Posts tagged with 'CEO pay'
Weekly Audit: Business Press Gets Nasty as Economy Worsens
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by Zach Carter, Media Consortium blogger
The economy is terrible. Jobs are nowhere to be found. Wall Street bonuses are through the roof. But mainstream business journalism is still praising the con-men who created this mess, yet attacking anybody who takes real solutions—like government spending to create jobs—seriously.
Whatever corporate journalists say, the American economy will not recover until policymakers and the media acknowledge the mistakes of the past and move forward with a new economic agenda focused on middle-class prosperity, rather than financial evisceration by elites.
Creating jobs is key
As Annie Lowrey notes for The Washington Independent, while President Barack Obama’s economic stimulus package has dramatically slowed the pace of job losses, it hasn’t been enough to make a serious dent in the unemployment rate, which currently stands at 9.6 percent. Without a serious new set of stimulus measures, we’ll see that rate stay near double-digits for years to come. (more…)
Weekly Audit: After Health Care, the Economy
By Zach Carter, Media Consortium blogger
Now that health care reform has finally been enacted, a host of critical economic issues are taking center stage, including financial reform, unemployment and deeply rooted economic inequality. But it’s important to note that with its health care vote, the U.S. House of Representatives actually approved a very important, and often overlooked financial reform: Student lending.
Pedro de la Torre III of Campus Progress explains the current student loan nightmare in an interview with The American Prospect’s Rebecca Delaney. For years, the U.S. government has paid massive subsidies to some of the worst-run companies in the country.
Thanks a lot, Sallie Mae
As de la Torre notes, instead of directly making loans to students, the government spent years funneling money to firms like Sallie Mae to actually make the loans. When things went sour, taxpayers covered the lender’s losses from student loans that ultimately went bad.
Taxpayers were also footing the bill for the loans and taking on the risk, while private companies and their executives enjoyed the benefits. The executives made quite a haul. In 2008 alone, Sallie Mae CEO Albert Lord took home an astonishing $46 million. Even among CEOs, that’s a princely sum—more than double what Halliburton CEO David Lesar made the same year. All of that money could have financed a lot of college educations.
Fortunately, the student loan landscape is almost certain to change as a result of the health care vote. The House bill included a provision to end student loan subsidies and boost funding for direct grants from the government to students.
Since the student loan reform and health care were both eligible for reconciliation in the Senate (meaning only 51 votes are needed for passage instead of the 60 to clear a filibuster), House Democrats decided to move on both at the same time. It’s a significant reform, and one that will soon become law with President Barack Obama’s signature.
What would an overhaul of the consumer finance industry entail?
The student loan system is just one aspect of the consumer finance industry that needs a major overhaul. On mortgages, credit cards, overdrafts, and payday loans, the banking status quo is one of outright predation. As Heather McGhee of Demos explains to The Nation’s Christopher Hayes, there’s a reason why federal agencies do a lousy job regulating consumer banking abuses.
Right now there is no agency responsible for consumer protection alone. Every regulator also focuses on making sure banks don’t fail, which generally means that regulators support anything that increases short-term profits. Egregiously predatory practices generally lead to big short-term gains in banking.
A new consumer financial protection bureau
Last week, Senate Banking Committee Chairman Chris Dodd (D-CT) introduced a bill that would create a new bureau of consumer financial protection, with no constraints from bank profitability. It’s a step in the right direction, but as McGhee notes, there are plenty of problems with Dodd’s proposal. Most problematically, the bill gives existing agencies a veto power over any new consumer protection rules. That’s a terrible loophole. Existing regulators have actively opposed consumer protections in the past, and there is every reason to expect that practice to continue.
Rapid tax refunds scam the poor
It’s late March, which means tax season is getting into full swing. All over the country, mascots from Liberty Tax are spilling into the streets wearing goofy costumes, trying to win your business. But millions of Americans don’t realize that Liberty, along with H&R Block, Jackson-Hewitt and hundreds of smaller businesses are engaged in a monstrous scam disguised as a complicated accounting service.
As Alexander Zaitchik emphasizes for AlterNet, these tax preparers have used deceptive advertising and slick salesmanship to con people into taking out “refund anticipation loans,” also known as “rapid refunds” and a handful of other pleasant euphemisms. It’s a simple gimmick: H&R Block does your taxes, and then presents you with your tax refund, right away, no waiting. But the check you receive is not actually your tax refund—it’s your tax refund minus a truckload of fees that you didn’t realize were being deducted. This is the tax-time equivalent of payday lending.
When the government sends in your actual, larger tax refund one-to-two weeks later, you won’t see it—it goes straight to H&R Block’s bank partner. Those banks are making big money taking from your tax returns. Here’s Zaitchik:
“In 2008, more than eight million Americans spent nearly a billion dollars paying interest and fees on RALs—often based on misleading or incomplete information—swelling the profits of tax preparers and their partner banks.”
