Posts Tagged ‘crony capitalism’

How to destroy capitalism in one easy lesson

February 5, 2013

Today, February 5, 2013, U.S. Attorney General, Eric Holder – the socialist Obama-appointee who currently heads up the Justice Department – is expected to bring a civil law suit against Standard & Poor’s Rating Services, one of New York’s three giant bond-rating agencies. Several state attorneys general are expected to join this rent-seeking lawsuit.

This suit is designed to bankrupt the company and send out a warning signal to the remaining two giants not to mess with the Obama administration. Incidentally, the law suit will strike yet another Obama blow against the rule of law and anything remotely resembling laissez-faire capitalism in the United States.

Officially, the law suit is targeted at S & P for its failure to predict the housing meltdown that led to the financial crisis in fall 2008. In truth, it is a revenge action because S & P downgraded the U.S. credit rating following the failure of the Obama administration to address the debt crisis in fall 2011. If the federal courts buckle under such administration pressure, the Madisonian experiment is over and yet another Republic will be well on its way to internal dissolution.

The financial crisis was generated not by any rating agency, but by a cross-party political conspiracy to bludgeon mortgage companies to extend mortgages to minority households that had no resources to enter into home ownership. A crude vote-seeking frenzy ensued, fed by Fannie Mae and Freddie Mac, two government-enterprises that were shell agencies for a Ponzi scheme in the housing market. S & P’s error was ever to take credit guarantees emanating from the government with anything except supreme contempt.

Let us hope that the courts toss out this evil lawsuit and award damages for reckless litigation against the Juatice Department and its co-conspirators.

When crooks fall out honest men come into their own

October 10, 2012

Over a period of some 40 years, following pressure initially  exerted by the Carter administration, United States financial institutions were egged on into making mortgage loans to high-risk households. The outcome in 2007-2008 was all but inevitable, when the housing market collapsed and a huge raft of worthless mortgage securities brought the global economy to its knees.

Central to the entire corrupt enterprise were the government agencies that forced uneconomic mortgage lending down the throat of reluctant financial institutions. Fannie Mae and Freddie Mac, of course, were the Fagin fences that established markets for junk securities under the stamp of their approval.  Operating behind the scenes as the evil and menacing Bill Sikes of the underworld, however, was the Federal Housing Association (FHA), a government agency that does not make loans, but that insures the loans made by others that satisfy its standards.

Throughout the years building up to the crisis, it turns out that the FHA had no standards whatsoever concerning loans made to the poor and the unemployed, the profligate and the irresolute,who flooded into the housing market in search of easy gains from a rising market. As the chickens come home to roost, and as the FHA exhausts its reserves in covering defaults by high-risk borrowers, the Obama administration is now soaking the very financial institutions pressured by the FHA  to make such loans.

In February 2012, Bank of America agreed to a $1 billion settlement of False Claims Act fraud allegations involving FHA-backed loans without admitting any wrong-doing.  Three other large banks since then have agreed to pay more than $490 million in similar cases.  Last week, New York’s top prosecutor filed a civl lawsuit against J.P. Morgan Chase
alleging widespread fraud by the company’s Bear Stearns unit in the sale of mortgage-backed securities.

Yesterday, the U.S. government sued Wells Fargo &  Co., accusing the nation’s biggest mortgage lender of reckless lending and of leaving a federal insurance program to pick up the tab. Wells Fargo denies the allegations, but, like its illustrious predecessors, it most likely will settle out of court.

The FHA is desperate to extract such protection money because its reserves are seriously under threat. Because of its own ideological preference for expanding home ownership into high-risk markets, the FHA’s reserves, standing at $4.7 billion one year ago, would have been wiped out in 2012, forcing the agency to seek $700 million from the U.S. Treasury. Instead, it has soaked the financial institutions to cover the cost of  its own malfeasance.

The good news should be that financial institutions will never make mortgage loans into high-risk territory in the future. As a consequence, the housing market should prove less vulnerable to price bubbles and to bubble bursts.  At best, the market for mortgage loans will tighten significantly as borrowers’ credit ratings are properly evaluated and suitably  high down-payments are required.

