Corporate Capitalism

Introductory remarks taken from article “On Corporate Capitalism in America” by Irving Kristol, found in National Affairs issue Number 41, Fall 1975, pp 124–141.

introduction

“The United States is the capitalist nation par excellence.  That is to say, it is not merely the case that capitalism has flourished here more vigorously than, for instance, in the nations of Western Europe.  The point is, rather, that the Founding Fathers intended this nation to be capitalist and regarded it as the only set of economic arrangements consistent with the liberal democracy they had established.

“It is a fact that capitalism in this country has a historical legitimacy that it does not possess elsewhere.  In other lands, the nation and its fundamental institutions antedate the capitalist era; in the United States, where liberal democracy is not merely a form of government but also a “way of life,” capitalism and democracy have been organically linked.” (1)

“But one must also concede that both the Founding Fathers and Adam Smith would have been perplexed by the kind of capitalism we have in 1976.  They could not have interpreted the domination of economic activity by large corporate bureaucracies as representing, in any sense, the working of a “system of natural liberty.”  Entrepreneurial capitalism, as they understood it, was mainly an individual-or at most, a family-affair.  Such large organizations as might exist-joint stock companies, for example-were limited in purpose (e.g., building a canal or a railroad) and usually in duration as well.  The large, publicly-owned corporation of today which strives for immortality, which is committed to no line of business but rather (like an investment banker) seeks the best return on investment, which is governed by an anonymous oligarchy-such an institution would have troubled and puzzled them, just as it troubles and puzzles us.  And they would have asked themselves the same questions we have been asking ourselves for almost a century now:  Who “owns” this new leviathan? Who governs it-and by what right, and according to what principles?” (2)

Our real concern is to search for justification for the loss of so much promise in America.  The middle class was declining long before the subprime loan scandal.  We have begun to realize that opportunities for financial self-reliance are disappearing, never to return.  Information was always available to us before the subprime loan scandal,  just more transparent now.

working definition

corporation -  A state sanctioned collective entity that is treated as an individual person, but is not a person in any moral sense.  It is an institution created to shield individual persons from responsibility for the actions of the entity that generates their profits.  (Black Crayon)  Protection for individuals includes company officers and stockholders, both institutional and individual.

Corporate capitalism -  As a phrase, represents the control large corporations maintain over our economies, governments, and opportunities including our hopes, dreams, moralities, even our self-esteem.

leviathan -  Something unusually large of its kind.

moneyed interests – Large corporations.  Control is placed in hands of individuals with major concerns for short term profit margin, little to no concern for impact on market or citizen consumers, smaller corporations,  jobs or production.  Profit for profits sake.

legacy

Corporations continue to move operations out of the United States.  The US government does not penalize them, they have no incentive to stay.  3^rd world nations produce goods for corporations at low cost with no improvement in standard of living for their populace.  In fact, their economies fall further fomenting even greater unrest.

Wealth and power become more concentrated with the elite few.  Global corporations and CEO’s acquire massive amounts of money, concurrent with a real and big time decline of income for the middle class and impoverished poor.  The middle class is dying, being systematically wiped out.  Once it is gone, it will be incredibly difficult to rebuild.

Greater control by corporations over electorate (voting citizens).  Helped further by a Supreme Court ruling allowing direct corporate contributions for or against candidates, garnishing increased influence purchased in Congress.

essentials

The government’s role in a capitalist state, the premier state being the United States, defined in three bullets:

• “Provide services that cannot be reliably developed through private means, such as public and orderly traffic.
• “Protect haves from have-nots, securing the process of capital accumulation to benefit the moneyed interests, while heavily circumscribing the demands of the working pupulace.
• “Prevent the capitalist system from devouring itself.”  (3)

In the United States, the 1^st two bullets have been covered most satisfactorily by our elected officials.  Their major sin has been an inability to stop the capitalist system from devouring itself.  By reducing consumer income to record low levels, corporations destroy the very market source they require to survive.  The United States is a consumer oriented society.  Less income, fewer purchases, reduced production . . . increased instability.

Increased instability makes it more difficult for elected officials to protect the capitalist state.  Middle class and impoverished citizens react by replacing elected officials with new faces.  These new faces campaign with funds furnished by the same corporations and special interests groups as the old faces.  In most cases, new candidates win their elections with carefully orchestrated campaigns designed to defame and degrade their opponents integrity.  It is difficult to believe that these new officials will protect corporate capitalism any better than before.

Candidates respond to corporations’ interests, not their needs.  Corporations need regulations to control excessive market place greed and avarice.  They need regulations which re-create the consumer in order for the economy to grow and spirits to flourish, for corporate capitalism to survive.

“Wall Street Banks” Jim Morin

Footnotes:

(1) para 1.  “On Corporate Capitalism in America” by Irving Kristol, National Affairs, issue Number 41, Fall 1975, pp 124–141.

(2) para 3.  ibid

(3) para 19.  “Capitalism’s Self-inflicted Apocalypse” by Michael Parenti PhD, April 4, 2010.

“The Financial Crisis and a Flaw in Corporate Capitalism” by Gary Burtless, The National Journal, June 23, 2011.  ”Disconnect between the financial interests of senior company managers and the owners of the companies they work for.”