The one break low-income people get under the U.S. tax code is the Earned Income Tax Credit (EITC), the nation’s largest anti-poverty program. Only about 16% of taxpayers qualify for the EITC, but as Zaitchik notes, nearly two-thirds of the people who take out refund anticipation loans receive the credit. Tax preparers are making a concerted effort to prey on the poor, making the EITC program more expensive and less efficient for all taxpayers—not just those who go to H&R Block or Liberty Tax.
More action needed on jobs
Beyond finance, the U.S. economy has a serious jobs problem. Last week, Congress approved an $18 billion jobs package that is simply far too small to make a serious dent in the nearly double-digit unemployment rate. As Art Levine explains for Working In These Times, the package will create 250,000 jobs at best. That number shouldn’t be acceptable to anyone watching the U.S. economy, which has shed about 7 million jobs since the recession began.
There are much stronger options available than the $18 million bill the Senate approved. Rep. George Miller (D-CA) has introduced a bill in the House that would quickly save or create one million jobs, and the House has already passed a separate $154 billion jobs package that would prevent 900,000 lay-offs. If the Senate moved on either one, the result would be a major economic boost.
The link between poor economies and poor health
All of these problems—unemployment, student loan scamming, refund anticipation loan sharking and other forms of financial predation—reinforce economic inequality in the United States, which is at levels unseen since before the Great Depression. That inequality is ultimately actively damaging to public health, as epidemiologist Richard Wilkinson explains in an interview with Brooke Jarvis for Yes! Magazine. Rampant economic inequality in the United States is literally making us sick.
“We looked at life expectancy, mental illness, teen birthrates, violence, the percent of populations in prison, and drug use,” Wilkinson says. “They were all not just a little bit worse, but much worse, in more unequal countries.”
With health care finally finished, Congress and the administration have an opportunity to make serious headway on the economy. They’ve got plenty of work to do.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.
Weekly Audit: Stop Wall Street’s Economic Rampage
By Zach Carter, TMC Blogger
Over the past year, Wall Street’s excess has helped push the unemployment rate to epic levels and created millions of foreclosures. Yet the rules of the financial road remain unchanged. As 2009 draws to a close, it’s astonishing that so little progress towards financial reform has been made.
President Obama, Congress and federal regulators have not been tough enough on the nation’s financial elite. As Monika Bauerlein and Clara Jeffery emphasize for Mother Jones, the government has committed about $14 trillion in bailout funds to save the banking system without demanding much of anything in return. Goldman Sachs and other big banks are now planning to pay giant bonuses that come straight from taxpayer giveaways rather than invest that money in socially constructive banking.
“Bankers aren’t being rewarded for pulling the economy out of the doldrums,” Bauerlein and Jeffery write. “Nope, they’re simply skimming from the trillions we’ve shoveled at them.”
The major banks are even spending our bailout money to lobby against reform. When President Obama called a meeting for leaders of the nation’s largest banks to scold them for their lobbying, the heads of Morgan Stanley, Goldman Sachs and Citigroup didn’t even bother to show up, as Matthew Rothschild describes in a podcast for The Progressive.
It’s easy to see why the bank execs are so indifferent, Rothschild argues, even to the president. Now that almost all of these banks have repaid the loans they received under the Troubled Asset Relief Program (TARP), Obama has no negotiating leverage and the bankers know it. Even though it represents just a tiny fraction of the $14 trillion bailout, TARP was the only program that attached any strings to that money. Prior to those TARP repayments, Obama could have demanded that banks do more lending to help the economy, work harder to keep troubled borrowers in their homes—or face executive compensation restrictions or other penalties.
And many of the same regulators who helped bring about today’s economic disaster are still in power. As Sen. Bernie Sanders (I-VT) explains for Brave New Films (video below), Federal Reserve Chairman Ben Bernanke blew just about every major policy decision he faced in the years leading up to the crisis. Bernanke, who was recently named person of the year by Time magazine, failed to rein in reckless mortgage speculation, predatory lending or excessive compensation packages. Nevertheless, President Obama has appointed him to another term.
“This recession was precipitated by the greed, recklessness and illegal behavior on Wall Street,” Sanders says. “One of the key responsibilities of the Fed is to maintain the safety and soundness of our financial institutions … The Fed was asleep at the wheel, Bernanke did not do the job.”
Sanders notes that even Bernanke’s financial clean-up operations have been deeply flawed. Bernanke has helped make today’s too-big-to-fail banks even bigger. If we want to stop the lobbying and policy deference that politicians grant to Wall Street, we have to break up the biggest banks into smaller firms that do not endanger the economy if they fail.
Bernanke is not the only holdover from the Bush administration that wields significant economic power under Obama. As I note in a piece for The Nation, John Dugan, the top bank regulator appointed by President George W. Bush, remains in office today, despite failing to ensure the financial health of our largest banks and actively working to undermine consumer protection.
Campaign contributions from the bank lobby will not be enough to counter the voter outrage that President Obama and members of Congress are facing, nor should they. If our leaders want a serious shot at re-election, they need to recognize the need for significant change on Wall Street. That means breaking up the big banks and setting economic policy that helps all of our citizens, not just financiers.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.
