Donald Trump’s economic inheritance in 7 charts

The only president to take office during a stronger economy is George HW Bush

by: Lauren Leatherby in New York



Donald Trump will enter the White House presiding over one of the stronger US economies any president has inherited in recent history.

On Thursday, the Department of Commerce reported that the US economy grew at a far faster pace in the third quarter of 2016 than previously thought — an annualised rate of 3.5 per cent. Since the 1980s, the only president to have taken office while the economy was growing at a faster rate was George HW Bush.
 
The latest data stand in sharp contrast to the free-falling economy Barack Obama inherited in 2009, when the US was losing almost 800,000 jobs a month. On the campaign trail, Mr Trump repeatedly characterised the economy under Mr Obama as a disaster, but the economy has come a long way since then.
An analysis of economic metrics paints a picture of an economy finding solid footing after the financial crisis. Unemployment stands at a nine-year low, the S&P 500 continues to break records, and home sales hit their highest rate since 2007.
 
Here are seven charts showing how the trends Mr Trump will inherit compare to the state of the US economy at other recent presidential inaugurations:
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In recent history, only Jimmy Carter and George HW Bush have entered the White House with higher GDP growth rates, and Thursday’s commerce department report shows that the US economy is picking up even more steam.


 
After its recovery from the 2008 financial crisis, the stock market regularly set record highs beginning around 2013. Stocks surged even higher after Mr Trump’s election, as investors bet that he would follow through on his campaign promises to cut taxes and regulations for businesses. But some of his other proposals could have downsides for big businesses, such as his suggestion of imposing tariffs on Chinese and Mexican imports.

 
 
The US unemployment rate has fallen to 4.6 per cent. Only one recent president — George W Bush — has taken the oath of office when the US had a lower jobless rate.

Unemployment peaked at 10 per cent in October 2009, just after Mr Obama entered the White House. Ronald Reagan is the only other recent president to have overseen a similarly sized drop in unemployment: the rate shrank from 10.8 per cent in 1982 to 5.3 per cent in 1988.


 
Mr Obama’s opponents are quick to point out that, despite the low unemployment rate, the labour force participation rate is lower than it was during its late-1990s peak. Many workers were squeezed out of the job market during the financial crisis, but today it is difficult to tell how many of those workers would like to re-enter the workforce versus how many are retired Baby Boomers or have left the workforce for other reasons, for instance to be a stay-at-home parent.
 


The US Federal Reserve sees 2 per cent inflation as a sweet spot for maximum employment and price stability. As inflation approaches that target, the Fed said in December it would raise rates for the first time in a decade. It forecast three more rate rises next year in response to what policymakers saw as an economy that is heating up.
But the road ahead for Mr Trump is not without its bumps. Inequality is higher than it has been in decades, and the federal deficit is larger than ever.
 



US inequality has surged to its highest point since the 1920s, before the Great Depression. The nation’s top earners take home a higher and higher share of US income, while the average income for the bottom half of US workers has not increased since the 1970s.

Increasing inequality harms outcomes for the US economy as a whole: studies show that increased inequality leads to greater political polarisation, decreased economic mobility, a shrinking middle class, poorer education outcomes and more.

Worsening inequality would already be difficult to reverse. But under Mr Trump’s proposed policies, inequality might get worse before it improves, especially if the boom in capital markets continues and if Mr Trump’s proposed tax breaks disproportionately benefit the country’s richest as much as analysts predict.

Mr Trump’s promises to impose tariffs on cheap Chinese imports could also drive up prices for low-income Americans, especially if such policies fail to bring back the volume of jobs he promises.




The nation’s deficit is also the highest it has ever been, at over $19tn. In contrast to conservatives’ traditional pledge to reduce government spending, Mr Trump’s transition team has pledged to spend $550bn on infrastructure and significantly boost defence spending. This additional government spending, coupled with government revenue loss from his plans to cut taxes, would lead to a $7.2tn rise in the federal debt over the next decade, according to the Tax Policy Center.

Inequality and the federal deficit are not the only large economic challenges that may come to haunt Mr Trump during his presidency. Growth has stagnated in both the developed world and in emerging markets. Manufacturing employment, of course, remains much lower today than it was four decades ago.

