Naked Capitalism on Scott Walker’s War on Workers


Bill Black: Scott Walker’s War on Workers and the Wall Street Journal’s Cleaned-Up Coverage

Posted on March 3, 2015 by

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives

Wisconsin Governor Scott Walker has channeled his inner Mitt Romney and written off an immense swath of Americans as people he would not represent if he were elected President. Romney wrote off 47% of Americans and Walker wrote off America’s workers. Romney channeled his inner Ayn Rand and labeled 47% of American’s as worthless “takers.” Walker was more extreme. He labeled American workers, peacefully protesting, as analogous to ISIS terrorists. Romney’s dismissal of the 47% was made as part of a fund raising pitch to billionaire supporters who responded warmly. Walker’ war on workers was warmly received by his ultra-conservative base and his ultra-wealthy potential donors.

Romney’s dismissal of nearly half of America helped doom his campaign, but Walker is running for the nomination of the Republican Party, so demonstrating how much Walker hates a large portion of Americans made him the (early) leading candidate for his party’s nomination. (Consider the hypocrisy of this occurring while Rabid Rudi claims Obama does not love America and Walker responds that he doesn’t know whether Obama loves America. It appears that Republicans see nothing inconsistent between “loving America” and despising nearly half of all Americans. What is America if it is not Americans?)

The Wall Street Journal weighed in on Walker’s war on workers in a piece dated February 28, 2015 entitled “Scott Walker Confronts Doubts About His Grasp of Foreign Policy” by Patrick O’Connor with an opening picture of Walker addressing the “Club for Growth.” The Club is composed of ultra-wealthy and ultra-conservative Republican donors who seek to destroy any effort at effective regulation. This February 28 version of O’Connor’s article contained Walker’s slander of American workers.

“The exchange came two days after Mr. Walker raised eyebrows at the Conservative Political Action Conference when he compared Islamic State fighters to union members in Wisconsin who protested his decision to limit collective-bargaining rights for state workers, telling the crowd, ‘If I can take on 100,000 protesters, I can do the same across the world.’

In the March 1 (printed?) version of O’Conner’s piece, however, the photo stayed but the slanderous sentence that was so embarrassing and politically harmful to Walker disappeared from the WSJ coverage.

The further irony is that Walker made his slander of labor as the key to his (bizarre) defense of his foreign policy skills. His metaphorical defense of his non-existent foreign policy skills is that President Reagan’s best foreign policy move (according to Walker) was breaking the PATCO (air controller) strike. Because Walker has removed the right of public employees to bargain collectively and ridiculed peaceful protests by 100,000 workers he is just like Reagan. Because he is just like Reagan he too will be effective in foreign policy. Even without the slander of comparing peaceful worker protests by Americans to ISIS terrorists, this metaphor served as an unintended confession of how little Walker knows of foreign policy – or American workers – or logic.

As anti-worker as Reagan was, however, he continued to praise unions and their vital contribution to America. Ronald Reagan would be unable to win a Republican primary in any state in 2015 because he supported the right of workers to organize and bargain collectively. That is how extreme his Party has become.

Common Dreams on the Student-Loan Ripoff

Four Reasons Young Americans Should Burn Their Student Loan Papers

‘Fifty years ago students burned their draft cards to protest an immoral war against the people of Vietnam. Today it’s a different kind of war, immoral in another way, waged against young Americans of approximately the same age, and threatening them in a manner that endangers not their lives but their livelihoods.’ (Photo: Wikimedia Commons)

‘Hell No, We Won’t Go’ — 1967
‘No Way, We Won’t Pay’ — 2015

Fifty years ago students burned their draft cards to protest an immoral war against the people of Vietnam. Today it’s a different kind of war, immoral in another way, waged against young Americans of approximately the same age, and threatening them in a manner that endangers not their lives but their livelihoods.

There are at least four good reasons why America’s young adults— and their parents—should take up the fight against financial firms who are holding high-interest student loans that total more than the nation’s credit card debt, and more than the total income of the poorer half of America.

1. The Protest Has Already Begun

Fifteen former students of for-profit Corinthian Colleges recently announced a debt strikeagainst the company and its predatory loan practices. The 15 students, members of theDebt Collective initiative of debt abolisher Rolling Jubilee, have refused to repay their loans. Corinthian, which has been accused of false marketing, grade tampering, and recruitment improprieties, and which has 60 percent of its students default on loans, was sued in 2013 for employing a “predatory scheme” to recruit students.

2. For-Profit Colleges Use Taxpayer Money for False Marketing to Get MORE Taxpayer Money

Corinthian isn’t the only loan predator. Of 15 for-profit colleges investigated by the Government Accountability Office, 13 were found guilty of deceptive marketing, with false job and salary guarantees. The 15 companies got a stunning 86 percent of their funding from the public, in the form of student loans and grants.

Worse yet, a Senate report found that they spend about a quarter of their revenue on marketing, and take 20 percent in profits, while spending only about 17 percent on instruction.

After all that, only 22 percent of students get a degree after six years.

3. Traditional Colleges Aren’t Much Better: Students are Treated Like Products for Profit-Makers

Since the 1980s, the number of administrators at private universities has doubled.

To pay all the administrators, tenure-track teachers have been eliminated, and underpaid part-timers have taken their places. Adjunct and student teachers, who made up about 22 percent of instructional staff in 1969, now make up an estimated 76 percent of instructional staff in higher education, with a median wage in 2010 of about $2,700 per course, and with little or no benefits.

To further pay for all the administrators, and to pay for amenities like recreations centers, dining halls, and athletics, tuition has been steadily increasing, to twelve times its cost in 1978.

4. College Graduates Have Been Cheated out of Good Jobs

The unemployment rate may be going down, but the available jobs are well below the skill levels of college-trained adults. According to the New York Federal Reserve, 44 percent of recent college graduates are underemployed, holding jobs that are normally held by high school graduates.

College graduates have not recovered from the recession. They took a 19 percent pay cut in the two years after the recession, and by 2013 they were part of the only age group with lower average wages in early 2013 than in 2000. As recently as July of 2014 the Federal Reserve of San Francisco wrote that recent college graduates “were and continue to be hit hard.”

