Thursday, October 7, 2010

13 Bankers vs. Brooksley Born

In the book 13 Bankers by MIT professor Simon Johnson and James Kwak it is noted that it costs five times as much, after accounting for inflation, then in 1974 to win a seat in the House of Representatives, about $1,250,000.  Banking industry profits are three times the percentage of total corporate profits that they were in 1980. In 1980 average total compensation in the banking sector was the same as that of the private sector, now it is twice that of the private sector. It is argued in 13 Bankers that much of this is a result of 30 years of deregulation, in particular Brooksley Born's loss to Greenspan, Rubin and Summers over the regulation of derivatives.  Johnson and Kwak term the financial industries control of the people who regulate the financial industry 'regulatory capture,' another term for it is the fox guarding the hen house.  The explosion in use of financial derivatives has also been credited with creating an unstable financial system, Warren Buffet has said "derivatives are financial weapons of mass destruction."  Financial derivatives are essentially insurance policies on the prices of things traded on a market like for instance the stock market or the commodities market but unlike traditional insurance policies where the insurer is strictly required to have substantial assets to back the liability and the holder must be insuring a liability, derivative issuers have much less regulation.  One of the reason often given for lax regulation of derivatives is that the complex mathematical models and hedging strategies used by the financial companies are self regulating and too complicated for the government to understand, unfortunately the assumptions of the mathematical models don't always hold, for instance assumptions on low volatility, and financial companies are known to take advantage of their adversaries lack of knowledge.  Secrecy in the derivatives market (over the counter derivatives means secrecy) created a situation where no one knew which financial institutions were solvent.  A good documentary on the situation is given in Frontlines 'the Warning.'  Also see the documentary 'Inside Job.'      See the 'Basline Scenario' blog by authors of 13 Bankers.

It is common for Wall Street firms to hire PhD's in mathematics or physics who's primary purpose it is to dazzle potential clients with bullshit, disguising a situation with complicated mathematical modeling when a more down to earth measure of risk would be appropriate and at times more accurate.  As Warren Buffett says "beware of geeks bearing formulas."  Here is an article with input from nobel laureate Joseph Stiglitz on the need to put U.S. bankers in prison as a result of all this and the corruption in the U.S. government that has prevented that from happening.

This has resulted in the largest income inequality in the last 100 years in the U.S. and to the fact that the top 5% of households hold more assets than the bottom 95% and the top 1% hold more assets than the bottom 90%.  There is worse income inequality than in Iran, China or Russia.  According to the CIA world factbook the Gini index of income inequality for the four countries are U.S. 45, Iran 44.5, China 41.5 Russia 42.2 where a higher Gini score indicates higher income inequality within the population.  

How income inequality is maintained

NYtimes on our Hedge fund republic

Wealth in America data

To see other ways that the United kleptocracy of America is maintained see the story of the whistle blower Mark Whitacre and the ADM price fixing fraud.  Also see the case of whistle blower Bradley Birkenfeld and the U.S. tax evasion fraud that netted the IRS 780 million, in both cases the whistle blower is the one to do the majority of the jail time.  As FBI agent Herndon who broke the ADM price fixing case says corporate corruption is "more typical than we realize."  This doesn't even open the defense department corruption can of worms.

The law makers of the United States have been complicit with the banking industry, passing financial deregulation bills over the last 25 years, see the savings and loan crisis for an earlier example of deregulation gone awry.  Another recent example of law maker fraud is Jack Abramoff, one of the most prominent congressional fundraisers and lobbyists, who extorted his funds from Indian casinos and sweat shops by providing friendly legislation to those who paid.  Abramoff did less than six years in prison.  Why has the punishment been so lenient for people stealing millions or billions of dollars?

Abramoff documentary: Casino Jack and the United States of Money

The executive branch is also in on the deal, the SEC has demonstrated its incompetence many times over when it comes to corporate crime.  Where was the SEC when Enron implemented it's massive accounting fraud?  The SEC had been warned of both Bernard Madoff's and Allen Stanford's ponzi schemes many times yet did nothing.  Who is keeping the SEC stupid?  Possibly the vary people who carry out the fraud, for example Bernard Madoff.  Madoff was convicted of the largest ponzi scheme in world history, he was a co-founder and CEO of NASDAQ, the largest U.S. exchange.  Madoff had plenty of leverage over U.S. financial regulators.  It's easier to play poker with idiots and often times Wall Street is playing poker with the federal government so it is in Wall Streets interest to keep the government stupid.  Goldman Sachs and others have been implicated in creating pools of mortgages in order to bet those same mortgages would fail without telling investors, see the NPR piece on magnestar capital and another example of implementing the same strategy by Goldman Sachs is Paulson's hedge fund, Goldman has also lied to congress about its activity.  Goldman's board is implicated in an insider trading ring as well.  Yet Goldman Sachs has a long standing reputation as having vast influence over the U.S. government, sometimes called Government Sachs.  As Warren Buffett said "I like to go for cinches. I like to shoot fish in a barrel. But I like to do it after the water has run out,"  Wall Street and Government Sachs have run the water out of the SEC.  The U.S. is a kleptocracy not a meritocracy, it just happens to be one of the most sophisticated kleptocracies in the world.  It is painfully clear that the U.S. government is more interested in protecting the corrupt and powerful than it is in protecting the U.S. public, bring on the guillotines!

 SEC incompetence

Frontline Madoff documentary

Enron: The Smartest Guys In the Room

Of course it may be that the fraud has stimulated the economy over the last 30 years and contributed to the fact that the United States has consumed a larger percentage of the worlds non-renewable resources before the large populations in the developing world (China, India) can industrialize and increase their consumption rate.

No comments:

Post a Comment