Also, the US dollar hit its highest level in 14 years in December. A strong dollar hurts US exports while making it cheaper to import goods. That would widen the trade deficit and make it much more difficult for Mr Trump to fulfil his campaign promises to slash the trade déficit.


The Age of Incompetence

J. Bradford DeLong

Trump rally

 

BERKELEY – On January 20, 2017, US President-elect Donald Trump will take office having received almost three million fewer votes than his opponent; and he will work with a Republican Senate majority whose members won 13 million fewer votes than their Democratic opponents. Only the Republican majority in the House of Representatives, led by Speaker Paul Ryan, has any claim to represent a numerical majority of the 55% of Americans who voted on Election Day 2016.
 
Trump will also begin his presidency with an approval rating below 50%. This is unprecedented – or “unpresidented,” as one of his semi-literate tweets put it (before he deleted it) – in the history of such ratings. The government of the world’s oldest democracy is, in fact, not democratic. Also unprecedented is the fact that so few members of the president-elect’s own party, and none of the Democratic opposition, consider him to be qualified for the duties of the presidency, apart from serving as Cheerleader-in-Chief.
 
Of course, the Trump phenomenon has been gestating for a long period. With the honorable exception of George H.W. Bush, who had the requisite knowledge, intelligence, temperament, and values to serve, the last time a fully qualified Republican was inaugurated was in 1957. No one denies that Richard Nixon had the knowledge and intelligence to be president; but most people will admit that his temperament and values left something to be desired.
 
Similarly, most people thought that Ronald Reagan lacked the requisite knowledge and intelligence for the office. According to the journalist Peter Jenkins, former British Prime Minister Margaret Thatcher once said of Reagan, “Poor dear, there’s nothing between his ears.” And the qualifications that Reagan did have on Inauguration Day eroded over time, after he was wounded in a failed assassination attempt 69 days into his presidency, and, later, when he began to suffer from Alzheimer’s disease.
 
Still, Reagan’s temperament and values (generally speaking) were well suited to the presidency.

He fully understood that being the star did not mean that he was the boss. Both as a Hollywood actor and as a US president, Reagan had smart, dedicated, and trained professionals writing his lines and directing his moves. He knew that his job was to be on screen, and not to interfere with the people behind the camera and in the post-production editing room, who were responsible for the finished product.
 
This is what most observers expected to see when George W. Bush took office in 2001: a folksy cheerleader who would follow the lead of the wise advisers he had inherited from his father.

But the younger Bush came to think of himself not just as the star, but as “the decider,” too.

And while Vice President Dick Cheney and Secretary of Defense Donald Rumsfeld had been savvy policymakers back in the 1970s, they had become rather erratic by the early 2000s. For whatever reason, Bush bonded with the two, which sealed his fate. He has not attended any Republican National Conventions since leaving office, and he may wish that he had he never sent James Baker to Florida in November 2000 to secure his victory over Al Gore.
 
Trump clearly has not taken any lessons from the second Bush presidency. He knows that he is the star, but he also wrongly believes that he has the knowledge and intelligence to be the boss.

He seems unaware that his campaign is over, that he could fail catastrophically and permanently in his new role, and that it is in his own interest to ensure that his proposals are sound, not just as slogans, but as actual policies that will keep the US safe and create prosperity.
 
So, what should the millions of Americans who now fear for the future do? First, we can work at the state level to try to neutralize any Trump policy initiatives that are flawed or infeasible.
 
Democrats and principled Republicans in state legislatures need to work together to keep tax revenues flowing and to fund the many spending programs that are in the American interest, regardless of what is happening in Washington, DC. And they should promise each other that, regardless of who comes to power in 2021, they will not hold each other liable for acting as disruptors today.
 
At the national level, we should constantly remind Senate Republicans that they speak for 13 million fewer voters than the Democrats do. And we should remind Paul Ryan that he made a mistake by going along with the Bush administration’s discredited economic and foreign-policy initiatives between 2001 and 2008, and that it is a disservice to the country to show unconditional partisan support for an administration that is so obviously unfit.
 
And, if all else fails, we should remember that standing up to an unpopular president who received almost three million fewer votes than his opponent is not just the right thing to do; it will also make for great reality TV.
 
