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Forum Post: Predator Banks Enter Brave New World of Epic Scams and Public Hasn't Got a Clue

Posted 2 months ago on Feb. 19, 2014, 3:56 p.m. EST by LeoYo (4899)
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Predator Banks Enter Brave New World of Epic Scams and Public Hasn't Got a Clue

Wednesday, 19 February 2014 13:36 By Lynn Parramore, AlterNet | Op-Ed

http://truth-out.org/opinion/item/21969-predator-banks-enter-brave-new-world-of-epic-scams-and-public-hasnt-got-a-clue Wall Street watchers have been concerned for some time about the monopolizing trend among big banks. One of the most alarming developments in recent years is a buying spree in which megabanks have been gobbling up physical assets.

Matt Taibbi of Rolling Stone has delved into this story in his characteristically colorful way, shining a light on how this particular activity took off, namely through an overlooked provision in the Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999. This arcane-sounding piece of Clinton-era legislation ranks high on the list of Very Bad Ideas coming out of Washington since the 1980s. It essentially overturned Depression-era regulations that had kept the banking sector under control and opened the door for commercial banks, investment banks and insurance companies to merge their businesses.

The fine print of the bill also allowed commercial banks to dive into any activity that is "complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally."

So what exactly classifies as “complementary” to financial activity? When the idea came up in Congress in 1999, JPMorgan’s Michael Patterson said it was something like American Express owning a lifestyle magazine that complemented its business. No biggie.

But in reality, it has meant pretty much everything. Like, for example, oil tankers and raw materials. The result is something the public never signed off on — banks getting their mitts on entire supply chains and industrial processes. Taibbi explains how this is going down:

“Today, banks like Morgan Stanley, JPMorgan Chase and Goldman Sachs own oil tankers, run airports and control huge quantities of coal, natural gas, heating oil, electric power and precious metals. They likewise can now be found exerting direct control over the supply of a whole galaxy of raw materials crucial to world industry and to society in general, including everything from food products to metals like zinc, copper, tin, nickel and, most infamously thanks to a recent high-profile scandal, aluminum.”

Recently, something rotten occurred in Denmark, as Goldman Sachs launched its bid to buy a 19 percent stake in the national electricity provider, a deal that would give it control of key management decisions. The streets erupted in protest as Danes (some carrying images of vampire squids) raged at the idea that government ministers could have invited an American investment bank to exert so much control over the state energy grid. The deal actually set off a crisis in the Danish government.

In California, citizens found out recently that big banks have been rigging prices in the physical business interests they own. JPMorgan Chase and Barclays are accused of manipulating the delivery of electricity in California and elsewhere. Last year, JPMorgan paid $410 million to settle allegations of power market manipulation in California to the Federal Energy Regulatory Commission. Goldman Sachs, for its part, has come under scrutiny for allegedly delaying the delivery of metals from warehouses it owned so that it could manipulate prices (it has since offered to speed delivery).

Banks not only own the supply chains, they also place bets on their activity in financial markets, such as buying commodities futures. The whole thing is a recipe for corruption and conflicts of interest. Regulators, who have doing precious little about the money laundering, bribery and other scams we already know about, have been slow to address these new problems, the scope of which may be very frightening indeed.

The financial crisis taught us that big banks have turned into dangerous companies that are not only too big to fail, but, as Attorney General Eric Holder openly admitted, too big to police. Their reach continues to extend into more areas of the economy, with little public debate. President Obama has surrounded himself with economic advisors who are not inclined to rein in the banks; some of the banks even participated in the dismantling of the laws that once protected American citizens from their predation.

A lot will depend on the ability of the regulators to adapt to the changes occurring in the banking industry. Wall Street is under pressure to get rid of some commodities assets amid growing awareness of their ability to muck around with the availability of supplies and prices. The Federal Reserve is moving toward tighter restrictions on bank roles in physical commodity markets, and has issued a request for public input on the matter.

Wall Street’s push into the physical commodities markets is a brave new world of financial risk, which will be assumed, as always, by you and me. Now we can add the fear of a catastrophic pipeline explosion to the list of events that might trigger another meltdown the taxpayers will end up paying for.