Progressive Unity

Progressives have no shortage of important causes, but an attack on predatory student loan policies could be a unifying force for us, particularly if the power of social networking is employed.

An Apple executive said, “The U.S. has stopped producing people with the skills we need.” But almost the entirety of corporate profits are being spent on stock buybacks to enrich executives and shareholders, rather than on job training.

The proposal for an America Permanent Fund of $10,000 per household, based on the corporate debt to society for public research, is about the same, in numbers, as the $1.16 trillion of student loan debt. A protest against student loans is a good way to earn the first dividend.

Paul Buchheit is a college teacher, an active member of US Uncut Chicago, founder and developer of social justice and educational websites (,,, and the editor and main author of “American Wars: Illusions and Realities” (Clarity Press). He can be reached at

LUV News on Social Security Truths


If We’re Going to Defend Social Security We Need to Understand It

by Dave Lindorff

The Republican-dominated Congress, with the help of a cadre of sell-out conservative Democrats in both chambers, are gearing up to attack Social Security again, under the guise of “saving” the program.

The attack will be brutal, because the program’s assassins understand that this is probably their last chance to undermine Social Security. With the Baby Boom generation born after 1946 now seriously starting to file for retirement benefits, it will soon become such a mainstay for so many people that it will be impregnable, unless already undermined.

A person born in 1946 could have retired at age 62 as early as 2008, and next year could retire at 70 and receive maximum benefits. There are already seven years’ worth of Baby Boomers who are at least eligible to start collecting benefits. By the time the last Baby Boomer born in 1964 is eligible to retire in 2026, the “senior lobby” of Social Security-eligible voters will be more double what it is today, and more importantly, will represent a bloc 50% larger as a proportion of the voting population than it is in today’s elderly population. Social Security’s enemies in Congress and in the business world know that as powerful as the elderly vote is today it will be 50% more powerful in years to come. And don’t forget, it’s not just retirees who ardently support Social Security. It’s people in their 50s and early 60s, who are looking ahead at the program as their salvation in retirement.

Polls show that even among the young, there is strong and abiding support for this flawed but critical program founded in 1936, which today provides 100% of income for one-seventh of all America’s elderly, and 90% or more of income for one-third of the elderly. Another one-third depend upon those benefits for more than half their income. Most of the rest too depend on their Social Security benefits for basic expenses like food and rent. It’s the rare American who just uses their benefit checks for vacations, luxury purchases or investment purposes.

But for all that Americans remain incredibly ignorant about the program, and are losing out on many of its benefits because of that ignorance. If this information were more readily available and understandable, it would be far harder for the program’s enemies to successfully attack it. I will attempt to do that here.

I’ve been writing about Social Security for years, and am happy to say that, only weeks away from my 66th birthday, am also getting close to the point where I will personally become a beneficiary of the program.

First of all, let’s address and debunk the main arguments of attack made by Social Security’s enemies. These are:

* Social Security is going to go bankrupt. This bogus argument alludes to the fact that the Social Security Trust Fund, a surplus that was deliberately created over time as a result of a “reform” of the system instituted in a compromise plan developed by President Ronald Reagan and the Democratic Congress in 1983, specifically to provide funding for the looming wave of Baby Boomers who were not only more numerous than anticipated, but who were living longer than their parents. But while the reform didn’t quite provide enough funding, Social Security will not, and cannot go bust. There are several reasons for this. The first is that Social Security is not a private annuity. It is a government program, and its payouts to retirees are not and have never been primarily from the Trust Fund (which is still growing), but from current FICA tax payments being made by current workers. The truth is that even if, in what is an the tremendously unlikely event (more on this later) that Washington doesn’t fix the shortfall by coming up with more sources of revenue, there would still be enough current workers paying into the program along with their employers after 2033, when the Trust Fund is predicted to be exhausted, to pay 77% of promised benefits to retirees indefinitely into the future.

* Social Security might not be here when you retire. This scare line, popular with some financial advisors dealing with younger clients, is designed to get them to invest more money with the advisor, who of course gets to collect the management fees. But it is, in the words of one financial advising expert, Michael Kitces, a partner and director of research at Pinnacle Advisors Group in Columbia, MD, “bullshit!” As he puts it, “The idea that the Social Security program will be repealed is simply ludicrous. It may be tinkered with, they might raise the retirement age, for instance, or increase the payroll tax, but even if they did nothing at all to fix it, today’s college student would retire getting 75% of today’s benefits. And the political reality is that the program could never be taken away.”

In terms of both the two above arguments — that the soon-to-retire may see their benefits cut in 2033, or that young people may never get their Social Security — the reality is that for the very same demographic reason (the Baby Boomers) that the Social Security Trust Fund predictably and as planned decades ago is being run down, there will be a huge surge in retiree and near-retiree voters who will ensure that fixes are made in the program to assure full, and probably even better benefit payments going forward. Don’t believe the lies being put out that your Social Security benefits won’t be there when you need them! It’s a political, not a financial or actuarial issue, and you simply need to make sure you are politically active in defending your benefits, and not in 2033, or whenever you retire, but now, when the program is under attack.

* Social Security is an Age War, with the Greedy Elderly Robbing their Kids. This absurd argument actually undermines the prior one, which implies that it’s all about the Trust Fund, by making the point the benefits are actually paid by current workers, i.e. by the children and grandchildren of retirees. But it ignores the reality that those working kids and grandkids are glad to be providing their parents and grandparents with a secure income in retirement. I have never met a young person who complained that their retired parents or grandparents were getting too much money from Social Security! Nobody would want to go back to the old days when children and grandchildren had to provide for the entire cost of caring form their elders.

And don’t forget — Social Security is not just a retirement program for the elderly. It is also a disability payment program for those of any age who can no longer work because of some physical or mental impairment. Those benefits can be substantial too, and in some cases can even provide spousal benefits for a partner. The critics of the program don’t mention that, though they do also want to cut the disability program, and in fact one of the first thing this new Congress did was push for a 20% cut in Social Security disability payments — a disgusting move that is being opposed by progressives but that could still pass.

