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A Christmas Message From America's Rich

POSTED: December 22, 9:05 AM ET

A Christmas Message From America's Rich
Dario Cantatore/Getty

It seems America’s bankers are tired of all the abuse. They’ve decided to speak out.
True, they’re doing it from behind the ropeline, in front of friendly crowds at industry conferences and country clubs, meaning they don’t have to look the rest of America in the eye when they call us all imbeciles and complain that they shouldn’t have to apologize for being so successful.

But while they haven’t yet deigned to talk to protesting America face to face, they are willing to scribble out some complaints on notes and send them downstairs on silver trays. Courtesy of a remarkable story by Max Abelson at Bloomberg, we now get to hear some of those choice comments.

Home Depot co-founder Bernard Marcus, for instance, is not worried about OWS:

“Who gives a crap about some imbecile?” Marcus said. “Are you kidding me?”

Former New York gurbernatorial candidate Tom Golisano, the billionaire owner of the billing firm Paychex, offered his wisdom while his half-his-age tennis champion girlfriend hung on his arm:

“If I hear a politician use the term paying your fair shareone more time, I’m going to vomit,” said Golisano, who turned 70 last month, celebrating the birthday with girlfriend Monica Seles, the former tennis star who won nine Grand Slam singles titles.

Then there’s Leon Cooperman, the former chief of Goldman Sachs’s money-management unit, who said he was urged to speak out by his fellow golfers. His message was a version of Wall Street’s increasingly popular If-you-people-want-a-job, then-you’ll-shut-the-fuck-up rhetorical line:

Cooperman, 68, said in an interview that he can’t walk through the dining room of St. Andrews Country Club in Boca Raton, Florida, without being thanked for speaking up. At least four people expressed their gratitude on Dec. 5 while he was eating an egg-white omelet, he said. 
“You’ll get more out of me,” the billionaire said, “if you treat me with respect.”

Finally, there is this from Blackstone CEO Steven Schwartzman:

Asked if he were willing to pay more taxes in a Nov. 30 interview with Bloomberg Television, Blackstone Group LP CEO Stephen Schwarzman spoke about lower-income U.S. families who pay no income tax.

“You have to have skin in the game,” said Schwarzman, 64. “I’m not saying how much people should do. But we should all be part of the system.”

There are obviously a great many things that one could say about this remarkable collection of quotes. One could even, if one wanted, simply savor them alone, without commentary, like lumps of fresh caviar, or raw oysters.

But out of Abelson’s collection of doleful woe-is-us complaints from the offended rich, the one that deserves the most attention is Schwarzman’s line about lower-income folks lackingskin in the game.” This incredible statement gets right to the heart of why these people suck.

Why? It's not because Schwarzman is factually wrong about lower-income people having noskin in the game,” ignoring the fact that everyone pays sales taxes, and most everyone pays payroll taxes, and of course there are property taxes for even the lowliest subprime mortgage holders, and so on.

It’s not even because Schwarzman probably himself pays close to zero in income tax – as a private equity chief, he doesn’t pay income tax but tax on carried interest, which carries a maximum 15% tax rate, half the rate of a New York City firefighter.

The real issue has to do with the context of Schwarzman’s quote. The Blackstone billionaire, remember, is one of the more uniquely abhorrent, self-congratulating jerks in the entire world – a man who famously symbolized the excesses of the crisis era when, just as the rest of America was heading into a recession, he threw himself a $5 million birthday party, featuring private performances by Rod Stewart and Patti Labelle, to celebrate an IPO that made him $677 million in a matter of days (within a year, incidentally, the investors who bought that stock would lose three-fourths of their investments).

So that IPO birthday boy is now standing up and insisting, with a straight face, that America’s problem is that compared to taxpaying billionaires like himself, poor people are not invested enough in our society’s future. Apparently, we’d all be in much better shape if the poor were as motivated as Steven Schwarzman is to make America a better place.

But it seems to me that if you’re broke enough that you’re not paying any income tax, you’ve got nothing but skin in the game. You've got it all riding on how well America works.

You can’t afford private security: you need to depend on the police. You can’t afford private health care: Medicare is all you have. You get arrested, you’re not hiring Davis, Polk to get you out of jail: you rely on a public defender to negotiate a court system you'd better pray deals with everyone from the same deck. And you can’t hire landscapers to manicure your lawn and trim your trees: you need the garbage man to come on time and you need the city to patch the potholes in your street.

And in the bigger picture, of course, you need the state and the private sector both to be functioning well enough to provide you with regular work, and a safe place to raise your children, and clean water and clean air.

The entire ethos of modern Wall Street, on the other hand, is complete indifference to all of these matters. The very rich on today’s Wall Street are now so rich that they buy their own social infrastructure. They hire private security, they live on gated mansions on islands and other tax havens, and most notably, they buy their own justice and their own government.

