Thursday, April 29, 2010

Senate Forecast Update: Little Chance of GOP Takeover, but Dem Position Remains Precarious

Senate Forecast Update: Little Chance of GOP Takeover, but Dem Position Remains Precarious



Posted: April 29, 2010


How Goldman ruined your neighborhood

BY BRIAN DICKERSON
FREE PRESS COLUMNIST
Carl Levin is a genuine Washington heavyweight, one of a handful of senators -- Arizona's John McCain, Connecticut's Joe Lieberman and Massachusetts' John Kerry round out the list -- whose celebrity runs coast-to-coast.

So Michigan's senior senator is used to the national news media paying attention when he has something to say. And media outlets such as CNN, the Wall Street Journal and the Washington Post were hanging on his every word this week when Levin and Lloyd Blankfein, head kahuna of Goldman Sachs, went mano a mano on Goldman's role in the 2008 financial meltdown.

When Michigan met Wall St.

But Levin also is an elected official from a particular state, and one of his prime objectives as chairman of the subcommittee investigating the origins of the worldwide financial crisis has been to connect the dots between the chicanery on Wall Street and Michigan's foreclosure crisis.
So far, though, he's had more success stirring up the political and financial establishments back east than rousing the folks back home to righteous indignation.
Tuesday's showdown with Blankfein and other Goldman Sachs execs, which led the Wednesday editions of the New York Times, the Washington Post and the Wall Street Journal, received far less prominent play in Michigan newspapers. Much of the in-state coverage focused on Levin's uncharacteristic use of profanity -- he repeatedly quoted a Goldman employee's e-mail describing one of the mortgage-backed bonds the firm marketed as "a shitty deal" -- while ignoring Levin's larger point that Goldman's aggressive marketing of such bonds had exacerbated the collapse of home values here and elsewhere.
For the record, Levin's theory about the nexus between what banks like Goldman did and what happened to housing values in your neighborhood is becoming conventional wisdom among economists.
The invention of the mortgage bond market, in which large investors bought and sold claims on the pooled monthly mortgage payments of thousands of homeowners, gave Goldman and other big Wall Street firms their first direct stake in the debts of ordinary consumers.
It worked out well as long as the bundled mortgages were sound ones guaranteed by the government. But when Goldman and its rivals began selling bonds tied to the performance of much riskier mortgages, the system grew unstable.

Sophisticated sales resistance

Levin argues that Goldman's willingness to package and sell loans its employees knew were increasingly, um, substandard allowed unscrupulous lenders to keep writing mortgages for borrowers who were less and less creditworthy, fueling the run-up in home prices and assuring that a large percentage of those mortgages would go sour.
Goldman argues that it was merely meeting its sophisticated clients' demand for riskier (and thus more potentially profitable) pieces of mortgage market action.
But Fabrice Tourre, the young Goldman executive at the center of a fraud suit brought by the government, wrote in an e-mail obtained by Levin's investigators that sophisticated investors were the firm's worst customers ("they know exactly how things work"). He urged Goldman's sales force to target "ratings-based buyers" who would be impressed by the AAA reviews craven rating agencies such as Moody's and Standard & Poor's gave to Goldman's crummy deals.
Even CEO Blankfein conceded that Goldman's bad business decisions contributed to the financial crisis, and allowed that tighter government regulation of mortgage-backed securities would help prevent a repeat of 2008's housing market collapse.
He's confident Goldman and its rivals can continue to be profitable in a more regulated environment.
And really, who would bet against him?
BRIAN DICKERSON is deputy editorial page editor of the Free Press. Contact him at bdickerson@freepress.com

