How Bad Could it Get?

Well. For those of you who like horror movies or apocalyptic tales, this one will satiate you. It has a link to the automatic earth blog, which I can't recommend, but sounds worth checking out.

I ran across it while looking for the reporting on an Iceland official saying that the days of the US international reserve currency are over. Iceland is negotiating a 5 Billion Ruble loan from Russia. I hear Russia has also told Belarus that it wants to conduct future sales in Rubles, not dollars.... just a rumor at this point.

McCain and Keating-Five Scandal

This 90-sec video is worth the watch.



This isn't the only time McCain has tried to influence regulators. Remember Vickie Iseman? McCain tried to strong-arm Federal Communications Commissioners on behalf of Paxon Communications for whom Iseman was a lobbyist.

Sources:

HuffPolitics YouTube Channel video.

McCain and Paxson Communicaion

John "Keating Five" McCain is famous for being one of five Senators caught trying to intimidate federal commissioners responsible for enforcing the rules of the Savings and Loan industry. Charles Keating's S&L was in financial and legal trouble after making huge profits before the S&L crash in the 1980s. McCain tried to get regulators to look the other way in Keating's case.

A more recent case goes by the name Paxson Communication. In the Paxson case, there is written evidence that McCain clearly violated ex parte rules barring outside pressure on Federal Communications Commissioner (FCC) decisions, like trying to influence a judge. What makes it even more improper is that McCain did this as chairman of the Senate Commerce Committee, which has jurisdiction over the FCC, its chartering legislation and its budget. Being in government myself, when the Senator of the committee that approves your budget asks you to jump, you don't wait to ask "how high," you immediately jump as high as you can.

The Issue:

At issue in the Paxson case was Paxson's desire to gain commercial control over a public TV station in Pittsburg, PA. It was a small-time issue, which makes it even more suspicious that Chairman McCain would take a personal interest. The reason for his personal interest was that the now-famous Vicki Iseman was lobbying Chairman McCain on behalf of Paxson.

What McCain Did Wrong:

First, McCain took sides on an issue in favor of a private organization contrary to the public interest. Second, he did so by trying to pressure the "judges" in the case, members of the FCC. There was an issue of the clock running out on Vickie Iseman's client Paxson. McCain wrote letters directly to each FCC commissioner inquiring about their votes, and asking them to respond by a specific date. FCC Commissioner Tristani wrote McCain saying, in diplomatic terms to the man who controlled the FCC budget:

“In that letter, you requested that each commissioner advise you in writing by the close of business today whether we have acted upon these applications. Respectfully, I cannot comply with your request, in order to preserve the integrity of our processes. It is my practice not to publicly disclose whether I have voted or when I will be voting on items in restricted proceedings prior to their adoption by the full commission.”

It's not only Tristani's practice, it's the law. She knew that McCain's actions were illegal. According to Angela Campbell, director of the Institute for Public Representation at Georgetown University Law Center, McCain's actions were formally proven to be a violation:

... on December 20th, we actually filed a complaint with the Federal Communications Commission’s general counsel, alleging that he had violated the rules, and we asked for them to act on it right away. They did not. However, eventually, in August of 2000, they did rule that the senator had violated the rules.

So, McCain's claims of high integrity are probably no better than any other Senator. Given his fame in the Keating Five scandal, his record is probably worse than most.

Update:

John McCain's campaign has denied the Sentor met with Paxson Communications in 1999; however, Lowell Paxson has contradicted this statement. McCain's Paxson Problem.

Sources:

Keating Five Belies McCain's Record

In his reponse to the New York Times article regarding lobbyist Vickie Imesman, McCain said:

At no time have I ever done anything that would betray the public trust nor make a decision which in any way would not be in the public interest and would favor anyone or any organization. As chairman of the Commerce Committee, there were hundreds of issues, including many telecommunications issues, that came before the committee. I had to make decisions on those issues, and I made those decisions. Sometimes they were agreed with, sometimes they were not.

