Well, our holiday guests have come and gone, and it is time for me to return to blogging. Don't ask me why. I do pay a modest yearly fee to my web hosting service, so I guess one answer would be that I have to get my money's worth, but I could solve that problem by pulling the plug on this exercise in self delusion.
As it's been a while since I posted, this post will involve a few of the week's events, all built around a common theme. So, off we go.
Those of you who regularly read this blog probably know that I am somewhat cynical. Not as cynical as one near and dear to me seems to think, but somewhat cynical. Yet even I was astounded to realize the extent to which Wall Street has gamed the bankruptcy system in its favor. While pensioners in Detroit may be taking a huge hit, despite a state constitution saying their pensions are sacrosanct, several banks that conned Detroit into a disastrous investment vehicle are well protected:
As Detroit struggles to come up with money to improve services for its residents, two large banks are poised to receive hundreds of millions of dollars to cancel a deal that helped push the city into bankruptcy in the first place.
The two banks, UBS and Bank of America, were the only creditors that managed to reach a settlement with Detroit before the city declared bankruptcy last July. They agreed to let Detroit out of financial contracts called interest-rate swaps for 75 percent of what the city owed, or about $230 million. They also agreed to give up some casino tax proceeds that Detroit had pledged to them as collateral for the swaps.
The 75 cents on the dollar is a far better deal than the city’s other creditors will probably get. And because of an unusual provision in the federal bankruptcy code, these two banks actually have a legal right to 100 cents on the dollar. The provision gives traders in swaps, options and other derivatives a so-called safe harbor, exempting them from the usual stay that blocks creditors’ efforts to collect debts.
The provision has turned on its head the meaning of safe harbor in bankruptcy. Bankruptcy proceedings are supposed to give debtors like Detroit a safe place to negotiate a way out their problems under the protective eye of a federal judge.
Bankruptcy law rests on the bedrock principle that the best outcome can be achieved if everybody shares equitably in the pain and losses. But in the brave new world of municipal bankruptcy, the law gives derivatives traders an even safer harbor than Detroit’s.
As the article says, the bankruptcy act was “reformed” several times over the course of the years to declare more and more Wall Street debt protected.
This may be hard to believe, but there was a time when the Bankruptcy system actually looked out for the little guy. 1978 was not really that long ago. It was in that year that the Bankruptcy Act of 1978 was passed (you can tell by the title of the Act). That act actually reformed the system in a way that was friendly toward regular people. The only onerous provision (and it may have been added later) was the provision excepting student loans from discharge, which has, of course, led to student loan abuse, particularly by for-profit institutions, of massive proportions. But, other than that, the law was quite solicitous of normal people. For instance, it expanded the scope of exemptions available to debtors. Prior to its enactment, a debtor declaring bankruptcy could keep only so much as state laws allowed. A debtor in Connecticut would lose pretty much everything, while a Florida debtor could keep his or her home. The 1978 law allowed a debtor to chose the more generous of state law exemptions or a new package of federal exemptions. The Act actually put the debtor into a position where he or she had some leverage over creditors.
Wall Street and the creditor class, could not, of course, allow this situation to persist. “Reform” was needed, and “reform” is what we got. It is entirely okay for creditors to lure debtors into borrowing money on onerous terms that would have been considered usurious in any other day or age. The bankruptcy system is now punitive and expensive for individuals, but it remains quite business friendly. Just ask any worker who has had his union contract set aside by a bankruptcy court, or his pension eviscerated. Now we see that under our very noses the banks have “reformed” the bankruptcy code so that they can drive our cities into bankruptcy and then shove themselves into first place in line to get paid for their services.
