Money or Service? Goldman Sachs Exposed

After almost twelve years at the Wall Street firm Goldman Sachs, Greg Smith resigned yesterday.

People quit jobs every day, but this executive director at one of the biggest global financing firms published his complaints against his former employer on today's op-ed page of the New York Times. Needless to say, he's making a splash in the world of high finance.

One way to interpret what he's saying is that the film "Margin Call" could have been a documentary. In that minor Hollywood release, Jeremy Irons' character (John Tuld) utters a memorable line (a far more subtle one than Gordon Gekko's famous "greed is good" from Oliver Stone's Wall Street):

"There are three ways to make a living in this business: be first, be smarter, or cheat."

According to Smith, this ruthless logic has taken hold at Goldman Sachs.

Consider this exchange from Margin Call:

Sam Rogers [Spacey]: And you're selling something that you know has no value?

John Tuld [Irons]: We are selling to willing buyers at the current, fair market price.

This kind of mindset, according to Greg Smith, has taken hold at Goldman Sachs, which was once the envy of the financial world for its customer care, humility, and integrity.

According to Smith, Goldman is now morally bankrupt.  As he puts it in today's Times (underlining is mine),

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. . . .

It makes me ill how callously people talk about ripping their clients off.

. . .

These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave.  

. . .

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer. 

This is exactly the heart of the problem (as I've put it before): the pursuit of money, a good external to the actual welfare of one's customers, is trumping the goods intrinsic to the pursuit of one's business, which would be devoted to providing the best service to one's customers.

Smith is right--and we should all applaud him. He didn't just tell the boss to "take this job and shove it." He blew the whistle on corruption at the heart of Wall Street, while pointing to a better way.

An Exemplary Failure?

Today's New York Times web opinion page ran an interesting piece by D. Michael Lindsay, the current president of Gordon College who was an academic sociologist at Rice University until this year. Lindsay also wrote Faith in the Halls of Power: How Evangelicals Joined the American Elite, a book based on several hundred interviews with evangelical Christians who have "made it" by getting into top positions at mainstream institutions in American society.

But there is another side to the story of "making it." And it's one that I've been thinking about for several years. When Christians enter the Big Time of corporate leadership, will they be corrupted by power? If necessary, will they be willing to sacrifice their positions in order to stay true to their faith?

Lindsay tells us that Gerard Arpey, the CEO of American Airlines, did the latter. As Lindsay puts it, Arpey

resigned and stepped away with no severance package and nearly worthless stock holdings. He split with his employer of 30 years out of a belief that bankruptcy was morally wrong, and that he could not, in good conscience, lead an organization that followed this familiar path.

I'm grateful to hear about this. If Lindsay's account is accurate (and I have no reason to doubt it, since he's interviewed Arpey), then this is a great example of the kind of leadership that Christians could exert in corporate America: real leadership that embraces noble failure rather than compromised success.

Or to be more accurate, the kind of leadership that takes seriously the call and example of Jesus to be a sacrificial servant of others rather than exalt oneself. As Jesus said, "If anyone wants to be first, he must be the very last, and the servant of all" (Mark 9:35). In case the readers of Mark missed the point, this is repeated:

whoever wants to become great among you must be your servant, and whoever wants to be first must be slave of all. For even the Son of Man did not come to be served, but to serve, and to give his life as a ransom for many. (Mark 10:43-45)

A little context helps appreciate how radical Arpey's move is. First, as I've blogged about before, executive pay has gone crazy in this country, and Arpey is bucking a major trend. Second, all airlines have struggled to be profitable and contemplated bankruptcy in order to shed union contracts with pilots, flight attendants, and maintenance workers. And some of their CEOs had no such scruples. By leading their companies through bankruptcy, they slashed their workers' pay and trimmed their retirement pensions, taking money away from ordinary workers. But Northwest Airlines' CEO came out of bankruptcy in 2007 with a compensation package worth $26.6 million. After United Airlines CEO Glenn Tilton put his company and his workers through bankruptcy, he walked away with a cool $39.7 million.

So Gerard Arpey does deserve our praise! Well-done, good and faithful servant.

Epilogue to this story
Of course, the day that Arpey resigned, American Airlines declared bankruptcy, which means that the end of the American Airlines story isn't good news. But the good news of the Christian story is that those servants who sacrifice and end up last will someday, in the Kingdom's economy, be first.

If we were in Arpey's shoes, I hope we'd choose the right thing--to be more motivated by truly loving God and our neighbor in the long run (and in the long run, as Keynes said, we are all dead, so we'll have to face our Maker) than by enriching ourselves. I hope we'd decide to work toward that day when we might hear those words: "Well-done, good and faithful servant! You were faithful with a few things; I will put you in charge of many things. Come and share your Master's happiness" (Matt 25:23).

Alone in a Dark Room With a Pile of Money: What Would You Do?

Review of Michael Lewis, Boomerang: Travels in the New Third World (New York: W.W. Norton, 2011)

Michael Lewis, author of Moneyball and The Blind Side, first came to prominence with Liar's Poker, his memoir of going to work for the Wall Street bond trading firm Salomon Brothers in the mid-1980s (a book I finally read this summer). Liar's Poker is a hillarious send-up of the big shots who ran Salomon by someone who saw their greed and recklessness firsthand. Lewis was close enough to be on the inside, but critical enough to keep his distance; his account turns out to be readable introduction to Wall Street, specifically the bond market, in the 1980s.

An art history major at Princeton who ended up making a tremendous amount of money shortly after graduation, thanks to Salomon Brothers, Lewis maintains a bemused and detached tone throughout Liar's Poker. It's as if he never believed that he was smart enough to work there. His detachment was evident when he quit while he was still young. (Of course, it didn't hurt that he had a nice financial cushion.)

Twenty years later, his knowledge of the global bond market--including the introduction of mortgage-backed bonds--would help him later unravel parts of the global financial crisis of 2007-2009. His first book on the crisis, The Big Short (reviewed last year in this blog), explained how several smart investors predicted the crisis and were able to "short" collateralized mortgage bonds when their value crashed. ("Shorting" is basically betting that the value of an asset will fall in the future, by borrowing it and selling it in the present. If indeed the investor is correct, then they benefit by buying the same asset at a lower price in the future.)  Hedge fund investors like John Paulson and Kyle Bass made out like bandits when the mortgage-backed bond market collapsed, because they had essentially shorted these bonds by investing in credit-default swaps.

Lewis starts Boomerang by confessing that he ignored some of what Kyle Bass, a Texas-based investor, had told him back while he was researching The Big Short. Bass had told Lewis that the next big crisis was going to be in the market for government bonds (sovereign debt). At the end of 2008, Bass was predicting that Greece would probably default within two years and possibly cause the Euro currency to collapse. "He was totally persuasive. He was also totally incredible" (xv). How could some guy in Dallas figure this out when almost no one else could? The guy seemed a little crazy. So, as Lewis puts it, "I made my excuses . . . and more or less dismissed him. When I wrote the book, I left Kyle Bass on the cutting room floor." (xvi).

