Economists May Contribute to a “Lost Decade” for America
By Mark Weisbrot
This article was published by The Guardian (UK) on January 10, 2012. If anyone wants to reprint it, please include a link to the original (http://www.guardian.co.uk/commentisfree/cifamerica/2012/jan/10/economic-...).
The American Economic Association’s annual meetings are a scary sight, with thousands of economists all gathered in the same place – a veritable weapon of mass destruction. Chicago was the lucky city for 2012 this past weekend, and I had just finished participating in an interesting panel on “The Economics of Regime Change,” when I stumbled over to see what the big budget experts had to say about “The Political Economy of the U.S. Debt and Deficits.”
The session was introduced by UC Berkeley economist Alan Auerbach, who put up a graph of the United States’ rising debt-to-GDP ratio, and warned of dire consequences if Congress didn’t do something about it. Yawn.
But the panelists got off to a good start, with Alan Blinder of Princeton, former vice-chairman of the U.S. Federal Reserve, describing the public discussion of the U.S. national debt as generally ranging from “ludicrous to horrific.” True that. He asked and answered four questions: (1) Is there any urgency (to reduce the deficit or debt)? No. The government can borrow short term at negative real interest rates, and long-term at about zero. The world is paying us to hold their money. That is anything but a debt crisis.
The Fed is out of bullets, he said – referring to the fact that the U.S. Federal Reserve had lowered short-term rates to zero and had used quantitative easing to help keep long-term rates low. So we need more fiscal stimulus, preferably spending that focuses on actually creating jobs. Amen.
(2) Should we focus on the next decade? No, he said, and noted that the Congressional Budget Office’s (CBO’s) budget deficit projections over the next decade are about 3.6 percent of GDP, which is not much to get agitated about. Also true.
(3) Is government spending the problem? No, he said, it’s health care costs, and mainly the rising price of health care (i.e not the aging of the population). Most important truth yet ! (More on this below).
(4) Is the public really up in arms about the deficit? No, actually they care more about the economy and jobs. As they should.
Blinder concluded that since this is an election year, we can forget about having any fact-based discussion of these issues in 2012. Happy New Year, he said, and the audience laughed.
Well that was refreshing, I thought—an economist telling the unvarnished truth to hundreds of his people at the annual meetings. But a rapid descent into Hell was imminent.
Former CBO director Douglas Holtz-Eakin was next, talking about the need to “repair” Social Security and Medicare. The United States has all the characteristics of countries that run into trouble, he said. Then he warned that the U.S. is going to end up like Greece. This is one of the dumbest things that anyone with an economics degree can say.
Hello, Mr. Holtz-Eakin! Have you ever heard of the U.S. dollar, the world’s key reserve currency? The United States is not going to end up like Greece any sooner than it will end up like Haiti or Burkina Faso. A country that can pay its foreign public debt in its own currency and runs its own central bank does not end up like Greece. In fact, even Japan is not going to end up like Greece, and Japan has a gross public debt of about 220 percent of its GDP, more than twice the size of ours and vastly larger – again relative to its economy—than that of Greece. And the yen is nowhere near the dollar in its importance as an international reserve currency. But the Japanese government is still borrowing at just one percent interest rates for its 10-year bonds.
At this point it was clear that this panel, other than Blinder, was living in a dystopian fantasy world. Next up was Rudy Penner of the Urban Insitute, another former CBO director. His perspective was not much different from that of Auerbach or Holtz-Eakin. He complained about the polarization of the political process, which prevents the two major parties from reaching an agreement. It’s not partisanship, he said – House Speaker Tip O’Neill and President Ronald Reagan knew how to be partisan but they were able to reach agreement on the 1983 Social Security package and the 1986 tax reforms. And yadda yadda. He might have added that we have had 25 years of lying about Social Security since then, and even Reagan didn’t dare try to privatize Social Security. And of course Social Security can currently pay all promised benefits for the next 24 years without any changes.
These arguments about polarization really beg the question. From the viewpoint of the 99 percent, it’s not polarization, but weakness in defending our interests that is the problem. President Obama compromised much more than he should have last year, offering cuts to Social Security and Medicare in exchange for a long-term budget deal. The 99 percent are just lucky that the Republicans are too extremist to make this kind of a “grand bargain” with Obama.
The last panelist was Alice Rivlin of the Brookings Institution, another former CBO budget director and Fed vice-chair, as well as a member of the President’s (2010) National Commission on Fiscal Responsibility and Reform. She agreed with Blinder that we need more stimulus. But we can only get this if we agree to long-run spending cuts, including Social Security, of course. Yuck. This is a political strategy that is sure to end in disaster, given the prevailing state of misinformation and disinformation.
