Monthly Archives: February 2016

Naked Capitalism: Breaking Up the Banks


Ex-Goldmanite , Now Minneapolis Fed President Neel Kashkari Calls for “Transformative” Changes to Banks, Ending TBTF, Even Regulating Them as Utilities

What does one make of it when someone whose career has been based on having powerful friends and contacts at the top levels of the financial services industry appears to be acting as a traitor to his class? In this case, the apparent turncoat is one Neel Kashkari, ex Goldman, ex Treasury, ex Pimco employee, now the new President of the Minneapolis Fed, who in his first speech in his new job, said all sorts of unpleasant truths: the financial crisis imposed huge costs on society as a whole, Dodd Frank didn’t go far enough, the authorities won’t be willing to risk using untested new powers in a financial meltdown and will bail out banks again. He also argued that the financial system was now stable enough to make (by implication overdue) transformative changes to end the “too big to fail” problem, such as breaking up banks and regulating them like utilities. Kashkari plans to come up with a comprehensive plan by year end and is seeking public input, including having expert discussions that will be webcast.

Now readers might think I’ve gone soft in the head by virtue of having an insider advocate some of our pet ideas, like treating banks like utilities, when I tell you there are reasonable odds that Kashakri is serious.

As much as there was a great deal to like in his speech, I feel compelled to comment on a couple of issues before turning to the big question of “What to make of this?”

Kashkari Calls for a “Bold Approach”

This is the guts of Kashkari’s speech:

Now is the right time for Congress to consider going further than Dodd-Frank with bold, transformational solutions to solve this problem once and for all. The Federal Reserve Bank of Minneapolis is launching a major initiative to develop an actionable plan to end TBTF, and we will deliver our plan to the public by the end of the year. Ultimately Congress must decide whether such a transformational restructuring of our financial system is justified in order to mitigate the ongoing risks posed by large banks.

Although TBTF banks were not the sole cause of the recent financial crisis and Great Recession, there is no question that their presence at the center of our financial system contributed significantly to the magnitude of the crisis and to the extensive damage it inflicted across the economy…

I believe we must seriously consider bolder, transformational options. Some other Federal Reserve policymakers have noted the potential benefits to considering more transformational measures.6 I believe we must begin this work now and give serious consideration to a range of options, including the following:
• Breaking up large banks into smaller, less connected, less important entities.
• Turning large banks into public utilities by forcing them to hold so much capital that they virtually can’t fail (with regulation akin to that of a nuclear power plant).
• Taxing leverage throughout the financial system to reduce systemic risks wherever they lie.
Options such as these have been mentioned before, but in my view, policymakers and legislators have not yet seriously considered the need to implement them in the near term. They are transformational—which can be unsettling. The financial sector has lobbied hard to preserve its current structure and thrown up endless objections to fundamental change. And in the immediate aftermath of the crisis, when the Dodd-Frank Act was passed, the economic outlook was perhaps too uncertain to take truly bold action. But the economy is stronger now, and the time has come to move past parochial interests and solve this problem. The risks of not doing so are just too great.

A Few Quibbles

Kashkari, and sadly, this is now conventional wisdom, treats some earlier financial crises as less serious than they were deemed to be at the time. From his speech:

When roughly 1,000 savings and loans failed in the late 1980s, there was no risk of an economic collapse. When the technology bubble burst in 2000, it was very painful for Silicon Valley and for technology investors, but it did not represent a systemic risk to our economy.

While Kashkari is correct that the US was not at risk of a seize-up, the S&L crisis was widely expected to impose much greater macroeconomic costs than it did. The banking system had taken a body blow and experts anticipated it would take a very long time for banks to repair their balance sheets, which in turn would dampen the recovery. The financial system got back on its feet faster than projected because Greenspan engineered and maintained a very steep yield curve, which gave banks big profits, which they used to shore up their capital levels.

Similarly, while I agree that stock market busts, even big ones like the dot-bomb era, have limited macroeconomic impact unless the stock buys were fueled with a lot of borrowed money. However, Greenspan, imprinted by the 1987 crash, thought otherwise, and drove interests rates negative, in real terms, for a full nine quarters, when the past Fed response in a recession was to drive interest rates low only for a quarter or at most two.