 


The Soviet Union and Russia: Tragedy and Farce

Russia’s recent military adventures have mostly aimed to create an illusion of strength.

By George Friedman

This week marks the 25th anniversary of the fall of the Soviet Union. Its collapse was inconceivable at the time. The Soviet Union loomed as a stone colossus astride the world, the equal of the United States, and in the minds of some, its superior. In fact, it was built on a base of sand, held together during its hardest times by the secret police. But as the KGB weakened from careerism and corruption, the glue dissolved and the regime collapsed. It was a surprise to the outside world and perhaps even to much of the Politburo. But it couldn’t have been a surprise to the people within the KGB. They knew what was coming and readied themselves to take advantage of the new world.

We now find ourselves in a new confrontation with Russia. For me, this is not a surprise, as I had forecast a resurgence of Russia in a book that was published eight years ago called “The Next 100 Years.” Russia was not going to do the world the favor of remaining in the chaos of privatization that President Boris Yeltsin had presided over. The men who had enriched themselves in the 1990s would emerge as the new elite in the 2000s. Their roots would be in the past, and their wish would be to return Russia to its former greatness, both out of nostalgia and to preserve their positions. Russian culture celebrates strong leaders, and leaders strengthen themselves with this admiration. The issue now is what shall we make of this second confrontation.

Russian President Vladimir Putin speaks during his annual press conference in Moscow on Dec. 23, 2016. NATALIA KOLESNIKOVA/AFP/Getty Images

 

Karl Marx once wrote that history repeats itself, first as tragedy, second as farce. President Vladimir Putin was a member of the KGB and therefore a member of the Communist Party. It is certain that he read Marx’s words. I wonder if he is haunted by them now. He should be because they capture the essence of the re-emergence of Russian power.
There was something terrible and magnificent in the Soviet Union. The terrible we all know about. But among that was also the brutal industrialization of Russia, the 20 million who died to defeat Nazi Germany and the launch of Sputnik and Yuri Gagarin. Even the terror and the purges, shocking and terrible as they were, had a breadth and ambition that scholars have spent their lives trying to comprehend. Aleksandr Solzhenitsyn wrote magnificent books, filled with contempt and awe, to chronicle the brutality of the prison camps. The world is well rid of the Soviet Union, but it is a time and place worthy of remembrance.

The Russian Federation today is, in comparison, a banal place. The greatest banality is watching Putin, a former KGB agent, attend Orthodox Church ceremonies. I wonder if he was dishonest about being an atheist in the Communist Party or if he has undergone a conversion, perhaps genuine but certainly convenient. The Russian leader almost a year ago talked about this in a speech in which he remarked, "I cannot say that I was a hard-line advocate of the Communist ideology. Yet my attitude to all this was very delicate." Delicacy is of the essence. Russia must be led by a magician who can make small things appear large. It isn’t a place for a man of deep beliefs.

The litany of Russia’s woes will be familiar to my readers. Russia needs Ukraine to act as a buffer. Before the ousting of President Viktor Yanukovych, Putin had a pro-Russian government in Kiev. It was overthrown and replaced with a pro-Western government. Putin’s invasion of Ukraine and annexation of Crimea, where Russia already had forces by treaty, was simply an attempt to demonstrate decisive force, but it turned into an attempt to draw something out of a massive defeat. His goal to foment a rising in eastern Ukraine failed miserably.

In addition, Russia’s economy resembles Saudi Arabia’s. Russia lives and dies by the price of oil, and when oil prices go down, people living outside of Moscow and St. Petersburg don’t get paid.

In all of this, Russia has searched for opportunities to declare a great victory to the world. Its intervention in Syria allowed Putin to save Syrian President Bashar al-Assad. Putin could never explain to anyone what benefit he gained from saving Assad. He did it because he could. And because he could, he postured as a global power. More than a year after Russia arrived, Aleppo fell. Now that Aleppo has fallen, how has the hand of history moved forward? During the Cold War, Russia dominated or heavily influenced entire swathes of the Middle East: Syria, Iraq, Egypt, Libya, Algeria. Today, Russia controls part of Syria, not even all of it.