Sometimes they were agreed with, sometimes they were not? Aside from being senseless, one has to wonder, does McCain mean to say "sometimes they were above board and sometimes they were not?" The evidence presented below proves that sometimes McCain favored private interests at the expense of the public, contrary to his statement above.

Two well-documented cases belie the claim McCain is upstanding. The first has a historic name, and the second involves lobbyist Vickei Iesman.

The first goes by the name of the Keating Five, of which McCain was one of the five. In short, the Keating Five crimes involved five US Senators who tried to influence regulators on behalf of wealthy Savings and Loan magnate Charles Keating during the 1980s version of today's mortgage and financial crisis. It's as illegal as trying to influence a judge's decision. The point. McCain cannot claim a long unblemished career; he's central to a famous influence peddling scandal.

The second more recent case goes by the name Paxson Communication. In the Paxson case, there is written evidence that McCain clearly violated ex parte rules barring outside pressure on Federal Communications Commission (FCC) decisions, like trying to influence a judge. What makes it even more improper is that McCain did this as chairman of the Senate Commerce Committee, which has jurisdiction over the FCC, its chartering legislation and its budget. Being in government myself, when the Senator of the committee that approves your budget asks you to jump, you don't wait to ask "how high," you immediately jump as high as you can.

The Issue:

At issue in the Paxson case was Paxson's desire to gain commercial control over a public TV station in Pittsburg, PA. It was a small-time issue, which makes it even more suspicious that Chairman McCain would take a personal interest. The reason for his personal interest was that the now-famous Vicki Iseman was lobbying Chairman McCain on behalf of Paxson.

What McCain Did Wrong:

First, McCain took sides on an issue in favor of a private organization contrary to the public interest. Second, he did so by trying to pressure the "judges" in the case, members of the FCC. There was an issue of the clock running out on Vickie Iseman's client Paxson. McCain wrote letters directly to each FCC commissioner inquiring about their votes, and asking them to respond by a specific date. FCC Commissioner Tristani wrote McCain saying, in diplomatic terms to the man who controlled the FCC budget:

“In that letter, you requested that each commissioner advise you in writing by the close of business today whether we have acted upon these applications. Respectfully, I cannot comply with your request, in order to preserve the integrity of our processes. It is my practice not to publicly disclose whether I have voted or when I will be voting on items in restricted proceedings prior to their adoption by the full commission.”

It's not only Tristani's practice, it's the law. She knew that McCain's actions were illegal. According to Angela Campbell, director of the Institute for Public Representation at Georgetown University Law Center, McCain's actions were formally proven to be a violation:

... on December 20th, we actually filed a complaint with the Federal Communications Commission’s general counsel, alleging that he had violated the rules, and we asked for them to act on it right away. They did not. However, eventually, in August of 2000, they did rule that the senator had violated the rules.

So, McCain's claims of high integrity are probably no better than any other Senator. Given his fame in the Keating Five scandal, his record is probably worse than most.

Update:

John McCain's campaign has denied the Sentor met with Paxson Communications in 1999; however, Lowell Paxson has contradicted this statement. McCain's Paxson Problem.

Sources:

The Arizona Republic, The Keating Five, Dan Nowicki, Bill Muller, March 1, 2007, AZCentral.com.

DemocracyNow!, Behind the John McCain Lobbying Scandal: A Look at How McCain Urged the Federal Communications Commission to Act on Behalf of Paxson Communications, February 22, 2008.

Paxton, Paxon

Who is Responsible for Subprime Mess?

First, I should say that some entities have broken laws. Their blame is beyond question. However, the entities on which I'm focusing are those that didn't technically break any laws. They still bear responsibility.

The case, in a nutshell, is that corporations are amoral profit-seeking machines, so it is expected that they will push the legal and ethical limits. As a consequence, you can't blame a dog for acting like a dog, and the same goes with Wall Street and loan originating corporations. Yet, if someone is bitten by a dog, the dog still shares in the blame, even if provoked.