This section of the speech is intriguing:

Many of the arguments against adoption of a more transformational solution to the problem of TBTF are that the societal benefits of such financial giants somehow justify the exposure to another financial crisis. I find such arguments unpersuasive.
• Finance lobbyists argue that multinational corporations do business in many countries and therefore need global banks. But these corporations manage thousands of suppliers around the world—can’t they manage a few more banking relationships?
• Many argue that large banks benefit society by creating economies of scope and scale. No doubt this is true—but cost/benefit analyses require understanding costs, too. I don’t see the benefits of scale of large banks outweighing the massive externalities of a widespread economic collapse.
• Some argue that if we limited U.S. banks in size or scope, they would be at a disadvantage relative to banks in countries with looser regulations. If other countries want to take extreme risks with their financial systems, we can’t stop them—but the United States should do what is right for our economy and establish one set of rules for those who want to do business here.

Yves here. Now I could (and have) argued with validity of each of the big banks defender talking points that Kashkari cites. For instance, there is ample evidence that banks show diseconomies of scale above a relatively small size threshold. But Kashkari doesn’t bother arguing whether these claims hold up. He says that even if they are true, they don’t deserve to be taken all that seriously.

What to Make of Kashkari’s Plan to Develop a “Bold” Plan?

Many of my interlocutors were suspicious of Kashkari’s appointment to the Minneapolis Fed presidency, and saw it as Government Sachs of other insider pulling strings to get a plaint ally a seat at the table. He’s relatively young, 42 years old. He was at Goldman for four years, sought a public service job he did not get (White House fellow) and then went with Hank Paulson to Treasury, where he was moved over from his original role at Treasury to work on crisis matters, most notably administering the TARP on a day-to-day basis.

After Kashkari left Treasury, he joined Pimco and became head of their effort to enter the equities business. This was an odd choice, since Kashkari had been on the investment banking side of Goldman, meaning he had no experience in equity research, stock picking, or the asset management business. The six mutual funds he created all underperformed. Kashkari left Pimco to run for California governor as a Republican and lost to Jerry Brown. This is Wikipedia’s summary of his political positions:

Kashkari has been a Republican his whole life. In a 2008 speech to the American Enterprise Institute, Kashkari described himself as “a free-market Republican.” In 2013 he described himself as a “pro-growth Republican”. He opposes most of Obama’s economic agenda and supports cutting business regulations. He has called for cutting Social Security and Medicare and replacing the Patient Protection and Affordable Care Act. In 2012, he voted against California’s Proposition 30, which raised taxes in the state, and for Proposition 32, which would have weakened labor unions’ political influence. In a March 2014 interview, he praised Wisconsin governor Scott Walker’s controversial policies limiting collective bargaining.

On social issues, he has described himself as libertarian[78] and “a different kind of Republican”, supporting abortion rights, Same-sex marriage, and a path to legal status for illegal immigrants.[72] He voted against California’s Proposition 8, which banned same-sex marriage in 2008…

Kashkari cites Paulson, Mitch Daniels, and Jeb Bush as political mentors. He voted for Obama in the 2008 presidential election and Romney in the 2012 election.

Kashkari’s deep ties to the financial services industry, his support of the internally inconsistent idea of “free-markets,” and his libertarian, ant-regulatory stance are reasons aplenty to think his call for bold measures is just a great big Trojan horse.

But the official position of the financial services industry is that Dodd Frank went too far and has hobbled them with all sorts of red tape that has hurt their profits. And senior executives and their mouthpieces have adopted a “take no prisoners” posture, howling over even minor regulatory changes or criticisms of their conduct (remember how loath they are to admit they fight tooth and nail admitting they have done anything wrong?).

Now it could be that Kashkari is trying to develop a paln to compete with Elizabeth Warren’s 21st Glass Steagall Act, one that would be weaker and thus easier to get passed. But the banks don’t want another round of reforms, even weak reforms. And Kashkari is messaging ot the left of Warren. His mention of breaking up the banks, or the even more radical idea of regulating them as utilities, effectively endorses her and Bernie Sander’s calls for breaking up the banks until he puts a real plan forward, which is nearly a year away, an eternity in politics.

My best guess is this plan is all about Kashkari advancing his career via infighting effectively at the Fed. Fed presidents, except at the New York Fed, have limited authority. In a famous incident in the 1990s, four regional Fed presidents, including Janet Yellen, complained to Greenspan about how they were marginalized at staff at the Board of Governors had more power than they did. Moreover, the central bank is preoccupied with monetary policy. Kashkari has no expertise on this front and would not be treated with much respect. Many people outside the Fed regarded his credentials as far too thin to deserve the job; he’d be seen as a lightweight internally as well.

