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Saturday, January 07, 2017

The Curious World of Donald Trump’s Private Russian Connections
James S. Henry


Donald Trump, Tevfik Arif, and Felix Sater

 Did the American people really know they were putting such a "well-connected" guy in the White House?

 Intro by David Cay Johnston

Pulitizer-Prize winning author, The Making of Donald Trump.

Throughout Donald Trump's presidential campaign, he expressed glowing admiration for Russian leader Vladimir Putin. Many of Trump's adoring comments were utterly gratuitous. After his Electoral College victory, Trump continued praising the former head of the KGB while dismissing the finding of all 17 American national security agencies that Putin had directed Russian government interference to help Trump in the 2016 American presidential election.

 As veteran investigative economist and journalist Jim Henry shows below, a robust public record helps to explain the fealty of Trump and his family to this murderous autocrat and the network of Russian oligarchs.

 Putin and his billionaire friends have plundered the wealth of their own people. They have also run numerous schemes to defraud governments and investors in the United States and Europe. From public records, using his renowned analytical skills, Henry shows what the mainstream news media in United States have failed to report in any meaningful way: for at least three decades Donald Trump has profited from his connections to the Russian oligarchs, whose own fortunes now depend on their continued fealty to Putin.

We don't know the full relationship between Donald Trump, the Trump family and their enterprises with the network of the world– class criminals known as the Russian oligarchs. Henry acknowledges that his article poses more questions than answers, establishes more connections than full explanations. But what Henry does show should prompt every American to rise up in defense of their country, to demand a thorough out in the open Congressional investigation with no holds barred. The national security of United States of America and of peace around the world, especially in Europe, may depend on how thoroughly we understand the rich network of relationships between the 45th president and the Russian oligarchy. When Donald Trump chooses to exercise, or not exercise, his power to restrain Putin's drive to invade independent countries and seize their wealth, as well as to loot countries beyond his control, Americans need to know in whose interest the president 's acting or looking the other way.



Tell me who you walk with and I’ll tell you who you are.”


“I’ve always been blessed with a kind of intuition about people that allows me to sense who the sleazy guys are, and I stay far away.”

—Donald Trump, Surviving at the Top

Even before the November 8 election, many leading Democrats were vociferously demanding that the FBI disclose the fruits of its investigations into Putin-backed Russian hackers. Instead FBI Director Comey decided to temporarily revive his zombie-like investigation of Hillary’s emails. That decision may well have had an important impact on the election, but it did nothing to resolve the allegations about Putin. Even now, after the CIA has disclosed an abstract of its own still-secret investigation, it is fair to say that we still lack the cyberspace equivalent of a smoking gun.

Fortunately, however, for those of us who are curious about Trump’s Russian connections, there is another readily accessible body of published and other Internet material that has so far received surprisingly little attention. This suggests that whatever the nature of President-elect Donald Trump’s relationship with President Putin, he has certainly managed to accumulate direct and indirect connections with a far-flung private Russian/FSU network of outright mobsters, oligarchs, fraudsters, and kleptocrats. Vladimir-putin-judo

Any one of these connections might have occurred at random. But the overall pattern is a veritable Star Wars bar scene of unsavory characters, with Donald Trump seated right in the middle. The analytical challenge is to map this network—a task that most journalists and law enforcement agencies, focused on individual cases, have failed to do.

Of course, to label this network “private” may be a stretch, given that in Putin’s Russia, even the toughest mobsters learn the hard way to maintain a respectful relationship with the “New Tsar.” But here the central question pertains to our new Tsar. Did the American people really know they were putting such a “well-connected” guy in the White House?

The Big Picture: Kleptocracy and Capital Flight

A few of Donald Trump’s connections to oligarchs and assorted thugs have already received sporadic press attention -- for example, former Trump campaign manager Paul Manafort’s reported relationship with exiled Ukrainian oligarch Dmytro Firtash. But no one has pulled the connections together, used them to identify still more relationships, and developed an image of the overall patterns.

Nor has anyone related these cases to one of the most central facts about modern Russia: its emergence since the 1990s as a world-class kleptocracy, second only to China as a source of illicit capital and criminal loot, with more than $1.3 trillion of net offshore “flight wealth” as of 2016.[1]


This tidal wave of illicit capital is hardly just Putin’s doing. It is in fact a symptom of one of the most epic failures in modern political economy -- one for which the West bears a great deal of responsibility. This is the failure, in the wake of the Soviet Union’s collapse in the late 1980s, to ensure that Russia acquires the kind of strong, middle-class-centric economic and political base that is required for democratic capitalism, the rule of law, and stable, peaceful relationships with its neighbors.

Instead, from 1992 to the Russian debt crisis of August 1998, the West in general—and the U.S. Treasury, USAID, the State Department, the IMF/World Bank, the ERDB, and many leading economists in particular—actively promoted and, indeed, helped to finance one of the most massive transfers of public wealth into private hands that the world has ever seen.

For example, Russia’s 1992 “voucher privatization” program permitted a tiny elite of former state-owned company managers and party apparatchiks to acquire control over a vast number of public enterprises, often with the help of outright mobsters. A majority of Gazprom, the state energy company that controlled a third of the world’s gas reserves, was sold for $230 million; Russia’s entire national electric grid was privatized for $630 million; ZIL, Russia's largest auto company, went for about $4 million; ports, ships, oil, iron and steel, aluminum, much of the high-tech arms and airlines industries, the world’s largest diamond mines, and most of Russia’s banking system also went for a song.

In 1994–96, under the infamous “loans-for-shares” program, Russia privatized 150 state-owned companies for just $12 billion, most of which was loaned to a handful of well-connected buyers by the state—and indirectly by the World Bank and the IMF. The principal beneficiaries of this “privatization”—actually, cartelization—were initially just 25 or so budding oligarchs with the insider connections to buy these properties and the muscle to hold them.[2] The happy few who made personal fortunes from this feeding frenzy —in a sense, the very first of the new kleptocrats—not only included numerous Russian officials, but also leading gringo investors/advisers, Harvard professors, USAID advisers, and bankers at Credit Suisse First Boston and other Wall Street investment banks. As the renowned development economist Alex Gerschenkron, an authority on Russian development, once said, "If we were in Vienna, we would have said, "We wish we could play it on the piano!"

For the vast majority of ordinary Russian citizens, this extreme re-concentration of wealth coincided with nothing less than a full-scale 1930s-type depression, a sudden “shock therapy”-induced rise in domestic price levels that wiped out the private savings of millions, rampant lawlessness, a public health crisis, and a sharp decline in life expectancy and birth rates.

Sadly, this neoliberal “market reform” policy package that was introduced at a Stalin-like pace from 1992 to late 1998 was not only condoned but partly designed and financed by senior Clinton Administration officials, neoliberal economists, and innumerable USAID, World Bank, and IMF officials. The few dissenting voices included some of the West's best economic brains -- Nobel laureates like James Tobin, Kenneth Arrow, Lawrence Klein, and Joseph Stiglitz. They also included Moscow University’s Sergei Glaziev, who now serves as President Putin’s chief economic advisor.[3] Unfortunately, they were no match for the folks with the cash.

There was also an important intervention in Russian politics. In January 1996 a secret team of professional U.S. political consultants arrived in Moscow to discover that, as CNN put it back then, “The only thing voters like less than Boris Yeltsin is the prospect of upheaval.” The experts' solution was one of earliest "Our brand is crisis" campaign strategies, in which Yeltsin was “spun” as the only alternative to "chaos." To support him, in March 1996 the IMF also pitched in with $10.1 billion of new loans, on top of $17.3 billion of IMF/World Bank loans that had already been made.

With all this outside help, plus ample contributions from Russia’s new elite, Yeltsin went from just 8 percent approval in the January 1996 polls to a 54-41 percent victory over the Communist Party candidate, Gennady Zyuganov, in the second round of the July 1996 election. At the time, mainstream media like Time and the New York Times were delighted. Very few outside Russia questioned the wisdom of this blatant intervention in post-Soviet Russia’s first democratic election, or the West's right to do it in order to protect itself.

By the late 1990s the actual chaos that resulted from Yeltsin's warped policies had laid the foundations for a strong counterrevolution, including the rise of ex-KGB officer Putin and a massive outpouring of oligarchic flight capital that has continued virtually up to the present. For ordinary Russians, as noted, this was disastrous. But for many banks, private bankers, hedge funds, law firms, and accounting firms, for leading oil companies like ExxonMobil and BP, as well as for needy borrowers like the Trump Organization the opportunity to feed on post-Soviet spoils was a godsend. This was vulture capitalism at its worst.

The nine-lived Trump, in particular, had just suffered a string of six successive bankruptcies. So the massive illicit outflows from Russia and oil-rich FSU members like Kazahkstan and Azerbaijan from the mid-1990s provided precisely the kind of undiscriminating investors that he needed. These outflows arrived at just the right time to fund several of Trump's post-2000 high-risk real estate and casino ventures – most of which failed. As Donald Trump, Jr., executive vice president of development and acquisitions for the Trump Organization, told the “Bridging U.S. and Emerging Markets Real Estate” conference in Manhattan in September 2008, on the basis, he said, of his own “half dozen trips to Russia in 18 months”:

"[I]n terms of high-end product influx into the United States, Russians make up a pretty disproportionate cross-section of a lot of our assets; say in Dubai, and certainly with our project in SoHo and anywhere in New York. We see a lot of money pouring in from Russia."

All this helps to explain one of the most intriguing puzzles about Donald Trump’s long, turbulent business career: how he managed to keep financing it, despite a dismal track record of failed projects.[4]

According to the “official story,” this was simply due to a combination of brilliant deal-making, Trump’s gold-plated brand, and raw animal spirits – with $916 million of creative tax dodging as a kicker. But this official story is hokum. The truth is that, since the late 1990s, Trump was also greatly assisted by these abundant new sources of global finance, especially from "submerging markets" like Russia

This suggests that neither Trump nor Putin is an “uncaused cause.” They are not evil twins, exactly, but they are both byproducts of the same neoliberal policy scams that were peddled to Russia’s struggling new democracy.

A Guided Tour of Trump's Russian/FSU Connections

The following roundup of Trump’s Russo-Soviet business connections is based on published sources, interviews with former law enforcement staff and other experts in the United States, the United Kingdom, and Iceland, searches of online corporate registries,[5] and a detailed analysis of offshore company data from the Panama Papers.[6] Given the sheer scope of Trump’s activities, there are undoubtedly other worthy cases, but our interest here is in overall patterns.

Note that none of the activities and business connections related here necessarily involved criminal conduct. While several key players do have criminal records, few of their prolific business dealings have been thoroughly investigated, and of course they all deserve the presumption of innocence. Furthermore, several of these players reside in countries where activities like bribery, tax dodging, and other financial chicanery are either not illegal or are rarely prosecuted. As former British Chancellor of the Exchequer Denis Healey once said, when it comes to financial chicanery, the difference between “legal” and “illegal” is often just “the width of a prison wall.”

So why spend time collecting and reviewing material that may either not point to anything illegal and or in some cases may even be impossible to verify? Because, we submit, the mere fact that such assertions are widely made is of legitimate public interest in its own right. In other words, when it comes to evaluating the probity of senior public officials, the public has the right to know about any material allegations—true, false, or, most commonly, unprovable—about their business partners and associates, so long as this information is clearly labeled as unverified.

Furthermore, the individual case-based approach to investigations employed by most investigative journalists and law enforcement often misses the big picture: the global networks of influence and finance, licit and illicit, that exist among business people, investors, kleptocrats, organized criminals, and politicians, as well as the "enablers" -- banks, accounting firms, law firms, and havens.

Any particular component of these networks might easily disappear without making any difference. But the networks live on. It is these shadowy transnational networks that really deserve scrutiny.

Bayrock Group LLC—Kazakhstan and Tevfik Arif

 We’ll begin our tour of Trump's Russian/FSU connections with several business relationships that evolved out of the curious case of Bayrock Group LLC, a spectacularly unsuccessful New York real estate development company that surfaced in the early 2000s and, by 2014, had all but disappeared except for a few lawsuits. As of 2007, Bayrock and its partners reportedly had more than $2 billion of Trump-branded deals in the works. But most of these either never materialized or were miserable failures, for reasons that will soon become obvious.

Bayrock’s “white elephants” included the 46-story Trump SoHo condo-hotel on Spring Street in New York City, for which the principle developer was a partnership formed by Bayrock and FL Group, an Icelandic investment company. Completed in 2010, the SoHo soon became the subject of prolonged civil litigation by disgruntled condo buyers. The building was foreclosed by creditors and resold in 2014 after more than $3 million of customer down payments had to be refunded. Similarly, Bayrock’s Trump International Hotel & Tower in Fort Lauderdale was foreclosed and resold in 2012, while at least three other Trump-branded properties in the United States, plus many other “project concepts” that Bayrock had contemplated, from Istanbul and Kiev to Moscow and Warsaw, also never happened.

Carelessness about due diligence with respect to potential partners and associates is one of Donald Trump’s more predictable qualities. Acting on the seat of the pants, he had hooked up with Bayrock rather quickly in 2005, becoming an 18 percent minority equity partner in the Trump SoHo, and agreeing to license his brand and manage the building.[7]

Donald Trump and Tevfik Arif

 Exhibit A in the panoply of former Trump business partners is Bayrock’s former Chairman, Tevfik Arif (aka Arifov), an émigré from Kazakhstan who reportedly took up residence in Brooklyn in the 1990s. Trump also had extensive contacts with another key Bayrock Russian-American from Brooklyn, Felix Sater (aka Satter), discussed below.[8] Trump has lately had some difficulty recalling very much about either Arif or Sater. But this is hardly surprising, given what we now know about them. Trump described his introduction to Bayrock in a 2013 deposition for a lawsuit that was brought by investors in the Fort Lauderdale project, one of Trump’s first with Bayrock: “Well, we had a tenant in …Trump Tower called Bayrock, and Bayrock was interested in getting us into deals.”[9]

According to several reports, Tevfik Arif was originally from Kazakhstan, a Soviet republic until 1992. Born in 1950, Arif worked for 17 years in the Soviet Ministry of Commerce and Trade, serving as Deputy Director of Hotel Management by the time of the Soviet Union’s collapse.[10] In the early 1990s he relocated to Turkey, where he reportedly helped to develop properties for the Rixos Hotel chain. Not long thereafter he relocated to Brooklyn, founded Bayrock, opened an office in the Trump Tower, and started to pursue projects with Trump and other investors.[11]

Tevfik Arif was not Bayrock’s only connection to Kazakhstan. A 2007 Bayrock investor presentation refers to Alexander Mashevich’s “Eurasia Group” as a strategic partner for Bayrock’s equity finance. Together with two other prominent Kazakh billionaires, Patokh Chodiev (aka “Shodiyev”) and Alijan Ibragimov, Mashkevich reportedly ran the “Eurasian Natural Resources Cooperation.” In Kazakhstan these three are sometimes referred to as “the Trio.”[12]

The Trio has apparently worked together ever since Gorbachev's late 1980s perestroika in metals and other natural resources. It was during this period that they first acquired a significant degree of control over Kazakhstan’s vast mineral and gas reserves. Naturally they found it useful to become friends with Nursaltan Nazarbayev, Kazakhstan’s long-time ruler. Indeed, State Department cables leaked by Wikileaks in November 2010 describe a close relationship between “the Trio” and the seemingly-perpetual Nazarbayev kleptocracy.

In any case, the Trio has recently attracted the attention of many other investigators and news outlets, including the September 11 Commission Report, the Guardian, Forbes, and the Wall Street Journal. In addition to resource grabbing, the litany of the Trio's alleged activities include money laundering, bribery, and racketeering.[13] In 2005, according to U.S. State Department cables released by Wikileaks, Chodiev (referred to in a State Department cable as “Fatokh Shodiyev”) was recorded on video attending the birthday of reputed Uzbek mob boss Salim Abduvaliyeva and presenting him with a $10,000 “gift” or “tribute.”

According to the Belgian newspaper Le Soir, Chodiev and Mashkevich also became close associates of a curious Russian-Canadian businessman, Boris J. Birshtein. who happens to have been the father-in-law of another key Russian-Canadian business associate of Donald Trump in Toronto. We will return to Birshtein below.

The Trio also turn up in the April 2016 Panama Papers database as the apparent beneficial owners of a Cook Islands company, “International Financial Limited.” [14] The Belgian newspapers Het Laatste Nieuws, Le Soir, and La Libre Belgique have reported that Chodiev paid €23 million to obtain a “Class B” banking license for this same company, permitting it to make international currency trades. In the words of a leading Belgian financial regulator, that would “make all money laundering undetectable.”

The Panama Papers also indicate that some of Arif’s connections at the Rixos Hotel Group may have ties to Kazakhstan. For example, one offshore company listed in the Panama Papers database, “Group Rixos Hotel,” reportedly acts as an intermediary for four BVI offshore companies.[15] Rixos Hotel’s CEO, Fettah Tamince, is listed as having been a shareholder for two of these companies, while a shareholder in another—“Hazara Asset Management”—had the same name as the son of a recent Kazakhstan Minister for Sports and Tourism. As of 2012, this Kazakh official was described as the third-most influential deputy in the country’s Mazhilis (the lower house of Parliament), in a Forbes-Kazakhstan article.

According to a 2015 lawsuit against Bayrock by Jody Kriss, one of its former employees, Bayrock started to receive millions of dollars in equity contributions in 2004, supposedly by way of Arif’s brother in Russia, who allegedly “had access to cash accounts at a chromium refinery in Kazakhstan.”

This as-yet unproven allegation might well just be an attempt by the plaintiff to extract a more attractive settlement from Bayrock and its original principals. But it is also consistent with fact that chromium is indeed one of the Kazakh natural resources that is reportedly controlled by the Trio.

As for Arif, his most recent visible brush with the law came in 2010, when he and other members of Bayrock’s Eurasian Trio were arrested together in Turkey during a police raid on a suspected prostitution ring, according to the Israeli daily Yediot Ahronot.

At the time, Turkish investigators reportedly asserted that Arif might be the head of a criminal organization that was trafficking in Russian and Ukrainian escorts, allegedly including some as young as 13.[16] According to these assertions, big-ticket clients were making their selections by way of a modeling agency website, with Arif allegedly handling the logistics. Especially galling to Turkish authorities, the preferred venue was reportedly a yacht that had once belonged to the widely-revered Turkish leader Atatürk. It was also alleged that Arif may have also provided lodging for young women at Rixos Group hotels.[17]

According to Russian media, two senior Kazakh officials were also arrested during this incident, although the Turkish Foreign Ministry quickly dismissed this allegation as “groundless.” In the end, all the charges against Arif resulting from this incident were dismissed in 2012 by Turkish courts, and his spokespeople have subsequently denied all involvement.

Finally, despite Bayrock’s demise and these other legal entanglements, Arif has apparently remained active. For example, Bloomberg reports that, as of 2013, he, his son, and Rixos Hotels’ CEO Fettah Tamince had partnered to pursue the rather controversial business of advancing funds to cash-strapped high-profile soccer players, in exchange for a share of their future marketing revenues and team transfer fees. In the case of Arif and his partners, this new-wave form of indentured servitude was reportedly implemented by way of a UK- and Malta-based hedge fund, Doyen Capital LLP. Because this practice is subject to innumerable potential abuses, including the possibility of subjecting athletes or clubs to undue pressure to sign over valuable rights and fees, UEFA, Europe’s governing soccer body, wants to ban it. But FIFA, the notorious global football regulator, has been customarily slow to act. To date, Doyen Capital LLP has reportedly taken financial gambles on several well-known players, including the Brazilian star Neymar.

The Case of Bayrock LLC—Felix Sater

06TRUMPSOHOweb2-master675Our second exhibit is Felix Sater, the senior Bayrock executive introduced earlier. This is the fellow who worked at Bayrock from 2002 to 2008 and negotiated several important deals with the Trump Organization and other investors. When Trump was asked who at Bayrock had brought him the Fort Lauderdale project in the 2013 deposition cited above, he replied: “It could have been Felix Sater, it could have been—I really don’t know who it might have been, but somebody from Bayrock.” [18]

Although Sater left Bayrock in 2008, by 2010 he was reportedly back in Trump Tower as a “senior advisor” to the Trump Organization – at least on his business card -- with his own office in the building.

Sater has also testified under oath that he had escorted Donald Trump, Jr. and Ivanka Trump around Moscow in 2006, had met frequently with Donald over several years, and had once flown with him to Colorado. And although this might easily have been staged, he is also reported to have visited Trump Tower in July 2016 and made a personal $5,400 contribution to Trump’s campaign.

Whatever Felix Sater has been up to recently, the key point is that by 2002, at the latest,[19] Tevfik Arif decided to hire him as Bayrock’s COO and managing director. This was despite the fact that by then Felix had already compiled an astonishing track record as a professional criminal, with multiple felony pleas and convictions, extensive connections to organized crime, and — the ultimate prize —a virtual “get out of jail free card,” based on an informant relationship with the FBI and the CIA that is vaguely reminiscent of Whitey Bulger.[20]

Sater, a Brooklyn resident like Arif, was born in Russia in 1966. He reportedly emigrated with his family to the United States in the mid-1970s and settled in “Little Odessa.” It seems that his father, Mikhael Sheferovsky (aka Michael Sater), may have been engaged in Russian mob activity before he arrived in the United States. According to a certified U.S. Supreme Court petition, Felix Sater’s FBI handler stated that he “was well familiar with the crimes of Sater and his (Sater’s) father, a (Semion) Mogilevich crime syndicate boss.” [21] A 1998 FBI report reportedly said Mogilevich’s organization had “approximately 250 members,” and was involved in trafficking nuclear materials, weapons and more as well as money laundering. (See below.)

But Michael Sater may have been less ambitious than his son. His only reported U.S. criminal conviction came in 2000, when he pled guilty to two felony counts for extorting Brooklyn restaurants, grocery stores, and clinics. He was released with three years’ probation. Interestingly, the U.S. Attorney for the Eastern District of New York who handled that case at the time was Ms. Loretta Lynch, who succeeded Eric Holder as US Attorney General in 2014. Back in 2000, she was also overseeing a budding informant relationship and a plea bargain with Michael’s son Felix, which may help to explain the father's sentence.

By then young Felix Sater was already well on his way to a career as a prototypical Russian-American mobster. In 1991 he stabbed a commodity trader in the face with a margarita glass stem in a Manhattan bar, severing a nerve. He was convicted of a felony and sent to prison. As Trump tells it, Sater simply “got into a barroom fight, which a lot of people do.” The sentence for this felony conviction could not have been very long, because by 1993 27-year-old Felix was already a trader in a brand new Brooklyn-based commodity firm called “White Rock Partners,” an innovative joint venture among four New York crime families and the Russian mob aimed at bringing state-of-the art financial fraud to Wall Street.

Five years later, in 1998, Felix Sater pled guilty to stock racketeering, as one of 19 U.S.-and Russian mob-connected traders who participated in a $40 million “pump and dump” securities fraud scheme. Facing twenty years in Federal prison, Sater and Gennady Klotsman, a fellow Russian-American who'd been with him on the night of the Manhattan bar fight, turned "snitch" and helped the Department of Justice prosecute their co-conspirators.[22] Reportedly, so did Salvatore Lauria, another "trader” involved in the scheme. According to the Jody Kriss lawsuit, Lauria later joined Bayrock as an off-the-books paid “consultant.” Initially their cooperation, which lasted from 1998 until at least late 2001, was kept secret, until it was inadvertently revealed in a March 2000 press release by U.S. Attorney Lynch.

Unfortunately for Sater, about the same time the NYPD also reportedly discovered that he'd had been running a money-laundering scheme and illicit gun sales out of a Manhattan storage locker. He and Klotsman fled to Russia. However, according to the New York Times, citing Klotsman and Lauria, soon after the events of September 11, 2001 the ever-creative Sater succeeded in brokering information about the black market for Stinger anti-aircraft missiles to the CIA and the FBI. According to Klotsman, this strategy “bought Felix his freedom,” allowing him to return to Brooklyn. It is still not clear precisely what information Sater actually provided, but in 2015 US Attorney General Loretta Lynch publicly commended him for sharing information that she described as “crucial to national security.”

SaterBizCardMeanwhile, Sater’s sentence for his financial crimes continued to be deferred even after his official cooperation in that case ceased in late 2001. His files remained sealed, and he managed to avoid any sentencing for those crimes at all until October 23, 2009. When he finally appeared before the Eastern District's Judge I. Leo Glasser, Felix received a $25,000 fine, no jail time, and no probation, in a quiet proceeding that attracted no press attention. Some compared this sentence to Judge Glasser's earlier sentence of Mafia hit man “Sammy the Bull” Gravano to 4.5 years for 19 murders, in exchange for “cooperating against John Gotti.”

In any case, between 2002 and 2008, when Felix Sater finally left Bayrock LLC, and well beyond, his ability to avoid jail and conceal his criminal roots enabled him to enjoy a lucrative new career as Bayrock’s chief operating officer. In that position, he was in charge of negotiating aggressive property deals all over the planet, even while—according to lawsuits by former Bayrock investors — engaging in still more financial fraud. The only apparent difference was that he changed his name from “Sater” to “Satter.” [23]

In the 2013 deposition cited earlier, Trump went on to say “I don’t see Felix as being a member of the Mafia.” Asked if he had any evidence for this claim, Trump conceded “I have none.”[24]

As for Sater’s pal Klotsman, the past few years have not been kind. As of December 2016 he is in a Russian penal colony, working off a ten-year sentence for a failed $2.8 million Moscow diamond heist in August 2010. In 2016 Klotsman was reportedly placed on a “top-ten list” of Americans that the Russians were willing to exchange for high-value Russian prisoners in U.S. custody, like the infamous arms dealer Viktor Bout. So far there have been no takers. But with Donald Trump as President, who knows?

The Case of Iceland’s FL Group

 One of the most serious frauds alleged in the recent Bayrock lawsuit involves FL Group, an Icelandic private investment fund that is really a saga all its own.

Iceland is not usually thought of as a major offshore financial center. It is a small snowy island in the North Atlantic, closer to Greenland than to the UK or Europe, with only 330,000 citizens and a total GDP of just $17 billion. Twenty years ago, its main exports were cod and aluminum – with the imported bauxite smelted there to take advantage of the island's low electricity costs.

But in the 1990s Iceland’s tiny neoliberal political elite had what they all told themselves was a brilliant idea: "Let's privatize our state-owned banks, deregulate capital markets, and turn them loose on the world!" By the time all three of the resulting privatized banks, as well as FL Group, failed in 2008, the combined bank loan portfolio amounted to more than 12.5 times Iceland’s GDP -- the highest country debt ratio in the entire world.

Iceland 2008 - All Cross-Holdings

For purposes of our story, the most interesting thing about Iceland is that, long before this crisis hit and utterly bankrupted FL Group, our two key Russian/FSU/Brooklyn mobster-mavens, Arif and Sater, had somehow stumbled on this obscure Iceland fund. Indeed, in early 2007 they persuaded FL Group to invest $50 million in a project to build the Trump SoHo in mid-town Manhattan.

According to the Kriss lawsuit, at the same time, FL Group and Bayrock’s Felix Sater also agreed in principle to pursue up to an additional $2 billion in other Trump-related deals. The Kriss lawsuit further alleges that FL Group (FLG) also agreed to work with Bayrock to facilitate outright tax fraud on more than $250 million of potential earnings. In particular, it alleges that FLG agreed to provide the $50 million in exchange for a 62 percent stake in the four Bayrock Trump projects, but Bayrock would structure the contract as a “loan.” This meant that Bayrock would not have to pay taxes on the initial proceeds, while FLG’s anticipated $250 million of dividends would be channeled through a Delaware company and characterized as “interest payments,” allowing Bayrock to avoid up to $100 million in taxes. For tax purposes, Bayrock would pretend that their actual partner was a Delaware partnership that it had formed with FLG, “FLG Property I LLC,” rather than FLG itself.

The Trump Organization has denied any involvement with FLG. However, as an equity partner in the Trump SoHo, with a significant 18 percent equity stake in this one deal alone, Donald Trump himself had to sign off on the Bayrock-FLG deal.

This raises many questions. Most of these will have to await the outcome of the Kriss litigation, which might well take years, especially now that Trump is President. But several of these questions just leap off the page.

First, how much did President-elect Trump know about the partners and the inner workings of this deal? After all, he had a significant equity stake in it, unlike many of his “brand-name only” deals, and it was also supposed to finance several of his most important East Coast properties.

Second, how did the FL Group and Bayrock come together to do this dodgy deal in the first place? One former FL Group manager alleges that the deal arrived by accident, a “relatively small deal" was nothing special on either side.[25] The Kriss lawsuit, on the other hand, alleges that FLG was a well-known source of easy money from dodgy sources like Kazakhstan and Russia, and that other Bayrock players with criminal histories— like Salvatore Lauria, for example—were involved in making the introductions.

At this stage the evidence with respect to this second question is incomplete. But there are already some interesting indications that FL Group’s willingness to generously finance Bayrock’s peculiar Russian/FSU/Brooklyn team, its rather poorly-conceived Trump projects, and its purported tax dodging were not simply due to Icelandic backwardness. There is much more for us to know about Iceland’s “special” relationship with Russian finance. In this regard, there are several puzzles to be resolved.

First, it turns out that FL Group, Iceland’s largest private investment fund until it crashed in 2008, had several owners/investors with deep Russian business connections, including several key investors in all three top Iceland banks.

Second, it turns out that FL Group had constructed an incredible maze of cross-shareholding, lending, and cross-derivatives relationships with all these major banks, as illustrated by the following snapshot of cross-shareholding among Iceland’s financial institutions and companies as of 2008.[26]

Cross-shareholding Relationships, FLG and Other Leading Icelandic Financial Institutions, 2008


This thicket of cross-dealing made it almost impossible to regulate “control fraud,” where insiders at leading financial institutions went on a self-serving binge, borrowing and lending to finance risky investments of all kinds. It became difficult to determine which institutions were net borrowers or investors, as the concentration of ownership and self-dealing in the financial system just soared.

Third, FL Group make a variety of peculiar loans to Russian-connected oligarchs as well as to Bayrock. For example, as discussed below, Alex Shnaider, the Russian-Canadian billionaire who later became Donald Trump’s Toronto business partner, secured a €45.8 million loan to buy a yacht from Kaupthing Bank during the same period, while a company

Cross-shareholding Relationships, FLG and Other Leading Icelandic Financial Institutions, 2008

belonging to another Russian billionaire who reportedly owns an important vodka franchise got an even larger loan.[27]  

Fourth, Iceland’s largest banks also made a series of extraordinary loans to Russian interests during the run-up to the 2008 crisis. For example, one of Russia’s wealthiest oligarchs, a close friend of President Putin, nearly managed to secure at least €400 million (or, some say, up to 4 times that much) from Kaupthing, Iceland’s largest bank, in late September 2008, just as the financial crisis was breaking wide open. This bank also had important direct and indirect investments in FL Group. Indeed, until December 2006, it is reported to have employed the FL Group private equity manager who allegedly negotiated Felix Sater’s $50 million deal in early 2007.[28]

Fifth, there are unconfirmed accounts of a secret U.S. Federal Reserve report that unnamed Iceland banks were being used for Russian money laundering.[29] Furthermore, Kaupthing Bank’s repeated requests to open a New York branch in 2007–08 were rejected by the Fed. Similar unconfirmed rumors repeatedly appeared in Danish and German publications, as did allegations about the supposed Kazakh origins of FLG’s cash to be “laundered” in the Kriss lawsuit.