The Soviets had tremendous intelligence achievements during the Cold War. You need only think of its operation to steal the secret of the atomic bomb. Today, the Russians’ stunning achievement is hacking into the Democratic National Committee (DNC) and discovering that the chairman of the committee didn’t want Bernie Sanders to win the nomination and that a donation to the Clinton Foundation got a donor a meeting with Hillary Clinton.

The novelist Arthur Koestler wrote during the Stalin years that the Soviet Union had once made history, and now it makes politics. We could add that the Russian Federation today does neither but simply makes gestures that it inflates or allows others to inflate into significant events. The audience for most of these things is Russia itself. The Russian failures have left its people’s paychecks subject to the price of oil. The pain is mounting and Putin can do nothing about it. But hacking into the DNC allows Putin to say, in transparent code, that he made Russia great and influenced the U.S. election, while also denying that he had anything to do with it (wink, wink).

This is not to say that Russia isn’t dangerous. If its leaders go mad, they have many nuclear missiles they can use. If the leadership takes extreme risks, it can attack the Baltics and thereby do the one thing that would reunite NATO. But instead of taking these measures, Putin is increasingly supporting extreme right-wing groups around the world.

This is not new. The KGB spent substantial resources supporting communists and communist-leaning troops around the world. It also had campaigns designed to influence what Lenin referred to as “useful idiots.” These were academics, journalists and politicians who would believe Soviet myths and repeat them endlessly. During the Korean War, the myth was that the U.S. was engaging in germ warfare. The Soviets had a special program just to collect these people, bring them to the Soviet Union and have them go home and write about these myths breathlessly.

The “useful idiots” this time come from the far right. All intelligence organizations are under the illusion that they can conduct psychological warfare – planting stories, recruiting agitators, underwriting a range of movements from political parties to terrorists – and change the course of history. The Soviets managed to convince generations of leftists to despise the U.S. even if they didn’t love the Soviet Union. But the truth was that they influenced few who wouldn’t have believed it without their effort.

Most importantly, for all its efforts to shape Western opinion, the Soviet Union still collapsed. Operationally, it performed well. Each particular operation had a tendency to work. The problem was that from a strategic point of view it was all a terrible waste. The Soviets were fighting the wrong war, but they fought that war because they didn’t want to fight a real one. They convinced themselves that what they could do would be sufficient. Putin is going down the same road, except I doubt he believes it will change strategic realities. He is playing the game he can, collecting “useful idiots” in the hope that something will turn up. It is a matter of some delicacy.

I am not saying that Russia is not a serious country or that it should be seen as an unimportant threat. I was one of the first to argue – to much derision – that the Russians will re-emerge as a threat to the West. Now, I am arguing that overreaction is as dangerous as complacency. When we look at Russian actions closely, they diminish in significance. It would be foolish not to make the small efforts needed to contain the Russians or keep them off balance. They are far more vulnerable than the U.S., and the U.S. has the advantage that they know it. Most importantly, this new edition of what is a very minor cold war must be kept in context. There is the tragedy of the Soviet Union. And then there is the farce of the current episode.

Barack’s Last Bank Bash

Former villains are now victims in a final round of official larceny.

    Photo: PA Wire/Zuma Press


The Obama Justice Department is pulling up to the ATM for one last withdrawal from banks.

Having blamed U.S. financial firms for the 2008 mortgage crisis and squeezed them for more than $100 billion in settlements, the feds are now gashing foreign banks. Cases against such unsympathetic targets are sure to please progressives, but don’t expect the feds to prove any of these cases in court.

Last week Credit Suisse agreed to fork over more than $5 billion and Deutsche Bank agreed to pay more than $7 billion. Barclays refused to settle and was sued by Justice on Thursday. Good for Barclays.

Here’s hoping the British bank takes its case to trial, because Justice’s complaint is a 198-page flight from logic. The government’s lawsuit accuses Barclays of defrauding investors who bought its mortgage-backed securities in the years leading up to the financial crisis. The allegation is that the bank didn’t disclose how bad the underlying loans were. But the government acknowledges in its complaint that Barclays was also an investor in most of the securities at issue, and that it was often buying some of the riskiest slices of the deal. Was Barclays defrauding itself?
The suit goes downhill from there. The statute of limitations has run out for bringing a typical case under securities law. But the government is still able to sue Barclays under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (Firrea).