Weekly Audit: Dismantling the Wall Street Casino
By Zach Carter, Media Consortium Blogger
Bailout pay czar Ken Feinberg raised a ruckus last week when he announced plans to slash cash payouts to executives at seven companies that have received massive levels of taxpayer support. While better oversight of the bailout barons is helpful, the best way to change Wall Street pay practices is to adopt a set of tough, comprehensive regulations that cover everything from the executive suite to the loan department. As is, many of the executives Feinberg cracked down on will still make millions this year from stocks and other perks, while the very banks that depend the most on bailout money are spending like mad to lobby against reform. (more…)
Weekly Audit: Cheating Workers and Pampering CEOs
By Zach Carter, Media Consortium Blogger
Low-wage workers are struggling to navigate the current recession. A new study conducted by a team of academics reveals that the majority of workers at the bottom of the economic ladder have been shorted on their paychecks as recently as last week. But the compensation crisis looks very different on Wall Street, where excessive pay tied to risky activities helped set the economy on its crash course. Despite the resulting deep recession, pay for high-level U.S. financiers remains over-the-top, even as low wage workers struggle to navigate the downturn.
The U.S. has made a few gestures toward scaling back executive compensation for banks that it bailed out under the Troubled Asset Relief Program, but the rules have amounted to little more than window-dressing, according to a paper published last week by the Institute for Policy Studies. The paper’s authors, Sarah Anderson and Sam Pizzigati, found that ten of the 20 largest bailout banks have reported stock option compensation for 2009, and the top five executives at those companies have scored a full $90 million so far this year. That’s just through stock options. The number gets even more obscene if you include bonuses, salary and other payouts.
As Anderson and Pizzigati explain in a companion piece published in AlterNet, bank executives collected huge bonuses based on the profits from subprime loans during the housing bubble. Since subprime mortgages were more expensive than traditional loans, profits were high—until borrowers stopped being able to pay back their predatory, unaffordable debt. Suddenly the banks were all busted, but the executives had already made a killing.
Katrina vanden Huevel emphasizes in The Nation that the U.S. government doesn’t even try to tax this kind of income, much less regulate its connection to risk-taking. Billions of dollars in tax revenue are lost each year as financiers hide payouts in offshore tax havens, while on-the-books income from financial activities are taxed at arbitrarily low rates. Capital gains like stock price increases, for instance, are taxed at just 15%, while income from an ordinary paycheck is taxed at 35% for the wealthiest individuals.
While the U.S. dallies on executive pay, key leaders in Europe are moving to rein in risky compensation practices in the financial sector, as detailed in this video report over at The Real News. President Barack Obama will meet with U.K. Prime Minister Gordon Brown, French President Nicholas Sarkozy, German Chancellor Angela Merkel and other leaders of the G-20 in Pittsburgh later this month, and financial regulatory reform will be at the top of the agenda.
For ordinary workers, there are few positive signs in the current economy. The Washington Monthly’s Steve Benen dissects the latest batch of unemployment numbers from the Labor Department. The good news is that the overall pace of layoffs seems to be abating. The bad news? The U.S. still lost a whopping 216,000 jobs in August. And broader measures of workplace woe are even worse. The unemployment rate does not include discouraged workers who have stopped looking for a job, and it doesn’t include those who want to work full-time but have to settle for part-time employment. That statistic actually declined slightly in July, giving some economists cause for optimism. But the metric soared again in August, reaching the highest level on record.
And unemployment is not the only problem workers face. Both Tim Fernholz of The American Prospect and Elizabeth Palmberg of Sojourners highlight a New York Times story by labor reporter Steven Greenhouse, which details how low-wage workers are routinely cheated by their employers. According to a recent study, a full 68% of these workers report having experienced an illegal workplace abuse in the past week, such as being denied overtime pay or being required to work for less than minimum wage. On average, workers lost 15% of their weekly income as a result of this exploitation.
We have good laws to protect workers, but they just aren’t being enforced. Companies have successfully intimidated their employees into not reporting blatantly illegal pay practices. The best way to resolve this situation is to expand unionization and give workers a stronger voice in the workplace, making it safe to speak out against abuses. And the best way to expand unionization is to enact the Employee Free Choice Act, which lowers barriers to creating a union. But the legislative process has been delayed by a smear campaign organized by executives and managers claiming that unions, and not corporate elites, are the actual source of workplace coercion.
“It ought to make your blood boil—especially as people decry union thugs ‘intimidating’ people into joining unions when that doesn’t happen and most workers want to join a union,” Fernholz writes.
The U.S. needs to get its economic priorities in order. We should be protecting low-wage workers from executive excess, not the other way around. President Obama will have an opportunity to coordinate that effort globally at the G-20 summit later this month. Let’s hope he doesn’t squander it.
This post features links to the best independent, progressive reporting about the economy and is free to reprint. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.
Weekly Audit: Bigger Than ‘Too Big to Fail’
by Zach Carter, TMC MediaWire Blogger
Now that trillions of taxpayer dollars have been pumped through the financial system, Wall Street giants JPMorgan and Goldman Sachs are reporting record profits—and giving out record bonuses. Goldman is planning to pay out $11.4 billion in compensation “earned” with our money. Even worse, attempts to regulate reckless financiers or empower ordinary workers are still being stymied by influential corporate lobbyists.