Wall Street on Algorithms

Thursday, May 6, 2010.   Bad day on Wall Street.  There are concerns about debt in Europe, Greece in particular.  2:42 pm.  With the Dow Jones Index already down 300 points, Wall Street suffers a big time crash, a “flash crash.”  Within 5 minutes, the index drops more than 600 points.  The drop was triggered by “an algorithmic program instructing computers to execute a sell order totaling $4.1 billion within a span of 20 minutes.  The computer algorithm was set to sell on the basis of volume, not price.”(1)  

The market events of May 6th represent a major failure of Wall Street processes, a failure that has nothing to do with the prime loan scandal.  The phenomenal speed of the crash was caused by the action of computer algorithms.  Computers panicked, reflecting programming installed by their owners.  

“In 2001, some 90 percent of trading volume on the NYSE and the Chicago Mercantile Exchange (CME) was carried out by humans on the trading floor. In 2009, the open outcry volume is under 10 percent on both exchanges.  In just nine years the ratio of open outcry to electronic trading on these two major exchanges swapped from about 90/10 to about 10/90. That’s a lot of computerization in a little time.”(2) 

Which is why we beg to understand the new role of computers in our financial world.  Quotations come from articles found in McClatchy, 60 Minutes, and ars technica.

Part One – Definitions

SEC – Securities and Exchange Commission.  Mary Schapiro is the SEC Chairman.

CFTC – Commodity Futures Trading Commission.  Regulates the futures market.  Bart Chilton is a member of the CFTC.

algorithmic trading – the use of computer programs to enter trading orders where the computer algorithm decides on aspects of each order such as timing, price, or quantity, in many cases initiating the order without human intervention.  Algorithmic trading is used by pension funds, mutual funds, and other buy side (investor driven) institutional traders, to divide large trades into several smaller trades in order to manage market impact and risk. (Wikipedia)

high frequency trading – Superfast algorithmic computer trading performed without human intervention.

e-mini futures market – An electronic market that bets on the price of futures contracts. 

futures – Financial transactions based on a price anticipated at some point in the future. 

flash crash – The May 6, 2010 Flash Crash was a United States stock market crash in which the Dow Jones Industrial Average plunged about 900 points, or about nine percent,  only to recover those losses within minutes. It was the second largest point swing, 1,010.14 points, and the biggest one-day point decline, 998.5 points, on an intraday basis in Dow Jones Industrial Average history.  (Wikipedia)  The sudden stock market dip erased over $862 billion in U.S. equity value in less than 20 minutes. (pressabout.com)

predatory behavior - The selling of stocks, securities, or services at a very low price, intending to drive competitors out of the market, or create barriers to entry for new competitors. If competitors cannot sustain equal or lower prices without losing money, they go out of business or choose not to enter the business.

liquidity - ”refers to how quickly and cheaply an asset can be converted into cash. Money (in the form of cash) is the most liquid asset. Assets that generally can only be sold after a long exhaustive search for a buyer are known as illiquid.” (about.com)

institutional trader – Manages large amounts of capital compared to most traders.  They trade huge amounts of money at a time, wielding enormous power in the markets.  (Joe Saluzzi is an institutional trader of Themis Trading LLC.)

stock market – A stock market or equity market is a public entity (a loose network of economic transactions, not a specific facility) for the trading of company stock (shares) and derivatives;  These are securities listed on a stock exchange as well as those owned and traded privately.

“The size of the world stock market was estimated at about $36.6 trillion at the start of October 2008.  The total world derivatives market has been estimated at about $791 trillion face or nominal value, 11 times the size of the entire world economy.  “The vast majority of derivatives ‘cancel’ each other out (i.e., a derivative ‘bet’ on an event occurring is offset by a comparable derivative ‘bet’ on the event not occurring).” (Wikipedia)

Flash Crash Impact

“The crash contributed to the crisis in confidence on Wall Street. Since last spring, people have pulled $70 billion out of mutual funds and the biggest concern of Schapiro and Senator Kaufman is that average investors have lost faith in the integrity of the system.”(3)  “Others suggested the May 6 crash underscored how a casino atmosphere has overtaken markets that were originally designed to provide businesses with money to finance goods and services in the real economy.”(4)

“Since the flash crash, regulators have imposed more restrictions designed to halt trading on certain stocks for a period of 10 minutes when price falls by more than 5 percent. Chilton, of the CFTC commission, argues that even more restrictions are needed on electronic trading.”(5)  “And Schapiro says it has happened since the May 6 crash, after circuit breakers were put in place that automatically halt trading in a stock that moves more than 10 percent in a five minute period.”(6)

“There are now more than 80 alternative trading systems around the country, plus two brand new electronic stock exchanges which most of you have probably never heard of:  BATS and Direct Edge.  They’re owned by the big banks and by high frequency trading firms.  “They trade more than a billion shares a day at blinding speed, and most of those bets are being made by machines.  “The players range from firms like Goldman Sachs, Barclays, Credit-Suisse and Morgan Stanley to hedge funds and smaller operations.”(7)

In addition, the NYSE is creating its own center for trading computers and their algorithms.  “Larry Leibowitz, the chief operating officer of the New York Stock Exchange, believes its massive new data center in Mahwah, N.J. will help the exchange regain some of the market share it has lost to electronic trading platforms. And he is busy persuading traders to lease space in the center’s stark black boxes for their super computers.”(8)

Computers provide the trading edge, speed.  “That edge, Joe Saluzzi claims, has made high frequency traders the new insiders on Wall Street, and he says he spots signs of predatory behavior every day. Saluzzi, who trades large blocks of stock for institutional investors, says the supercomputers are programmed to place and then cancel thousands of orders a second, trying to sniff out which way a market is moving in order to jump in ahead of big rallies and sell off before big declines. He calls them parasites who exploit a technological advantage to suck money out of the market and add no value.  Asked if high frequency trading raises capital for companies, Saluzzi said, “Absolutely not. If anything, it’s distracting from the capital raising process.”(9)

Assessment

“Leibowitz and other proponents of high frequency, high speed computer trading say it has performed a valuable function: tripling volume, reducing stock spreads and transaction costs, and providing liquidity to the markets.

