Interesting post from Yves at Naked Capitalism about Wall Street in the 1920′s just before the Great Crash and Great Depression. Read it here.
by CalculatedRisk on 12/15/2009 11:11:00 PM
The WaPo has an article about a tax break for Citigroup: U.S. gave up billions in tax money in deal for Citigroup’s bailout repayment
The Internal Revenue Service on Friday issued an exception to long-standing tax rules for the benefit of Citigroup and a few other companies partially owned by the government. As a result, Citigroup will be allowed to retain billions of dollars worth of tax breaks that otherwise would decline in value when the government sells its stake to private investors.
While the Obama administration has said taxpayers are likely to profit from the sale of the Citigroup shares, accounting experts said the lost tax revenue could easily outstrip those profits.
Federal tax law lets companies reduce taxable income in a good year by the amount of losses in bad years. But the law limits the transfer of those benefits to new ownership as a way of preventing profitable companies from buying losers to avoid taxes. Under the law, the government’s sale of its 34 percent stake in Citigroup, combined with the company’s recent sales of stock to raise money, qualified as a change in ownership.
The IRS notice issued Friday saves Citigroup from the consequences by stipulating that the government’s share sale does not count toward the definition of an ownership change.
Who benefits? The value of the shares the U.S. owns should increase, but only 34% of the share price increase accrues to U.S. taxpayers The other current shareholders receive the rest. So this doesn’t seem to make sense …
The stock market’s hitting 10,000 again. Politicians and bankers, anxious for recovery (for votes & bonuses), are claiming victory and saying the recovery is on. I say not so fast. Maybe we recover, but we’ve been credit-aholics. Like a recovering alcoholic, relapse is a very real danger. As Palley points out below, the econometric models are likely misleading.
October 11, 2009 4:37pm
By Thomas Palley
Over the past year the global economy has experienced a massive contraction, the deepest since the Great Depression of the 1930s. But this spring, economists started talking of “green shoots” of recovery and that optimistic assessment quickly spread to Wall Street. More recently, on the anniversary of the Lehman Brothers crash, Ben Bernanke, Federal Reserve chairman, officially blessed this consensus by declaring the recession is “very likely over”.
The future is fundamentally uncertain, which always makes prediction a rash enterprise. That said there is a good chance the new consensus is wrong. Instead, there are solid grounds for believing the US economy will experience a second dip followed by extended stagnation that will qualify as the second Great Depression. Some indications to this effect are already rolling in with unexpectedly large US job losses in September and the crash in US automobile sales following the end of the “cash-for-clunkers” programme. Continue reading
In the past I’ve mentioned Simon Johnson’s article on “The Quiet Coup”. It’s worth another look. The real epidemic that’s going to wipe us out isn’t swine flu or any other virus. Instead it’s a viral idea. An idea that people in positions of power hold in this country. Namely, the idea that they got where they are due solely to merit. And since they believe they got where they are by merit, then they must be good people. And then they conclude that whatever is in their personal best interest must also be good. It’s rationalization of greed, corruption, and avarice. Nothing less.
A few data points to consider:
- Our secretary of treasury, Tim Geithner, was confirmed despite admitting to being a tax cheat. Even when he was caught by the IRS and informed that his “interpretation” of the tax laws was errroneous, he paid only the absolutely legal minimum. He refused to pay back the back taxes that were beyond the statute of limitations. Apparently it’s only wrong if you get caught and publicized in Timmy’s book. That doesn’t bode well for the Timmy designing a derivatives regulatory regime, does it?
- From NewsDaily and other sources:
Stephen Friedman, chairman of the New York Federal Reserve Bank‘s board of directors, resigned on Thursday amid questions about his purchases of stock in his former firm, Goldman Sachs.
What did he do? He “quit” (the revolving door is open) a job at Goldman Sachs to take a position replacing Tim Geithner as President of the New York Federal Reserve Bank. For those not familiar, the NY Fed is supposed to regulate Goldman Sachs. So did Friedman put his Goldman stock in a blind trust? No. Did he sell it and seperate himself from Goldman? No. Instead he not only continued to own stock in the firm he is supposed to regulate (and that has profited by the billions from bail-out programs, including those of the Fed). He not only continued to own stock, he bought more. Later in the same article Friedman is quoted as saying what he did was “in compliance with the rules”. Of course it was. That’s because even later in the same article we discover that he was granted a waiver of the rules. He sounds absolutely indignant that people think he has a conflict of interest and that we question his motivation.
- From Reuters today:
Private equity fund The Carlyle Group will pay a $20 million penalty to settle its role in a probe of investment firms that hired politically connected people to help them get chosen to manage New York state’s pension fund, the state’s attorney general said on Thursday.
