Thursday, September 24, 2009

Big Bucks for Bailout Barons, the Need for Clawbacks and What Leadership?

Before we go into the very big bucks being paid to the "Bailout Barons," John Mauldin has a few words that will raise your blood pressure about the payback you will soon experience (and makes the case precisely for the "clawbacks" required for fairness). (Emphasis marks added - Ed.)

This week we continue to look at what powers the forces of deflation. As I continue to stress, getting the fundamental question answered correctly is the most important issue we face going forward. And the problem is that we cannot use the usual historical comparisons. This week we look at one more factor: bank lending. I give you a sneak preview of what will be an explosive report from Institutional Risk Analytics about the problems in the banking sector. Are you ready for the FDIC to be down as much as $400 billion? This should be an interesting, if sobering, letter.

. . . speaking of holes, let's look at a huge one that is looming at the FDIC. Institutional Risk Analytics (IRA) is maybe the premier bank-analyst service in the country. They charge over six figures for their flagship service. Good friend and Maine fishing buddy Chris Whalen runs the show and was kind enough to send me some of his new data, which they have not yet released to the public. You get it here. (

IRA takes the data from the FDIC and crunches it with their own set of risk parameters. While the FDIC has a little over 400 banks on its current "watch" list, IRA gives 2,256 banks an "F." They project that over 1,000 banks will either fold or be taken over during the current cycle. To date in 2009, a total of 92 banks have failed across the country, compared with 25 for all of 2008, according to the FDIC. 900 more to go. Ouch.

How much money are we talking about? The banks rated F have total insured assets of $4.46 trillion. So far in this cycle banks that have been taken over by the FDIC are showing losses of 25%!

From almost $60 billion last fall, the FDIC's reserves have been drawn down to only about $10 billion today (after set-asides), a 16-year low. A quick look at the FDIC's own data shows us how inadequate those reserves are compared to the deposits they are now insuring. The FDIC only has about two-tenths of one cent for every dollar of assets it covers.

View the graphs and read the full analysis here (enter your email for full free access).

(If you would like to make a contribution to Welcome to Pottersville2, please do so now as I'm on my last legs with this site. I know that everyone is asking for your help due to the increasingly bad economic times (no relief in sight for any but the banksters!), but please consider making even a small donation to my blog if you care to continue seeing its content and viewpoint. You may either use the Paypal button on the top left of this site, or send me an email at for a snail mail address. My heartfelt thanks go out to the beautiful people who have supported me so generously in the past. As a terminally loud-mouthed critic of both the defense and domestic policies of the U.S. since the 80's (from within the aerospace defense establishment) who will never be employed again but would accept any job or aid offered, I need your help.)

Katrina vanden Heuvel delivers the goods on exactly whom is being paid off (and gives Obama a bye instead of a boot!). (Emphasis marks added - Ed.)

Big Bucks for Bailout Barons

Katrina vanden Heuvel

The Nation

One year after the global banking system collapsed the Institute for Policy Studies (IPS) 16th Annual Executive Excess report - "America's Bailout Barons" - shows that the perverse system of executive compensation which contributed to the financial meltdown is still thriving for top bailout recipients.

President Obama had it right in April when he delivered his "economic Sermon on the Mount " and said, "We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock." And, as the IPS report notes, even earlier in the year Obama spoke out against excessive executive compensation, saying, "In order to restore our financial system, we've got to restore trust. And in order to restore trust, we've got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street."

But the fact is we haven't learned - or haven't acted on - the lessons we must heed if we're going to build a more just, sustainable economy that works for the real economy rather than the Wall Street. The IPS report focuses on the twenty banks that have received the most bailout money from the federal government and shows that the banks and bankers are still acting and being rewarded as if they are Masters of the universe - abetted by a government that is failing to take on the status quo.

Sure, some steps have been taken to rein in compensation for TARP recipients - but they are timid ones. And IPS's valuable report makes clear, "Lobbying armies from corporate and financial trade associations are energetically doing battle behind the scenes to keep even modest changes in pay rules off the legislative table."

As a result historic inequality in pay is still prevalent and the neo-Gilded Age tycoons are raking it in. According to the report, a generation ago top execs rarely earned more than thirty to forty times the pay of the average American worker. But now top execs make an average of 319 times more than the typical worker. For the top twenty financial industry execs the divide is even greater - 436 times more than the average worker in 2008. In the past three years, the top five execs at the twenty US financial firms receiving the most Bailout Bucks took home pay packages worth a staggering $3.2 billion - an average of $32 million each. In 2008 those cats averaged nearly $14 million each - even though their twenty firms laid off more than 160,000 people since January of that year.