An ordinary person who has a problem that needs fixing puts a letter in the mail to his congressman and sends it to stand in a line in some DC mailroom with thousands of others, waiting for a response.

But citizens of the stateless archipelago where people like Schwarzman live spend millions a year lobbying and donating to political campaigns so that they can jump the line. They don’t need to make sure the government is fulfilling its customer-service obligations, because they buy special access to the government, and get the special service and the metaphorical comped bottle of VIP-room Cristal afforded to select customers.

Want to lower the capital reserve requirements for investment banks? Then-Goldman CEO Hank Paulson takes a meeting with SEC chief Bill Donaldson, and gets it done. Want to kill an attempt to erase the carried interest tax break? Guys like Schwarzman, and Apollo’s Leon Black, and Carlyle’s David Rubenstein, they just show up in Washington at Max Baucus’s doorstep, and they get it killed.

Some of these people take that VIP-room idea a step further. J.P. Morgan Chase CEO Jamie Dimon – the man the New York Times once calledObama’s favorite banker” – had an excellent method of guaranteeing that the Federal Reserve system’s doors would always be open to him. What he did was, he served as the Chairman of the Board of the New York Fed.

And in 2008, in that moonlighting capacity, he orchestrated a deal in which the Fed provided $29 billion in assistance to help his own bank, Chase, buy up the teetering investment firm Bear Stearns. You read that right: Jamie Dimon helped give himself a bailout. Who needs to worry about good government, when you are the government?

Dimon, incidentally, is another one of those bankers who’s complaining now about the unfair criticism.Acting like everyone who’s been successful is bad and because you’re rich you’re bad, I don’t understand it,” he recently said, at an investor’s conference.

Hmm. Is Dimon right? Do people hate him just because he’s rich and successful? That really would be unfair. Maybe we should ask the people of Jefferson County, Alabama, what they think.

That particular locality is now in bankruptcy proceedings primarily because Dimon’s bank, Chase, used middlemen to bribe local officialsliterally bribe, with cash and watches and new suits – to sign on to a series of onerous interest-rate swap deals that vastly expanded the county’s debt burden.

Essentially, Jamie Dimon handed Birmingham, Alabama a Chase credit card and then bribed its local officials to run up a gigantic balance, leaving future residents and those residents’ children with the bill. As a result, the citizens of Jefferson County will now be making payments to Chase until the end of time.

Do you think Jamie Dimon would have done that deal if he lived in Jefferson County? Put it this way: if he was trying to support two kids on $30,000 a year, and lived in a Birmingham neighborhood full of people in the same boat, would he sign off on a deal that jacked up everyone’s sewer bills 400% for the next thirty years?

Doubtful. But then again, people like Jamie Dimon aren’t really citizens of any country. They live in their own gated archipelago, and the rest of the world is a dumping ground.
Just look at how Chase behaved in Greece, for example.

Having seen how well interest-rate swaps worked for Jefferson County, Alabama, Chase helpedGreece mask its debt problem for years by selling a similar series of swaps to the Greek government. The bank then turned around and worked with banks like Goldman, Sachs to create a thing called the iTraxx SovX Western Europe index, which allowed investors to bet against Greek debt.

In other words, Chase knowingly larded up the nation of Greece with a crippling future debt burden, then turned around and helped the world bet against Greek debt.

Does a citizen of Greece do that deal? Forget that: does a human being do that deal?

Operations like the Greek swap/short index maneuver were easy money for banks like Goldman and Chasehell, it’s a no-lose play, like cutting a car’s brake lines and then betting on the driver to crash – but they helped create the monstrous European debt problem that this very minute is threatening to send the entire world economy into collapse, which would result in who knows what horrors. At minimum, millions might lose their jobs and benefits and homes. Millions more will be ruined financially.

But why should Chase and Goldman care what happens to those people? Do they have any skin in that game?

Of course not. We’re talking about banks that not only didn’t warn the citizens of Greece about their future debt disaster, they actively traded on that information, to make money for themselves.

People like Dimon, and Schwarzman, and John Paulson, and all of the rest of them who think the “imbeciles” on the streets are simply full of reasonless class anger, they don’t get it. Nobody hates them for being successful. And not that this needs repeating, but nobody even minds that they are rich.

What makes people furious is that they have stopped being citizens.

Most of us 99-percenters couldn’t even let our dogs leave a dump on the sidewalk without feeling ashamed before our neighbors. It's called having a conscience: even though there are plenty of things most of us could get away with doing, we just don’t do them, because, well, we live here. Most of us wouldn’t take a million dollars to swindle the local school system, or put our next door neighbors out on the street with a robosigned foreclosure, or steal the life’s savings of some old pensioner down the block by selling him a bunch of worthless securities.