During the discussion, Blinder – who identified himself as a Democrat – expressed his frustration in not being able to convince fellow Democrats to cut Social Security. Double yuck. The average Social Security check is about $1,177 a month, and a majority of senior citizens are getting most of their meager income from Social Security. Why these people insist on creating more poverty among the elderly, especially when the program is solvent for decades to come, is beyond me.
I got to ask the first question for the panel. I called attention to Blinder’s presentation of the long-term budget problem as almost completely a problem of the rising price of health care. I pointed out that you could take any country with a life expectancy greater than ours – including the other high-income countries – and put their per capita health care costs into our budget, and the long-term budget deficit would turn into a surplus. My question was simple: are Americans so inherently different from other nationalities that we can’t have similar health care costs? And if not, then why are we talking about long-term budget problems instead of how to fix our health care system?
None of the panelists offered a serious answer to this question. Auerbach, the moderator, said that other countries have rising health care costs too. And some of the others said or implied that health care costs were rising at an unsustainable pace worldwide.
But this is nonsense. The United States pays about twice as much per person for health care as other high-income countries – and still leaves 50 million people uninsured. This is a result of a dysfunctional health care system that has had health care prices rising much faster than those of other high-income countries for decades. What the budget hawks are basically telling us is that we must assume that insurance and pharmaceutical companies will have a veto over the provisions of health care reform for decades to come. And that therefore we must find other ways to make up for these excessive costs, including cutting Social Security and other government spending, and pushing us into higher rates of poverty and inequality than we already have.
And even worse in the short run, all this crap about the deficit and the debt will be used to block the necessary stimulus measures – “stimulus” has already become a dirty word that Democratic politicians are afraid to utter. This means high unemployment and a lot of unnecessary misery in the world’s richest country for the foreseeable future.
A dismal performance for the dismal science, on some of the most important issues of the day. Of course there are other economists, including Nobel Prize winners such as Paul Krugman, Joe Stiglitz, and Robert Solow (full disclosure: the latter two are members of CEPR’s advisory board), who would offer more sensible views. But this panel was, sadly, representative of economists with the most influence on public policy.
With a brain trust like this, a lost decade for America looks likely – unless the citizenry can steer a different course.
Center for Economic and Policy Research, 1611 Connecticut Ave, NW, Suite 400, Washington, DC 20009
Phone: (202) 293-5380, Fax: (202) 588-1356
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Everything You Need to Know About Wall St, in One Brief Tale
Street, in One Brief Tale
by Matt Taibbi
If there was ever a news story that crystallized the moral dementia of modern Wall Street in one little vignette, this is it.
Newspapers in Colorado today are reporting that the elegant Hotel Jerome in Aspen, Colorado, will be closed to the public from today through Monday at noon.
Why? Because a local squire has apparently decided to rent out all 94 rooms of the hotel for three-plus days for his daughter’s Bat Mitzvah.
The hotel’s general manager, Tony DiLucia, would say only that the party was being thrown by a "nice family," but newspapers are now reporting that the Daddy of the lucky little gal is one Jeffrey Verschleiser, currently an executive with Goldman, Sachs.
At first, I couldn't remember how I knew that name. But then I looked it up and saw an explosive Atlantic magazine story, published last year, called, "E-mails Suggest Bear Stearns Cheated Clients Out Of Millions." And then I remembered that piece, and it hit me: Jeffrey Verschleiser is one of the biggest assholes in the entire world!
The story begins at Bear Stearns, where Verschleiser used to work, up until the company exploded, in large part because of him personally.
Back in the day, you see, Verschleiser headed Bear’s mortgage-backed securities operations. Toward the end of his tenure, his particular specialty began with what at the time was the usual industry-wide practice, putting together gigantic packages of crappy subprime mortgages and dumping them on unsuspecting clients.
But Verschleiser reportedly went beyond that. According to a lawsuit later filed by a bond insurer called Ambac, Verschleiser also masterminded a kind of double-dipping scheme. What he would do is sell a bunch of toxic mortgages into a trust, which like all mortgage trusts had provisions written into their pooling and servicing agreements (PSAs) that required the original lenders to buy the loans back if they went into default.
So Verschleiser would sell bad mortgages back to the banks at a discount, but instead of passing the money back to the trust, he and other Bear execs allegedly pocketed the funds.
From the Atlantic story by reporter Teri Buhl:
The traders were essentially double-dipping -- getting paid twice on the deal. How was this possible? Once the security was sold, they didn't have a legal claim to get cash back from the bad loans -- that claim belonged to bond investors -- but they did so anyway and kept the money. Thus, Bear was cheating the investors they promised to have sold a safe product out of their cash. According to former Bear Stearns and EMC traders and analysts who spoke with The Atlantic, Nierenberg and Verschleiser were the decision-makers for the double dipping scheme.