While a new and smart economic populism has fueled plenty of talk about compensation reform, good proposals haven't been seized. Senators Bernie Sanders and Claire McCaskill tried to cap compensation for employees of bailed-out firms so that it wouldn't exceed that of the President of the US, $400,000. The amendment was passed but then stripped in conference committee. In April, Progressive Caucus member and Chief Deputy Whip Jan Schakowsky introduced the Patriot Corporations Act to extend tax breaks and contracting preferences to companies that meet certain benchmarks, including not compensating any executive at more than 100 times the income of the company's lowest-paid worker. That bill has been referred to committee. Hedge fund managers are still only paying 15 percent capital gains rate on the profit share they get for managing investment funds rather than the 35 percent income tax they should pay. And unlimited amounts of executive compensation are still shielded in deferred accounts - at an annual cost of $80.6 billion to taxpayers - in contrast to the limits placed on income deferred by normal taxpayers via 401(k) plans.

There is no shortage of opportunities to curb this unjust and unproductive growth in unequal pay. As IPS senior scholar and Nation contributor Chuck Collins put it, "Public officials in Congress and the White House hold the pin that could pop the executive pay bubble. They have so far failed to use it." It's time to use it.

Katrina's commenters define the issue to its nub (read until weeping commences):

..."As IPS senior scholar and Nation contributor Chuck Collins put it, "Public officials in Congress and the White House hold the pin that could pop the executive pay bubble. They have so far failed to use it." It's time to use it." -K. vanden H.

Unfortunately for the central thesis of this piece, the executive compensation held forth as being the centerpiece (she didn't say core, she didn't say heart, no-no-no!) of the aggregate problem is a mere drop in the cesspool. The REST of the cesspool consists of the multiple noodley oodles and garkey gobs and blatant buttloads of Fraudulent Finance Paper, otherwise known to the gilt-edged Wall Street/Foggy Bottom crowd as "Derivatives".

Derivatives are to commerce-as-finance-lending pretty much as top-shelf porno is to genuine human love. A cheap and phony though sweet-scented and entirely utterly abjectly sophisticated imitation of the Real Thing, in other words.

By all the (rare) authoritative reportage devoted to the latter on the Web as found, y'see, Wall Street's Securitized Financial Derivative Trading Documents characteristically make reference in multiple large-print paragraphs to the tranche (OK, "basket" or "fistful" or even "pallet-load" will also do) of actual genuine real live physical loan instruments AND the mutually human-consented equitable financial transactions they represent, while in the Fine Print allowing/enabling the buyer of said "securitized derivative" paper NO RECOURSE - NO ACCESS - to the underlying, genuinely commerce-based and collateral-secured cash flow. Bizarre? Only to one who is both dead honest AND not a fool.

Elsewise, it's just another Keynesian-grade grumble in Bernard Mandeville's fine ol' Grumbling Hive. (See for the base text from the 1600s. Especially if the Gentle Reader enjoys the sheer retro-sense of Historick Rhymed Vintage Satirickal Economick Doggerel Couplets.)Fact is, all the "Securitized" derivative paper in the world has been, was, and today still is sold (though the derivatives market is repoortedly very slow right now) on the "Greater Fool" Principle. This is most easily done by the Finance Lizards of Wall Street during the upswing of the bubble-of-the-moment, which we are now well and truly past, today.

Example: One may remember the collapse of the Florida public-school teacher salary and pension funds a couple of years or so back? That crash came about because the world was already running out of Greater Fools to buy the swindle by then, in fact. Um, things ain't any more lively these days, at all. Too many woulda'-been fools done wised up, y'see.

Fact: Derivative sales and trading are entirely based on the collusive crimininality-based "trust" of the financial trading partners. It was and still is all done under the cloak of built-in small-print non-disclosure agreements. As always, the Large Print giveth and the Small Print taketh away. (Step ri-i-i-ght up.)

Fact: The "notional" value of all the derivative paper now printed into physical being (and now just waiting on Bank of America's and Morgan Stanley's and the Fed's and all the Rest of the Private Financial Trading Banks' shelf-space and hard-drives for the Next Round of Greater Fools to self-generate or sumpin') is conservatively estimated to exceed the actual amount of US dollars, Japanese yen, British pound sterling, Chinese remimbi/yuan, and all the rest of the legitimate national currencies now extant in this world by just under a 2:1 margin.

In other words, if all the derivative paper on earth were to all be bought up by any one "someone" all at once, that someone'd have to both own a BIG printing press *and* make with the fresh ink right away for hours and months on end, just to pay the Derivative Dealer's invoice in full at the end of the day.

Fact: It'll be a LONG time afore the Poppy Fields of Afghanistan produce enuf heroin base at today's depressed poppy-juice prices to make up the difference. Meanwhile, um, let's just ask a WHOLE LOT just what Great American Family Financial Interests and the Values Thereof are indeed served best by the ongoing US presence in poppy-laden Afghanistan (Devourer of Empires for as long as there have been rapacious empires), shall we?

Oh, and the Unocal pipeline being rammed right through, too. Must remember the oil, or most o' th' the gunships'll stop dead in the water right quick too.