But Bass was right. It turned out that private bank debts were becoming public debts in both the US and Europe, as the Fed and the European Central Bank bailed out private banks. Iceland and Ireland had already crashed. And Greece was the tipping point.

What happened? Lewis travels to Iceland, Greece, Ireland, Germany, and California to tell their stories before and after the collapse of the global bubble. In each place, he singles out cultural factors that make each place unique. This cultural approach is quite simplistic, but it does help explain how different countries react when they are "left alone in a dark room with a pile of money" (the pile of money being a huge expansion of bank lending). It also roots the financial problems in a larger context than mere government regulation. It turns out that we all have a cultural and moral problem.

Greece, on Lewis' view, simply lacks any public spiritedness and is so corrupt that even a group of Greek monks participated in the corruption. No one pays taxes and everyone is looking to bilk the government.

In Iceland, he contends, a male-dominated fishing culture led to excessive risk-taking. Once the fisherman of Iceland got rich, they needed to find something else to do. International banking and speculation was it.

"But while the Icelandic male used foreign money to conquer foreign places--trophy companies in Britain, chunks of Scandinavia--the Irish male used foreign money to conquer Ireland. Left alone in a dark room with a pile of money, the Irish decided what they really wanted to do with it was buy Ireland. From each other" (84, emphasis in original). In other words, Ireland had a massive real estate bubble that has now popped. According to one estimate, "Irish bank losses alone would absorb every penny of Irish taxes for the next four years" (85). Ouch! But the Irish are buckling down and embracing austerity to pay down the debt (quite in contrast to Greece).

The Germans, being so-rule oriented (or so Lewis argues), trusted the bond credit ratings agencies that said that mortgage-backed bonds and collateralized debt obligations were AAA (the safest of any bonds), so they ended up getting stuck buying lots of these. Too bad for them.

Finally, there are the Americans. California's dire public finances (especially at the local level) are a microcosm of the national struggle to balance budgets. But it's not just the mortgage bankers or governments who are to blame. Public-sector unions also took advantage of the financial boom to wrest huge pension guarantees from governments. And private citizens borrowed to the hilt. The problem, writes Lewis, is "with the entire society."

It's what happened on Wall Street in the run-up to the subprime crisis. It's a problem of people taking what they can, just because they can, without regard to the larger social consequences. It's not just a coincidence that the debts of cities and states spun out of control at the same time as the debts of individual Americans. Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom. They'd been conditioned to grab as much as they could, without thinking about the long-term consequences. Afterward, the people on Wall Street would privately bemoan the low morals of the American people who walked away from their subprime loans, and the American people would express outrage at the Wall Street people who paid themselves a fortune to design the bad loans (202).

Lewis, usually a hillarious and light-hearted story-teller, ends up in prophetic mode, issuing a jeremiad: "Everywhere you turn," he writes, "you see Americans sacrifice their long-term interests for a short-term reward. What happens when a society loses its ability to self-regulate, and insists on sacrificing its long-term self-interest for short-term rewards? How does the story end?" (205)

In the end, Lewis' book offers a sober diagnosis of the American character, covering Wall Street bankers, politicians, unions, and households. We're all in this together, but how in the world do we get ourselves back on track in living for the long-term?

Let us know if you figure that out.

"Margin Call" Challenges Wall Street Ethics

I woke up this morning to Kenneth Turan's positive review on NPR of the just-released Hollywood drama, Margin Call, which is based on the collapse of the Wall Street firm Lehman Brothers in 2008. (Also see Turan's review for the LA Times and the HBO film Too Big to Fail.)

That radio story was quickly followed by my reading of A.O. Scott's glowing review in the New York Times. In light of both reviews, I was hoping to see this movie tonight (in violation of my usual policy of waiting until movies make it to the dollar theater or DVD). It's not often that I would willingly part with $9.00 for a movie; I have to be persuaded by multiple sources. Sadly, though, Margin Call isn't playing in our area yet.

That's a bit surprising, because you would think that the continuing Occupy Wall Street protests and the Academy Award winning documentary Inside Job would warrant a nationwide release. While Inside Job marshals enough evidence to outrage even the most indifferent citizen (see earlier posts), Margin Call is said to take a subtler approach. As in Kevin Spacey's portrait of Jack Abramoff in Casino Jack (another ripped-from-the headlines drama), we get to see real people making real choices in morally compromising situations. These are flesh-and-blood human beings--not crude caricatures like Oliver Stone's evil Gordon Gekko in the two Wall Street films.

A very telling exchange quoted in Turan's review is between Kevin Spacey's character and Jeremy Irons' character (the CEO):

Sam Rogers [Spacey]: And you're selling something that you know has no value?

John Tuld [Irons]: We are selling to willing buyers at the current, fair market price.

One lesson of this snippet? The winners are those who can get away with peddling junk; the losers are the ordinary suckers who aren't smart enough to see how the winners have gamed the system. Too bad for the losers: it's a free market. If they lost, it was because they got out of the game too late. They were "the last one holding the bag." They were the fools who bought the junk. Hey, it's a free market; they just failed to do their due diligence. The market punishes fools.

The real lesson: A free market economy full of unethical people like Irons' CEO is no longer a free market. It's a system that allows the slick, smart, greedy, and unethical to dupe unsuspecting, trusting people. Such a system is predatory and enslaving: the opposite of free. And saying this is not "class warfare." It's just describing Wall Street and the global financial system for what they have become: a group of people cloaking their knowing misdeeds in the rhetoric of the free market.

Occupy Wall Street: Social Movement or Flash in the Pan?

In the last week, anti-Wall Street protests have begun to attract more media attention. The Occupy Wall Street movement may just catch on, but it's too soon to tell. Two things about Occupy Wall Street bear directly on globalization.

First, one of their key slogans "We are the 99%" capitalizes on the startling fact that the top 1% of income earners in our society earn a significant share of national income--a dynamic that the growth of the financial sector (Wall Street) has aided and abetted.

Second, the Occupy Wall Street page explicitly claims inspiration from the Arab Spring movements--perhaps one of the first times in history that young people in a Western democracy were inspired to go out into the streets by young people in the Arab world. This feedback loop from the Arab world to the United States suggests that global media do have some power to spread contagious ideas of protest and freedom in multiple directions around the globe.

For a little sense of the rather chill vibe down in the financial district in lower Manhattan, check out this video:


Right Here All Over (Occupy Wall St.) from Alex Mallis on Vimeo.