But our Too-Big-To-Fail banks unhesitatingly take billions in bailout money and then turn right around and finance the export of jobs to new locations in China and India. They defraud the pension funds of state workers into buying billions of their crap mortgage assets. They take zero-interest loans from the state and then lend that same money back to us at interest. Or, like Chase, they bribe the politicians serving countries and states and cities and even school boards to take on crippling debt deals.

Nobody with real skin in the game, who had any kind of stake in our collective future, would do any of those things. Or, if a person did do those things, you’d at least expect him to have enough shame not to whine to a Bloomberg reporter when the rest of us complained about it.

But these people don’t have shame. What they have, in the place where most of us have shame, are extra sets of balls. Just listen to Cooperman, the former Goldman exec from that country club in Boca. According to Cooperman, the rich do contribute to society:

Capitalists “are not the scourge that they are too often made out to be” and the wealthy aren’t “a monolithic, selfish and unfeeling lot,” Cooperman wrote. They make products that “fill store shelves at Christmas…”
Unbelievable. Merry Christmas, bankers. And good luck getting that message out.

Read more:

December 23, 2011

Bank Deposits at European Central Bank Reach High for Year


FRANKFURT — Banks from the 17 European Union countries that use the euro stashed 347 billion euros overnight with the European Central Bank on Thursday, in another sign that the Continent’s debt crisis is still putting pressure on the banking system despite central bank support.

The figure announced Friday, equivalent to $453 billion, is the highest for 2011, topping 346.4 billion euros earlier this month.

It is a sign of mistrust in the interbank lending market where banks raise operating funds, suggesting they are depositing money with the central bank at low interest rates because they are afraid to lend it to other banks — for fear they won’t get paid back.

Europe is suffering from a debt crisis marked by concerns that heavily indebted governments, like Italy, may be unable to pay off their bonds. That means trouble for banks because they typically hold government bonds.

The large deposits come despite Wednesday’s big central bank credit operation, in which the European Central Bank let banks borrow as much as they wanted for up to three years. As a result 523 banks took 489 billion euros, the largest package of loans from the central bank in the 13-year history of the euro.

The European Central Bank has stepped up lending to banks to help them get through the crisis. Some of the banks are finding it extremely difficult to raise money elsewhere, so the bank steps in as lender of last resort, a typical role for central banks in times of turmoil.

The bank has refused to play the same role for governments by buying large amounts of their bonds, saying they must get their debts under control through their own efforts and not wait for a central bank rescue.

Italian 10-year bond yields remained elevated Friday at 6.90 percent, another sign that the markets remain fearful of a default by the euro zone’s third-largest economy. Before the crisis spread to Italy, it was able to borrow at under 4 percent as recently as October 2010.

European governments are trying to win back the confidence of bond market investors by reducing deficits, a difficult job in a slowing economy. The Italian prime minister, Mario Monti, won approval Thursday from the Italian Senate for 30 billion euros in additional cutbacks and revenue increases.

Greece is working on a deal to cut its debt by making bondholders accept a bond exchange that would mean a 50 percent reduction in the value of their investments. The bondholders could accept that instead of the larger losses that would come from a disorderly default not agreed in advance.

A top policy maker with the European Central Bank said in an interview published Friday that the bank could use its power to create new money to buy financial assets if a deteriorating economy threatens the euro zone with deflation.

The official, Lorenzo Bini Smaghi, who is leaving office next week, was quoted by The Financial Times as saying he sawno reasonwhy the bank could not use the technique, called quantitative easing by economists. Both the United States Federal Reserve and the Bank of England have used it after lowering interest rates to record low levels and finding that their economies still needed more stimulus.

The central bank’s mandate is to provide price stability, so fighting deflation could be consistent with that. At the moment, however, inflation is running at 3 percent, well above the bank’s goal of just under 2 percent.  

December 22, 2011 6:46 pm

Ties between sovereigns and banks set to deepen

By Gillian Tett

A few weeks ago, some senior officials at Bank of Tokyo Mitsubishi spotted a fascinating fact: for the first time the volume of Japanese government bonds sitting on the bank’s balance sheet swelled above corporate and consumer loans.

Yes, you read that right: at an entity such as Bank of Tokyo Mitsubishi, it is now the government not the private sector – which is grabbing most credit, as the bank gobbles up JGBs, notwithstanding rock-bottom low rates.


Welcome to a key theme of 2012. During the past four decades, it was widely assumed in the western world that the main role of banks and asset managers was to provide funding to the private sector, rather than act as a piggy bank for the state. But now, that assumption – like so many of the other ideas that dominated before 2007 – is quietly crumbling. And not just in Japan.