Imagine giving someone a hundred bucks to buy a bushel of apples, but making a deal with him that he has to buy back any apples that turn out to have worms in them. That's what happened here: Bear sold the wormy apples back to the farmer, but instead of taking the money from those sales and passing it on to you, they simply kept the money, according to the suit.
How wormy were those apples? In one infamous email cited in the suit, a Bear exec colorfully described the content of the bonds they were selling:
Bear deal manager Nicolas Smith wrote an e-mail on August 11th, 2006 to Keith Lind, a Managing Director on the trading desk, referring to a particular bond, SACO 2006-8, as "SACK OF SHIT [2006-]8" and said, "I hope your [sic] making a lot of money off this trade."
So did Verschleiser himself know the mortgages were bad? Not only did he know it, he went so far as to tell his colleagues in writing that it was a waste of money to even bother performing due diligence on the bad bonds:
Jeffrey Verschleiser even said in an e-mail that he knew this was an issue. He wrote to his peer Mike Nierenberg in March 2006, "[we] are wasting way too much money on Bad Due Diligence." Yet a year later nothing had changed. In March 2007, Verschleiser wrote to Nierenberg again about the same due diligence firm, "[w]e are just burning money hiring them."
One of the ways that banks like Bear managed to convince investors to buy these bonds was by wrapping them in bond insurance through companies like Ambac, commonly known as “monoline” insurers. Investors who knew the bonds were insured were less worried about default.
Verschleiser, seeing that Bear had gotten firms like Ambac to insure its “sack of shit” bonds, saw here a new opportunity to make money. He first induced the monolines to insure the worthless bonds, then bet against the insurers! (Is it any wonder this guy ended up hired by Goldman, Sachs?) From the Atlantic story again:
Then in November 2007, Verschleiser wrote to his risk committee that he knew insurers for mortgage securities were going to have big financial problems. He suggested they multiply by ten times the short bet he'd just made against stocks like Ambac. These e-mails show Verschleiser's trading desk bragging to firm leadership that he made $55 million off shorting insurers' stock in just three weeks.
So in essence, Verschleiser was triple-dipping. First he was selling worthless “sacks of shit” to investors, representing them as good investments. Then, he kept the money from the return sales of the wormy apples. And then, on top of that, he made money by betting against the insurers he was sticking with these toxic assets.
We all know what happened from there. Bear, Stearns went under, thanks in large part to insane schemes like Verschleiser’s, and all of us were forced to pick up at least part of the tab as the Fed spent billions subsidizing Bear’s emergency takeover by JP Morgan Chase. In subsequent litigation, Chase has steadfastly refused to buy back the bad mortgages dumped on investors by the likes of Verschleiser, and has even fought tooth and nail to prevent the information in the Ambac suit from being made public.
Ambac went into Chapter 11 bankruptcy in 2010 for a variety of reasons, some of which had nothing to do with its losses in deals like these. But certainly Ambac and other monoline insurers like MBIA suffered for having insured worthless mortgage bonds sold onto the market by the Verschleisers of the world. Ambac in its suit asserted that it paid out over $641 million in claims related to the bonds from the Bear deals.
With all of this, though, Verschleiser landed happily on his feet. He reportedly heads Goldman’s mortgage division now. And after cutting a mile-wide swath of losses through the American economy, helping destroy two venerable firms in Bear and Ambac, bilking the taxpayer for untold millions more (he is also named in a lawsuit filed by the Federal Housing Finance Agency for allegedly speeding bad loans onto securitization before they defaulted), Verschleiser is now living the contented life of a proud family man, renting out a 94-room hotel for three days for his daughter’s Bat Mitzvah.
It’s certainly heartening that Verschleiser is spending this money on his daughter instead of, say, hiring a busload of Jamaican hookers to spend the weekend lounging with him in a hot tub full of Beluga caviar. People ought to give their children the best, I guess. But there’s this, too: at a time when one in four Americans has zero or negative net worth, renting a 94-room hotel for three days for a tweenager party might already be pushing the edge of the good taste/tact envelope. Even for the most honest millionaire in Aspen, it would seem a little gauche.
But for this burglarizing dickhead to do it? It’s breathtaking. I hope he at least invited his bankrupted investors to the pool party.
p.s. Since this blog was posted, I've received a number of letters all asking the same question -- how could it be possible that what Verschleiser did is not illegal? How is he not in jail?
The answer is that if the allegations in the Ambac suit are true, it certainly would seem to be illegal. Most notably, the pocketing of putback money almost has to be a form of theft or embezzlement.