Not exactly violent or scary. It does seem a little vague and unfocused.

Nonetheless, I suspect we'll be hearing more from this group in the weeks to come, as they clarify what it would take for them to go home. See the Occupy Wall Street page for more up-to-date information.  And for a list of specific demands, see this page.

For now, it isn't clear that these protests will rise to the level of being a significant social movement or whether they will fizzle out. Will they drive real political change in our governmental institutions or policies? Or will they occupy unemployed hipsters until the cold weather hits? Either way, I'll be watching them closely.

"Figures on a Balance Sheet" or Things You Can See?

A week or so ago, I watched a torn-from-the-headlines Hollywood flick entitled The Company Men. Starring Ben Affleck, Tommy Lee Jones, Chris Cooper, Craig T. Nelson, and Kevin Costner, the film puts a Boston-area face on American capitalism in an era of recession. The official trailer gives you the idea of the story arc, which was obvious but ambitious. (Spoiler alert: I give away the ending in the next paragraph.)



Overall, Company Men is a heavy-handed, melodramatic, and predictable riff on corporate America. Ben Affleck's arrogant sales executive character gets downsized from his job in shipbuilding sales and eventually rediscovers honest manual labor by helping out his brother-in-law (played by Kevin Costner, who tries out the same terrible Boston accent that marred his character in Thirteen Days). Then, in the end, Affleck's humbled character gets a second chance to work in shipbuilding with his old boss, played by Tommy Lee Jones.

The hopeful ending fits uneasily with some underlying, deep, and undying trends of corporate capitalism that are condemned in the film. Among those trends, which continue today, are the avid pursuit of profit, luxury, debt, and power by corporate executive suites. If visual depictions of all this sound heavy-handed to you, well, you would be right. The Company Men explores some of the same terrain as Up in Air, but without the surprise plot twists or clever visual crafting. It's earnest but all too obvious.

Yet, however didactic the tone, the film's writers still do well to describe root problems with American corporations in an era of footloose global capital. In one forty second monologue by Tommy Lee Jones (my favorite scene) they nail what I consider to be the fundamental problem. As Jones walks with Ben Affleck through the dormant old shipyard, he points to an abandoned factory building and waxes eloquent about the past:

Two thousand men a shift, three shifts a day, six thousand men, held an honest wage in that room. Fed their kids . . . bought homes . . . made enough to send their kids to college . . . buy a second car . . . building something they could see--not just figures on a balance sheet but a ship they could see, smell, touch.

Anyone who's ever lived in a Rust Belt town full of empty old factories will feel this scene tugging at their heartstrings.

But there's a serious point being made here, too, which the writers clearly get by alluding to "figures on a balance sheet." A couple of years ago, I made a similar point in an article titled "Money or Business?" which started with the gap between the pursuit of profit and the craft of business. Essentially, I asked, should corporations pursue abstract figures on a balance sheet or the tangible goods intrinsic to the practice of their business (care for the product, for customers, for the community, all pursued virtuously)? I argued for the latter: corporations are involved in a corporate (communal) work, and should be working to pursue goods intrinsic to their businesses. In other words, good shipbuilding means attending to the excellent crafting of physical ships within the wider community, which could lead to profits as a desirable by-product, but the pursuit of profit for its own sake will corrupt the business by introducing the competition for a scarce good external to the practice of shipbuilding. By competing for profits, the corporation will be tempted to neglect its original mission of building excellent ships within its community.

Now, thanks to Jon Wells (the producer of the TV series ER) and his fellow filmmakers on The Company Men, the point is much clearer: the pursuit of a good balance sheet is not the primary pursuit of good business. Rather, a good business will first pursue the good, as manifested in something they can see, smell, or touch. And they will count profits as an added blessing.

Somewhere along the line, many corporations reversed that emphasis, putting profits before their physical business, and as a result we are all suffering. But it's never too late to return to sanity.

Capital Reserves? No Thanks, Say the Banks

Joe Nocera, a business-reporter-turned columnist for the New York Times, ran an informative column yesterday about raising the required amounts of capital that international banks must have in reserve to cover their lending. As he notes, the Basel III agreement being negotiated in Switzerland would require the banks to have 7 to 10 percent of reserve capital on hand, far less than the 14 percent preferred by Federal Reserve Governor Daniel Tarullo. (Nocera is a co-author of one of the best books on the mortgage meltdown, reviewed in this space in a previous post.)

Naturally, of course, the big Wall Street banks and their allies in Congress are resisting this push, citing the dangers of "over-regulation." But we've tried de-regulation of the financial industry over the last 30 years and ended up with the worst financial crisis since the Great Depression (and it may yet equal the Great Depression).

Which raises a rhetorical question. Why can't the banks and politicians do the right thing for the nation and the world, even it means some modest sacrifice?

Executive Pay and Globalization

 In the Lexus and the Olive Tree, Tom Friedman has a catchy chapter on the dangers of a winner-take-all, free-market society--the kind of society rewarded by processes of globalization. He uses a professional basketball analogy to make his main point. A few top competitors--those like Michael Jordan or LeBron James--reap massive rewards, while the average competitors in the market--the lesser-known teammates of the superstars--get much less. Friedman's concern is a real one: How sustainable is a team that includes both mega-rich and not-so-rich players? We have cause to worry about the erosion of social solidarity between the affluent and the ordinary.

U.S. income data since the 1970s suggest that this concern is valid. "The rich are getting richer, while the poor are getting poorer" is one of those thoughtless cliches that turns out to have some truth in it. The undisputed fact here is that the top 1% of income earners now account for at least a quarter of the nation's total income.

But who are these people and how do they get their money? Are they executives, doctors, lawyers, or financiers? According to a recent study of tax returns by three researchers reported in today's Washington Post, "executives, managers, supervisors, and financial professionals" accounted for around 60 percent of this group by 2005. Executives, managers, and supervisors alone were 40 percent of the group. 

The study itself is pretty dry material for the average reader, but the Post story by Peter Whoriskey frames their findings with a comparison of the top executives at Dean Foods, a Fortune 500 national dairy company. 

His lead paragraphs capture the reality of today's executive compensation problem:

It was the 1970s, and the chief executive of a leading U.S. dairy company, Kenneth J. Douglas, lived the good life. He earned the equivalent of about $1 million today. He and his family moved from a three-bedroom home to a four-bedroom home, about a half-mile away, in River Forest, Ill., an upscale Chicago suburb. He joined a country club. The company gave him a Cadillac. The money was good enough, in fact, that he sometimes turned down raises. He said making too much was bad for morale.