“Liquidity means that if you want to buy or sell a stock you could do it right away, and you could do it at a fair price. That’s what liquidity means. And without short-term traders, there is no liquidity,” Manoj Narang explained.

“Traders like Narang say their presence in the market is making it cheaper and easier for everyone to buy and sell stocks, but regulators and lawmakers like Senator Ted Kaufman of Delaware have other concerns.

“Clearly, liquidity’s way up. But what I say is, liquidity’s always trumped by transparency and fairness. You can’t have fairness if you don’t have transparency, Sen. Kaufman explained.  Right now, it’s not even possible to determine for sure who is making high frequency trades or what they are telling their computers to do.”(10)

“In sum, the growing concern with HFT is not that computers are doing something that people used to do; it’s that they’re doing a whole lot of it, very rapidly, so that the market as a system-of-systems now has starkly different frequency, amplitude, and connectedness characteristics that may (or may not) give it a new, currently unknown set of emergent properties. And if a fuse blows while the machines are driving the bus, we’re all traveling so fast that we may hit a wall before the humans in the vehicle have time to react.”(11)

Essentials

We concede that computer algorithms are here to stay, that only the gargantuan can play.  But high frequency trading must be more transparent.  Exchanges should be able to determine who is buying, who is selling, what they are buying, what they are selling, and at what price and what volume at the time sales occur.  We are sensitive to the need for discretion and the seclusion of back offices.  These attributes should be available for planning, decision processes and programming.  But stock sales and purchases which occur from the application of algorithms should be just as public as any open outcry on a trading floor.

Accountability must be available for those who choose to make big bucks at the expense of a world economy, its jobs, its people and their dignity.  The stakes are too high, world security being the most important.  Human integrity and its algorithms will fail without support.  

The company referenced as executing the $4.1 billion sale, identified in a report by Kevin G Hall,  has indicated they believe that they did not cause the flash crash.  Our concern is that the nature of this sale was for a purpose, not a mistake.  We have just begun to recover from the prime loan scandal.

“Wall Street Glitch” by permission.  Jim Morin

Findings Regarding the Market Events of May 6, 2010  -  104 page report by the Securities and Exchange Commission and the Commodity Futures Trading Commission dated Sept 30, 2010.  Report does not identify the large investment firm involved, but indicates that the firm was executing a sell order totaling $4.1 billion on the e-mini futures market.  (pdf file)

Footnotes:

Kevin G Hall – “One trader caused May’s 998-point drop in the Dow,”  McClatchy Online.  Notes:  1 - para 4,  4 - para 14,  5 - para 12.

Steve Kroft – “How Speed Traders Are Changing Wall Street”   60 Minutes.  Notes:  3 - para 65,  6 – para 63,  7 – para 8,9,10,  8 – para 36,  9 – para 45,  10 – para 51 thru 55.

Jon Stokes – “Computer-trading worries grow as NYSE builds new datacenter.”  ars technica.  Notes:  2 – para 26,  11 – para 13. 

Election Payola

The Impoverished Pauper attempts to understand complex financial issues of our time.  We include also a desire to understand the complexities of our health care system.  But this is an election year, and the 1^st Tuesday in November is upon us.  Definitions:

corporate payola – Payment by a corporation directly or indirectly through employees or other means to candidates or special interest groups.  Payments are made in anticipation that monies will be utilized by and for candidate re-election.  Exceptions can be made for candidate’s personal needs.  Payments are made in anticipation of a return on investment. 

Corporate payola given to special interest groups can be tax exempt when given to organizations with a tax exempt status.  

return on investment – Statutes or regulations designed to favor the contributor or contributing corporation.  Government projects for the contributor or contributing corporation. 

There are rumors that some of these returns can be positive, and include enhanced employment opportunities and more jobs. 

special interest groups – Funding sources include corporations, wealthly individuals, middle class individuals, impoverished individuals,  union members, other.  An equal opportunity for all to contribute.  An unequal opportunity for all to influence.

attack ads – Attacks on a candidate designed to anger and divide the voting populace.  No reality quotient involved.   The context in which statements are made is not required.  In fact, it is a bad thing.  Full disclosure of context can ruin the impact of the ad.  Sound bites should predominate, although we understand the temptation to be instructive.

When voting, please consider the source of a candidate’s contributions.  Choose candidates who receive support from corporate and special interest groups of your choice. 

But under any circumstances, vote!  There are some good candidates out there.

Returning to Finance and Health Care . . . . . .

Human Genome for Profit

Health Care is the largest industry in our country.  More profits are made in Health Care than any other industry, more projected profits are made for health care than any other industry.  Our concern is with the patenting of human genes for profit.  We want to know what it means to patent a human gene.

“The U.S. Patent and Trademark Office has granted patents to at least 4,382 human genes, including genes related to Alzheimer’s, asthma, cancer, muscular dystrophy and other serious diseases.  Twenty percent of the human genes are currently patented. (1)  “The Patent Office estimated that about 52,800 patents have been granted related to genes, fragments of genes, genetic processes and bits of DNA as small as a single letter change in the genetic code.” (2)

First we call for definitions.  Definitions help us understand relationships, and genetic relationships are not easy to understand.  (I still long for Mendel’s peas.)