But by launching a splashy bank reform initiative, with the explicit aim of developing a legislative proposal, Kashkari has opened up a new front, and one where he has the advantage over Fed incumbents, save bank reformer Danny Tarullo, who presumably will be an ally. Kashkari’s assets are his bully pulpit, which he has made clear he intends to use heavily, and the Minneapolis Fed staff, which historically, and perhaps still, has some insight into “too big to fail” issues. In fact, this is an area where Yellen has performed badly. Recall how Elizabeth Warren dressed her down over the Fed’s repeated failure to make the biggest banks develop viable living wills or take action to force them to divest assets or simplify operations. In other words, Kashkari’s initiative looks like a challenge on terrain where the leaders of the Fed, Yellen, Stanley Fischer, and the power behind the throne, general counsel Scott Alvarez, hae not covered themselves with glory.

And Kashkari has devised a process that will keep his initiative in the headlines:

Starting in the spring, we will hold a series of policy symposiums to explore various options from expert researchers around the country. We will also invite leaders from policy and regulatory institutions and, yes, the financial industry to offer their views and to test one another’s assumptions. We will consider the likely benefits, costs, risks and implementation challenges of these options. We will invite the media to these symposiums and livestream them so that the public can follow along and learn with us.

Following the symposiums, we will publish a series of policy briefs summarizing our key take-aways on each issue, so that all can provide feedback. And feedback can start now. We have established a website where anyone can share with us their ideas on solving TBTF. If you are a researcher—if you work in the financial sector—if you just have a good idea for solving TBTF, wherever you are, please share it with us at

Now we’ll have an idea of how serious Kashkari’s plans really are by who gets invited to these confabs. However, it is worth noting that policy development is just about never done is such a public manner. I’m not sure financial services industry incumbents recognize that the bland talking points they serve up in private discussions to often-not-knowledgeable recipients, like spread-too-thin Congressional staffers, won’t hold up so well when presented before a larger audience that includes lots of people who know how Big Finance actually works.

In other words, Kashkari may have concluded that breaking some financial services industry china is a career-advancing move. How much of a ruckus he really intends to create will become apparent in the coming months.

Flint Is Just the Beginning


How Many Flints? America’s Coast-to-Coast Toxic Crisis

By David Rosner and Gerald Markowitz, TomDispatch regulars, co-authors and co-editors of seven books and 85 articles on a variety of industrial and occupational hazards, including Deceit and Denial: The Deadly Politics of Industrial Pollution and, most recently, Lead Wars: The Politics of Science and the Fate of America’s Children.  Rosner is a professor of sociomedical sciences and history at Columbia University and co-director of the Center for the History of Public Health at Columbia’s Mailman School of Public Health. Markowitz is a professor of history at John Jay College and the Graduate Center, City University of New York. Both have been awarded a certificate of appreciation by the United States Senate through the office of Senator Sheldon Whitehouse, who has recognized the importance of their work on lead and industrial poisoning. Originally published at TomlDisptach

“I know if I was a parent up there, I would be beside myself if my kids’ health could be at risk,” said President Obama on a recent trip to Michigan.  “Up there” was Flint, a rusting industrial city in the grip of a “water crisis” brought on by a government austerity scheme.  To save a couple of million dollars, that city switched its source of water from Lake Huron to the Flint River, a long-time industrial dumping ground for the toxic industries that had once made their home along its banks.  Now, the city is enveloped in a public health emergency, with elevated levels of lead in its water supply and in the blood of its children.

The price tag for replacing the lead pipes that contaminated its drinking water, thanks to the corrosive toxins found in the Flint River, is now estimated at up to $1.5 billion. No one knows where that money will come from or when it will arrive.  In the meantime, the cost to the children of Flint has been and will be incalculable.   As little as a few specks of lead in the water children drink or in flakes of paint that come off the walls of old houses and are ingested can change the course of a life. The amount of lead dust that covers a thumbnail is enough to send a child into a coma or into convulsions leading to death. It takes less than a tenth of that amount to cause IQ loss, hearing loss, or behavioral problems like attention deficit hyperactivity disorder and dyslexia. The Centers for Disease Control (CDC), the government agency responsible for tracking and protecting the nation’s health, says simply, “No safe blood lead level in children has been identified.”