The bad news is that such is the grip of the federal government over liquid and insolvent financial institutions that the FHA will continue to press for bad loans on the one hand while recouping the default losses from those loans from those self-same banks.  The Fagins and the Sikes of this U.S.  mortgage- securities underworld will continue their nefarious activities unless they face the dreaded drop or a Bow Street runner’s bullet, as the case may be.

That is life under crony capitalism.

Hat Tip: Shane Raice and Nick Timaraos, ‘U.S. Sues Wells Fargo For Faulty Mortgages’, The Wall Street Journal, October 10, 2012

Bootleggers and Baptists in the political market-place

September 20, 2012

In 1983,  Bruce Yandle*  published a theory of regulation in which seemingly opposed interest groups campaign for and vote in favor of identical regulatory controls.  Specifically, the article addressed political interactions that culminated in the   18th Amendment to the United States Constitution in 1920 that prohibited the production, distribution and sale of alcohol.

In Yandle’s model, criminal bootleggers of alcohol favor prohibition because they understand that the elimination of a legitimate market opens up an opportunity for high-profit margins for suppliers operating outside the law.  Baptist preachers and their congregations also favor prohibition, citing religious reasons.  Temperance organizations such as the Anti-Saloon League and the Prohibition Party join the prohibition lobby because of alleged negative health and social  externalities from alcohol consumption.  Criminal syndicates also relish the profit opportunities that extra-legal enforcement of illegal bootleg-liquor contracts will offer.

So both Bootleggers and Baptists separately campaign in favor of prohibition laws, for completely independent reasons. Presumably, they do not actively conspire, on the assumption that the Baptists are driven by Godly motives, though in reality some unscrupulous Baptists may conspire on the assumption that higher alcohol prices under Prohibition will deter consumption at the margin.

Unscrupulous politicians capitalize on this congruence of interests, accepting contributions from all sides while citing the morals of the preacher rather than the profit motives of of would-be Joe Kennedy’s and  Al Capone’s in their campaign speeches.

Prohibition thankfully was repealed in 1933, not least because state alcohol taxes were required to replace declining state revenues at the trough of the Great Depression.  But the Bootleggers and Baptists model of regulation is alive and well and offers a powerful force in favor of crony capitalism.

“The complexity of environmental issues, a regulatory bias toward command-and-control approaches and extreme advocacy of environmentalists – the Baptists in this case – has created fertile ground for bootleggers to profit.  When the Environmental Protection Agency (EPA) began tightening clean-air rules in 2010,   Exelon  (a Chicago-based utility that has close ties to the Obama administration) estimated that it would earn $400 million annually because the regulations would force dozens of competing coal-burning plants to close.  Just recently, the EPA issued a controversial Utility MACT (Maximum Achievable Control Technology)  regulation, which is the most expensive regulation under the Clean Air Act – $10.9 billion annually.  The winners from this regulation are utilities with nuclear or compliant coal-fired plants.  Recognizing that this rule would force some utilities to close, these actors formed the Clean Energy Group to support the EPA’s initiative.  This group of bootleggers based its support of the multi-billion-dollar rule  with advocacy saying it would promote the public health and the economy.  In reality, they profit; the consumer pays.”  William O’Keefe,  ‘U.S. has a bad case of crony capitalism’,  The Washington Times,  September 20, 2012

Warren Buffet and George Soros are two highly successful bootleggers who are amassing fortunes out of the Obama administration by positioning themselves to wipe out competition with the support of public interest groups that campaign for pro-green and anti-global warming regulatory and subsidy initiatives.

* Bruce Yandle, ‘Bootleggers and Baptists: The Education of a Regulatory Economist’ Regulation, 7, No. 3, 1983

Deputy Governor of Bank of England allegedly price fixes Libor

July 9, 2012

Paul Tucker – Deputy Governor of the Bank of England and the leading candidate to replace Mervyn King as the next Governor of the Bank of England- testifies today before a parliamentary committee about alleged price-fixing by Barclays PLC and other global banks with respect to interest rates like the London interbank offered rate, or Libor. 