Genetics

chromosome – There are 23 pairs of chromosomes found in the nucleus of each cell of the human body.  22 pairs are identical, with the 23^rd being the infamous sex chromosome which breaks down to the XX chromosome for the female and the XY chromosome for the male.  A chromosome is the organized thread-like structure of DNA.

DNA – Deoxyribonucleic acid.  The DNA helix.  It contains genetic instructions for development and functioning of all living organisms, including humans.  A chromosome contains a single piece of coiled DNA.

 

gene – A segment of DNA which carries the genetic instructions for development and function of living organisms.  It is a specific sequence of base pairs in the DNA (e.g., ATTCCGGA) which spells out instructions to create an organism (or human being) with its own unique traits.  The four chemical bases are adenine (A), guanine (G), cytosine (C), and thymine (T).

genome – A genome is all the DNA in an organism, including its genes.  There are approximately 23,000 genes in human DNA.  Genes carry information for making all the proteins required by all organisms. “These proteins determine, among other things, how the organism looks, how well its body metabolizes food or fights infection, and sometimes even how it behaves.”   ( ornl.gov )

gene switch – A portion of the DNA helix that controls a specific gene.  Among other things, it determines when the gene is turned on, and how long and to what extent it is active.  “Mutations in DNA switches that control body-shaping genes, rather than in the genes themselves, have been a significant source of evolving differences among animals.”  (Scientific American)

human genome – The complete set of genes (or portions of the DNA helix) in the chromosomes of each cell of a human being.  The human genome would also include gene switches, and the remaining portions of the DNA helix with no currently identified purpose.

Patents

patent – “A grant made by a government that confers upon the creator of an invention the sole right to make, use, and sell that invention for a set period of time.”  (thefreedictionary.com)

gene patent – “A gene patent gives its owner the exclusive right, for up to 20 years, to control its use for medical research, diagnosis or treatment. (3)  Further, “A gene patent holder has the right to prevent anyone from studying, testing or even looking at a gene.” (4)

“Questionable patents are too easily obtained and are too difficult to challenge,” the Senate Committee on the Judiciary declared last month. “An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining license fees. (5) “As a result, scientific research and genetic testing has been delayed, limited or even shut down due to concerns about gene patents.” (6)

Legal

Reference article “US judge strikes down patent on cancer genes,”  March 29, 2010,  by Larry Neumeister.  This article reports on perhaps the first legal victory in the effort to fight patenting of human genes.  It will be appealed, possibly to become a landmark case.  The case involves mutations found in two genes.  When found, these mutations can indicate a greater risk of breast or ovarian cancer.  The sole test available in the market, a test by the patent holder, costs nearly $4,000.

US District Judge Robert Sweet “said he invalidated the patents because DNA’s existence in an isolated form does not alter the fundamental quality of DNA as it exists in the body nor the information it encodes. (7)  “He rejected arguments that it was acceptable to grant patents on DNA sequences as long as they are claimed in the form of isolated DNA.” (8)

“The judge said his findings were consistent with Supreme Court rulings that have established that purifying a product of nature does not mean it can be patented.” (9)

Essentials

Human genes are being patented.  In doing so, companies lay claim to a portion of our own bodies.  Granting human gene patents is not the same as granting patents for special biological microbes synthesized in a lab for the purpose of digesting oil, nor is it the same as granting patents for components or processes.  A gene is not an invention.  Genes are part of our bodies.  Defective genes and gene switches are part of our bodies.  The equipment required to find genes can be patented to protect the owner, but our genes should not.  Our genes already have an owner.

Wall Street has long been investing in companies that are aquiring these patents.  It will take courage and big time money for a legal system to halt the growing threat to health care that comes from patenting human genes.  The consequences of our failure to halt this practice include stifled research, cures not found, more suffering, more lives lost, more expensive care.  We pay a huge tax for patents on our genes.

Post Op

“High Court Throws Out Human Gene Patents,”  CBS News, 03/26/2012.

Robert S Boyd  “Patenting human genes thwarts research, scientists say,” McClatchy Newspapers, June 03, 2009.

1. para 2,   2. para 3,   3. para 4,   4. para 5,   5. para 9,   6. para 5

Larry Neumeister  “US Judge strikes down patent on cancer genes,” Larry Neumeister, Associated Press Writer, March 29, 2020, article in physorg.com on line.

7. para 2,   8. para 3,   9. para 5

Hybrid Medical Animation – 3D chromosome illustration by permission (Jeff Johnson)

Financial Overhaul Bill

Wall Street is big time and complex, and offers many ways to gamble.  But it was their journey into subprime loans that was responsible for shrinking the world monetary supply.  When foreign countries used tax revenues to invest in securities purchased in the Cayman Islands, they used real money.  When the value of those securities crashed, investors lost real money.  Rather than earn a good return, in effect a high interest rate, the value of their securities fell to almost nothing.  This was a downward fall, far in excess of anyone’s dreams, and in the wrong direction.

Regulations found in the Financial Overhaul Bill are addressed in two parts below, the same breakdown as provided in Meltdown Basics.  New regulations which cover Loan Processing and new regulations which cover activities on Wall Street.

