank), lobbied Congress for corporate tax loopholes (GE) and drained cash reserves to repurchase shares until companies teetered on the brink of insolvency (much of the financial industry). Some corporations even used accounting fraud to raise share price (Enron and WorldCom). Public companies employed these strategies even though many executives and directors felt uneasy about them, sensing that a single-minded pursuit of higher share prices did not serve the interests of society, the company or shareholders themselves."

Stout concludes:  "It's time to recognize that the philosophy of 'maximize shareholder value' is just such a defunct economist's idea. Let's throw off our intellectual chains so our corporate sector can do a better job for shareholders — and the rest of us too."

Law professors and corporate practitioners would do well to re-consider what they are teaching and/or practicing when they support the "new-ish" legal principle of "profit maximization."  Surely a corporation exists to do more than simply provide profits for its shareholders.


And finally today, we wish to take a moment to reflect on and remember those who lost their lives and those who continue to grieve their losses of 9.11.01.

MITT AND THE FOREIGN MEGABANKS

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.

MITT ROMNEY: CANDIDATE OF THE MEGABANKS

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 OpenSecrets.org 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.

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.

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)

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.

NYPD Fail - Report Finds Stop and Frisk Harms, Not Helps

New Yorkers protesting "stop and frisk" including NYC Comptroller John Liu

As a follow-on to an earlier CJB post this week regarding police brutality at Occupy Wall Street protests by the New York Police Department, a report from the Center for Constitutional Rights finds that New York's "stop and frisk" policy has been applied in a racially discriminatory manner, and has by and large, failed as a policy.  The CCR report indicates that more than 85% of New Yorkers stopped and frisked under its policy are minority.  Stunningly, the report finds that in the "stop and frisk" context, where police officers are supposed to be motivated by a reasonable suspicion before frisking, contraband or weapons are found only in 1.14% of the stops.  This is an abysmal statistic for such an intrusive policy.

The CCR report further details the terrible effect "stop and frisk" is having on the lives of New Yorkers:

Racial Discimination:  The NYPD "is conducting stops and frisks in record numbers – roughly 685,000 in 2011 and on track to reach over 700,000 this year. Black and Latino people are consistently and intentionally stopped at a hugely disproportionate rate: nearly 85 percent of all stops. These alarming statistics speak volumes on their own – the overwhelming racial disparity and the low rate of lawful arrests or discovery of contraband that result from stops and frisks raise serious questions about the purpose or usefulness of this practice." 

Failing as a Policy:  "The use of stops and frisks has grown at an astounding rate – a more than 600 percent increase over the past ten years. The number of stops in 2011 was the largest on record and 2012 is on track to be higher still, with over 203,500 stops in the first three months alone – an average of 2,200 stops per day. These numbers are all the more significant in light of evidence that an alarming number of these stops, frisks, and searches are illegal, in part because they are not based on the required level of suspicion of criminal activity. Despite the City’s attempts to justify the program as aimed at confiscating illegal weapons, a 2010 expert report by Professor Jeffrey Fagan that CCR submitted to the court in Floyd found that the weapons and contraband yield from stops and frisks hovered around only 1.14 percent – a rate no greater than would be found by chance at random check points."

(photo courtesy of Thomas Good via WikiMedia Commons)

Police Abuse and Occupy Wall Street

A report out today from NYU Law School and Fordham Law School documents lawless policing by the New York Police Department in connection with the Occupy Wall Street protests last year.  The report, "Suppressing Protest: Human Rights Violations in the U.S. Response to Occupy Wall Street" catalogs the repeated and systematic violations of constitutional and human rights of protesting United States citizens.  According to the Executive Summary of the 195-page report:

"Government responses to Occupy Wall Street in the United States have varied significantly, both within and across cities. Indeed, there have been examples of good practice . . .  But across the United States, abusive and unlawful protest regulation and policing practices have been and continue to be alarmingly evident. This report follows a review of thousands of news reports and hundreds of hours of video, extensive firsthand observation, and detailed witness interviews. In New York City, some of the worst practices documented include:

• Aggressive, unnecessary and excessive police force against peaceful protesters, bystanders, legal observers, and journalists

• Obstruction of press freedoms and independent legal monitoring

• Pervasive surveillance of peaceful political activity

• Violent late-night raids on peaceful encampments

• Unjustified closure of public space, dispersal of peaceful assemblies, and kettling (corralling and trapping) of protesters

• Arbitrary and selective rule enforcement and baseless arrests

• Failures to ensure transparency about applicable government policies

• Failures to ensure accountability for those allegedly responsible for abuses

These practices violate assembly and expression rights and breach the U.S. government’s international legal obligations to respect those rights. In New York City, protest policing concerns are extensive and exist against a backdrop of disproportionate and well-documented abusive policing practices in poor and minority communities outside of the protest context. . . .

For protesters who previously had little interaction with police, these abusive practices have
radically altered worldviews about the role of police in protecting citizens. For others who
had long experienced official discrimination and abuse, especially those from minority and
economically disadvantaged communities, protest experiences have simply reinforced
existing negative perceptions."