Even a cynic has a hard time believing this sort of thing. However, my cynicism is strong enough to be absolutely sure that nothing will be done to rectify this abuse, no matter how much publicity it may get. (I should add that the banks settled for 43% of their money; still more than the other creditors will get, and you can rest assured they've come out winners overall)
Speaking of cynicism and Wall Street, is there any surprise here:
Providing additional evidence that the Obama Administration's Department of Justice (DOJ) is protecting “banks too big to fail,” Pulitzer Prize winning financial reporter David Cay Johnston has revealed that the DOJ has refused to force JPMorgan Chase to comply with an ongoing investigation into the bank's possible knowledge of Bernard Madoff's fraud scheme of a few years ago.
Perhaps the worst appointment Obama ever made was Little Timmy Geithner, who ran interference for Wall Street from his post at the Treasury Department for four years, though we can give Obama points for consistency as he may have matched Timmy with Jack Lew. Not to be outdone, however, Eric Holder has run a strong second or third, depending on how you rate Lew. Is there anything he's done as Attorney General that Obama can truly point to with pride? Maybe that's a bad way to phrase the question. Is there anything Holder has done as Attorney General that the rest of us Democrats can point to with pride? If so, it pales in comparison to the harm he's done as Wall Street's legal enabler.
Still speaking of cynicism and Wall Street, is there any surprise here:
Signs of the energy business are inescapable in and around Houston — the pipelines, refineries and tankers that crowd the harbor, and the gleaming office towers where oil companies and energy traders have transformed the skyline.
And in a squat glass building on the University of Houston campus, a measure of the industry’s pre-eminence can also be found in the person of Craig Pirrong, a professor of finance, who sits at the nexus of commerce and academia.
As energy companies and traders have reaped fortunes by buying and selling oil and other commodities during the recent boom in the commodity markets, Mr. Pirrong has positioned himself as the hard-nosed defender of financial speculators — the combative, occasionally acerbic academic authority to call upon when difficult questions arise in Congress and elsewhere about the multitrillion-dollar global commodities trade.
Do financial speculators and commodity index funds drive up prices of oil and other essentials, ultimately costing consumers? Since 2006, Mr. Pirrong has written a flurry of influential letters to federal agencies arguing that the answer to that question is an emphatic no. He has testified before Congress to that effect, hosted seminars with traders and government regulators, and given countless interviews for financial publications absolving Wall Street speculation of any appreciable role in the price spikes.
What Mr. Pirrong has routinely left out of most of his public pronouncements in favor of speculation is that he has reaped financial benefits from speculators and some of the largest players in the commodities business, The New York Times has found.
There is nothing new about academics acting as whores for various industries. Lots of scientists do it as well, but it works particularly well for economics professors, as they can never be proven wrong, at least not the way the game is currently being played. Sooner or later a scientist that shills for industry will be found out. But in this day and age there is absolutely no penalty for being wrong in the economics profession. In fact, nothing enhances your reputation more. Just ask Alan Greenspan, the man who has never been right. Still it takes a special kind of guy to brazenly deny the truth of something that is so obviously true.
What I always find interesting is how cheaply people like Pirrong can be bought. I remember when our three term governor got caught with his hand in the cookie jar it turned out that he really didn't get many cookies considering the goodies he was handing out. Pirrong won't say what he's been paid, and his employer isn't curious in the least about it, possibly because the school itself is being handsomely bribed, but another academic discussed in the article rented his soul for a mere $50,000. Admittedly, he can keep renting it so the money may pile up, but that kind of money is merely the crumbs off the crumbs from the table of the folks for whom he shills. In defense of Pirrong and his ilk, the price of a college professor really should pale next to the cost of the governor of a state, even a state as small as Connecticut. Every governor has a monopoly for the length of his or her term, but there are undoubtedly scores of professors who'd be only too happy to step up and take Pirrong's place if he upped his price. As economics professors other than Pirrong would undoubtedly point out, it's a simple question of supply and demand.
By the way, if you guessed that the common theme of this post was cynicism, you were right.
Having gotten all that off my chest, I hereby acknowledge that I am in arrears on my good news post, but only because I haven't been posting. I'll find something by tomorrow.