Sixth, there is the peculiar fact is that when Iceland’s banks went belly-up in October 2008, their private banking subsidiaries in Luxembourg, which were managing at least €8 billion of private assets, were suddenly seized by Luxembourg banking authorities and transferred to a new bank, Banque Havilland. This happened so fast that Iceland’s Central Bank was prevented from learning anything about the identities or portfolio sizes of the Iceland banks’ private offshore clients. But again, there were rumors of some important Russian names.

Finally, there is the rather odd phone call that Russia’s Ambassador to Iceland made to Iceland’s Prime Minister at 6:45 a.m. on October 7, 2008, the day after the financial crisis hit Iceland. According to the PM's own account, the Russian Ambassador informed him that then Prime-Minister Putin was willing to consider offering Iceland a €4 billion Russian bailout.

Of course this alleged Putin offer was modified not long thereafter to a willingness to entertain an Icelandic negotiating team in Moscow. By the time the Iceland team got to Moscow later that year, Russia’s willingness to lend had cooled, and Iceland ended up accepting a $2.1 billion IMF "stabilization package" instead. But according to a member of the negotiating team, the reasons for the reversal are still a mystery. Perhaps Putin had reconsidered because he simply decided that Russia had to worry about its own considerable financial problems. Or perhaps he had discovered that Iceland’s banks had indeed been very generous to Russian interests on the lending side, while -- given Luxembourg’s fact actions -- any Russian private wealth invested in Iceland banks was already safe.

On the other hand, there may be a simpler explanation for Iceland’s peculiar generosity to sketchy partners like Bayrock. After all, right up to the last minute before the October 2008 meltdown, the whole world had awarded Iceland AAA ratings – depositors queued up in London to open high-yield Iceland bank accounts, its bank stocks were booming, and the compensation paid to its financiers was off the charts. So why would anyone worry about making a few more dubious deals?

Overall, therefore, with respect to these odd “Russia-Iceland” connections, the proverbial jury is still out. But all these Icelandic puzzles are intriguing and bear further investigation.

The Case of the Trump Toronto Tower and Hotel—Alex Shnaider

 Our fourth case study of Trump's business associates concerns the 48-year-old Russian-Canadian billionaire Alex Shnaider, who co-financed the seventy-story Trump Tower and Hotel, Canada’s tallest building. It opened in Toronto in 2012. Unfortunately, like so many of Trump’s other Russia/FSU-financed projects, this massive Toronto condo-hotel project went belly-up this November and has now entered foreclosure.

Donald Trump and Alex Shnaider

According to an online profile of Shnaider by a Ukrainian news agency, Alex Shnaider was born in Leningrad in 1968, the son of "Евсей Шнайдер," or "Evsei Shnaider" in Russian.[30] A recent Forbes article says that he and his family emigrated to Israel from Russia when he was four and then relocated to Toronto when he was 13-14. The Ukrainian news agency says that Alex's familly soon established "one of the most successful stories in Toronto's Russian quarter, " and that young Alex, with "an entrepreneurial streak," "helped his father Evsei Shnaider in the business, placing goods on the shelves and wiping floors."

Eventually that proved to be a great decision – Shnaider prospered in the New World. Much of this was no doubt due to raw talent. But it also appears that for a time he got significant helping hand from his (now reportedly x) father-in-law,   another colorful Russian-Canadian, Boris J. Birshtein.

Originally from Lithuania, Birshtein, now about 69, has been a Canadian citizen since at least 1982.[31] He resided in Zurich for a time in the early 1990s, but then returned to Toronto and New York.[32] One of his key companies was called Seabeco SA, a "trading" company that was registered in Zurich in December 1982.[33] By the early 1990s Birshtein and his partners had started many other Seabeco-related companies in a wide variety of locations, inclding Antwerp,[34] Toronto,[35] Winnipeg,[36] Moscow, Delaware,[37] Panama, [38] and Zurich.[39] Several of these are still active.[40] He often staffed them with directors and officers from a far-flung network of Russians, emissaries from other FSU countries like Kirgizstan and Moldova, and recent Russia/FSU emigres to Canada.[41]

According to the Financial Times and the FBI, in addition to running Seabeco, Birshtein was a close business associate of Sergei Mikhaylov, the reputed head of Solntsevskaya Bratva, the Russian mob's largest branch, and the world’s highest-grossing organized crime group as of 2014, according to Fortune. [42] A 1996 FBI intelligence report cited by the FT claims that Birshtein hosted a meeting in his Tel Aviv office for Mikhaylov, the Ukrainian-born Semion Mogilevich, and several other leaders of the Russo/FSU mafia, in order to discuss “the sharing interests in Ukraine.”[43] A subsequent 1998 FBI Intelligence report on the "Semion Mogilevich Organization" repeated the same charge,[44] and described Mogilevich's successful attempts at gaining control over Ukraine privatization assets. This FT article also described how Birshtein and his associates had acquired extraordinary influence with key Ukraine officials, including President Leonid Kuchma, with the help of up to $5 million of payoffs.[45] Citing Swiss and Belgian investigators, the FT also claimed that Birshtein and Mikhaylov jointly controlled a Belgian company called MAB International in the early 1990s.[46] During that period, those same investigators reportedly observed transfers worth millions of dollars between accounts held by Mikhaylov, Birshtein, and Alexander Volkov, Seabeco's representative in Ukraine.

In 1993, the Yeltsin government reportedly accused Birshtein of illegally exporting seven million tons of Russian oil and laundering the proceeds.[47] Dmytro Iakoubovski, a former associate of Birshtein’s who had also moved to Toronto, was said to be cooperating with the Russian investigation. One night a gunman fired three shots into Iakoubovski’s home, leaving a note warning him to cease his cooperation, according to a New York Times article published that year. As noted above, according to the Belgian newspaper Le Soir, two members of Bayrock’s Eurasian Trio were also involved in Seabeco during this period as well—Patokh Chodiev and Alexander Mashkevich. Chodiev reportedly first met Birshtein through the Soviet Foreign Ministry, and then went on to run Seabeco’s Moscow office before joining its Belgium office in 1991. Le Soir further claims that Mashkevich worked for Seabeco too, and that this was actually how he and Chodiev had first met.

All this is fascinating, but what about the connections between Birshtein and Trump's Toronto business associate, Alex Shnaider? Again, the leads we have are tantalizing.The Toronto Globe and Mail reported that in 1991, while enrolled in law school, young Alex Shnaider started working for Birshtein at Seabeco’s Zurich headquarters, where he was reportedly introduced to steel trading. Evidently this was much more than just a job; the Zurich company registry lists "Alex Shnaider" as a Director of "Seabeco Metals AG" from March 1993 to January 1994. [48]

In 1994, according to this account, reportedly left Seabeco in January 1994 to start his own trading company in Antwerp, in partnership with a Belgian trader-partner. Curiously, Le Soir also says that Mikhaylov and Birshtein co-founded MAB International in Antwerp in January 1994. Is it far-fetched to suspect that Alex Shnaider and mob boss Mikhaylov might have crossed paths, since they were both in the same city and they were both close to Shnaider’s father-in-law?

According to Forbes, soon after Shnaider moved to Antwerp, he started visiting the factories of his steel trading partners in Ukraine.[49] His favorite client was the Zaporizhstal steel mill, the Ukraine's fourth largest. At the Zaporizhstal mill he reportedly met Eduard Shifrin (aka Shyfrin), a metals trader with a Ph.D. in metallurgical engineering. Together they founded Midland Resource Holdings Ltd. in 1994.[50]

As the Forbes piece argues, with privatization sweeping Eastern Europe, private investors were jockeying to buy up the government’s shares in Zaprozhstal. But most traders lacked the financial backing and political connectons to accumulate large risky positions. Shnaider and Shifrin, in contrast, started buying up shares without limit, as if their pockets and connections were very deep. By 2001 they had purchased 93 percent of the plant for about $70 million, a stake that would be worth much more just five years later, when Shnaider reportedly turned down a $1.2 billion offer.

Today Midland Resources Holdings Ltd. reportedly generates more than $4 billion a year of revenue and has numerous subsidiaries all across Eastern Europe.[51] Shnaider also reportedly owns Talon International Development, the firm that oversaw construction of the Trump hotel-tower in Toronto. All this wealth apparently helped Iceland's FL Group decide that it could afford to extend a €48.5 million loan to Alex Shnaider in 2008 to buy a yacht. [52]

            As of December 2016, a search of the Panama Papers database found no less than 28 offshore companies that have been associated with “Midland Resources Holding Limited.”[53] According to the database, "Midland Resources Holding Limited" was a shareholder in at least two of these companies, alongside an individual named “Oleg Sheykhametov.”[54] The two companies, Olave Equities Limited and Colley International Marketing SA, were both registered and active in the British Virgin Islands from 2007–10.[55] A Russian restaurateur by that same name reportedly runs a sushi franchise owned by two other alleged Solntsevskaya mob associates, Lev Kvetnoy and Andrei Skoch, both of whom are pictured below with Sergei Mikhaylov below. Of course mere inclusion in such a group photo is no evidence of any wrong-doing. (INSERT Picture Link here: According to Forbes, Kvetnoy is the 55th richest person in Russia and Skoch, now a deputy in the Russian Duma, is the 18th. [56]           

            Finally, it is also intriguing to note that Bori Birshtein is also listed as the President of "ME Moldova Enterprises AG," a Zurich-based company" that was founded in November1992, transferred to the canton of Schwyz in September 1994, and liquidated and cancelled in January 1999.[57] Birshstein was a member of the company's board of directors from November 1992 to January 1994, when he became its President. At that point he was succeeded as President in June 1994 by one "Evsei Shnaider, Canadian citizen, resident in Zurich," who was also listed as Director of the company in September 1994.[58] " Evsei Schnaider" is also listed in the Panama registry as a Treasurer and Director of "The Seabeco Group Inc," formed on December 6, 1991, [59]and as Treasurer and Director of Seabeco Security International Inc.," formed on December 10, 1991. As of December 2016, both companies are still in existence.[60] Boris Birstein is listed as President and Director of both companies.[61]

The Case of Paul Manafort’s Ukrainian Oligarchs

 Our fifth Trump associate profile concerns the Russo/Ukrainian connections of Paul Manafort, the former Washington lobbyist who served as Donald Trump’s national campaign director from April 2016 to August 2016. Manafort’s partner, Rick Davis, also served as national campaign manager for Senator John McCain in 2008, so this may not just be a Trump association.


Dymytro Firtash

One of Manafort’s biggest clients was the dubious pro-Russian Ukrainian billionaire Dmytro Firtash. By his own admission, Firtash maintains strong ties with a recurrent figure on this scene, the reputed Ukrainian/Russian mob boss Semion Mogilevich. His most important other links are almost certainly to Putin. Otherwise it is difficult to explain how this former used-car salesman could gain a lock on trading goods for gas in Turkmenstan and also become a lynchpin investor in the Swiss company RosUrEnergo, which controls Gazprom's gas sales to Europe[62]

In 2008, Manafort teamed up with a former manager of the Trump Organization to purchase the Drake Hotel in New York for up to $850 million, with Firtash agreeing to invest $112 million. According to a lawsuit brought against Manafort and Firtash, the key point of the deal was not to make a carefully-planned investment in real estate, but to simply launder part of the huge profits that Firtash had skimmed while brokering dodgy natural gas deals between Russia and Ukraine, with Mogilevich acting as a “silent partner.”

Ultimately Firtash pulled out of this Drake Hotel deal. The reasons are unclear – it has been suggestd that he needed to focus on the 2015 collapse and nationalization of his Group DF's Bank Nadra back home in the Ukraine.[63] But it certainly doesn't appear to have changed his behiavor. Since 2014 there have been a spate of other Firtash-related prosecutions, with the US try to extradict from Austria in order to stand trial on allegations that his vast spidernet "Group DF" had paid $18.5 million in bribes to Indian officials to secure mining licenses. The Austrian court, knowing Firtash like a brother, required him to put up a record-busting €125 mm bail while he awaits a decision. [64] And just last month, Spain has also tried to extradite Firtash on a separate money laundering case, involving washing €10 million through Spanish property investments.

After Firtash pulled out of the deal, Manafort reportedly turned to Trump, but he declined to engage. Manafort stepped down as Trump’s campaign manager in August of 2016 in response to press investigations into his ties not only to Firtash, but to the Ukraine's previous pro-Russian Yanukovych government, which had been deposed by a uprising in 2014.  However, following the November 8 election, Manafort reportedly returned to advise Trump on staffing his new administration.  He got an assist from Putin -- on November 30 a spokeswoman for the Russian Foreign Ministry accused Ukraine of leaking stories about Manafort in an effort to hurt Trump.

The Case of “Well-Connected” Russia/FSU Mobsters

 Finally, several other interesting Russo/FSU connections have a more residential flavor, but they are a source of very important leads about the Trump network.

Indeed, partly because it has no prying co-op board, Trump Tower in New York has received press attention for including among its many honest residents tax-dodgers, bribers, arms dealers, convicted cocaine traffickers, and corrupt former FIFA officials. [65]

Semion Mogilevich

One typical example involves the alleged Russian mobster Anatoly Golubchik, who went to prison in 2014 for running an illegal gambling ring out of Trump Tower -- not only the headquarters of the Trump Organization but also the former headquarters of Bayrock Group LLC. This operation reportedly took up the entire 51st floor. Also reportedly involved in it was the alleged mobster Alimzhan Tokhtakhounov, [66] who has the distinction of making the Forbes 2008 list of the World’s Ten Most Wanted Criminals, and whose organization the FBI believed to be tied to Mogilevich’s. Even as this gambling ring was still operating in Trump Tower, Tokhtakhounov reportedly travelled to Moscow to attend Donald Trump’s 2013 Miss Universe contest as a special VIP.

In the Panama Papers database we do find the name “Anatoly Golubchik.” Interestingly, his particular offshore company, "Lytton Ventures Inc.," [67] shares a corporate director, Stanley Williams, with a company that may well be connected to our old friend Semion Mogilevich, the Russian mafia’s alleged “Boss of Bosses” who has appeared so frequently above. Thus Lytton Ventures Inc. shares this particular director with another company that is held under the name of “Galina Telesh.”[68] According to the Organized Crime and Corruption Reporting Project, multiple offshore companies belonging to Semion Mogilevich have been registered under this same name -- which just happens to be that of Mogilevich’s first wife.

A 2003 indictment of Mogilevich also mentions two offshore companies that he is said to have owned, with names that include the terms “Arbat” and “Arigon.” The same corporate director shared by Golubchik and Telesh also happens to be a director of a company called Westix Ltd.,[69] which shares its Moscow address with “Arigon Overseas” and “Arbat Capital.”[70] And another company with that same director appears to belong to Dariga Nazarbayeva, the eldest daughter of Nursultan Nazarbayev, the long-lived President of Kazakhstan. Dariga is expected to take his place if he ever decides to leave office or proves to be mortal.

Lastly, Dmytro Firtash—the Mogilevich pal and Manafort client that we met earlier—also turns up in the Panama Papers database, as part of Galina Telesh’s network neighborhood. A director of Telesh’s “Barlow Investing,” Vasliki Andreou, was also a nominee director of a Cyprus company called “Toromont Ltd.,” while another Toromont Ltd. nominee director, Annex Holdings Ltd., a St. Kitts company, is also listed as a shareholder in Firtash’s Group DF Ltd., along with Firtash himself.[71] And Group DF’s CEO, who allegedly worked with Manafort to channel Firtash’s funding into the Drake Hotel venture, is also listed in the Panama Papers database as a Group DF shareholder. Moreover, a 2006 Financial Times investigation identified three other offshore companies that are linked to both Firtash and Telesh.[72] 

Anatoly Golubchik’s Panama Papers Network Neighborhood

Of course, all of these curious relationships may just be meaningless coincidences. After all, the director shared by Telesh and Golubchik is also listed in the same role for more than 200 other companies, and more than a thousand companies besides Arbat Capital and Arigon Overseas share Westix’s corporate address. In the burgeoning land of offshore havens and shell-game corporate citizenship, there is no such thing as overcrowding. The appropriate way to view all this evidence is to regard it as "Socratic:" raising important unanswered questions – not providing definite answers.

In any case, returning to Trump's relationships through Trump Tower, another odd one involves the 1990s-vintage fraudulent company YBM Magnex International. YBM, ostensibly a world-class manufacturer of industrial magnets, was founded indirectly in Newtown, Bucks County, Pennsylvania in 1995 by the "boss of bosses," Semion Mogilevich, Moscow’s “brainy Don.”

This is a fellow with an incredible history, even if only one-half of what has been written about him is true. [73] Unfortunately, we have to focus here only on the bits that are most relevant.. Born in Kiev, and now a citizen of Israel as well as the Ukraine and Russia, Semion, now 70, is a lifelong criminal. But he boasts an undergraduate economics degree from Lviv University, and is reported to take special pride in designing sophisticated, virtually undetectable financial frauds that take years to put in place. To pull them off, he often relies on the human frailties of top bankers, stock brokers, accountants, business magnates, and key politicians.[74]

In YBM’s case, for a mere $2.4 million in bribes, Semion and his henchmen spent years in the 1990s launching a product-free, fictitious company on the still-badly under-regulated Toronto Stock Exchange. Along the way they succeeded in securing the support of several leading Toronto business people and a former Ontario Province Premier to sit on YBM’s board. They also paid the “Big Four” accounting firm Deloitte Touche very handsomely to issue glowing audits. By mid-1998, YBM’s stock price had gone from less than $.10 to $20, and Semion cashed out at least $18 million—a relatively big fraud for its day—before the FBI raid its YBM's corporate headquarters. When it did so, it found piles of bogus invoices for magnets, but no magnets. [75]

In 2003, Mogilevich was indicted in Philadelphia on 45 felony counts for this $150 million stock fraud. But there is no extradition treaty between the United States and Russia, and no chance that Russia will ever extradite Semion voluntarily; he is arguably a national treasure, especially now. Acknowledging these realities, or perhaps for other reasons, the FBI quietly removed Mogilevich from its Top Ten Most Wanted list in 2015, where he had resided for the previous six years.[76]

For our purposes, one of the most interesting things to note about this YBM Magnex case is that its CEO was a Russian-American named Jacob Bogatin, who was also indicted in the Philadelphia case. His brother David had served in the Soviet Army in a North Vietnamese anti-aircraft unit, helping to shoot down American jet pilots like Senator John McCain. Since the early 1990s, David Bogatin was considered by the FBI to be one of the key members of Semion Mogilevich’s Russian organized crime family in the United States, with a long string of convictions for big-ticket Mogilevich-type offenses like financial fraud and tax dodging.

At one point, David Bogatin owned five separate condos in Trump Tower that Donald Trump had reportedly sold to him personally.[77] And Vyacheslav Ivankov, another key Mogilevich lieutenant in the United States during the 1990s, also resided for a time at Trump Tower, and reportedly had in his personal phone book the private telephone and fax numbers for the Trump Organization’s office in that building.[78]


So what have we learned from this deep dive into the network of Donald Trump's Russian/FSU connections?

¶ First, the President-Elect really is very "well-connected," with an extensive network of unsavory global underground connections that may well be unprecedented in White House history. In choosing his associates, evidently Donald Trump only pays cursory attention to questions of background, character and integrity.

¶ Second, Donald Trump has also literally spent decades cultivating senior relationships of all kinds with Russia and the FSU. And public and private senior Russian figures of all kinds have likewise spent decades cultivating him, not only as a business partner, but as a "useful idiot."

After all, on September 1, 1987 (!), Trump was already willing to spend a $94,801 on full-page ads in the Boston Globe, the Washington Post, and the New York Times, calling for the US to stop spending money to defend Japan, Europe, and the Persian Gulf, "an area of only marginal significance to the US for its oil supplies, but one upon which Japan and others are almost totally dependent.''[79]

This is one key reason why just this week, Robert Gates, a registered Republican who has served Secretary of Defense under Presidents from both parties, as well as Director and Deputy Director of the CIA, critized the response of Congress and the White House to the alleged Putin-backed hacking as far too "laid back." [80]

¶ Third, even beyond questions of illegality, the public clearly has a right to know much more than it already does about the nature of such global connections. As our opening quote from Cervantes suggests, these relationships are probably a pretty good leading indicator of how Presidents will behave once in office.

Unfortunately, for many reasons, this year American voters never really got the chance to decide whether such low connections and entanglements belong at the world’s high peak of official power. In the waning days of the Obama Administration, with the Electoral College about to ratify Trump's election and Congress in recess, it is too late to establish the kind of bipartisan 9/11-type commission that would be needed to explore these connections in detail.

Finally, the long-run consequence of careless interventions in other countries is that they often come back to haunt us.  In Russia's case, it just has.


James S. Henry, Esq. is an investigative economist and lawyer who has written widely about offshore and onshore tax havens, kleptocracy, and pirate banking. He is the author of The Blood Bankers (Basic Books, 2003,2005), a classic investigation of where the money went that was loaned to key debtor countries in the 1970s-1990s. He is a Senior Fellow at the Columbia University's Center on Sustainable Investment, a Global Justice Fellow at Yale, a Senior Advisor at the Tax Justice Network, and a member of the New York Bar. He has pursued frontline investigations of odious debt, flight capital, and corruption in more than 50 developing countries, including Russia, China, South Africa, Brazil, the Philippines, Argentina, Venezuela, Nicaragua, Mexico, and Panama.


[1] Author’s estimates; see for more details.

[2] For an overview and critical discussion, see

[3] See Lawrence Klein and Marshall Pomer, Russia's Economic Transition Gone Awry (Stanford U. Press, 2002); see also James S. Henry and Marshall Pomer, "A Pile of Ruble," The New Republic, 1998, 219 (10), 20-21.

[4] See this Washington Post report, which counts just six bankruptcies to the Trump Organization’s credit, but excludes failed projects like the Trump SoHo, the Toronto condo-hotel, the Fort Lauderdale condo-hotel, and many others Trump was a minority investor or had simply licensed his brand.

[5] For example, the Swiss federal and cantonal corporate registries, available at

[6] For ICIJ's April 2016 "Panama Papers" database of offshore companies, see

[7] Trump’s minority equity deal with Bayrock was unlike many others, where he simply licensed his name. See this March 2008 New York Magazine piece.

[8] “I dealt mostly with Tevfik,” he said in 2007

[9] Case 1:09-cv-21406-KMW Document 408-1. Entered on FLSD Docket 11/26/2013. p. 15.


[11] Bayrock reported its co-ownership of six Rixos hotels in a 2007 press release.

[12] See also Salihovic, Elnur, Major Players in the Muslim Business World, p.107;

[13] See also;;

[14] According to the Panama Papers database, "International Financial Limited" was registered on April 3, 1998, but is no longer active today, although no precise deregistration date is available. See

[15]According to the Panama Papers, “Group Rixos Hotel” is still active company, while three of the four companies it serves were struck off in 2007 and the fourth, Hazara Asset Management, in 2013.


[17] See also [17]; [17]

[18] Case 1:09-cv-21406-KMW Document 408-1. Entered on FLSD Docket 11/26/2013. p. 16.

[19]The exact date that Sater joined Bayrock is unclear. A New York Times article says 2003, but this appears to be too late. Sater says 1999, but this is much too early. A certified petition filed with the U.S. Supreme Court places the time around 2002, which is more consistent with Sater’s other activities during this period, including his cooperation with the Department of Justice on the Coppa case in 1998–2001, and his foreign travel.

[20] See;;

; [20] Note that previous accounts of Sater's activities have overlooked the role that this very permissive relationship with federal law enforcement, especially the FBI, may have played in encouraging Sater's subsequent risk-taking and financial crimes. See

[21] See, 13.

[22] Sater’s 1998 case, never formally sealed, was U.S. v. Sater, 98-CR-1101 (E.D.N.Y.) The case in which Sater secretly informed was U.S. v. Coppa, 00-CR-196 (E.D.N.Y.). See also

[23] Sater also may have taken other steps to conceal his criminal past. According to the 2015 lawsuit filed by x Bayrocker Jody Kriss, Arif agreed to pay Sater his $1 million salary under the table, allowing Sater to pretend that he lacked resources to compensate any victims of his prior financial frauds. See Kriss v. Bayrock, pp. 2, 18, at The lawsuit also alleges that Sater may have held a majority of Bayrock's ownership, but that Arif, Sater and other Bayrock officers may have conspired to hide this by listing Arif as the sole owner on offering documents.

[24] See, 155.

[25] "Former FL Group manager," interview with London, August 2016. Sigrun Davidsdottir, Iceland journalist.

[26] See "Report of the Special Investigation Commission on the 2008 Financial Crisis." (April 12, 2010), available at

[27] These loans are disclosed in the Kaupthing Bank's "Corporate Credit – Disclosure of Large Exposures > €40 mm." loan book, September 15, 2008. This document was disclosed by Wikileaks in 2009   See;, p.145 (€79.5mm construction yacht loan to Russian vodka magnate Yuri Shefler's Serena Equity Ltd.;   p. 208: (€45.8 mm yacht construction loan to Canadian-Russian billionaire Alex Shnaider's Filbert Pacific Ltd..

[28] Kriss lawsuit, op. cit.; author's analysis of Kaupthing/ FL G employees published career histories.

[29] Author's interview, "Iceland Economist," Reykjavik, July 2016.

[30] The passage in Russian, with the father's name underlined, is as follows: "Родители Алекса Шнайдера владели одним из первых успешных русских  магазинов в русском квартале Торонто. Алекс помогал в бизнесе отцу – Евсею Шнайдеру, расставляя на полках товар и протирая полы. С юных лет в Алексе зрела предпринимательская жилка.  Живя с родителями, он стал занимать деньги у их друзей и торговать тканями и электроникой с разваливающимися в конце 80-х годов советскими предприятиями." "Евсею Шнайде

ру" is the dative case of "Евсей Шнайдер," or "Evsei Shnaider," the father's name in Russian.

[31] The Zurich company registry ( reports that "Seabeco SA" (CHE-104.863.207) was initially registered on December 16, 1982, with "Boris Joseph Birshtein, Canadian citizen, resident in Toronto" as its President. It entered liquidation on May 5, 1999, in Arth, handled by the Swiss trustee Paul Barth. The Zurich company registry listed "Boris Joseph Birshtein, Canadian citizen, resident in Toronto," as the President of Seabeco Kirgizstan AG in 1992, while "Boris Joseph Birshtein, Canadian citizen, resident in Zurich," was listed as the company's President in 1993. "Boris Birshtein" is also listed as the President and director of a 1991 Panama company, The Seabeco Group, Inc. as of December 6 1991. See below.

[32] See

[33] The Zurich company registry reports that "Seabeco SA" (CHE-104.863.207) was initially registered on December 16, 1982, with "Boris Joseph Birshtein, Canadian citizen, resident in Toronto" as its President. According to the registry, it entered liquidation on May 5, 1999. See also!topic/soc.culture.ukrainian/1mtgIacNtMw. The liquidation was handled by the Swiss trustee Paul Barth, in Arth.

[34] For Seabeco's Antwerp subsidiary, see

[35] "Royal HTM Group, Inc." of Toronto, (Canadian Federal Corporation # 624476-9), owned 50-50 by Birshtein and his nephew. See,%20Inc.&crpNmbr=&bsNmbr= .

[36] Birshtein was a director of Seabeco Capital Inc. (Canadian Federal Incorporatio # 248194-4,) a Winnipeg company created 6/2/1989 and dissolved 12/22/1992 )

[37] Since 1998, Boris Birshtein (Toronto) has also served as Chairman, CEO, and a principle shareholder of "Trimol Group Inc.," a publicly-traded Delaware company that trades over the counter. (Symbol: TMOL). Its product line is supposedly "computerized photo identification and database management system utilized in the production of variety of secure essential government identification documents." See;

However, according to Trimol's July 2015 10-K ( the company has only had one customer, the former FSU member Moldova, with which Trimol's wholly-owned subsidiary Intercomsoft concluded a contract in 1996 for the producton of a National Passport and Population Registration system. That contract was not renewed in 2006, and the subsidiary and Trimol have had no revenues since then. Accordingly, as of 2016 Trimol has only two part time employees, its two principle shareholders, Birshtein and his nephew, who, directly and indirectly account for 79 percent of Trimol's shares outstanding. According to the July 2015 10-K, Birshtein, in particular, owned 54 percent of TMOL's outstanding 78.3 million shares, including 3.9 million by way of "Magnum Associates, Inc.," which the 10-K says only has Birshtein as a shareholder, and 34.7 million by way of yet another Canadian company, "Royal HTM Group, Inc." of Ontario (Canadian Federal Corporation # 624476-9), which is owned 50-50 by Birshtein and a nephew. It is interesting to note according to the Panama Papers database, a Panama company called "Magnum Associates Inc. was incorporated on December 10, 1987, and struck off on March 10, 1989.   See As of December 2016, TMOL's stock price was zero.

[38] See the case of Trimol Group Inc above. The Seabeco Group, Inc., a Panama company that was formed in December 1991, apparently still exists. Boris J. Birshtein is listed as this company's Director and President. See "The Seabeco Group Inc." registered in Panama by Morgan Y Morgan, 1991-12.06, with "Numero de Ficha" 254192,;

[39] As of December 2016, the Zurich company registry ( listed a Zurich company called "Conim Investment AG" (CH- was originally formed in May 1992, and in January 1995 was transferred to Arth, in the Canton of Schwyz, where it is still in existence. (CHE-102.029.498). This is confirmed by the Schwyz Canton registery: According to these registries, Conim Investment AG is the successor company to two other Zurich campanies, "Seabeco Kirgizstan AG,"formed in 1992, and "KD Kirgizstan Development AG," its direct successor.   (

The Swiss federal company registry also reports the following Swiss companies in which Boris J.Birshtein has been an officer and or director, all of which are now in liquidation: (1) Seabeco Trade and Finance AG (CH-, 4/3/92-11/30/98 ), ; (2) Seabeco SA (CHE-104.863.207,12/16/82-5/9/99) ; (3) Seabeco Metals AG (4/3/92-6/11/96); (4) BNB Trading AG (CH-, 1/10/92-11/19/98 ); and (5) ME Moldova Enterprises AG (CH-, 11/10/92-9/16/94). All of these liquidations were handled by the same trustee, Paul Barth in Arth.

[40] As of December 2016, active Birshtein companies include "Conim Investment AG" (CH- in the Swiss Canton of Schwyz and he Seabeco Group, Inc. in Panama.