Prosecutors like this law because it requires a low burden of proof and can result in huge penalties. The catch, since Firrea was created to punish savings-and-loan executives, is that it can only be used against those who have allegedly harmed a federally insured financial institution. So instead of presenting mom-and-pop investors who lost money, prosecutors have to present other banks as victims and describe how they allegedly suffered at the hands of the defendant.

For the purposes of extracting cash from Barclays, guess who the government is now calling a victim? Yes, Citibank.

For those who don’t appreciate the humor in this Beltway scam, recall that two years ago the feds used Firrea to claim that during the run-up to the same financial crisis the bank’s parent Citigroup was the villain that had misled investors in mortgage-backed securities. Justice extracted a $7 billion settlement from Citi.

In announcing that deal, then Attorney General Eric Holder called Citi’s conduct “egregious.”

Mr. Holder said the bank had “contributed mightily to the financial crisis that devastated our economy” and spoke of shattered lives allegedly caused by the villainous firm. But that was so 2014.

Now we are asked to believe that this mastermind of an international plot to defraud investors was simultaneously taken in by a nearly identical plot cooked up by a rival rogue organization. Amazing. Will Citi now get some of its $7 billion back to reflect its new victim status?

There’s more. The government says Barclays had many other institutional victims, such as Fannie Mae and Freddie Mac. Even the partisan Financial Crisis Inquiry Commission, created by the 2009 Pelosi Congress and chaired by a former state Democratic Party chairman, had to acknowledge the destruction caused by these reckless “kings of leverage.” But lately the government finds them more useful as alleged victims when suing other firms.

Another alleged victim in the civil case against Barclays is IndyMac, the California liar-loan factory that used to brag about all the “nontraditional” mortgages it was originating before failing in 2008.

According to Justice, IndyMac is now a victim not because it bought mortgage-backed securities from Barclays, but because it sold to Barclays lots of risky loans that were bundled into securities.

Justice claims that Barclays harmed IndyMac by “creating demand” for its products. Were IndyMac executives powerless to offer anything but poorly underwritten mortgages?

Justice seems to be saying that shoddy products are the responsibility of the consumers who order them. It might be entertaining to watch government attorneys try to argue this point in court. Carried to its conclusion, this suggests that President Obama’s beloved Consumer Financial Protection Bureau has been protecting the wrong side of a financial transaction.

The worst financial abuses are these bank raids by the Obama Department of Justice. Repairing this agency and its reputation begins with an end to evidence-free money grabs against unpopular defendants.


A Brazilian bribery machine

Record fine for illegal payments by Odebrecht raises hopes of end to the country’s culture of impunity



It revamped the Maracanã stadium, Brazil’s home of football in Rio de Janeiro, for the 2014 World Cup, developed one of the largest hydroelectric dams in Africa and built a $1bn port in Cuba. But now Odebrecht, Latin America’s largest construction group, is in danger of being better known for creating one of the biggest bribery machines in corporate history.

The US Department of Justice last week described the operation, which channelled almost $788m to politicians and officials across a dozencountries, as an “unparalleled bribery and bid rigging scheme” as it together with Brazilian and Swiss authorities slapped a record fine of at least $3.5bn on Odebrecht.

The scandal that has torn through Odebrecht and threatens to unseat senior politicians in Brazil and across the region had discreet beginnings in the company’s mundane sounding “structured operations” división.

It was there — a secret operation in full public view — that Maria Tavares, a secretary at the company, began her work day, she told prosecutors, by “downloading a spreadsheet that contained the [bribery] payments to be made for that week” — essentially a payroll for politicians and public officials stretching from Brasília to Maputo in Mozambique.

So sophisticated was the operation, which ran for at least a decade starting in 2001, that it used its own separate computer and email systems complete with code names for the payees, the payments — known as acarajés after a local fried bean cake — and the bag men who delivered the money. Odebrecht even set up its own, one-stop bribery shop by buying a bank in Antigua where the corrupt could open accounts and receive direct payments.