How did Goldman score the biggest quarterly profit in its history? Matt Taibbi explains in an interview with GritTV’s Laura Flanders. The $10 billion in direct capital that Goldman received from taxpayers under the Troubled Asset Relief Program (TARP) is actually one of the minor offenses. The company also converted corporate charters to become eligible for guarantees, and issued a whopping $28 billion in debt guaranteed by the government.
Banks were foundering last Fall, and very few investors were willing to supply them with emergency capital. So the FDIC guaranteed their debt, which allowed banks to raise funds at extremely low interest rates. The FDIC guarantee means that taxpayers will get stuck with the bill if the company defaults. If you can raise money at absurdly low rates, its very easy to turn over huge profits, as both Goldman and JPMorgan did.
There are other outrages: We still don’t know how much money the Federal Reserve loaned Goldman through its emergency lending facilities. The government’s bailout of AIG served as a huge windfall for the company, funneling at least $12.9 billion in taxpayer largesse directly to Goldman Sachs.
“AIG owed Goldman about $20 billion, and if AIG had gone through a normal bankruptcy, Goldman probably would have gone out of business. Instead, they got paid 100 cents on the dollar for every dollar that AIG owed them,” says Taibbi, author of a blistering take-down of the investment banking giant in the most recent issue of Rolling Stone.
In Salon, former Clinton Secretary of Labor Robert Reich says that this year’s big bank failures have resulted in a heavier concentration of financial influence in the few surviving firms, namely Goldman Sachs and JPMorgan. We have taken the “too big to fail” problem and made it bigger. JPMorgan acquired rival Bear Stearns for a pittance last March with billions of dollars in government guarantees. The company also picked up national banking giant Washington Mutual last fall. That means more risk in our economy and a greater concentration of lobbying power in our political system.
“We’ve ended up with two giants that now have most of the casino to themselves, are playing with poker chips backed by taxpayers, and have a big say in what the rules of the game are to be,” Reich writes.
Adam Schlesinger of Air America took to Wall Street to compile a hodgepodge of one-on-one interviews with bailout critics and condescending financiers. Schlesinger underscores the absurdity of Goldman’s pending bonuses by posting his own checking account balance ($13.75). The point of this massive bailout was to make the economy function for ordinary people. Instead, we’ve made sure that it benefits extremely wealthy bankers.
The government so completely resists doing anything about this staggering inequality, as Eyal Press writes for The Nation. There are two ways to approach the inequality problem. We can rein in the recklessness at the top by imposing serious regulations, and empower those at the bottom by giving them greater negotiating leverage with their employers (i.e., promoting unionization). While the bonus money flows on Wall Street, the Employee Free Choice Act (EFCA), a key bill to empowering unions, was just stripped of a crucial provision that would have made it easier for workers to organize, as David Moberg reports for In These Times.
As EFCA is gutted, bills proposing regulations for the financial sector are moving at a snail’s pace—even after two years of economic turmoil. Last week, Congressional leaders from both parties nominated members for a new panel, the Financial Crisis Inquiry Commission, to investigate the causes of the financial crisis. The investigation seems doomed to failure by its very design. Zachary Roth details the committee’s various shortcomings for Talking Points Memo. Of the panelists, six were nominated by the Democratic leadership, while four were nominated by the Republican leadership. If all four Republican nominees vote to block a subpoena, the committee cannot issue it, and without broad subpoena power, the entire exercise is futile.
Roth also emphasizes the excessively political nature of the appointees, particularly on the Republican side, which named former Rep. Bill Thomas, R-Calif., as Vice Chair. The Democratic picks are generally uninspiring, except for Brooksley Born, who fought to regulate derivatives in the 1990s as head of the Commodity Futures Trading Commission. But the Democrats have nobody anywhere near as frightening as Rep. Thomas, a vicious partisan who specialized in ushering money to special interests during his tenure as Chairman of the House Ways and Means Committee.
Mary Kane of The Washington Independent explains the troubling record of another Republican commission appointee, Peter Wallison of the American Enterprise Institute (AEI), a conservative think tank. The various conspiracy theories Wallison peddled include a robustly debunked belief that a decades-old anti-discrimination law is responsible for the mortgage meltdown. The law in question, known as the Community Reinvestment Act (CRA), dates back to 1977, and Wallison’s conspiracy theory has been rejected by nearly everyone in the financial commentariat, including regulators appointed by George W. Bush.
The Community Reinvestment Act requires banks to make loans to communities where they collect deposits. If you accept deposits at a branch in a poor neighborhood, you have to offer responsible loans in the same community. The idea is to expand access to affordable credit in the inner cities, while the subprime crisis is heavily concentrated in the suburbs. CRA loans have to be affordable, which means high-interest subprime loans do not count. CRA does not require banks to lower their lending standards, because any recipients have to be credit-worthy. Only 6% of high-interest mortgages were made by companies subject to CRA regulations, and lest we forget, this law was passed in 1977, while financial crisis erupted in 2007.
