[Marxism] The economy is still at the brink

[Louis Proyect <lnp3@xxxxxxxxx>]

NY Times, June 7, 2009
Op-Ed Contributors
The Economy Is Still at the Brink
By SANDY B. LEWIS and WILLIAM D. COHAN

WHETHER at a fund-raising dinner for wealthy supporters in Beverly 
Hills, or at an Air Force base in Nevada, or at Charlie Rose’s table in 
New York City, President Obama is conducting an all-out campaign to try 
to make us feel a whole lot better about the economy as quickly as 
possible. “It’s safe to say we have stepped back from the brink, that 
there is some calm that didn’t exist before,” he told donors at the 
Beverly Hilton Hotel late last month.

Mr. Obama thinks that the way to revive the economy is to restore 
confidence in it. If the mood is right, the capital will flow. But this 
belief is dangerously misguided. We are sympathetic to the extraordinary 
challenge the president faces, but if we’ve learned anything at all two 
years into the worst financial crisis of our lifetimes, it is that a 
capital-markets system this dependent on public confidence is a 
shockingly inadequate foundation upon which to rest our economy.

We have both spent large chunks of our lives working on Wall Street, 
absorbing its ethic and mores. We’re concerned that nothing has really 
been fixed. We’re doubly concerned that people appear to feel the worst 
of the storm is over — and in this, they are aided and abetted by a 
hugely popular and charismatic president and by the fact that the Dow 
has increased by 35 percent or so since Mr. Obama started to lay out his 
economic plans in March. But wishing for improvement and managing by the 
Dow’s swings are a fool’s game. (Disclosure: One of us, Mr. Lewis, was 
convicted on federal charges of stock manipulation in 1989, pardoned by 
President Bill Clinton in 2001 and had his lifetime trading ban 
overturned by the Securities and Exchange Commission in 2006; documents 
relating to the case can be found at sblewis.net.)

The storm is not over, not by a long shot. Huge structural flaws remain 
in the architecture of our financial system, and many of the fixes that 
the Obama administration has proposed will do little to address them and 
may make them worse. At another fund-raising event, for Senator Harry 
Reid, President Obama said: “We didn’t ask for the challenges that we 
face. But we are determined to answer the call to meet those challenges, 
to cast aside the old arguments and overcome the stubborn divisions and 
move forward as one people and one nation .... It will take time but I 
promise you, I promise you, I’ll always tell you the truth about the 
challenges we face.”

Keeping that statement in mind — as well as an abiding faith in the 
importance of properly functioning capital markets — we have come up 
with a set of questions meant to challenge a popular president, with 
vast majorities in Congress, to find the flaws in the system, to figure 
out what’s being done to fix them and to get to the truth about the 
difficulties we face as we set out to restore the proper functioning of 
our markets and our standing in the world.

•

Six months ago, nobody believed that our banking system was well 
designed, functioning smoothly or properly regulated — so why then are 
we so desperately anxious to restore that model as the status quo? 
Nearly every new program emanating these days from the Treasury 
Department — the Term Asset-Backed Securities Loan Facility, the Public 
Private Investment Program, the “stress tests” of major banks — appears 
to have been designed to either paper over or to prop up a system that 
has clearly failed.

Instead of hauling out the new drywall to cover up the existing studs, 
let’s seriously consider ripping down the entire structure, dynamiting 
the foundation and building a new system that rewards taking prudent 
risks, allocates capital where it is needed, allows all investors to get 
accurate and timely financial information and increases value to 
shareholders and creditors.

As a start, the best-compensated executives at the top of these big 
banks, hedge funds and private-equity firms should be treated like 
general partners of yore. If a firm takes prudent risks that pay off, 
this top layer of management should be well compensated. But if the 
risks these people take are imprudent and the losses grave, they should 
expect to lose their jobs. Instead of getting guaranteed salaries or 
huge bonuses, they should have the bulk of their net worth completely at 
risk for a long stretch of time — 10 years come to mind — for the 
decisions they make while in charge. This would go a long way toward 
re-aligning the interests of these firms with those of their 
shareholders and clients and the American people, who have been saddled 
with their risks and mistakes.

•

Why is so much effort being put into propping up those at the top of the 
economic pyramid — the money-center banks, the insurance companies, the 
hedge funds and so forth — when during a period of deflation like the 
one we are in, any recovery will come only by restoring the confidence 
of the people down at the bottom of the pyramid?

Confidence will return only when jobs can be found and mortgage payments 
are made. Even if Mr. Obama’s claim is true that his $780 billion 
stimulus package “saved or created” some 150,000 jobs, we seem a long 
way away from the point where those struggling to get by will feel like 
spending again. What happens when people buy a car once every 10 years 
instead of once every two or three, especially now that we taxpayers own 
such a big percentage of the American auto industry?