Forty years later, the trappings at the top of Dean Foods, as at most U.S. big companies, are more lavish. The current chief executive, Gregg L. Engles, averages 10 times as much in compensation as Douglas did, or about $10 million in a typical year. He owns a $6 million home in an elite suburb of Dallas and 64 acres near Vail, Colo., an area he frequently visits. He belongs to as many as four golf clubs at a time — two in Texas and two in Colorado. While Douglas’s office sat on the second floor of a milk distribution center, Engles’s stylish new headquarters occupies the top nine floors of a 41-story Dallas office tower. When Engles leaves town, he takes the company’s $10 million Challenger 604 jet, which is largely dedicated to his needs, both business and personal.

Meanwhile, as Whoriskey reports, 

while pay for Dean Foods chief executives was rising 10 times over, wages for the unionized workers actually declined slightly. The hourly wage rate for the people who process, pasteurize and package the milk at the company’s dairies declined by 9 percent in real terms, according to union contract records. It is now about $23 an hour.

The concern here is about relative gains. The ordinary workers, probably because of union power, are not destitute; $23 an hour is a decent wage. But their share of the overall wealth generated by the company is declining, just as ordinary workers' shares of national wealth are declining. And whose shares are gaining? The bosses'.

CNN reported in 2007 that the average American CEO was making 364 times more than the average American worker. With stock options and salaries and all the rest, the top bosses were doing quite well, even while they were downsizing and outsourcing and union-busting. As a result, CEOs became the single largest group within the top 1 percent of American income earners.

Back in the day people like Kenneth Douglas were willing to turn down raises out of a sense of solidarity. But people like Gregg Engles--and other winner-take-all executives--are jeopardizing the stability of our society. They might blame globalization, but they we all know that greed is the real problem.

"Inside Job" Won Best Documentary

Semi-regular readers of this blog (all two of you) might remember that Charles Ferguson's documentary film Inside Job has interested me for awhile now (see previous posts here and here.)

For those of you, like me, who don't obsess over the winners of the Academy Awards, I'm pleased to report (a little late) that Inside Job won this year's award for best documentary feature.

It's nice to see the Academy of Motion Picture Arts and Sciences rewarding a great and important film that all Americans should see.

Back to Our Regularly Scheduled Programming: Global Finance

Just before the Egyptian Revolution broke out, I was preparing to review more books on the global financial crisis.

Today's book is Bethany McLean's and Joe Nocera's All the Devils Are Here: The Hidden History of the Financial Crisis--an important contribution to the conversation about what happened to the US and global financial systems in 2007 and 2008 (click here for more posts on this topic). This book makes a great companion to the film Inside Job.

"Hell is empty, and all the devils are here," wrote Shakespeare in The Tempest. Borrowing his phrase for the title is an apt move, since the authors (former colleagues at Forbes magazine) attempt to interview all of the culprits who contributed to this caper. Unlike the cooler historical and analytical overview provided by Nouriel Roubini in Crisis Economics, this is a vivid, human drama, filled with characters who have stories.

Although I occasionally got bogged down in blizzards of names and esoteric financial terms, I found All the Devils to be the clearest and most comprehensive overview of the crisis out there. By interviewing most of the key players, McLean and Nocera help us to see the complexity of the crisis through their eyes. In the process, they clarify several points that have been disputed in analyzing the crisis. Among them are the following:

1. The government-supported mortgage guarantors (Fannie Mae and Freddie Mac) were not responsible for the crisis, although they tried to profit from it and were dragged down by it.
This criticism has been a standard conservative criticism, blaming the Clinton administration and Democratic politicians for leaning on Fannie and Freddie to push mortgages on unqualified borrowers (in order to increase homeownership). McLean and Nocera address this directly, arguing that both Fannie and Freddie got into the subprime business because Countrywide and other banks were making immense profits from it (p. 50). But they got into it late in the game, between 2005 and 2007 (p. 185), seeking to make big bucks like the Wall Street banks.

2. Quantitative analysis, which many didn't properly understand, lulled many into thinking that risks were under control when they really weren't.
McLean and Nocera describe how a J.P. Morgan analyst named Till Guldimann invented a measure called Value at Risk (or VaR), which all the other big Wall Street banks came to use. The problem was that VaR assumed normal market conditions similar to the past. "The fact that VaR told you how much your firm might lose 95 percent of the time didn't say a thing about what might happen the other five percent of the time" (p. 57). You could lose billions, but the statistic gave the misleading impression that Wall Street banks were controlling and predicting the risk to their investments. In the book, I call this arrogance. Humility means knowing that you cannot predict or control the future.

On this score, Goldman Sachs was rare among Wall Street firms: "When it came to managing risk," write McLean and Nocera, "Goldman had what can only be called a kind of humility, a belief that the model was only as good as the inputs and that faith in the model had to balanced with the informed judgment of human beings" (p. 158).

3. The private bond rating companies and government regulators were corrupted.
Moody's, Standard & Poors, and Fitch Ratings were supposed to analyze the portfolios of mortgage-backed bonds to see how risky they were as investments. Unfortunately, the Wall Street banks would go "ratings shopping" between the three companies (p. 118). If they didn't get the high ratings they wanted, they would threaten to take their business to one of the other ones. This was a classic example of a "race to the bottom" (p. 119). Furthermore, all three companies were profiting from rubber-stamping these deals. The president of Moody's took home $3.2 million in compensation in 2007 (p. 124).

Alan Greenspan, chairman of the Federal Reserve, trusted that private, self-regulation would work to keep companies in line. "Market discipline," rather than government regulation, would be effective. But that didn't work out so well in practice.

4. The supply side on Wall Street was pushing predatory, punishing subprime loans
Subprime loan originators told the authors that it was Wall Street banks that drove the trade. These banks were lending the money to mortgage firms "and then buying up their mortgages and securitizing them" (p. 134). Riskier subprime loans "were roughly seven times more profitable than prime mortgages" (p. 134). Thus, the Wall Street firms demanded that subprime brokers pushed "payment option adjustable rate mortgages" which "gave consumers the right to choose whatever rate they wanted at the start, from a very low teaser rate to a higher rate that more resembled a thirty-year fixed mortgage" (p. 135). Eventually, these loans would reset to a higher rate and borrowers would go into "payment shock." It wasn't greedy borrowers so much as greedy Wall Streeters that drove this trade. This supply-side view aligns with the Financial Crisis Inquiry Commission Report, rather than the demand-side view that blames those who pushed or sought subprime loans for the crisis.

5. Subprime lenders often encouraged borrowers to lie.
McLean and Nocera share several stories of people who pursued home loans from Countrywide and were encouraged to sign on to fraudulent documents. Although there were certainly cases of people trying to borrow more than they ought, the subprime lenders were hardly innocent victims. Score another one for the supply side argument.