* The wealthy don’t need Social Security. It should go just to the poor. Well, actually, while it’s probably true that the truly wealthy — those who are retiring with incomes of $200,000 or more — probably don’t need those benefit checks, taking them away would do little or nothing to alleviate the burden of funding checks for the rest of us. What it would do is make higher-income earners opponents of the program, by turning it into welfare. One of the key things that has made retirement programs popular and enduring in countries around the world is that they are universal. Everyone pays into them, and everyone receives the benefits. Don’t get sucked into the trick of turning the program into a welfare program. We’ve seen what happens to those: just look at Food Stamps.

Those are the arguments being used to attack the program. Meanwhile, the fixes for the program are not being talked about. Instead, the talk on the right, among sell-out Democrats who take their money from Wall Street (which would love to privatize retirement entirely, making everyone’s future live or die based on the performance of the stock market, which would allow the industry to such fees out of every desperate worker), and in the corporate media (whose owners of course resent having to pay the payroll tax for their own workers) is of cutting benefits, for example by skimping on annual benefit adjustments for inflation, or by raising the retirement age. In truth, though, there are some easy and relatively painless progressive ways to raise the money to pay full benefits after 2033, and even to raise benefits paid (the average US Social Security benefit only replaces about a third of the income a person or couple was receiving before retirement, compared to 60-66% of final income for people who retire in most of Europe and Scandinavia). Here are some of those solutions:

*Eliminate the cap on income subject to Social Security taxation. At present that cap is $118,000. This means that if a person earns more than $118,000, neither the worker or the employer pays any more taxes on that other income. If the cap were completely lifted, so that all income were subject to the same 12.4% tax (6.2% for the worker, 6.2% for the employer), it would raise some $150 billion annually and Social Security benefits would be funded fully beyond 2045, to a time when all but the most methuselan of Baby Boomers will have had gone to that great Woodstock in the sky.

*Put a small tax on all short-term stock trading. Most of the trading on the stock market these days is being done not by individuals by by computers run by the too-big-to-fail banks and by hedgefunds. Just check a graph of the market on almost any day, and you’ll typically see the day’s trading on the Dow, the S&P 500, the NASDAQ or any other index begin with an almost straight line rise or fall that often is quickly reversed by the subsequent slower trend in trading. What’s happening is that the computer traders move in and get the jump on everyone else, capture all the gain (or make puts on the losses) based upon whatever news is driving the market that day, positive or negative, and then let the rest of the suckers diddle around for the rest of the day winning and losing the old-fashioned way. It’s estimated that a 0.5% tax on high-speed trading only, which would only impact the top 1% of Americans — the very wealthiest people — would raise $300-350 billion a year in new revenue. If this were applied to the Social Security program it would not only solve projected funding issues, but allow the system to boost benefits to start to be more of a real retirement program, instead of a just a backstop and poverty-prevention program.

* Fully tax Social Security benefits paid to those earning over $200,000 a year. At present, Social Security benefits are taxed at varying rates depending upon the retiree’s income, but even for the wealthy, only 85% of the annual benefit is taxable. The other 15% is tax free. While this won’t raise a huge amount of money, it would help finance any campaign to raise benefits, and makes perfect sense.

* And finally, of course, there’s raising the FICA tax. While raising the tax, currently 6.2% for workers and 6.2% on employers for the first $118,000 of income (and 12.4% on net income for the self-employed), is not the most progressive of solutions to increasing funding for the program, Kitces notes that doing so, with just a 1.5% increase in the FICA payroll tax (keeping the current income cap) for both worker and employer, would “fund current benefits fully for the next 100 years and beyond.” Kitces notes, “This is not a significant increase for people. For a low-income person earning $300 a week, it would be $4.50. And when during the recession, the government cut the FICA tax by 2%, people didn’t even notice the difference in their checks.”

The fundamental point is, there is no real crisis, what funding shortfall is being projected for 2033 could be easily solved at little or no cost to people of low income and negligible cost to everyone, including the wealthy, and there is absolutely no threat to the system except for the manufactured one by politicians backing the greedy desires of Wall Street, the US Chamber of Commerce and the wealthiest 1% of Americans.

Now let’s get to some of the other widespread misunderstandings and points about the Social Security System that people need to understand.

First of all, nobody should start collecting Social Security benefits at age 62, or even at age 66, unless they have no other resources, can no longer work, and do not have a spouse who could outlive them and who has little or no Social Security to depend upon. This is because Social Security benefits grow significantly for every year that you wait to start collecting.

My poet brother called me when he turned 62, and proudly announced that he had filed for his benefits and was collecting $750 a month. I told him he was making a huge mistake, and that, as a basically healthy, fit guy, he was dooming himself to a pathetic $750 a month (plus inflation adjustment) for a life that, given our family’s history, could see him living well into his 90s and beyond. I said that if he waited until 70, even if he never worked for another day in his life for pay, he could expect to start receiving, instead of $750 a month, $1320 in constant dollars, or in other words $1320 plus whatever CPI increases were approved over the intervening 8 years. I said that if he understandably didn’t want to work anymore at the manual labor jobs that he had been doing, he should draw that $750 a month from the small sum of money he had inherited from our late parents, instead of saving it for later, and hold off on collecting his Social Security benefits until he hit 70. He agreed, and luckily, since one is allowed to buy back up to a year’s benefits and reverse a mistaken decision to start drawing Social Security, he is now waiting until later to collect.

This was the right move. As Kitces, who has done research comparing potential investment returns to the guaranteed 76% boost in benefits you get for waiting until 70 to collect, puts it, Social Security is “a highly beneficial investment, with a real return that dominates TIPS, is radically superior to commercially available annuities, and even generates a real return comparable to equities but without any market risk.” He calls waiting until 70 to collect your benefits “the best long-term return money can buy.”

Obviously, if someone has no savings and can’t stand working any longer, or gets laid off, starting to collect Social Security at 62 or some other year earlier than age 70 can be a must. But at present almost half of all Americans start their benefits at 62 and only 1-2% wait until 70. Such numbers are clearly the result of widespread sheer ignorance, which must be ended.