Meanwhile, you can bet Wall Street is looking for the next loophole.

This piece was reprinted by Truthout with permission or license.

19 Comments

19 Comments


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[-] 7 points by shadz66 (17954) 2 months ago

''Banks not only own the supply chains, they also place bets on their activity in financial markets, such as buying commodities futures. The whole thing is a recipe for corruption and conflicts of interest. Regulators, who have doing precious little about the money laundering, bribery and other scams we already know about, have been slow to address these new problems, the scope of which may be very frightening indeed.

''The financial crisis taught us that big banks have turned into dangerous companies that are not only too big to fail, but, as Attorney General Eric Holder openly admitted, too big to police. Their reach continues to extend into more areas of the economy, with little public debate. President Obama has surrounded himself with economic advisors who are not inclined to rein in the banks; some of the banks even participated in the dismantling of the laws that once protected American citizens from their predation.'' - From the above.

The Bankster Mthrfkrs are clearly out of control. Moral Hazard ; Perverse Incentives ; Regulatory Capture & Conflicts of Interest rule the day & our so called ''Representative Democracies'' reflect the corrupt, corporate controlled and captured nature of Western demoCRAZY deMOCKERYcy. The Two Party Congress in the US & Parliament in the UK and all other such bodies have been infiltrated and usurped and still we wonder why we're in the shit we're in. If the blood doesn't boil then it is because we're drugged up, fed up & fukt up, too busy consuming, trying to keep our heads up above water whilst being price-gouged or trying to 'entertain ourselves to death' !!! Rant over !! Phew ! Also further consider :

''Ask your average guy-on-the-street ‘what caused the financial crisis’, and you’ll either get a blank stare followed by a shrug of the shoulders or a brusque, three-word answer: “The housing bubble”. Even people who follow the news closely are usually sketchy on the details. They might add something about subprime mortgages or Lehman Brothers, but not much more than that. Very few people seem to know that the crisis began in a shadowy part of the financial system called repo, which is short for repurchase agreement. In 2008, repo was ground zero, the epicenter of the meltdown. That’s where the bank run took place that froze the credit markets and sent the financial system into freefall. Unfortunately, nothing has been done to fix the problems in repo, which means that we’re just as vulnerable today as we were five years ago when Lehman imploded and all hell broke loose.

''Repo is a critical part of today’s financial architecture. It allows the banks to fund their long-term securities cheaply while giving lenders, like money markets, a place where they can park their money overnight and get a small return. The entire repo market is roughly $4.5 trillion, although the more volatile tri-party repo market is around $1.6 trillion. (Note: That’s $1.6 trillion that’s rolled over every day.)

''Repo works a lot like a pawn shop. You bring your rusty bike and your imitation Van Gogh “Starry Night” to Rosie’s E-Z-Pawn, and the guy with the gold earring behind the counter gives you 15 bucks in return. That’s how repo works too, the only difference is that repo is a loan. The banks post collateral –mostly pools of mortgages (MBS) or US Treasuries– and get overnight loans from a cash-heavy lenders, like money markets, insurance companies or pension funds. Borrowers repay the loan with interest added to the original sum.'' Also fyi :

radix omnium malorum est cupiditas ...

[-] 2 points by MattLHolck (16833) from San Diego, CA 1 month ago

yep loan money gain property

[-] 2 points by shadz66 (17954) 1 month ago

''What The Hell Is Barack Obama's Presidency For ?'' by Gary Younge :

Also while we're asking questions, what's the deal with your 'karma points' Matt & the auto-zero btw ?!!

consilio et animis ...

[-] 2 points by MattLHolck (16833) from San Diego, CA 1 month ago

Obama's got two years left

I suggest he take a hard line o ending personal debt and military intervention

EVITA-"She Is A Diamond"-Jeff Austin

[-] 3 points by shadz66 (17954) 1 month ago

Evita she ain't & Hitlary's no ''diamond'' ! Obomber has closer to 3 than 2 years left btw !! Misanthropic Replicant Psychopaths or Neocon Dem Maniacs = a faux choice in a demoCRAZY deMOCKERYcy !

verum ex absurdo ...

