DANCING NEBULA

DANCING NEBULA
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Monday, December 5, 2011

Jolly on Wall Street

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THIS WEEK

“The law, in its majestic equality, forbids the rich and the poor alike,” the great Nobel Prize-winning writer Anatole France once quipped, “to sleep under bridges, to beg in the streets, and to steal bread."

Anatole France would have relished the spectacle on Capitol Hill last week after Senate Democrats proposed a surtax on millionaires to pay for extending the current payroll tax cut. Republican leaders refused to go along. They proposed instead to offset the payroll tax cut by freezing federal worker pay for three more years and making high-income earners pay more for Medicare.

Under the Senate GOP plan, a Washington Post news report would go on to explain, “the wealthy would also be blocked from receiving benefits such as food stamps and unemployment insurance.”

In Washington these days, that counts as “equality of sacrifice.” We offer in this week’s Too Much, as always, a somewhat different take.


GREED AT A GLANCE

America’s conservatives can’t seem to make up their mind about how to respond to Occupy Wall Street. One wing of the right wing — led by presidential candidate Newt Gingrich — wants conservatives to double down on the old-time rich-can-do-no-wrong religion. In South Carolina last Tuesday, Gingrich demanded that President Obama “repudiate” the “concept of the 99 and the 1” as “un-American.” The very next day, at a Republican governors conference in Orlando, messaging expert Frank Luntz gave the exact opposite advice. If questioned on inequality, Luntz suggested, preface every response with three words: “I get it.” How can governors explain away their opposition to “taxing the rich”? Tell voters, Luntz advised the governors, that you oppose any initiative that “takes from the rich.”

The U.S. Senate has voted to clamp down — a little — on the executive pay that goes to corporate defense contractors. On Thursday the Senate adopted an amendment that would cap at $400,000 what defense contractors can charge the federal government for executive compensation. Under current law, contractors can directly charge taxpayers up to $693,951. Senator Jay Rockefeller from West Virginia says the Senate “took a step in the right direction by deciding to cap excessive salaries for corporate executives.” But the new legislation, even if okayed in the House, won’t cap any contractor's executive salary, only that portion of it that comes directly from a federal procurement contract . . .

Snow
Executives at companies that pull in big government contracts don’t get their big bucks from the dollars they directly bill the government. Their windfalls come from cashing in on the rising share prices that government contracts make possible — or swinging merger deals that reduce the number if bidders for the government's business. Last week, for instance, news reportsrevealed that CEO David Snow of Medco Health Solutions, a firm that manages prescription drug programs for millions of public sector employees, stands to clear $39 million once Medco’s impending merger with rival Express Scripts goes through. Medco has so far this year spent nearly $1 million lobbying the U.S. Department of Defense, other federal departments, and Congress for support on the merger bid . . .

Liane Bonin Starr, a celebrity journalist for outlets that range from Daily Variety to the Hollywood Reporter, has reached her “gag inducing” limit with “reality TV about the flashy super rich.” Watching the “pampered” shop, says Starr, “used to be, well, fun.” But these days, with so much greater awareness of the “disconnect” between the wealthy and America’s 99 percent, rich people reality TV now strikes Starr as a direct “affront” to average Americans. What sent Starr over the edge?The Real Housewives of Beverly Hills did the trick. A recent episode had restaurateur Lisa Vanderpump and her daughter Pandora “coo over” invitations that run $100 a pop. The two end up be spending $15,000 on missives “destined to be momentarily admired, envied, and pitched into trash cans.”

Must be something about the restaurant business that gets people of means just giddy about excess. The proprietors of the Serendipity3 boutique eatery in Washington’s Georgetown have just sent out a news release announcing the first sale of their $1,000 ice cream sundae. The dish features “Tahitian vanilla bean ice cream infused with Madagascar vanilla” schmeared with “23-karat edible gold leaf” and dribbled with chunks of chocolate and caviar. The devourer of this sweet feast did get to keep the goblet the confection came in.



INEQUALITY BY THE NUMBERS


IN FOCUS

Still Tis the Season to Be Jolly on Wall Street?

Financial industry insiders are grousing about a big downturn in annual bonuses. They should be thanking the rest of us — bombshell new research shows — for their continuing awesome good tidings.

Wall Street’s power suits aren’t humming along, this December, with all the holiday jingles. Bankers, traders, and law firm partners are quite frankly feeling kind of foul. End-of-year Wall Street bonuses, experts predict, are going to be down from 2010 levels — by as much, on average, as 35 percent.

Total 2011 pay for the typical bond-trading managing director at a top Wall Street securities firm will likely be off, says analyst Michael Karp, nearly 40 percent.