Meanwhile there is another thing to consider, and that’s one’s spouse. If you are the largest earner in a married couple, you cannot just think about your own longevity. Your spouse, if you die, will be eligible to receive, instead of his or her own Social Security, a “survivor benefit” equal to what you would have received on your own, so you need to factor in your spouse’s longevity, if your higher benefit from waiting to collect will mean the difference between a reasonable life and a life of brutal penury for your spouse.

And don’t forget the important strategy of file-and-suspend available to couples. If you are married, and one spouse has earned significantly more over the years than the other– or even if your earnings were about equal– one spouse, or the lower-earning spouse can opt to receive what are called “spousal benefits” on the account of the other, usually higher-earner, once that spouse has reached so-called the “full retirement” age of 66 (for people born in 1954), or 67 (for those born after 1954). Ideally the spouse going for spousal benefits should be at full retirement age too for this maneuver, in order to collect the highest amount. The way it works is that one spouse, usually the higher earner, at full retirement age, files for benefits, and then asks to have those benefits suspended until age 70. That way, the benefit amount keeps rising to the maximum, but meanwhile, because the account was opened, the other spouse, if also at full retirement age, can start receiving 50% of the full-retirement benefit amount the first spouse is eligible to receive, but is leaving untouched. For example, if one spouse at 66 this year were able to start receiving $1500 a month at that age and files, but then suspends benefits, that spouse would continue not receiving benefits until reaching 70 and then would start receiving $1960 a month. Meanwhile the other spouse, if also 66, could start receiving spousal benefits of $750/month, which would continue until age 70, at which point this person could switch over to her or his own account and start receiving the maximum possible benefit, too. This maneuver can substantially improve the retirement prospects of most couples by providing them with the essentially free cash over four years that can help them both hold off until 70 to start receiving their own benefits.

Minor children can also receive Social Security benefits, either based upon a parent who is receiving disability benefits under the program, or as additional survivor benefits if a Social Security eligible parent dies. A child can receive up to half of the monthly benefit of a disabled parent, or 75% of a deceased parent’s final benefit amount. Children who are in a legal guardianship relationship of a grandparent can also receive dependent benefits on the grandparent-guardian’s account. In the case of multiple children in a family, there is a limit of 150-180% of the primary Social Security recipient’s benefit amount, so where there are three or more kids involved, the benefit amount per child will be reduced, but this is a substantial benefit that can help in such situations of family distress.

While more than a year after starting to collect Social Security benefits at any age lower than 70, you’re locked into the benefit level you got, you are not locked into your benefit if certain situations change. For example, if you opted to collect spousal benefits on your higher-earning spouse’s account, and then your spouse dies, you can switch over to receiving a survivor’s benefit, which would be at least double what you are receiving a a spousal benefit. If your own account will end up being even higher once you reach 70, you can then switch from the spousal benefit to your own account.

All in all, though it is nowhere near as generous a program as the social security schemes that exist in much of Europe and other developed countries, and though it was never intended to provide for a fully-funded retirement as those countries’ plans are, Social Security is a wonderful program that has substantially reduced poverty among America’s elderly (once a desperate problem in the US), as well as substantially easing the burden on children and grandchildren to provide for their elders. But make no mistake — its enemies (who include President Obama, who promoted cuts in benefits for current and future retirees in the form of a deceptive way of reducing the annual adjustment for inflation) are hell-bent on wrecking it as much as they can before the majority of Baby Boomers wakes up to the threat and rises en masse to its defense.

Now is the moment for a new progressive movement of Americans of all ages, built around defending and expanding this signal accomplishment of the New Deal.

Democrats failed to make defending and expanding Social Security a cornerstone of their congressional campaign last year, and as a result, they got trounced, and handed Congress to the Republicans. This disaster cannot be allowed to be repeated in 2016. No one should be supported for Congress in the next election, or for the presidency, who does not stand foursquare for a progressive funding increase for Social Security designed not only to guarantee full benefits for all for as far as can be predicted, but to improve those benefits so Americans no longer will have to scrimp and save during their working lives, only to see their savings destroyed by a corrupted financial market, and sucked dry by the fee-greedy investment and insurance industry and its agents.


The Vanishing Middle Class


The Rape of Public Schools

The School Closure Playbook – How Billionaires Exploit Poor Children in Chicago

Posted on February 26, 2015 by

Rebecca Rojer, who directed this film essay about a public school version of the Shock Doctrine playbook called “corporate school reform” asked us to present her video after it first appeared on Jacobin. It is accessible yet presents a hard-hitting overview of who is behind this taxpayer looting program and the mechanics of how it operates. From Rojer’s overview:

The piece uses Chicago to explore the broader neoliberal campaign against public schools, focusing on how education “reformers” manufactured a budget crisis through a combination of creative accounting, secretive tax schemes (specifically TIF), and media cooperation. It also looks at some of the organizing that developed to regain local control of schools (and possibly just forced Rahm into a run-off election!).

What is stunning is the degree of out and out grifting that has taken place in Chicago, with millions diverted from public schools to create a false image of a budgetary crisis. And some of the money wound up in dubious-looking pockets, like a Hyatt Hotels franchise.

I hope you’ll watch this video. Be sure to circulate it to anyone you know who lives or votes in Chicago.

The School Closure Playbook from Jacobin on Vimeo.

If you have trouble viewing the embedded version above, you can also view it here.

Humor: The Borowitz Report

Republicans Unlearning Facts Learned in Third Grade to Compete in Primary


Credit Photographs by (from left) Chip Somodevilla/Getty, Kevork Djansezian/Getty, Darren Hauck/Getty

WASHINGTON (The Borowitz Report)—In the hopes of appealing to Republican primary voters, candidates for the 2016 Presidential nomination are working around the clock to unlearn everything that they have learned since the third grade, aides to the candidates have confirmed.

With the Iowa caucuses less than a year away, the hopefuls are busy scrubbing their brains of basic facts of math, science, and geography in an attempt to resemble the semi-sentient beings that Republican primary voters prize.