Wall Street's blame is greater than the loan originators. By Wall Street I mean hedge funds, major banks, investment firms, bond raters and other enablers that kept moving bad investment bubble expanding. They helped create the bubble market, in part
by financing the local mortgage lenders. Wall Street should have known better. They were making wind fall profits, many knowing that investors in mortgage backed bonds were going to be left holding the bag. Some were stupid, but when you have your hands on major investments that can rock the nation's economy, being dumb isn't an excuse.

The loan originators were just operating day to day responding to the market created by Wall Street. Their reasoning, "The balloon is still expanding, I'll go originate another loan until I can't do so any more." Although many loan originators used unethical practices, so do car sales men.

The buyers share some of the blame, yet they are clearly price takers, many being forced to operate in a failing market. That is, if your job moved, and you had to move and buy a house, you were forced to do so, while Wall Street operators were profiting handsomely at your expense. When buyers wondered how they could afford the loans, the loan brokers reassured them. They were telling buyers, "this is just the way the market works now. It's been like this in California for decades. The rest of the Nation is just catching up. It's true that some buyers were speculating and flipping real estate, and they deserve more blame than typical buyers. Buyers were duped and forced to deal with a failing market.

And who let the market failure occur and perpetuate? The regulators. They are experts and should have known better than to let profit-seeking machines run amok with so much at stake. Even part-time hobbyists like me could see the disaster coming. Unfortunately, they profess knowledge, but were themselves duped by their own belief that the market is self-correcting. They're partly right. But they failed to consider that the self-correction could be like a plane self-correcting into the ground.

Now the bailouts come, and guess who will pay for it? Not the Wall Street insiders who were spending their bonuses last year on upgrading their Manhattan real estate from a $3 million dollar flat to a bigger flat with a better view. Not the regulators, one of whom named Greenspan has just written his memoirs and re-written history. Not the loan originators. The industry pawns have already paid once by being laid off, and are likely to be paying again, with the rest of us, in direct bail outs of "too big to fail" firms, like Citigroup, and paying in the form of not having government programs that widely benefit the common people (expansion and maintenance of national parks and museums, financial aid for college, improved health care, etc.)

That's the gist of it. But for those who are interested, there's more.

Robert Kuttner points out a contradiction about "free markets" in explaining why regulators should not have allowed this unfolding disaster to happen:

There were regulations on the books that the federal reserve refused to enforce because the Fed claims to believe in free markets, except when they go nuts, then the Fed bails them out.

In other words, the markets are free when the inside crowd is vacuuming in profits from the commoners, but when the self-correction comes, the market is no longer free, and the inside-crowd gets bailed out... by the commoners.

Economist Paul Krugman, who specializes in global financial stability and crises, recently wrote a column for the New York Times entitled, "Innovating Our Way to Financial Crisis."

First, Krugman gives us a sense of the magnitude of the crisis:

How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.

This time, market players seem truly horrified — because they’ve suddenly realized that they don’t understand the complex financial system they created.

Others, whom I could quote if I was more diligent, have said this crisis is ten times worse than the Savings and Loan crisis of the 1980s. We tax payers are still paying for that bailout.

Krugman explains the regulator's blunder:

... the problem was ideological: policy makers, committed to the view that the market is always right, simply ignored the warning signs. We know, in particular, that Alan Greenspan brushed aside warnings from Edward Gramlich, who was a member of the Federal Reserve Board, about a potential subprime crisis.

Krugman continues, indicating that the regulators have still not learned their lesson:

Just a few weeks ago Henry Paulson, the Treasury secretary, admitted to Fortune magazine that financial innovation got ahead of regulation — but added, “I don’t think we’d want it the other way around.” Is that your final answer, Mr. Secretary?

I noted that this essay focuses on legal operatives. A potentially valid criticism of this essay is to assume that the whole damn affair wasn't fraught with illegal activity. Some have surely crossed the legal line, particularly in the mortgage lending sector. One is particularly noteworthy.