Instead of appointing toothless commissions, we should be making sure the financial oligarchs do things that are good for the rest of us. Congress should be writing regulations to curb risk in the financial system as fast as bankers are paying themselves bonuses. They’re our representatives, after all, and it’s our money.
This post features links to the best independent, progressive reporting about the economy. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.
Weekly Audit: Debt and Taxes
by Zach Carter, TMC MediaWire Blogger
Earlier this month, President Barack Obama rolled out a new plan to limit the use of offshore tax havens and crack down on corporate abuse of the tax system. These tax havens siphon over $100 billion a year from the government, and have allowed many U.S. banks to duck paying taxes despite receiving massive, taxpayer-funded bailouts. The president’s plan is far from perfect, but comes as a welcome acknowledgment of the unfairness embedded in the current tax code.
Corporate taxes are precisely the type of issue that mainstream media outlets prefer to avoid. Even though the government’s tolerance of corporate tax evasion is a major scandal, it takes time to explain the issue’s intricacies, and it’s easier to resort to pundit-jousting than to provide a detailed report on how companies are cooking the books.
Most discussions of corporate taxes are quickly distorted by focusing on the overall income tax rate for the wealthiest corporations. This rate is 35% in the U.S., which is relatively high when compared to other developed nations with complex economies. But corporate lobbyists have successfully pushed thousands of complex loopholes into the U.S. tax code, making the actual, paid tax rate much lower. In a battle between pundits, a talking head screaming “Thirty-five per cent!” tends to be more persuasive than an academic talking about offshore deferred compensation.
This sheer density of the tax code creates a destructive feedback loop for policymakers. “If the loopholes are very complicated, then the only people who know enough to argue over them will be the lobbyists dedicated to their preservation,” Ezra Klein writes for The American Prospect.
As a result of this information imbalance, lobbyists can convince Congress to gouge ordinary citizens, even when those lobbyists are representing companies dependent on taxpayer largess for their very existence. Financial firms are particularly fond of establishing small sub-corporations in the Caribbean to shield their income from the U.S. Treasury. By registering their headquarters in these tiny nations, companies pay tiny fees to their “home” country and shirk being taxed in the U.S.
Citigroup has received over $45 billion in direct capital injections from taxpayers and billions more in federal insurance, but as Jim Hightower notes, the banking behemoth has a total of 427 sub-corporations scattered around the globe, and they serve no purpose other than avoiding taxes.
It’s not as if these companies have actually moved their employees or their trading houses or their factories to these remote locales. Their existence outside the United States entirely a fiction of paperwork crafted by clever corporate lobbyists. About 400,000 companies are headquartered in the British Virgin Islands, and none actually do any business there.
“All 400,000 companies are located in one gray, two-storey building in the town of Tortola,” Hightower notes.
Similar situations exist in dozens of other tax-haven nations. The Cayman Islands have over 12,000 companies “housed” in a single building. As David Cay Johnston explains in The Nation, the Caymans bar these pseudo-firms from engaging in any business beyond hiding profits.
Corporate tax-dodging has real consequences. “Honest taxpayers have to make up for the revenues lost through this offshore cheating in three ways: we pay more in taxes, we get fewer government services and we incur rising government debt,” Johnston writes.
The practice also helps artificially inflate corporate profits—and fake profit-taking was one of the chief drivers of the current financial crisis. In an illuminating interview with GritTV’s Laura Flanders, former banking regulator William Black explains how top-level executives at major financial institutions used accounting gimmicks to score record bonuses at the expense of the greater economy.
“It was an epidemic of fraud lead by the CEOs, and they were using accounting to commit that fraud,” Black says.
Subprime loans have much higher interest rates than ordinary prime loans. This means subprime loans are actually worth more to banks, provided the borrower can actually pay the loan. An executive with an eye to his own paycheck might urge his company to gobble up massive quantities of subprime loans, according to Black, enabling the bank to book record profits for the few months or years that borrowers could actually keep up with their mortgage payments. Giant profits generate gigantic bonuses for the executives, so even when the company is destroyed by all this subprime binging, the executive walks away rich.
Executives also aligned the pay incentives of employees lower on the corporate food chain with this strategy, ensuring that lenders churned out as many loans as possible, regardless of quality. The result is a devastating chain of fraud starting at the Wall Street CEO and ending at the mortgage broker. In the below video for American News Project, Lagan Sebert outlines the operations subprime mortgage giant Ameriquest and their Wall Street enablers, Citigroup.
Obama deserves some credit for acknowledging that corporate tax-scamming is a problem—Presidents Bill Clinton and George W. Bush were happy to sign-off on laws that made it easier for wealthy companies to evade taxes. But Obama’s crackdown doesn’t go nearly far enough. His plan would only bring in about 10% of the revenue the U.S. Treasury Department thinks it is losing through these scams. If Obama is serious about restoring accountability to Wall Street, that commitment does not end with the tax code. It is equally essential for Obama to secure new regulations on CEO pay that tie compensation to meaningful, long-term profits instead of short-term risk-taking, and to hire financial regulatory officials who will not tolerate endemic fraud.