An aide to Jeb Bush acknowledged that, for the former Florida governor, “The unlearning curve has been daunting.”

“The biggest strike against Jeb is that he graduated from college Phi Beta Kappa,” the aide said. “It’s going to take a lot of work to get his brain back to its factory settings.”

At the campaign of Wisconsin Governor Scott Walker, the mood was considerably more upbeat, as aides indicated that Walker’s ironclad façade of ignorance is being polished to a high sheen.

“The fact that Scott instinctively says that he doesn’t know the answers to even the easiest questions gives him an enormous leg up,” an aide said.

But while some G.O.P. candidates are pulling all-nighters to rid themselves of knowledge acquired when they were eight, the campaign of Rick Perry, the former governor of Texas, is exuding a quiet confidence.

“I don’t want to sound too cocky about Rick,” said one Perry aide. “But what little he knows, he’s shown he can forget.”

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Hiding Outrageous HSBC CEO Pay in Havens


Bill Black: HSBC CEO – My Pay Was So Outrageous I Had to Use Tax Havens to Hide it from My Peers

Posted on February 24, 2015 by

Yves here. This tidbit from HSBC reveals a new low in the standards of banking, which given how low those already are, amounts to an accomplishment of sorts. Perhaps we should create a Stuart Gulliver Award for other instances of creative extreme seaminess. Nominees?

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives

Greetings from Quito, where I will be spending four months teaching at IAEN about effective regulation and building ties with UMKC.

The latest twists on the latest HSBC tax evasion and tax avoidance scandal is that it has come out that Stuart Gulliver, HSBC’s head, put his money where his mouth wasn’t. He personally used double tax havens – Panama plus Switzerland – to hide his income and wealth from view because his pay was so outrageous that even other HSBC executives would have been outraged by it. The New York Times’ account of this tale demonstrates that Gulliver needs to fire Gulliver as his spokesperson.

He said he set up a Swiss account to hide his bonus from his Hong Kong colleagues, and then another one in Panama to hide the amounts from the bank’s employees in Switzerland.

“Being in Switzerland protects me from Hong Kong, being in Panama helps protect me from the Swiss bank,” he said.

Yes, the HSBC CEO just said openly that he felt a desperate, personal need to be “protect[ed] “from the Swiss bank” – by which he means HSBC. He felt a similar need to be “protect[ed]” “from his Hong Kong colleagues” at HSBC. Any HSBC customer victimized by HSBC’s PPI and “swap” rip offs of customers and any UK taxpayer ripped off by the tax evasion emporium run for the powerful and wealthy out of that same HSBC “Swiss bank” can empathize with Gulliver. HSBC customers and non-elite UK taxpayers all feel a desperate need to be “protect[ed]” from HSBC – and Gulliver.

What Gulliver was so desperate to have “protect[ed]” from his “HSBC colleagues” was knowledge of his pay. He knew his pay was so excessive that it would outrage even HSBC’s senior managers. Remember this event when the next bank CEO rails against the “politics of envy.” The insanely jealous people that Gulliver feared were his peers, because even in the corrupt culture of HSBC he stood out for his greed.

Only a few things would need to be true to make this nearly perfect story the perfect story of the inevitable result of the City of London “winning” the regulatory “race to the bottom” and becoming the financial cesspool of the world – while being praised by the business press (even the Guardian).

First, the defense of Gulliver’s outrageous pay could actually blame criticisms of his pay on “the politics of envy” by little people rather than Gulliver’s wealthy peers. An article entitled “HSBC’s banking excess or banking excellence?” might read:

Some might say those who fret over Mr Gulliver’s pay are practising the politics of envy.

Second, after HSBC was fined for laundering over $1 billion for the Sinaloa drug cartel, a “think tank” might praise Gulliver’s outrageous pay as the just reward for exceptional performance in an article entitled “Our banks are a national treasure – Britain is good at financial services.” The think tank admitted to only one problem by banks – they have not yet found an effective way of triumphing over our stupidity. Indeed, we are not worthy of Gulliver and HSBC.

Admittedly, banks need to do a better job of explaining to the public what exactly they do. Economic literacy is exceptionally poor….

Third, HSBC’s defense to the Guardian of Gulliver’s use of opaque tax havens was that hiding his income and wealth and his outrageous pay (and minimizing taxes) was the epitome of “transparency.”

“There is absolutely no story here,” said [HSBC Chairman Douglas] Flint of the chief executive’s bank account. “There is nothing that Stuart has done that is not absolutely transparent, legal and appropriate.”

Thank you, Mr. Flint, for demonstrating why relying on a board of directors chosen by the CEO to supposedly keep bad CEOs on the right track results in recurrent, unintentional self-parody. Combining Panama and Swiss tax havens to ensure secrecy is the new “transparent” in banking.

Naked Capitalism: Drive Time Subprime


Wolf Richter: Subprime Pump-and-Dump Frenzy Heats Up

Posted on February 23, 2015 by

Lambert here: A car is just a bundle, after all. Why not unbundle the hub caps, and securitize those? Make the cup-holders pay per use, and securitize the revenue stream!

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

Investors, driven to near insanity by the Fed’s interest rate repression, have developed an insatiable lust for structured securities backed by subprime auto loans.

Mind you, these are not high-risk securities, as you might be misled to imagine from the name “subprime”; many of them are triple-A rated by none other than venerable Standard & Poor’s, which agreed in early February to pay $1.375 billion to settle with the Department of Justice and 19 state agencies the allegations that it “had engaged in a scheme to defraud investors in structured financial products,” namely slapping triple-A ratings on toxic Mortgage-Backed Securities and Collateralized Debt Obligations in the run-up to the Financial Crisis.

OK, today’s subprime securitization rage is in the auto-loan sector, not mortgages. About 31% of all outstanding auto loan balances are rated subprime. They’re the foundation of booming auto sales. There is a lot to securitize. It’s so hot that private-equity firms are all over it. And IPOs are flying off the shelf.

These auto lenders – from giants such as Ally and GM Financial to smaller ones – are under investigation by the DOJ and a laundry list of other federal and state agencies for the underwriting criteria they used on securitized subprime auto loans as well as the representations and warranties related to these securitizations.