If the allegations are substantiated Tucker’s intervention must be viewed not only as government corruption, but more importantly, as evidence of the socialization of the world’s global banking system.  Such an intervention would clearly signal that bank stress tests, certainly in the United Kingdom, but perhaps world-wide, are little more than a government-manipulated mockery.

Libor serves as the benchmark for rates on trillions of dollars of loans world-wide. It is composed of daily submissions from a group of leading banks which report their estimated costs of borrowing from each other . As the counterparty risk of interbank borrowing increases, so  Libor increases.

The scandal centers in part on banks during the early years of the financial crisis understating these costs in order to disguise their mounting financial distress.  Barclays Bank is at the center of the developing scandal.

After reaching a $449 million settlement with U.S. and British regulators over its attempts to artifially depress the Libor rate, Barclays sought to defend its behavior by releasing notes from an October 2008 phone call between Deputy Governor Tucker and Mr Diamond, a top Barclays investment-banking official who later became chief executive before being forced to resign last week.

According to Mr. Diamond’s notes concerning the call, Deputy Governor Tucker relayed concerns from ‘senior British officials’ about Barclays above-average Libor submissions.

 ‘Mr Tucker stated…that while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently’ wrote Mr. Diamond to two of his colleagues.  One of the recipients, banking executive Jerry del Misier, interpreted that message as an instruction to understate Barclays’s borrowing costs.  Mr Del Missier also resigned from Barclay’s last week.

The British parliament now questions just how high up within the last  government pressure from Deputy Governor Tucker may have emanated. Who knew what, and when did they know about it, is the inevitable post-Watergate question. Prime Minister Gordon Brown and Bank of England Governor Mervyn King are certainly not above suspicion.

“Sipping a glass of champagne before the women’s finals on Saturday, a British banking executive who considers himself a friend of Mr. Tucker’s said his hopes of becoming governor havce been ‘deeply hurt.’  David Enrich, ‘Rate Probe Moves To Official’s Role’, The Wall  Street Journal, July 9, 2012

If price-rigging of Libor was imposed on Barclays by corrupt British government officials, the nerve center of capitalism has truly been distorted by an out-of-control Labor Government. Here indeed is a dangerous harbinger for crony capitalism in a world dominated by excessively powerful governments.

Beware the rationalizations of Benjamin Franklin

April 18, 2012

“Benjamin Franklin, a leading figure of the 18th-century enlightenment, advocated a rational approach to decision-making.  In a letter to the English chemist, Joseph Priestley, Franklin claimed to have found ‘great advantage’ in a process he described as moral or prudential algebra: set out pros and cons, attach weights to each consideration and arrive at a balanced judgment taking all relevant factors into account.  Yet Franklin knew very well that this was not how real people, including himself, behaved.  Franklin was an occasional vegetarian, having balanced the moral, nutritional and practical arguments.  But confronted with the delicious smell of freshly grilled fish, he observed that the fish themselves had disregarded his precepts by eating other fish and so deserved to be eaten.  ‘How convenient it is,’ he said, ‘to be a reasonable creature since it enables one to make or find a reason for whatever one has a mind to do.’  John Kay, ‘Beware Franklin’s Gambit in making big decisions’”, Financial Times, April 18, 2012

In recent years, Franklin’s Gambit has been utilized extensively,and with disastrous effect, by economists, statisticians, financial analysts and the like in developing business models.  John Kay played a role in such activity while engaged commercially in this field.  ‘Why,’ he asked himself continuously, ‘do we not use these models ourselves?’ The answer – the writing on the wall – was that such models were not useful in the running of any business. Their value lay in allowing managers to justify to boards, investors, and government bureaucrat, decisions that had already been made on entirely other grounds.