[-] 4 points by LeoYo (4899) 1 month ago

Inside the Secret Wall Street Society of the 1%

Monday, 03 March 2014 12:34 By Jaisal Noor, The Real News Network | Video Interview

http://truth-out.org/news/item/22218-inside-the-secret-wall-street-society-of-the-1

More at The Real News

http://www.youtube.com/watch?feature=player_embedded&v=jbHsvRjvxIQ

TRANSCRIPT:

JAISAL NOOR, TRNN PRODUCER: Welcome to The Real News Network. I'm Jaisal Noor in Baltimore.

By now many of you've heard the story of the journalist and writer Kevin Roose. He crashed an exclusive Wall Street fraternity initiation night. We're showing some of the photos of the party atmosphere--we'll show them in a second--inductees in drag and performing skits. Some of those attending were the CEO of AIG, founder of Home Depot, and former mayor of New York and billionaire Michael Bloomberg.

We're now joined by Kevin Roose. He's a writer for New York magazine. His most recent book is titled Young Money.

Thank you so much for joining us.

KEVIN ROOSE, AUTHOR, YOUNG MONEY: Thanks for having me.

NOOR: So, Kevin, we wanted you to have a chance to kind of tell some of these stories of what you saw and what transpired in this party, this Wall Street party you snuck into. And we're going to show some of the names of the people who attended this party and are part of this Wall Street fraternity, Kappa Beta Phi, and specifically the chair, billionaire Wilbur Ross. Go ahead and get right into it.

ROOSE: So this was a secret society of Wall Street executives that was 80 years old. It was founded in 1929. And it's a society that consists of many of the people who run the global economy, who manage billions of dollars in money at hedge funds, private equity firms, and big banks.

So I heard about this, and I decided I had to at least try to go. Each year they gather for one dinner where they induct new members. Those members are required to dress up in drag, put on skits and musical acts, and basically humiliate themselves in front of the veteran members.

So I rented a tuxedo, and I went over to the hotel where it was being held, and I walked right in. It was amazing.

NOOR: And who is Wilbur Ross? And talk about your interactions with him, 'cause he basically offered to, in a way, bribe you with inside information, with being a source, if you didn't write about this.

ROOSE: Well, Wilbur Ross is a billionaire investor. He's been around Wall Street for a long time. He's very well known. And he was that year's leader of the dinner. And so I witnessed this whole thing--off-color jokes, sexist humor, jokes about the Occupy movement, and things like that. And afterwards I got outed. People found out that I was a reporter.

And Wilbur Ross sort of snuck me off into the hallway and said, look, you know, if you don't write about this or if you take it easy on us, you know, the people in this room could be very good sources for you, and I'll pick up the phone any time you need. So he was basically, you're right, saying, you know, I will bribe you in order to get a better treatment out of this.

NOOR: And there's another main character in your piece, Michael Novogratz. Who is he? And what was your interaction with him?

ROOSE: Well, he was the one who outed me. So he's a billionaire hedge fund manager with Fortress Investment Group, and he was seated at my table at this dinner. And after, you know, most of the skits and things had played out, I was taking a picture with my phone. And he sort of stopped me and said, well, who are you? So I identified myself. I said, I'm a reporter with The New York Times. And he proceeded to sort of stand me up and say, you're not allowed to be here, and give me your phone--he wanted to destroy the evidence. So I said, no, you know, you can't have my phone. And he sort of got belligerent, and he was, you know, grabbing my lapels and it seemed like about to be physically violent with me. And that was when Wilbur Ross pulled me away and started offering to give me things in exchange for treating them fairly.

NOOR: And so we looked into a little bit of Novogratz's background. He's given thousands of dollars both to Democrats and Republicans, $2,400 in 2010 to Senate majority leader Harry Reid, $2,000 in 2012 to Senate minority leader Mitch McConnell. He's given several thousand dollars to Democrats for Education Reform, which promotes the privatization of public education, charter schools. So a lot of these figures are giving money to both the Democrats and Republicans. And so what's your response to that?