President Obama would have good reason to worry if his kids lived in Flint.  But the city’s children are hardly the only ones threatened by this public health crisis.  There’s a lead crisis for children in Baltimore, Maryland, Herculaneum, Missouri, Sebring, Ohio, and even the nation’s capital, Washington, D.C., and that’s just to begin a list.  State reports suggest, for instance, that “18 cities in Pennsylvania and 11 in New Jersey may have an even higher share of children with dangerously elevated levels of lead than does Flint.” Today, scientists agree that there is no safe level of lead for children and at least half of American children have some of this neurotoxin in their blood.  The CDC is especially concerned about the more than 500,000 American children who have substantial amounts of lead in their bodies. Over the past century, an untold number have had their IQs reduced, their school performances limited, their behaviors altered, and their neurological development undermined.  From coast to coast, from the Sun Belt to the Rust Belt, children have been and continue to be imperiled by a century of industrial production, commercial gluttony, and abandonment by the local, state, and federal governments that should have protected them.  Unlike in Flint, the “crisis” seldom comes to public attention.

Two, Three… Many Flints

In Flint, the origins of the current crisis lay in the history of auto giant General Motors (GM) and its rise in the middle decades of the twentieth century to the status of the world’s largest corporation. GM’s Buick plant alone once occupied “an area almost a mile and a half long and half a mile wide,” according to the Chicago Tribune, and several Chevrolet and other GM plants literally covered the waterfront of “this automotive city.” Into the Flint River went the toxic wastes of factories large and small, which once supplied batteries, paints, solders, glass, fabrics, oils, lubricating fluids, and a multitude of other materials that made up the modern car. In these plants strung out along the banks of the Flint and Saginaw rivers and their detritus lay the origins of the present public health emergency.

The crisis that attracted President Obama’s attention is certainly horrifying, but the children of Flint have been poisoned in one way or another for at least 80 years. Three generations of those children living around Chevrolet Avenue in the old industrial heart of the city experienced an environment filled with heavy metal toxins that cause neurological conditions in them and cardiovascular problems in adults.

As Michael Moore documented in his film Roger and Me, GM abandoned Flint in a vain attempt to stave off financial disaster.  Having sucked its people dry, the company ditched the city, leaving it to deal with a polluted hell without the means to do so.  Like other industrial cities that have suffered this kind of abandonment, Flint’s population is majority African American and Latino, and has a disproportionate number of families living below the poverty line.  Of its 100,000 residents, 65% are African American and Latino and 42%  are mired in poverty.

The president should be worried about Flint’s children and local, state, and federal authorities need to fix the pipes, sewers, and water supply of the city. Technically, this is a feasible, if expensive, proposition. It’s already clear, however, that the political will is just not there even for this one community. Gina McCarthy, the Environmental Protection Agency’s administrator, has refused to provide Flint’s residents with even a prospective timetable for replacing their pipes and making their water safe. There is, however, a far graver problem that is even less easy to fix: the mix of racism and corporate greed that have put lead and other pollutants into millions of homes in the United States. The scores of endangered kids in Flint are just the tip of a vast, toxic iceberg.  Even Baltimore, which first identified its lead poisoning epidemic in the 1930s, still faces a crisis, especially in largely African American communities, when it comes to the lead paint in its older housing stock.

Just this month, Maryland’s secretary of housing, community, and development, Kenneth C. Holt, dismissed the never-ending lead crisis in Baltimore by callously suggesting that it might all be a shuck.  A mother, he said, might fake such poisoning by putting “a lead fishing weight in her child’s mouth [and] then take the child in for testing.” Such a tactic, he indicated, without any kind of proof, was aimed at making landlords “liable for providing the child with [better] housing.” Unfortunately, the attitudes of Holt and Governor Rick Snyder of Michigan have proven all too typical of the ways in which America’s civic and state leaders have tended to ignore, dismiss, or simply deny the real suffering of children, especially those who are black and Latino, when it comes to lead and other toxic chemicals.

There is, in fact, a grim broader history of lead poisoning in America.  It was probably the most widely dispersed environmental toxin that affected children in this country.  In part, this was because, for decades during the middle of the twentieth century, it was marketed as an essential ingredient in industrial society, something without which none of us could get along comfortably.  Those toxic pipes in Flint are hardly the only, or even the primary, source of danger to children left over from that era.

In the 1920s, tetraethyl lead was introduced as an additive for gasoline.  It was lauded at the time as a “gift of God” by a representative of the Ethyl Corporation, a creation of GM, Standard Oil, and Dupont, the companies that invented, produced, and marketed the stuff. Despite warnings that this industrial toxin might pollute the planet, which it did, almost three-quarters of a century would pass before it was removed from gasoline in the United States.  During that time, spewed out of the tailpipes of hundreds of millions of cars and trucks, it tainted the soil that children played in and was tracked onto floors that toddlers touched.  Banned from use in the 1980s, it still lurks in the environment today.