This post features links to the best independent, progressive reporting about the economy. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.
Weekly Audit: Bank Execs Looting Consumers, Shareholders and Taxpayers
by Zach Carter, TMC MediaWire Blogger
Some of the largest U.S. banks may be on the ropes these days, but the disparity between the plight of financial executives and ordinary Americans has never been starker. Over the past two decades, the banking system has grown accustomed to scoring massive profits by preying on its own customers, making 2009’s transition to pilfering taxpayer wallets an easy one. After burying the economy under a mountain of unaffordable debt, bank CEOs are now finding ways to subsidize their own paychecks with taxpayer bailout funds.
With over $550 billion in government money already dedicated to shoring up the financial system under the Troubled Asset Relief Program (TARP), it’s easy to wonder just what Wall Street and its highly-compensated executives actually do for the economy. Federal Reserve Chairman Ben Bernanke offered one explanation in a speech last week in Washington, D.C. At its best, Bernanke claimed, Wall Street innovates, creating new financial products that expand access to credit, making it easier to run small businesses and improving living standards for households. Armed with ever-expanding paydays, Wall Street has indeed innovated over the past thirty years, radically altering the economic landscape in the process.
But as Ezra Klein emphasizes for The American Prospect, much of Wall Street’s so-called innovation is sheer gimmickry. Financiers have intentionally designed loan contracts to be mystifying and complex to the ordinary consumer, tricking bank customers into racking up unaffordable levels of debt. From credit cards to credit default swaps, these new products have indeed signaled progress for bank balance sheets, but in many cases, banks have enjoyed outsized profits at the expense of the broader economy.
“Innovations are not always win-win,” Klein emphasizes. “They’re often win-lose.”
Of course, some financial stunts were so convoluted that many of the nation’s most revered financial brands– including AIG, Lehman Brothers, Bear Stearns and Wachovia– crumbled under their complexity. Today, something as simple as mortgage has become a byzantine, hard-to-value security, once Wall Street wizards bundle it together with hundreds of other mortgages and sell it off to dozens of investors. In the below video for American News Project, Lagan Sebert and David Murdock put a human face on Wall Street’s toxic assets, telling the story of Sandra Berrios, a mother of two who was conned into a predatory loan by a deceptive mortgage broker. The broker provided Sandra with documents promising her a 30-year fixed-rate mortgage, but instead sold her an outrageous adjustable-rate mortgage in order to collect a fee from Flagstar Bank, which actually funded the loan.
“We believed the broker . . . but what they were telling us was not the truth,” Berrios says.
Even though Flagstar has received $266 million in government bailout money, the company still refuses to renegotiate Berrios’ loan. While some money from TARP went to healthy banks, but Flagstar was truly desperate for the funding. The company’s stock is trading at around $1.00 per share thanks to fears over its financial stability, and Flagstar recently agreed to be acquired by a private equity company for still less to avoid complete financial ruin. The source of the company’s difficulties? Losses on loans like the one Sandra Berrios is struggling with.
Writing for The Nation, Christopher Hayes highlights a letter from a reader who questions malfeasance on the part of Goldman Sachs, which received $10 billion in taxpayer funds under the Troubled Asset Relief Program. Executives at Goldman recently decided to pay back the government before it paid off the investment from billionaire Warren Buffett, even though Buffett is reaping double the interest rate that the government is receiving from Goldman.
The scenario speaks volumes about just how lousy a deal taxpayers got under the bank bailout. Paying Buffett back first would clearly be the better deal for shareholders of the Wall Street titan, as it would save them years of payments at higher interest rates. But Buffett’s plan does not involve the same restrictions on executive compensation that are included under TARP. By prioritizing the TARP repayment, Goldman’s top brass are screwing their own shareholders to guarantee a bigger payday.
Exorbitant CEO compensation, especially on Wall Street, has played a major role in deepening income inequality in the United States. But even the onset of the worst recession since the Great Depression was cause for little alarm for top executives at American corporations last year, as Laura Flanders explains for GritTV.
“While wages and benefits have been going down for most Americans, more U.S. chief executives got pay raises than had their pay cut in 2008,” Flanders said, noting that “CEO’s weren’t just making more, they were making more while laying their workers off.”
Flanders notes that Citigroup CEO Vikram Pandit slashed 74,000 jobs at his company in 2008, but did not object to paying himself a whopping $38 million salary. The outrage is compounded by the fact that Pandit allowed his company to collapse last year, ultimately tapping taxpayers for multiple bailouts that have reached $45 billion in scope, an amount nearly three times Citigroup’s current stock market value.
The financial system doesn’t have to be a contest between citizens and executives. There is no good reason why responsible regulations cannot be enacted to rein in CEO pay, ban socially destructive lending practices and reduce the influence of banking behemoths on public policy. We’d all be better off with that kind of innovation.
This post features links to the best independent, progressive reporting about the economy. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.