•

Instead of promising the imminent return of good times, why isn’t Mr. 
Obama talking more about the importance of living within our means and 
not spending money we don’t have on things we don’t need? We used to be 
a frugal nation. The president should be talking about kicking our 
addictions to easy credit, to quick fixes and to a culture of more is 
better (and Congress’s new credit-card legislation, while perhaps 
eliminating some of the worst aspects of that industry, certainly didn’t 
send the right message about personal finance).

Gas-guzzling S.U.V.’s, cigarette boats, no-income mortgages and private 
jets should be relegated to the junk heaps of history, or better yet, 
put in a museum dedicated to never forgetting the greed and avarice that 
led us so far astray.

•

Why is the morphine drip still in the veins of the financial system? 
These trillions in profligate federal spending are intended to make us 
feel better again even though feeling pain, and dealing with it 
responsibly, would be healthier in the long run. It is time to stop 
rescuing the banks that got us into this mess. If that means more bank 
failures on a grander scale or the dismemberment of Citigroup, so be it. 
Depositors will be protected — up to $250,000 per account — but 
shareholders, creditors and, sadly, many employees will, for the 
long-term health of the system, need to feel the market’s wrath.

•

Is there to be any limit on bailouts? We have now thrown money at the 
big banks, any number of regional ones, insurance companies, General 
Motors, Chrysler and state and local governments. Will we soon be 
bailing out Dartmouth, which just lost its AAA bond rating? Is there no 
room left for what the Austrian economist Joseph Schumpeter termed 
“creative destruction”? And what is the plan to get the American people 
out of all these equity stakes we now own and don’t want?

Furthermore, for government leaders to decide who shall live and who 
shall die in an economic sense opens them up to legitimate charges of 
crony capitalism and favoritism. We will benefit in the long run from a 
return to market discipline.

•

Why has Mr. Obama surrounded himself largely with economic advisers who 
are theoreticians and academics — distinguished though they may be — but 
not those who have sat on a trading desk, made a market, managed a 
portfolio or set a spread?

In our view, one of the ways out of this economic conundrum is to have 
experienced traders — not hothouse flowers — design incentives that will 
encourage the market to have buyers and sellers meet anew around the 
proper valuations of assets, not some artificial construct of a market 
propped up by a pliant Financial Accounting Standards Board or 
government-sponsored programs that appear to be virtually giving money 
away to hedge funds and private-equity firms so that they will buy 
assets they would not ordinarily buy. We’re not talking about putting 
the fox in charge of the henhouse, just putting people who know how 
markets function in the real world into the important seats in Washington.

•

Why isn’t the Obama administration working night and day to give the 
public a vastly increased amount of detailed information about what 
happens in financial markets? Ever since traders started disappearing 
from the floor of the New York Stock Exchange in the last decade of the 
20th century, there has been less and less transparency about the price 
and volume of trades. The New York Stock Exchange really exists in name 
only, as computers execute a very large percentage of all trades, far 
away from any exchange.

As a result, there is little flow of information, and small investors 
are paying the price. The beneficiaries, no surprise, are the remains of 
the old Wall Street broker-dealers — now bank-holding companies like 
Goldman Sachs and Morgan Stanley — that can see in advance what their 
clients are interested in buying, and might trade the same stocks for 
their own accounts. Incredibly, despite the events of last fall, nearly 
every one of Wall Street’s proprietary trading desks can still take huge 
risks and then, if they get into trouble, head to the Federal Reserve 
for short-term rescue financing.

Here’s something that should change in terms of transparency. The most 
recent price that any stock traded for should be published online in 
real time for all to see. And the public should have access to a new 
type of electronic ticker that provides market information in language 
that all can understand, not just the insiders.

As for those impossibly complex securities that caused so much of the 
trouble — among them derivatives, credit-default swaps and asset-backed 
securities — the S.E.C. should have the power to make public all the 
documentation surrounding these weapons of mass financial destruction, 
including all data about the current costs of buying and selling them 
and the cash flow underlying them. We also need widely accessible, 
real-time reporting of all trades in the bond market. We bet Mike 
Bloomberg’s company could help design such a system for our benefit.

•

Why is the government still complicit in making the system ever less 
transparent, even when it comes to what should clearly be considered 
public information? For instance, it took more than a year for the 
Federal Reserve to disclose that it had agreed to pay BlackRock — the 
huge money manager that is 45 percent owned by Bank of America — and 
others $71 million in a no-bid contract to manage the $30 billion of 
toxic assets that JPMorgan did not want when it bought Bear Stearns in 
March 2008. And that is only one of the five contracts BlackRock has 
with the government as a result of this crisis — the nature of the other 
contracts remains secret.