GOP Drops Filibuster After Dems Roll Over On Bailout Fund

Charlie Brown, will you never learn? You really thought Democrats were actually standing up to the Republicans on financial reform, huh? From Huffington Post:
Threatened with the prospect of having to spend the entire night sleeping on a cot inside the white sepulchre known as the United States Capitol, Senate Republicans have apparently assented to allowing a debate on the financial regulatory reform bill. Victory for Main Street! Unless, of course, Senate Democrats decided to back down on a strong(ish) bill so that the seeds of bipartisanship could be sown. In which case: Victory for David Broder!
No one exactly knows what is happening [C&L note: The Washington Post now confirms the deal], buthere's what the New York Times is reporting:
Republicans insisted that they had won some crucial concessions from Democrats, including the elimination of a proposed $50 billion fund that would be paid for by big financial companies and would be used to help pay for putting failed banks out of business.
The Obama administration also had expressed opposition to the fund, out of concern that it would complicate efforts to deal with more costly failures of financial companies. And the Democrats already had expressed a willingness to remove the fund from the bill.
Oh, well, that's just great! You know, it seems like only a week ago, Republicans were calling that provision the "permanent bailout fund" because that was the precise lie that Frank Luntz coached them to tell, over and over again. Incensed Democrats complained about this falsehood, over and over again, and actually did pretty well in getting the media on their side. But now, it's just one more thing that nobody really liked anyway, whatever -- hope you enjoyed the Kabuki theater.
Of course, we now have the benefit of viewing Senator Christopher Dodd's FinReg bill alongside the one put forth by the GOP, and can appreciate the ways in which they parted company. (TheWashington Independent's Annie Lowrey has a great comparative analysis of which you can avail yourself.)
Significantly, the two proposals aren't exactly worlds apart. But one way in which they part company dramatically is in the area of consumer protection. Per Matt Yglesias:
The ugly part of the bill is what it does to consumer protection. On the one hand, it seemingly weakens the independence of the consumer regulator. On the other hand, it has the consumer regulator preempt any and all state regulations. This is a helpful reminder that nobody on the right actually gives a damn about federalism except as a tool to advance conservative substantive policy--federal preemption of strong state regulation is always welcome.

Spill, Baby, SPILL!