[41] For example, the Zurich and Schwyz company registries indicates that the following have been board members of Birshtein companies: (1) Seabeco Trade and Finance AG: Iouri Orlov (citizen of Russia, resident of Moscow), Alexander Griaznov (citizen of Russia, resident of Basserdorf Switzerland), and Igor Filippov (citizen of Russia, resident of Basel). (2) ME Moldova Enterprises: Andrei Keptein (citizen of FSU/ Moldova; Evsei Shnaider (Russian émigré to Canada); (3) Seabeco Kirigizstan/ Conim Investment AG: Sanjarbek Almatov (citizen of Bishkek, FSU/ Kirgizstan), Toursounbek Tchynguychev (citizen of Bishkek, FSU/Kirgizstan), Evsei Shnaider (Russian émigré to Canada); (4) BNB Trading AG: Yuri Spivak (Russian émigré to Canada; (5) Seabeco Metals AG: Alex Shnaider (Russian émigré to Canada).

[42] Charles Clover, "Ukraine: Questions over Kuchma's adviser cast shadows," FT, October 30, 1999, available at See also Misha Glenny, 2009. McMafia: A Journey Through the Global Criminal Underworld. (New York: Vintage Books), 63-65.

[43] Charles Clover, "Ukraine: Questions over Kuchma's adviser cast shadows," FT, October 30, 1999, available at .

[44] See FBI, Organizational Intelligence Unit (August 1998), "Semion Mogilevich Organization: Eurasian Organized Crime," available at

[45] Charles Clover, "Ukraine: Questions over Kuchma's adviser cast shadows," FT, October 30, 1999, available at

[46] Charles Clover, "Ukraine: Questions over Kuchma's adviser cast shadows," FT, October 30, 1999, available at .

[47] Toronto Star, Aug 28, 1993 “Boris knows everyone,”

[48] See Zurich corporate registry for "Seabeco Metals AG" (CH-, formed 4/3/92 and liquidated 6/11/96.




[52] See Kaupthing Bank, "Loan Book, September 2008," wikileaks:,_26_Sep_2008

[53]The Panama Papers database provides an address for “Midland Resources Holding Limited" ( that exactly matches the company's corporate address in Guernsey, as noted by Bloomberg's corporate data base. Here are the 28 companies that are associated with Midland in database:  

Aligory Business Ltd.,;

Anglesey Business Ltd.,;

Blue Industrial Skies Inc.,;  

Cl 850 Aviation Holdings Ltd.,;

Cl 850 Aircraft Investments Ltd.,;

Caray Business Inc.,;

Challenger Aircraft Company Limited,;

Colley International Marketing S.A.,;

East International Realty Ltd.,;

Filbert Pacific Limited,;

Gorlane Business Inc.,;

Jabar Incorporated,;

Jervois Holdings Inc.( ,

Kerryhill Investments Corp.,;

Leaterby International Investments Corp.,

Maddocks Equities Ltd.,(,

Maverfin Holding Inc.(,

Midland Maritime Holding Ltd.(,

Midland River-Sea Holding Ltd. (,

Midland Drybulk Holding Ltd.(,

Midland Fundco Ltd. (,

Norson Investments Corp.(,

Olave Equities Limited,;;

Orlion Business Incorporated,

Perseus Global Inc.,;

Sellana Investments Global Corp.,

Stogan Assets Incorporated,

Toomish Asset Ltd.,

[54] With the address "11 First Tverskaya-Yamskaya Street; apt. 42; Moscow; Russia.";;;

[55] As for the Midland-related offshore vehicles still listed as active, one shareholder in two of them -- -- Stogan Assets Incorporated and Blue Sky Industries Inc. -- happens to have the same name as Russia’s Deputy Culture Minister Gregory Pirumov, reportedly arrested in March 2016 on embezzlement charges. The “Gregory Pirumov” in the Panama Papers ( has a registered address in Moscow (4 Beregkovskaia Quay; 121059), as do the reported agents of these two companies: "Global Secretary Services Ltd. Mal. Tolmachevskiy pereulok 10 Office No.3 Moscow, Russia 119017 Attention: Katya Skupova)." See A "Georgy Pirumov" is also listed separately in the Panama Papers as having been a shareholder in the same two companies (; For what it is worth, in September 2016, one "Georgy Pirumov" was convicted in Moscow of "illegally taking over a building in Gogolevsky Boulevard," and sentenced to 20 months in a minimum-security correctional facility. See The Investigative Committee of the Russian Federation, Sept 15, 2016, At this point, however, we need to emphasize that there is still plenty that needs to be investigated -- we cannot yet confirm whether "Georgy" and "Gregory" are the same person, whether they are related, how they might be related to Shnaider's Mineral Resources, or whether they are the same people named in the articles just noted above about criminal prosecutions.


[57] See Schwyz canton corporate registry,, ""ME Moldova Enterprises AG," CH-

[58] See Zurich corporate registry,, "ME Moldova Enterprises AG," CH- (11/10/92-9/16/94).

[59] See "Seabeco Group Inc.," Panama Corporate Registry # 254192,, formed 12-6-1991.

[60] See "Seabeco Security Intl Inc." Panama Corporate Registry #254206, formed 12-10-1991,"

[61] Ibid, footnotes 58 and 59.


[63] See


[65] See

[66] A.K.A. "Tochtachunov." See FBI, Organizational Intelligence Unit (August 1998), "Semion Mogilevich Organization: Eurasian Organized Crime," available at, 1.

[67]According to the Panama Papers, as of December 2016, Lytton Ventures Inc., incorporated in 2006, was still an active company but its registration jurisdiction was listed as "unknown." See

[68] For Telesh’s company the director’s name is given as “Stanley Williams,” as compared with “Stanley Edward Williams” in Golubchik’s, but they have the same address. See Telesh’s company, Barlow Investing, was incorporated in 2004. In the PP database, as of December 2016 its status was “Transferred Out,” although its de-registration date and registration jurisdiction are unknown.

[69] Westix Ltd., registered in 2005, is still active, according to the Panama Papers. See

[70] In the Panama Papers, Telesh’s company and Golubchik’s reportedly have the same director, one Stanley Williams. Williams is also reportedly a director of Westix, which shares its address with two other offshore companies that use corporate names that Mogilevich has reportedly used at least twice each in the past. Arbat Capital, registered in 2003, was still active as of December 2016, as was Arigon Overseas, registered in 2007.

[71] See the diagram below.

[72]These three offshore companies are not in the Panama Papers data base. Firtash acknowledged these connections to Telesh but still told FT reporters that he didn’t know her. The three companies identified in the report are (1) Highrock Holdings, which Firtash and Telesh each reportedly owned 1/3rd of, and where Firtash served as director beginning in 2001; (2) Agatheas Holdings, where Firtash apparently replaced Telesh as director in 2003; and (3) Elmstad Trading, a Cyprus company owned by Firtash which in 2002 transferred the shares of a Russian company named Rinvey to Telesh and two other people: one of them Firtash’s lawyer and the other the wife of a reputed Mogilevich business partner. See also

[73] On Mogilevich, see, for example,

[74] See also FBI, Organizational Intelligence Unit (August 1998), "Semion Mogilevich Organization; Eurasian Organized Crime," available at


[76] See;

[77]David Cay Johnston, interview with the author, November 2016. Wayne Barrett, Trump: The Greatest Show on Earth: The Deals, the Downfall, the Reinvention (Regan Arts, 2016).

[78]Johnston, interview; see also [78] In another interesting coincidence, the President of YBM Magnex was also reportedly a financial director of Highrock in the late 1990s, before Manafort-client Dmytro Firtash joined the company as a director in 2001. See note 151.





January 7, 2017 at 11:37 PM | Permalink | Comments (0)

Friday, August 01, 2014

Understanding Argentina's Pseudo-Debt Crisis


ImagesFor those who are interested in Argentina's recent troubles with the debt vultures, here is Chapter VII from my book The Blood Bankers. (New York: Basic Books, 2005).  

No important political or economic event can be Images-6 understood without an historical analysis.  

This chapter provides the essential historical background  that you need to understand where Argentina's current crisis came from, and its "debt problem" is so deep-rooted. 


Griesa_thomas.jpg_1328648940 Images-7Here are a few of my recent TV and newspaper interviews on the subject: (1),  (2), and (3). And here is the 2012 US Court of Appeals decision that upheld US Federal District Court Judge Thomas P. Griesa's 2011 rulings in favor of the vulture funds. 

Download USCOURTS-ca2-12-00916-0.pdf
More later!  Stay tuned! 

August 1, 2014 at 05:30 PM | Permalink | Comments (0)

Friday, February 28, 2014

The Real Wolves of Wall Street

Please click on this image to get a real sense

of what "too big to jail" is all about: CorpCrimes

February 28, 2014 at 09:59 PM | Permalink | Comments (0)

Wednesday, January 18, 2012

24 Hour Blackout, In Opposition to SOPA and PIPA "Closed Internet" Legislation




January 18, 2012 at 01:38 AM | Permalink | Comments (0)

Wednesday, August 04, 2010

A Modest Proposal for Improving Global Tax Justice NOW
James S. Henry


(Note: The following article also recently appeared in Forbes.)

How can we get the world's wealthiest scoundrels – arms dealers, dictators, drug barons, tax evaders – to help us pay for the soaring costs of deficits, disaster relief, climate change, and development?

Simple: levy a modest withholding tax on untaxed private offshore loot

Many above-ground economies around the world are struggling, but Fatrich the global economic underground is booming. By my estimate, there's $15 to $20 trillion of private wealth sitting offshore in bank accounts, brokerage accounts, and hedge fund portfolios, completely untaxed.

Money_laundering Much of this offshore wealth derives from capital flight and the proceeds of past and present tax evasion. Another key source is crime. At least a third comes from developing countries -- more than their outstanding foreign debt.   This wealth is incredible concentrated. Nearly half of it is owned by 91,000 people -- 0.001% of the world's population.  Ninety percent is owned by the planet's wealthiest 10 million people.

146082857v8_225x225_Front Let's tax it. The pile of offshore anonymous loot is now large enough so that even a very modest 0.5% global withholding tax would yield at least $50 to $100 billion a year.

This "global scofflaw tax" could be used to help pay our own staggering unpaid bills for debt service, retirement insurance, and heath care, as well as the developing world's bills for disaster relief and climate change.

By reducing incentives for capital flight and tax evasion, a tax on illicit, anonymous wealth would also help countries to depend less heavily on debt, inflationary finance, and regressive taxes.

Is it feasible?   Yes. The majority of these assets are managed Alg_ubs by the top 50 global banks. As of September 2009, these banks accounted for $8.1 trillion of all offshore assets under management -- 72% of the offshore industry's total. The top 10 banks manage 40 percent.

Images-1 In other words, the real "tax haven" problem is not tiny island havens on the periphery of the system. The real problem is the global "pirate banking" industry, with an assist by the best lawyers, accountants, and lobbyists money can buy. At its core are the world's true tax havens: institutions like JPMorganChase, UBS, Credit Suisse, Citigroup, Morgan Stanley, HSBC, Deutsche Bank, Barclay's, Bank of America, BNP Paribas, Pictet & Cie, Goldman Sachs, and ABN Amro. They are all based, not in picturesque principalities or remote tropical paradises, but in New York, London, Amsterdam, Zurich, Geneva, Frankfurt, Hong Kong, and Singapore.  They fall firmly under the jurisdiction of First World government agencies.3253574971_c8494b57aa_o

Capital may be "mobile," but it rarely travels without an escort. For  decades these institutions have operated "Capital Flight Air," recruiting clients and teaching them how to hide wealth offshore, launder it, and access it remotely.

Now they are going to help us tax it.

Images-3 These highly-visible institutions should be required to withhold a 0827wyly modest 0.5% tax, prorated each quarter, on the value of their clients' assets – which they already track on a daily basis. The proceeds could be turned over to First World tax authorities, with a disproportionate share dedicated to development aid.

Only anonymous wealth should be taxed. If the beneficial owners can show they're paying taxes on their offshore assets back home, they can claim rebates. Most will just pay up.

Images Over time, we can continue to chip away at "tax havens," trying to make the world's 80-odd havens less secret while helping developing countries enforce their own tax codes.Images-2

But that's a long war. The haven system has taken decades to build,  and it will probably take decades to dismantle. Right now there's something simple that OECD countries can do to collect badly-needed revenue from the world's wealthiest crooks – no questions asked.

August 4, 2010 at 05:28 PM | Permalink | Comments (0)

Thursday, May 06, 2010

Part III: "Jokers to My Right"
James S. Henry

Well, la gente Americano may not know the difference between a synthetic CDO and a snow shovel,  but the masses are clearly frothing for a  taste of banquero al la brasa, fresh from the spit.

"Financial reform," whatever that means, is now far more popular than "health care reform."  And it has only recently  become even more so, in the wake of all the recent investigations and prosecutions -- Warren Buffett  might say "persecutions" -- of the "demon bank" Goldman Sachs.     

Evidently the masses' appetite for banker blood was  only slightly sated by the SEC's April 16th civil charges against Goldman, Senator Levin's  11-hour show-trial  of senior Goldman officials on April  27, and the "entirely coincidental"  announcement on April 30th that the US Justice Department --   which is under  strong political pressure  to bring more fraud cases to trial, but also tends to screw them up -- has launched a criminal investigation into Goldman's mortgage trading.


In the wake of this populist uprising, Senate Republicans have suddenly adopted "financial reform" as their cause too,  allowing the Senate to commence debate this week on Senator Dodd's 1600-page reform bill. 

However, this promises to be a lengthy process.  While reform proponents like US PIRG and Americans for Financial Reform were hoping for final action as early as this week,  Senator Reid  now  expects to have a Senate bill by Memorial Day at the earliest, and Obama only expects to be able to sign a bill by September. 

That's just two months ahead of the fall 2010 elections, so there's not much room for error.  But the beleaguered Democrats may just be figuring  that they'd rather bash banks than run on their rather mixed track record on health care reformunemployment, climate change,  and offshore drilling, let alone -- Wodin forbid --  immigration reform.     

In any case,  Senator Dodd's  bill has now been through more permutations than a Greek budget forecast.  The latest one  discards the $50 billion bank restructuring fund as well as new reporting requirements  that would helped to spot abusive lending practices.

These concessions apparently were part of retiring Senator Chris Dodd's Grail-like quest for that elusive 60th (Republican) vote -- rumored to be hidden away and  guarded by an ancient secret order known as "Maine Republicans."  


Meanwhile, behind the scenes, leading Republicans, aided by several Democrats from big-bank states like New York, California, and Illinois, and countless lobbyists,  have been trying to weaken other key provisions in the bill, which was already pretty tame to begin with. 

The most important  measures at issue pertain to derivatives and proprietary trading, the power of the new Consumer Financial Products Bureau (especially, according to Senator Shelby, the Federal Reserve's shameless power grab over orthodontists),  the regulation of large "non-banks,"  and (interestingly, from a states' rights perspective)  the power of states to preempt federal regulation. 

On the other hand,  the bill has also inspired dozens of amendments  from a cross-section of Senators who appear to be genuinely concerned  -- even apart from the opportunities for grandstanding  -- that the Dodd bill isn't nearly hard-hitting enough.

Some of these amendments are purely populist anger-management devices that don't really have much to do with preventing future financial crises. 

These include Senator Sanders' proposals to revive usury laws and audit the Federal Reserve, a proposal by Senators Barbara Boxer and Jim Webb  for a one-time  surtax on bank bonuses, Senator Mark Udall's proposal for free credit reports, and Senator Tom Harkin's proposal to cap ATM fees.

The very first amendment adopted was also in this performative utterance  category: Senator Barbara Boxer's bold declaration that "no taxpayer funds shall be used" to prevent the liquidation of any financial company in "receivership." 

Cynics were quick to point out that in any real banking crisis, this kind of broad promise would be unenforceable, since it would also be among the very first measures to be repealed. 


Other proposed amendments sound like more serious attempts at structural reform.

These include  the Brown-Kaufman amendment that tries to limit the number of "too big to fail" institutions by placing upper limits on the share of system-wide insured deposits and other liabilities held by any one bank holding company, and the Merkley-Levin amendment, which  attempts to  "ban" proprietary trading and hedge fund investments by US banks, and also  defines tougher fiduciary standards for market-makers.  

But so far neither of these measures has received the imprimatur of the Senate Banking Committee, let alone Senator  Reid.  This means that for all practical purposes they are may amount to escape valves for venting popular steam,  but little more. 

This is especially true, given the delayed schedule that Reid, Dodd, and the Obama Administration seem to have accepted, which will relieve the pressure for such reforms.

Furthermore,  upon closer inspection, both proposals leave much to be desired.  Indeed, one gets the distinct impression that they dreamed up by Hill staffers on the midnight shift to appease the  latest  cause célèbre,

For example, the Brown-Kaufman amendment,   highly touted by  chic  liberal "banking experts" like Simon Johnson, doesn't mandate the seizure and breakup of any particular large-scale financial institutions directly.  Nor does empower the FTC to set tougher standards for competition in this industry, as it might have done, or even specify what kind of industry structure would be desirable from the standpoint of avoiding banking crises. 

To a large extent that simply reflects the paucity of knowledge about the relationship between structure and behavior in financial services. As a bootstrap, the amendment  specifies arbitrary caps on bank activities that may or may not be related to actual misbehavior -- for example, the share of "insured deposits" managed by any one bank holding company (≤ 10%), and the ratio of "non-deposit liabilities to US GDP" (≤ 2%).

This has arbitrary consequences. Under the limits in the amendment,  for example, Wells Fargo and Citigroup, the # 4 and #1 banks in the country by asset size, would  nearly avoid any breakup, while JPMorgan and BankAmerica would feel much more pressure. 

Meanwhile, evil Goldman Sachs' minimal .3% shares under both limits would leave it plenty of room to grow -- perhaps even by acquiring the extra share that the "Big Four" would have to spin off.

Furthermore,  even the largest US institutions might be able to avoid  the caps by devoting more attention to  large-scale private banking customers, whose deposits and other investments would avoid these regulations,  or by conducting more of their risky business through offshore banking centers.

Indeed, this also suggests a key problem with the Merkley-Levin amendment as well: it is a  US  solo act. It  completely ignores the fact that  even our largest banks, and the US financial system as a whole, are part  of a competitive global financial market.

As  this week's Greco-European financial crisis has underscored, to be effective,  bank regulation and structural reform must be conducted on a coordinated international basis. Unilateral initiatives only drive bad behavior to the myriad of under-regulated offshore and onshore financial centers.

From this perspective, I'm  surprised that  Senator Levin,  a long-time critic of offshore financial centers, has proceed in such a ham-handed way  with this.  This  was his year to finally round up global support to crack down on offshore centers -- a precondition for effective global bank regulation.  Instead he decided to  target Goldman and pursue this wayward, sloppy attempt  at unilateral reform -- as if  the Isle of Man, Guernsey, Jersey, Bermuda, and the Cayman Islands, let alone London and Zurich and Singapore and Hong Kong, are not waiting in the wings. 


If we step back from this political goat rodeo, what have we learned about the political economy of financiali reform?  No of Banks and Staff 1992-2010 label


First, as shown in the above chart, the US banking industry has indeed undergone a major structural transformation, especially December 1992. The following 15 years became the era of Wild West banking, when all the lessons that should have been learned from the Third World debt crisis were forgotten.  It became an era of rampant deregulation, rising US public and private debt levels, and asset speculation.

The impacts on financial structure were far reaching and rapid. Back in December 1992,  there were more than 13,500 banks, and the top four US banks accounted for less than 10 percent of the sector's jobs. 

Already by 1998, there was a decided increase in this concentration level, to more than 20 percent.  Today there are fewer than 8000 banks. The top 4 alone  -- Citigroup, JPMorganChase, Bank of America, and Wells Fargo -- now employ more than 800,000 people, over 40 percent of the US total. Indeed, together with the failed banks they acquired, the top four banks have accounted for almost all the sector's employment growth;  the rest of the sector has shrunk.

Tiny Goldman has also been growing, but it now only accounts for about 18,900, less than 10 percent of any one of the top four.  


This growing concentration is also reflected in most key US banking markets, especially the markets for deposits, overall bank loans, real estate loans in general, home mortgages, and credit derivatives. As indicated, in each of these markets, the market share commanded by top four banks  has increased from less than 10 percent in 1992 to 40-50 percent or more by 2010. In the case of the credit derivatives market, the share now approaches 90 percent.

Nor has this increasing concentration been accounted for by superior performance. Indeed, the "big four" also now account for more than 78 percent of all bad home mortgages -- behind in payments, or suspended entirely. While some of that is accounted for by the acquisition of failing institutions, most of it is not.  GoldmanMktShare 


Third, once again, for the sake of Goldman bashers in the audience, as indicated above, its share of each of these key market indicators is trivial. Even in credit derivatives, the segment for which Goldman has taken such a beating, its market share today is just 8 percent, compared to the "Big Four's" commanding 88 percent. And Goldman's share of real estate loans, home loans, insured and uninsured bank deposits, and bad home mortgages are even lower.

Just to pick one example: today the "top 4" banks have more than $204 billion of bad home loans, compared with Goldman's $0.0 of such loans.  

From this standpoint, the Levin hearings were a stellar example of  completely ignoring industry economics. They singled out a smaller,  more successful,  widely-envied target for political scapegoating, while ignoring the much more economically  much more important financial giants. 


The  key driver on the domestic side of all these developments is a political-economy complex that in the long run has had perhaps as profound an influence on our nation's political and economic system as the  legendary "military industrial" complex.  This is  what we've called (in the first chart above) the "US mortgage-industrial complex," including financial institutions, real estate firms, and insurance companies. From 1992 to 2010, in comparable $2010, this industry spent an average of $2793 per day per US Senator and Congressman on federal campaign contributions and lobbying -- far more than the corresponding levels in the 1970s and 1980s.  

Except for the insurance industry -- where health care reform efforts by Clinton and Obama tilted the giving -- Democrats and Republicans have more or less divided this kitty pretty evenly. It is also important to note that more than 71 percent of total federal spending by these industries  from 1990 to 2010  was on lobbyists, not campaign contributions. While  cases like the recent Citizens United decision may affect this balance,


Furthermore, within the financial services industry, the top four US  banks alone have accounted for at least 20 percent of all spending on federal lobbying and campaign contributions (in comparable $2010) from 1992 to 2010. Investment banks as a group -- including Goldman, Lehman Brothers, Bear Stearns, Morgan Stanley, UBS, Credit Suisse, and their key predecessors, especially Paine Webber and Dean Witter -- added another 8 percent.   But once again, by comparison, and contrary to its reputation as the premier political operator in Washington,   Goldman Sach's share of total "real" spending on lobbying and contributions was relatively small -- just 2.2 percent. 

This was just 40 percent of what Citigroup spent, and less than 60 percent of what JPMorganChase spent during  this same period.  

C'mon guys -- Is it any really wonder that Jamie Dimon gets invited to the Obama White House for dinner while Lloyd Blankfein gets served for dinner on a spit up on the Hill?  


Ironically,  if it were just a question of a given institution's loyalty to the Democratic Party, Goldman -- and indeed Lehman Brothers and Bear Stearns as well -- would have clearly had the inside edge. As shown below,  these investment firms clearly preferred Democrats over the long haul. FedContribbyPartyandDonor
Ironically, to paraphrase Senator Levin, especially in Goldman's case the Democratic Party appears at least so far to have "put its own interests and profits" first, basically turning a blind eye  -- at least so far -- to the substantially much larger potential misbehavior of the "big four."

Meanwhile, when President Obama traveled to New York two weeks ago to give a speech on the urgent need for financial reform, the peripatetic Mr. Dimon could be found in Chicago.  He was rumored to have met with CME and/or Board of Trade executives to prepare to invest in an exciting new "derivatives exchange," should JPMorgan need to transfer its substantial share of that business -- several times Goldman's market share, even in credit derivatives -- to an open exchange. 


So all this concentration of political and economic power in US financial markets would appear to make a strong prima facie case for a serious structural reform, perhaps even along the lines of the Brown-Kaufman amendment,  n'est pas?  Unfortunately, no.

As we argued earlier, that amendment sets very crude targets that bear little immediate relationship to bank misbehavior or even political influence. At worst, the caps might just force bad behavior like risky derivatives and hedge fund investing offshore. And the bill's  current caps would, at best, just force banks like Cit, JPM, and BankAmerica to shed less than 10 percent of their market shares, setting them back to -- say -- 2005 levels.

In other words, they're not a substitute for effective regulation. But that puts us back in the chicken-egg problem with "regulatory capture."

My own particular solution to these dilemmas is suggested by the following chart -- although it also suggests MarketCAPTOPBANKS2010
that the most opportune time to implement it has already come and gone.  In terms of the current  banal  American political  discourse,   it would be probably be  quickly dismissed as  'socialist,"  although that term is such a catch-all that it has really become virtually useless, except as a device for red-baiting timid liberals.  


So don't take my word for it; let's ask the ghost of Chile's General Pinochet, whom I'm quite certain no one ever accused of being a "socialist," at least not to his face. For years he was best known among economists as one of the key political proponents of Milton Friedman's so-called "Chicago School" of ultra-free market economics.  But in February 1983, during a severe crisis when all the banks in Chile failed, Pinochet showed that he could be quite pragmatic -- with a little arm-twisting from from leading US banks, which threatened to cut off his trade lines if he didn't nationalize the banks' debts.

So, after swearing up and down that private debts and private banks would never be nationalized, Pinochet's government did so. Three to six years later, after restructuring the banks and cleaning them up,  and privatizing their substantial investments in other companies, they were sold back to the Chilean people and the private sector -- for a nice profit. (Similar policies were also followed by "socialist" Sweden in the case of a 1990s banking crisis, but the Pinochet example provides a more instructive example for so-called conservatives. Much earlier, General Douglas MacArthur, a lifelong Republican,  also employed similar pragmatic tactics in restructuring Japanese banks in the early 1950s.) 

Now this is the plan that the US Treasury (under Paulson and then Geithner) might have adopted in the Fall 2008 - Spring 2010, if only it had not been so hide-bound -- and in the case of the Obama Administration, so wary of being termed a "socialist." 

In hindsight, the economics of such a pragmatic temporary government takeover and reprivatization would have been compelling. At its market low in March 2009, the  combined "market cap" of the "big four" banks was just $120 billion -- including $5 billion for Citi and $15 billion for Bank of American.  This was a mere fraction of the capital and loans that were ultimately provided to them. (At that point Goldman's market cap had fallen to $37 billion from $80 billion a year earlier -- not as steep a decline as the giants, but clearly no picnic for its shareholders, either.)

Only a year later, while the "demon bank" Goldman has recovered to more or less where it was in June 2008, before the crisis, the market cap of the "top four"  US banks is now nearly six times higher than its low in March 2009, and, indeed, at an all time high -- well above both previous peaks.

Too bad the US taxpayers have only captured a small fraction of that $500 billion industry gain.

Too bad the US Treasury hasn't exercized strong "socialist" control over these institutions, changing the way they behavior directly, and restructuring them in the interests of the economy as a whole before selling them back to the private sector.

Too bad that "big four" lobbyists are now back in force on the ground in Washington DC, influencing the fine print of the "financial reform" bill in ways that we will probably only understand years hence. Despite its woes, undoubtedly this will be a bumper year for political spending by the  financial services industry.  

Of course, President Obama  IS now being widely demonized as a "socialist"  -- anyway.


(c)JSH, SubmergingMarkets, 2010





May 6, 2010 at 02:10 AM | Permalink | Comments (0) | TrackBack

Tuesday, April 27, 2010

Part II: "The Crucible"
James S. Henry

Salem Whatever the ultimate legal merits of the SEC's case against Goldman Sachs -- and those appear to me to be questionable at best --  6a00d83455f15269e20133ecfd9a4b970b-580wi its most important contributions are being made right now. They are not judicial, but political. 

'Lord knows I've been about as critical as one can possibly be of Wall Street banks, as well as of unfettered free marktets. (See, for example, a, b, and c.)

However, after listing to today's  showdown hearings before  US Senator Carl M. Levin's Permanent Investigations Subcommittee,  I'm convinced that:

(1) If anyone needs the benefit of the new "financial literacy" program proposed  by S.3217, Senator Dodd's proposed financial reform bill, it is the US Senate. Many  members of the Senate -- and by extension, the House -- don't  seem to understand very basic things about  the structure and role of private capital markets, finance, and business economics, let alone global competition. In the world's largest capitalist economy, this level of ignorance  on behalf of our political elite is really mind-boggling.

Blankfein2 (2) After 18 months of intensive investigation, the US Senate's Permanent Subcommittee on Investigations  and the SEC have not so far been able to find anything that is clearly illegal to pin on Goldman Sachs.

(3) On the other hand, on the secondary trading side of Goldman's  business, Goldman traders  clearly have "market maker" ethics, not investment adviser ethics. They've grown accustomed simply to  providing market liquidity for whatever securities clients  happen to want -- or can be persuaded to want, even if Goldman is taking opposite positions at the very same time in the very same securities. 

For example, regardless of what Goldman's own sales people  felt about the terrible quality of the synthetic Goldmanlevinshorts CDOs they were selling in 2007  -- including many securities packaged out of  "stated income" mortgages --  they continued to sell anything for which there was a current price.  

Goldman's trader culture simply  doesn't  buy the notion that market makers  have any "duty to serve the best interests of their clients. In competitive world, this amoral culture may well be essential to being a successful "market  maker,"  and Goldman is one of the most successful secondary traders in the world  However, if we expect some higher standard of behavior toward clients, this is likely to require new rules; Goldman will never get there on its own.

Of course, in a highly competitive global market,  any such rnew ules might just cause  this entire business to move offshore, to London, Hong Kong, Singapore, or any number of other offshore financial centers.

Tourre2 (4) With great respect to Michael Lewis, the notion that Goldman Sachs engaged in a hugely profitable "big short" in 2007-2008, in the sense of secretly betting systematically against the same securities that it was underwriting for its clients, is easily overstated. Goldman's investment portfolio in mortgage securities turned negative in early 2007,  was net short all year long in 2007, and at times had up to $13 billion of gross shorts, the bank's net profits from all this shorting that year was $500 mllion to $1 billion. The following year, 2008, its mortgage portfolio lost $1.8 billion 

(5) There appears to be enormous pent-up rage and ressentiment in the country at large, right now, driven by the financial crisis, the slow recovery, high unemployment, and the loss of homes and pensions, on the one hand, and the widespread perception that banks not only created the crisis, but have also profited immensely from it.  Most people may not know a CDO from a dustpan, but there is a very disturbing tendency to seek scapegoats, dividing the world into villains and victims. Ironically,  the most obvious targets include companies like Goldman Sachs, one of our most successful, better-managed, if trader-ridden  companies.

(6) Compared to other major US banks, Goldman Sachs' role in the credit derivatives market, the mortgage Levin market, and bank lending in general, as well as in the roots of the most recent crisis, was minor at best. Indeed, compared with the more than $240 billion of past due/non-performing mortgage loans now on the books of the "big four" banks,  the sums involved even in Goldman's most questionable deals were trivial. Why the US Senate and the SEC decided to focus so heavily on Goldman, as compared with Citi, Bank of America, JP Morgan, and Wells Fargo, is an interesting political-economic puzzle.  