Of course it wasn’t just the NY state pension fund, it was pension funds in at least 36 states. Carlyle Group is one of the largest private private equity and investment mgt firms in the world. One of it’s prime methods is to employ former top political people (ex-Presidents of US, ex-Secretaries of State, ex-Prime Ministers of UK, etc). Then magically, the firm’s owned companies get big government contracts. Surprise! In this latest episode, Carlyle bribes “employs” people who make campaign contributions to the politicos who are on the boards of the ublic pension funds. Then, magic, the funds find that Carlyle is an excellent investment manager and should be hired.
Yesterday the Obama admin forced GM CEO Rick Waggoner to resign as a condition of continued support for GM’s restructuring. Yet, the administration has not yet demanded any of the banks change management (except AIG & Fannie last Sept), despite the banks using 18-20 times as much bailout money.
Several folks have asked me why? Why the double-standard? The answer is that in the last 30 years, the banking industry has captured Washington. Our Treasury Dept officials are ex-bankers and when done in DC they return to banking. The leading economic advisors (Larry Summers now, Bob Rubin and Hank Paulson in past) are either bankers or have long career ties to banking. This is not a good thing.
Simon Johnson, ex-IMF chief economist, has written analysis of the problem that, while long, is very worthwhile read. He calls the financial industry’s capture of our government’s policy a Quiet Coup.
I have some key excerpts below the fold, but it’s worth checking out the whole article. Continue reading
Ralph Nader has made IMHO an excellent contribution to the discussion of what can be done to prevent future crises on Wall St such as the current one.
Here are seven avoidance indicators which outline what Washington is not doing to prevent another round of greed and misdeeds by the Wall Street few against the innocent many throughout the country.
Market manipulation is alive and well on Wall Street. Calling all suckers:
Submitted by Rolfe Winkler, CFA, publisher of OptionARMageddon
We’re not quite as healthy as we thought we were. Oops. (WSJ)
J.P. Morgan Chase Chief Executive James Dimon said…that March was a little tougher than the first two months of the year….Bank of America…CEO Kenneth Lewis also said that March had been a tougher month for his bank. [Convenient that they decided to dump this information on Friday afternoon, and at the close of a very good week].
Readers may recall that a few weeks ago, those two CEOs—along with Citi’s Vikram Pandit—said the first two months of the year had been very good:
Excellent but long post by Edward Harrison at Naked Capitalism.
This post describes what’s happening with the “Geithner Plan” for revised bailout of banks/ dealing with toxic assets in the context of an earlier bailout: the Mexican currency crisis in 1994-95. It”s many of the same folks involved: Summers, Geithner, and a populist sentiment in Congress that the powers that be decided to go around.
Good read for both the current crisis and to review the Mexican currency crisis.
One of the best articles I’ve found on how the banking industry & Wall St got so screwed up that they could take down the world’s economy. It’s very long, but an easy and engaging read – you don’t have to be an economist to understand it. Warning to the sensitive: it’s from Rolling Stone, so some of language is a bit salty. Check it out here at: The Big Takeover.
Courtesy of Paul Krugman. He’s starting to get at the core issues. I’ll discuss more in future posts, but for now ponder:
The Madoff Economy, by Paul Krugman, Commentary, NY Times: The revelation that Bernard Madoff — brilliant investor (or so almost everyone thought), philanthropist, pillar of the community — was a phony has shocked the world, and understandably so. The scale of his alleged $50 billion Ponzi scheme is hard to comprehend.
Yet surely I’m not the only person to ask the obvious question: How different, really, is Mr. Madoff’s tale from the story of the investment industry as a whole?
The financial services industry has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it’s … had a corrupting effect on our society as a whole.
Let’s start with those paychecks. … The incomes of the richest Americans have exploded over the past generation, even as wages of ordinary workers have stagnated; high pay on Wall Street was a major cause of that divergence.
But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.
Consider the hypothetical example of a money manager who leverages up his clients’ money…, then invests the bulked-up total in high-yielding but risky assets… For a while — say, as long as a housing bubble continues to inflate — he (it’s almost always a he) will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big — but he’ll keep those bonuses.
O.K., maybe my example wasn’t hypothetical after all.
So, how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients’ money rather than collecting big fees while exposing investors to risks they didn’t understand. … Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.
We’re talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we’re talking about $400 billion a year in waste, fraud and abuse.
But the costs of America’s Ponzi era surely went beyond the direct waste of dollars and cents.
At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics… Meanwhile, how much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?
Most of all, the vast riches … undermined our sense of reality and degraded our judgment. Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? … The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.
After all, that’s why so many people trusted Mr. Madoff.
Now, as we survey the wreckage and try to understand how things can have gone so wrong, so fast, the answer is actually quite simple: What we’re looking at now are the consequences of a world gone Madoff.