Archive for April, 2010

Goldman and the Sacking of Capitalism

April 29, 2010

They called themselves Masters of the Universe. What we’re learning is that they didn’t live in the same universe as the rest of us.

Not only were they in a place alien to those without a Wall Street address, they didn’t, and still don’t, speak the same language.

I just sat through an eternity of grilling of Goldman Sachs’ executives who couldn’t understand simple questions of ethics, morality, or duty to trusting clients. The senators who questioned them were exasperated, accusing them of what on the surface seemed like stonewalling. After a while you realized it wasn’t so much stonewalling as a failure to communicate.

The Goldman people just couldn’t see anything wrong with hyping mortgage related products to their clients as good investments and then betting that those same products would fail.

Daniel Sparks, the former head of Goldman’s mortgage department, was asked that specific question: shouldn’t you have disclosed that Goldman believed the market was about to tank and was betting against it? After a number of attempts at trying to understand the question he said “no.”

When asked whether he thought this type of trading should be regulated, Joshua Birnbaum, who managed the trading process for Goldman during the go-go years prior to the crash, responded only that it was an “interesting” idea.

Twelve times Committee Chairman Senator Carl Levin referred to an internal Goldman memo calling one its mortgage packages a “shitty deal,” and tried in vain to get any of the witnesses to admit that pushing the Goldman sales force to sell it might have been unethical.

A couple of weeks ago I sat through a similar performance by no less than Alan Greenspan, former Treasury Secretary and Citibank Chairman Robert Rubin, and key Citigroup executives. Far from apologizing for anything they might have done to contribute to the meltdown they professed little understanding of why they might even have been considered suspects.

At the Goldman hearing Missouri Senator Clair McCaskill kept referring to the markets made by Goldman as “gambling casinos” and the people who managed them as “bookies.” A day earlier, Banking Chairman Chris Dodd gave an impassioned floor speech equating the situation as a robbery during which people coming back from a trip found they had lost everything.

But I think the alternative universe analogy is much closer to what we’re really up against.

This alternative universe is far larger and more dangerous than a few clueless investment bankers. It really involves much of present day capitalism itself, along with academic, government and media enablers.

For many years MBA schools have been pumping out the best and brightest with singular ambitions to go to Wall Street and make fast fortunes. The idea was to use modern tools to create “instruments” that would accelerate profits.

One of those “instruments”—-in fact, the most widely used of those instruments prior to the market collapse—was euphemistically called a “synthetic” credit default swap. In plain English, this was a bet on whether the market would go up or down. It provided no capital for mortgages, no financing for business, no useful purpose of any kind. It was, pure and simple, a bet.

At the time of the market collapse the amount of money bet in the “synthetic” market was ten times or more the amount backing mortgages themselves. And it got worse. Bettors took out “insurance” that their bets would win. Who insured those bets? Most notably companies like AIG. Who was placing the bets? Banks. Pension funds. Cities and states and whole countries looking to pick up more return on their loose cash than they could get from traditional investments.

All of this created an alternative universe, where greed replaced good sense and wealth that might have gone to any number of useful purposes was diverted into streams that lacked even elementary transparency.

And that warped the outlook of so many of those playing at those tables. Otherwise rational people who worked for Lehman Brothers moved money off their books at the end of the financial reporting quarter and put it back a few days later so the company’s losses wouldn’t show. People who ran venerable institutions like the Royal Bank of Scotland decided to gamble with others’ money attracted by the lure of bigger profits. And so on.

What can you say about an investment bank, Goldman, that sells bundles of mortgages, most of which were issued to people who only “stated” their incomes, with no verification. What can you say about the fools who buy them? Billions of dollars of them.

Go backward in time, and not too far. It wasn’t long ago that Enron was being exalted in business schools as the ideal company, even as it was twisting itself in knots with unfathomable off book subsidiaries to keep what amounted to a multi-billion dollar Ponzi scheme going.

Or go to 1999, when a Democratic president and more than 90 U.S. senators convinced themselves that unregulated markets could be trusted not to succumb to an orgy of greed. That, despite the $200 billion+ taxpayer bailout triggered by the savings and loan crisis just a few years earlier.

All along most of the business press and popular publications cheered on the excesses and overlooked the dangers.

Capitalism is markets and competition. Finance is an efficient way to pool money for useful private and public purposes. But in recent years the normal blood cells of those systems have mutated into a cancerous body that has become a mortal risk to itself.

The people from Goldman Sachs have been living in that diseased world so long they think it’s normal. No one is going to change their minds, or the minds or behavior of those still managing Wall Street.

It’s going to take some powerful outside medicine to do that.

Probably a heavier dose than the prescription that Congress is even now trying to administer.