Meanwhile, homes across the country were tainted by lead in quite a different way. Lead carbonate, a white powder, was mixed with linseed oil to create the paint that was used in the nation’s homes, hospitals, schools, and other buildings until 1978.  Though its power to harm and even kill children who sucked on lead-painted windowsills, toys, cribs, and woodwork had long been known, it was only in that year that the federal government banned its use in household paints.

Hundreds of tons of the lead in paint that covered the walls of houses, apartment buildings, and workplaces across the United States remains in place almost four decades later, especially in poorer neighborhoods where millions of African American and Latino children currently live.  Right now, most middle class white families feel relatively immune from the dangers of lead, although the gentrification of old neighborhoods and the renovation of old homes can still expose their children to dangerous levels of lead dust from the old paint on those walls. However, economically and politically vulnerable black and Hispanic children, many of whom inhabit dilapidated older housing, still suffer disproportionately from the devastating effects of the toxin. This is the meaning of institutional racism in action today.  As with the water flowing into homes from the pipes of Flint’s water system, so the walls of its apartment complexes, not to mention those in poor neighborhoods of Detroit, Baltimore, Washington, and virtually every other older urban center in the country, continue to poison children exposed to lead-polluted dust, chips, soil, and air.

Over the course of the past century, tens of millions of children have been poisoned by lead and millions more remain in danger of it today. Add to this the risks these same children face from industrial toxins like mercury, asbestos, and polychlorinated biphenyls (better known as PCBs) and you have an ongoing recipe for a Flint-like disaster but on a national scale.

In truth, the United States has scores of “Flints” awaiting their moments.  Think of them as ticking toxic time bombs — just an austerity scheme or some official’s poor decision away from a public health disaster.  Given this, it’s remarkable, even in the wake of Flint, how little attention or publicity such threats receive.  Not surprisingly, then, there seems to be virtually no political will to ensure that future generations of children will not suffer the same fate as those in Flint.

The Future of America’s Toxic Past

A series of decisions by state and local officials turned Flint’s chronic post-industrial crisis into a total public health disaster.  If clueless, corrupt, or heartless government officials get all the blame for this (and blame they do deserve), the larger point will unfortunately be missed — that there are many post-industrial Flints, many other hidden tragedies affecting America’s children that await their moments in the news. Treat Flint as an anomaly and you condemn families nationwide to bear the damage to their children alone, abandoned by a society unwilling to invest in cleaning up a century of industrial pollution, or even to acknowledge the injustice involved.

Flint may be years away from a solution to its current crisis, but in a few cities elsewhere in the country there is at least a modicum of hope when it comes to developing ways to begin to address this country’s poisonous past. In California, for example, 10 cities and counties, including San Francisco, San Diego, Los Angeles, and Oakland, have successfully sued and won an initial judgment against three lead pigment manufacturers for $1.15 billion. That money will be invested in removing lead paint from the walls of homes in these cities. If this judgment is upheld on appeal, it would be an unprecedented and pathbreaking victory, since it would force a polluting industry to clean up the mess it created and from which it profited.

There have been other partial victories, too. In Herculaneum, Missouri, for instance, where half the children within a mile of the nation’s largest lead smelter suffered lead poisoning, jurors returned a $320 million verdict against Fluor Corporation, one of the world’s largest construction and engineering firms. That verdict is also on appeal, while the company has moved its smelter to Peru where whole new populations are undoubtedly being poisoned.

President Obama hit the nail on the head with his recent comments on Flint, but he also missed the larger point. There he was just a few dozen miles from that city’s damaged water system when he spoke in Detroit, another symbol of corporate abandonment with its own grim toxic legacy. Thousands of homes in the Motor City, the former capital of the auto industry, are still lead paint disaster areas. Perhaps it’s time to widen the canvas when it comes to the poisoning of America’s children and face the terrible human toll caused by “the American century.”

Naked Capitalism: The Prescription Drug Rip-Off


Tax Breaks for Big Pharma on Top of Unreasonable Price Hikes

By Ed Walker, who wrote as masaccio at Firedoglake and now writes regularly at emptywheel. You can follow him at Twitter at @MasaccioEW, and here’s his author page at Shadowproof.