Major sources of information were two articles, one from the Wall Street Journal and the other from McClatchy Newspapers.  The WSJ article was more mechanical and addressed specifics in detail.  The McClatchy article was more of a summary,  listing high points in a Q & A format.   It was written more to address the human factor.

Financial Overhaul Bill  Regulations  (Loan Processing) 

Establishes minimum underwriting standards for home mortagages.  Lenders will have to assess borrowers ability to pay by verifying income, credit history and job status. 

Bans payments to mortgage brokers for steering borrowers to high priced loans.

“Many borrowers erroneously assumed that these brokers had their best interests at heart, when in fact there was no fiduciary duty to borrowers. Rather, lenders rewarded many brokers for getting borrowers into ill-suited mortgages.”  The new law “ends steering payments that put mortgage brokers’ interests out of sync with buyers’ interests,” said Sen. Jeff Merkley, D-Ore.” (1)

Prepayment penalties and bonuses to lenders will be banned.

Protections at ending predatory lending practices will be set up.

“The law includes a number of provisions that restrict predatory lending. The question is how aggressively the new bureau oversees mortgage lending. For example, will it set ironclad limits on so-called “liar loans,” in which there was no income verification for mortgages? Will it ban adjustable-rate mortgages with low teaser rates that allowed borrowers to get into homes they couldn’t afford? The bureau also is expected to force lenders to use clear language about borrowing costs.” (2)

Financial Overhaul Bill Regulations  (Wall Street) 

Limits the ability of banks to trade and invest in their own accounts (the Volcker rule).

Establishes a new Securities and Exchange Commission office to regulate credit rating agencies.  Allows investors to sue credit rating firms.

Requires hedge funds and private equity funds to register with the SEC as investment advisers and to provide information on trades to help regulators monitor systemic risk.  Private equity and hedge funds with $150 million or more will have to register with the SEC.

Gives shareholders of public corporations a non-binding vote on executive pay and “golden parachutes” (bonuses for executives when fired).  Gives SEC the authority to grant shareholders the ability to nominate their own directors to company boards.

Regulates the derivatives market, including credit default swaps, requiring that most derivative traffic be routed through exchanges, electronic trading platforms, and clearing houses.

“The lack of information about complex bets made on the probability of bond defaults was one reason the Federal Reserve stepped in and took majority ownership in insurance giant American International Group. Trillions of dollars’ worth of private two-way bets were occurring outside regulators’ view, and AIG was the biggest player. Today taxpayers could still be on the hook for about $162.5 billion, partly due to AIG’s involvement in credit-default swaps.

“Under the new law, however, deposit-taking institutions will be forbidden from significant involvement in the market for these swaps, which are bets on the chance of a bond default. Most derivatives transactions will have to occur on an exchange or central clearinghouse. There’ll be real-time information about any given trade and, more broadly, about the swaps market, data that didn’t exist when the meltdown hit in 2008.” (3)

Fannie Mae and Freddie Mac

“The two mortgage finance giants, now in government conservatorship, certainly were contributing factors to the financial crisis. The Obama administration and congressional Democrats opted to leave Fannie and Freddie out of the bill, ostensibly to address them in separate legislation once the housing market recovers.

“Fannie and Freddie buy mortgages originated by banks, then bundle them for sale to investors as bonds. From 2000 to 2006, Wall Street banks jumped aggressively into this business and out-competed Fannie and Freddie. In 2007, these Wall Street bonds backed by pools of U.S. mortgages began blowing up, and on came the financial meltdown.

“Right now, Fannie and Freddie are the only mortgage-bond game in town. The private sector’s secondary market, where Wall Street banks passed on their mortgages, is frozen. When this market revives, banks and other mortgage originators will have to keep a portion of what they generate on their own balance sheets to ensure they have capital at risk. This wasn’t required during the run-up to the crisis.” (4)

I believe Ben Stein was correct to refer to the relevant operators from Wall Street as “Frat Boys.”  Efforts continued full blown to make good money from bad, to delay even further the economic downturn in order to sell more bad money to investors.  Which of course made the recession even worse.  I don’t think it matters if these frat boys thought the government or governments would attempt to bail out failing companies.  It matters that they took the world down with no concern.  Their actions should be regulated. 

With this new Financial Overhaul Bill in effect, “Greed or malfeasance won’t disappear from Wall Street, but regulators and investors will have more information than ever before to combat it.” (5)

Kevin G Hall     “What’s this big finance-regulation overhaul really do?”

            Footnotes:  (1) para 5,  (2) para 4,  (3) para 15 & 16,  (4) para 18-20,  (5) para 17

Wall Str Journal   “Major provisions in the financial overhaul bill.”

Fannie Mae and Freddie Mac

Fannie Mae      -  Federal National Mortgage Association

Freddie Mac     -  Federal Home Mortgage Corporation

The Federal National Mortgage Association and the Federal Home Mortgage Corporation operate as Government Sponsored Enterprises (GSE’s).  The companies are privately owned and operated by shareholders, but they are protected financially by the support of the Federal Government.  This arrangement was established by Congress in 1968.

“Meltdown Basics” (previous article) did not include any reference to Fannie Mae and Freddie Mac.  That article was about processes, the how and why of the meltdown, although it did identify Wall Street and other firms as major players.   What follows are paraphrased excerpts from a video discussion between Paul Jay and Kevin G Hall. 

“not the cause. . .“

Fannie Mae and Freddie Mac are originators of securitization.  They “basically buy top rated mortgages, package them together and sell them as a security to investors.”