But those typical managing directors should be able to survive the holidays quite nicely. Bonus cuts will leave average high-powered bond traders with $1.8 million for their daily labors in 2011. The average U.S. worker would have to labor 43 years — an adult lifetime — to take home that same $1.8 million.

In other words, by any real-world yardstick, Wall Street’s finest are doing just fine. And they owe their good fortune, blockbuster new research makes clear, to the generosity of Uncle Sam’s one and only central bank, the Federal Reserve.

During the financial meltdown, a new analysis of 29,000 pages of previously secret documents shows, central bankers at the Fed shoveled out an incredible $7.77 trillion in dirt-cheap loans to the nation’s financial institutions.

This massive wave of low-cost loans, note the Bloomberg news analysts who broke the story last week, amounted to a bailout over ten times larger than the $700 billion funneled to banks via the Treasury Department’s controversial Troubled Asset Relief Program, or TARP.

Bloomberg reporters had to win a court case to access the stunning new bailout data. How stunning? The $7.77 trillion the Fed committed to the nation’s financial industry, observes Bloomberg, equaled “more than half the value of everything produced” in the entire United States during the key crisis year.

To put the bailout in more homespun terms: The Fed provided banks the equivalent of over $25,000 per American.

The nation’s six biggest banks — J.P. Morgan, Bank of America, Citibank, Wells Fargo, Goldman Sachs, and Morgan Stanley — grabbed $460 billion of the secret loans. Morgan Stanley took in $10 billion in publicly visible TARP bailout dollars and $107 billion from the hidden Fed loan program.

All the TARP dollars came with modest strings on executive pay. To end run the strings, big banks rushed to pay back their TARP bailout and then loudly proclaimed themselves healthy and stable enough to resume business as usual.

Meanwhile, at that same moment, these “healthy” banks were taking advantage of the secret Fed loans to register billions in new profits — with no executive pay strings attached.

The Fed loans came with interest rates as low as 0.01 percent. The banks lent out these loan dollars at much higher rates and made, Bloomberg estimates, at least $13 billion on these transactions. That $13 billion, notes economist Dean Baker, essentially rates as a pure “gift” from taxpayers.

But the Fed's total giving to America's biggest banks has run much higher than that $13 billion. By backstopping big banks so energeticaly, former U.S. senator Ted Kaufman from Delaware points out, the Fed has served notice that the federal government would never let the big banks fail — and that notification continues to translate into favorable borrowing rates for the big banks.

The big banks, for their part, have pooh-poohed all the hubbub about the enormous subsidies they’ve received. They’ve argued that no one should be bent out of joint, since the banks have paid their loans back.

The big banks, counters financial analyst Steve Randy Waldman, have definitely not paid back the lucrative freedom from downside risk that the Fed and Treasury Department have so graciously provided them.

In financial markets, Waldman explains, “risk-bearing” has always been “the ultimate commodity.” The Fed and Treasury underwrote this risk-bearing — for big banks — at next to nothing. Middle class Americans, by contrast, have to pay for their own risk-bearing. They pay, for instance, their fire insurance bills year in and year out, without ever expecting that the Fed is going to foot the bill.

Massive federal bailout subsidies, adds analyst Les Leopold, have had another spin-off benefit. They've “allowed banks to step up their lobbying efforts.” These lobbying efforts, in turn, have saved the banks countless billions more.

One example: Bank political pressure has forged a federal housing crisis policy that protects banks from the “downside” of the crash of the housing market.

But the generosity of top federal officials to America’s banks has gone still further. We learned last week, notes Reuters analyst Felix Salmon, that Treasury secretary Hank Paulson was “giving inside information to his old Wall Street buddies” right as the financial crisis was unfolding, insider info that helped Goldman Sachs-connected hedge fund managers score millions in easy profits.

The bottom line of all this generosity? The total assets of America’s top six banks jumped from $6.8 trillion in September 2006 to $9.5 trillion in September 2011. The trading arms of big banks and other independent firms, the Washington Postreports, have generated over $83 billion in profit over the last two and a half years, $6 billion more than they generated over the previous eight.

Returns this massive, in turn, translated last year into the biggest bankcompensation haul in history. Wall Street salaries in New York averaged $361,330 in 2010, five times the city's average private-sector pay.

And average Americans? Their economic status continues to slide. A new Rutgers University study out last week documents that just 7 percent of those Americans “who lost jobs after the financial crisis have returned to or exceeded their previous financial position.” Two million construction workers have lost jobs since the housing collapse began. The industry has hired back only 47,000.

That housing collapse keeps collapsing. Over a quarter of American mortgages, 28 percent, have now sunk “underwater,” up from 23 percent last year.

Some context for these numbers: The $107 billion in Fed loans that one bank alone, Morgan Stanley, pocketed in September 2008 would have been enough,notes Bloomberg, “to pay off one-tenth of the country’s delinquent mortgages.