ROOSE: Well, this is not a political organization, Kappa Beta Phi. It's a professional one. And everyone who works there, you know, works [inaud.] and they span the range from Democrats to Republicans, and probably, you know, everything in between. So I don't think, you know, it's fair to draw conclusions about the [inaud.] as a whole.

I will say that I think that there's sort of a political class in New York made up of these wealthy Wall Street donors who tend to support both parties. They're sort of hedging their bets. You know, whoever tends to win they want to be in league with. And so they, you know, sometimes will donate to both sides of the aisle.

NOOR: Right. And critics would say that both political parties are really protecting this group's interests because of the vast donations they're giving to both.

ROOSE: You could say that. I think there's certainly evidence that Wall Street has undue influence in Washington.

But what I thought was interesting--and so this is the thesis of my book--and for my book I followed eight young bankers around for three years--was that this is actually sort of a generation gap on Wall Street, that not everyone thinks like this. This is sort of an old, obsolete generation of Wall Street executives. The new people coming up through the ranks are much more conscientious, and I think they tend to be a little bit more progressive in their politics.

NOOR: And so talk more about what you took away from this experience and more about this young generation and perhaps their interactions at events like this.

ROOSE: Well, the young people weren't invited to events like this. This is purely for the CEO class.

But what was sort of interesting to me and one of the things that I think is very telling is that when I explained what had happened at this dinner to some of my eight young sources, you know, I expected them to be jealous or to say, you know, how do I get into this thing, but they were sort of--they were just as offended as I was. They said that's ridiculous that something like this would go on, and they thought it sounded like sort of Occupy Wall Street, like, what the Occupy movement would have invented if they had wanted people to hate bankers even more. So they were just as embarrassed on the behalf of the members of this thing as I was.

NOOR: And so, Kevin Roose, you said, you know, there's a new generation of these bankers coming up. And, you know, you also mention that events like this kind of give bankers a bad name. But do you think this younger generation will kind of change--will really change some of the structural problems? And you said they're maybe perhaps more progressive. But, you know, at a time of unprecedented inequality, of social services being slashed across the country, do you think these young progressive bankers will have even the power to change the structural problems that are prevalent in our society today, the inequality?

ROOSE: No. I think that's a much bigger issue than they're able to deal with. That's way above their pay grade. And I think that when it comes to reforming Wall Street, change has to come from the outside. And Wall Street's culture is very strong, very self-protective, and I don't think the bankers are ever willingly going to change their practices unless they're forced to.

NOOR: Okay. Kevin Roose, thank you so much for joining us.

ROOSE: Thanks for having me.

NOOR: You can follow us @therealnews on Twitter. Tweet me questions and comments @jaisalnoor.

Thank you so much for joining us.

This piece was reprinted by Truthout with permission or license.

[-] 5 points by Ache4Change (3025) 1 month ago

'A sales tax on speculators can deliver tangibles that people need but Wall Street says we can't afford — infrastructure, Social Security, education, good jobs, etc. Just as important, it can deliver intangibles that our nation needs but Wall Street tries to ignore — fairness, social cohesion, equal opportunity, etc.' from - http://www.nationofchange.org/financial-transaction-tax-high-frequency-traders-1394023208 Never Give Up Exposing Banker Avarice! Occupy 'The Real News'! Solidarity.

[-] 3 points by gsw (2727) 2 months ago

So our society trusts these banksters to get even bigger?

Wall Street recovered, how about the rest of us. Jobs haven't come back. Wages seem to have constricted.

We should have a massive green energy jobs initiative, have some of these bank profits go to good uses, partner with local groups, put people to work in green energy for every home and factory.

Also, let's demand more jobs be inshored.

Let's rethink capitalism, how can it be improved?

"The banksters caused the catastrophic financial crisis of 2008 with their wild gambling with untold billions of dollars--betting literally on people losing their houses and livelihoods. That's money that could have been used to end hunger around the world or rebuild every crumbling school or provide full-time jobs at a living wage or create a sustainable society that doesn't wreck the environment.