Where things went wrong in the housing market began about 2001.  Wall Street during the boom began to issue what was called “private label” mortgage backed securities to compete with Fannie & Freddie, and “within 4 years were eating Fannie and Freddie’s lunch.”

The bad origination of subprime loans and the weakened lending standards didn’t happen at Fannie and Freddie.   It happened with the Wall Street firms.  And all the bad actors are gone.  Lehman Brothers, Bear Stearns, New Century.   What we call “non-bank” lenders. 

These non-bank lenders “also exploited a regulation loophole so they weren’t regulated by the federal government, just by state governments.”

Fannie and Freddie are the good guys in this story.  They remain a strong source of mortgage monies for the housing market, but they are not a panacea.  They have conflicting responsibilities.  They are charged with making home loans more affordable and available, but yet they are also responsible to shareholders for profit.  Just as with Wall Street, they require further attention and regulation.

Video:   “What to do About Fannie Mae and Freddie Mac”   Paul Jay and Kevin G Hall

History News Network:  What Are the Origins of Freddie Mac and Fannie Mae?    Rob Alford

Meltdown Basics

Below is the Impoverished Pauper’s attempt to understand why and how the world economic meltdown occurred.  It is my interpretation of a series of articles published in McClatchy Newspapers. 

Definitions first.  They are necessary to understand who was being paid, how they were being paid, and what they were being paid for.  Our country has created its own brand of capitalism freely shared with the world, supported by universities, governments (foreign, federal, state, and local), Wall Street, the very wealthy (known and unknown), and sometimes a middle class.  The impoverished poor are not included.  They have no investments in the system.

part one definitions . . .

mortgage -  A temporary, conditional pledge of property to a creditor as security for repayment of a debt.  A homeowner loan is a mortgage loan where the borrower pledges to pay the loan.

mortgage broker – Matches the lender to a person or company seeking a loan.  Most states regulate mortgage brokers to ensure compliance with banking and or finance laws.

underwriting – The process that banks and other financial service providers use to assess the eligibility of a customer to receive their products (mortgages, insurance poilicies, or other credit).

underwriter – Assesses the risk of enrolling an applicant for coverage of a loan or a policy.  An underwriter gives financial support and takes responsibility for paying any costs associated with the activity he or she underwrites.  “An underwriter may also serve as an intermediary between an issuer of a security and an investor.  In this capacity, an underwriter buys securities from a company and resells them to investors.”

securities – Packaged loans.  Home loans, car loans, credit card debt, even student loans have been packaged into securities for sale to investors.

subprime loans – Subprime mortgage loans are riskier loans in that they are made to borrowers unable to qualify under traditional, more stringent criteria due to a limited or blemished credit history.  Subprime borrowers are generally defined as infividuals with limited income or having credit scores between 500 and 620 on a scale that ranges from 300 to 850.  Subprime mortgage loans have a much higher rate of default than prime mortgage loans and are priced based on the risk assumed by the lender.  Interest rates are higher.

investment banker – A banker who deals chiefly in underwriting new securities.

loan processor – The loan company employee who reviews the mortgage loan application and gathers required verifying documentation on the applicant and the real estate property.  The individual who makes sure that all documents are collected and filed in order that a loan can be processed and underwritten in a timely manner.

Part One – The Loan

Have account executives pay mortgage brokers to steer clients to them.  Pay mortgage brokers largely in sales commissions.   The more loans they secure, the more money they make.

Have sales executives pay kickbacks to company loan processors responsible for closing loans.  Pay sales executives based on value of and number of loans that close.

Toss out the requirement that every homebuyer make a down payment.  Begin lending up to 80 percent of property’s value for a first mortgage and up to 20 percent for a second.   Lower minimum required credit scores into the 500’s.  (700 or better is considered a good score.  Nationwide average is around 693.)

Accept any income claim on an application as truthful.  Do not verify employment.

Waive other key financial issues that might otherwise torpedo a deal.

Punish individual underwriters who cannot or will not follow looser approval standards.

Lay out financial terms that punish buyers.  Create introductory payment plans that will guarantee loan default.  Set up loans with higher interest rates and increase payments dramatically by beginnig with low, misleading monthly payments that quickly escalate to values that are multiples of the original.  Punish those who seek refinancing with stiff penalties.

Acknowledgements:   These specific loan instructions (paraphrased here) were found in an article written by Greg Gordon, McClatchy Newspapers.  They were from his research of New Century Financial Corporation, which was one of the leading subprime mortgage lenders in the United States.  They were not alone.  For the full article, use the link below.

Article 1:   Why did blue-chip Goldman take a walk on subprime’s wild side?    Greg Gordon - McClatchy Newspapers

part two definitions . . .

mortgage banker – A company, individual or institution that originates mortgages.  They may use their own funds, or borrow from a warehouse lender to fund mortgages.  Their primary responsibility is to earn the fees associated with loan origination. 

warehouse loan – A form of interim financing, used to raise funds to make home mortgages and carry them until the mortgages are packaged and sold to an investor.

shell corporation – A company that serves as a vehicle for business transactions without itself having any significant assets or operations.  Shell corporations are not in themselves illegal, but they can be used for unsavory purposes such as tax evasion or company buffers, making it very difficult and time consuming to determine a responsible party.   

credit derivative – A credit derivative is a wager whose value is derived from the credit risk of an underlying bond, loan or any other financial asset.  It is a contract between a buyer and seller under which the seller sells protection against the credit risk of the underlying bond, loan, or financial asset.

credit default swap – A “credit default swap” (CDS) is a credit derivative contract between two parties. The buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument defaults. 