(7) On the other hand, these other major  private banks, plus Lehman  Brothers and Bear Stearns, were by far the largest players in the private mortgage market. If they  had followed Goldman's risk management, accounting, disclosure, and leverage practices, the worst of this crisis might well have been avoided.  Indeed, it appears that one reason these generally much larger firms did not adopt such practices was because -- unlike Goldman -- they genuinely believed they were "too big to fail."  

(8) Going forward, the real problem with Goldman market was not, by and large,  illegal behavior, but an excess of perfectly legal behavior that may well be socially unproductive and way under-regulated.  Especially in a world where other countries have fallen behind in the move to  update their financial regulations, dealing with this problem will require much more than lawsuits and investigative hearings.  


Images Today's hearings probably came as close to fireworks  as investment banking and "structured finance"  ever gets.  In one corner there was 6a00d83455f15269e20134802d29fd970c-580wi Goldman Sach's slightly shaken,  but still-unbent  CEO Lloyd C. Blankfein (Harvard '75/ HLS '78).


There was also Blankfein's articulate, amiable  life-time Goldman employee David Viniar  (HBS '80); the now-notorious, side-lined 31-year old Goldman VP Fabrice P. (aka "fabulous Fab") Tourre (Stanford M.S. '01),  architect of the particular "synthetic CDO" at the heart of the SEC case;  and several other  past and present stars from the "devil bank's" specialists in mortgage banking.  

Apparently not pressent was Goldman's President and COO,  Gary D. Cohn (American U, 'whenever)  (aka "Aeolus,"). Perhaps he had flown to Athens to arrange more  cosmetic "dirty debt swaps"  for Greece,   

Article-0-092B46B6000005DC-273_233x423Ring-side support for the Goldman front line  was  provided by a hand-picked team of  very high-priced trainer/coaches.  This included former Democratic House Speaker Richard Gephardt,  former Reagan Chief of Staff Ken Duberst225px-Gary_D._Cohn_-_World_Economic_Forum_Annual_Meeting_Davos_2010ein, and Janice O'Connell (aka "Puerta Giratoria"), a former key aid to Senator Dodd.

 Senator Dodd, the retiring Chair of the Senate Banking Committee, has been working since November on  S.3217, an epic 1600-page bill that Senate Republicans (with perhaps a little help from Fed staffers who opposed the bill) have  just prevented from coming to a vote

Of course Goldman has also hired Obama's own former chief counsel Gregory Craig as a key member of its defense team.


Once taken seriously as a "liberal" Democratic Presidential candidate, Gephardt has gone the way of all flesh, and is now  completely preoccupied with serving such worthy clients as Peabody Energy, the world's largest private coal company; NAPEO, an association of "professional employer organizations" that is trying to dis-intermediate what little remains of labor rights for outsourced workers; UnitedHealthCare, a stalwart opponent of the "public option" in health care reform; and of coursImages-2e, Goldman Sachs, which has also employed the  prosaic Missourian to pitch the (really insidious) idea of "infrastructure privatization"  all over the country to cash-strapped state and local governments.


In the other corner is the aging  heavyweight champion from Michigan. Senator Levin (Harvard Law '59), is a Carl_enron low-key but tenacious warrior, with a mean-right hook; Goldman would do well not to underestimate him.   He's a  veteran critic, investigator, and opponent  of  global financial chicanery, dirty banks, and tax havens -- except perhaps when it comes to GM's captive leasing shells and re-insurance companies in the Cayman Islands and Bermuda (Heh, even a Dem's  gotta eat!)  

Sen. Levin is backed up by several knowledgeable, tough cross-examiners, especially Democratic Sen. Kaufman of Delaware and Republican Senator Collins of Maine. On the other hand, Republican Senators McCain and Sen Tom Coburn  were a bit more  "understanding" of Goldman's basic amoral attitude toward market-making. 


In handicapping this contest, some observers predicted that the best and brightest from our nation's leading  investment bank  would basically roll over the "old folks" from the Senate.

Panel In the first few hours, however, it quickly became clear that the bankers were a little under-prepared for the Senators' often-times impatient, hard-nosed tone, especially from former Prosecutor Levin, Collins, and Kaufman.

Nor were they prepared for the widespread, if perhaps naive and even "Midwestern" view  that there was just something fundamentally wrong with the lines Goldman drew between pure "market-making" and providing investment advice.


For example, Sen. Levin  was a real rat terrier  on the question  of whether it was ethical for Goldman market-makers in 2007 to  be aggressively pushing clients like Bear Stearns  to buy a CDO security called "Timberwolf" that Goldman's own internal analysts had called  "shitty."  Meanwhile, Goldman's ABS group was shorting Bear by buying puts.  The panel of five present or former Goldman executives had trouble recognizing that there was any problem at all -- given the fact that, from a legal standpoint, Goldman had fully informed these clients about the risks they were taking.

For another $2 billion "Hudson" CLevin2DO deal that Goldman sold from its inventory, the firm's own sales people characterized the product as "junk," and indicated that more sophisticated customers might not buy it.  Yet, according to Senator Levin,  Goldman's selling documents for a portion of the sale characterized  the deal as one where Goldman's interests and the client's interests were "aligned" because Goldman retained an equity interest in the Hudson package. In Senator Levin's view, this  "retention" was misleading, simply because Goldman took time to sell down its position.

On the question of the Abacus transaction at the core of the SEC law suit,  Sen. Levin was able to establish that the  Goldman's  Tourre never told the German bank that invested in the deal that  John Paulson, the hedge fund manager who helped choose the portfolio, although he claimed to have told portfolio selection manager ACA.  Oddly enough, from what we heard about other "raw deals" today for the first time, this now appears to have been perhaps the weakest deal for SEC to attack.

Similarly, Senator Collins pressed a group of Goldman securities "market-makers"  very hard about whether  or not they felt they had a "duty" to work in the "best interests of their clients." The responses she received indicated that these Goldman executives, while insisting on the organization's high ethical standards, also simply "did not get" the point that there might be some higher ethical, let alone legal,  duties to clients, for pure market makers, beyond just providing them with legally-required disclosure.


Senator Levin claimed that these hearings have been in the works for more than a year. He says that it is just sheer coincidence that they are occurring soon after the SEC decided to file its case by a narrow 3-2 party lines vote, and right when Senator Dodd's reform bill just happens to be on the verge of being introduced. 

Other sources indicate that Levin's investigation had been scheduled to continue through May, and that it was abruptly rescheduled after the SEC vote.

Furthermore, for someone who is supposedly holding hearings to gather facts and find out what was really went on,  Senator Levin had already formed quite a few strong opinions prior to hearing from any witnesses -Anti_banker_small- as shown in his latest press release.  

 But so what?  Even if  he's was a little simplistic, filled with anti-bank animus, and eager to portray the financial crisis as a kind of morality play,  and even if there's no big payoff other than the theatrics, it was definitely kind of fun to  watch the "show trial" -- finally  see someone  asking  big bankers tough questions under oath.  After all,  regardless of what  "caused" the financial crisis and its interminable aftermath,  it is pretty clear who is paying for it -- and it is certainly  was neither these Senators nor the bankers in the dock. 

( Stay tuned for Part III, which takes a closer look the Goldman Sachs case in light of these hearings, and consider the broader question of other "big bank" roles in the crisis.)


(c) JSHenry, SubmergingMarkets (2010)

April 27, 2010 at 07:35 AM | Permalink | Comments (1)

Thursday, April 22, 2010

Part I: "Clowns to the Left of Me"
James S. Henry

Article PDF

Goldman Defense PDF

Monty_python_witch Bankers_1294271c Well, we no longer have to worry only about corrupt bankers in Kyrgystan. Ever since the Goldman Sachs case erupted last week,  there's been plenty of fresh banker blood in the water right here at home, with scores of financial pundits, professors-cum-prosecutors, and political piranha swirling around the wounded giants in the banking industry as if they were a herd of cattle crossing a tributary on the upper Rio Negro.

This feeding frenzy was precipitated by last Friday's surprising SEC announcement of civil fraud chargesKillerfish against Goldman Sachs -- heretofore by far the most profitable, highly-respected, and, indeed, public-spirited US investment bank.     

Despite6a00d8341c652b53ef0120a8704c30970b-120wi -- or more likely because of --  Goldman Sach's  relatively clean track record and  illustrious credentials, many commentators  have assumed a certain Madame Defarge pose, reigning  down  censure and derision from the penultimate rungs of their  mobile moral pedestals. 

Over the weekend, for example,  Huffington  featured a  half dozen vituperative columns on the subject, including  a Vanity Fair contributing editor's feverish claim that the whole affair was somehow deeply connected to one high-level Wall Street marriage, and an MSNBC host's denunciation of Goldman 356323163v_225x225_Front_padToSquare-truefor refusing to appear on his show -- his show ! There was also a plea from Madame Ariana for criminal charges.

In fact, this is a case where, as we'll see in Part III, the SEC's civil charges against Goldman Sachs are not only highly debatable, but largely beside the point.  

Kuttner Meanwhile, Bob Kuttner,  another Huffy perennial, and one of our most prolific popularizers of conventional liberal dogma, asserted  that Goldman demonstrates conclusively that Wall Street en tout  is nothing but an on-going criminal enterprise, up to its eyeballs in outright fraud

In a lurch toward financial Ludditism, Bob figuratively placed his hands on his hips, stomped his feet,  and demanded nothing less than a "radical simplification of the financial system" -- leaving it to the reader's imagination to determine just what the hell that means. 

Will we still be permitted to use ATMs, checking accounts and paper currency, or  will we all soon have to return to  wampum beads and n-party barter?    56

Elsewhere, the Daily Beast published a de facto job application  from Harvard Law's Prof. Alan Dershowitz -- otherwise well known in the legal profession as "He whose key clients are either fabulously wealthy or innocent."  

Prof. Dershowitz argues -- quite rightly -- that Goldman'  behavior, while no doubt morally reprehensible, was also by no means clearly illegal. On the other hand, he also says the law is so vague that hedge fund investor Paulson might even be charged with conspiracy to commit fraud.

Well, ok -- except for the article's faint suggestion that for a modest  fee, our country's  finest criminal lawyer may just be available to help explain all  this to a judge --  and also to argue that  "only a tiny fraction of investment bankers who abuse their clients actually commit murder."  


0506-fmi_m_0 Finally, there is the omni-present, virtually unavoidable  Simon Johnson, a Peterson Institute Fellow, MIT B-school prof, book author, "public intellectual,"  and  "contributing business editor" at Huffington.

This week has been  Prof. Johnson's heure de gloire, and he is living it to the fullest.

All week long he could be found at all hours on nearly every cable  news channel and web site, pitching his own increasingly Puritanical, if not neo-Manichean views of the banking crisis and Goldman's role in it.

At first,  Prof. Johnson merely expressed delight that the US had finally reached its "Pecora moment" --   referring to the 1933-34 US Senate investigation of Wall Street that, indeed, makes the modest $8 million  Angelides Commission look like a California '68 love-in.

But by mid-week he'd had moved on to a much harsher assessment.

Not only is Goldman guilty as sin, but  hedge fund investor John Paulson,Newalqaida one of the key parties to the Goldman transaction, deserves to be "banned for life" from the securities industry.  If necessary, Johnson says, the US Congress should even  pass an ex post facto bill of attainder!

Piranha-eat-cows-1 Now of course Prof. Johnson hails from the UK.

He may therefore not be aware that the US Constitution (Article 1, Section 9) has explicitly prohibited both ex post facto laws and bills of attainder (legislative decrees that punish  a single individual or group without trial) ever since 1788.

Just this month, a US federal  district court in New York struck down Congressional sanctions that singled out ACORN, the community organizing group on precisely these grounds. The case is now on appeal.

Indeed, even in the UK, there have been no bills of attainder since 1798


Despite Prof. Johnson's limited grasp of US or even UK law, and his Draconian appetites, I've  actually grown rather fond  of him lately -- or at least more understanding.

This is partly because since he left the IMF in September 2008, he's apparently had a kind of  road-to-Damacus epiphany.

He now realizes, as if for the first time, the enormous carnage that has been inflicted by a comparative handful of giant global banks, as well as  the huge potential rewards  of  decrying these outrages from the roof tops.

356509241v_225x225_Front_padToSquare-true One of only nine "former IMF Chief Economists" who still walk amongst us,  Prof. Johnson may have only served in that post briefly,  from March 2007 until September 2008. 

But that 1+ year was more than enough  time for him to leave a lasting impression at the IMF. 

He is still fondly remembered at the IMF not only for  having entirely missed the 2007-08 mortgage crisis even as it was unfolding, but also  for deciding in July 2008,     less than 3 months before the entire global financial system nearly 356322446v_225x225_Front_padToSquare-true collapsed, to sharply increase the IMF's growth forecast for both 2008 and 2009. 

That was  just one month before the otherwise-feckless Bush SEC initiated the 18-month investigation of Goldman Sachs that  ultimately led  to last week's charges. 

If and when the Goldman Sachs case ever comes to trial, therefore, it may be interesting for Goldman's attorneys --   perhaps Prof. Dershowitz -- to consider calling Prof. Johnson as a witness for the defense.

After all, he probably qualifies  as an expert on the heart-rending experience of just how difficult it was even for highly-trained experts to have clear peripheral vision, much less perfect foresight, back in the heady days of the real estate boom.

John-Paulson He may also be able to instruct the jury on the fine arts of concealing what one really believes  in order to reconcile the divergent interests of multiple clients. 

In Prof. Johnson's case, these included IMF senior management,  executive directors, and a myriad of country officials who were all pressuring the IMF to inflate its forecasts back in 2008,  just as housing markets and financial markets were beginning to crumble.

In July 2008, on Prof. Johnson's watch,  they temporarily prevailed.

From this angle, the IMF Chief Economist's role might even be compared to that of a certain young Goldman Sachs VP. 


Even in the dark days ahead, therefore,  Goldman Sachs execs have at least a few consolations.

First, they can remind themselves that there were very damn few heroes in this sordid tale -- journalists, politicians,  public intellectuals, and economists included. 

Indeed,  Brooklyn-born investor John Paulson may turn out to have been, if not quite a "hero," at least  one of the few relatively  straightforward and consistent players in the lot.  

At least in his own investing, he consistently opposed the systematic distortions about the housing miracle and  the exaggerate  forecasts --  dare one say frauds? -- that institutions the US Treasury, the Federal Reserve, and Prof. Johnson's own IMF employed in the final stage of the real estate bubble, in a failed attempt to achieve a 'soft landing.'  

Second, while it may be hard for us to imagine,  things might actually have turned out a whole lot worse. 

Goldman Sachs might well have relied on Prof. Johnson's sophisticated, bullish forecasts rather than on  John Paulson's intuitive short-side skepticism. 

How much money would Goldman's clients, investors, and the rest of us have lost then?


© JSH, SubmergingMarkets, 2010.

April 22, 2010 at 06:43 AM | Permalink | Comments (3)

Tuesday, March 09, 2010


Why Doesn't Obama Support This Very Modest Progressive Tax?
Just Guess Who Opposes It!
James S. Henry

While we wait patiently for any signs whatsoever of progressive change in America, progress is still being made, deo gratis, elsewhere. Of course this is no thanks to the banker-minded Spartans who still occupy the Trojan Horse that is become the US Treasury Department.

Today the European Parliament adopted a resolution supporting the kind of global financial transactions tax that is discussed in the extraordinary performance by Bill Nighy below. For more information about the European action, please follow this link.

NGOs like Tax Justice Network International, Oxfam GB, Global Financial Integrity, Action Aid, New Rules, Christian Aid have all been working hard to support this proposal. They could use your active involvement and support -- right now.

As the Puritan minister Stephan Marshall once said in a sermon addressed to Parliament in 1641, "You have great works to do, the planting of a new heaven and a new earth among us, and great works have great enemies."

(If for some odd reason the video does not appear below, please travel here to get it.)

March 9, 2010 at 10:21 PM | Permalink | Comments (1)

Tuesday, November 10, 2009

True Unemployment: 20% and Still Rising
Send Geithner Home to Wall Street!
His Legacy: 30+ MM Underemployed, Failed Stimulus, No Bank Reform, Soaring Deficits, Sinking $$
James S. Henry

Reservearmyjsh112009 Geithner2 With official US unemployment now at 10.2 percent,  the third highest among the 29 OECD countries,  and unofficial unemployment at least two times  higher, more than 30 million American workers and their families are now being forcefully reminded  every day that "the reserve army of the unemployed" is not just pure Marxist rhetoric.  

While China and most developing countries are already recovering nicely from this First World-made debt crisis, all indications are that US unemployment is still rising, and that we will soon see a new postwar record -- -- two years after the "Great Recession," the longest and deepest since the 1930s,  began in December 2007. 


To get the real unemployment picture, we need to adjust the official statistics upwards. First, as the Bureau of Labor Statistics' own data shows, the "official" rate leaves out many workers who are (a) underemployed, working only part time when they'd prefer full time jobs (9.3 million now); (b) fully unemployed,  and desirous of jobs, but not counted in the official statistics because they've given up look (2.3 to 5.6 million). Allowing for these two adjustments already boosts "underemployment" to the 17.5% figure cited in some recent press reports.

But even that figure is too low.  First,  it omits the country's 20 million "self-employed" (incorporated and unincorporated), a growing share of the labor force. All  are counted as "employed" in the official statistics, no matter how underutilized they are. Yet other surveys report that this group is also experiencing serious underemployment.

Furthermore, the official statistics also leave out  about 1.6 million who are now serving in the military, plus the record 2.33 million  US prison inmate population. Both populations are heavily young, male,  and undereducated, and would therefore experience relatively high unemployment. This is especially important for the sake of historical comparability  -- say, for comparisons with the 1930s, when the US military  and the prison populations were both tiny. 

In addition, of course, when the Great Recession started there were at least 8 to 10 million undocumented workers in the US, none of whom appear in the official statistics. Whatever we think of illegal immigration, the fact is that most of these workers have not been able to return to their homelands, and are still here, quietly suffering through this recession. Indeed, to the extent that they are unable to draw on unemployment benefits and other social programs to cushion the blow, they are being forced to compete with the rest of us more fiercely than ever.

All told, therefore, as shown in the adjacent chart (click to pop up), this makes the "real" US unemployment in October 2009 at least 20 percent or more -- twice the official rate.


One might have expected this historic jobs crisis to have provoked a quick, decisive response from Washington  Unfortunately, American workers have also recently been reminded that, disturbingly, the Democratic Party can simply no longer be counted Picture-141on to put labor's interests ahead of capital's. 

This was evident to some of us when Obama's first stimulus package was being designed -- given that it was loaded up with so many Christmas goodies for special interests and so many regressive tax cuts. 

But by now it should be clear to anyone but the most bullet-headed diehard party ideologues.

Whatever else Obama's February 2009 stimulus package has accomplished, it simply hasn't created nearly enough new jobs, fast enough.

Codepinkfiregeithner-1 Nor has it provided nearly enough aid to debt-ridden homeowners --  as the continued record-setting pace of home foreclosures and bankruptcies testifies.

These basic policy shortcomings are not due to some Herbert Hoover or Ronald Reagan.  While Obama obviously inherited a mess, by now enough time has passed that his administration has become responsible for  its continuation.

How high does unemployment have to go for the Obama Administration to actually  want to do something more about it?

When FDR took office in March 1933, unemployment stood at nearly 25 percent of the labor force, and heFigure5.4 immediately took decisive action to make sure that unemployment was reduced, by establishing targeted federal job creation programs, attacking anti-competitive practices by large banks and corporations, and making sure debt relief got through to small businesses, farmers, and homeowners. 

What is it about the character of the Obama Administration that has made its response so different?


As we've argued for some time (See "The Pseudo Stimulus," The Nation, February 3, 2009, and "Too Big Not to Fail," The Nation, February 23, 2009),  one basic problem seems to be that Obama's Administration, unlike FDR's, has been overly dependent from the get-go on pro-Wall Street insider/ fifth columnists, captained by the Supreme "Jimmy Do-little"/  Andrew Mellon of the period,  Treasury Secretary Timothy Geithner. 

Not only has Geithner  been far too slow to recognize that the first stimulus was woefully inadequate.

Unemployment-line-nyc-depression Time and again, he and his x Goldman groupies at Treasury have also piled out of the Trojan horse to defend traditional Wall Street prerogatives. They have:

  • ☛Opposed serious restrictions on executive compensation and perks for senior bank staff that are unrelated to performance;
  • ☛Opposed  clawbacks or windfall profits taxes on the hundreds of millions in stock options  granted by bailed-out banks last spring;
☛Opposed serious debt relief for homeowners, and failed to strengthen the loan modification program introduced last spring, even after it had clearly failed;

☛Failed to fight hard for "cram-down" legislation that would have required banks to accelerate loan Unemployment-1modifications;

☛Opposed   the establishment of a new independent consumer protection agency for financial products; 

☛Opposed forcing banks that have accepted US aid to accelerate lending to small business and homeowners;

☛Opposed proposals for a "Tobin tax" on financial transactions, as suggested by the UK and France, as a way of financing climate change aid;

☛Opposed G20 proposals to clean up a wide variety of tax haven abuses by major bank and companies around the globe;

☛Failed to achieve any serious reforms whatsoever  of financial regulation, more than a year after the crisis;

☛Failed to get anywhere with the vaunted "toxic asset buyback" program;

☛Insisted that any reforms leave the ultimate regulatory authority in the hands of the US Federal Reserve  -- an anti-democratic, pro-Wall Street institution if ever there was one, whose policy errors  have contributed significantly to this costly crisis. 


Of course at this stage, with US budget deficits at a postwar high, and controversial measures like health care reform, climate change, Afghanistan, and immigration still in stuck in traffic, plus a mid-term Congressional election fast approaching,  it may well be too late for the Obama Administration to propose a second stimulus. If this were going to happen, it  would have needed Treasury and White House leadership already. 

Geitherobama1 It is not too late, however, for Obama to send a signal that he actually holds his own senior executives accountable.

Secretary Geithner, I'm told, already has multiple job offers from at least a half a dozen leading banks and hedge funds, so he will only profit from this exit  -- which he probably anticipated all along. 

By clearing the decks and bringing in a fresh team with some new, more progressive ideas,  more daring-do, and independence, this could  help prevent Obama from repeating Jimmy Carter's sad, rapid one-term involution. 

In any case, when the history of the Obama Administration is written, it is worth remembering that at least a few progressives warned about all this very early  --  the risks of adopting a "pseudo-stimulus," failing to aid small debtors and businesses, and failing to exert strong control over the banks.

Ultimately, that may be one of the biggest costs of this crisis --  the lost opportunity to show that Democrats really are still capable of providing the country with outstanding, disinterested economic leadership in times of crisis. 

(c) SubmergingMarkets, 2009

November 10, 2009 at 01:35 AM | Permalink | Comments (2)

Monday, November 02, 2009


Wild Protests in Geneva, Vaduz, and Guernsey
James S. Henry


"Delaware Named As Better Place to Hide Money Than Switzerland"

"Delaware Beats Switzerland As Most Secretive Financial Center"

"Delaware Most Opaque Haven, Switzerland Third."

(Geneva) Thousands of angry private bankers from SwitzerlandLiechtenstein, and the Channel Islands have taken to the streets to denounce Delaware's official designation as the world's worst "financial secrecy center" by the heretofore-renowned international critic of tax havens, TJN International.

"Surely this is one contest that we deserved to win," said a leading Geneva private banker. "We feel like Ist-imf3 Chicago after the Olympics selection."

A Guernsey banker echoed his sentiments. "I smell a rat. Just because the US VP is from Delaware, the fix must have been in. Our assets have been flowing out since 2005. Now we know where they've gone."

"Wilmington.  Who'd' a thunk it?"

For the past few years jurisdictions like Switzerland,  Liechtenstein, and the Channel Islands  have indeed been competing vigorously for the prize of the "world's worst haven."

Riot3 According to Dubios Pictet von Hentsch, another  long-time Swiss banker, "I don't know what they want from us. We have tried everything -- including  having many senior bankers from our largest banks get indicted and convicted for helping thousands of wealthy foreigners evade taxes!

"This was supposed to be OUR YEAR!"

"We've also been laundering all those smarmy Euros  for decades! This is the thanks we get?  Meh!  " 

"What's happened to "pay-for-performance" in financial services?"

A Vaduz-based private banker from BIL, the legendary Liechtenstein private money-laundering bank owned by the Crown Prince's family, also expressed shock and dismay.

"We're just a tiny developing country (even if we do happen to have the world's highest per capita income.) How's our Crown Prince supposed to feel after this? After all our efforts to help wealthy foreigners all over the planet evade taxes over the last decade, we lose to...Wilmington? Meh!"

"All the really dirty money has been flowing to an even tinier, more obscure place than we are:  this place Wilmington_Delaware_aerial_view called  WilmingtonAnd we didn't even know about it. We are obviously a little embarrassed." 

"Personally Dirty+Money+V.5(DJ+RPM)I've never been to Wilmington. But I am dying to go there now. Are there any direct flights?"

 A Singapore banker commented, "Wilmington?  Uh, where is that, exactly?  Surely If its number one, it must be packed with non-doms, wealthy sheiks, fancy hotels and shops, and of course lots and lots of ultra-ancient, ultra-discrete private banks, law firms, and accounting firms." 

"How is the skiing and the diving, by the way? Not good? Meh!"

Other sources confirm that  until it was disclosed by TJN,  Wilmington's  role in global financial chicanery was  one of the world's best kept secrets. 

"Apparently all the truly sophisticated dirty money goes there," said a Panama lawyer.

 "It's a facade-- purposefully understated, if you will."

"Of course we had all heard rumors. But now  that it has been officially2008031817roubiniDentro_20080319 confirmed by TJN,  it must be true."


 "I tell you,  you  Americans are something else.  For years you have been pointing the fingers at the rest of us, while secretly preparing this bid. 

Now it turns out to be you who are the real winners. Meh!"

A Luxembourg private banker commented: "We got the third highest per capita incomes in the world and these peons  in Wilmington wanna piece of our pie!! " 


The Luxembourg private banker agreed to expand a bit on why he thinks the first prize for Wilmington is just so unfair.

"Ok, sure, yeah, everybody has known for some time that First World countries like the US, the UK, Switzerland, Austria, the Netherlands, and Luxembourg  are the world's largest ultimate havens -- at least since that book Banqueros Y Lavadolares (1996) laid out the whole story.  Foreign money has been  flowing out of higher-tax places and developing countries for decades. 

Images-1 "Part of it is just natural risk-diversification. For example, what moron wants to keep all his hard-earned shekels in a place like Mexico? The place is a cesspool of corruption, on the front lines of the drug wars, with lots of kidnappings, and the courts for sale to the highest bidder.  You wanna keep all your money there or pay taxes to a government like that?  Knock yourself out."

"But  it isn't just a question of diversifying away from country risk, because that doesn't explain why all the money gets invested in FIRST WORLD banks. 

We First World havens also worked really hard  to become the world's top laundromats, so the money would come here."  


"First of all,  we got the tax laws right, hiring the best lawyers on the planet to design them to attract capital flight and tax evasion, as well as any criminal proceeds that happen to come along for the ride. 

None of these rich countries wealthy foreign investors on, say,  the interest income they get from, say, bank deposits at UBS or HSBC or Citigroup,  or our 200 offshore banks in Luxembourg.  And sure we'll respond if the US Department of Justice comes a callin'."

"But we sure as hell don't report this income to, say, the Mexican IRS.

"So all the wealthy foreigners from developing countries investing in First World banks?"

"There are no big customers secrets!  The banks know who they are! 

"We have to. They are all our private banking clients!"  

"So Angel Gurria can keep his lousy foreign accounts in New York and Geneva, we ain't gonna tell 37577175DSC_0672a-200 nobody." 

You see -- even if the US IRS knew the "beneficial owners" of every offshore account in Luxembourg, and New York, and London, and Wilmington, the income these owners earn isn't taxable here. And under the rules we've set,  no  First World government is going to turn over this information to some no-count Third World country Hey, there's big bucks at stake! "

"It isn't  about "secrecy," my friend.  It's about tax laws and the people who write them. Or at least that's what we always thought -- until now!"


Number two,  we build a vast global pirate banking industry.  We put together  top fifty most powerful First World Banks, law firms, and accounting firms in the world, and unleashed them on the developing world, where most of this  

"Who do you think made all these tax and banking laws, Elwin?  Did they just sorta pop up?"

"Naw, this haven stuff is a big business.

Robert-rubin "So our  lobbyists went to work and designed all these  tax laws, plus the banking laws that accomodated them.  If  we don't get it done with lobbyists, we  get a Treasury Secretary or two -- likeForeclosure-Phil-Gramm28may08 Robert Rubin, who came from Goldman Sachs and went back to work at Citigroup, or former US Senator Phil Gramm, who was Chairman of the Senate Banking Committee for five years before he left the Senate to become Vice Chairman of UBS.

"Understand one thing:   the City of London, Geneva, Zurich, and New York City would barely exist without this offshore banking/ investments businesses. Naturally Singapore and Hong Kong and Dubai now want a piece of action."


"You see, my friend -- that's why we're so troubled by Wilmington's victory here.

Bush-SPY-ON-YOU We don't understand how all the pure "corporate secrecy" in the world has anything necessarily at all to do with being an outstanding tax haven -- or the flip side, with taking money out of poor countries and keeping it outside, tax free. Or with "tax justice."

"We always thought: we take care of the tax laws and have an aggressive private banking industry, then  we will win."

"Since  the banks and hedge funds know who their clients are anyway, the government could always order them to cough the info up, whether or not there's a single "secret" beneficiary anywhere.

On the other hand, you could have all the most perfect information on beneficial owners in the world, and if you can't get First World governments to either (a)  tax foreigners on their investments or (b) share the information with developing countries, it won't matter. "


"But now, according to this index,  it isn't enough for us havens not to tax foreigners. It isn't enough for us to have the world's most aggressive private bankers."

"Now we gotta get down and  compete with Wilmington Delaware on all the 14 technical/legal factors in this stupid index!  You look closely at this fancy index,  which took two years to complete. 

"You find, for example, that  Luxembourg lost first place to Delaware just because Delaware corporate law allows redomiciliation and ours doesn't?  

"What private banking client ever heard of redomiciliation in Delaware? Of redomiciliation anywhere? Tax rates? Sure. Information exchange? Sure. Great private banking services? Absolutely.  Redomiciliation??

Are you shitting me?"

"Any corporate lawyer worth his salt knows you can accomplish the same thing in lots of other ways."But now that CNN is talking about it, you're gonna have every two bit crook in the world running around saying "Redom....redom....Nah nah nah-nah nah...You ain't got it, we're heading to Wilmington!"

Who are they working for, the Delaware Secretary of State?" 


Meanwhile, in Wilmington, the town's 72,000 residents woke up this morning to discover that the world had literally shifted under their feet.

"Our cover has finally been blown," said one local banker. "I'm not sureMoney-launderer_medium this is a prize we wanted to win. Certainly it comes as a huge surprise to most of our community -- except for the tiny, carefully selected group that have been in on the secret. "

"The VP was not one of them, so we think he's in the clear. Hopefully."