Big Pharma is under increasingly bitter attacks by people from all sides, outraged by enormous increases in drug prices. Notorious price-hikers include Martin Shkreli ond his company, Turing Pharmaceuticals, and Valeant Pharmaceuticals. Shkreli and the two companies were called before a House Oversight Committee hearing by the Republican Jason Chaffetz of Utah and Ranking Member Elijah Cummings of Maryland. The hearing can be viewed here, and there is a partial transcript. Shkreli pled the Fifth, and left after acting like a jerk. The price hikes are outlandish even by the standards of this money-sucking industry. According to Truveris, a health-care data company, drug prices increased more than 10% in 2015, “… with branded drugs up 14.77 percent, specialty drugs up 9.21 percent and even generic drugs rising 2.93 percent.“ That’s massively higher than the inflation rate of 0.7% for the same period.

Big Pharma has standard responses to this hostility. It claims that Turing and Valeant are bad actors, leaving the implication that all other companies are fabulous corporate citizens. Recently it began telling heart-warming stories about how the drugs help people, which in some cases is true, but has nothing to do with the price of drugs. It tells us about patient assistance programs that pick up the co-pay on drugs, but ignores the fact that the balance is picked up by insurance companies and passed along to insurance policy holders. It tells us that hospitals and some drug plans can bargain for lower prices, which is true only if there is competition, and for many generics and specialty drugs there is no competition. All of the companies say the same things, as Lee Fang demonstrated in a recent article. We need to communicate better. We are victims here. We need to work across party lines to influence public policy (meaning we need to spend more on legislators). There’s something like a new marketing plan, described by Stat, which specializes in pharmaceutical issues.

But, at the top of the list is that old stand-by: We need the money so we can do expensive Research and Development. Ian Read, the CEO of Pfizer, was on CNBC with Brent Saunders, CEO of Allergan. You can watch part of the interview here. Asked about the increase in prices of 105 drugs, Read gets outside the standard talking points and tries to pass price hikes off as some kind of market-driven thing, which is facially stupid, since many of the drugs with price hikes are protected by patents and others are generics which have no competition. He also said drug prices are a drop in the bucket, that they account for only about 10% of total health care spending, which comes to about $310 billion, a bit less than $1000 per person in the US. So, a 10% hike costs each of us an average of about $100. All this talk is just politics, says Read, who in 2014 received total compensation of $23.3 million. Surely for that kind of money he could do a better job of defending his company’s thuggishness.

The Allergan merger enables Pfizer to move to Ireland and cut its taxes. As expected, Read claims that the money will go to increased R&D. He implies Pfizer doesn’t have enough money for R&D right now. Let’s see what Pfizer’s 2014 financial statements say about that. In 2014, Pfizer reported net income of $9.1 billion. P. 58. It paid dividends of $6.6 billion, and repurchased stock for $5.0 billion, a total return to shareholders of $11.1 billion. No wonder there is no money for an increase in R&D.

Remember that R&D expenses are deductible in full in the year incurred, a temporary tax law recently made permanent by Congress. Pfizer takes advantage of that whenever possible. Note J of Notes to Consolidated Financial Statements. Let’s see what we get for that tax break. Pfizer reports that in 2012, it had an R&D expense of $250 million paid to AstraZeneca to “obtain the exclusive, global, OTC rights to Nexium”. P. 28. So, Uncle Sam gets stiffed for about $80 million to help pay for that purchase. In 2014, Pfizer counted as part of its increase in R&D this gem: “$309 million, reflecting the estimated fair value of certain co-promotion rights for Xalkori given to Merck KGaA”. That’s a non-cash transaction that cut Pfizer’s taxes.

And here’s a description of the R&D program at Pfizer:

We take a holistic approach to our R&D operations and manage the operations on a total-company basis through our matrix organizations described above. Specifically, a single committee, co-chaired by members of our R&D and commercial organizations, is accountable for aligning resources among all of our R&D projects and for seeking to ensure that our company is focusing its R&D resources in the areas where we believe that we can be most successful and maximize our return on investment. We believe that this approach also serves to maximize accountability and flexibility.

There is, of course, nothing there about producing new drugs to help people. It’s about being accountable to make money for shareholders and the CEO.