“Insurance contracts require the disclosure of all known risks involved. CDS’s have no such requirement. Most significantly, unlike insurance companies, sellers of CDS’s are not required to maintain any capital reserves to guarantee payment of claims.”  (Wikipedia)

Part Two – Wall Street

Extend lines of credit to mortgage bankers through warehouse loans in the billions of dollars to finance the issuance of home loans to marginal borrowers.

Have mortgage bankers sell loans to Wall Street firms where borrowers’ ratios of debt to income is 50 percent and higher.  Some borrowers can be left to live on 20 percent of their paychecks.

Reduce the percentage of loans that are reviewed before deals are closed (packaged for securities).  “Reviews went from 100 percent in the late ‘90s to probably less than 10 percent in 2006.” (article 1, para 23)

Agree not to “kick out” as unacceptable more than 5 percent of loans in a pool.

Pay US ratings agencies to declare worthless securities as top rated AAA securities.

Use offsite or out-of-the-country tax havens such as the Cayman Islands in the Caribbean (a British territory) or Luxembourg in Europe to sell packages of loans to “sophisticated” investors through shell corporations.  

Purchase credit-default swaps to guarantee a profit from the economic downturn when the inevitable loan defaults occur.

 

Part Three – The Investor

pension funds

university endowments

insurance companies

labor unions

European banks                              

other foreign financial institutions and banks around the world

other institutional investors

 

Part Four - Results

Big time home loan defaults with subsequent housing market crash.

Major world economic meltdown, worst since the Great Depression.

AIG paid out $62 billion using taxpayer bailout funds to settle credit-default swap contracts.  Lehman Brothers collapsed declaring bankruptcy, and Bank of America rescued Merrill Lynch through a $50 billion deal brokered by the Federal Government.

“Experts estimate that Wall Street investment banks sold 25 percent to 50 percent of these bonds and related securities overseas, resulting in massive losses in Europe and elsewhere when the market collapsed.”  (article 2, para 12)

In spring of 2009,  The International Monetary Fund projects “that global write-downs on “U.S.-originated assets” stemming from the subprime disaster could reach $2.7 trillion.”  (article 2, para 13)

Article 2:   Goldman left foreign investors holding the subprime bag   Greg Gordon - McClatchy Newspapers

Impoverished Values

The Impoverished Pauper attempts to understand complex financial issues of our time.  We want to know why we are dependent on the actions of people so far away, people we do not know.  We want to know how people can be interested only in making money for themselves or their company without any consideration for the other billions of people in the world.  We know that capitalism is better when it is regulated.  During the last few years capitalism has almost been destroyed by the very people who preach its praises.  Kruschev would be pleased.

Recent readings have led me to the revelation that our trillion dollar bailout during the last days of the Bush administration was probably not to save the economy, but to keep certain financial firms from folding.  Seems some financial firms have a pipeline to and from Washington in the form of both jobs and influence.  Both directions.  

I am hoping that when the Obama administration created another “booster” package, that their intent was to actually help the country and its people survive, to avoid another depression perhaps far greater than the one from the thirties.  Even so, their actions have also aided some of the same institutions, the institutions that took the world down in order to make a profit.  Our elected officials apparently are not exactly in charge of the economy.  They also appear to suffer from a fear of big firms, and worse, understand little of what they do on Wall Street. 

Added to the mix – a recent January, 2010 Supreme Court decision to block the ban on corporate political spending.  Now any financial company can mount a multi-million dollar election campaign (although they may call it something else) at their convenience to help take down any elected official.  All a firm has to do is run a series of commercials that make us angry at a candidate and behold, we vote against him or her.  We vote against the very person who would have helped us regulate the firm that paid for the adds.  This same thing is going on today, commercials by special interest groups.  Just not as much as we will see in the future.

It is very difficult not to become angry at the deceit that has become so endemic to our society, and certainly to our financial institutions.  But the problem is “How do we make a change?”  How can we save ourselves?  We do require salvation.  Do we vote people out of office?  Probably not.  Companies are far better equipped to finance campaigns and support new officials than are citizens.  

I believe that some elected officials and members of financial institutions realize the need to reign in this excessive behavior.  So much needs to be done.   Few, if any, of the people who brought down our economy will suffer consequences for their actions.   They will and have already received megabucks for their efforts, and will or have already been re-hired to help clean up the mess they created. 

We constantly complain about how our taxes are spent by the government.  But we can see where those taxes are spent, even in our own daily lives.  We pay taxes to these companies far in excess of any tax we pay to our government.  Yet we know nothing about how their money is spent.

This same appeal, profit for profit’s sake, is shared by many in the health care industry.  We pay an enormous tax in the form of profits that are made by treating the sick and the injured.  Here there also appears to be little concern for the economic pain shared by the nation or its citizens.  Health care for profit is not concerned with suffering caused by someone’s inability to purchase health care, or suffering caused by collection agencies that confiscate homes to pay medical bills.

The next time a politician wants to talk to me about family values, we will talk about family values.  We will talk about how he or she plans to effect the economy to provide more jobs.  How he will plan to enable us to work for a living and salvage our dignity.  How he will enable us to pay for our medical care without losing our homes.  The First Amendment is already here.  We have the freedom to worship as we choose.