Instead, the money and the resources were wasted on a financial system that exists to make the rich ever more obscenely rich.

Five years after Wall Street's meltdown, we should remember an old lesson we were taught anew--that capitalism is a system controlled by and run in the interests of a tiny minority. The needs of the vast majority of people in that society come second, if at all, behind the drive for greater power and wealth, no matter what the cost. That system must be changed."

http://socialistworker.org/2013/09/16/still-paying-for-the-meltdown

[-] 5 points by gsw (2727) 2 months ago

I'll reply to self, avoid flame throwers

Hey bank interest should be capped at 2 percent, which would include repayment insurance

Why keep paying 13 percent to the bankster?

[-] 2 points by ZenDog (20550) from South Burlington, VT 2 months ago

you have thrust your pen at the very heart of capitalist theory - that of supply and demand.

The fluctuation of interest rates is, I believe, meant to reflect two things - one the availability of cash for loans within the overall banking system, and the other the degree of risk that each loan may entail.

The second represents a form of Institutionalized discrimination within the industry of finance. And I do wish I could find that quote I heard attributed to a bankster that clearly illustrates the depth of this financial principle regarding risk is held, as a matter of basic classism.

[-] 4 points by gsw (2727) 2 months ago

Well the banks have the money, but won't lend to credit worthy people, because they are greedy. As I see in below link

http://blogs.reuters.com/felix-salmon/2014/01/15/why-banks-arent-lending-to-homebuyers/

Why not take some greed out of economy, so it can get going again. Say, 15 year housing loan backed by us government, at 2 percent rate. 20 year at 2.5 percent

If someone defaults, a new homeowner could reassume the loan for additional .5 percent interest.

[-] 1 points by ZenDog (20550) from South Burlington, VT 2 months ago

apparently you have not been paying attention. repelicans have very effectively insisted that the defaults were the result of loans made to people who should not have them.

Bankers and repelicans did not like the regulations that incentivized making loans to under served communities; banks are graded on a point system, providing loans to low income individuals and to individuals within a low income demographic area gets them points.

Repelicans have insisted that the loan defaults were the fault of the borrower, which is not true. The initial rate made the loan affordable - but because of the risk associated with loans to low income individuals they justified a kind of variable rate loan - one that remained stable for up to five years before the interest payment balloons.

Any bailout of these individuals was nixed on the basis of a very simple process - it pitted homeowners with previous or current loans who have not defaulted against those who had. The basic principle was very simple - it is called Envy.

They used this same principle via slightly different messaging to instill the same kind of envy against Fanny and Freddy - whose problems it turns out were at least in part brought about by CountryWid

And of course, repelicans were receiving preferential treatment from this same lender at the time.

I'm not saying your proposal is a bad idea.

What I am saying is that to get such a process underway - or even anything like it - you will have to overcome the various repelican messaging efforts which I am sure will remain among the envious, as well as the greedy -

IE - grassroots libertarian ayn.randians and their bailed out bankers.

[-] 6 points by gsw (2727) 1 month ago

Replicants have low credibility. They wrap selves with the flag and god and family, that's their apple pie brand.

We need to just start, incorporate a city, and a public bank, give 2 percent loans, build affordable housing with our own labor, found new cities, develop some model affordable developments. Incorporate new cities, produce all the materials locally, just start doing it, bypas the one percent. Make the homes affordable, adobe and straw. Maybe a 40,000 per household buy in for the land. Get enough houses to buy a farm, and incorporate a city. Each little city ought to have a specialty products they manufacture, not for big corporation, maybe boats, electric cars or scooters, I had seen some generic open source basic machinery, tractors, etc.

[-] 1 points by ZenDog (20550) from South Burlington, VT 1 month ago

Most of the decent land, land with top soil and water, in the lower 48 has already been taken. An island in the Pacific is out of the question. Canada is a distinct possibility, but until Global Warming kicks in we could expect some long harsh winters, and no one really knows what to expect after.

The easiest method I think is to simply take over an existing community. But to do that right, without creating a whole lot of friction and resulting bad press, is to be surreptitious about it. That requires a slow and steady approach carried out over the long term, and long term plans like that are best kept very quiet - not a likely outcome when more people are involved.