In Europe, Nicholas Sarkozy, French president, indicated earlier this month that he is keen for banks to use their €489bn European Central Bank bonanza to purchase more eurozone government bonds. Asset managers in places such as Spain and Ireland are now facing pressure to acquire more sovereign debt, or quasi sovereign bonds, as debt pressures bite there. More subtly, British banks are being required to buy more sterling bonds, as a result of regulatory reform. Even in the US, government officials and bank leaders have recently taken to muttering that American banks have an unusually low holding of US government bonds, by international standards. The unspoken assumption, then, is that as western debt levels rise, banks and asset managers’ holdings of state debt will grow too never mind that western sovereign debt is looking riskier by the day.

Now, in part this is simply a knee-jerk consequence to the current crisis. And in a sluggish world where private sector demand for credit is limited, it arguably might make macro economic sense for the banks to lend more to government. But the really big question now, that investors would do well to ask, is whether this trend also reflects a stealthy slide towards a wider process of quasi-financial repression.

To understand this, it is worth taking a look at a fascinating recent working paper by Carmen Reinhart and M. Belen Sbrancia, published by the Bank for International Settlements*, but drawing on earlier work for the International Monetary Fund.

The arguments in this paper are complex (For an excellent description, see John McDermott’s posts on FT alphaville.) But what Reinhart and Sbrancia argue is that if you want to understand how the west cut its debts during the last great bout of deleveraging, namely after the second world war, then do not just focus on austerity or growth; instead, the crucial issue is that during that period, the state engineered a situation where the yields on government bonds were kept slightly below the prevailing rate of inflation for many years. This gap was not vast. But since asset managers and banks continued to buy those bonds at unfavourable prices, this implicit, subtle subsidy from investors helped the government to cut its debt pile over several years. Indeed Reinhart and Sbrancia calculate that suchrepressionaccounted for half of the post-second world war fiscal adjustment in the US and UK, due to the magic of compounding.

Now, these days, it is hard to imagine any western government overtly calling for a second wave of suchrepression”. After all, as Kevin Warsh, a former Fed governor, recently pointed out, the drawback of financial repression is that it curbs private sector investment and credit growth. And in any case, it is a moot point whether such repression could even be implemented today, given the globalised nature of markets.

Nevertheless, the political incentives to flirt with this concept are clear. After all, the beauty of a stealth subsidy is precisely that: it is too subtle for most voters to understand. It is also arguably a more equitable form of burden-sharing, and thus less politically divisive, than, say, state spending cuts. Moreover, governments do not necessarily need to be “repressive” to achieve the “repressiontrick; as the economist Alan Taylor observes, if investors are so terrified that they cannot see alternative investment choices, they may end up buying government bonds by default – even at unattractive prices. Indeed, that is arguably what is already occurring today in the Treasuries market, or the world of JGBs. And, perhaps, in the eurozone too; after all, when eurozone banks were given €442bn of ECB money two years ago, they used half of this to buy government bonds – without compulsion at all. Whatever you want to call it, then, the state and private sector finance are becoming more entwined by the day. It is a profound irony of 21st centurymarketcapitalism. And in 2012, it will only deepen.

*BIS working paper 363; the Liquidation of Government Debt, by Carmen Reinhart and M. Belen Sbrancia (with discussion by Ignacio Visco and Alan Taylor.)

Copyright The Financial Times Limited 2011.

The year Americans will decide about inequality

Michael Ignatieff

December 23, 2011

This year inequality became the issue driving democratic politics. 2012 will be the year when voters in America have to decide what to do about it.

The economic battle will be about whether to increase taxation on top earners and what this will do to incentives and innovation. The cultural battle will be about what government should do to protect the American Dream for a disillusioned middle class. The ideological battle will be about the role of government as guarantor of equal opportunity in a market society. Socially, the election of 2012 will be about class as no election has been since Franklin D. Roosevelt.

The politics of class are devilishly complex for both parties. Republicans have to oppose higher taxation on the rich without appearing captives of an arrogant business elite, while Democrats have to support higher taxation without appearing to threaten the middle class. Both have to hold onto their ideological base while gaining votes from the moderate middle. The rhetoric will alternate between rousing appeals to the base and moderate appeals to the middle, but there is no doubt that this will be the most ideologically polarised election in a generation.

The victor in November 2012 will inherit not just an economic mess at home and abroad but a gathering crisis of public faith in the fairness of society. Wealth itself is not the issue, rather it is wealth that ducks responsibility for financial chaos and wealth that buys political privilege. The fairness problem in capitalist societies is compounding their economic problem. The new president will discover that societies where millions feel the deck is stacked against them are tough to govern.

The writer teaches at the university of Toronto