"TJN really knows their stuff. I think they even sent a small squad of undercover investigators here last summer -- a group of Brits, mainly.

 "We immediately suspected them of being up to something, but we didn't know until now just how much sleuthing they were doing. We thought they were here for the nightlife, the boys and girls. It never pays to try and fool those folks."

"After all, after having had a hand in the design of offshore havens in Anguilla, Antigua, Aruba, Bahamas, Barbados, Barbuda, Belize, Bermuda, BVI, the Cayman Islands, the Cook Islands, Cyprus, Gilbraltar,  Guernsey, Hong Kong, the Isle of Man, Malaysia, Mauritius, Nauru, Niue, St. Kitts,  St. Lucia, St. Vincent, Singapore, the Turks and Caicos, and the UAE, they really know a good haven when they see one."

Electiondayinfreetown "Naturally our heart goes out to all the other secretive financial centers in the world. It's never fun to go to bed one night thinking you were number one,  and discover that some tiny town thAlg_bidenat no one has heard of has beaten you to a pulp."

"The downside?  Well, it'll probably be much harder to be a secretive financial  center, obviously.  And now we'll have all those smarmy Euros, plus a lot of Florida cosmetic surgeons  coming here with their bags of cash. Meh!"

"Personally I'm already thinking about moving to Wyoming." 

(c) JSH 2009

November 2, 2009 at 07:24 PM | Permalink | Comments (0)

Monday, October 26, 2009


Global Wealth Inequality (2007-08 Average)
James S. Henry and Brent Blackwelder
(Click chart)

Globaldistoffshore200809 Res Ipsa Loquitur.

October 26, 2009 at 01:44 PM | Permalink | Comments (0)

Friday, October 02, 2009

Pittsburgh's State of Siege

Suppressiing Dissent With High-Priced Cop Toys

James S. Henry
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3953363973_bdf039ae20 Studentinjury2

You didn't hear much about it from any major US news organizations, but there was a very disturbing case of gratuitous police-led violence and intimidation at the G20 Summit in Pittsburgh on September 23rd-25th, 2009. Perhaps the only consolation is that it allowed those of us who were there to get a close look at some of the disturbing "brave new world:  technologies for anti-democratic crowd control. These were initially developed by the US military to fight terrorists on the high seas and abroad, in places like Afghanistan, Somalia, and Iraq, but are now coming home to roost.  Indeed, ironically enough, this is one of the few remaining global growth industries where the US is still the undisputed world leader, as we'll see below.

Police2 One local newspaper account described  the events at the Pittsburgh G20  as a "clash" between the police, protesters, and college students. 

Indeed, a handful of storefronts were reportedly broken on Thursday September 24 by a  few unknown vandals. 

However, based on our own visit to the summit,  interviews with several students and other eye witnesses,  and a careful review of the significant amount of video footage that is available online, the only real "clash"  that occurred in Pittsburgh on September 23-25, 2009, was between lawless policing and the Bill of Rights. 

The most aggressive large-scale policing abuses occurred from 9 pm to 11:30 pm on Friday September 25th near Schenley Park, in the middle of the University of Pittsburgh campus. This was miles away from the downtown area where the G20 had met, and, in any case, it was hours after the G20 had ended.

This particular case of aggressive policing -- "Hammer and Anvil," as the operation was described on police scanners -- was clearly not just a matter of a few "bad apples." 

Rather, it appears to have been part of a willful, highly-organized, one-sided, rather  high-tech experiment or training exercise in very aggressive crowd control by nothing less than a really scary uniformed mob.

New York police sometimes describe their firemen counterparts, tongue in cheek, as "robbers with boots." In this case we have no hesitation at all in describing this uniformed mob in Pittsburgh as "assailants with badges."

Their actions resulted in the unlawful suppression of the civil rights of  hundreds of otherwise-peaceful students who were just "hanging out with their friends on a Friday night in Oakland," or attending a free jazz/blues concert in Schenley Park. 

Essentially they got trapped in a cyclone of conflicting and inconsistent police directives to "leave the area." The result was nearly 200 arrests, gassings, beatings, and the deployment of dogs and rubber bullets against dozens of innocent people.

In addition to the students,  this aggressive policing also assaulted the civil rights of a small number of relatively-peaceful protesters and quite a few ordinary Pittsburgh residents, most of whom were as innocent as bystanders can possibly be these days. 

Why did this occur?  In addition to whatever top-down "experiment" or training action was being conducted there appears to have been an extraordinary amojnt of pent-up police frustration and anger.  For example, one student overheard a policeman piling out of a rented Budget van near Schenley Park around 9:50 PM Friday.

The officer was heard to exclaim, "Time to kick some ass!"

This is disturbing, but perhaps not all that surprising. After all, thousands of police had  basically stood around for days in  riot gear, sweltering in the "Indian Summer" heat, dealing with  the tensions associated with potential terrorist attacks as well as all the hassles of managing large-scale protest marches, even if peaceful.There was also the inevitable tensions of social class and culture among police, Guardsman, and college students.

On the other hand, precisely because such tensions are so predictable, those in direct command or higher political office, and, indeed University officials, should have acted forcefully to corral them.


ArrestedstudentposedwithpoliceAll this means that Pittsburgh  has unfortunately now joined the growing list of  cities around the world that have experienced such serious conflicts -- mainly in connection with  economic summits or national political conventions.

The list of summit frays includes this summer's G-8 in Italylast Spring's G20 in London,  the September '08 RNC in Minneapolis,  the '04 RNC in New York City, Miami's Free Trade Area of the Americas Summit (11/03),  Quebec (4/01),  Naples (3/01), Montreal (10/00),  Prague 9/00), Washington D.C. (4/00),  the  November '99 WTO "Battle in Seattle," the J18 in London (6/99), Madrid (10/1994), and Berlin (9/88).

President Obama had  originally selected Pittsburgh for the G20 because he hoped to showcase its recovery  since the 1980s, especially in the last  few years, under a Democratic Mayor, in a Democratic state that he barely carried in the 2008 Presidential contest. 

In seeking to explain such events, therefore, it alway helps to keep a firm eye on the question -- whose interests did really  this serve?

In retrospect, the failure of these leaders to control the police at the G20 has created a serious blemish on the city's reputation for good government. It may have also to some extent undermined Obama’s relations with college students and other activists  who worked so hard for his election in this key state. And it certainly did not help the reputation of the Democratic Party in Pittsburgh or Pensylvania at large.


To journalists like me who happened to have been in Beijing in May 1989, during the buildup to the June 4th massacre in Tiananmen Square,  Pittsburgh also bears an interesting resemblance. The analogy may sound a little strained, but bear with me.  

(1)  As in Beijing, there was a very large deputized police force from all over the country.  These included  over 1000 police "volunteers" (out of 4000 total police and 2500 National Guardsmen) who were ported in just for the G20.

According to the conventional wisdom, not being from the same community is likely to reduce your inhibitions when it comes to macing and kicking the crap out of unarmed, defenseless young people.

The guest policeman also included several hundred police who were under the command of Miami Police 2076 Chief John F. Timoney,  pioneer of the infamous "Miami model" for suppressing protest that was first deployed at the Miami Free Trade Area of the Americas Conference in November 2003. (Here’s the Miami model checklist, most of which was repeated in Pittsburgh.)

As one writer has observed, Timoney, who  also served as Police Chief in Philadelphia,   "(L)iterally transformed the city into a police state war zone with tanks, blockades and “non-lethal” (but severely damaging) artillery."

It is unclear to what extent he played a similar role behind-the-scenes in Pittsburgh this year, but there certainly is a strong sulfurous odor.     Scaredstudents

(2) As in Beijing, In Pittsburgh there were no identifying badges on officers' uniforms, and they also refused to provide any identifying personal information in response to questions. Several photographers also complained about receiving threats and actual damage to their cameras.

(3) As in Beijing, there was simply no  direct contest between the power of the security forces once they mobilized, and those of the unarmed students.   The only kind of victory that the students could possibly have one in both cases was a moral one -- by essentially sacrificing their bodies and their rights to a tidal wave of repression.

Indeed, the "clash" theory of these events looks even odder once we take into account the  fact that on Friday night in Pittsburgh, for example, unarmed students and protesters faced  hundreds of police in full riot gear,  armed for bear with equipped  muzzled attack dogs, gas, smoke canisters, rubber bullets, bean-bag shotguns, pepper pellets, long-range pepper spray,  at least four UH-60 Black Hawk helicopters (courtesty of New York Governor Patterson and his National Guard's 3-142nd Assault Helicopter Battalion unit),  plus several brand new "acoustic cannons" (see below). There were also probably dozens of undercover agents provocateurs -- at least three of whom were actually "outed" by the students. 

The police were also actively monitoring student communications on web sites like Twitter.

 From this angle, a key difference with Bejing  in 1989 was that the Chinese authorities felt genuinely  threatened by the growth of student power and the democracy movement, and feared being ousted,from power.  and  were therefore able to justify their brutality as part of a zero-sum game. In the case of Pittsburgh, whatever police violence occurred was entirely gratuitous.

Police6 (4) As in Beijing, the Pittsburgh police  really liked deploying loud, repetitive warnings, broadcast from sound-trucks -- like the following,  broadcast  repeatedly last Thursday and Friday: 

"I hereby declare this to be an unlawful assembly. I order all those assembled to immediately disburse. You must leave the immediate vicinity. If you remain in this immediate vicinity, you will be in violation of the Pennsylvania crimes code, no matter what your purpose is. You must leave. If you do not disburse, you may be arrested and/or subject to other police action. Other police action may include actual physical removal, the use of riot control agents, and/or less lethal munitions, which could risk of injury to those who remain."

The fact is that this warning was itself completely unlawful.  Putting on the NYCLU lawyer's hat for a moment, absent a "clear and present danger" to the public peace, these threats violated the First Amendment's explicit recognition of right to "peacefully assemble.” 

In effect, the fact is that the police and National Guard in Pittsburgh  temporarily seized control over public streets, parks, and other public spaces, and exercised it arbitrarily.  By the time the victims of these outrageous civil rights infringements have their day in court, the damage will have been long since done.

(5) As in Beijing, the police and military decided  to launch their biggest raid late at nightafter the summit had ended most major mediaPolice11 had gone home, and the courts had closed for the weekend.

Of course, there were no tanks, no real bullets, and no fatalities in Pittsburgh. Unlike the April '09 G20 and the Genoa G8 protests, no civilians died as a direct result of police actions. But the Pittsburgh students who were on the receiving end of all this unprovoked police brutality -- like one who was shot four times in the back and legs with rubber bullets, and another who was gassed and shot in the face -- may be forgiven for wondering just how close they came to emulating their peers in Europe.


Police behavior at all these global summits has evolved over time into a rather high-tech affair that would make Iranian crowd control experts turn  bright green with envy. 

5c6c33b0-9c3f-49e6-8ca5-d5aea8751de5_300 For example,  last week's G20 featured one of the largest US deployments ever against civilian demonstrators of  "LRADS," or acoustic cannons

These sophisticated  "phase array" device s emit a targeted 30-degree beam of 100+decibel  sound that is effective up to several hundred yards, and is potentially very harmful to the human ear. 

LRAD2Manufactured by San Diego's tiny American Technology Corporation (NASDQ: ATCO), the $37,500 so-call "500X" version of the sound cannon that was used in Pittsburg was developed at the behest of the US military, reportedly in response to the USS Cole incident in 2000,  to help the Navy repel hostile forces at sea.

The Pittsburgh units  were apparently  purchased by  local sheriffs' departments across the country with the help of recent grants from the US Department of Homeland Security. Officially the grants have been justtified in the name of improving communications with the public, by permitting clearer voice channels (!), but that's a cover story -- the true purpose is crowd control. ( Roll tape: LRAD-500X_SDCo_Sheriff1).

Other recent ATCO customers include the US Army (for "force protection" in Iraq  and Afghanistan), and  the US Navy and the navies of Japan and Singapore, for communicating with potentially-hostile vessels at sea. 

In 2008 ATCO flogged its wares at the biannual China Police Forum, Asia's largest mart for police security equipment. Obviously China would make a terrific reference customer, since it is one of the global front-runners in the brutal suppression of mass dissent.

ATCO also has a 2007 contract with the US Marine Corps' "Joint Non-Lethal Weapons Program" to develop new, even more powerful weapons, euphemistically branded  "acoustic hailing devices." Saakashvili

Police3 Until recently the most widely-publicized use of LRADS had been against Somali pirates. The devices have also been deployed against "insurgents" by the US military in Fallujah,  by the increasingly-unpopular, anything-but-democratic regime of Mikhail Saakashvili in the Republic of Georgia, and by New York City at the RNC in 2005.

Just two weeks before the Pittsburgh G20,  they turned up  in San Diego, where the Sheriff's Department provoked controversy by stationing them near a Congressional town hall forum -- just in case.

This growing  use of LRADs for domestic crowd control in theSomalis_called_pirates_while_the_West_du US is worrisome, not only because it is a potent anti-civil liberties weapon, because -- just like tasers,  rubber bullets, OC gas, and other so-called "non-lethal but actually just "less lethal" weapons" -- they can cause serious injuries to ears, and perhaps even provoke strokes. 


For all the homeland security technology buffs in the audience, you may rest assured that LRADs are hardly the  only Military potential "less-lethal" free speech-and-assembly killers in the pipeline. 

In the last decade the non-lethal weapons arena has exploded, and the US appears to be  far ahead, assisted by ample  R&D grants and purchase contracts from organizations like the Department of Justice's "National Institute of Justice," DHS's multi-billion dollar Homeland Security Grant Program, the U.S Coast Guard, and the Security Advanced Research Projects Agency, and DOD's Joint Non-Lethal Weapons Directorate (JNLWD) Program

The industry has also been aided by key contractors like ATCO, spearheaded by legendary engineer, inventor, and entrepreneur "Woody" Norris;  and Penn State's Advanced Research Lab -- home of the Institute for Emerging Defense Technologies.   NIJ also works closely with police organizations like PERF, and international organizations like the UK's Home Office Scientific Development Branch.

In the first instance, the development of such non-lethal technologies is usually justified by their potential for providing an alternative to heavier weaponry, thereby reducing civilian casualties in combat situations.

The fact that the US military now has at least 750 military bases around the world, and has also recently  been playing an important "military policing" role in countries like Somalia, Haiti, Bosnia, Iraq, and Afghanistan, underscored DOD's rationale for these technologies.

The problem is that just as in the case of the LRAD,  once developed, it is very difficult to wall such technologies out of the US, or restrict them to "pro-civilian/pro-democratic" uses, like providing clearer amplification for outdoor announcements.  

Even aside from their technical merits, the competitive nature of the global law enforcement equipment industry  virtually insures that every tin-horn US sheriff, as well as every Chinese party boss in Urumqi, will soon have access to these very latest tools in the arsenal for suppressing dissent.  

The ultimate irony, of course, is that the first generation of all  these powerful new free speech suppressors have all been developed,  not by authoritarian China, Iran, Burma or North Korea, but by US,  ostensibly still the leader of the "Free World." 


So what's in store for those who are on the front lines of popular dissent?  We assume that some of the juiciest details are classified. But even a cursory review of public sources reveals that the following new crowd-control technologies may soon be coming to an economic summit near you.  (See this recent UK review for more details.). 

"Area Denial Systems." This is a powerful new "directed-energy" device that generates a precise, targeted beam of "millimeter waves," producing an "intolerable heating sensation on an adversary's skin." 

Under development by the US military since at least the late 1980s, this class of "non-lethal" weapons is now close to field deployment. Its key advantage over LRADs is that it has about ten times the range. Raytheon is already supplying its "Silent Guardian" version of the system to the US Army.

The next step required to bring this product to the police market will be to make it smaller and more mobile. According to this week's New Scientist, a new highly-portable, battery-powered version of the system, called the "Thermal Laser," will soon become available -- though it has yet to show that demonstrate conclusively that it is within the bounds of the UN Binding Protocol on Laser Weapons.

New Riot-Control Chemicals and Delivery Systems.

Subject to the dicey question of whether these new "calmative," drug-like agents are outside the boundaries of the 1993 Chemical Weapons Convention (to which the US and 187 other countries are signatories), these would not irritate their targets, unlike pepper spray or tear gas, but calm them down.

In the words of one DOD/JNLWD research director:  "We need anesthetic agents, that would put everyone to sleep or in a good mood..." Or as the former Marine Corps commander of the program said," "I would like a magic dust that would put everyone in a building to sleep.." Among the delivery mechanisms considered: drinking water, aerosol spray, or rubber bullet. (Apparently the old-fashioned, tried-and-true "light up, inhale, and pass on" method is not a candidate.) The College of Medicine at Penn State's ARL, locGluegunated 135 miles east of Pittsburgh, has been especially active in advocating the advantages of such new chemical weapons.
Unfortunately for it, DOD apparently believes that the CWC and its current regulations prohibit it from funding the developing such magic dust directly, so it is working through DOJ and DOE to do so.

Glue Guns. If all else fails, UK's Home Office reports that another approach to "less- lethal" crowd control weaponry is also making progress -- a gigantic glue gun that sprays at least some 30 feet, bemingling its target audience in one huge adhesive dissident-ball.

Apparently still unsolved is the question of precisely what becomes of all those who are stuck together, or how the police avoid becoming entangled with them. But undoubtedly millions of pounds  are being devoted to solving these issues even as we speak.


I went to Pittsburgh last week on behalf of  Tax Justice Network, a global NGO that is concerned about the harmful impacts that tax havens and dodgy behavior by First World banks, MNCs, lawyers, and accountants are having, especially on developing countries. I was under no illusion that the reforms we   were rather politely advocating would quickly be adopted, but at least we'd  say our piece,  if anyone cared to listen.

I came away with the depressing sense that the G20 summit, like its many predecessors,  was never intended  to be a listening post for independent, outside opinions. But even worse, it had actually become, in practice, an excuse for the criminalization of dissent in capital cities all over the globe, even in those that are nominally the most free,  by way of the vast new security measures that it requires and subsidizes,and the repressive tactics that it legitimized. 

In this day and age, of course,  we are told that almost any amount of security is too little.  And this heightened sense of insecurity  is certainly not aided by having the world's top 20 leaders regularly shuffling from pitstop to pitstop,  trying to conduct the world’s business from a traveling roadshow.

But I was struck by just how unnecessary,  senseless, and counterproductive almost all of the repressive policing tactics deployed in Pittsburgh really were -- how they ran roughshod over many of our  most precious freedoms, freedoms  that we are supposedly trying to protect.   And to what a degree whatever “terrorists” there are out there have already won, by  succeeding in creating a society that is really is often ruled by fear instead of justice, by force instead of discourse.

Rather than, say,  simply allowing the overwhelmingly non-violent demonstrators and students at that peaceful Friday night blues concert  to have their say, instead some 200 people were arrested and scores were gassed, clubbed, rubber-bulleted, and imprinted with galling memories that will last a lifetime. The City of Pittsburgh and its residents will certainly be fighting criminal cases and civil rights law suits for years to come.  I supposed we are meant to be consoled by the fact that, as the New York Times chose to emphasize this week, things are much more repressive in Guinea.

So perhaps it is time to establish a permanent location for all these global summits. Perhaps one of the Caribbean tax havens, like Antigua or St. Kitts, would do -- journalists always like the sun, and after TJN gets done with them, these havens are going to need to find a new calling anyway!  




October 2, 2009 at 08:47 AM | Permalink | Comments (3)

Saturday, February 28, 2009

James S. Henry

(A version of the following story appeared in the Nation on February 23, 2009, here )

3195449564_c57044bb8f_o Even if a global economic recovery still eludes us, has President Obama's new team at least already achieved a stunning turnaround in US economic policy?

Or has the administration just been fighting the last war,paying far too much attention to ancient history, special interests, political correctness, and its own pre-recession agenda, in its programs to stimulate the economy, fix the banks and providing debt relief to homeowners?.

For lifelong students of the Great Depression like Federal Reserve Chairman Ben Bernanke and Larry Summers, it probably seems that Obama's economics team is on track.

In less than a month, Obama has pushed his record $787 billion stimulus bill through a highly partisan Congress. The resulting projected federal deficits will be even larger as a share of of national income than those incurred under FDR, until World War II. At a time when unemployment is rising sharply, this should be good news for the economy--- if the plan is sufficiently stimulating.

On February 10, Treasury Secretary Timothy Geithner announced a bold, if somewhat imprecise, $2.5 trillion program to relieve US banks of dodgy assets once and for all. Combined with trillions in other loans and guarantees from the US Treasury and the Federal Reserve, this is designed to avoid another costly Great Depression-type error, in which scores of banks were allowed to fail and credit markets seized up. If the plan really is expected to work, that should also be good news for the economy.

Herbert_hoover1 Bernanke also concluded from his lengthy studies of the Great Depression that the Federal Reserve had blown it way back then by keeping monetary policy too tight. So ever since last summer he's made the US money supply as loose as loose can be, ballooning the Fed's balance sheet to nearly $1 trillion and driving real interest rates down to zero, while pressuring his counterparts in Europe and Japan to folllow suit.

Obama's team also has emphasized the importance of avoiding the beggar-thy-neighbor "protectionism" of the 1930s--aside from a little "Buy American" language in the stimulus bill and a few remarks from Geithner about China. If loose monetary policy and tighter lips are sufficient for recovery, it should be just around the corner.

Finally, in the course of Obama's drive to pass the stimulus, he traveled to troubled communities in Indiana, Florida and Arizona and heard first-hand that millions of American homeowners and small businesses could use a little financial aid of their own right now. So Obama has committed $275 billion of the remaining TARP/"Financial Stability" funds to this purpose. In principle, this should also be good news for the economy--if we really believe that the plan has what it takes to stem the galloping pace of foreclosures and bankruptcies.

Obama and his team may really believe that their first month in office compares favorably with FDR's in 1933. Historical pitfalls have been avoided, and there has been no shortage of good intentions, optimism and action. The new president has also assembled a team that includes, by its own admission, the nation's brightest economists and its most experienced veterans of the Fed and the Treasury.

Fdr1 But something seems to be missing. During FDR's first few months in office, and well into his second term, he received an overwhelmingly positive response not only from the public at large but also from the stock market, despite the fact that FDR and Wall Street generally detested each other.

In contrast, the reaction of global stock markets and market analysts to Obama's flurry of policy initiatives has been overwhelmingly negative. In the past week alone, since the passage of the stimulus, the announcement of the Geithner plan and the president's new plan for mortgage relief, the stock market has declined more than 10 percent. Indeed, the country's largest banks and auto companies, which were supposed to be the beneficiaries of much of these new programs, are on the brink of bankruptcy.

So what's the problem? Actually there are several problems. The first, as I noted in part one of this series, "The Pseudo Stimulus," there really is much less to Obama's stimulus than meets the eye and far less than will be needed to head off the dramatic increase in unemployment that is fast approaching.

For reasons of political convenience and a desire to move quickly, Obama and his advisors decided to appease a handful of key Republican senators, rather than seize the bully pulpit and rally support around a larger, more direct spending package with more debt relief for homeowners.

Ultimately Obama succeeded in getting just three "moderate" Republican senators and zero HouseFDR12 Republicans to support the package. (Eleven House Democrats also voted against it.) These votes were costly. The final bill ended up slashing almost $40 billion from the package, while boosting the share of tax cuts to nearly 40 percent--including almost half of all relief provided in the critical first year when it is essential to get the downturn under control.

Most macroeconomists still believe that under conditions of excess capacity, tax cuts generate much less employment per dollar of lost revenue than almost any kind of spending, because upper-income types will save the proceeds or use them to pay down debts. Furthermore, many of the tax cuts in Obama's bill are regressive, even allowing for his favorites, "Make Work Pay," the earned income credit and child care credit. This means their impact on jobs will be even more limited.

For example, of $214 billion of individual tax cuts in the first two years, $100 billion will go to the top 20 percent, while the bottom 60 percent gets $81 billion. Indeed, for one of the largest single tax cuts in the bill, the $70 billion reduction in the "alternative minimum tax," 70 percent will go to the top 10 percent, while the bottom 60 percent--including most unemployed workers--get .5 percent. So Obama's vaunted plan relies on this premier-class AMT cut, plus another $100 billion of business tax breaks, for 27 percent of its first two years of "stimulus."

On top of this, Republicans like Arlen Specter also have shown that they give no ground to Democrats when it comes to sausage-making. I won't repeat part one's list of trinkets, except to note that almost all the worst projects survived, and indeed were only enhanced by the solons' scrutiny.

As a former Minnesotan I'm all in favor of free WiFi for each and every one of the nation's two million farmers; I've also recently written here in glowing terms about the merits of government- sponsored research and development and "green housing." But this kind of spending has little to do with putting millions of unemployed people--most of whom are in urban areas--back to work.

All told, at least $200 billion of this stimulus spending, on top of the $200 billion of wasteful tax cuts, is not remotely related to the urgent goal of creating as many jobs as possible in the next twelve to eighteen months. The cause of recovery was hijacked by a weird coalition of environmentalists, energy companies, venture capitalists, public-sector unions, state governors, tax-cut nuts and other special interests.

The stimulus program was supposed to realize Obama's declared goal of saving or creating at least 4 million new jobs by 2012--even then, at the average cost of $200,000 per job. According to the Congressional Budget Office, even that level of job creation would only reduce the US unemployment rate by an average of less than one percentage point a year by 2012, for a cumulative reduction of 2.5 to 3 percent relative to the CBO's projections of what unemployment will look like without the program.

By the time the Senate got through with it, Obama's stimulus became much weaker. So most economists now agree that it will be lucky to create or save even an extra 2.5 million jobs by 2012--about a 1.5 to 2 percentage-point cumulative reduction in the official unemployment rate by 2012, at an average cost to taxpayers of $315,000 per job.

The contrast with FDR's focus on spending programs that really did put people back to work, is striking.


Unemployment Recent trends in unemployment help us to understand just how much work we will have to do to define victory and to see how close we really may come to another Great Depression.

    All the standard measures of unemployment are woefully inadequate, but the shortcomings change with the times. In good times, with tight labor markets, conservative economists find it satisfying to remind us that the degree of "involuntary" unemployment is probably overstated, because workers can afford to game the welfare system--for example, by collecting unemployment insurance while refusing reasonable job offers.

    In hard times like these, however, official unemployment rates seriously understate the degree of slack and hardship in labor markets. For example, in addition to the 13 million people now unemployed (that's 8.5 percent of the labor force) another 7.8 million workers report that they are underemployed; at least 2.1 million to 5.9 million more (none of whom are collecting unemployment) say they're not in the labor force because they've given up looking. By another measure, the peak labor force participation rate, established when labor markets were very tight in 1999 and 2000, shows the potential supply of labor not counted as unemployed is even larger--10.6 million right now.

    All told, this means by now there are already at least 23 million to 33 million American adults who are already experiencing increased unemployment, up from 13 million to 17 million from a year ago. By the end of 2009, as the official unemployment rate passes 10 percent and the other indicators of slack labor markets grow as well, this figure will swell to 40 million American adults--at least 9 million to 18 million more under-utilized workers than we have now.

    A majority of these people have families. Furthermore, the unemployed population constantly turns over, with a median duration of joblessness that now exceeds ten weeks. This means that during the next year, up to one-third of the entire US population will personally encounter someone facing the harsh realities of involuntary unemployment, and perhaps homelessness and poverty as well.

    These figures omit several other kinds of "hidden" unemployment that are not recorded in conventional labor force and unemployment statistics: the 1.44 million people on active duty in the military and the unemployment they would face if and when they return to civilian life; the 2.3 million inmates in federal, state and local prisons, all of whom are omitted from labor force and unemployment statistics; and the estimated 8.1 million undocumented workers in the United States who are in the labor force.

    In many ways undocumented workers are the most vulnerable victims of the crisis. Most support families either abroad or home. Many also have been working hard here for years and have now lost their jobs, without any unemployment insurance, healthcare, rights to Social Security or other benefits. And since Congress has not been able to agree on a decent immigration reform bill, they may not even be able to count on achieving US citizenship, after years of working and waiting. Now they face a hard choice between remaining here, unemployed, or returning to violent, corruption-ridden "Bantustans" in Mexico, Central America, the Philippines and elsewhere.

    It's important to take these factors into account when we consider how this downturn compares with earlier financial crises. Unemployment statistics for the 1930s are difficult to compare with our current situation, given the different statistical procedures employed and the very different demographics in the two eras. But my analysis shows that it is possible that this crisis may turn out to be comparable to the situation in 1933, when unemployment peaked at roughly 25 percent of the US labor force.

    This analysis provides a context for assessing Obama's original goal of creating/saving 3 million to 4 million jobs by 2012. The fact is, even that original goal simply wasn't anywhere close to being ambitious enough--and it certainly won't be met under the sadly compromised final "stimulus" plan. The negative reaction of global stock markets markets to Obama's plans so far appears to confirm this. We're going to have to stop the political games and get serious.


    GEITHNER_001 What about the second leg of Obama's new post-Depression economics policy initiatives, Geithner's plan to inject yet another $2.5 trillion of ("public-private") capital into US banks to get rid of their toxic assets?

    Markets reacted negatively to the plan not because investors necessarily opposed his new toxic asset buyback scheme. Most analysts felt that his long-anticipated statement was long on rhetoric about "stress tests and transparency" but short on digestible content--like being invited to dinner and then served pictures of food.

    Indeed, like his website,, Geithner's plan remains under construction. But critics may have missed the point--this lack of detail actually may be a political necessity. If the American people understood just how high a price the Obama adminstration may be willing to pay simply to keep our country's largest failing private banks private, we might need a few more guards at the Winter Palace.

    Tim Geithner is not a former Wall Street insider in the Paulson/Rubin mold, nor was he ever for a single PeterGeithner day a community organizer. He's an ambitious and cautious policy technocrat, whose lucrative private-sector career and board seats are still in front of him. We'd be hard-pressed to find anyone who, at age 47.5, had already punched more establishment tickets. His grandfather was a Ford Motor executive and Eisenhower adviser; his father is a Ford Foundation officer who raised Tim on three continents. He graduated from Dartmouth and Johns Hopkins, became a consultant for Kissinger Associates, a protégé of Robert Rubin and Larry Summers at Treasury in the 1990s, an IMF policy director in 2001-2003, a Council on Foreign Relations fellow and finally head of the Federal Reserve of New York. As of the end of 2008, he was still a member of the CFR, the Group of Thirty and the Economic Club of New York, organizations not routinely associated with sponsoring deep reforms in post-capitalist economies.

    Geithner has seen his share of banking crises firsthand: Mexico in 1995, when the entire banking system had to be re-nationalized; Thailand, Indonesia and Russia in 1997-98; Argentina in 2001; and now the biggest one of all right here. All of the Third World crises just noted ended badly--costly, poorly-managed fiascos that did nothing to enhance the reputations of the US Treasury and the IMF. But perhaps Geithner was just an apparatchik. He worked closely last year with Hank Paulson and Bernanke on Bear Stearns bailout, the Lehman/Merrill decisions, the AIG takeover and TARP I. So he probably understands full well not only the gory details of program design but also two fundamental political realities.