[-] 1 points by MattLHolck (16833) from San Diego, CA 2 months ago

these high percentages have destroyed bank credibility

[-] 2 points by LeoYo (4899) 2 months ago

"Frackgate": Ohio Regulators Planned to Subvert Eco-Groups, Promote Fracking in State Parks

Wednesday, 19 February 2014 09:09 By Mike Ludwig, Truthout | Report

http://truth-out.org/news/item/21957-frackgate-ohio-regulators-planned-to-subvert-eco-groups-promote-fracking-in-state-parks

This story was updated at 1:00 PM EST on Wednesday, February 19.

A fracking scandal is unfolding in Ohio. Environmental groups and state lawmakers slammed Republican Gov. John Kasich and state regulators this week over internal documents that they say show the Kasich administration planned to collude with the oil and gas industry to publicly promote fracking in state parks while fending off criticism from a "Nixon-style enemies list" of state lawmakers and environmental groups.

In 2012, the Ohio Department of Natural Resources (ODNR) outlined a broad public relations campaign for selling Ohioans on the benefits of hydraulic fracturing, or fracking, in two state parks. The 13-page "communication plan," which was uncovered by the Ohio Sierra Club, proposes that the ODNR enlist support from "allies" in the Kasich administration and the oil and gas industry and "marginalize the effectiveness of communications" of fracking opponents. The plan was never implemented.

The plan admits that the fracking initiative would "blur public perception of ODNR's regulatory role in oil and gas," which would "require precise messaging and coordination by ODNR."

Industry Friends and Environmental Foes

A list of "current and potential" non-governmental allies in the plan includes Halliburton, the Ohio Oil and Gas Association, the US Chamber of Commerce and America's Natural Gas Alliance.

A list of targeted "opposition groups" includes the Ohio Sierra Club, the Natural Resources Defense Council, EcoWatch, Waterkeeper Alliance, Ohio FrackAction and two Democratic state lawmakers.

The ODNR communication plan warns that fracking in state parks would be met by "zealous resistance" from anti-fracking activists who are "skilled propagandists." The public, the plan states, would be vulnerable to messages from fracking opponents who would paint the initiative as "a dangerous and radical state policy by Gov. Kasich." Anti-fracking activists also may stage confrontational protests and try to physically or legally stop fracking operations on public lands, the plan states.

"This is an unprecedented collusion between oil and gas companies and the agencies that regulate them," said Brian Kunkemoeller, a program coordinator with the Ohio Sierra Club who stumbled on the plan last week while reviewing files from a public information request. "This isn't just bad news for our parks and forests, it's bad news for our democracy."

Allies within the Kasich administration listed in the document include the Ohio EPA, Kasich's office and the state health department. The plan also calls on JobsOhio, Kasich's controversial economic development nonprofit, to promote fracking in state parks as an opportunity for creating jobs.

The ODNR did not respond to Truthout's request for a statement on the PR strategy document. A spokesman for Kasich also did not respond to a request for comment.

"FrackGate" Fallout in Ohio

On Tuesday, Rep. Nickie Antonio and Rep. Robert Hagan, the two state lawmakers listed as opponents among the environmental watchdogs and activist groups, sent a letter to the speaker of the Ohio House demanding legislative hearings to determine whether Kasich and the ODNR improperly promoted the interests of the oil and gas industry instead of protecting the public.

“The governor is quick to jump in bed with Halliburton and the oil and gas companies, with no apparent regard for the legitimate concerns of Ohio citizens,” Hagan said. “This document raises a lot of questions regarding taxpayer resources being used to play politics, and taxpayers deserve answers.”

Rob Nichols, a spokesman for Kasich, initially told the Columbus Dispatch on Friday that the governor's office had never seen the communication plan. Internal emails released this week by the Ohio Sierra Club and ProgressOhio, however, show that Kasich's senior staffers were invited to a meet with top ODNR officials to discuss a "strategy and communications" for leasing state lands for oil and gas development. The meeting was called for August 20, 2012, the same day the communication plan strategy is dated.