6. Everyone was making so much money from the global trade in bonds derived from subprime mortgages that they didn't care.
McLean and Nocera make a statement very similar to one made by Adam Davidson on NPR right after the crisis (and quoted in chapter 3 of the book):

Here was the ultimate consequence of the delinking of borrower and lender, which securitization had made possible: no one in the chain, from broker to subprime originator to Wall Street, cared that the loans they were making and selling were likely to go bad. In truth, they were all taking huge risks in granting these terrible loans. But they were all making too much money to see it. Everyone assumed that someone else would be left holding the bag (p. 218).

7. Despite all the damage done, very few people have been or will be held legally responsible.
The authors write,

Much of what took place during the crisis was immoral, unjust, craven, delusional behavior--but it wasn't criminal. The most clear-cut cases of corruption--the brokers who tricked people into bad mortages, the Wall Street bankers who knowingly packaged bad mortgages--are in the shadows, cogs inside the wheels of firms Ameriquest, New Century, Merrill Lynch, and Goldman Sachs. We'll probably never even learn most of these people's names (362).

And on that not-so-happy note, we return to special bulletins on the aftermath of the peaceful regime change in Egypt. Speaking of which, maybe a peaceful revolt against the new oligarchy on Wall Street would be in order. If Egyptians can demand change, then why can't we?

Shocking News: The Global Financial Crisis Was Avoidable

It's not really shocking news, but in the spirit of the Onion this headline from today's New York Times  could elicit a chuckle: "Financial Crisis Was Avoidable, Inquiry Finds." (Shocking! Haha!)

As I noted in an earlier post, the now-Oscar-nominated film Inside Job doles out plenty of blame to people who caused the crisis (primarily Wall Street bankers and regulators). Likewise, a host of books reviewed on this blog explain the many things that people could have done differently to avoid the crisis. 

But today's story is news because the Financial Crisis Inquiry Commission, a government study group set up by President Obama and Congress, is set to issue its report tomorrow morning. And the theme of this 576-page report, according to Sewell Chan of the Times, is that real human beings are to blame. According to Chan, the report states that 

the crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. . . . The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble.

It's highly likely that the chair of the commission leaked a copy of the report's conclusions in advance to build interest in tomorrow's press conference announcing the release. 

But there will be some Republican complaints about this report, because the report was approved along party lines. The six Democrats on the panel voted to approve it, but the four Republicans rejected it.

We now have two main interpretations of the crisis: the canonical Democratic view, best expressed in Inside Job, that blames alleged Wall Street greed and an alleged lack of regulation; and the dissenting Republican view, which blames Fannie Mae and Freddie Mac, the two Federal government-supported (and now government-owned) mortgage guarantors, for allegedly pushing poorer, sub-prime borrowers to purchase to take on risky mortgages. 

In the Republican view, individual borrowers demanded cheap credit and caused the crisis. We can call this the demand-side explanation.

In the Democratic view, it was the flood of global money pouring into Wall Street that created an excess supply of capital looking for a return on investment. Wall Street firms were dying to make huge money for themselves and their clients, so they pushed subprime lending. We can call this the supply-side explanation.

Who's right? As I'll explain in a later post, probably both parties. As I tell students, whenever you are presented with Option A and Option B, always choose Option C! 

Charles Ferguson is Pissed!

Filmmaker Ferguson is an angry Ph.D.

Thanks to the Canton Palace Theatre Thursday art film series, tonight I finally got to see Inside Job, the documentary film on the global financial crisis of 2007-2008 that I called "The Most Important Film of 2010" in an earlier post (even though I hadn't seen it yet).

Thankfully, now I can say that my judgment, however premature, was warranted. This is an amazing, devastating, illuminating, captivating, and compelling film. Anyone who cares about what happened to our economy in the last few decades needs to see this.

What drives the film and gives it such power is the barely concealed rage of its sole interviewer, writer, director, and producer: Charles Ferguson, who should be nominated not only for an Oscar for best documentary, but also for the title of "the academic Michael Moore."

Ferguson, who has a Ph.D. in political science from MIT and went on to make some money in the software industry before an early buyout/retirement, made his first-ever film on the bungled postwar occupation of Iraq. He got curious and started interviewing people with a camera, and pretty soon he had a film on his hands.

Despite being broadly supportive of regime change in Iraq into early 2003, he was appalled at the disasters that followed: looting, suicide bombings, insurgency, economic collapse, and so on. So, like a good political scientist, he tried to figure out what had gone wrong in the policy process, by interviewing as many decision-makers as he could. With their help, he made the counterfactual argument that it could have been different. Instead of agreeing with then-Secretary of Defense Donald Rumsfeld that "stuff happens" and that looting was the price of freedom, Ferguson assembled dozens of interviews to show that officials of the U.S. government made several critical errors that, if avoided, would have prevented the disasters that followed.

Ferguson has taken the same approach with Inside Job, right away dismantling the lazy assumption that the economic crisis that began in late 2007 was somehow either inevitable or unexpected. Instead, he plays clips from interviews of Charles Morris and Nouriel Roubini, who both predicted the crisis beforehand (or at least understood its main causes in the very early stages). Later, he shows Ben Bernanke denying to a TV anchorwoman in 2005 that a housing market problem could contribute to a recession (oops, sorry about that).

And he makes the convincing case that a number of people knowingly contributed to the crisis through their appalling action or inaction. This wasn't an accident of history but the result of greedy people pursuing their own private gain--at the expense of the public treasury and the public good.

While making his case, Ferguson has a series of testy exchanges with Glenn Hubbard, former economic adviser to President George W. Bush; Martin Feldstein, professor of economics at Harvard; John Campbell, chair of the economics department at Harvard; Scott Talbott, chief lobbyist for the Financial Services Roundtable; Frederic Mishkin, ex-Federal Reserve Board Governor; and David McCormick, former U.S. Treasury Under Secretary for International Affairs. (Watch the trailer for the best ones.)

Apart from these Michael Moore-like, on-camera confrontations, Ferguson tells a good story. For his hook, he starts with Iceland's parallel economic collapse and a short synopsis of the onset of the crisis in the September 15, 2008 bankruptcy of Lehman Brothers. Peter Gabriel's punchy song "Big Time" is the perfect accompaniment to aerial shots of the financial district in Manhattan, evoking upbeat emotions, with lyrics that could be telling the story of Wall Street bankers making it "Big Time".  From there he tells the story in five chapters.

Part I is "How We Got Here." Short answer: our political leaders allowed the financial industry to concentrate its operations and get too big, without proper oversight, especially in the $70 billion a year "derivatives" market, where the famous collateralized debt obligations and credit-default swaps were hatched, all without supervision. Alan Greenspan comes in for special scrutiny here.