MSN Tracking Image
Oil spill, Gulf of Mexico: This April 25 satellite photo shows a portion of the Gulf oil spill from the 42,000 gallon-a-day leak from a well in the Gulf of Mexico following the April 20 oil rig explosion at the Deepwater Horizon platform.
AP/via NASA
Some say environmental impact could surpass '89 disaster
By James Eng
msnbc.com
updated 1:12 p.m. CT, Thurs., April 29, 2010
The oil leak triggered by a deadly rig blast off the coast of Louisiana has the potential to cause more environmental damage than the 1989 Exxon Valdez spill, one of the largest ecological disasters ever recorded, some observers say.
"As it is now, it's already looking like this could be the worst oil spill since the Valdez," John Hocevar, oceans campaign director for Greenpeace USA, told msnbc.com on Thursday.
"It’s quite possible this will end up being worse than the Valdez in terms of environmental impact since it seems like BP will be unable to cap the spill for months. In terms of total quantity of oil released, it seems this will probably fall short of Exxon Valdez. But because of the habitat, the environmental impact will be worse."
"Probably the only thing comparable to this is the Kuwait fires [following the Gulf War in 1991]," Mike Miller, head of Canadian oil well fire-fighting company Safety Boss, told the BBC World Service.
"The Exxon Valdez is going to pale in comparison to this as it goes on."
The spill was triggered by an explosion last week off the Louisiana coast that sank an oil rig operated by BP. Eleven workers are missing and presumed dead.
So far the leak from a blown-out well 5,000 feet under the sea is not nearly as big as the Exxon Valdez disaster, which spilled about 11 million gallons of oil into Alaska's Prince William Sound 21 years ago. BP's well is spewing about 210,000 gallons of oil a day into the ocean, the Coast Guard estimates.
But if the leak is not capped, millions of gallons of oil could spill into the Gulf of Mexico. The environmental impact could be disastrous if the oil reaches the ecologically fragile U.S. coastline.
Potential for catastrophe"If we lose the integrity of that wellhead, it could be a catastrophic spill,'' Adm. Thad Allen, commandant of the Coast Guard, which is directing efforts to contain the spreading spill, told The Miami Herald's editorial board Wednesday.
Greenpeace's Hocevar said he's particularly concerned about the impact to critically endangered bluefin tuna. "It's their spawning season and bluefin larvae in this part of their life-cycle would be near the surface of water," Hocevar said.
The oil could also harm sea turtles, which are approaching nesting season; fin whales; menhaden, a fish species harvested mostly for fish meal and fish oil; bottom-feeding oysters; and numerous species of birds, Hocevar said.
Experts said the spill could also destroy the livelihood of commercial fishermen and shrimp catchers and impact recreational fishermen. According to the Louisiana Department of Wildlife and Fisheries, the state’s fishing industry is worth $265 billion at dockside and has a total economic impact of $2.3 trillion.
Tourism also could take a blow if beaches are fouled.
Already, a federal class-action lawsuit has been filed on behalf of two commercial shrimpers from Louisiana seeking at least $5 million in compensatory damages plus an unspecified amount of punitive damages against Transocean, BP and other companies linked to the rig blast.
Louisiana opened a special shrimp season along parts of the coast to allow shrimpers to harvest the profitable white shrimp before the spill reaches the area.
Which way the wind blowsAlaska's Exxon Valdez spill contaminated more than 1,200 miles of shoreline and killed hundreds of thousands of seabirds and marine animals. More than $2 billion has been spent on cleanup and recovery, and Exxon has paid at least $1 billion in damages.
Jeffrey Short, science director for the Oceana conservation group based in Juneau, Alaska, and a former chemist and environmental expert for the National Oceanic and Atmospheric Administration, told USA Today the latest spill is "basically déjà vu all over again."
"The time scale for the Exxon Valdez, having lived through it, it took days and weeks to unfold and for us to really realize the nature of it. We're still in early days here. So far the trajectory of events has been pretty foreseeable."
James Opaluch, a professor of natural-resource economics at the University of Rhode Island, has studied more than a dozen oil spills, including the Exxon Valdez. He said the severity of the environmental consequences of the gulf spill depends largely on how much oil reaches shore.
At this point, Opaluch told msnbc.com by e-mail, the most comparable spill is the Ixtoc I oil spill in 1979, caused by a blowout and subsequent fire from a drilling rig in Mexican waters of the Gulf of Mexico. By the time the well was brought under control in March 1980, an estimated 140 million galons of oil had spilled — more than 10 times larger than Exxon Valdez. Most of the oil stayed offshore for a long time, and at least some oil eventually came onshore on Texas beaches. "Damages from Ixtoc were relatively modest, certainly much less than Exxon Valdez as far as we can tell," Opaluch said.
"I think the most important issues for the present spill are, one, how long the spill continues for, therefore how much is spilled; two, whether the spill comes ashore, and three, if it does come ashore, where it comes ashore," he said.
"The best-case scenario is for all of the oil to go into the deep waters in the gulf. The worst-case scenario is for much of the oil to come ashore in wetlands. An intermediate case is if the oil comes ashore primarily on rocky shorelines or sandy beaches."
Hocevar said he's still hopeful officials will find a way to plug the well leak, but he said a lot of environmental damage has already been done.
"This is the real cost of oil," Hocevar said. "The gulf may be the one place where we are best prepared to deal with an oil spill. This is a stark reminder of what little you can do once a spill happens."
URL: http://www.msnbc.msn.com/id/36850248/from/RSS/

© 2010 MSNBC.com
 
Published on Wednesday, March 31, 2010 by the Guardian/UK

Article printed from www.CommonDreams.org

Tuesday, April 27, 2010


AlterNet

The Surprising Reason Why Americans Are So Lonely, and Why Future Prosperity Means Socializing with Your Neighbors