Turning to the Allergan deal, CEO Read assures us that Pfizer will use the tax savings for R&D. Frank D’Amelio, CFO of Pfizer, disputes that assertion. He says Pfizer will continue to pay dividends of about 50% of earnings per share, meaning that at least half the savings will be used to pay dividends. Let’s ignore that disagreement, and try to guess the amount of tax savings. According to Americans for Tax Freedom, in 2014 Pfizer paid an effective world-wide tax rate of 7.5%. That compares with the 25.5% reported on its 10-K. P. 28. ATF offers a detailed explanation of the way this was engineered, and explains that most US multinationals don’t use the same accounting treatment. ATF adds that Pfizer had as much as $148 billion parked overseas and untaxed in the US. At least that explains where they get the money to pay off their shareholders and keep Wall Street happy.

What are their actual R&D plans, as opposed to the happy talk? In recent years, Pfizer has shut down R&D facilities after each of its mergers.

Writing in Nature, former Pfizer R&D executive John LaMattina noted that the company’s three largest buyouts–Warner-Lambert, Pharmacia and Wyeth–resulted in sweeping research cuts and site closures, leaving more than 20,000 scientists out of work. And those who stick around were saddled with major R&D delays, LaMattina wrote, as integrating two large companies involves a painstaking review of assets that can slow development down to a crawl. Even more difficult to quantify is the effect on productivity, he wrote, as word of potential layoffs spreads fast throughout a large company and distracts workers from their projects.

After the merger the number two man, Brent Saunders of Allergan, will oversee operations. Here’s Saunders in August, 2015, discussing his vision of R&D with Randall Pierson of Reuters.

Saunders said discovery research, where researchers test ideas and compounds in test tubes and animals, typically eats up about 30 percent of pharmaceutical company research budgets, although only about one of every 20 such products that enters human trials succeeds and is approved.

“Discovery is where the industry has its lowest return on investment,” he said, “and not a good (use) of Allergan’s research dollars.”

Instead, he said Allergan will acquire products from companies that have already done the research spadework, and then itself develop the medicines and submit them for regulatory approvals.

In other words, Pfizer’s business model will be buying other people’s research and then doing some tests and filling out the paperwork for drug approvals. This gets them a patent and a fat tax deduction for all the paperwork. Then they can sell the drugs for monopoly prices. Or, they could sell the drug rights for a profit that is taxed (if at all) at capital gain rates, and if a US company buys it, the US company gets to treat the price it paid as a fully deductible R&D expense. Sweet.

Remember that Read is magnificently compensated for running this business, but what does he bring to the table? He is indifferent to drug creation and manufacture. His contribution is measured by how little Pfizer pays in taxes, and how well he engineers earnings, and not by any contribution to the well-being of humans. That’s your free market at work.

The Congressional Hearing on this issue droned on for quite a while, with the usual grandstanding and inability to ask decent questions. Then a Democrat, obviously fed up with the garbage from the industry witnesses, started trying to verbalize an inchoate idea of how to fix this once and for all. It involved conditioning patents on reasonable pricing, and some kind of license to the US government which if the pricing was deemed unreasonable would spring to life and enable DARPA (the Defense Advanced Research Projects Agency) to arrange for the manufacture of the drug and sale at a small profit. That, or something like it, might be a good idea.

But remember, Pfizer will soon be an Irish company. It could transfer the rights to a Vietnamese company, and institute proceedings under the Investor-State Dispute Resolution provisions of TPP and then what? Or, maybe the TISA will be adopted, and they won’t even have to pretend to have a Vietnamese company. That would be a two-fer: Free Market and Free Trade.

The Return of Liar’s Loans



This is an extract from a blog post (“The Bank Whistleblowers United Plan of Urgent Financial Change”) by Bill Black, 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. Many of us a bit long in tooth remember a time that when you wanted to buy a home, you had to genuflect to a banker and put up gallons of blood and your first-born. Changes in bank policy—and levels of greed—ultimately helped lead to the great recession we’re still struggling with. And virtually nobody has been held accountable. Here are some of his thoughts:

Our goal of restoring accountability to Wall Street is not controversial.  Indeed, there is unanimity among the candidates for the presidency that accountability for Wall Street elites has disappeared and urgently needs to be restored.  But that same unanimity among candidates has existed for over a decade.  Beginning with DOJ’s failure to prosecute the elite bankers that aided and abetted Enron’s senior managers’ looting and destruction of Enron in 2000-2001 – the consensus on the need to restore accountability has failed to produce accountability for elite bankers for over 15 years.  Every political leader says they want to help honest bankers succeed.  Nearly every political leader agrees that the “revolving door” corrupts Wall Street’s regulators.  The movie The Big Short has a scene at a pool that is designed to be emblematic of the public perception that the SEC (and, by extension, the other federal financial regulators, the FBI, and the DOJ) is staffed by lawyers whose goal in life is to be hired by Goldman Sachs.  One of our major insights is how law enforcement priorities with regard to financial elites have become sharply perverse as the financial regulatory agencies’ input to the FBI and DOJ have virtually ceased through the destruction of the agencies’ criminal referral process and been replaced by misdirected law enforcement priorities pushed by the elite bankers.  We propose concrete steps to return our priorities to the most damaging financial frauds, which are always led by elites….