(Joe Rothstein can be contacted at joe@einnews.com)

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Worry More About Gannett and Comcast Than Limbaugh and Beck

April 23, 2010

April 22, 2010

By Joe Rothstein
Editor, EINNEWS.COM

I’m not worried about Glenn Beck, Rush Limbaugh or their legion of over-the-top imitators. To keep their disciples happy Beck and Limbaugh need to constantly throw out bigger chunks of red meat. Ultimately it’s totally so raw that it becomes irrelevant.

For all the buzz about them, the commentators of the hysterical Right have smaller and less committed audiences than the notorious Father Coughlin had back during the Great Depression. Radio was then the political media weapon of choice. With a U.S. population half its current size Father Coughlin regularly had 40 million listeners. His rants began as attacks on capitalism, but as he became more and more virulent he wound up a full throated supporter of Hitler.

He even created a political party and promised he would quit broadcasting if his chosen presidential candidate pulled in fewer than a million votes. The candidate didn’t, but Coughlin stayed on the air anyway. (Remind you of Limbaugh and his unredeemed promise to move to Costa Rica if health reform was enacted)?

No, these people don’t scare me. What does scare me is what’s happened to the rest of the media.

In poll after poll we see that the American public is awash in misinformation. A third of the public believes the nonsense about “death panels.” There’s dangerous erosion in public belief about the science of climate change. A very shaky grip on reality runs through many vital public issues.

The genius behind America’s success, and its example which so many other nations have followed, is that government rests on the consent of the governed. From the nation’s earliest days, the Founding Fathers had no doubt that the free flow of information and competing ideas were inseparable from a government representative of majority interests. Even during those times, when there was hardly any public money to be had, much of it was spent to support printers, newspapers, and distribution through the Post Office.

Public support for journalism is as old as the nation itself. Even today it’s estimated that newspapers and magazines are subsidized to the tune of nearly a billion dollars through Post Office delivery.

But the unfortunate, and potentially deadly truth today is that most of our information comes through very narrow funnels. Where 100 years ago a city like Washington, D.C. or New York would have a dozen newspapers representing a multitude of voices and viewpoints, today we have newspaper monopolies. Radio offered the promise of diversity but has evolved into a few large chains with robotic operations. TV was born as the ultimate small funnel, with just 3 national networks. Cable might have fixed that, but, like newspapers and radio, cable now is the domain of Comcast, Time Warner and just a few others.

Now we have the Internet. But a federal court ruled the other day that the FCC has no power to keep cyberspace open to all. You already can see the squeeze—-the big guys buying up the popular sites, and the consolidation of internet service providers who manage the gateways.

There’s a struggle going on now that’s often labeled a struggle over the future of journalism. It’s really a struggle over the future of democracy. If journalism is considered merely a “profit center,” as it has been by the goliaths that own newspaper chains and TV and cable networks, what happens to the public’s vital interest in news that impacts their lives? Where’s the solid ground of information and viewpoint from which the governed can exercise its consent?

The Internet has been disruptive to the entire communications industry. But it’s an industry that’s been badly in need of disruption. Monopolies, the tyranny of Wall Street’s quarterly earnings demands, the subtle influence of the advertising model on writers and editors—-this hasn’t been the most fertile environment for serious journalism. Things needed changing even before the Internet and the compounded devastation wrought by the current recession.

A few months ago, Len Downie, the former executive editor of the Washington Post, and Michael Schudson, a widely respected Columbia University journalism professor, published an influential paper about all of this.

“It may not be essential to save or promote any particular news medium, including print newspapers,” they say in their analysis. “What is paramount is preserving independent, original, credible reporting, whether or not it is profitable, and regardless of the medium in which it appears.”

To do that they suggest a long menu of possibilities, some of which already are happening. Including, among others, development of independent news operations focused on investigative reporting, including serious local coverage; more support from universities and non-profits, a national fund for local news, managed by the FCC, an expansion of PBS into more community-based coverage, changes in tax laws to encourage new for profit and non-profit independent news entities, and more open government records.

The important thing here is to develop scale. Monopoly corporate media, for sometimes good and often bad, has had deep reach into the nation’s information channels. Once things get said on four broadcast network news channels, cable channels, the AP radio wire and the community’s only newspaper (if it still has one) information and perspective take common root.

And because mainstream media and its corporate owners and sponsors are so sensitive about “bias,” the mainstream report invariably is he-said, she-said—–even when all the facts are on one side of that see-saw.

A multitude of voices can give truth a better chance of finding a path out of this constrained box—-if those voices can be heard.

The problem with journalism today isn’t so much with the demagogues who are heard too much but with the truth that’s heard too little.

(Joe Rothstein can be contacted at joe@einnews.com)

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April 23, 2010

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