By Bill McKibben, Henry Holt
Posted on April 27, 2010, Printed on April 27, 2010
http://www.alternet.org/story/146623/
Excerpted from the book EAARTH: Making a Life on a Tough New Planet by Bill McKibben. Reprinted by arrangement with Henry Holt and Company, LLC. All rights reserved. Copyright (c) 2010 by Bill McKibben.
Community may suffer from overuse more sorely than any word in the dictionary. Politicians left and right sprinkle it through their remarks the way a bad Chinese restaurant uses MSG, to mask the lack of wholesome ingredients. But we need to rescue it; we need to make sure that community will become, on this tougher planet, one of the most prosaic terms in the lexicon, like hoe or bicycle or computer. Access to endless amounts of cheap energy made us rich, and wrecked our climate, and it also made us the first people on earth who had no practical need of our neighbors.
In the halcyon days of the final economic booms, everyone on your cul de sac could have died overnight from some mysterious plague, and while you might have been sad, you wouldn't have been inconvenienced. Our economy, unlike any that came before it, is designed to work without the input of your neighbors. Borne on cheap oil, our food arrives as if by magic from a great distance (typically, two thousand miles). If you have a credit card and an Internet connection, you can order most of what you need and have it left anonymously at your door. We've evolved a neighborless lifestyle; on average an American eats half as many meals with family and friends as she did fifty years ago. On average, we have half as many close friends.
I've written extensively, in a book called Deep Economy, about the psychological implications of our hyperindividualism. In short, we're less happy than we used to be, and no wonder -- we are, after all, highly evolved social animals. There aren't enough iPods on earth to compensate for those missing friendships. But I'm determined to be relentlessly practical -- to talk about surviving, not thriving. And so it heartens me that around the world people are starting to purposefully rebuild communities as functioning economic entities, in the hope that they'll be able to buffer some of the effects of peak oil and climate change.
The Transition Town movement began in England and has spread to North America and Asia; in one city after another, people are building barter networks, expanding community gardens. And they've paid equal, or even greater, attention to suburbia; in the developed world, after all, that's where most people live. Though our sprawl is designed for the car, the sunk costs of those tens of millions of houses mean they're not going to disappear just because the price of gas rises. They'll have to change instead. "Suburbia, not as a model for material consumption, but as a legal and social lattice of decentralized and more uniformly distributed production land ownership, has the potential to serve as the foundation for just such a pioneering adaptation," writes Jeff Vail, a widely read economic theorist who envisions "a Resilient Suburbia."
In fact, quite sober economists have begun to insist that even in our seemingly globalized world, our economies are actually far more local than we realize. Despite the "pervasive image of a single U.S. economy," the economists William Barnes and Larry Ledeber write, "local economies -- primarily metropolitan-centered and strongly linked -- are the real economies in the United States." They build, with rich statistical backing, on the original insights of thinkers like Jane Jacobs, who always insisted that the city was the fundamental building block of our economic life. These "Local Economic Regions" comprise the web of transportation and communication links, the chain of educational institutions in a region, and the web of emotional ties. (My Vermont neighbors may not care much how many gold medals the United States captured at the Olympics, but they are deeply involved with how many runs the Red Sox scored last night.)
Those local economies were originally shaped by geography -- a port, a river, a low place in the mountains where you could build a canal. For a while those assets seemed less important; with endless cheap energy, you could always put something on a truck or a plane. But the cities built on those early patterns persisted; they were a sunk cost, too. No one was going to move Buffalo, with its museums and universities and square miles of housing stock, just because the highway had bypassed the Erie Canal. (And now some of those original assets may be returning to prominence. The Erie Canal, for instance, has seen a marked upswing in business as the price of oil rises, because a gallon of diesel pulls a ton of cargo 59 miles by truck, but 514 miles in a barge.) Shanghai is 7,371 miles from New York. It's true that Chinese workers cost you a dollar an hour, but at some point the math shifts.
Even David Ricardo, the nineteenth-century economist who helped kick off globalization with his theory of comparative advantage, never quite imagined the Flat Earth we've lately celebrated.
It was true, he said, that since Britain could make cloth more cheaply, and Portugal wine, each country should specialize. He believed, however, that capital would stay at home, due to "the natural disinclination which every man has to quit the country of his birth and connexions and entrust himself, with all his habits fixed, to a strange government and new laws. These feelings, which I should be sorry to see weakened, induce most men of property to be satisfied with a low rate of profit in their own country, rather than seek a more advantageous employment for their wealth in foreign nations."
David Ricardo, meet Woody Tasch. A New Mexico-based venture capitalist and the founder of the Slow Money movement, Tasch focuses on finding funds to help local businesses grow a little larger. Not the kind of money that's looking for a 20 percent annual gain; when that happens, everything but return gets pushed aside. What Tasch has in mind is a consistent, sound, 3 or 4 percent return, which at the same time benefits the community where both the investor and the business live.
"These kinds of local businesses are by definition going to be lower risk, because they're embedded in their communities, they're cooperating with each other," he says. They can use those networks to grow, but only up to a certain point -- and you only want to grow to a point. Ben and Jerry's was great when it was a Burlington ice cream shop, and pretty neat when it was a regional brand -- but now it's owned by Unilever. What if your newspaper wasn't owned by some corporate overlord looking for a 20 percent return? What if a small annual profit was enough? Maybe it would still be covering the city council and sending a reporter on the road with the baseball team.