On the same day that the White House announced that President Bush is nominating California billionaire Roland E. Arnall to be ambassador to the Netherlands, the company he controls said it would set aside $325 million for a possible settlement of allegations of predatory lending tactics.

Arnall's company, Ameriquest Mortgage Co., is being investigated by regulators in 30 states. A $325 million settlement would be one of the largest ever in a predatory lending case.

You can read more in the July 29, 2007 Washington Post.

Another case was the lender "Countrywide." I had a loan with them once. They might have been the one who, upon buying my loan, or maybe it was selling it to another lender, failed to pass along the home owners insurance information. I received a notice from the insurance company that my premium hadn't been paid, and was no longer covered (had the house burned down at that point, I'd have been one seriously fucked individual). It seemed like a scam, because when I went to buy insurance, I had to pay a lot more than before... everything has changed since 9/11, and I think the commoners are paying for it... again.

Everyone interested in this subject should read Inside the Countrywide Lending Spree.

Barowers are being scapegoated. This essay is an attempt to mitigate that misplaced blame. A lot of the innovated lending products were complicated and misrepresented by brokers who bore no risk because they either never owned the mortgage, or they sold it to be bundled with other loans as a mortgage-backed security (bond). This time around, we need to learn the lesson of the S&L scanals. That is, it was three scandals. The first was the Congressional deregulation scandal. The second was the corporate run amok scandal. The third was the Congressional bail out scandal. Lets bail out the duped home buyers, but not the profit reaping inside crowd this time around.

Sources:

This essay was inspired by an interview of Robert Kuttner by Robert McChesney,on the December 2, 2007 episode of the radio show Media Matters. Dr. Kuttner is a founder of the American Prospect Magazine and author of the recent book, "The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity" (Knopf, November 2007), which goes further into these issues.

Sweetheart Insider Loans for Bush

Once upon a business digest...

President Bush has called for an end to some of the very insider transactions that he used as a director of Harken Energy in the late 1980s. Mr. Bush received two low-interest loans and then benefited from the company's relaxation of the terms of one loan. On Tuesday, he challenged directors to "put an end to all company loans to corporate officers."

Dan Bartlett, the White House communications director, discounted suggestions that Mr. Bush was being hypocritical in calling for an end to loans of a kind he once received. Mr. Bartlett said that while such loans had been properly used in the past, they had recently been abused.

Yea, right. More details on the loans.

Bush a Phony Businessman:

In 1986, Bush's company, Spectrum 7, was on the brink of insolvency. Harken bought it, paying Bush and his partners roughly $2 million in Harken stock. Bush's name and connections were the main reasons Harken was willing to offer so much to purchase the otherwise ruined Spectrum 7, pay impressive director's and consultant's fees, and generous loans to someone who had yet to launch a successful business venture.

More serious questions surrounded Bush's 1990 sale of his Harken stock. Basically, Bush used the loans to buy Harken stock. Bush later sold the stock on inside information shortly before the company announced major losses. In 1991, the Security and Exchange Commission investigated Bush for fraud, including failure to report the stock sale, but... when you're the President's son, justice doesn't seem to apply the same as it would otherwise.

Harken pulls an Enron: Facing large end-of-year losses, Harken sold a chain of gas stations for $11 million to a group of investors, including Harken's chair and a director. Harken received $1 million, and loaned the rest to the investors. In an Enronian bit of accounting, Harken posted a $7.9 million current profit. Harken's executives obtained approval for the transaction from Harken's directors, among them Bush.

I've directly quoted extensively from The Truth About George . Com [2].

Sources:

1. New York Times, Business Digest, July 11, 2002.

2. TheTruthAbout George.com

Subprime Scandal: Don't Blame the Victims

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It's so predictable. Soon you'll be hearing politicians and corporate media pundits repeat the following over and over:

"We feel bad that people are loosing their homes to foreclosure, but they should have known better than to take on more debt than they could afford."