Weekly Audit: Stop Subsidizing Wall Street
Treasury Secretary Timothy Geithner rolled out his new Wall Street bailout plan on Monday and the progressive verdict is already in: This bailout doesn’t look much better than the last one. In fact, Geithner’s latest plan isn’t much different from several other flawed proposals policymakers have floated over the past year. At its core, Geithner’s program is just another attempt buy up “toxic assets” from banks at inflated prices.
If most major U.S. banks accepted current market prices for the bad, mortgage-related assets on their books, they would be insolvent. Geithner is trying to convince Wall Street that the assets are worth a lot more than everyone thinks they are, rather than deal with the fundamental problems of the assets and their owners. The plan unveiled on Monday involves a smorgasbord of guarantees for Wall Street investors, all part of an effort to sweeten the pot and convince them to buy toxic mortgage-related assets from troubled banks. Unfortunately, Geithner’s revisions create new problems without solving key previous dilemmas inherent in the plan.
In a post for Talking Points Memo, Josh Marshall highlights a clip of Nobel Prize-winning economist Joseph Stiglitz rejecting a very similar plan in early February. Marshall asks “Why are we still at this?”
Under older formulations of the toxic asset purchase model, the government would have purchased the assets directly from banks. Since the assets are hard to value, this approach would have carried the risk that the Treasury would pay too much and provide banks with what amounts to a bailout (inflated price = free money + no strings attached). Geithner’s new plan offers incentives that encourage hedge funds and private equity companies to buy toxic assets from banks. But the incentives do nothing to make sure the funds do not pay too much for those assets. Indeed, Geithner’s plan actually encourages the private sector to pay too much. The troubled banks are still likely to be bailed out, thanks to a strong possibility that investors will pony up artificially high prices for their assets. The result is a set of economically irrational subsidies for both banks and Wall Street investment houses.
As Ezra Klein puts it for The American Prospect: “Imagine an art auction. Now imagine an art auction where Sotheby’s loans money to the participants and promises to pay the losses if the paintings fall in value. Think the pricing will be the same? And who would you say is being protected: Sotheby’s or the private investors?”
Still worse, all of those subsidies and guarantees for hedge funds mean that taxpayers are on the hook for much more than our private sector “partners,” since buying up assets that nobody wants to buy is an intrinsically risky plan. In a sane investment world, taxpayers would benefit from a greater share of any gains from the investment. But the Geithner plan actually works the opposite way, as David Corn writes for Mother Jones: “The feds are shouldering much more of the risk burden than the private firms. Yet the feds would not get any greater split of the profits—if they ever materialize.”
The government has intentionally created a gamble in which taxpayers bear the brunt of the blow for any losses, but allows Wall Street investors to enjoy a disproportionately large share of any gains. Subsidizing hedge funds and private equity firms serves no real economic function– they do not make loans that help small businesses or consumers. If we are going to bail out troubled banks, we might as well control how our funds are spent and ensure that the mistakes that created this problem are not repeated: wipe out the shareholders who made bad bets on poorly run companies and kick out the management teams who drove those companies into the ground.
Everyone, of course, is still angry about those AIG bonuses. But excessive executive compensation is not only a problem for companies that have been bailed out, as David Moberg explains for In These Times. Outrageous CEO paychecks distort timelines for executives, encouraging them to take short-term risks at the expense of long-term profitability. This is bad not only for individual companies, but for the entire economy. The current financial crisis is a direct result of executives binging on risky securities to score big paydays without worrying about future damages to their companies’ balance sheets.
It’s also easy to forget that corporations are not merely wealth machines for their top executives—they are supposed to serve a useful economic function and fulfill actual social needs. Moberg argues persuasively that we need new rules for corporate accountability that align the interests of companies with the well-being of our society.
Over at Yes!, David Korten emphasizes the risk that important reforms on Wall Street will fall by the wayside if the government continues to focus on short-term emergency bailout plans instead of serious regulatory changes. It’s past time for regulators to impose new rules on the game. The current financial crisis hit in the summer of 2007. Bear Stearns collapsed over a year ago. If the government had devoted more time to restructuring a broken financial system and less time orchestrating short-term bailouts, policymakers would have a much more effective set of tools to combat the crisis with. The most important lesson we have learned so far is that when a bank is considered too big to fail, it has become too big to exist. If lawmakers do not force over-sized financial behemoths to downsize, the entire economy will be jeopardized again when Wall Street’s next speculative bubble bursts.
At present, however, Geithner seems content to simply blow another bubble with a new set of windfalls for Wall Street. If that sounds like a raw deal for taxpayers, that’s because it is.
This post features links to the best independent, progressive reporting about the economy. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.
Weekly Audit: The Worst is Yet to Come
Last week’s passage of the economic stimulus bill marked the first major win for progressives on economic policy under President Barack Obama, but the hardest economic battles have yet to come. The fight against entrenched corporate interests and a global order that ignores the needy will likely be as long and arduous as the recession itself.
The stimulus package may be an absolutely essential step for fending off economic catastrophe, but it does nothing to overhaul the deeply flawed structure of our economic system. “In unleashing a flood of deficit spending and avoiding tax increases, the legislation didn’t threaten moneyed interests, didn’t alter the existing economic topography, and therefore didn’t attract the withering hostility from business groups that typically prevents ‘hope’ from becoming ‘change,’” David Sirota writes for Salon.