So what ought to be done? For starters, former New York governor Eliot Spitzerurged last week, Congress ought to require banks to use the profits they made investing their almost interest-free money from the Fed “to write down the value of mortgages of those who are underwater.”

Nassim Nicholas Taleb — a New York University risk engineer, best-selling author, and a hedge fund investor — has a longer-term solution. He wants the feds to start regulating Wall Street pay. No one at a company that would require a taxpayer-financed bailout if it failed, says Taleb, should “get a bonus, ever.”

“Consider that we trust military and homeland security personnel with our lives, yet we don’t give them lavish bonuses,” he explains. “They get promotions and the honor of a job well done if they succeed, and the severe disincentive of shame if they fail.”

For bankers, Taleb adds, the opposite holds. They get “a bonus if they make short-term profits and a bailout if they go bust.”

Reforms like these still seem, at our current political moment, sheer fantasy. New research from the Center for Responsive Politics helps us understand one reason. Nineteen current members of Congress last year held personal investments in Wall Street’s most notorious bank, Goldman Sachs. These investments averaged well over three-quarters of a million dollars.

Nine of these 18 investors just happened to sit on the congressional committees that oversee the financial industry. Two of the 18 not on one of these committees just happened to be the two most powerful leaders in the House, speaker John Boehner and majority leader Eric Cantor.




IN REVIEW

Solid Background for the Occupy Generation

Michael Kazin, American Dreamers: How the Left Changed the Nation. Alfred A. Knopf, 329 pp.

Kazin
Jay Mandle, an economist at Colgate University, last week put his finger on what may be the central paradox of modern American history.

“Ethnicity, gender, and sexual orientation have receded as sources of stigma,” observed Mandle. “Socially, we are more egalitarian than ever before.”

Yet economically we have become, over the last half-century, phenomenally more unequal — an inequality that the Occupy Wall Street movement has so dramatically shoved onto our national political stage.

How did we end up here? How did we succeed so significantly socially and fail so appallingly on the economic front? Michael Kazin, a historian at Georgetown University, has authored a new book that can help speed our search for answers.

Kazin’s sweeping new study begins in antebellum times, with the abolitionists, and takes the story right through 2010, to the eve of Occupy. We now have no better introduction to the lifework of the men and women who have openly and defiantly challenged privilege in America, of every different sort.

Most histories of progressive struggle concentrate on the political ins and outs of campaigns and movements. Kazin brings in the battles champions of equality have fought on the cultural level as well. His narrative encompasses everything from Dr. Seuss to Hollywood.

Kazin does concentrate more on the struggles for social than economic equality. So you won’t find in these pages a gameplan for upending our 1 percent. You will find stories that reinforce the importance of broad vision to social progress.

Without “an egalitarian ideal,” as Kazin sums up, “the real world will be ever harder to change.”



Quote of the Week

“The most affluent luxury customer is spending with confidence,”
Karen Katz, CEO, luxury retail chain Neiman Marcus,commenting on the doubling of her company's most recent quarterly profits,New York Post, November 29, 2011

Stat of the Week

If average American families today were still receiving the same share of America’s national income that average households earned in 1980, veteran venture capitalist Nick Hanauer noted last week, each average family today would “have an astounding $13,000 more” in income. Hanuaer, an original investor in Amazon, wants to see the nation “tax the rich like we once did and use that money to spur growth by putting purchasing power back in the hands of the middle class.”

New Wisdom
on Wealth

Rick Goldman, One analyst's take on how the economic-equality gap got so largeMontreal Gazette, November 30, 2011. The rich have for years been using government intervention to funnel wealth from the vast majority to themselves.

Salvatore Babones, We need a flat tax for Social SecurityDes Moines Register, November 30, 2009. Taxing rich at same Social Security rate as poor would raise enough to bring seniors back to 1973 level of well-being.

Michael Skapinker, CEOs need to join the 20 times club nowFinancial Times, December 1, 2011. Peter Drucker, the great management thinker, thought CEOs should earn no more than 20 times what their workers make.

Paul Buchheit, A Very Good Reason to Tax the Very RichCommonDreams.org, December 1, 2011. Our top-paid hedge fund manager makes enough to pay the starting salaries of 100,000 firefighters.

Justin Elliott, Foreclosure battle: A new hope, Salon, December 3, 2011. The next stage in the growing movement to overcome the top 1 percent's rulebook.

OECD, Divided We Stand: Why Inequality Keeps Rising, December 5, 2011. Top 1 percent income in the United States has increased three times faster than top 1 percent income in the Netherlands over the past 30 years, two times faster than top 1 percent income in Japan.

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