We need to limit the industries in which people can make such huge profits by thinking only of themselves, by disregarding the impact of their actions on others.  Financial Markets and Health Care (including Health Care Insurance) firms should be high on that list.  Energy and Utilities firms would do well to follow.

Gatekeepers

Ratings Agencies

First, some definitions.  Ratings Agencies provide ratings for investments.  They are the gatekeepers.  Home loans, car loans, credit card debt, even student loans have been packaged into securities for sale to investors.  A tripple A rating (AAA) is a top class rating.  The better the rating of an investment, the more money people and organizations will invest.  This would include 401K plans. 

In the 1970’s, “ratings agencies were allowed to switch from having investors pay for ratings to having the issuers of debt pay for them.  That led the agencies to compete for business by currying favor with investment banks that would pay handsomely for the ratings they wanted.”(1)  Prior to this change, ratings agencies were paid by investors.  Now they worked for Wall Street, banks, and other companies which sold the very securities they were rating.  Profits for ratings agencies increased many fold.  In 2001, Moody’s Investors Service  had revenues of $800.7 million and in 2006, $2.037 billion. 

Fast forward, New time frame:  Late 2006 thru early 2008.  “The housing market unraveled, poisoning first mortgage finance, then global finance.  More than 60 percent of the bonds backed by mortgages have had their rating downgraded.”(2)   “Moody’s wasn’t alone in ignoring the mounting problems.  It wasn’t even first among competitors.  The financial industry newsletter Asset-Backed Alert found that Standard & Poor’s participated in 1,962 deals in 2006 involving pools of loans, while Moody’s did 1,697.”(3)  “S&P continued to give top ratings to products that analysts from all three ratings agencies knew were of increasingly poor quality.  To guard against defaults, they threw more bad loans into the loan pools, telling investors they were reducing risks.”(4)  A ponzi scheme to enhance bad debt.

The gatekeepers failed in their responsibility.   The United States and the World were taken down big time.  Money,  confidence, trust, hope.  Big loosers.  New classes of impoverished souls were created.

Today, March, 2010.  Recovery time, we need help.  “Experts such as Columbia University’s Coffee think that Congress must impose some legal liability on credit rating agencies.  Otherwise, they’ll remain ‘just one more conflicted gatekeeper,’ and the process of pooling loans – essential to the flow of credit – will remain paralyzed and economic recovery restrained.”(5)

Investors provide the money for borrowing, not our government.  We need a set of regulations that can create confidence in the reliability of our gatekeepers.  We need to be able to hold gatekeepers accountable.  We need to make them responsible.  We need to bring our recently impoverished investors back to the markets. 

The SEC Nationally Recognized Statistical Rating Organizations:  Standard & Poor’s, Moody’s Investors Service, Fitch Ratings Lld

 Footnotes:

 Kevin G Hall     How Moody’s sold its ratings – and sold out investors.   Originally posted Oct 18, 2009 McClatchy.

 #1. para 13,  #2. para 17,  #3. para 53,  #4. para 55,  #5. para 58.   Numbers and amounts from same article.

James Surowiecki     Ratings Downgrade.  Originally posted Sept 28, 2009 The New Yorker.

Health Care for Profit

It is very difficult to find a truth about health care costs, except that which we experience ourselves.  In the past few weeks, there has been an explosion of scare tactics and false information aimed at voters, even marches on Washington.  It is an expensive political campaign.  Big money for big profits.

Hospitals, insurance companies, drug companies, and other patient care facilities are caught up in a web of profit for profit.  Their administrative decisions mirror their competitiveness and interest in the bottom line. “Health care for profit” has led to increased costs for patient care, and has wrested control of planning from both physicians and patients.  Even families with sound financial planning, including health insurance, have found themselves tossed to the streets.  Health care has become a boon to collection agencies, and a mecca for CEO’s.

We are now seeing big time efforts from “concerned” organizations, efforts that put pressure on congressmen, street demonstrations, tv and radio commercials, even billboard ads.  The money and strategy to support these efforts “comes from conservative political consultants, professional organizers and millionaires, some of whom hold financial stakes in the outcome.” (1)  Margaret Talev identifies contributors in her article from McClatchy Online.   Joseph Galloway addresses campaigns against health care reform by focusing on the high costs to patients.  “If ever there were a time for comprehensive health care reform, it’s now, and yet the forces of darkness are lining up against this urgent need, buttressed by lies, mobs inflamed by those lies and millions of dollars changing hands and changing votes in Washington, D.C.” (2)

TV stations and networks continue to cover demonstrations.   They have questioned people on streets, in town halls,  even in their studios.  But their interviews have given us no specifics about the nature or expense of health care.  The have not addressed the real issues of health care - its costs, how we receive care,  how we pay for care, how profits are made from patient care.

Health care is the largest industry in this country.  It is personal.  Further regulations and a government option are on the table.  As legislators address these options in what is now a poisonous political environment, they should understand that the impoverished middle class is no longer surviving escalating costs.   Neither are the impoverished poor.  The purveyors of health-care-for-profit will not, on their own, make changes to benefit the consumer.

“No Public Option” by permission.  Jim Morin

Article 1:  “Commentary: This country needs an outburst of common sense.” Joseph L Galloway, McClatchy online, 1st posted 8/7/2009.

Article 2: “Who’s behind the attacks on a health care overhaul?” Margaret Talev, McClatchy online, 1st posted 8/14/2009.

Footnotes:  (1) Article 2, paragraph 1, Margaret Talev.   (2) Article 1, paragraph 1, Joseph Galloway.