    The first is that while nationalizing top-tier global banks may be politically acceptable in places like Norway, Sweden, Chile, Iceland, Ireland and even Japan and the UK, it is still viscerally opposed by most members of the power elite in New York and Washington--including most of his former club members.

    The second is that by now, most American taxpayers have simply had it with huge Wall Street bailouts, supine members of Congress, overpaid banker chutzpadiks and high-handed Treasury secretaries. If they were ever asked, there is no way in Naraka that taxpayers would ever approve yet another open-ended injection of public capital into banks--especially one costing three times the entire "stimulus" and three-and-a-half times TARP I.

    So the trick is to not ask them. With bank stocks sinking every day, the credit crunch hampering recovery and high expectations about policy changes, Geithner had to say something. But not too much. The whole subtext of his vague announcement was to finesse the question of precisely where all the money would come from. The hope was that this would buy time to line up private capital, perhaps by negotiating some kind of insurance subsidy that would induce it to participate. The hope was that this would do enough to stem the decline in bank stock prices and redirect attention away from the new "N"-word--nationalization. 


    Fat_cat The public outrage is justified. Since October, more than 360 US banks (out of 8,367) have already received at least $353 billion of TARP I funds from the Treasury. This is by far the largest corporate bailout in US history, more than twenty times the original $17.4 billion auto industry bailout.

    Of this, more than half went to the top fifteen banks in the country. This includes $145 billion of capital injections awarded to Citigroup, Bank of America, JP Morgan and Wells Fargo, the top four US commercial banks; another $10 billion each for Goldman Sachs and Morgan Stanley, two worthy investment banks that decided to become commercial banks to avail themselves of federal aid; and a grand total of $84 billion to the rest of the US banks. There was also $40 billion in capital injections and $113 billion in credit in AIG, the profligate insurance company that sold so many flaky credit derivative swaps to investment banks like Goldman that it pioneered a whole new new "too fraudulent to fail" rule. In addition, by now US banks have also received at least $1.82 trillion of federal loan guarantees and $872 billion in federal loans.

    These sums need to be viewed in the context of the staggering amount of government assistance that has recently been provided to private financial institutions all over the world. By February 2008, by my reckoning, banks and insurance companies have already absorbed at least $817 billion of government capital injections, $251 billion of toxic asset purchases, $2.6 trillion of government loans and $5.9 trillion of government debt guarantees. If we added the guarantees for once quasi-private entities like Fannie Mae and Freddie Mac, the loan guarantees double to $10.9 trillion.

    To put all this in perspective, the 1980s savings and loan crisis cost taxpayers from $150 billion to $300 billlion in comparable 2007 dollars. The 1998-99 Asian banking crisis cost $400 billion. Japan's prolonged banking crisis in the 1990s cost $750 billion. And the total amount of debt relief received by all Third World countries on the $4 trillion of dodgy foreign debt that they incurred from 1970 to 2006 was just $310 billion.

    Those crises are completely over, while this one is still unfolding, so its ultimate cost is still uncertain. Already it is clear that ordinary taxpayers around the world are on the hook for total losses that will easily dwarf all the costs of all these other recent banking crises combined--including $2 trillion to $4 trillion of further bank write-offs beyond the $1 trillion of losses already recognized. Since no government on earth has the surpluses on hand needed to fund such largesse, this means that we will be paying for this bailout one way or another for the rest of our lives, and probably for our children's lives as well, through increased inflation, taxation and reduced government services.

    Never has so much been given to so few by many. Yet despite all this public generosity, much of the US banks' recent behavior been execrable. For example, in December we learned that the US Treasury got preferred securities in exchange for the first $254 billion of TARP funds that, right off the bat, were worth $78 billion less than the funds they received.

    We've also watched with amazement as they've continued to fund corporate jets and other perks, and as several of the largest recipients of TARP funds have paid extravagant bonuses to senior executives for "performance" in 2008--a year when the banking industry contributed mightily to the tanking of the entire global economy. Nor have most banks been forthcoming about what they've actually done with all the TARP money--except to to concede that they haven't done much new net lending. After all, they say, in this economic environment, with regulators suddenly breathing down their necks about leverage and toxic assets, they are not eager to take risks.

    That's all well and good at the micro level, but at the level of the overall economy, we badly need banks to swallow hard and start churning out new loans--and not just to gold-plated borrowers who don't really need the money. Since TARP I funds were not dedicated to new lending, and, indeed, since policy makers like Paulson, Bernanke and (presumably) Geithner decided to leave TARP I's use entirely up to the banks' discretion, this period of extreme largesse and low interest rates has also coincided with tight credit markets--except for well-off corporations and elite borrowers and refinancers, who have actually been the main beneficiaries of Bernanke's low-interest rate policy.

    So while both the Federal Reserve and the Treasury have been busy demonstrating that they have finally taken the lessons of the Great Depression to heart, and have been setting records for generosity and loose lending, at the end of the day they still allowed the private banking system to keep its elephant in the hallway, blocking the road to recovery.

      In the four months since receiving the first TARP Installment, the US banking industry has become a supersized version of the US auto industry--on the verge of bankruptcy, kept afloat by government capital, loans and loan guarantees, with no long-run strategy other than to continue its well-funded lobbying efforts and heavy campaign contributions and to occasionally show up in DC before toothless Congressional committees for well-choreographed rituals of contrition.

      Since October 2008, the net worth of the entire US banking system-- all 8,367 domestic-owned US banks--has declined by $420 billion, to just $540 billion. In other words, TARP was one of the worst investment decisions in corporate history--the banks' net worth has declined by more one dollar of equity value for each additional dollar of TARP funds injected.

      Indeed, the net worth of two of the largest banks in the system, Citigroup and Bank of America, is now around $30 billion, less than half of the $70 billion in government capital that they have received from TARP I, on top of $424 billion of federal loan guarantees. Not only has their own "value added" during this period evidently been negative. For a fraction of the funds we've given these two banks, we could have stopped begging them to clean up their balance sheets, restructure their mortgages, stop wasting money, change their compensation plans and initiate sensible new lending programs. We could have bought a controlling share, hired new management from the droves of idle bankers now out on the street and re-privatized them at a profit for taxpayers in two to three years--just as successful "turnaround nationalization" programs have done again and again in these situations, from Norway to Chile.

      No wonder that growing numbers of critics--not just hard-core lefties and Nobel laureates like Paul Krugman and Joseph Stiglitz but even pragmatic politicians like South Carolina Republican Senator Lindsey Graham--have started to break the taboo and talk explicitly about "nationalization."

      But in an important sense the taboo had really already been shattered by TARP I, last year's expansion of FDIC deposit insurance and all the other new federal loan guarantees for the bank. In effect, these already "nationalized" the banks' debts. Now we're just talking about the other side of the balance sheet, where there might at least be some value, if only under new management.


      Geithner is hardly unaware of this short-term nationalization approach to the credit crunch, or of the Timothy_geithner_reuters success it has in many other markets. But he has apparently rejected it in favor of a much more costly and uncertain route--establishing a public-private bailout fund that will somehow entice the banks to sell off their lousy assets and still have enough equity left to survive as private entities.

      The limitations of this approach are best understood by taking another close look at Citigroup and Bank of America, two of the most troubled institutions in this story. On their most recent balance sheets reported to the FDIC, these two big banks alone accounted for $4.1 trillion of official on-balance-sheet "assets"--mostly loans and federal securities, but also a hefty amount of potentially dodgy mortgage-backed securities and other asset-based securities.

      Right off the bat, therefore, at least by the accounting numbers, these two top banks alone now account for more than 30 percent of all the assets outstanding in the entire US banking industry. Indeed, the top fifteen banks account for over 60 percent. This represents an incredible increase in banking industry concentration since the early 1990s, when Citibank and Bank of America held just 7 percent of all US bank assets, and the top fifteen banks held 21 percent.

      This increase in industry concentration was hardly an accident. It originated in the desires of bank executives to grow, boosting market share, short-term earnings, stock prices and the executive bonuses driven by those metrics. But it also reflected the gloves-off stance that Congress, regulators and antitrust enforcement took toward bank expansion during this period. And that, in turn, was probably related to the more than $1 billion contributed by the financial services industry, their lobbyists and law firms, to politicians of both major parties since 1990, which turned the Senate Banking Committee the House Financial Services Committee and other key Congressional committees, in effect, into wholly owned subsidiaries of the banking industry.

      Now how much might all these assets on the banks' balance sheets actually be worth? There is no active exchange for most bank assets, especially those that are hardest to value in this environment, like mortgage-backed securities. And by law, the banks are permitted to value the assets on their books at "fair market value"--in essence, whatever their accountants tell them they are likely to be worth, given historical experience with loan losses. But the difference between these accounting numbers and today's market value for these assets may be huge--up to half or more of book value. And the banks have a strong incentive to hold on to the loans and hope that things get better, rather than sell them off right now at whatever the market will bear. After all, as soon as they start selling down one loan bundle, they may be required to "mark to market" all similar ones. And the resulting writedowns might well be enough to wipe out all stockholder equity, leading to insolvency.

      03fed4-600 This whole situation is reminescent of the 1980s Third World debt crisis, when banks like Citibank, Morgan and Chase resisted for years the demands of policy makers and developing countries to write down or sell off the billions of overvalued loans on their books--for no other reason than, as one former Chase banker put it, "a rolling loan gathers no loss." Similar behavior occurred during the prolonged Japanese debt crisis of the 1990s, when banks stubbornly resisted the efforts to get them to "mark to market" because several of them realized they would be bankrupt and no longer with us if they did so.

      There's not really much moral culpability here. At ground level, from the standpoint of any individual bank, this behavior is understandable. After all, they have just gone through a period of careless underwriting, and are trying to reduce their loan losses and improve their capital ratios--just like most bank regulators want them to do. The larger banks have balance sheets that are best described as follows: "On the left side (assets), nothing is right; on the right side (deposits and other capital), nothing is left." And since the economy is still slipping at an unpredictable pace all around them, no loan officer is eager to take on more risks. So it is hardly surprising that in the last quarter of 2008, even as the TARP money started to flow, US bank lending suffered its sharpest decline since 1980. It also makes perfect sense for them to resist selling off its loans and securities at what may eventually turn out to have been fire-sale prices.

      While all this may be well and good for bankers, however, for rest of us it means that even after all those trillions in federal bailouts and loan guarantees, the economy is still starved for credit. The fact that major banks as a group continue to sit on all these lousy loans at book value, rather than selling them off and writing them down, means that they don't have much room on their balance sheets and in their capital/asset ratios for new loans. So the credit crunch continues. And banks that we eventually may find out were really insolvent may walk around in a trance for months or even years, like a scene from Night of the Living Dead. We're not talking about restoring the loose lending of the 2005-2007 bubble; we're talking about the essential liquidity needed to keep the wheels from coming off, stimulate demand and stem the decline in housing prices.

        The importance of all this becomes clearer when we take a close look at the composition of Citigroup's and Bank of America's $4.1 trillion of assets outstanding. It turns out that these include $1.3 trillion of real estate loans and mortgage-backed securities (22 percent of the US industry's total), $153 billion of credit card loans (38 percent of the total) and $150 billion of auto loans, student loans and other loans to individuals (25 percent). Clearly all these book values may be severely at risk in the current economic crisis.

        But these potentially troubled categories of assets only add up to about $1.6 trillion; why is Geithner Large_Geithner talking about a $2.5 trillion program? The FDIC's latest statistic a provides a clue. It reveals the dominant role that the country's top banks have also played in issuing derivatives, including not only interest rate and currency swaps, but also in more notorious debt-based over-the-counter derivatives. As of September 2008, JPMorganChase, Citigroup and Bank of America accounted for an incredible 90 percent of $7.9 trillion of these "off-balance sheet" credit derivatives that have been guaranteed by these banks themselves--including $2.6 trillion guaranteed by B of A and Citi. So when Secretary Geithner was talking about running "stress tests"--scenarios for future housing prices, default rates and interest rates--against the balance sheets of particular banks, he was not talking about First Federal of Tuscaloosa or Suffolk County National in Riverhead. They've probably never guaranteed a credit derivative in their lives, much less tucked anything away in some Cayman Island "special purpose vehicle." Clearly, Geithner had his friends on Wall Street in mind.


        In short, we have a choice to make: we can spend perhaps $150 billion to $200 billion buying out the equity of a handful of leading banks that have gotten themselves in this mess and reform them. This would involve taking them over immediately, installing new managers, giving their creditors a haircut, writing down the toxic assets (which the government-owned bank could do without fear of market reactions) and then preparing them for privatization when the market recovers.

        Or we can follow Secretary Geithner's lead, fiddle around for months, throwing trillions more of government capital, loan guarantees and portfolio insurance at the problem, without any guarantee that the resulting cockamamie approach to creating a "public-private" toxic bank will ever work--while the same old troubled institutions are left standing, no longer encumbered by their dodgy assets perhaps, but still encumbered by dodgy managements.

        There are lots of technical issues to be weighed in making this choice. But after reviewing all the objections to the kind of short-term, temporary, partial nationalization, I'm convinced that the most important issues are simply political, a choice between our commitment to a failed, hands-off model of bailouts and banking regulation and decisive, FDR-like action.

        It is precisely because it is so hard to value these dodgy assets at all that we are even having this discussion. Given the absence of competitive markets for the assets, the uncertain environment and their dependence on taxpayer subsidies and insurance, the prices established are intrinsically political. Either they will be set so low that banks will have to take such massive writedowns that their shareholder equity will disappear entirely anyway, or--more likely--the prices or insurance arrangements will be set so that even more taxpayer wealth is transferred to these very same top-tier banks.

        Meanwhile, the whole economy is hostage to this decision. We have no time to waste. We should get on with it, making use of one of the clearest market signals available in this situation--the current value of Citibank and Bank of America shares.

        This argument is not at all anti-market, or necessarily even anti-bank. At their best, private markets, entrepreneurship and innovation are absolutely essential. My real objection is to a very specific kind of bank-dominated political economy. To call this "capitalism" is to have Ayn Rand and Friedrich von Hayek turning somersaults in the crypt. Time and again, this pathological form of pro-bank development has jeopardized the prosperity, stability and innovation of the small businesses, inventors and would-be savers who are the backbone of market economies. Bank-dominated political economies don't really deserve to be called "capitalism," since big bankers have never really been entrepreneurs who are content to stick to the capitalist rules of the game. Instead, they periodically demand the divine right to take unlimited risks, privatize the resulting gains and stick the rest of us with any resulting losses.

        It is time for accountability, we are told by our new president. If so, we should start by holding the world's largest banks, hedge funds, insurance companies, mortgage brokers and private equity firms, together with their many friends in accounting, law, public relations, credit rating, central banking and higher office accountable for this crisis--if in no other way than by refusing to award them this even more massive TARP II bailout, permitting them to rob us, once again, with both hands.


        February 28, 2009 at 03:09 PM | Permalink | Comments (1) | TrackBack

        Wednesday, February 04, 2009

        Obama's Pseudo-Stimulus

        (This article appeared in The Nation on February 4, 2009 here.)

        First of a three-part series on the economic crisis.

        You, telling me the things you're gonna do for me.
        I ain't blind and I don't like what I think I see.

           --Michael McDonald, The Doobie Brothers,
            "Takin' It To the Streets"

        For what is the crime of robbing a bank, compared with the crime of owning one?   --Berthold BrechImagest

        Hope-bong-743955 So now that President Obama is in office, his economic team is in place, the largest stimulus package in  US history is nearly complete, real interest rates are negative and the Treasury is about to announce a "big bang" version of TARP that provides even more capital to private banks, we're good, right?

        Lo siento, no, as shown by last week's steep stock market slide, even after his program passed the House. For once, the Republican wingnuts may be right. There really is much less to Obama's stimulus than meets the eye.

        His new plan for ridding the banks of toxic assets--"cash for trash," as economist Joseph Stiglitz has aptly described it--is also likely to be way too kind to bank executives and shareholders, and he appears to be remarkably ignorant about the indisputable successes that capitalist countries like Norway, Chile, and Japan have had with temporary, partial bank nationalizations that make the taxpayers "owners of last resort."

        There has been far too little debt relief provided to the growing number of homeowners facing foreclosure, small business owners facing bankruptcy, and other debtors. This step is urgently needed to stem the free fall in housing prices and the rising tide of layoffs among small businesses, where most of the country's jobs are.

          There are rumors afloat that Obama's team may soon announce something like this, but the numbers that we've heard from key Congressmen--$50 billion to $100 billion--are far too modest. We need to pressure the president for a "People's TARP," no less generous than the ones that the banks are receiving.

        Finally, while US policymakers have been throwing gargantuan sums of borrowed money at the wall, mollycoddling Wall Street, and dithering on debt relief for the rest of us, the global crisis has deepened. All across Europe and Asia--from Athens, Chongqging, London, Moscow, Paris and Prague, to Rekyavik, Riga, Seoul, Sofia and Vilnius--people have become completely fed up with their governments and are taking it to the streets.

        So here's a message for our new president, from someone who worked hard for his election long before it was fashionable: if you dally and temporize, the very same thing could easily happe180px-Combat_Bootstrapn here--perhaps just in the form of a massive tax strike, in solidarity with Messrs. Geithner and Daschle.

        While Americans are usually much less militant and certainly less well organized than our comrades around the world, the serious deficiencies in the first drafts that we've seen of Obama's stimulus and financial plans really do need to be corrected in short order.

        We also need to see much tougher action with the financial services industry, which bears a disproportionate share of the responsibility for this nightmare. At a minimum, this means a return to a more orthodox and tightly regulated banking system, a renewed assault on tax havens and the anarchy of the world's financial order, strict limits on executive pay plans that reward unbalanced risk-taking, and a 1930s Pecora Commission-style investigation of the industry's misbehavior--complete with subpoena power.

        In the words of FDR's first inaugural address in March 1933--which, by the way, was harder-hitting and much more memorable than Obama's--it is time for the "money changers" to be forced to flee from "their high seats in the temple of our civilization" once and for all. The only thing we have to fear is Obama's temerity.


        By now everyone has had just about enough bad economic news, but just to set the stage for the discussion, it is important to review the basics. 

        It's is already a cliché to describe this crisis as "the deepest global downturn since the Great Depression." Actually in many ways it threatens to become even worse--faster, sharper and far more global. Here at home there are already more than 11.1 million unemployed, close to the 11.4 million peak that was reached in 1933, when 20 percent of the population still lived on farms and, apart from the Dust Bowl and bank repossesions, could at least count on having a place to grow their own food. In 2008 alone there were already 2.3 million residential foreclosures filed and 861,664 completed in the US, compared with the 600,000 total that was recorded from 1930 to 33. Obviously, relative to the Image5_016size and wealth of the economy, conditions were worse back then, partly because the social welfare system provided less help and more bank depositors got wiped out. But in absolute terms the sheer number of our fellow citizens who are already experiencing serious hardship is really disturbing. And we are only a few months into this.

        Since October, growth rates have plummeted and unemployment has soared worldwide. Just last week, the International Monetary Fund cut its latest forecast for world growth in 2009 to .5 percent, and for the United States to negative 1.6 percent, as fourth-quarter US growth plunged by over 5 percent, apart from inventory accumulation. Other credible observers are far more gloomy.

        Each day brings news of massive layoffs, corporate losses, foreclosures, the bankruptcies of well-known brands like Waterford Wedgwood and Circuit City, continuing house price declines, bank failures, abandoned projects, soaring government deficits and bailouts and widening spreads on loans to some First World countries, not to mention financial frauds, robberies, suicides and other indexes of deep financial distress.

        Seuss-bootstrapsThis is the world's first post-globalization debt crisis, and the worldwide effects are catastrophic. From Labuan, Jakarta and Guangdong to Chicago and Detroit, London and Moscow, the ranks of the unemployed are expected to swell by 51 million by mid-2009, and of those living in dire poverty by at least 176 million. Beyond impersonal statistics, there are also innumerable tragic stories of personal hardship, involving people and families that have suddenly lost jobs, careers, businesses, homes, life savings, healthcare, scholarships and, most important, hope for the future.


          Given this situation, the US economy's influence on the global situation, and the importance of resetting expectations, the stakes for Obama's very first economic initiatives are enormous. Unfortunately, the first drafts already adopted by the House and under debate in the Senate are disappointing.

        Surely, at these prices we deserved a much more carefully targeted anti-Depression program. Instead, over 63 percent of Obama's $825 billion-plus in new spending and tax cuts won't even be felt for at least a year, and more than $100 billion won't show up until 2012 or beyond. Even if the plan works as advertised, it would only reduce unemployment by less than one percentage point a year, relative to the more than 9 percent baseline projection we are facing.

        But this plan will almost certainly not work as advertised. It has been weighed down with $275 billion in tax cuts that would have very modest short-term multipliers. At least 21 percent to 25 percent of Obama's tax credits would go to recipients in the top 20 percent, with incomes above $113,000. These folks are more likely to save the money than those with lower incomes--and right how what we need is spending, not saving.

        Evidently these tax cuts were included out of some broad-minded attempt to reach out to Republicans and Blue Dog Democrats. One might have thought they were already sated by a decade of record tax cuts for upper-income groups, starting with Bill Clinton's sharp reduction of capital gains taxes in 1997--even larger, by the way, than George W. Bush's. But Obama's diplomatic gesture yielded not a single Republican vote in the House last week, and also failed to win over eleven Democrats. Welcome back to Earth, Mr. President.

        Even Obama's $550 billion of extra spending will not be sufficiently stimulative. First, around $200 billion will be channeled through state aid. On average, this will have an even lower multiplier than tax cuts, because of bureaucratic delays and the fact that our political system always channels a disproportionate share of aid to less-needy states. At one end of the spectrum, six states with unemployment rates above 9 percent now account for about one-fourth of the nation's unemployment--2.8 millioAlan_Greenspan_Hotnessn people. Under Obama's program these states would get less than 20 percent of all this state-channeled aid, an average of $8,623 per jobless person. But ten mainly Western states with unemployment rates below 5 percent will get nearly $20,000 per unemployed person.

        Second, despite the sales rhetoric about promoting recovery and saving jobs, these were clearly not the plan's only--or even its most important--objectives. If they had been, there'd be far more up-front spending on direct job creation and programs with higher multipliers and faster paybacks, like unemployment benefits and populist debt relief. There'd also be more top-down control.

        Louboutin_noeudette_gisa_sandal_2 Instead what we have is a dog's breakfast of pet projects, spread across 104 federal agencies, from the Administration on Aging and the Bureau of Indian Affairs to Fish and Wildlife and the National Endowment for the Arts. Dozens of projects were evidently extracted from various liberal wish lists, dusted off and dressed up in the latest "recovery-jobs" couture. Almost anything can qualify so long as it carries a big enough price tag: digital TV conversion ($640 million, on top of the $1.3 billion already spent for this worthy cause), port security ($600 million), research on biomass and geothermal ($1.2 billion), constructing the "smart grid" ($4.4 billion), climate science ($390 million), fixing Amtrak ($800 million), developing satellites ($460 million), restoring wildlife habitats ($400 million), preserving forest health ($850 million), special education ($13.3 billion), immunization ($954 million), STD prevention ($350 million), water projects ($13.7 billion), preparing for a flu pandemic ($620 million), grants to local police ($4 billion), advanced batteries ($2 billion), wireless broadband ($6 billion), a new data center for Social Security ($400 million)...

        The overall impression is a parody of bloviated corporate liberalism. It is as if every deep-sea creature in the ocean suddenly came to the surface at the same time. There they all are, writhing and waiting for someone to make sense of the overall game plan.

        Road and bridge repair be damned! Why worry about being unemployed when there's so much else to do? Soon we'll all be firing up the clean-coal stoves and sewage-fired generators, recharging our federally subsidized Volts and the underground battery farms and heading on over to new neighborhood health centers, where we'll download some interactive broadband training on aging and avoiding STDs. Then perhaps we'll plant a tree or apply for grants to "weatherize" or found a "rural enterprise." By then it will be time to pick up Little Dorothy at Early Head Start, get her vaccinated, say hey to the new federally funded "local" police chief, artists and high school teachers, then kick back in front of the converter box with a long cool draught of federal H2O and a generous helping of nutritious cuisine from the "local" Emergency Food store--making sure that the CO2 that we generate is properly sequestered and not bubbling up through the neighbor's brand new geothermal system.

        By the laws of probability, of course, at least a few of these schemes may actually turn out to have some merit. But it is clear that Washington's finest lobbyists and law firms--second only to Wall Street in terms of sheer venality--have already been hard at work to insure that no key client has been left behind: electric utilities, the coal industry, telecoms, agribusiness, the IT industry, the teachers unions, the Asphalt Pavement Alliance, the Portland Cement Association ("we pour strength into our recovery"), commercial real estate developers and even venture capitalists, are all lined up to profit from Obama's extraordinary spending spree.

        I'm beginning to sound like a Republican wingnut. But really, at lightning speed, we've gone from booting single mothers off the dole in the interests of "personal responsibility" (saving a grand total of--what, Bill Clinton?--maybe $5 billion per year at most, while finding jobs for only half of the 60 percent who got the boot) to having almost every single key interest group in the country lining up with a tin cup, right behind the banks.

        More important, from a global perspective, Obama's program takes the eye of the ball. What the world economy desperately needs most right now from the US economy--remember, we're the ones who originated this debacle--is not "reinvention," or some hastily-assembled collection of alternative energy demonstration projects, but a good, old-fashioned healthy US market recovery.

        Once that is in place, there will be plenty of time and money to save the planet. But unless that is in place, there will be no serious worldwide attention paid to climate change, global warming or alternative energy, nor will there be necessary funds and economic incentives that are required to really fix the the problem. At a time when tens of millions are having a hard time feeding their families, these are luxury goods. I defer to no one in my hardcore environmentalism--but Obama's plan has had a little bit too much input from Al Gore's "green limousine" set, and is putting the green cart before the debt-ridden horse

        In fact, this program somehow manages to be neither reinvention nor recovery. Nor is it very thoughtful. Rather, it is a Jackson Pollack approach to social and economic policy. That kind of action painting may have been OK for hip Hamptons artists way back in the 1950s, but in these times it is dangerously blithe. It also risks discrediting everything that progressives should stand for, if we want to see government taken seriously again as an agent of social change. If we continue with this scattershot, favorite-liberal-interest-group approach, creditors like China may soon begin to wonder whether we've become just another Banana Republic--not the chain store, but the political pathology--or an aging superpower that has an acute case of ADHD.

        Of course it is easy to criticize. The real test is to come up with a superior, politically feasible alternative. Later on in this series, I'll suggest one--a combination of high-multiplier spending and serious popular debt relief that would command more support, provide a much greater direct stimulus, stem the decline in housing prices and small business closings and placate foreign creditors who are worried about our sanity. It might even permit Obama to finally win a few Republican votes for his program.

        February 4, 2009 at 12:33 PM | Permalink | Comments (0) | TrackBack

        Saturday, October 11, 2008

        Why This Republican X-Banker Has Decided to (Partially) Socialize Our Entire Banking System
        James S. Henry

         "We have made changes, Sire. Yes, it is true, we have made changes. But we have made them at the right time. And the right time is, when there is no other choice."

        -- Conservative adviser to King Edward VII, explaining his support for liberal reforms

        OctoberrevolutionWe may have just reached a critical turning point in American political economy -- not only in our efforts to overcome the burgeoning global banking crisis, but also to overcome the pernicious influence of free-market fundamentalism, which has dominated US economic policy for the last 30 years.

        Ironically enough, the person who deserves more credit than anyone else for helping us to reach these goals is our current Treasury Secretary, a lifelong die-hard Republican and former Wall Street king-pin.

        Last night, a few hours after the US stock market closed,  the Bush Administration, embodied in Henry M. Paulson,Jr.,  announced that in order to stem the continuing turmoil in capital markets,  in conjunction with other G-7 countries, the US federal government will begin "as sBernankepaulson_s1274_2oon as we can" to use taxpayer money to buy preferred equity in private financial institutions, especially banks.

        Depending on how it is implemented, this could very well amount to a partial nationalization of the entire US banking system by the US Government. Are you paying attention here, Hugo, Fidel, and Evo? 

        This marks a very sharp U turn in recent US policy. Indeed, just two weeks ago, in their September 23rd testimony before Congress, Paulson and Federal Reserve Chair Ben Bernanke dismissed such equity investments as a "losing strategy," compared to their preferred scheme, a government-run "reverse auction" to buy up to $700 billion of "toxic" bank assets.


        HAIL MARY

        This policy U-turn was not due to sudden new insights generated by careful academic analysis or some precise economic model. 

        It feels more like a Hail-Mary pass,  coming at the end of  one of the most disastrous weekly stock market performances in US and global history.

        That, in turn, was preceded by ten exhausting days of political goat-rodeo and Congressional negotiations over the infamous "$700 billion bailout," on top of the preceding six exhausting months of  more or less ad hoc, increasingly expensive but largely unsuccessful one-off  interventions in money markets and the banking system by the US Treasury, the Federal Reserve, and a myriad other US bank regulators. 

        Meanwhile, there has been an even more quirky set of poorly-coordinated improvisational remedies administered by diverse regulators in the UK, Germany, France, Iceland, and Belgium. 

        At the end of all this,  fear, uncertainty, and doubt (FUD) have continued to spread across global capital markets, as policymakers stumble into each other, national banking systems compete for deposits, the US Treasury becomes (ironically) a huge depository for safe-haven flight capital, and no one manages to get ahead of the crisis.

        If the FUD continued to spread, and global credit remained on lock-down,  the forthcoming global recession -- already likely to plunge real growth in Europe and the US  to zero or less next year, China to 6 - 8 percent or less, and the rest of the developing world to 4-6 percent -- would become dire indeed. 

        So one answer to the riddle of Paulson's "sudden conversion" is that he simply had no alternative. Given that ad hoc bailouts, coordinated interest rate cuts, increased deposit insurance, the extension of government insurance and liquidity to money market funds, the commercial paper market, on top of the takeovers of AIG and Fannie/ Freddie, had not done the job, nationaliziation -- really internationalization, since global banks are involved, and other countries will presumably be asked to contribute -- is one of the few arrows left in his quiver.


        This will hardly be the first US experience with quasi-nationalization. Indeed, on September 16, the Federal Reserve had effectively "nationalized" the giant insurance company AIG, acquiring 80 percent of its equity in exchange for an $85 billion loan. And on September 7, the US Government announced that it had formally taken over Fannie Mae and Freddie Mac, the world's largest players in the "secondary" mortgage market, with more than $1.6 trillion of assets. All told, these are probably the largest nationalizations anywhere in human history.

        Way back in the 1930s and 1940s,  the US Reconstruction Finance Corporation seized and recapitalized many banks. The FDIC has also done this many times since then.

        European governments have even longer histories of direct intervention in banking markets.  And several of them moved almost too quickly in the last year to nationalize particular banks -- for example, the UK's Northern Rock in February 2008 and Fortis in September 2008.

        Of course, most of these recent cases have involved failing institutions, where the government was a "lender of last resort." As discussed below, Paulson's plan is rather different.