But in our world, it's actually harder than you'd think to stay small. To understand why, visit the Farmers Diner, one of my favorite restaurants but also a place that illustrates just how hard it can be to find the sweet spot. How local is the Farmers Diner? The first thing you see when you walk in the door of their outlet in the Vermont town of Quechee is a jukebox, glinting like any diner jukebox. Some Willie Nelson, some John Cougar Mellencamp. But half the albums are by Vermonters. Phish, sure. But it's Grace Potter and the Nocturnals who get the most play. And they're just the start. You'll find the Starline Rhythm Boys (singing "The Tavern Parking Lot") and Banjo Dan and the Mid-Nite Plowboys ("The Cider Song"). And Patti Casey, of course. Never heard of Patti Casey? Your loss, but that's the point. In an economy where music comes from L.A. or Nashville, she's from here.
The menu, at first glance, looks like any diner menu. Hash and eggs. Liver and onions. Bacon cheeseburger. Pancakes. At diner prices: $5 for a grilled cheese, home fries for $1.75. But look a little closer: almost every item comes with a modest biography. The blue cheese comes from Jasper Hill Farm in Greensboro. The yogurt is from Butterworks Farm up in Westfield, which also supplies wheat flour for the pancakes. In an economy where diner food rolls up on an eighteen-wheeler from the factory farms of the South and Midwest, your Farmers Diner patty melt is like the music on the jukebox: it comes from here.
And it comes with an attitude. One page of the menu is given over to the Kentucky farmer and writer Wendell Berry's magnificent poem "Manifesto: The Mad Farmer Liberation Front": "So, friends, every day do something / that won't compute...." Another is taken up by Thomas Jefferson's 1803 letter calling for a conversion of the nation's "charitable" institutions into "schools of agriculture" so our citizens may "increase the productions of the nation instead of consuming them." This may be the only diner in the world that comes with a mission statement: "to increase the economic vitality of local agrarian communities." The bumper sticker above the counter says it even more plainly: "Think Globally -- Act Neighborly."
But it also comes with a problem. In the words of the owner, Tod Murphy, "How do you create a company that will take food off the farmer's hands in the easiest way for him, and set it in front of the customers in the easiest way for them, and do it at a price point everyone can live with?" Tailing him for a day as he made the rounds of his suppliers shows both the promise and the difficulty of the idea. You could start the morning in Strafford, say, at Rock Bottom Farm, where Earl Ransom's cows were producing organic milk and cream on the land where he was born. "I had to educate people that cream isn't necessarily white," Murphy recalled. "When the cows went out to pasture in the spring, the half-and-half changed color noticeably, and the waitresses were afraid people would freak."
It doesn't always go so easily, though. Consider, for instance, the pig. When the first Farmers Diner opened in Barre, it needed bacon -- you can't have a diner without bacon. The problem was that no one was producing pork commercially in Vermont. Fifty years ago, sure, every farm had a few hogs growing fat on leftover milk from the dairy herd. But as agriculture became a commodity business -- as dairy producers concentrated on cows, and pork producers on pigs -- that changed. Vermont dairies became fewer in number and much, much bigger; in other parts of the nation the same thing happened with hogs.
According to Brian Halweil in his book Eat Here, there's a hog farm in Utah with 1.5 million pigs. That's absurd -- the pigs produce more solid waste each day than the entire city of Los Angeles. But it's also cheap -- so cheap that it sets the psychological price for a pound of bacon pretty low. So when Murphy wanted to buy pigs for his bacon and sausage, he approached a few farmers to see whether they were interested. One was Maple Wind Farm, a breeder in Huntington raising fifty hogs a year, mostly to sell at farmers' markets. They're fed on grass and organic grains -- the pork tastes absolutely incredible -- and they fetch good money. "We get $7.50 a pound for bacon at the farmers' market, and $8.50 a pound for pork chops," says Beth Whiting, who runs the farm with her husband, Bruce Hennessey. So when Murphy asked them if they could raise him some pigs at eighty-nine cents a pound, "we had to bury our laughter."
And yet eighty-nine cents a pound is more than the upscale national pork producer Niman Ranch pays its contract pig farmers. In essence, it's a Goldilocks problem: somehow Murphy has to find just the right size. What his operation really requires is not huge commodity producers or small, incredibly wonderful gourmet farms. "What I need are 1950s-size farms," he says. Not a million hogs, but not fifty, either -- maybe three or four hundred. Not organic operations necessarily, just family farms. Precisely, in other words, the kinds of farms that have almost all gone out of business in recent decades.
Murphy can still find vegetable growers to fit his scale, for example, someone to plant the five acres of cucumbers he needs for his pickles. But to help rebuild the supply of meat and chicken farmers, he's launching a nonprofit foundation. Named for a character in one of Wendell Berry's novels, the Jack Beecham Foundation will help growers with business plans and marketing strategies. Woody Tasch has been helping.
All this to make a smoked-turkey club. Or, to read from today's specials menu, some poached Vermont eggs with Cabot cheddar cream sauce. Or some maple butternut squash. Or some Cortland apple cobbler topped with local granola, and a scoop of that Strafford ice cream. With some Grace Potter wailing from the jukebox. For change back from a ten-dollar bill, it doesn't get much sweeter than this. It should work. It should spread. If the eaarth is going to support restaurants, they'll need to look like the Farmers Diner.
Across the country communities have begun to transform themselves. They encounter the same kinds of problems that trip up Murphy, but they find solutions, too. Often a farmers' market is the catalyst -- not just because people find that they like local produce, but because they actually meet each other again. This is not sentiment talking; this is data. A team of sociologists recently followed shoppers around supermarkets and then farmers' markets. You know the drill at the Stop'n'Shop: you come in the automatic door, fall into a light fluorescent trance, visit the stations of the cross around the perimeter of the store, exit after a discussion of credit or debit, paper or plastic. But that's not what happens at farmers' markets. On average, the sociologists found, people were having ten times as many conversations per visit. They were starting to rebuild the withered network that we call a community. So it shouldn't surprise us that farmers' markets are the fastest-growing part of our food economy; they are simply the way that humans have always shopped, acquiring gossip and good cheer along with calories.
Environmentalist and author Bill McKibben is the founder of 350.org, an international climate campaign.
© 2010 Henry Holt All rights reserved.
View this story online at: http://www.alternet.org/story/146623/