But this isn’t curtailing investors’ insatiable lust for these highly-rated, seemingly low-risk products, and subprime lenders keep pushing them out the door.

Santander Consumer USA, one of the targets of the DOJ investigation, is planning a $1 billion securitization of subprime auto loans. It already issued two securitizations since the DOJ subpoenas last summer, no problem. A $434-million slice of the current deal is rated triple-A by S&P.

In 2011, private-equity firms Kohlberg Kravis Roberts, Centerbridge Partners, and Warburg Pincus bought a 25% stake in the unit from Banco Santander in Spain. In January, they all cashed out part of their investment by selling 75 million shares to the public at $24 a share, raising $1.8 billion in the IPO. Banco Santander sold a 4% stake for a net gain of $1 billion, Bloomberg reported. It still owns 61% of the unit. The PE firms pocketed a partly realized gain of at least 133% on their $1 billion equity investment, including $257 million in cash dividends.

The public wasn’t so lucky. The shares closed on Friday at $22.88, down 4.6% from their IPO price.

Also this week, DriveTime Automotive Group sold $265 million in structured securities based on subprime auto loans, according to Structured Finance News. In November, it had settled with the Consumer Financial Protection Bureau (CFPB) by agreeing to pay $8 million and changing its debt collection practices, such as not calling delinquent borrowers at work after being told not to.

DriveTime is a privately-held used-vehicle retailer with 126 dealerships across the US, focused on “deep subprime” – consumers with a FICO score of less than 550. About 20% of its customers don’t even have a FICO score. It finances its sales in house and then securitizes the loans.

In its securitization pool this week, 86.3% are loans with terms of 61 months or more, which are riskier than shorter-term loans. A $130-million slice was triple-A rated by S&P, another slice was double-A rated, and the third slice was single-A rated. Risks and investigations, no problem.

Also this week, subprime auto lender CarFinance sold $266 million in structured securities. The least risky slice carried S&P’s single-A rating. Other slices were rated as low as “BB-.” The underlying loans have an average FICO score of 603, pay an annual interest rate of 15%, have a term of 72 months, and sport an average loan-to-value ratio of a dizzying 118%.

These loans should give you the willies. But in the zero interest rate environment imposed by the Fed, investors go for anything that has a discernible yield.

PE firm Perella Weinberg Partners established CarFinance in 2011. Since then, its portfolio has ballooned to $716 million. Last month, Perella merged it with its other subprime auto-loan outfit, Flagship Credit Acceptance. Combined, they originate about $1.2 billion in subprime auto loans a year.

But it’s not easy to make money in this business. Subprime auto lender Exeter Finance, which PE firm Blackstone Group bought in 2011, exploded its portfolio from $150 million to $2.8 billion in three years. It has now become America’s third-largest issuer of subprime auto-loan structured securities. It too received subpoenas from the DOJ and other agencies. And it has been losing money for three years.

American Banker  took a look at a $500-million securitization the company sold last August and found a doozie:

The average APR on those loans was 18.59%. The original term length was 70 months. 75% of these loans had a loan-to-value ratio of over 105%. Eighty-one percent of the borrowers had a FICO score of below 600. And yet some of the securities that these loans are turned into are rated AAA.

Given the hoopla surrounding subprime, American Banker asked Exeter’s new CEO Thomas Anderson if he was thinking about an IPO (despite the losses). “I think it’s probably unlikely in ’15, but I wouldn’t rule it out,” he said.

And has the regulatory scrutiny led to changes inside the company? Well, “probably the only real meaningful, tangible difference is it’s led us to have kind of more people in, I’ll call it the legal department….”

But it has not had any impact on investor enthusiasm, at least not “to date,” Anderson said.

Subprime loans allow the over-indebted, under-paid middle class, the new American proletariat, to buy a car without which they couldn’t go to work, go to the grocery store, or take their kids to the doctor. But these folks are sitting ducks for the industry. Thinking they have no options, they get pushed into overpriced vehicles and – what makes investors’ mouth water – expensive loans.

In face of this boundless investor enthusiasm and blindness to risks, Equifax, which makes its money selling the data it collects on consumers, came out swinging in defense of subprime.

Consumers with deep-subprime FICO scores on average improve their scores after they buy a car and make payments regularly, it said. It didn’t mention the other consumers who default on their usurious subprime loans; they get whacked.

Equifax complained that subprime auto loans were “an all too easy target these days,” though the industry “deserves some recognition for … ultimately helping to pave the way for our recent economic recovery.” A subprime-based economic recovery.

And then it said point-blank, “The Subprime Auto Bubble is Fiction, Not Fact.”

Not a word about the securitization boom and that is stuffing these sliced and diced and repackaged triple-A rated subprime loans into bond funds of unsuspecting conservative investors – because that’s where most of these things end up, and that’s where they can quietly decompose.

New vehicle sales in the US could hit 17 million in 2015, everyone believes. The glory days are back, thanks to subprime. The industry is drunk with its own enthusiasm. Read… Subprime Spikes Auto Sales, Delinquencies Soar, Industry in Total Denial, Fallout to Hit Main Street

Naked Capitalism: Wall Street Sucks Life Out of Main Street


Two New Papers Say Big Finance Sectors Hurt Growth and Innovation

Posted on February 19, 2015 by

In a bit of synchronicity, two new papers confirm the long-held suspicion that Wall Street is sucking the life out of Main Street.

The BIS has released an important paper, embedded at the end of this post, which has created quite a stir, even leading the orthodoxy-touting Economist to take note. Titled, Why does financial sector growth crowd out real economic growth?, its analysis of why too much finance is a bad thing is robust and compelling. This article is a follow up to a 2012 paper by the same authors, Stephen Cecchetti and Enisse Kharroubi, which found that when finance sectors exceeded a certain size, specifically when private sector debt topped 100% of GDP or when financial services industry professions were more than 3.9% of the work force, it became a drag on growth. Notice that this finding alone is damning as far as policy in the US is concerned, where cheaper debt, deregulation, more access to financial markets, and “financial deepening” are all seen as virtuous.