But absent any material of intrinsic value such as gold or platinum or silver or heroin base suitable for real-world Intrinsic Value backing, it's aught but Fiat Currency rolling off the press all day long to buy the trash and trashets alike, with nary a scrap o' anything real or genuine actually backing the as-printed pastel-tinted face value with anything of genuine worth. So when the private-owned Fed or the (ostensibly) public-owned US (or any other nation's) Treasury swaps its own in-house debt-paper for that fine gilt-edged load of fraudulent derivative paper bundles palleted up on the loading dock over there where I'm pointing, WHO is REALLY the Greater Fool, I asks ye?

Honestly and objectively, try though I might to suss it all out any different, the whole thing comes off as crooked as any common dog's hind leg (and as shifty-squirmy as any drunken snake). That is the result either way - ANY way - that this one has ever sliced it.That is why, by all the lawful rules of traditionally legitimate commerce and finance as I for one have learnt them, all "derivative" paper is entirely ILLEGAL. This is so by all the rightful laws and Lawful rights we all SHOULD and once DID enjoy under Heaven, pre-Glass-Steagall, Back Then. (Ah, sweet Camelot!).

There was indeed once a time when the US SEC agreed with that Good Free Idea; that time is not yet returned unto us. Meanwhile, shill-shally publick wordsmithing is all that stands any longer between the AUTHORS of this world's Derivative Paper in the aggregate and all their consequent Fraudulent Finance Activity, now held in Dame Justice's one pan, and all the consequences in *this* life of one hundred eighty-nine point six percent or so of all the money in the world having been by dint of smoke, mirrors and Counterinsurance with Side Letters Attached all wrapped up in the Very Costly Works of Thickly Complexificated Financial Securitization Fiction known as "derivatives" being entirely and loudly and fully and publicly en masse exposed for the swindlin' criminals that they all are, on the other.

Opinion: Paying them pinstripey-clad criminal perps the Big Bonus Money to do what they did is vewwy, vewwy wong, to be sure. Ah, but to leave out what they all did to all the Rest of the Whole Round World that was soooo wrong in the FIRST place just adds to the cancerous complicity still a-growin' amid all the apparent conundrum-complexity, Miz Katrina VandenH!

Ma'am: Kindly consider digging a little deeper into the FERTILE manure-pile of World Finance, and bringing us all up more - much, much more - on the Real Problem, out of the steaming stinking hole that has been dug for us all to die in by them criminals in Banker Garb, out into the bright beaming sunlight for proper publick exposure and cleansing! You sure do have the raw talent - and why not, really, anyway? Avoiding the necrotic core at the heart of the boil while purporting to lance the thang with that fine-point quill o' yourn only adds to the stench and delays HEALING, did you KNOW that, Ma'am?Um, maybe a good scan through the prior two years' worth of International Currency Review might clear things up a bit, and restore a proper sense of proportion to the journalist's sense of the problem as a whole, hm? See for a taste, Gentle Reader, and then hit up the News Archive one reliably finds at for a more comprehensive treatment - the sort that one can actually Learn from History by perusing once-through right quick, like a good investigative reporter always should be able and willing to do.

Honest weights, true measures, sensible proportions, genuine equitability, and straight-up level-field balance - in other words JUSTICE - is where it's gotta' be at, Ma'am. An upgrade now will prevent significant trouble later, in this Complex Systems Analyst's considered and respectful opinion.

Not that anyone'd want anyone to just switch sides or agendas or nuthin' like that, of course. (But surely someone might KNOW when one wants to, hm?) So have they published "Derivatives for Dummies" yet?

Walking Turtle Homepage 09.03.09 - 6:04 pm # Hal O'Leary and RichM, Jim Hightower might have found the issue to set things rolling - "A Traitorous Assault on Our Democracy: Chief Justice Roberts plans to overturn the campaign finance laws in September, to remove all limits on corporations. This will effectively destroy what democracy you have left.

If he carries through, it's your duty to demand the impeachment of both Roberts and his accomplices, who will be openly flouting your Constitution.

Gerald Ford got rid of Abe Fortas, because of his dubious corporate ties. In this case, the issue couldn't be posed more starkly.

Bob Jackson 09.03.09 - 6:23 pm # Its all happens in the town square. All you need is a huge barrel of tar and a bags of itchy feathers. Then you need some wooden yokes and shackles to stick heads and arms in. And finally, you need to set up the guillotine. A big ass guillotine that makes a huge thud when it drops. Oh yeah . . . the torches. Flashlights do not have the same affect. When going door to door in the Hamptons and Uptown Manhattan, the peeps should really have wooden torches with real flames, and a smell of kerosine, to light the way.

You all know the well paid CEO's, hedgefund millionaires, the treasonous politicos, corrupt govt officials. The real fun will be the lobbyists. You'll need to compile a list. And be careful they will be armed and guarded. Must be patient and smoke them out.

observer 09.04.09 - 6:21 am #

Further comment needed?

Suzan ________________________

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