rolling blackouts push california toward energy indepenence...should other states follow?

...California

Though the term did not enter popular use in the U.S. until the California electricity crisis of the early 2000s, outages had indeed occurred previously. The outages were almost always triggered by unusually hot temperatures during the summer, which causes a surge in demand due to heavy use of air conditioning. However, in 2004, taped conversations of Enron traders became public showing that traders were purposely manipulating the supply of electricity, in order to raise energy prices.

On December 13, 2003, shortly before leaving office, Governor Gray Davis officially brought the energy crisis to an end by issuing a proclamation ending the state of emergency he declared on January 17, 2001. The state of emergency allowed the state to buy electricity for the financially strapped utility companies. The emergency authority allowed Davis to order the California Energy Commission to streamline the application process for new power plants. During that time, California issued licenses to 38 new power plants, amounting to 14,365 megawatts of electricity production when completed.

Rolling blackouts were again imposed in late August 2005 in Southern California due to the loss of a key transmission line; the transmission line shut itself off because of a faulty sensor.

Most of California is divided into 14 power grids, each containing approximately 7% of electricity customers in the state, creating a total of 98%. The remaining 2% are placed on a separate grid, where users such as hospitals and police stations are exempt from ever having their power deliberately cut off.

In a Stage 1 emergency only a general call for voluntary conservation is issued, while a Stage 2 emergency results in power being temporarily cut off to certain large users, primarily industrial concerns, who have agreed to this arrangement in exchange for lower rates. When a Stage 3 power emergency is declared, electricity to one of the grids is shut off for a fixed period of time, which can range from 60 minutes to 2½ hours. If after this period of time the Stage 3 emergency still exists, power is restored to this grid but then the next grid in the sequence is blacked out, and so on, until the situation is stabilized — the blackout thus "rolls" from one grid to the next.