        Even farther back, in the early 19th century, states like Virginia and Pennsylvania often invested directly in state-chartered banks to set them up and keep them going. Those were not especially happy experiences with government ownership.

        But this is hardly a great time for champions of private capital markets to be quibbling about the efficiency costs of government intervention -- private markets in the US alone have just lost $7 trillion of market cap in the last year, including $3 trillion in the last 3 weeks. And the global "opportunity cost" of the crisis is probably at least twice this high.     


         If done right,   Paulson's PIP  (Public Investment Program) will be much broader,  more proactive and more innovative than previous bank nationalizations.

        For example, one idea would be to establish a "Global Recovery Fund," permitting fresh private capital, "sovereign wealth funds" like those in Norway and the UAE, and European, Latin and Asian countries that have a clear stake in restoring the world's financial sector to health to invest alongside the US Treasury.

        Even, Heaven help us, the IMF and the World Bank's IFC might participate in such a fund.  They have run out of developing country crises to solve, are looking for a new role, and have $billions in untapped credit lines. 

        Such an approach would help to share the heavy burden placed on US taxpayers, and make this program more politically palatable than the TARP bailout proved to be.

        A global fund would also help to diversify investment risks across many more countries and banks. 

        Indeed, the USG and its new partners might even become lenders of far-from-last resort, clearing the way for threatened but essentially-healthy institutions  to survive the financial contagion, raise much more private capital as well, and, most important, turn each and every  new $1 of equity into $10 to $15 of new lending.

        If the fund is successful in reviving the world's financial system, and restoring banks to financial health, taxpayers and investors will no doubt all be paid back handsomely. But the most important benefits may be the "hidden" ones -- the catastrophic losses that would be avoided by preventing further chaos and market decline.

        This is very different from Paulson's original TARP buy-back scheme, which promised to boost bank equity informally by way of overpaying for toxic assets with highly-uncertain values. 

        Ironically, that approach just rewards those companies with the very worst  portfolios and lending practiceswhile enabling much less increased lending.

        Indeed, TARP's only comparative advantage seems to have been that by avoiding direct government investment in the private sector, it did not violate any red lines of so-called free-market conservatives.

        In hindsight, however, given TARP's birth pains, plus the fact that the market value of all US publicly-traded stocks fell from $12.9 trillion on September 19 to $9.2 trillion in the three weeks after Paulson Plan I was announced.

        So respecting this neoliberal ideological taboo may well have just cost US investors -- most of whom are taxpayers -- at least $1 to $2 trillion of  market value that might have been saved with an immediate recapitalization plan.

        With that much extra dough,  we could almost afford to wage another Iraq-scale war somewhere. 

        Bolivianacionalizacion1 REMAINING ISSUES

        The PIP program faces many challenges.  It needs careful guidelines about how to value investments, which banks will be eligible, and how they will be incented to participate. There needs to be controls the propensity of Treasury officials to have "revolving door" relationships with the companies they are investing in.

        It is also vital to  focus on the program's central objective -- a temporary Hanklenin investment to stabilize the financial system, returning the investment (hopefully with gains)  to the Treasury as soon as possible.   

        The US Treasury also needs to decide what corporate rights we should get for our money.

        For example, Mr. Warren Buffett, everyone's favorite wealthy investor these days,  would probably demand  protections against non-dilution and excessive dividends to other shareholders, and perhaps voting rights as well, if he were the investor. If  taxpayers are investing and taking all this risk, why is Warren's money any more deserving of such rights than ours?

        None of these issues are insurmountable. Furthermore, purchasing equity in established, publicly-traded institutions will certainly be a whole lot easier than setting up brand new, complex "reverse auction" markets for previously untraded mortgage-backed securities, much less insurance on them.

        In any case, as we'll examine in Part II of this article, given the incredibly shaky structure of the global banking system's balance sheet, especially in the US and Europe, at this point Hank Paulson's public equity investment plan is really the US Treasury's only option for putting our banking system back on its feet.

        So viva Comrade Hank!  Y Viva la Revolucion! 

        But investors, workers, home owners, students, beware:    it still pays to be conservative here, despite  Hank's Revolution. 

        Because even if the government invest heavily in all these banks, no one is still quite sure what all those $trillions of asset-backed securities on and off their balance sheets are worth.

        We may not find out until the housing market touches bottom and there are comprehensive audits of major financial institutions and their hedge fund buddies. 

        So keep at least some of your powder dry and hang on to your hats -- the ride will continue next week. 

        (c) SubmergingMarkets,

        October 11, 2008 at 04:25 AM | Permalink | Comments (0) | TrackBack

        Wednesday, September 24, 2008

        James S. Henry

        Artbushap Last night on national television, Comrade Bush presented his own miniature 14-minute "Cliff Notes" version of the roots of the current US financial crisis, and a heart-rending appeal for the most generous act to date of his Administration, the $700 billion blank-check Wall Street bailout

        By now the man has established a bit of a pattern --  customarily trying to scare us all into granting him unlimited powers,  while arguing that there is simply no alternative to whatever bitter pill he happens to be pushing at the moment. 

        You are of course free to believe him if you like. Hundreds do.

        Stockmarketcrash1929 In fact, as we argued yesterday, there are all sorts of improvements to be made to the proposed Whale of a Bailout package.   

        These include things like, at a minimum, (1) equity investment and warrants for taxpayers, to provide some upside returns in proportion to the risks we are taking on any purchases of bank assets; (2) stronger oversight; (3) more assistance for the millions of Americans who are experiencing home foreclosures; (4) compensation ceilings, clawbacks, and stiff progressive tax rates on incomes over $1 million and estates over $10 million, to offset the cost of all this; (5) a Financial Products Safety Commission; (6) a new Treasury-backed competitive insurance market for mortgage securities,  available to banks and homeowners; (7) expanded FDIC reserve fund rather than buy "toxic" bank securities up now, set up an  -- since all the "I-banks" are commercial banks now, anyway; (8) a new installment of the 1932 Pecora Commission, complete with subpoena power, to investigate the origins of the crisis and hold people accountable.

        (For more details, here is the testimony that Dr. Brent Blackwelder, Friends of the Earth, and I submitted to Rep. Frank's House Financial Services Committee yesterday: BAILOUT.pdf)

        Even more important, the President's central claim that there is no alternative to this bitter pill is a triple whopper with cheese.    

        As the IMF -- not our favorite institution, but it does know a thing or two about recapitalizing broken banking sectors --  has suggested just this week, long-term "swaps" of mortgage-backed securities for government bonds could be used to clean up the banks' balance sheets while completely sparing  taxpayers the risks of a huge loss on the $billions of toxic assets we'll soon be owning. 

        There are also numerous other approaches  to broken-banking sector restructuring  that have been employed by governments all over the planet in more than 124 banking sector crises since 1970 -- for example, in Chile, Korea, Germany, Buffettserious75x75Mexico, and  Japan.

        Doesn't anyone else find it odd that none of this expertise is being put to use?

        Or that, with losses on complex derivative and structured securities at the core of this debacle, and thousands of "quants" from MIT and Wharton on Wall Street, we cannot design some simple security vehicles to help taxpayers reduce their personal or collective exposure to its potential costs? 

        Perhaps Bush & Co. are not familiar with the IMF or the World Bank/ IFC's "Capital Markets Group." Perhaps Secretary Paulson never bothered to understand the first thing about derivatives and options during his 32 years at Goldman Sachs.   

        For their informaDoggytion, the World Bank/ IMF/ IFC  are located at 700 19th St. NW, Washington D.C., three blocks from the White House.

        Their staffs are not especially busy at the moment -- indeed,  15 percent of the IMF's professionals are being laid off, so they may have some time to help out.

        We've been assured by the Bush Administration, however, that the IMF's assistance is not really needed at this point.

        "What are we," Bush asks,  "Some sort of two-bit corrupt, debt-ridden plutocracy  that can't manage its own affairs?"

        Indeed, the President,  Secretary Paulson, and a weird new assortment of  bottom-feeding Wall Street investors  (Omaha's Warren Buffet, Tokyo's Nomura Holdings and Mitsubishi UJF), and, of course, those who are still left on Wall Street itself are in a white heat to get this deal done, and are trying to create a stampede. 

        They are also clearly not interested in improving the bailout. They just want our money -- and a loosey-goosey, behind-closed-doors process for distributing it that hasn't even been designed yet.

        Unlike US taxpayers, Buffet, who is reportedly investing $5 billion in Goldman Sachs, was saavy enough to get prefAp_obamccain32erred shares and warrants for his money -- worth up to 8 percent of the premier bank's share.

        At that rate, just think how much Wall Street real estate our  $700 billion would buy -- if only Paulson and Bernanke and the US Congress would follow in Buffet's footsteps and insist on some equity and warrants in exchange for a bailout. 

        Meanwhile, Bush has the temerity to intermeddle (once again) with the orderly conduct of a US Presidential election, by inviting the two leading Presidential candidates to the White House just to help him close the deal with Congress. (Ralph Nader and Bob Barr are reportedly already camped out in the White House basement.)

        As if the candidates don't have anything else to do, like debate each other,  41 days before the 539w election.

        As if Secretary Paulson and Chairman Bernanke were not already the world's consummate sales team!

        Of course both Obama and McCain will accept the President's hospitality -- they have no choice.

        So both have now been roped into making this deal happen. 

        Alas,  it probably will -- minus almost all of the possible improvements noted above. The largely symbolic CEO comp limit is probably the only exception

        To those to whom much has been given, even more will be given.

        We do have one consolation, however,  as we prepare to pay the check for this lousy meal. We've located a different version of the history of this crisis that is more accurate -- and more entertaining -- in this must-see video:

        (c) SubmergingMarkets, 2008

        September 24, 2008 at 05:40 PM | Permalink | Comments (0) | TrackBack

        Tuesday, September 23, 2008

        Ten Steps to Fix the Paulson Plan and Solve the US Debt Crisis
        JS Henry and Brent Blackwelder

        Images2_3 The US Congress is busy working hard on US Treasury SecretaryTarp30198 Henry M. Paulson Jr.'s $700 billion TARP bailout plan  -- at least everyone except Alabama's Rep. Spencer Bachus, the ranking Republican on the House Financial Services Committee, who has spent much of the day explaing why a senior official in his position has the time, much less the ethical license,  to be making scores of options trades during office hours.

        While we have every confidence that Rep. Bachus and his peers will provide masterful oversight of the Secretary's proposal, it is understandable that with less than six weeks left to the November election, and Congress set to adjourn on Sept. 29, we appreciate that they may have more important things to worry about than the greatest US financial crisis since the Great Depression. 

        So it is time to help them out. Given the widespread dissatisfaction -- indeed, revulsion -- at Paulson's initial request for a $700 billion blank check  -- on top of the other $500 - $700 billion that the Treasury/ FDIC and the Federal Reserve have already committed to Fannie/ Freddie, AIG, Bear Stearns, and other banks this year -- it is clear that revisions are needed. But time is short -- not just because of election imperatives, but because global financial markets are on pins and needles, waiting for a clear solution. Wl_wish_list

        Any time there is this kind of sea-changing economic event, it tends to surface every interest group's Christmas wish list of long-delayed "essential reforms."

        In this situation, indeed, the crisis has brought forth everything from proposals for "nationalizing the banks" and new regulatory agencies to "clawbacks" in executive severance plans and income tax reform.  There are also a substantial number of people who are concerned about the implications of the initial Paulson proposal for constitutional democracy -- some have called it as nothing less than an "economc coup d'etat" by "Commandate Paulson,"   because of all the unreviewable authority it would have vested in the Secretary and his minions. 

        Given that Congress is moving at the speed of light, we need to "tier" these proposals according to their importance.  There are also a few more innovative ones that deserve immediate attention. Here's our own "Top Ten Improvements" wish list.

        WISH LIST

        1.  Equity  “Upside” and Voting Power.

        In return for the undeniable new risks that US taxpayers are taking on, and the poor management track record of leading Wall Street institutions,  it is reasonable to insist that they receive an “upside” on the value of participating financial institutions (FIs) themselves as well as on the potential increased value of acquired mortgage-backed assets.  This proposal commands widespread support in this panel.

        Technically, this could be accomplished by demanding preferred shares (with anti-dilution provisions) from any financial institutions (FIs) that receive assistance, as was routinely done by Bank of Japan in exchange for financial assistance during the Japanese bank restructuring of the 1990s, and by the Chilean government during the February 1983 bank nationalization.

        Warrants might also be used, as was done in the case of the 1979 $1.2 billion Treasury loan guarantee to Chrysler. (According to Sen. Bradley, the Federal Government eventually made money on those warrants.) We believe that while warrants are easier to implement, it is vital to insist on actually equity (including voting power). This will provide the Treasury with much more direct influence over management behavior, will be easier to value, and will also be easier to explain to the public than warrants.

        2. Clawback Provisions for Executive Severance Pay.

        The basic  principle here is that for  senior FI executives, there should be accountability for some time period even after they leave office – at a minimum, any future compensation or severance that they receive should be subject to stiff taxes or repossession in bankruptcy court. Insisting on compliance with this standard should be a condition for participation in the bailout.

        3. Share the Pain.
        A.  Emergency Taxes. 

        Since this very costly bailout package may severely limit the ability of the Federal Government to afford vital programs like health insurance reform and alternative energy, it is important that we deal now with the substantial “tax justice” implications of the bailout.

        One way to do this would be to start treating this as the national emergency that it really is, and help ordinary taxpayers pay for it by: (1) eliminating the carried-interest benefits for hedge fund managers; (2) cracking down on offshore havens – no FIs should be permitted to establish subs or place SPVs  in them;   (3) imposing at least a temporary increased  income tax rate on all people with incomes above $1 million and on all estates above $10 million.

        B. Compulsory Write-Down/ Debt Reduction of Residential Mortgages.

        Given the failure of this summer’s relief packages for ordinary mortgage holders to have much impact, and the fact that foreclosures are still increasing (to a record 100,000+ per month, and that housing prices are still falling in a majority of key markets, this is an another essential measure. The debt restructuring should be implemented quickly, affect large numbers of people, and be inversely proportional to mortgage size. It might also be means –tested.

        Such a measure would not only provide equitable relief to millions of would-be homeowners; it would also help to kick-start a US economy recovery.

        4. Financial Products Safety Commission.

        This would review and certify the quality of all financial products offered to the general public. Products like zero-down payment mortgages would require special labeling, and might not qualify for government incentives like interest deductibility, access to the government insurance window, and so forth.

        5.  A New US Treasury-Created Market for MBS Insurance.

        A novel idea suggested by our good friend Prof. Lawrence Kotlikoff of Boston University  is that the US Treasury might be able to use current authority to offer ABX-like insurance at a fixed price per tranche  to institutions that hold MBSs.  According to Professors Kotlikoff and Merlin, if such a government-backed insurance market were in place, backed by a significant reserve against losses, it might even obviate the need for the entire $700 billion, while creating a market-based workout alternative.

        This could be combined with #1, if FIs were allowed to pay for the insurance with  equity or warrants.  This would also have the benefit of helping to recapitalize troubled FIs.

        6.  New “Pecora Commission” (ala 1932): a congressional committee with subponae power to investigate the root causes of this crisis and recommend further steps.


        September 23, 2008 at 04:42 PM | Permalink | Comments (0) | TrackBack

        Saturday, September 20, 2008

        Bailout Jeopardizes the Entire Progressive Agenda
        James S. Henry

        Classwar "“There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” --  Warren Buffet, June 2008

        Ladies and gentlemen: pardon my intemperance,  but it is high time for some moral outrage --  and a little good old-fashioned class warfare as well, in the sense of a return to seriously-progressive taxation and equity returns for public financing.

        After all, as this week's proposed record-setting Wall Street277_cartoon_bank_bailout_hurwitt_sm bailout with taxpayer money demonstrates once again,  those in charge of running this country have no problem whatsoever waging "class warfare" against the rest of us -- the middle classes, workers and the poor -- whenever it suits their interests.

        At a time when millions of Americans are facing bankruptcy and the risk of losing their homes without any help whatsoever from Washington DC,  the CEOs and speculators who created this mess, and the top 1 percent of households that owns at least 34 percent of financial stocks, and the top 10 percent that owns 85 percent of them, have teamed up with their "bipartisan" cronies in Congress, the US Treasury and the White House to stick us with the bill, plus all of the risk, plus none of the upside.

        Upon close inspection, the Treasury's proposal is nothing more than a bum's rush for unlimited power over hundreds of $billions, to be distributed at Secretary Paulson's discretion behind closed doors and without adequate Congressional oversight.

        This time they have gone too far.

        As discussed below, the cost of this bailout could easily jeopardize our ability to pay for the entire economic reform program that millions of ordinary citizens across both major parties have been demanding.


        Some kind of bailout may indeed be needed from the standpoint of managing the so-called "systemic risk" to our financial system.

        However, as discussed below, the Paulson plan does not really tackle the real problem head on. Thsi is the fact that many financial institutions, including hundreds of banks, are undercapitalized, and need more equity per dollar of debt, not just fewer bad assets.

        To provide that, we may well want to mandate debt restructurings and debt swaps, or provide more equity capital .

        If private markets can't deliver and we need to inject public capital into financial services companies on a temporary basis, so be it. But it should only be in return for equity returns that compensate the pubilc for the huge risks that it is taking.

        Call that "socialism" if you wish -- I think we are already well beyond that point -- sort of like Chilean economists became in 1983, when the entire private banking sector collapsed and was nationalized -- successfully -- by the heretofore "Los Chicago Boys."

        To me, public equity investment, in combination with increased progressive taxation, should be viewed as just one possible way to get these companies the equity they need, while providing fair compensation to the suppliers of capital and participation in any "upside," if there is one.

        Absent such measures, progressives certainly have much less reason to support this plan. After all, the increased public debt burdens that it would impose are so large that they could easily jeopardize our ability to pay for the entire economic reform program that millions of ordinary citizens (across both major parties) have been demanding.

        From this angle, the Paulson program, in effect, is a cleverly-designed program to "nationalize" hundreds of billions of risky, lousy assets of  private financial institutions, without acquiring any public stake in the private institutions themselves, and without raising any tax revenue from the class of people who not only created this mess, but would now like to be bailed out. 

        Any mega-bailout should come at a high price for those who made it necessary.

        In particular, we must make sure that the butcher's bill is paid by the tiny elite that was responsible for creating this mess in the first place.

        This is not about retribution. It is about insuring taxpayers are truly rewarded for the risks that they are taking -- isn't that the capitalist way?  And it is also about making sure that this kind of thing never happens again.

        After all, the real tragedy of this bailout is its opportunity cost. Consider a well-managed $1 trillion "matching" investment in strategic growth sectors like energy and health....If we really wanted to insure our competitive health, we would not be investing $1 trillion in lousy bank portolios generated by the chicanery-prone financial services sector.


        Bush_bernanke_080118_mn In financial terms, this latest Wall Street bailout is likely to cost US taxpayers at least $100-$150 billion per year of new debt service costs -- just for starters.

        This estimate is consistent with the $700 billion ("at any point in time") that President Bush and Treasury Secretary Hank Paulson are requesting from Congress this week to fund their virtually-unfettered ("unreviewable by any court") new "Troubled Asset Relief Program." (TARP)

        The sheer scale of Paulson's proposal implies that federal authorities plan to acquire at least $3 trillion of mortgage-backed securities, derivatives, and other distressed assets from private firms -- on top of Fannie/ Freddie Mac's $5.3 trillion mortgage securities portfolio. How the Fed and the Treasury actually propose to determine the fair market value of all these untrade-able assets is anyone's guess. But since  40 percent derive from the exuberant, fraud-prone days of 2006-7, they will probably all be subject to steep (60-90 percent) discounts from book value.

        27_scaredwoman_lgl That's consistent with the 78 percent  "haircut" that Merrill Lynch took on the value of  its entire mortgage-backed securities portfolio earlier this month -- actually, more like a 94.6% haircut, the portion that it received in cash.

        This implies, by the way, that if the Federal Government were required to "mark to market" their $29 billion March 2008 investment in Bear Stearns' securities, it would now have a cash value of just $1.6 billion. Not a very hopeful sign from a taxpayer's standpoint.

        Paulson's latest proposal dictates another sharp increase in the federal debt limit, to $11.313 trillion. This limit stood at just $5.8 trillion when Bush took office in 2001.  By October 2007 it stood at $9.8 trillion. Then it jumped again to $10.6 trillion in July 2008, during in the Fannie/Freddie meltdown. As of March 2008, the actual amount of Federal debt outstanding was $9.82, just six months behind the limit and gaining.   


        All this new TARP debt will be on top of $200 billion of new debt that was issued to buy Fannie/Freddie's preferred stock, plus the assumed risk for their $1.7 trillion of debt and $3.1 trillion of agency mortgage-backed securities.

        It is also in addition to  the $85 billion 2-year credit line that Federal Reserve just extended to AIG, the $29 billion "non-recourse" loan provided for the Bear Stearns deal noted above; $63 billion of similar Federal Reserve lending to banks this year; $180 billion of newly-available Federal Reserve "reciprocal currency swap lines:" $5 billion of other emergency Treasury buybacks of mortgage-backed securities;  $12 billion of Treasury-funded FDIC losses on commercial bank failures this year (including IndyMac's record failure in July); perhaps another $455 billion of Federal Reserve loans already collateralized by very risky bank assets;  and the FDIC's request for up to $400 billion of Treasury-backed borrowings to handle  the many new bank failures yet to come.

        There is also the record $486+ billion budget deficit  (net of $180 billion borrowed this year from Social Security trust fund) that the Bush Administration has compiled for 2008/09, drivem in part by the continued $12-$15 billion per month cost of the Iraq and Afghan Wars and the impact of the deepening recession on tax revenues. Longer term,  there is also the projected $1.7 trillion to $2.7 trillion "long run" cost of those wars (through 2017). 

        All told, then, we're talking about borrowing at least another $1-1.4 trillion of federal debt to finance a record level of lousy banking.


        By comparison, Detroit's latest request for a mere $25 billion bailout looks miserly. And if we were in Vienna, we would say, "We wish we could play it on the piano!"

        Compared to other bailouts, this is by far the largest ever.

        For example, the total amount of debt relief provided to all Third World countries by the World Bank/IMF, export credit agencies, and foreign governments from 1970 to 2006 totaled just $334 billion ($2008), about 8 percent of all the loans. (Henry, 2007). Charleskeating45_2

        The savings and loan bailout in the late 1980s cost just $170 billion ($2008).

        And the FDIC's 1984 bailout of Continental Illiinois, the largest bank failure up to this year, was (in $2008) just $8 billion (eventually reduced to $1.6 billion by asset recoveries).

        Meanwhile, compared with other countries that are well on their way to building forward-looking "sovereign wealth funds" to make strategic investments all over the world, the US seems to be on a drive to create this introverted "sovereign toxic debt dump." 

        CASH COST

        No one has a very precise idea of how much all this will cost, not only because many of the securities are complex and thinly traded,  but also because their value depends to a great extent on the future of the US housing market. Housing prices  have already fallen by 20-32 percent in the top 20 markets since mid-2006, and they continue to fall in 11 out of 20  major markets, especially Florida,  southern California, and Arizona, where the roller-coaster has been the most steep.


        At current T-bond rates (2-4 percent for 2-10 year bonds, the most likely maturities), near-term cash cost of this year's bailu is likely to be an extra $40 to $60 billion a year in interest payments alone. 

        Furthermore, since the borrowed funds will be invested in high-risk assets, the most important potential costs involve  capital risk. There's a good chance that, as in the case of Bear Stearns, we'll ultimately get much less than $.50 for each $1 borrowed and invested. For example, Fannie and Freddie alone could easily be sitting on $500 billion of losses (=$2 trillion/$5.3 trillion* 50% default*50% asset recovery).

        This could easily make the long-run cost of this bailout to taxpayers at least $150 billion a year.   

        No wonder traders on the floor of the New York Stock Exchange reportedly broke out singing "the Internationale" when they heard about the bailout.

        But the direct financial costs of the bailout are only the beginning....


        Middleclass_2 Last week's events produced terabytes of erudite discussion by an army of Wall Street journalists, prophets and pundits about short-selling rules, "covered bonds," and the structure of the financial services.

        This is absolutely par for the course, as modern financial crisis journalism is concerned -- the "story" is always told mainly from the standpoint of what's in it for the industry, the banks, the regulators, and the investors.   

        For the 90 percent of Americans who own no money-market funds, and less than 15 percent of all stocks and bonds, however, this bailout means just one thing.

        All of the money has just been spent.  And it has not been spent on you.

        For example, unless we demand an increase in taxes on the rich, big banks, and  big corporations, as well as some public equity  in exchange for the use of all this money, we can expect that the long-term costs of this bailout will "crowd out" almost all of the $140 to $160 billion of new federal programs that Barack Obama proposed. It will certainly make it impossible for Obama to finance his programs without either borrowing even more heavily, or going well beyond the  tax increases (on oil companies and the upper middle classes) that he has proposed.

        Without such changes, there will be no federal money available for comprehensive health insurance, or the reform of the health care delivery system.Obamaagendacost

        There will be no additional funding for pre-school education, child care, or college tuition.

        There will be no additional funding for investments in energy conservation, wind, or  solar power.

        There will be no additional investments in national infrastructure (e.g., the reconstruction of our aging roads, highways, and bridges to "somewhere.")

        Highway privatization and toll roads, here we come.

        There will be no money to bail out the millions of Americans who are on the brink of losing their homes.

        The supply of housing loans and other credit will remain tight, despite the bailout.

        Indeed, if the economic elite has its way,  the long-sought dream of "a home for every middle-class American family" may be abandoned as a goal of government policy.

        Meanwhile, the government-sponsored consolidation of the financial services industry will make financial services more profitable than ever.

        This is good news for the "owners of the means of finance." For the rest of us, it means steeper fees and rates.  And if we fail to keep up with the new charges, we'll  face the rough justice delivered by the latest  bankruptcy "reform," which was rammed through the Congress in 2005 with support from many top Democrats.   

        103473_f520 There will be no money to shore up the long-run drain on Social Security or Medicare.

        Indeed, ironically enough, this latest bank bailout may even increase the financial pressure to privatize these comparatively successful government programs.

        There will be no extra money to house our thousands of new homeless people,  relieve poverty, rebuild New Orleans, or support immigration reform.

        There will be no additional funds for national parks.

        Indeed, we might as well start  by privatizing our national and state parks, and drilling for oil and gas in the Arctic National Wildlife Refuge,  Yosemite,  the Grand Canyon, and right off the Santa Barbara coast. We're going to need those federal lease royalties. (Perhaps the oil barons will lend us an advance.) 

        There will be no funds available for increased homeland security.

        There will certainly be no "middle-class" tax cut.  Absent a progressive tax reform, the only "cut" the middle class is going to receive is another sharp reduction in  living standards.


        All told, the Bush/Paulson "permissive banking/ massive bailout" model  beats even the old 1980s vintage Reagan formula, which tried to force government down-sizing with huge tax cuts. 

        Contrary to the sales pitch, those cuts never produced any incremental tax revenues, let alone any significant down-sizing.  It has simply proved too easy for the federal government to borrow. And "conservatives" can always find wars, farm subsidies, defense contractors,  and "bridges to nowhere" to spend the money on, just as fast as liberals. 

        Lately, however, it appears that US debt levels may indeed be reaching the point where they could impose a limit on increased spending.  Given the sheer size of the new federal debt obligations, foreign creditors,who have recently been supplying more than half of new Federal borrowing, have been muttering about taking their lending elsewhere. And outside the financial services industry, Main Street companies are concerned being "crowded out" by record federal borrowing.


        To make sure that real economic reform is still feasible, we need to demand a "Get Real/ New Deal" from Congress right now. 

        At a minimum, this Get Real/New Deal package should consider measures like: 

        (1) The restoration of stiff progressive income and estate taxes on the top 1 percent of the population (with net incomes over $500,000 a year and estates over $5 million) -- especially on excessive CEO and hedge fund manager compensation;

        (2) Much more aggressive enforcement and tougher penalties against big-ticket corporate and individual tax dodgers;

        (3) Tougher regulation of financial institutions  -- possibly by a new agency that, unlike the US Federal Reserve, the SEC, and the US Treasury, is not "captive" to the industry;

        (4) A crackdown on the offshore havens that have been used by leading banks, corporations,  and hedge funds to circumvent our securities and tax laws;

        (5) The immediate revision of the punitive bankruptcy law that Congress enacted in 2005 at the behest of this now-bankrupt elite; and

        (6) While we are at it, stiff "pro-green" luxury taxes on mega-mansions, private jets, Land Rovers, yachts, and all other energy-inefficient upscale toys. 

        We also need (7) a National Commission to investigate the root causes of this financial crisis from top to bottom, and actually (unlike the hapless, ineffectual 9/11 Commission) hold people accountable.

        Finaily, if the pubilc is going to provide so much of the risk capital for this restructuring, we should demand (8) public equity in the private financial institutions that receive so much of our help.

        This will permit taxpayers to share in the upside of this restructuring, rather than just the downside risks.

        Along the way, this will require that we explain to Secretary Paulson that this country is not Goldman Sachs. Even after 8 years of President Bush, this is still a democracy. 

        Secretary Paulson is not going to be given unfettered discretion to hand out closet "liquidity injections" to his buddies on the street -- no matter how worthy they are. 

        Dp1774112 Over time, this progressive Real/ New Deal would help raise the hundreds of billions in new tax revenue needed to offset the costs of this bailout.

        This will be essential, if the Federal Government is to be able to afford key reforms like health insurance, clean energy, and investments in education.

        These may not matter very much to Wall Street executives, financial analysts, Treasury and Federal Reserve executives, or the more than 120-130 Members of Congress and 40-45 US Senators who earn more than $1 million a year -- and are already covered by a generous "national health care" package of their own design.

        But these  are the key "systemic risks" that ordinary Americans face. 

        These reforms may sound ambitious. So is the bailout.  And the reforms that we are discussing are only fair.

        After all, we the American people have recently been the very model of forgiveness and understanding. 

        We have tolerated and footed the bill for stolen elections,  highly-preventable terrorist attacks, gross mismanagement of "natural" disasters, prolonged, poorly conceived, costly wars, rampant high-level corruption, pervasive violations of the US Constitution,  and the systematic looting of the Treasury by politically-connected  defense contractors, oil companies, oligopolistic cable TV and telecommunications firms, hedge fund operators, big-ticket tax evaders, and our top classes in general.

        Does "class" still matter in America?  You betcha -- perhaps more than ever. But enough is enough.  Call your Congressperson now. Demand a"Get Real/ New Deal" qualifier to the bailout package before it is too late. We deserve to get much more for our money. So do our kids.

        (c) SubmergingMarkets, 2008

        September 20, 2008 at 04:41 PM | Permalink | Comments (0) | TrackBack

        Saturday, July 26, 2008

        Attach Green Strings to Those $Billions of Bailout Greenbacks!
        Brent Blackwelder and James S. Henry

        Solarpanels_2 19fannie1_75x751


        With Congress about to "lend" at least $300 billion to Fannie Mae and Freddie Mac, the nation's two giant mortgage lenders, shouldn't we at least insist in getting some lending policies that help promote energy-efficient new housing for all this money?