The financial crisis of September 2008 was a direct consequence of such misuse of financial models by Alan Greenspan, Ben Bernanke and Timothy Geithner, as well as such international agencies as DSK’s International Monetary Fund. Formal process was allowed to dominate common sense and historical perspective with disastrous consequences for ordinary people. Of course, the perpetrators of the error, with one exception,  walked out scot free from the shambles that they had created, delivering ludicrous sermons on economic policy to gullible audiences and stalking the international stage as policy heroes rather than as the low-lives that they really are.

The exception was Dominique Strauss-Kahn, who trapped himself in sexual honeypots that have exposed him for what he truly is as a human being. Even DSK will go down for sexual rather than for financial abuse. Such is the nature of the global market economy under state-run crony-capitalism.

Jon S. Corzine – poster-boy for crony-capitalism

November 3, 2011

“Jon Corzine let his family down, and he’ll probably let New Jersey down too.” Joanne Dougherty (deserted wife of Jon Corzine) The New York Times, November 2005

Jon Corzine is arch-typical of the growing cadre of sleazy Liberal Democrats who move effortlessly between political and economic markets in the United States. Such individuals know nothing about entrepreneurship of the kind that has made the United States a wealthy country. However they know plenty about crony-capitalism and about methods for removing the wallets of unwary Americans who put their trust in current and former public officials.

Corzine  learned his  first trade – in banking and finance – at the Mecca for crony-capitalism, Goldman Sachs, joining the company in 1975 and working his way up to CEO in 1994.  He obtained his first delicious taste of crony capitalism in 1998, when summoned by President Clinton to help develop a financial rescue package for the insolvent hedge fund, Long Term Capital  Management. 

In so doing, he alienated  his co-chairman at Goldman Sachs, Henry Paulson who seized control of the company and showed Corzine the door in January 1999. Corzine laughed his way to the bank, raking in $400 million from his stock in the company when it went public immediately following his exit.

With a raging thirst for politics, Corzine ran successfully for the U.S. Senate in November 2000, spending more than $62 million of his own money on his campaign – the most expensive Senate campaign in U.S. history.  Although Corzine’s predecessor in the senate, Frank Lautenburg, had been a left-leaning Democrat, Corzine’s far-left voting record clearly moved the Senate to the left.

Corzine’s popularity was declining significantly during the latter part of his term in the Senate, not least because of a notorious sexual relationship with Carla Katz that ended with a significant financial payout following the break-up of that menage in August 2004. Such, seemingly, is the tough lifestyle of many a limousine liberal in the United States.

The Senate failed to provide Jon Corzine with a sufficiency of personal political clout, although it had provided a useful locale for his extra-marital relatuionship. So in 2005, he ran for the Governorship of New Jersey, where he would be able to rub financial shoulders with  some very wealthy individuals, whose names not infrequently  would also end in a vowel. Naturally, Corzine did not resign his Senate seat while he ran for the Governorship.  After all, a political bird in the hand is worth two in the bush.

 Corzine unloaded $38 million to buy the Governorship of New Jersey, winning 54 per cent of the vote.  Governor Corzine turned out to have a taste for fast cars as well as for fast women. In April 2007, he was seriously injured in an automobile accident driven by a state trooper, at his request, in excess of 90 miles per hour. The Governor, of course, was not wearing a seat belt.  Released from hospital one month later, his motorcade was  clocked at 70 miles per hour in a 55 mile per hour zone on Interstate 295. The Governor evidently also had a taste for playing fast and loose with the laws of his state.

In November 2009, lady luck turned against Governor Corzine. He was comfortably defeated in the general election by a Republican challenger, Chris Christie.  Chris Christie is currently making quite a name for himself by cleaning up the New Jersey mess left behind by Jon Corzine.  His wife’s prediction about his likely performance proved to be right on the mark.

Now thoroughly well-trained in the sleaze of crony capitalism, Jon Corzine would make his way to MF Global, where he would destroy shareholder wealth and loot customer accounts. No doubt he has plenty of  his own dough stashed away in the accounts of more conservative, Republican-led financial institutions. Crony-capitalists are rarely true-believers. They do not put much of their own money where there mouth is.

 


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