Part II is about the housing bubble of 2001-2007, which a number of observers were able to detect by 2005 (although not Ben Bernanke, by then the new Chairman of the Federal Reserve Board of Governors). Among these high-level observers and on-camera interviewees were both the managing director and the chief economist of the International Monetary Fund, hedge fund founder George Soros, journalist Allan Sloan (who documented mortgage-related rot in an October 2007 article), and French Finance Minister Christine Lagarde. This bubble was entirely predictable.

Part III is a straightforward narration of the crisis of September-October 2008, stemming from the bankruptcy of Lehman Brothers and the near-collapse of the giant insurer AIG. Henry Paulson, Secretary of the Treasury, and former CEO of Goldman Sachs doesn't look so great by the end of this section.

Part IV--"Accountability"--seeks to figure out who should have taken action during or after the crisis. Stan O'Neal, the former head of Merrill Lynch, which tanked and had to be bought out by Bank of America, walked away with a total compensation package of $161 million. Who is allowing this? It turns out that the board of Merrill Lynch and other corporations' boards are not very effective checks. What about the government? The financial industry has the equivalent of five lobbyists for every member of Congress. The Obama Administration appointed Tim Geithner and Larry Summers, both with close ties to the financial services industry, to top positions. What about the economics profession in top universities? Here Ferguson digs up some of his juiciest material, pointing out that many top economists draw up to 80% of their income from sitting on financial service companies' corporate boards, consulting with them, or collecting speakers' fees from them. So much for truth-seeking academics speaking to power!

Part V--"Where Are We Now"--helps us assess the situation as of early 2010--a situation that, sadly, has barely improved. Unemployment has dropped a bit from the 10% level but we definitely suffered through a global recession that has devastated the lives of the poorest people more than the lives of people like me. (One of the more haunting segments in this section of the film is a small Chinese plant with empty tables, a vivid picture of how this worldwide recession affects migrant laborers in China making $80 a month.)

Ferguson ends with a shot of the Statue of Liberty and the hope that someone will fight to bring Wall Street bankers to justice. Could we imagine criminal or civil prosecutions of these characters? It's hard to imagine, when we have what one interviewee called "a Wall Street Government."

The Best Book (Yet) on the Global Meltdown

It's the Christmas season. And that has me thinking again about the global financial crisis, the subject of several earlier posts (just click on the chapter 3 tag here or at the bottom of this post).

The links there might not be entirely obvious, but there are two good reasons why this is a good time to dwell on financial globalization. First, Chapter 3 of my book is about lessons from the Christmas season for global finance, where I feature the 2007-2008 crisis as a case study. Second, the holiday season allows for more time to catch up on reading, and I've just had time to review Nouriel Roubini and Stephen Mihm's Crisis Economics: A Crash Course in the Future of Finance.

In a series of three posts in July and early August, I reviewed five other books that diagnose the crisis and explain it to readers. All of them were worth reading. Compared to these, however, I think Roubini's book is the best analysis, combining well-researched rigor with clear writing. It's a serious tome of 300 pages, and it certainly lacks the humor of John Lancaster's I.O.U. and the storytelling of Michael Lewis' Big Short or David Faber's And Then the Roof Caved In.

But it makes up for these deficits with helpful historical analogies drawn from previous financial crises and with sharply realistic prose devoid of ideology or wishful thinking. Other than a little chest-thumping at the beginning (crediting Roubini with predicting the crisis well before it began), the book rebuts the presumption that our current financial crisis was completely unexpected or unique. Instead, the authors argue, what happened from 2006 to late 2008 was entirely predictable; indeed, Roubini himself predicted much of what followed.

They argue in Chapter 2 that the crisis nicely fits Hyman Minsky's model of financial crises--a model made famous in Charles Kindleberger's Manias, Panics, and Crashes. Like Joseph Schumpeter and other Austrian economists, Minsky believed that booms and busts were a recurrent reality of the financial sector in global capitalism. This time was no different.

The authors spend five chapters in the middle of the book describing the long-term structural causes, the string of bank failures from 2006 to 2008, the spread of the crisis globally, the Fed's response, and the responses of the Bush Administration and Congress.

But a real strength of the book, which goes beyond its predecessors, lies in its final third, where the authors lay out a program of reforms and policies that could help prevent another nasty meltdown. As their subtitle suggests, they want to offer some guidance on the "future of finance." It's doubtful that we'll be able to predict the future in detail, but these two have given us a good grasp of what just happened, along with some thoughts on how to prevent it from happening again (or at least contain the damage). With the benefit of a little more time, they've given us insight that earlier books couldn't offer.

Right now I'm thinking that this will be the text of choice for covering global finance in my international political economy course next fall--unless a reader out there discovers a text that might be better. If you do find a better book, please let me know.

When Time Slows Down

Third in a series (first post on Christmas)

It's the week between Christmas and New Year's Day, a time when many (though not all) Americans can lay around the house guilt-free. You get a chance to pause and spend time with family or friends. And much of the time you are feasting, eating all kinds of goodies in between large meals and festive parties. Time slows down during these holidays.

Like Thanksgiving Day, Christmas Day is one of the only society-wide feast days in the United States. Feast days are those that break from the normal 24/7/365 work world of Western consumer society. Even fast food chains and gas stations close on Thanksgiving Day and December 25. There are no other days where this would fly. But on these days we understand and make an exception.

****
Over the break, I've been reading several of the books that I mentioned in my last post. Among them, Colin Beavan in No Impact Man talks about eating dinners with his grandparents who were both extremely frugal and extraordinarily attentive to the natural world around them.

 They insisted I climb back up the stairs to the bathroom to turn the light of if if I'd left it on. They taught me to take only what food I would eat and never to throw trash on the ground. They wore sweaters and kept the heat down low (p. 36).

They also took their time eating dinner, waiting until after sunset to start. After dinner,

when my grandmother washed the dishes, I would stand beside her and we'd look out the window together at the New England stone wall in her backyard. Chipmunks had burrowed there. "That's the father," my grandmother would say. "Those are the babies." The birds would come. A red-winged blackbird, Grannie would tell me. A goldfinch (p. 42).

Looking back, he thinks that gratitude connects their frugality and their attentiveness toward Creation:

My grandparents' no-waste rules seemed pointless when I was young. You should this. You shouldn't that. And for the sake of . . . what? Piety? Sanctimony? But something about their intention not to waste and their emphasis on cultivating gratitude--Depression-era thoughts or not--seems connected to making time to watch the sunset and the chipmunks (p. 43).