        For the full article, go here. 

        (Note:  Brent Blackwelder is President of Friends of the Earth. He is not only a committed environmentalist but a straight arrow.  Unlike the others on this page, he has never pocketed $millions from a $9 billion corporate earnings overstatement or mismanaged a gigantic corporation, let alone defended white-collar criminals, barred FBI agents from sharing intellligence with the CIA and DOD, or helped to shield former senior CIA and NSA officials from responsibility for 9/11.)








        July 26, 2008 at 03:20 AM | Permalink | Comments (0) | TrackBack

        Thursday, July 24, 2008

        The Great White Sharks at UBS and LGT
        James S. Henry

        (Note: The following is an expanded version of our article that appeared in the July 22, 2008 online edition of The Nation, available here.)

        "For what is the crime of burgling a bank, compared with the crime of building one?"Nationlogo_5
        -- Brecht

        The Hearing

        Levin_carl060328_2 Last week in Washington we got a rare look inside the global private banking industry, whose high purpose it is to gather up the assets of the world's wealthiest people and many of its worst villains, and shelter them from tax collectors, prosecutors, creditors, disgruntled business associates, family members and each other.

        Thursday's standing-room-only hearing on tax haven banks and taxPrincehansadamii compliance was held by the US Senate's Permanent Subcommittee on Investigations, chaired by Michigan Senator Carl Levin, a regular critic of tax havens--except when it comes to offshore leasing companies owned by US auto companies. He presented the results of his Committee's six-month investigation of two of Europe's most venerable financial institutions - LGT Group, the largest bank in Liechtenstein and the personal fiefdom of Crown Prince Hans-Adam II and the royal family, with more than $200 billion in client assets; and UBS, Switzerland's largest bank and the world's largest private wealth manager, with $1.9 trillion in client assets and nearly 84,000 employees in fifty countries, including 32,000 in the United States.Kieber

        Images The theatrics included videotaped testimony by Heinrich3030_kieber Kieber, a Liechtenstein computer expert in a witness protection program with a $7 million bounty on his head, for supplying a list of at least 1,400 LGT clients - some say more than 4,500 - to tax authorities in Europe and the United States; two former American clients of LGT, who took the Fifth Amendment; Martin Liechti, head of UBS international private banking for North and South America, who'd been detained in Miami since April, and who also took the Fifth; Douglas H. Shulman, our sixth IRS commissioner in eight years, who conceded that Martinliechtiubs offshore tax evasion must be a "serious, growing" problem even though the IRS has no idea how large it is; and Mark610x1 Branson, CFO of UBS's Global Wealth Management group, who apologized profusely, pledged to cooperate with the IRS (within the limits of Swiss secrecy) and surprised the Committee by announcing that UBS has decided (for the third time since 2002) to "exit" the shady business of providing new secret Swiss accounts to wealthy Americans.

        There were also several other potential witnesses whose Cov_lowypeter_032307 importance was underscored by their absence. Peter S. Lowy, of Beverly Hills, another former LGT client who'd been subpoenaed, is a key member of the Westfield Group, the world's largest shopping mall dynasty, which has interests in and operates 55 US malls and 63 others around the world with a combined value of more than $60 billion, holds the lease for a new shopping mall at the reconstructed World Trade Center, has many other properties in Australia and Israel, and was recently awarded a L3 billion project for the UK's largest shopping mall, in time for the 2012 Olympics.

        His lawyer, the renowned Washington fixer Robert S.Srobertbennettsmall Bennett, reported that Lowy was "out of the country" and would appear later, probably also just to take the Fifth. Perhaps he traveled to Australia, where his family is also reportedly facing an LGT-related tax audit. (Bennett's law partner, David Zornow, the head of Skadden, Arps' White Collar Crime practice, represents UBS's Liechti.)

        Steven D. Greenfield, a leading New York City toy vendor and private equity investor whose business had been personally recruited by the Crown Prince's brother, went AWOL and did not bother to send a lawyer.

        LGT Group declined to follow UBS's contrite example and also failed to appear.

        Robertwolfubs Also missing from the roster were two prominent UBS executives: Robert Wolf, CEO of UBS Americas, who has reportedly raised over $500,000 for Barack Obama, bundled more than $370,850 for him this year from his bank alone, making UBS Obama's fifth-largest corporate donor, and had private dinners with the junior Senator from Illinois; and former Texas Senator Phil Gramm, vice chairman of UBS Securities LLC, a leading lobbyist for UBS until March, and until recently, John McCain's senior economics adviser. (In 1995, while preparing his own ultimately-unsuccessful race for the Republican Presidential nomination, Gramm commented memorably, "I have the most reliable friend you can have in American politics, and that's ready money.") Images2

        While neither of these UBS executives have been directly implicated in the tax scandal, both might reasonably be questioned about precisely what the rest of UBS in the States knew about the Swiss program, what it implies for US tax policy, and whether those who complain about UBS's knowing facilitation of tax fraud are just whining.

        Small_courter While they were on the subject of offshore abuses, the Senate might also have wanted to depose former top McCain fundraiser James Courter, who also resigned last week, after it was disclosed that his telecom firm, IDT, had been fined $1.3 million by the FCC for using a haven company in the Turks and Caicos to pay bribes to former Haitian President Jean-Bertrand Aristide.

        The Cases

        This crowded docket, combined with the UBS mea culpa, almost distracted us from the sordid details of the Levin Committee's actual findings.

        UBS: UBS opened its first American branch in 1939, and for all we know, has likely been facilitating tax fraud ever since, but the Senate investigation focused only on 2000 to 2007. During this period, even as UBS was sharply expanding its onshore US operations by acquiring Paine Webber, expanding in investment and retail banking, it also mounted a top-secret effort to recruit wealthy Americans, spirit their money to Switzerland and other havens and conceal their assets from the IRS.

        This program, aimed at people with a net worth of $40 million to $50 million each, was staffed by fifty to eighty senior calling officers and 1,000 client advisors. Based in Zurich, Geneva, and Lugano, each officer made two to ten surreptitious trips per year to the United States, calling on thirty to forty existing clients per visit and trying to recruit new ones by attending HNW (high net worth) watering holes like Miami's Art Basel and the UBS Regatta in Newport. By 2007, this program had garnered 20,000 American clients, with offshore assets at UBS alone worth $20 billion.

        To achieve these results, UBS established an elaborate formal training program, which coached bankers on how to avoid surveillance by US customs and law enforcement, falsify visas, encrypt communications, secretly move money in and out of the country and market security products even without broker/dealer licenses.

        Meanwhile, back in 2001, UBS had signed a formal "qualified intermediary" agreement with the US Treasury. Under this program, it agreed either to withhold taxes against American clients who had Swiss accounts and owned US stocks, or disclose their identities. However, when UBS's American clients refused to go along with these arrangements, the bank just caved in and lied to the US government. Eventually, it concealed 19,000 such clients, partly by helping to form hundreds of offshore companies. This cost the US Treasury an estimated $200 million per year in lost taxes.

        In early July 2008, a US court approved a "John Doe" subpoena for UBS, demanding the identities of these 19,000 undisclosed clients. However, as of last week's Senate hearing, UBS has refused to disclose them. While it maintains that it is no longer accepting new Swiss accounts from Americans, it is also insisting on the distinction between "tax fraud" and "tax evasion," reserving full disclosure only for cases involving criminal tax fraud, which is much harder to prove under Swiss law. This means it may be difficult to ever know whether it has kept its commitments.

        Ultimately UBS got caught, not by virtue of diligent law enforcement, much less the Senate's investigation, but by sheer accident. In late June, Bradley Birkenfeld, a senior private banker who'd worked with UBS from 2001 until late 2005 out of Switzerland, and then continued to service the same clients from Miami, pleaded guilty to helping dozens of wealthy American clients launder money. His name surfaced when his largest client, Igor Olenicoff, a Russian emigré property developer from Southern California, was accidentally discovered by the IRS to be reporting much less income tax than he needed to justify his $1.6 billion measurement on the Forbes 400 list of billionaires.

        With Birkenfeld's help, Olenicoff succeeded in parking several hundred million of unreported assets offshore--including millions in accounts controlled by a Bahamian company that he said had been set by former Russian Premier Boris Yeltsin. Ultimately, Olenicoff settled with the IRS for $52 million in back taxes, one of the largest tax evasion cases in Southern California history, and also agreed to repatriate $346 million from Switzerland and Liechtenstein. In theory he faced up to three years of jail time, but--following standard US practice of going easy on big-ticket tax evaders who have no "priors"--he received only two years probation and three weeks of community service.

        As noted, Olenicoff also gave up his UBS private bankers, including Birkenfeld, who plead guilty in June to facilitating tax fraud and is now awaiting sentencing--the first US prosecution of a foreign private banker in history. It was Birkenfeld's revelations, in turn, that led to the disclosure of UBS' program for wealthy Americans, and at least one-half of the Senate investigation.

        The most important point is that this entire program would clearly have been impossible without the knowledge and approval of the bank's most senior officials in Switzerland, and probably some senior US executives as well -- although the Committee did not press this point. As former UBS CEO Peter Wuffli once said, "A company is only as ethical as its people." From this standpoint, we have reason to be concerned that UBS's behavior may repeat itself, so long as so many of these same senior executives remain in place.

        LGT: For all its pretensions to nobility, Liechtenstein is well-known in the trade as the "place for money with the stains that won't come out," a flexible jurisdiction whose "trusts" and "foundations" are basic necessities for everyone from Colombian drug lords and the Saudi royals to the Suhartos, Marcoses, Russian oligarchs, and Sicilian mafia.

        As detailed by the Senate investigation, LGT Group has certainly lived up to this reputation in the US market. It maintained a program that was, if anything, even more sophisticated and discreet than that of UBS for large fortunes. Among its specialties: setting up conduit companies in bland places like Canada, allowing clients to transfer money without attracting attention; leaving the designation of "beneficiaries" up to corporations controlled by potential beneficiaries themselves, a neat way of avoiding "know your customer" rules; rarely visiting clients at home, let alone mailing, e-mailing, or phoning them, certainly never from a Liechtenstein post office, Internet address, or area code; shifting the names of trust beneficiaries to very old folks just before death to make it look like a repatriation of capital was an inheritance.

        In terms of precise trade craft, indeed, LGT had it all over UBS. It only really got caught red-handed when it tried to modernize and trusted Heinrich Kieber, a fellow citizen and IT expert ,who turned out to be either a valiant whistleblower, a well-paid extortionist (he was paid $7.5 million by the German IRS alone for his DVDs), or both.

        The Implications

        So what do we learn from all this? Many will consider these revelations shocking. After all, just as the US government is facing a $500 billion deficit, millions of Americans are fighting to save their homes, cars, and college educations from the consequences of predatory lending, and inequalities of wealth and income are greater than at any time since the late 1920s, we learn that for decades, the world's largest banks have been helping wealthy Americans steal billions in tax revenues from the rest of us. At the very least, this suggests that it may be time to put the issue of big-ticket tax evasion, offshore and on, back on the front burner. But we also need historical perspective. Those who have studied this subject for decades also realize that achieving reform in this arena is not a matter of a few criminal prosecutions. It is a continuous game, requiring persistence and constant adaptations to the opponents, because we are playing against some of the world's most powerful vested interests, with huge fortunes at stake.

        After all, offshore tax evasion by wealthy Americans is hardly new. For example, in May 1937, Treasury Secretary Henry Morgenthau, Jr. wrote a lengthy letter to Franklin Delano Roosevelt, explaining why tax revenues had failed to meet his expectations despite a sharp rise in tax rates. Some rich folks didn't mind paying up, given the hard times so many Americans were facing during the Depression. As Edward Filene, the Boston department store magnate, famously remarked, "Why shouldn't the American people take half their money from me? I took all of it from them." However, according to Morgenthau, many other rich people busied themselves inventing new ways to dodge taxes, notably by secreting funds offshore in brand new havens like the Bahamas, Panama, and.... Newfoundland!

        Scroll forward to the Castle Bank and Trust case of the early 1970s, when another IRS investigation of offshore banking disclosed a list of several hundred wealthy Americans who'd set up trusts in the Bahamas and Cayman Islands. Just as the investigation was picking up steam and the names were about to be publicized, a new IRS Commissioner came in and shut it down--officially because the otherwise-lawless Nixon Administration suddenly got concerned about due process. Few names on the list--a copy of which appears in my forthcoming book, Pirate Bankers, were ever investigated.

        Scroll forward now to the late 1990s, when the Organization for Economic Cooperation and Development (OECD), the European Union and the US Treasury once again became excited about offshore tax havens. As the EU launched its "savings tax directive" on cross-border interest, a Cayman banker surfaced to report that more than 95 percent of his nearly 2,000 clients were Americans, and the IRS discovered 1 million to 2 million Americans using credit cards from offshore banks. Meanwhile, the OECD's favorite tool became the "blacklist." A list of thirty-five to forty "havens" was evaluated on the basis of abstract criteria like the quality of anti-money laundering programs and the willingness to negotiate information sharing agreements.

        Unfortunately this "name and shame" approach didn't have much success. First, the OECD had no success against jurisdictions like Monaco, Andorra, and Liechtenstein that are basically shameless. Second, the OECD's definition of "haven" was highly selective. It omitted many emerging havens like Dubai, the Malaysian island of Labuan, Estonia, Singapore, and for certain purposes even Denmark, whose importance has recently increased. As we'll see, it also ignored the role of major onshore havens like London and New York, which have been very attractive to the world's non-resident rich, especially from the developing world.

        Third, blacklisting havens focused on the wrong dimension. As Senator Levin's hearing has underscored, the real problem is a global pirate banking industry that cuts across individual havens, and includes many of our largest, most influential commercial and investment banks, hedge funds, law firms, and accounting firms. From their standpoint, it doesn't much matter whether a particular haven survives, so long as others turn up to take their place in providing anonymity, security, and low-tax returns. Up to now, despite blacklisting, the supply of new tax haven vehicles has been very elastic.

        On the other hand, as the UBS and LGT cases show, the dominant players in global private banking are relatively stable institutions--which makes sense, given their clients' need for stable sanctuaries. This suggests that it makes more sense to focus on regulating institutions than regulating or blacklisting physical places.

        Until the UBS case, this seemed to be much more difficult than, say, beating up on some tiny and distant sultry island for shady people. Even now, after the Birkenfeld case supplied the first private banker prosecution, we have yet to see the first criminal prosecution of a top-tier private bank--apart from BCCI in the early 1990s, which had already failed and was hardly top-tier.

        This is not because of a shortage of despicable behavior. For example, UBS, like most of its competitors in global private banking, has a long history of engaging in perfidious behavior, apologizing for it, and then turning back to the future. This includes UBS's involvement in South Africa's apartheid debt and the accounts scandals of the 1980s involving the Marcos family; Benazir Bhutto, Mobutu Sese Seko, Holocaust victims, and Nigerian dictator Sani Abacha in the 1990s; the 2001 Enron bankruptcy, and the Menem arms-purchasing scandal in Argentina; the 2003 Parmalat scandal; the 2004-2006 Iran/ Cuba/Saddam funds transfers scandal, for which it was fined $100 million by the Federal Reserve; the 2008 Massachusetts and New York securities fraud cases, and now the Birkenfeld matter. Furthermore, as the Committee report noted, UBS has a history of violating even its own policies. From this angle, unapologetic LGT is at least not hypocritical.

        It is also well to remember that UBS and LGT are hardly the only global private banks involved in recruiting wealthy clients to move money offshore. The Committee report indicates a long list of other banks that also provided offshore services to American clients involved in the UBS and LGT cases--including Citibank (Swiss), HSBC, Barclays (Birkenfeld's original employer), Credit Suisse, Lloyds TSB, Standard Chartered, Banque du Gotthard, Centrum, Bank Jacob Safra, and Bank of Montreal. In addition, there are dozens of other non-US and US banks that are also active in the offshore US private banking market. This suggests the shortcomings of a case-by-case prosecutorial approach, and the value of designing regulations to improve behavior and provide ongoing feedback about taxpayer compliance.

        In principle, one can imagine many such improvements in regulation, assuming a compliant Congress. For example, as proposed in the "Stop Haven Abuses Act" (S-681) introduced in 2006 and revised in February 2007 by Senators Levin, Coleman, and Obama, there would be a rebuttable presumption that offshore shell corporations and trusts are owned by those who establish them. This would eliminate the "Q.I. rule" exception, which allowed hundreds of UBS clients to avoid reporting to the IRS simply by moving their assets to into shell companies.

        We could also institute many other changes, including an increase in the painfully short, three-year statute of limitations for investigating and proposing changes in offshore tax liabilities; tightening up on anti-money laundering legislation; levying withholding taxes against hedge funds; raising the penalties for abusive tax shelters, and requiring banks that open offshore entities for US clients to report them to the US Treasury.

        Key Tasks

        However, most of these proposed rule changes have the flavor of stopgaps, technical gimmicks that are still far too focused on individual taxpayers rather than the private banking industry--the advisers, enablers, and systems operators. If we're right that this industry had become an unregulated, untaxed black hole--a multi-billion-dollar global "bad"--we need to focus on two key tasks.

        The first is to create appropriate incentives for the global private banking industry to do the right thing. We need to find ways to tax the behavior of tax-evading institutions, their CEOs, senior managers, and even shareholders, to punish them for more misbehavior, and perhaps also reward them for bringing the money home with a brief one-time tax amnesty. In the short run, there have to be more Bradley Birkenfelds, more exposés, and more penalties for banks and bankers alike. Mere apologies, however heartfelt, should not be enough.

        The second challenge is to organize a global alliance around this issue. This is more difficult, although steps are already being taken. Global organizations like Tax Justice International, Oxfam GB, Friends of the Earth, Global Witness, and Christian Aid are converging on a new global campaign around the issue of havens and offshore tax evasion. They've been enlisting support for this effort from countries like Norway, Chile, Brazil, Spain, and France, organizations like the UNDP, the World Bank, and even the International Monetary Fund.

        This is very exciting, but the organizers face one critical problem--the fact there are serious conflicts of interest among developed and developing countries. The fact is that the United States, the UK and other developed countries not only lose tax revenue to haven banking; they also profit from it, because their own banks are so deeply engaged in it, especially when it involves developing countries.

        Back in April 1986, this author broke the story that Citibank was actually taking far more capital out of Latin America and other developing countries than it was lending to them, despite its reputation as the largest Third-World lender. Indeed, the business of helping Third-World elites decapitalize their own countries had become so large and lucrative that Citi's private banking group was the bank's single most profitable division.

        To achieve that feat, Citigroup resorted to skullduggery and the flouting of local laws all over the planet. This included repeatedly sending teams of private bankers undercover to countries like Brazil, Argentina, and Venezuela; helping to set up thousands of shell companies and bank accounts in offshore havens and secretly transferring funds to them; teaching its clients money-laundering tricks like mis-invoicing and back-to-back loans; designing ways to communicate with clients that kept their financial secrets safe; and overall, concealing vast sums of flight capital from Third World tax authorities (and their competitors), while lobbying Congress to insure that any foreign capital that arrived in the United States enjoyed near-zero taxes and near-Swiss secrecy. For a time the resulting tax breaks and lax banking rules that applied to "nonresident aliens" from other countries made the United States, in effect, one of the world's largest tax havens.

        In short, from the 1970s to the 1990s, banks like Citigroup, BankAmerica, and JP Morgan Chase (and UBS, Credit Suisse, RBS, Paribas and Barclays, etc.) were behaving throughout the Third World just as badly as UBS has recently been behaving here. And their very success laid the foundations for the global, private-haven banking industry with which the IRS is now struggling.

        At the time, it seemed that their behavior was hurtful mainly to the developing world, which wasn't strong enough to hold Senate hearings and put Citibankers in jail. But lately it has become clear that the system has grown large enough to consume its creators.

        In the last thirty years, fueled by the globalization of financial services, lousy lending, capital flight, and mind-boggling corruption, a relatively small number of major banks, law firms, accounting firms, asset managers, insurance companies, and hedge funds have come to launder and conceal at least $10 trillion to $15 trillion of private untaxed anonymous cross-border wealth.

        Rich people the world over, including tens of thousands of wealthy Americans, are now free to opt in to this sophisticated, secretive, utterly unprincipled global private banking industry. They can become, in effect, residents of nowhere for tax purposes, citizens of a brave new virtual country, which offers its inhabitants unprecedented freedom from the taxes, regulations, and moral restraints that the rest of us take for granted. They wield enormous political influence even without paying taxes, merely by making contributions, threatening to withhold them--or better yet, threatening to abscond with their capital unless certain conditions are met. In a sense, this is the ultimate libertarian pipe dream: representation without taxation. But it is a nightmare for the rest of us, and we must design and organize our way around it.


        Let me just add one paragraph for those in the audience who don’t automatically stand up and cheer every time someone figures out a new way to boost tax revenues, even through better law enforcement.

        Why should we care whether Davy Jones is clever enough to fiddle with his IRS bill, even by way of offshore banks?  Wouldn’t the funds just be wasted if they went to the government rather than to finance Davy’s yacht tender in Marbella? Or won’t the government just borrow and spend anyway, regardless of revenues?

        Well, in these  straightened times, with a gargantuan federal deficit, most state and local governments running out of debt capacity, stagflation, a weak dollar,  private debt at record levels, and rising unemployment,  just imagine that every extra dollar for that yacht tender is coming right out of  the funds available for schools, teachers, hospitals, roads, police, and fire protection – local services. The free lunches have all been mortaged, or given away in capital gains tax cuts for the same social class that is also are evading what little taxes they still have to pay.  Meanwhile,  $1 spent on a yacht tender goes right to the bottom, while $1 spent on  food, salaries, or even roads has a much greater multipler, and benefits a more deserving class. 

        Perhaps best of all, think of the difference between giving an exra $1 to the hard-working child care worker down the street, compared with $1 to some wealthy scion of a giant shopping mall dynasty who spends his life just trying to spend his inheritance.


        About James S. Henry

        James S. Henry is a New York-based investigative journalist who has written widely on the problems of tax havens, debt, and development. His most recent book, The Blood Bankers (Basic Books, 2005), examined where the money went that was loaned to eight developing nations. His forthcoming book, Pirate Bankers (2009), examines the history and structure of the global private banking industry.

        July 24, 2008 at 01:06 AM | Permalink | Comments (0) | TrackBack

        Tuesday, July 01, 2008

        UBS Role Raises Basic Questions About McCain's Key Economic Adviser
        James S. Henry

        "A company is only as ethical as its people." 
        -- Peter Wuffli, x UBS CEO

        John McCain has long since admitted that he has a great deal to learn when it comes to economics.  But it turns out that hisMccain own chief economic advisor,  former US Senator Dr. Phil Gramm, has also needed rather extensive retraining lately. Unfortunately this has been acquired mainly at the expense of millions of US home buyers, honest taxpayers, former Enron employees, and would-be enforcers of our (bank-driven,  loophole-ridden) anti-money laundering laws.


        Gramm, a somewhat goofy-looking, deceptively slow-talking business economist from Georgia, spent 12 years teaching economics at Texas A&M before getting elected to Congress as a conservative Democrat in 1978. By 1982 he'd switched sides, joining the Reagan Revolution to become one of the Republican Party's most outspoken champions of deregulation, tax cuts, and spending controls -- so long as this didn't affect his pet interest groups.

        Enron In the next two decades,  Dr. Gramm was perhaps the Senate's leading proponent of  financial services deregulation, weakened restrictions commodity trading, credit cards, consumer banking, and predatory lending practices, in addition to leading the fight against Hillary Clinton's health insurance reforms. As chairman of the Senate Banking Committee from 1996 to 2000, he was a key author of legislation that eliminated most of the legal barriers between US banks, brokerages, investment banks, and insurance companies that had been in place since the 1930s.

        Phil was also a determined opponent of tougher IRS tax enforcement, and a principal author of a 2000 law that exempted companies like Enron from regulation for online energy trading activities. Of course this made sound economic sense. After all, Phil's wife Wendy was a member of Enron's board, and Enron was Phil's largest corporate contributor in the 1990s.

        In 2000-2002, both before and after 9/11, Phil also became the key opponent of tougher anti-money laundering regulations, and -- not coincidentally-- one of the largest recipients of contributions from the powerful financial services lobby. Among independent journalists, all this helped to make him known by a variety of sobriquets, including "Foreclosure Phil," "Slick Philly," and "The Personal Representative of the Bank of Antigua."


        Images This track record stood Dr. Gramm in good stead when it came time to seek new employment in 2003, after the Republicans lost control of the Senate.  Naturally enough,  he gravitated toward his friends in the global private banking industry, whose noble calling it is to gather the assets of the world's wealthiest people and protect and conceal them from taxes, regulation, and expropriation, not to mention  embittered family members, ex-lovers and business partners,  and each other.   

        Since 2002, Dr. Gramm has served as Vice Chairman of UBS Investment Bank, which is owned by UBS AG, the largest Swiss bank, the world's 16th largest commercial bank,  and the world's largest private asset manager, with more than 80,000 employees and offices in 50 countries.

        Even after joining McCain's campaign during the summer of 2007, Dr. Gramm continued to serve as a registered Washington lobbyist for UBS from 2004 until April 2008, lobbying Congress to maintain weak restrictions on sub-prime lending and predatory lending.

        BAD TIMING

        In hindsight, Dr. Gramm's recent crusade for even more financial freedom turned out to be  ill-timed,  for several reasons.

        First, this was hardly the moment for even more financial deregulation than the US had already digested in the 1990s. After 2002, on Dr. Gramm's watch, UBS became one of the most world's aggressive banks, helping to foment and finance the sub-prime lending crisis that has already cost nearly three million Americans their homes, generated more than $250 billion in bank losses, and driven a $7.7 trillion hole in global equity markets.

        Since November 2007 UBS alone has written off $37 billions in mortgage-related assets, the largest write-off for any Ubsstock62008bank.  In July 2007, UBS's McKinsey-trained CEO, Peter Wuffli, was forced to resign, and in April 2008 its $24 million -per-year Chairman, Marcel Ospel, was given the toe. Since then its stock price has plummeted more than 70 percent,  to its lowest level since 2002.

        Meanwhile, the bank also revealed itself to be curiously insensitive to US financial regulations. For example, in May 2004, it was fined $100 million by the US Federal Reserve for violating an embargo on funds transfers to countries like Iran and Cuba. 

        Finally, it now turns out that Dr.Gramm's  colleagues at the bank have also been up to their eyeballs in yet another dubious business:  helping up to 20,000 wealthy American tax cheats hide their wealth offshore and commit outright tax fraud, cheating the IRS out of tens of $billions in tax revenue.


        Late last month, Bradley Birkenfield, a senior private banker who'd worked with UBS from 2001 until 2006 out of Switzerland, and then continued to service their clients out of Miami,  pleaded guilty to helpingOlenicoffincourt21 dozens of his wealthy American clients launder their money. His name had originally surfaced when  a Southern California billionaire property developer, Igor M. Olenicoff, had been discovered by the IRS to be paying much less income tax than his status on the Forbes 400 list status warranted.

        With the help of Birkenfield and other UBS private bankers, Olenicoff, who'd first established offshore accounts as early as 1992, succeeded in parking at least several hundred million of unreported assets offshore.(Download bankers-indicment-in-florida.pdf)

        Ultimately Olenicoff settled with the IRS for $52 million in back taxes, one of the largest tax evasion cases in Southern California history. He also agreed to repatriate $346 million that he had parked in Switzerland and Liechtentstein.

        In theory he also faced up to 3 years of jail time, but in practice -- following the standard US practice of going easy on big-ticket tax evaders with no priors -- his maxmum exposure was just six months under standard US sentencing guidelines. Indeed, ultimately Olenicoff only got two years probation and 3 weeks of "community service."   

        One also gets the sense that this case was a bit like the cat pulling on the sweater yarn. According to Forbes, Olenicoff reported that many of his other foreign accounts were controlled by Sovereign Bancorp Ltd., a Bahamian company that he claimed had been set by former Russian Premier Boris Yeltsin.

        Images_2 In any case, in the process of making up for lost time with the IRS,  Olenicoff also gave up his two UBS private bankers, Birkenfield, and According to Birkenfield, he was just one of more than 50 UBS private bankers who visited the US out of Switzerland each quarter. This case,  the first US prosecution of a foreign private banker ever, signals that even the Bush Administration has become fed up with the estimated $100 billion per year in lost tax revenues that such practices are costing, and has decided to make an example of Dr. Gramm's employers.

        UBS'  sin was that it took "you be us" a step too far.  Like other major global banks, UBS AG had signed a "qualified intermediary" agreement with the US Treasury in 200(x), giving its corporate word that it would either insure that its clients were not US citizens, or withhold appropriate taxes. But when UBS AG's American clients refused to go along with such arrangements, UBS just caved in and lied to the US Government. 

        As a result, despite his cooperation, Birkenfield, the former UBS private banker,  is likely get serious jail time this August. Meanwhile, the DOJ has just  issued a "John Doe" summons to UBS AG, requiring it to turn over the identify of its entire list of wealthy American clients. The head of UBS AG's Global Private Banking business unit has been arrested and detained in the US on "material witness" charges, pending resolution of this dispute.  The private banker's wealthy clients are experiencing the tender mercies of the IRS's tax fraud department as we speak -- not only from this US case, but also from the recent scandal involving Liechtenstein's largest bank, where many UBS clients were also channeled.  UBS's shareholders all over the globe must be quaking in their boots, fearing the bank could be subject to massive fines or even a corporate indictment that would prevent it from doing business in the US ever again.


        The questions for Dr. Gramm arising out of these scandals are many.   

        • First,  was Dr. Gramm completely unaware that UBS AG had organized this massive illicit global campaign to elicit capital flight from the US and other "honest-tax" jurisdictions,  conceal it in low-tax havens like Liechtenstein,  and completely shelter it from the taxes that ordinary taxpayers have little choice but to pay?
        • Second, are any of these 20,000 wealthy tax cheats from Texas?  Does Dr. Phil know any of them personally? 
        • Third,  what kind of changes, if any,  in laws pertaining to "qualified intermediaries," offshore havens, private banking, and international tax havens does Dr. Gramm believe are necessary? Would he, for example, support the reform bill on foreign havens and "qualified intermediary" rules that Senators Levin and Obama have co-authored? Precisely when will John McCain sign up to endorse that legislation?
        • Fourth, what else has Dr. Phil learned from all these cases?  Has he changed any of his views on the morality of tax dodging, money laundering, and predatory lending?  Is all this just a matter of "sauve qui peut" -- of whatever we can all get away with, especially the rich?  Does John McCain agree with him on such matters?  What then remains, alas, of "patriotism" and "national sacrifice," two of McCain's favorite leitmotifs?
        • Finally, given that John McCain really does need sound advice on economic issues like the mortgage crisis, taxation, and money laundering from a "qualified intermediary" of his own,  does all this experience really qualify Dr. Phil Gramm to fill the bill?

        (c) SubmergingMarkets 2008

        July 1, 2008 at 08:41 PM | Permalink | Comments (0) | TrackBack