The paper is short and accessible, so I strongly encourage you to read it in full.

The paper starts by looking empirically at the fact that larger financial sectors are correlated with lower growth rates:


And the big reason is one that is no surprise to anyone in the US, that finance has been sucking “talent,” as in the best and brightest from a large range of disciplines, ranging from mathematicians, physicists, the best MBAs (which remember could be running manufacturing operations or in high-growth real economy businesses) and lawyers. The banking sector’s gain is Main Street’s loss. From the abstract:

In this paper we examine the negative relationship between the rate of growth of the financial sector and the rate of growth of total factor productivity. We begin by showing that by disproportionately benefiting high collateral/low productivity projects, an exogenous increase in finance reduces total factor productivity growth. Then, in a model with skilled workers and endogenous financial sector growth, we establish the possibility of multiple equilibria. In the equilibrium where skilled labour works in finance, the financial sector grows more quickly at the expense of the real economy. We go on to show that consistent with this theory, financial growth disproportionately harms financially dependent and R&D-intensive industries.

And how does this come about? One big reason is that financial firms like to lend, and to lend against collateral rather than business earnings. That drives lending to collateral-intensive activities, most of all real estate, which is not all that productive from a societal perspective:

In our model, we first show how an exogenous increase in financial sector growth can reduce
total factor productivity growth.2 This is a consequence of the fact that financial sector growth benefits disproportionately high collateral/low productivity projects. This mechanism reflects the fact that periods of high financial sector growth often coincide with the strong development in sectors like construction, where returns on projects are relatively easy to pledge as collateral but productivity (growth) is relatively low.

And the access to funding then drives where resources go:

Next, we introduce skilled workers who can be hired either by financiers to improve their ability to lend, increasing financial sector growth, or by entrepreneurs to improve their returns (albeit at the cost of lower pledgeability).3,4 We then show that when skilled workers work in one sector it generates a negative externality on the other sector. The externality works as follows: financiers who hire skilled workers can lend more to entrepreneurs than those who do not. With more abundant and cheaper funding, entrepreneurs have an incentive to invest in projects with higher pledgeability but lower productivity, reducing their demand for skilled labour. Conversely, entrepreneurs who hire skilled workers invest in high return/low pledgeability projects. As a result, financiers have no incentive to hire skilled workers because the benefit in terms of increased ability to lend is limited since entrepreneurs’ projects feature low pledgeability.5 This negative externality can lead to multiple equilibria. In the equilibrium where financiers employ the skilled workers, so that the financial sector grows more rapidly, total factor productivity growth is lower than it would be had agents coordinated on the equilibrium where entrepreneurs attract the skilled labour.6 Looking at welfare, we are able to show that, relative to the social optimum, financial booms in which skilled labour work for the financial sector, are sub-optimal when the bargaining power of financiers is sufficiently large.

And remember, even though the authors blandly mention “the bargaining power of financiers” the model does not include the further distortion seen in many advanced economies, of laundering subsidies to the housing sector through housing finance or tax breaks.

And they test their model against real economy outcomes:

Here we focus on manufacturing industries and find that industries that are in competition for resources with finance are particularly damaged by financial booms. Specifically, we find that manufacturing sectors that are either R&D-intensive or dependent on external finance suffer
disproportionate reductions in productivity growth when finance booms. That is, we confirm the results
in the model: by draining resources from the real economy, financial sector growth becomes a drag on
real growth.

The impact is large:

We find unambiguous evidence for very large effects of financial booms on industries that either have significant external financing needs or are R&D-intensive. We report estimates that imply that a highly R&D-intensive industry located in a country with a rapidly growing financial system will experience productivity growth of something like 2 percentage points per year less than an industry that is not very R&D-intensive located in a country with a slow-growing financial system.

Brad DeLong, earlier this week, flagged another important article on why finance has become a productivity drain by Thomas Philippon, titled Finance vs. Wal-Mart: Why are Financial Services so Expensive?

Despite the financial services industry having so much bigger and supposedly more efficient firms, the cost of financial intermediation is higher than in 1910. How is that possible? Is it all the new and improved looting? It’s even simpler. It’s Keynes’ capital markets as a casino problem:

…the current financial system does not seem better at transferring funds from savers to borrowers than the financial system of 1910. The role of the finance industry is to produce, trade and settle financial contracts that can be used to pool funds, share risks, transfer resources, produce information and provide incentives. Financial intermediaries are compensated for providing these services. Total compensation of financial intermediaries (profits, wages, salary and bonuses) as a fraction of GDP is at an all-time high, around 9% of GDP. What does society get in return? Or, in other words, what does the finance industry produce? I measure the output of the finance industry by looking at all issuances of bonds, loans, stocks (IPOs, SEOs), as well as liquidity services to firms and households. Measured output of the financial sector is indeed higher than it has been in much of the past. But, unlike the income earned by the sector, it is not unprecedentedly high. Historically, the unit cost of intermediation has been somewhere between 1.3% and 2.3% of assets. However, this unit cost has been trending upward since 1970 and is now significantly higher than in the past. In other words, the finance industry of 1900 was just as able as the finance industry of 2010 to produce loans, bonds and stocks, and it was certainly doing it more cheaply. This is counter-intuitive, to say the least. How is it possible for today’s finance industry not to be significantly more efficient than the finance industry of John Pierpont Morgan?… Technological improvements in finance have mostly been used to increase secondary market activities, i.e., trading. Trading activities are many times larger than at any time in previous history. Trading costs have decreased, but I find no evidence that increased liquidity has led to better (i.e., more informative) prices or to more insurance

This is another damning finding from a policy perspective, in that the bias of regulations has been strongly toward promoting more market liquidity. Readers may recall that we’ve been skeptical of that premise for years, noting that in the stone ages of our youth, investors were not terribly bothered by limited liquidity in large and important markets like corporate bonds. Yet the SEC and the Fed have been all in with the “more liquidity is better” program, with the SEC pushing for lower and lower transaction charges (which has the perverse effect of leading financial services firms as trading counterparties to be fleeced rather than good customers to be nutured) and promoting high frequency trading, and the Fed allowing derivatives to grow like kudzu, out of the belief (among other things) that they would facilitate price discovery in cash markets.