The slower time of a feast season like Christmas brings us closer to the fullness of time--kairos time--where we can appreciate more deeply the gifts of God's Son and God's Creation given for us and for our salvation. Thanksgiving is the general posture of the entire twelve days of the Christmas season.
****
Today, December 28, is the Feast of Commemoration of the Holy Innocents, which reminds us of how those gifts are not to be taken for granted. When Herod's soldiers slaughtered the young children of Bethlehem (see Matthew 2:13-18), they created a stark reminder in the Christian calendar that our gratitude for the gifts of God necessarily involves concern for others. The Episcopal Collect for this day makes this link explicit:

We remember this day, O God, the slaughter of the holy innocents of Bethlehem by the order of King Herod. Receive, we beseech thee, into the arms of thy mercy all innocent victims; and by thy great might frustrate the designs of evil tyrants and establish thy rule of justice, love, and peace; through Jesus Christ our Lord, who liveth and reigneth with thee, in the unity of the Holy Spirit, one God, for ever and ever. Amen

This emphasis--mercy for innocent victims, justice for the oppressors--builds on the Advent theme of the Kingdom. Even as we celebrate during this season the good gifts we have received, we long for the day when there will be no more injustice, when God's Kingdom will reign here on earth.

In Defense of Actual Reality (as opposed to financial numbers)

Today, a chunk of General Motors shares are going on sale at $33 a piece, which should allow GM to pay back billions of dollars to the Federal Government and cut the government's ownership share to 26 from a previous 61 percent. Good economic news for once.

Which may be why yesterday Warren Buffet issued a thank you note to Uncle Sam, giving credit to the Feds for helping rescue the U.S. (and world) economy from possible collapse. We usually complain about government, but Buffet points out that both the Bush and Obama administrations have done a lot to keep banks and businesses alive. Meanwhile, the citizenry thanked the incumbent regime by electing the Tea Party.

But the supposed good news about GM also prompted author Paul Clemens, a Detroit resident and former autoworker, to reflect on the difference between actual reality and the numbers games of financiers, in a piece on today's New York Times Op-Ed page. As part of the bankruptcy restructuring, a part of GM was shunted off into an "old GM," which is designed to sell off old assets, i.e., the many plants that are being shuttered forever--or being dismantled.

Like Michael Moore, who will forever be saddened about GM's abandoning Flint, Clemens is troubled by the abandonment of Detroit. (Full disclosure: Like Clemens, I was born in the Detroit area and grew up in Michigan during the 1970s and 80s, so I feel deeply for communities devastated by the loss of car manufacturing plants.)

I encourage you to read the whole piece, but the concluding paragraphs capture Clemens' main theme in a powerful way (I'll underline the best part):

ACROSS the nation, as in Detroit, there is an economic disconnect, a split between what the economic numbers say and how things feel on the ground. The economy is growing, but the unemployment rate hasn’t budged. The recession officially ended in June 2009, but more jobs have been lost than have been added since that “ending.”

Handling this disconnect requires political acuity. It brings to mind something Philip Roth once said about those who have little feel for literature and the texture of lived experience it provides and so “theorize” it. Mr. Roth imagined a scene of a father giving his son this advice while attending a baseball game: “Now, what I want you to do is watch the scoreboard. Stop watching the field. Just watch what happens when the numbers change on the scoreboard. Isn’t that great?” Then Mr. Roth asks: “Is that politicizing the baseball game? Is that theorizing the baseball game? No, it’s having not the foggiest idea in the world what baseball is.”

It’ll be fun, for a day or two, to look at the scoreboard, and to see what G.M.’s shares are going for: $26? $29? $33? $35? The numbers on the exchange will change; it’ll be great, and a welcome, temporary relief from the numbers, still difficult to comprehend, of jobs lost and plants closed. Soon enough, though, we’ll have to go back to watching what’s actually happening on the field, where there’s still a blowout in progress, with the home team way behind, and no one, seemingly, with the foggiest idea what to do about it.

Like Clemens, I want to defend those of us who live on the ground, in actual material reality, next door to car plants, on the field, playing the game--as opposed to the financiers who think that their numbers games are more real. (Chapter 3 of the book attempts to make this case.) A purely quantitative analysis of society is like "having the not the foggiest idea in the world" what social life is.

The Pontiac dealership just down the road from me is now closed (due to GM's restructuring plan). Should I celebrate today?

The Mortgage Mess: Worse Than We Thought

It turns out that using mortgages as collateral to back bonds sold globally was a bad idea. Financiers sold mortgage-backed securities as lucrative, risk-free investment vehicles. It was supposed to be a win-win for everyone.

But now it appears that these wonderful new financial products could undermine a large chunk of the U.S. housing market. A new report issued today by the Congressional Oversight Panel that oversees the Troubled Asset Relief Program (TARP bailout) suggests that the electronic mortgage-processing systems at the heart of this mess may call into question 33 million mortgage loans. Oops, sorry about that.

In an earlier post, I summarized an article by Professor Christopher Peterson of the University of Utah Law School. His analysis now sounds cautious. The new Congressional Oversight Panel report suggests that our entire financial system might be undermined: 

Clear and uncontested property rights are the foundation of the housing market. If these rights fall into question, that foundation could collapse. Borrowers may be unable to determine whether they are sending their monthly payments to the right people. Judges may block any effort to foreclose, even in cases where borrowers have failed to make regular payments. Multiple banks may attempt to foreclose upon the same property. Borrowers who have already suffered foreclosure may seek to regain title to their homes and force any new owners to move out. Would-be buyers and sellers could find themselves in limbo, unable to know with any certainty whether they can safely buy or sell a home. If such problems were to arise on a large scale, the housing market could experience even greater disruptions than have already occurred, resulting in significant harm to major financial institutions (COP "November Oversight Report," p. 5).

Oops, sorry about that. It really does come down to who owns the promissory note in your mortgage. Unfortunately, for 33 million people the answer to that question is not clear.

A Telling Foreclosure Story

In my previous post, I looked at the legal complications of using mortgage debts as collateral for additional debt. From the time I first heard about this practice--creating collateralized debt obligations or mortgage-backed bonds--in Thomas Friedman's book The Lexus and the Olive Tree (1999), I was troubled. Friedman takes a "gee-whiz-isn't that-cool" tone and looks forward to a day when "everything will be for sale" and can be turned into a bond.

But a story from Thursday's New York Times business section illustrates why turning mortgages into collateral is, in practice, a mess. At the end of the piece, the authors, Andrew Martin and Motoko Rich, tell the all-too-typical story of one family:

Charlotte and Thomas Sexton, of Carlisle, Ky., fell behind on their mortgage payments because the payments on their adjustable-rate mortgage spiked upwards and Ms. Sexton lost her job.

They tried unsuccessfully to sell the home, to refinance it and to modify their mortgage payment. When the Bank of New York Mellon filed a foreclosure notice last summer, they went to a local lawyer, Brian Canupp, who, with the help of a forensic accountant, found a problem in the foreclosure filing.

Last month, a judge tossed out a foreclosure judgment after Mr. Canupp argued that the mortgage trust that claimed to own the Sextons’ promissory note —Mortgage Pass-Through Certificates Series 2002-HE2 — did not exist.