“John Kasich is a bully. He’s looking more like Ohio’s answer to Chris Christie,” said Brian Rothenberg, director of the progressive group ProgressOhio. “First came the plans to make life tough for those that disagree with him and now the endless staff cover-ups."

Nichols did not respond to two requests for comment from Truthout, but he did release a statement to reporters in Ohio after ProgressOhio accused the governor's office of a cover-up.

"I don’t know what specific pieces of paper different people saw a year and a half ago, but of course the administration is going to coordinate and plan ahead on an important issue like gas production on state land," Nichols reportedly said. "If we didn’t, these same extremist groups would be attacking us for not planning ahead."

In 2011, Ohio lawmakers approved fracking and drilling in state parks. Kasich signed the legislation but has not filled seats on a committee that would oversee oil and gas extraction on public lands, so fracking has not occurred in the state's parks. After Hagan and Antonio demanded an investigation, Nichols told the Dispatch that Kasich does not support fracking in state parks and has not for the past year and a half, although his office reserves the right to revisit the issue.

Copyright, Truthout.

[-] 1 points by LeoYo (4899) 1 month ago

Powerful Private Equity Kingpins Are Moving Into Unregulated Parts of Banking

Tuesday, 04 March 2014 10:49 By Yves Smith, Naked Capitalism | News Analysis

http://truth-out.org/news/item/22239-focus-on-tbtf-banks-misses-how-even-more-powerful-private-equity-kingpins-are-moving-more-into-unregulated-parts-of-banking

The fact that the world's biggest banks drove themselves off a cliff yet managed to save their hides and even profit from the exercise while leaving ordinary citizens to pick up the tab is ample reason for citizens and the small cohort of non-captured regulators and politicians focused on their continuing misdeeds.

But as a result, an even more powerful set of financial players, namely, private equity firms, is continuing to expand the scope of their activities with little scrutiny and pushback by the press and public interest groups. For instance, when it was much smaller that it was today, and branded first as "raiders" and then "leveraged buyout firms" in the 1980s, the industry was the driver of the now-well established trend towards rewarding CEOs lavishly for cutting headcount and other expenses, relying on financial engineering rather than investing in the business of the business, and fixating on short-term results rather than long-term indicators of corporate health. The raiders initially focused on too-fat-and-happy companies, stripping out bloat and breaking them up to sell the constituent pieces for more than the former whole.

But as more and more capital was deployed into this strategy, stock prices rose to reflect the possibility of a takeover, forcing the takeover artists to engage in more radical makeover when they succeeded in closing a deal. And big companies mimicked these strategies defensively, to make themselves less attractive to these marauders.

By the 1990s, the executive class realized the raiders had done them a huge favor as the LBO artists had legitimated ideas like paying CEOs like entrepreneurs, heavily in stock (which as we've since learned has simply bloated compensation levels and produced an unhealthy fixation on managing investor perceptions and reported results over investing in performing operations and developing new products. As we've also chronicled, the "companies exist to maximize shareholder value" is an idea promoted by economists, and not a theory grounded in the legal obligations of management and boards, that became popular around this time and provided intellectual cover from this shift. Thus private equity firms have been the drivers of the continuing trend of "sweating the asset," which is finance-speak for squeezing workers and suppliers for the benefit of investors and top managers. And that, as Huffington Post points out today, has been a major driver of income inequality.

In other words, to ignore private equity is to ignore the moving forces behind the restructuring of the relationship between capital and labor over the last 35 years. Yes, Reagan breaking the air-traffic controllers' union and the right wing's persistent and effective attacks on labor were another critical part of this trend. But LBOs reshaped values and priorities in Corporate America in less than a decade, an astonishingly short period of time.

And the industry only grows in power. As of mid 2012, it had over $3 trillion globally in assets under management. With leverage, this translates into over $6 trillion of buying power. By way of comparison, the total capitalization of the US stock market at that time was roughly $21 trillion.