Marcelo Odebrecht arrives at a federal court in Curitiba in September 2015


The revelations provided by Ms Tavares and others that Odebrecht engaged in “brazen” systematic international bribery were revealed as part of a plea bargain agreed with US, Brazilian and Swiss prosecutors last week. Odebrecht will pay at least $3.5bn for its wrongdoing, including a $957m fine for Braskem, its petrochemical arm.

Beyond the figures, the discovery that one of the most important companies in Latin America’s largest economy conducted such a crime for so long and in so many jurisdictions has shaken Brazil’s business establishment to its foundations.

“Never has the political and economic system been hit so profoundly,” Gilmar Mendes, a Brazilian Supreme Court judge, told the Financial Times.

With many of the payments made through legitimate banking systems, the scandal is also raising questions over global compliance requirements, particularly in the developing world, where Odebrecht paid off scores of senior public officials and was only undone by a determined investigation by Brazilian federal police and prosecutors with the support of crusading judges.



For the government of President Michel Temer and its efforts to revive Brazil’s economy the episode poses a threat. Brought to power in August after his predecessor, the leftist president Dilma Rousseff, was impeached for manipulating the budget, investors are depending on an ambitious reform agenda to rescue what was six years ago one of the world’s fastest growing economies from its worst recession in more than a century.

Aside from the plea bargain announced in the US this month, nearly 80 executives of Odebrecht, including its former chief executive and scion of the founding family, Marcelo Odebrecht, have filed detailed witness testimonies — that are yet to be made public — with Brazil’s Supreme Court.

Leaks to Brazilian media have claimed that Mr Temer and senior figures in his ruling Brazilian Democratic Movement party have been implicated in some of the testimonies of these plea bargains. They deny wrongdoing.

Alongside the wider probe into corruption by construction groups and politicians at state-owned oil company Petrobras, known as lava jato (car wash), the Odebrecht investigation is changing the culture of impunity in Brazil.

“Popular pressure is very strong in Brazil these days and no one can really stand corruption any longer,” says Sérgio Lazzarini, an author of books on crony capitalism in Brazil. “Everyone has the sensation we have been robbed all these years.”

Presiding over expansion

If one man summed up the sense of impunity that used to pervade Brazil, it was Marcelo Odebrecht. Barely into his 40s, he assumed the leadership of the conglomerate founded by his grandfather Norberto Odebrecht, a descendant of German immigrants to Brazil, in 2009. The group employs 128,000 people of 70 nationalities and operates projects ranging from ports, dams, metro networks, highways and a nuclear submarine base in countries such as the US, Angola and Panama. It was one of Brazil’s first multinationals, with 58 per cent of its operating income coming from offshore.



Odebrecht's $1.2bn Orinoquia Bridge over the Orinoco River in Venezuela. The project was criticised for being poorly situated and has been little used since its completion


It prospered under Marcelo’s leadership and under the leftist governments of the Workers’ party, or PT. In the years following the re-election in 2006 of former PT president Luiz Inácio Lula da Silva, himself now a defendant in the Petrobras political funding scandal, Odebrecht’s gross revenue increased nearly sixfold to R$126.6bn ($38.6bn) for the 12 months ending June 2016.

An exercise fanatic who reportedly was such a workaholic he had to make notes in his calendar to remind himself to give his wife Bela and their three children a hug, Marcelo kept a hectic schedule. He would host heads of state from the developing world while plotting with his lieutenants how to influence various political contacts and manipulate bills going through congress to benefit Odebrecht and Braskem, according to court documents. He was particularly close to Mr Lula da Silva. He and his father Emílio Odebrecht regularly travelled with the former president, who has denied accusations of receiving favours from the company, around Africa and Latin America to meet world leaders.

Sense of invulnerability

When the Petrobras scandal first broke in 2014 it exposed the nexus between big business and the illicit funding of political parties and should have sent shivers around Odebrecht. It involved a cartel of construction companies that collaborated with Petrobras executives and politicians to exchange bribes and kickbacks for contracts.

The investigation has led to 82 people — ranging from former PT treasurer João Vaccari Neto to Marcelo Odebrecht himself — being convicted in the lower courts on charges ranging from corruption to money laundering while the Supreme Court, which is responsible for trying serving politicians, is processing a further 74 cases.