Many of the people who are loosing their homes will go along with this half-truth and drop their heads in guilty shame. They won't realize that they are victims of the The cancer stage of capitalism.[1]

Wealth has been consolidating into the hands of fewer people and corporations over the past few decades starting with policies of the Regan administration. It continued through policies of the Clinton (DLC) Administration, including support of corporate globalization and the 1996 Telecommunications Act. Then, the dot-com bubble burst and corporate corruption, symbolized by Enron, resulted in capital flight from Wall Street. This forced investment wealth to find a new home, and much of it fled to real estate; not just buying property, but investing in mortgage backed securities. Now, not only are subprime mortgage holders feeling pain, but pensions, university endowments, insurance companies and some of the largest commercial banks that are over-invested in the real estate bubble are soon to feel the pain (40 mortgage companies have recently filed for bankruptcy).

Corporate-sponsored Congressional deregulation of the financial and real estate industries allowed the real estate and associated finance industrial complex to run amok (get corrupt). Not only did money run to real estate, but money was created from thin air in the form of people taking out loans literally on top of loans on top of artificial equity, which fueled more speculation until this iterative cycle inflated an artificial real estate bubble of historic proportions. This led to artificially high real estate prices; how many of us have heard friends say, "I couldn't even afford to buy the house I live in. Glad I bought it when I did." Predatory lenders continued to lull people into signing mortgage loans for these over-priced homes. Profit-driven lenders convinced people that these exotic mortgages were the norm, and the only way anyone could afford to buy a home these days, suggesting that "every one's in the same boat."

So, is it really fair to blame people caught in default for over-priced homes, and simply look the other way from Congress, Bush's regulatory agencies, Wall Street, get-rich-quick scammers and the corporate media that has watched this travesty unfold without saying anything? Is the media really that clueless, or are they just part of the keep-quiet inside crowd?

One more prediction; it's certain that several members of Congress on both sides of the isle are implicated in this mess, just like the Savings and Loan tripple-scandal of the 1980s. The first scandal was the corporate-sponsored Congressional deregulation of the Regan era. The second scandal was the corporate corrupt exploitation of the deregulated markets. The third scandal was that Congress hid their blame buy bailing out the irresponsible industries with government bonds. That resulted in tax payers not only paying for the binge of the S & L scammers, but paying interest on the government bonds to.... those who are wealthy enough to buy the bonds... including those who profited from the S & L scams.

Will the public ever learn? We need to put some people in jail, regardless of their political affiliation.

Notes:

1. This is a reference to John McMurtry's book, The Cancer Stage of Capitalism. The US economy has evolved to a stage in which few tangible products are created. Instead, accumulated capital is moved around in speculative activities that are disconnected from the real economy. This can result in many dislocations, such as commodity prices being driven up by hedge funds, hitting small farmers with prices that don't make "economic" sense and threatening their existence.
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Payday Loan Business

Wow. Google payday loan business and you'll get over 2 million hits. Many are singing the praises of this business:

How to Start a Payday Loan Business

Why should you buy a payday loan or other money lending business?

You'll also see snippets like this one:

H&R Block To Settle More Payday Loan Suits ...

Some call it Legal Loansharking. Thought the 24% APR on a credit card was tough? On the average payday loan of $300 for eight days, a 15% fee equates to an APR of 459% according to Maureen Rooney.

But there's a story within the story. These seedy store fronts you see in depressed neighborhoods are "Big Business" posing as a little businesses, like Citigroup.

According to Danny Schechter, who appeared on Media Matters March 25, 2007 points to a similar operation.

One of the phenonomena that is very topical is people who go to various tax preparation services to get their refunds right away... they end up paying an exhorbtant fee charge on this. What we discovered was that there were these rat trap kind of little store fronts in the ghetto ... and behind the scenes was the HSBC Bank which was taking $1.6 Billion dollars out of poor neighborhoods with these tax refund businesses brokered through all kinds of differerent companies including H&R Block.

We tried to interview the head of this program at HSBC, and of course they refused to go on camera. Just the other day HSBC reported a $10 Billion dollar loss on its subprime loan situation. So, a lot of these people who are predators, predatory lenders, are now facing a big problem because these people have defaulted and they are left holding the bag, though they have made a small fortune on it.