And the cincher? Private equity kahunas are the top targets for political fundraising. While they do have top hedgies as competition in terms of the size of their personal balance sheets, PE firms are constantly doing deals, and thus provide a huge fee stream to investment banks and top law firms. Thus politically-oriented private equity players can pull on a large network of well-heeled professionals who would be foolish to turn down their requests for political contributions. The proof? Look at the first members of the board of Obama's library. Two of the three are in or have strong ties to the private equity industry.

Gillian Tett in the Financial Times gives us an update on how these firms are extending their reach yet have managed to remain almost entirely unsupervised by regulators. US readers are no doubt aware, for instance, of their massive move into the rental of single-family homes and how many reports of abusive practices have surfaced in their short tenure as landlords. Tett writes:

What is really striking is the volume of non-bank financing that is quietly being supplied to western economies with minimal regulatory scrutiny – a trend on which my colleague Henny Sender has reported extensively. The "non-bankers" who provide it now matter as much as the bankers, and they appear to be having more fun. Results released in the past two weeks by asset management groups illustrate the point. Last decade, Goldman Sachs' return on equity peaked at 40 per cent. Last year it was just 11 per cent. Meanwhile, KKR's return on equity was 27.4 per cent in 2013 – a margin that the banks can only dream of.

These groups' recent profits were boosted by sales of companies they acquired several years ago. But today they are branching out beyond turnround activity, partly because there are fewer new deals around, and jumping into areas that were the terrain of banks: credit and property.

The only reason non-banks can turn a profit by extending credit is that banks are no longer supplying credit to risky endeavours, such as small companies

Only a quarter of Apollo's $160bn-odd business is now focused on private equity. It has recently gobbled up so many corporate loans and bonds that its credit portfolio has exploded to more than $100bn, compared to just $4bn seven years ago. At Blackstone and KKR the switch is less dramatic: according to Bloomberg's calculations, credit is just a quarter of their portfolios. But they are shifting focus too. Just last week, Blackstone announced plans to start extending mortgage credit as part of its property business.

Now admittedly Apollo has a different profile than other so-called private equity firms. Its founder Leon Black came out of Drexel. The firm has long been a big player in real estate and distressed investing, both of which involve higher levels of leverage than more conventional PE strategies, so it isn't fully representative of the industry as a whole. KKR and Blackstone are better indicators of where the industry is headed, and even a 25% credit product level is impressive (and not in a good way).

Tett continues:

Of course, a $100bn credit book is still smaller than that of JPMorgan. It is bigger than many midsized American banks, however. And the asset managers' economic footprint is expanding in other ways too. Blackstone's portfolio companies, for example, now have 600,000 employees and $79bn of revenue...

This may not be entirely desirable. Non-banks are swelling in size because they do not face the same regulatory burdens as banks, allowing them to turn a profit on business that banks now find uneconomic. This worries regulators. The US Office of the Comptroller of the Currency recently warned that the activities of non-banks has fuelled a boom in risky corporate loans – and warned banks not to "skirt rules" by teaming up with non-banks to create more credit.

Tett ends on a cheery note, arguing that the PE firms don't have the maturity mismatches that banks do by relying on short-term funding like deposits and the interbank market. But the investors in PE funds are overwhelmingly retirement funds, particularly government funds (as in those of public employees). Should we really take cheer that PE funds can dump any mistakes on hapless and locked-in pension funds and walk away scot free? Illiquidity and a lack of aligned incentives are not sound principles (PE firms make money even when their deals crater, as Josh Kosman demonstrates in his book The Buyout of America). And we've already seen the the PE model is based on transferring value from ordinary people rather than creating it. It's hard to see why we should sit by and allow them to expand that model into new markets.

This piece was reprinted by Truthout with permission or license.

[-] 1 points by ZenDog (20550) from South Burlington, VT 2 months ago

there really is only one solution to a situation of this magnitude at a point in time such as this.

we must have heads.

We must make it clear, either the establishment will give those heads to us, or we will take those heads, along with the heads of everyone who stands in the way.

The whole reason they are apparently engaged in and getting away with all of this activity is because they think the public will not react.

If we prove them correct in that assumption, then we have only ourselves to blame.