We have no constraints on our ability to speak the truth and we have a history of speaking truth to power.  What follows is not the product of press flacks or political spinmeisters.  We have the expertise and personal knowledge to explain five key facts.

  • The most recent U.S. bubble and resultant financial crisis and Great Recession were driven by three epidemics of fraud led by elite bankers. The three epidemics that drove the crisis are appraisal fraud, “liar’s” loans (collectively, these were the loan origination frauds), and the resale of those fraudulently originated mortgages through fraudulent “reps and warranties” to the secondary market and the public.  Banks, like fish, rot from the head – the “C Suite.”   Liar’s loans is an industry term that shouts the industry’s knowledge that it was originating overwhelmingly fraudulent loans.  In a liar’s loan the lender agrees not to verify data that is essential to prudent underwriting.  This would be an insane practice for an honest lender – and it was practice that was always discouraged by the federal regulators – but it optimizes “accounting control fraud.”[1]

Tom Miller, the Nation’s longest serving state attorney general (for Iowa), was also a leader of key combined DOJ and state task forces on mortgage fraud.  Industry spokesmen invariably try to get the public to believe that the banks were the victims of liar’s loans, but as Miller testified before the Fed, investigations prove the opposite.

“[Many originators invent] non-existent occupations or income sources, or simply inflat[e] income totals to support loan applications. Importantly, our investigations have found that most stated income fraud occurs at the suggestion and direction of the loan originator, not the consumer.”

  • Not a single one of those elite bankers who led the fraud epidemics has been prosecuted and only one, a woman who was only moderately senior, has been held personally accountable in any meaningful way through a civil suit (made possible by a whistleblower). This is the greatest strategic failure of the DOJ in recent history.
  • The SEC has also proven ineffective in holding the elite Wall Street bankers who led these fraud epidemics personally accountable. As with DOJ, one of the fundamental problems that has gotten worse is the “revolving door.”  We propose a practical means of reducing that problem.
  • Dodd-Frank has not fixed the gaping problems endemic to finance that will cause future epidemics of elite financial fraud and resultant global crises.
  • We know how to identify developing fraud epidemics before they hyper-inflate financial bubbles, how to prevent or at least greatly reduce such epidemics, and how to prosecute effectively the elite banksters. Our group includes former regulators who demonstrated each of these abilities.  What we need is the political will to make the vital changes in the face of fierce opposition from the elite banksters.  That will is sapped by the revolving door.

And here’s a related piece that appeared on Bloomberg Business last fall.

Humor: The Borowitz Report


DES MOINES (The Borowitz Report)—Senator Ted Cruz’s stunning victory in the Iowa caucuses is serving as a beacon of hope to despised people across the nation, a number of disliked Americans confirmed on Monday.

In interviews from coast to coast, dozens of pariahs said that the Cruz triumph meant that “the sky’s the limit” for widely hated people like them.

Tracy Klugian, a real-estate agent from Jupiter, Florida, said that the fact that she has systematically alienated her co-workers, by bad-mouthing them to management and stealing their listings, no longer seems like an obstacle to advancement.

“Sometimes, knowing that everyone in the office hates me so much that they won’t even ride in an elevator with me kind of brought me down,” she said. “That’s why this Cruz thing is such a game-changer.”

Chuck Greister, a general contractor who has incurred the wrath of hundreds of clients for his shoddy work and flagrant, who-gives-a-crap attitude, said that Ted Cruz’s victory in Iowa has “been nothing short of inspirational.”

“Showing up four hours late or drinking on the job site—sure, loads of people hated me for that,” Greister said. “But a little hate never stopped a gentleman named Mr. Ted Cruz.”

In the wake of the Iowa caucuses, America’s most unlikeable people were lighting up Facebook with comments in praise of Cruz, bursting with pride that one of their number had a legitimate shot at the White House.

“There are a lot of despised little kids out there who probably think that they’ll never be President,” Klugian said. “Ted Cruz gives them a reason to dream.”