Treasury Secretary Timothy Geithner has made much of 
financialstability.gov, the Treasury’s new Web site dedicated to 
“transparency, oversight and accountability.” But look it over and try 
to find, for example, just one record of a bona fide credit-default 
swap, or the names of the hedge-fund and private-equity investors who 
have participated in the Term Asset-Backed Securities Loan Facility 
bonanza. It was only a lawsuit filed by a watchdog group that convinced 
the Treasury to divulge details of former Secretary Henry Paulson’s 
October meeting with the chief executives of the 10 largest Wall Street 
firms to force them to take money from the Troubled Asset Relief 
Program. A lawsuit filed last November by Bloomberg News to force the 
Federal Reserve to reveal the details on more than $2 trillion in loans 
that went to banks including Citigroup and Goldman Sachs is still 
pending in federal court.

And what has become of the S.E.C.’s year-old investigation into who made 
short-dated, out-of-the-money bets in March 2008 hoping Bear Stearns 
would fail — bets that were suddenly worth millions of dollars when the 
company did collapse later that month?

Why do we still not know why Mr. Paulson, Mr. Geithner and the Federal 
Reserve chairman, Ben Bernanke, allowed Lehman Brothers to file 
bankruptcy last Sept. 15 but then, a day later, saved A.I.G.? Or why 
last November this trio decided to absorb potential losses on $301 
billion of Citigroup’s shaky assets, when conventional wisdom among 
insiders held that they were worth only $150 billion at best?

Also, before Dick Fuld, Lehman Brothers’ chief executive, appeared 
before the House Committee on Oversight and Government Reform last 
October, it demanded from company executives boxes of documents about 
what happened at Lehman and why. Where are those documents?

•

Why hasn’t President Obama insisted on public hearings over what 
happened during this financial crisis?

Not

a single top executive of a Wall Street securities firm responsible for 
causing the financial crisis has had the courage or the decency to step 
forward in front of the cameras and explain to the American people in 
his own words exactly how and why he allowed his firm to cause the 
crisis. Both Mr. Fuld and Alan Schwartz, the chief executive of Bear 
Stearns at the end, in their Congressional testimony blamed the 
proverbial once-in-a-century financial tsunami. Do they or any of their 
peers really think this is true?

There may be a way to find out. There is much talk nowadays coming from 
top bankers — Lloyd Blankfein of Goldman Sachs, Jamie Dimon of 
JPMorganChase, John Mack of Morgan Stanley and even Ken Lewis of Bank of 
America — about seeing how quickly they can repay to the Treasury the 
TARP money Mr. Paulson forced on them. One precondition of their being 
allowed to repay the funds should be a requirement that each gives a 
public deposition and explains, under oath, what truly happened and why.

Such a public hearing would be meant only to offer a truthful assessment 
of the errors in judgment made at each firm and to promote 
understanding, so that we — somehow — can avoid repeating the same 
mistakes again. It would not be about indictments. These men should be 
offered use immunity from prosecution for their honest testimony, but 
only with a clear understanding that the failure to tell the truth at 
any point would result in serious legal consequences. The hearing could 
be complemented by a truth-seeking commission established to hear the 
accounts of several people who have departed the scene, including, among 
others, Mr. Paulson, former Treasury Secretary Robert Rubin and former 
Wall Street chiefs like Mr. Fuld, Hank Greenberg of A.I.G., Sanford 
Weill of Citigroup, Jimmy Cayne of Bear Stearns and Stan O’Neal of 
Merrill Lynch. While far removed from their positions of authority, 
these men have tales to tell about how this crisis got started and why.

•

Why are we not looking to change our current civil and criminal 
racketeering statutes, which are playing a perverse role in 
investigations of the crisis? Statutes meant to give prosecutors 
extraordinary powers of seizure before an indictment is handed up, or to 
impose treble damages, are appropriately used to break up rings of 
criminal behavior like the Mafia or drug cartels.

But

a few clever prosecutors could use such laws to bring charges against 
people or firms in the financial services industry whose pattern of bad 
behavior played important roles in the collapse. Such outright seizure 
of capital or assets through use of the racketeering statutes can do 
much harm by giving prosecutors an unnecessarily powerful role in our 
capital markets. There must be a way to keep what is good about the 
statutes and to make sure they are not used for ill in trying to get to 
the bottom of the financial meltdown.

We are in one of those “generational revolutions” that Jefferson said 
were as important as anything else to the proper functioning of our 
democracy. We can no longer pretend that our collective behavior as a 
nation for the past 25 years has been worthy of us as a people. Many of 
us hoped that Barack Obama’s election would redress the dire decline in 
our collective ethic. We are 139 days into his presidency, and while 
there is still plenty of hope that Mr. Obama will fulfill his mandate, 
his record on searching out the causes of the financial crisis has not 
been reassuring. He must do what is necessary to restore the American 
people’s — and the world’s — faith in American capitalism and in our 
nation. Answering our questions may help us get back on track. But time 
is wasting.

Sandy B. Lewis, an organic farmer, founded S B Lewis & Co., a brokerage 
house. William D. Cohan, a contributing editor at Fortune and former 
Wall Street banker, is the author of “House of Cards: A Tale of Hubris 
and Wretched Excess on Wall Street.”


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