The rest of Bear/Verschleiser's scheme, however, is also illegal, but in a more complicated way. If you read the complaint in the Ambac suit, what you see is a sort of extreme blueprint for how mortgage securitization worked in general during that period.
There is a veritable sea of fraudulent and corrupt practices one may gaze upon here, if the SEC were looking for something to target -- everything from withholding material facts from customers and ratings agencies, to threatening ratings agencies with lost business if they didn't overrate bonds, to lying in offering documents, to the manipulation of accounting procedures (this went on after the loans had moved onto Chase's books), etc. -- but the most flagrant violation in the suit involves the issue of due diligence, and here we do know a lot about Verschleiser's role.
It seems that when Bear did do due diligence in these deals, it very frequently overrode the firms they'd hired to do that due diligence, and put the loans in the deals anyway. In the third quarter of 2006, Bear overrode its due diligence firm an incredible 65% of the time, putting loans into their securitizations despite an outside firm finding red flags in the notes.
Even worse, Bear went out of its way to hide the evidence that it was knowingly ignoring due diligence. This is from the complaint:
Bear Stearns ignored the proposals made by the heads of its due diligence department in May 2005 to track the override decisions, and instead took the opposite tack, adopting an internal policy that directed its due diligence managers to delete the communications with its due diligence firms leading to its final loan purchase decisions, thereby eliminating the audit trail.
This is fraud because in its agreements with investors, Bear promised to conduct "due diligence," it promised to conduct "quality control" testing of the loan pools, it promised to "repurchase" defective loans, and it also promised to implement "seller monitoring," i.e. to prevent the securitization of loans from bad suppliers.
But it not only didn't do these things, it engaged the opposite behavior and knowingly covered up its fraud by deleting its communications.
Verschleiser was personally named in the evidence offered in the Ambac suit. In a letter to Ambac, Bear's RMBS Investor Relations managing director Cheryl Glory wrote that "Jeff will... provide you with the due diligence results of all three deals once complete."
But this is the same Jeff who we now have in writing saying this about those promised due diligence results: "We are wasting way too much money on Bad Due Diligence," and "We're just burning money hiring them."
It doesn't take a genius to deduce that Bear was not upholding its contractual obligations by delivering what it itself considered "bad due diligence" to Ambac. At the very least, this is actionable.
Verschleiser undermined due diligence in other ways. One good one was to demand that his due diligence people operate at speeds that made genuine due diligence impossible.
At one point during these deals, Verschleiser reamed out his immediate subordinate, co-head of mortgage finance Baron Silverstein, over the "problem" of the due diligence department taking too much time to do its work. Silverstein responded by issuing the following tirade to John Mongelluzzo, Bear's VP for Due Diligence, demanding that he not get in the way of Bear's insane goal of funding 500 mortgages a day:
I refuse to receive more emails from [Verchleiser] (or anyone else) questioning why we’re not funding loans every day. I’m holding each of you responsible for making sure we fund at least 500 each and every day… I was not happy when I saw the funding numbers and I knew NY would NOT BE HAPPY... I expect to see 500+ every day. I will do whatever is necessary to make sure you’re successful in meeting this objective.
Whenever any right-wing loon, or Bloombergite, tries to tell you the mortgage crisis was caused by the government forcing the poor banks to lend to broke black people, please direct them to this passage. The banks not only wanted to give out these loans, they wanted to give them out at the speed of light. They wanted to crank them out so fast that their own auditors literally couldn't read the writing on the loan applications. This was greed, not policy. Anybody who says anything else is high on something.
Anyway, given that much of Verschleiser's questionable behavior is in writing, his case sure seems court-ready. But for whatever reason, he has not been indicted.
One can almost understand a regulator not wanting to take on the whole circular securitization scheme -- Bear lends money to corrupt mortgage firm, mortgage firm makes bad loans, Bear packages bad loans and sells to investors, then takes the proceeds and creates more bad loans -- because it is so complex and difficult to prove.
But in this case there are simple issues of fraud and theft that could be taken on without having to prosecute broader crimes related to securitization. But prosecutors, apparently, just blew those off. In the current environment, regulators even miss the layups.
© 2012 Rolling Stone
http://www.rollingstone.com/politics/blogs/taibblog/everything-you-need-...
As Rolling Stone’s chief political reporter, Matt Taibbi's predecessors include the likes of journalistic giants Hunter S. Thompson and P.J. O'Rourke. Taibbi's 2004 campaign journal Spanking the Donkey cemented his status as an incisive, irreverent, zero-bullshit reporter. His books include Griftopia: A Story of Bankers, Politicians, and the Most Audacious Power Grab in American History, The Great Derangement: A Terrifying True Story of War, Politics, and Religion, Smells Like Dead Elephants: Dispatches from a Rotting Empire.
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