The Obama team seems to be considering nationalizing big, troubled banks temporarily, a prospect which was politically unthinkable just a few weeks back. Progressives have been pushing nationalization hard and it seems to be working. Several Republican Senators are supporting the idea, as temporary nationalization is already government policy for smaller banks that don’t employ massive lobbying teams.
But getting Obama and Treasury Secretary Timothy Geithner on board is only half the battle. In a piece for The Nation, Thomas Ferguson and Robert Johnson detail how hedge funds and private equity firms hope to capitalize on a big bank nationalization policy by using political clout to score unfairly cheap prices from the government.
“Much of the wind in the sails of this new push comes from private equity firms like KKR, Blackstone, or their political allies, mostly, though not entirely within the Republican Party,” Ferguson and Johnson write.
When the government nationalized troubled banks with the Resolution Trust Corp. under President George H.W. Bush, politically connected investors made out like bandits when the government resold the banks into the private sector. It is important that this corruption not be repeated. We don’t tolerate our politicians doing favors for wealthy constituents, and we shouldn’t allow our financial regulators to do so either.
The current recession has roots in excessive consumer debt—some of it predatory, some of it spawned by consumerism run amok. U.S. economic well-being has depended on destructive and environmentally unsustainable spending habits of its citizens for too long. Writing for In These Times, Terry Allen notes that “our own addiction to consumerism and failure to save tie us to debt and stress.” While consumer spending kept the economy from crashing until last year, it was very bad for individual households.
Over at The American Prospect, Matthew Yglesias discusses the global implications of lower levels of U.S. consumption. As the U.S. consumes less product, there will be major consequences for economies that rely on U.S. demand. Yglesias emphasizes that the current downturn is fully global, unlike every U.S. recession since the Great Depression. Potential solutions will have to involve coordinating policy responses with other countries to ensure that everyone is shouldering the stimulus load—and to help everyone adjust to an era in which U.S. consumers buy less stuff.
As Nomi Prins explains in Mother Jones, Wall Street bankers have always had a knack for bestowing lavish compensation upon themselves. Bonuses are routinely based on ill-conceived criteria that focus on short-term gains and create unnecessary risk. The key reforms, Prins says, do not merely involve capping executive compensation for bailed-out firms, but regulating bonus compensation and imposing heavy taxes on it in both good times and bad.
In recent years, Wall Street has dealt homeowners an absolutely devastating blow with various exotic mortgage schemes, but another major housing crisis is now looming for renters. Despite an overabundance of sprawling suburban developments, U.S. cities are facing a dramatic shortage of affordable rental housing. As hard as the economic crisis is for homeowners, those who rent in urban areas are being hit even harder. Many renters who cannot afford to buy a home under still face housing hardships today.
In the below video for American News Project, Garland McLaurin and Mike Fritz reveal the dire straits currently facing federal affordable housing programs. The Department of Housing and Urban Development, known as HUD, received a significant funding boost under Obama’s economic stimulus package—its $40.4 billion 2009 budget was supplemented by $13.6 billion. But thanks to years of neglect and political cronyism under the Bush administration, HUD housing units have a backlog of at least $22 billion in needed repairs, which severely hinders HUD’s ability to expand operations.
And the number of affordable rental housing units falls well short of what is needed. McLaurin and Fritz highlight Baltimore in their video, a city that has roughly 30,000 subsidized housing spaces, but will require 60,000 more to built in order to meet the city’s needs.
The proliferation of subprime mortgages was one of the chief drivers of the foreclosure epidemic. They seem absurd in retrospect. Lenders charged people with relatively weak credit scores higher interest rates to counter the risk in making loans to people with bad credit. But since credit scores are fairly closely linked to income level, lenders were essentially charging people with less money more than they would have charged an ordinary borrower. Not surprisingly, that business model is now completely destroyed.
But, as Daniel Fireside reveals in Yes! Magazine, there is a more effective way to expand access to homeownership, one that relies on charging—shock!—less for homes. Several U.S. cities now make use of non-profit land trusts to lower the costs of homeownership.
Here’s how it works: The land trust purchases a swath of property and builds housing on it if none already exists. The trust then sells homes to new homeowners, but does not sell the underlying land. The trust negotiates mortgages with banks on behalf of low-income borrowers. By using the land equity as part of the mortgage calculation, the necessary down payment is dramatically reduced. As a result, the home never falls into the hands of real estate speculators and the cost of owning a home falls by around 25%. If borrowers ever run into trouble on their loan, the trust works with them and the bank to fend off foreclosure. Land trusts feature foreclosure rates 30 times—not 30 percent, 30 times—lower than the national average.
Each of these initiatives is absolutely essential and will, unfortunately, involve brutal policy battles. Many people make a lot of money from the status quo. Let’s hope Obama has the political clout to tell corporate opportunists that the times are a-changing.
This post features links to the best independent, progressive reporting about the economy. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.