And of course, an overly costly financial services sector on a raw transaction level again drains resources from other sectors.

As the Tax Justice Network noted,

…an oversized large financial sector is not the Golden Goose providing benefits for all, but a cuckoo in the nest, crowding out and harming other sectors and society. Winston Churchill summarised:

“I would rather see finance less proud and industry more content.”


Naked Capitalism: HSBC and Tax Fraud


Where Are the “Progressive” Democrats on Loretta Lynch’s HSBC Money Laundering Wrist Slap?

Posted on February 18, 2015 by

Some Republican Senators are having a field day, and rightly so, over the fact that Obama’s attorney general nominee, Loretta Lynch, looks to have allowed bank giant HSBC, and more important, its executives and officers, off vastly too easy in a massive money-laundering and tax evasion scheme.

The background is that Lynch, as attorney for the Eastern District of New York, led the investigation of HSBC’s money laundering for drug dealers and other unsavory types that led to a $1.9 billion settlement in 2012. That deal was pilloried by both the right and left as being too lenient given the scale of HSBC’s misdeeds.

And now it turns out the great unwashed public was kept in the dark about another set of misdeeds, that of large-scale tax evasion for the wealthy, which Lynch was aware of when she was negotiating the money-laundering deal. From the Guardian:

Lynch negotiated a controversial settlement with HSBC in 2012, after the bank admitted to facilitating money-laundering by Mexican drug cartels and helping clients evade US sanctions.

Now there are questions over why she did not also pursue HSBC over evidence that its Swiss arm helped US taxpayers hide their assets.

The secret bank files – obtained and examined in detail this week in a series of reports by the Guardian, CBS 60 Minutes and other media outlets – reveal that HSBC’s Swiss arm colluded with some high net-worth individuals to hide their assets from tax authorities across the world.

The new data, leaked by a whistleblower, was obtained by French tax authorities and shared with the US government in 2010, raising questions over why the Department of Justice has yet to take action against HSBC in the US.

US government officials have told the Guardian that investigations by the DoJ’s tax division have been continuing for five years and criminal charges against HSBC or its bankers remain a possibility..

British, French and Spanish tax authorities have publicly disclosed the number of HSBC Swiss clients investigated as a result of the leak and the total sums recovered. In total, the three countries have recovered more than $825m from taxpayers who had not declared their assets in Geneva. However, in Washington, the IRS is refusing to disclose any information about investigations or recovered assets stemming from the leak.

If you think the DoJ was entertaining filing criminal charges, I have a bridge I’d like to sell you. The only reason there actually might be some prosecutions is solely as a result of the leak and the resultant media firestorm.

Keep in mind that the Republican opponents, Judiciary Committee chairman Chuck Grassley and David Vitter, both have a history of being tough on banking issues, so they have legitimate grounds for consternation. Grassley has put a hold on Loretta Lynch’s nomination. He and Vitter, who is in contact with the whistleblower, are planning to grill Lynch over what she knew about the tax evasion charges and when she became aware of it. Democratic senator and ranking Judiciary committee member Sherrod Brown has also said he is going to push the DoJ and the IRS for answers.

But what about Democratic Senators who were so upset about the wrist slap settlement in 2012? What of this supposed bold progressive wing that we are led to believe will rescue the Democratic party from its corporate sellout ways? Even with a safe target like HSBC, party tribalism apparently takes precedence over principle when a major Presidential nomination is in play. But mind you, no one expects this contretemps to derail Lynch getting voted in, since most Republicans deem her to be acceptable. But given a chance to move the Overton window in the direction of demanding something the American public overwhelmingly wants, prosecutions of bankers, key Democrats are trying to finesse being tough on HSBC without being tough on Lynch. Again from the Guardian:

Until now, Senate Democrats have been most outspoken over the revelations. The Republican chair of the Senate banking committee, Richard Shelby, from Alabama, declined to comment when pressed by the Guardian this week….

Elizabeth Warren, the Democratic senator who was most vocal in her opposition to the 2012 settlement with HSBC, also called on prosecutors to “come down hard” on the bank if the leaked data shows it colluded with US tax evaders. However, neither senator mentioned Lynch, amid concern on the Democratic side that the HSBC revelations could derail Lynch’s confirmation.

Jeff Merkley, a Democratic senator from Oregon, also called for tough action against HSBC over tax evasion, while steering clear of any reference to Lynch. “It is time to hold HSBC fully accountable under the law for its disturbing conduct,” Merkley said. “While criminal charges are obviously a matter to be settled in the judicial system, I strongly encourage prosecutors to mount the strongest possible charges rather than going for another slap on the wrist.”

What gives? The same logic of targeting bank executives, not banks, applies with administrative action in government agencies. It was on Lynch’s watch that the critical decision of how far to take the HSBC decision was made. Once she had made the deal, it was almost certain that staff were pulled off the case and tasked to other matters. It’s not realistic to hold the current DoJ accountable for a decision made by Lynch years ago.

If the Democrats want to regain the trust and ground they lost in the 2014 midterm debacle, they need to recognize the problem is how Obama has governed and start demanding higher standards from the party. That means going into opposition when the situation warrants it. Elizabeth Warren gained stature by fighting the Administration on the so-called Cromnibus bill and on Antonio Weiss. The way to move the party is to be willing to stand against it when its position is demonstrably wrong, which sadly is way too often, and inflict costs. The objective is not to win in every case but to exert influence and make the leadership think twice before taking expedient actions.

But so far, the much-touted progressive wing seems willing to buck the Administration only on comparatively narrow issues and mid-level appointments. Most important, both parties are still in the dark as to where the facts lie with Lynch and HSBC. Perhaps she has a cogent defense, but a head in the sand approach is no way to deal with a position this important. The Democratic bank critics should grill Lynch and be prepared to withhold support if her answers are evasive or confirm the worst suspicions about her being willing to go easy on powerful corporate miscreants.