Instead, another trust, called IXIS Real Estate Capital Trust, Series 2005-HE2, claimed to own the Sextons’ note, court records show.

Ms. Sexton said that regardless of who owns her promissory note, she just wants to stay in her home and hopes that the bank will eventually agree to a loan modification.

“We found a mistake,” she said, “that gave us a light at the end of the tunnel.”

So who owns their mortgage (or, more specifically, their promissory note)? The Bank of New York? The bondholders who own IXIS Real Estate Capital Trust Series 2005-HE2? Both? Neither?

The wizards didn't quite think through the simple question of who owns what. So our real estate market is a mish-mash of unclear title ownership, clogged courts, and messed-up foreclosures. It's going to take a long time to sort this all out--and nobody is happy about that (except maybe the Wall Street wizards who cashed out their profits a long time ago).

Who Really Owns Your House?

Who really owns your house? If your mortgage was securitized (used as collateral to back bonds that were sold worldwide) and you still owe on it, then the answer may be no one. Literally no one. As a matter of law, it isn't clear if the legal entities used to securitize mortgages can really assert ownership and foreclose on your house. Neither you, nor they, nor a bank, nor a diffuse group of bondholders can claim title. 

So how can banks foreclose on you if you go into default? Legally, they can't. This is the real reason why some of the big banks stopped foreclosure proceedings recently. Although recent stories focued on "robo-signers" signing tens of thousands of foreclosure notices a month, the story of this deeper legal morass is the real reason that bank shares are tumbling: investors are terrified that banks might not even be able to sell off foreclosed properties to cut their losses on mortgage-backed securities. The banks don't own the the underlying mortgages. Nobody does.

Floyd Norris of the New York Times, leads his column on Tuesday with this question: 

Was the great securitization machine that made hundreds of billions of dollars in mortgage loans based on a legal foundation of sand?

And the answer is Yes. 

In chapter 3 of my book, I made a passing reference to a judge's ruling in Cleveland that mortgage "trusts" couldn't actually claim title to homes. It turns out this is a major problem for any mortgages that were processed through MERS, the Mortgage Electronic Registration System, which is really a shell company set up by banks in the 1990s designed to bypass the traditional title registration process. (If you know anyone whose mortgage was processed through this system and who might be headed toward default, now is a good time to alert them to their rights.)

For those who want to delve into the legal details on this, Norris' column refers to a forthcoming paper by Christopher Peterson of the University of Utah Law School (click on the PDF download to read it)  that picks apart the fraudulent legal fiction called MERS, whose slogan is

As Peterson puts it, 

MERS is two-faced: impenetrably claiming to both own mortgages and act as an agent for others that also claim ownership.

MERS no legal right to both foreclose on you (as if it owns your mortgage) and act on behalf of banks (as if it is an agent of banks or trusts, to whom you owe a promissory note, promising to pay off what you owe). It cannot both assert property rights over your house and claim to be acting as a trustee of banks or bondholders who have a lien on your home. It has to be one or the other, but cannot be both. Yet MERS tries to do both. 

When financiers talk to investors, they claim to own mortgages in order to convey the sense that they own what they are selling. But when financiers talk to the government they claim not to own what they are selling so as to not be obliged to pay fees associated with owning it. MERS and its members prevent recording fees from being paid on assignments—that was the whole point of MERS—but then attempt avail themselves of the protection that having taken such an action would have afforded. 

The "whole point of MERS" was attempt to privatize and speed up the process of recording property rights and titles, bypassing local governments and their fees. Meanwhile, as Peterson says, the same giant banks that set up this shell company received massive bailouts while local governments were 

laying off teachers, firefighters, police officers, infectious disease clinic workers, closing criminal detention centers for violent juveniles, and shuttering courthouses.

Maybe this is why people are so mad at incumbent politicians. They know that something is deeply wrong with our institutions. They see that massive global banks continue to profit while ordinary people struggle to get by in local communities. 

Now, thanks to Professor Peterson and others like him, we can see that monied interests captured our institutions and no one really noticed. Globalized finance ran amok while we slept.

Can we wake up and figure out who owns our houses?

The Most Important Movie of 2010

In today's New York Times A.O. Scott positively reviews Inside Job, a new documentary about the global financial collapse. Produced by Charles Ferguson, who was responsible for No End in Sight, which was a brilliant analysis of the fiasco of the post-Iraq War occupation, this looks to be the most important film of the year. 

Call me a crazy globalization geek, but I cannot wait to see this as soon as possible. (If anybody knows if or when it's showing on the big screen in Northeast Ohio, please let me know. I don't want to wait until it's out on DVD.) I really do think every American citizen who cares about their country ought to watch this.

I say this because I think everyone needs to understand how our economy got into its current mess. And the way our economy got into its current mess is mainly due to the financial shock caused by aggressive, irresponsible lending by global banks.

Unlike Michael Moore, whose Capitalism: A Love Story was silly, Ferguson is not a cranky partisan. He has a PhD in political science from MIT, and he got into filmmaking by accident. He's an academic policy analyst at heart, and he applies his skills in his films. While No End in Sight was tightly focused on what happened after the Iraq invasion (in part because Ferguson actually supported Bush's policies beforehand), Inside Job delves into the deeper causes of the financial breakdown. (Here's the trailer.)

If you care about the world, you need to engage the story told in this film.

A Clear Analysis of New Global Financial Regulations

As the global sub-prime meltdown of 2007-08 showed, the financial systems of the world's major countries have been tightly integrated over the last 30 years. When U.S. banks wanted investors to buy bonds linked to subprime mortgages, they found them overseas. When overseas investors wanted to get higher returns on bonds, they bought supposedly safe subprime mortgage CDOs. Capital is global and mobile.

Meanwhile, banks and investment firms were able to leverage their assets, borrowing far more than they should have been able to, against the supposed value of their supposedly safe portfolios. It's clear to everyone that stricter capital requirements on banks would help. And that's exactly what the major players in global finance have agreed to in the so-called Basel III agreement. It's "so-called" because it's the third major agreement on global banking negotiated through the Bank of International Settlements in Basel, Switzerland. 

For a wonderfully clear and insightful analysis of this new deal, see a new article written by my former student, Dan McDowell. Dan makes the point that the enforcement of these new standards, which require banks to "keep more cash on hand" (as Dan puts it so clearly) will be voluntary. No international body will monitor compliance with the new Basel III standards, so the various participants might be tempted to cheat.

Basel III is a classic case study of global "governance without government" (which I discuss in chapter 9 of my book). There are standards, but there is no global authority to punish those who violate them (despite the misplaced fears of those who imagine that "a one world government" is just around the corner). Thanks to Dan, this is now clear. Nice work, Mr. McDowell!