One of the things I also found out about was a hundred thousand veterans coming back from Iraq, who are in hock up to their eyeballs, and have these payday loans, and down in Norfolk, Virginia, where we did some filming we found out that there were like three payday lenders around the base in Norfolk a year ago. Today there are twenty-six lenders

Danny Schechter continues to describe the Naval and Marine Corps relief society, which has researched the situation. They've discovered that the problem payday lenders are causing serious pain for military families.

Schechter continues to point out that the progressive community "by and large has not really spoken out on this."

People who are in MoveOn and other groups... and a lot of the bloggers are totally focused on every burp in Washington, every mini scandal problem to show that Bush is a liar, he's a liar, he's a liar, how many times have we heard that? But they don't really look at the institutional issues. And they don't look at the economic issues too often. So what I'm encouraging ... is that we have to focus on the economic realities, not just the political realities.

Schecter expands on this in an March 26, 2007 article entitled, "Lets Broaden Our Focus To Include Economic Issues: It’s Time To ‘Stop The Squeeze’" not Scheckter
.

Real Estate House of Cards Teetering

We all know the stories: Super hot real estate over the last five years has attracted inexperienced investors, some rehabbing and selling, some buying vacation homes, some buying to rent and resell. As the market peaked over the summer 2006, these investors are starting to exit the market; those who bought late are facing losses, particularly for rehabbers.

You don't need to be an analyst to recognize the next story. It goes like this, "I couldn't even afford to buy the house I'm living in." Raise your hand if you've heard that one in recent years. Ah, but the mortgage companies came to the rescue with innovative loan instruments, the most well known being interest-only ARMs. They are only affordable if the value of the home increases to enable a future refinancing. Those who bought recently are just plain out of luck. These are "subprime" mortgages, and in today's world of high finance, in which anything can be bundled and sold as a "bond," we now have mortgage-backed securities.

Add these stories together and you have a lot of people trying to sell real estate at the same time. Enter the principle of "supply and demand," in this case a double-wammie of massive supply of houses for sale combined with little demand to buy those houses. I anticipate housing prices to continue to decline further in 2007.

But guess what? Many large banks, 401k investors, and pension funds have invested in these "mortgage-backed securities," which increasingly are sold with very little documentation of their risk. So, in addition to teetering real estate market, many of our financial institutions are sitting on top of these houses of cards.

While much of today's financial news is focused on stock markets, the jitters are triggered by the stories outlined above. Here's what's being reported by an AP business writer:

HSBC Holdings PLC, Europe's largest bank, said it suffered $10.6 billion in losses in 2006 on bad loans from its U.S. subprime mortgage operations.

Companies involved with subprime mortgages, already dragged down by concerns that too many people are defaulting, were kicked down further when New Century Financial Corp., the second-largest subprime lender, said late Friday that a federal prosecutor and the New York Stock Exchange are conducting investigations into its stock movements. New Century fell $10.09, or 69 percent, to $4.56.

Also spooking investors was Fremont General Corp.'s announcement Monday that it is planning to sell its subprime residential real-estate lending business. Fremont fell $2.82, or 32.4 percent, to $5.89.

The burgeoning subprime worries also hurt banks and homebuilders Monday: National City Corp. and Washington Mutual Inc. fell more than 3 percent, while Toll Brothers Inc., D.R. Horton Inc., and Centex Corp. all lost more than 4 percent.

Ouch! I'm betting there is more bad news to come. My prediction is that there will be a nasty crash and the government will "solve the problem" by bailing out compainies that are too big to let them fail. The bail out will fall on the shoulders of the tax payers, and a small number of the inside crowd will walk off with millions as they have in the past (read "Savings and Loan Scandal." There were two scandals: The common one in which S & L scammers gammed the system, and the one in which Congress hid their complicity and put the burden of the bail out on the tax payer.)
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