And yet such was the sense of power at Odebrecht that Marcelo and his executives did not panic when prosecutors began probing Petrobras.

One associate remembers a meeting early in the investigation to discuss a loan in which the former Odebrecht chief became indignant when asked about the investigations and insisted it was all a plot to get at him and the PT-led government. Marcelo seemed confident until the end in his ability to subvert the probes, discussing strategies for doing so with his senior executives, according to prosecutors. He even paid €3m to a “high official” in Antigua in exchange for the official refusing to provide information on Odebrecht to Brazilian authorities, according to the plea bargain lodged in the US.



Emílio Odebrecht regularly travelled with the former president Luiz Inácio Lula da Silva to meet heads of state


Indeed, for a long time, Marcelo seemed untouchable. But then in February 2015 the Petrobras scandal reached his door when a former executive at the energy company, Paulo Roberto Costa, told prosecutors he had received $31.5m in bribes from Odebrecht paid into a Swiss account. In June that year federal police swooped in an operation they called Erga Omnes — a Latin term signifying that the law applies equally to everyone. They arrested Marcelo and seized 11 mobile phones from his home. As they dug deeper, they discovered the remarkable extent to which the Odebrecht group had gone to run its parallel payments network.

In March this year, Marcelo was sentenced to 19 years in jail for corruption and other charges.

After his arrest Marcelo initially denied any wrongdoing. But the growing weight of the evidence, including Ms Tavares’ revelations about the structured operations unit, coupled with the troubled financial condition of the group, which is struggling to secure loans even as its construction arm suffers a one-third contraction in new business, forced him to negotiate the plea bargain that led to this month’s settlement with the US, Brazilian and Swiss governments.


The Lauca dam in Angola, another Odebrecht project, wil start producing hydroelectric power in 2017


In exchange for providing testimony to the Supreme Court, Marcelo and the nearly 80 executives of his company involved in the plea bargain will be given leniency. While a relief for Odebrecht and its former chief, who could be released early from prison, the plea bargains are causing fresh tremors in a Brazilian political scene battered by the Petrobras scandal.

Newspapers this month detailed leaked testimony from Marcelo and another Odebrecht executive alleging that Mr Temer had sought political donations worth R$10m in May 2014 ahead of presidential elections that year. Mr Temer, who wasMs Rousseff’s vice-president, has denied any wrongdoing.

The leaks have sparked concerns about Mr Temer’s survival as president. The economy is showing few signs of life, shrinking at an annual rate of nearly 3 per cent in the third quarter. A poll by Pulso Brasil last week showed that 15 per cent of those surveyed approved of Mr Temer while 77 per cent disapproved.



But analysts argue that unlike Ms Rousseff, he has the markets and congress on his side. Where she alienated investors by backtracking on promises to rein in budget deficits, Mr Temer has pushed through a constitutional amendment freezing expenses in real terms for up to 20 years and has started difficult pension reforms. Ironically, his lack of popularity is leading him to try reforms few others have had the courage to attempt, say analysts.

“The paradox is that a highly unpopular government that therefore has little to lose has turned out to be a government that acts with conviction and in a pragmatic way,” says Fernando Schüler, a political scientist at Insper university in São Paulo.

‘Inevitable reform’

With the plea bargain payout, Odebrecht, which will struggle to pay the $3.5bn, has promised to turn over a new leaf. The structured operations division has gone. Ms Tavares told prosecutors how one day in August last year, she was suddenly sent to another division of Odebrecht. The structured operations division was “closed, there was not one person left there”, she said, and two of the most senior staff fled to Miami.

The question is whether the Odebrecht plea bargain and the car wash probe will mark an end to the endemic corruption affecting Brazil.

Many analysts argue corruption will not be wiped out until there is sweeping reform to lower the cost of political campaigns and reduce the incentives for graft. Brazil’s system allows an extreme number of parties — currently 35 in all — most of which exist only to extract rent from the system, analysts say. But the Odebrecht scandal and the car wash investigation have at least finally put the need for these reforms at the top of the political agenda, analysts say.

Mr Mendes, the judge, says: “I think [the car wash probe] has had this virtue: it has made reform of the system inevitable.”