In California, each customer's electric bill includes the number of the power grid (from 1 to 14) that customer belongs to; this gives customers at least some advance notice of when their electricity might be turned off in the event of a Stage 3 emergency. The grids are set up in such a manner as to ensure that a large percentage of customers in the same neighborhood would not be blacked out concurrently, which could invite looting and other related problems. Normal electricity customers can fall within the areas reserved for emergency use (if they are near a hospital or other critical infrastructure), in which case their electric bill will indicate a power grid of 99 and they will not be affected by rolling blackouts....


Tapes Show Enron Caused Rolling Blackouts in California

  Tapes Show Enron Arranged Plant Shutdown
  By Timothy Egan
  The New York Times

  Friday 04 February 2005

  EVERETT, Wash - In the midst of the California energy troubles in early 2001, when power plants were under a federal order to deliver a full output of electricity, the Enron Corporation arranged to take a plant off-line on the same day that California was hit by rolling blackouts, according to audiotapes of company traders released here on Thursday.

  The tapes and memorandums were made public by a small public utility north of Seattle that is fighting Enron over a power contract. They also showed that Enron, as early as 1998, was creating artificial energy shortages and running up prices in Canada in advance of California's larger experiment with deregulation.

  The tapes provide new details of market manipulation during the California energy crisis that produced blackouts and billions of dollars of surcharges to homes and businesses on the West Coast in 2000 and 2001.

  In one January 2001 telephone tape of an Enron trader the public utility identified as Bill Williams and a Las Vegas energy official identified only as Rich, an agreement was made to shut down a power plant providing energy to California. The shutdown was set for an afternoon of peak energy demand.

  "This is going to be a word-of-mouth kind of thing," Mr. Williams says on the tape. "We want you guys to get a little creative and come up with a reason to go down." After agreeing to take the plant down, the Nevada official questioned the reason. "O.K., so we're just coming down for some maintenance, like a forced outage type of thing?" Rich asks. "And that's cool?"

  "Hopefully," Mr. Williams says, before both men laugh.

  The next day, Jan. 17, 2001, as the plant was taken out of service, the State of California called a power emergency, and rolling blackouts hit up to a half-million consumers, according to daily logs of the western power grid.

  Officials with the Snohomish County Public Utility District in Washington State, which released the tapes, said they believed Enron officials had taken similar measures with other power plants. This tape, they said, was proof of what was going on.

  At the time, power plants in the greater West Coast grid were under a federal emergency order to keep their plants running.

  A spokeswoman for Enron, Jennifer Lowney, would not comment on the tapes, citing a blanket policy of the energy trading company, which is operating under bankruptcy protection and facing multiple criminal and civil proceedings. "We continue to cooperate with all ongoing investigations," she said.

  Conversations between energy traders and power plants were routinely recorded to give a record of transactions. The tapes were part of a large seizure of evidence by the F.B.I. The Snohomish County utility, which is in a court battle with Enron, obtained them through a legal action.

  Previous tapes released by the district last summer showed Enron officials joking about how they were "stealing" more than a $1 million a day from California and fleecing "Grandma Millie" while bringing Enron record profits.

  Other tapes released on Thursday showed Enron executives discussing their fear of going to jail for manipulating power markets in Canada and the United States. And memos showed that Enron practiced as early as 1998 to create artificial shortages and run up prices and extend the market manipulation to Canada.

  Three former Enron traders have pleaded guilty to federal criminal charges of fraudulently manipulating the West Coast energy market. Enron's former chairman, Kenneth L. Lay, and former president, Jeffrey K. Skilling, are under federal indictment for fraud.

  In cooperating with federal officials, West Coast traders have told how they devised schemes named "Death Star" and "Get Shorty" to make billions of dollars out of California's disastrous experiment with energy deregulation.

  But until the tapes were released on Thursday, there had been few public details of how Enron set in motion the phony power shortages.

  Company officials had long denied that they illegally shut down plants to create artificial shortages. In March 2001 - two months after the recording showed how the Nevada plant was shut down- Mr. Lay called any claims of market manipulation "conspiracy theories."

  Memos uncovered by Snohomish County also show that Enron rewarded midlevel executives based on their performance in manipulating the West Coast market.

  The tapes and memos were filed this week with the Federal Energy Regulatory Commission, as part of a broad investigation into how much money was lost by Enron market manipulation. Snohomish County is seeking to void a $122 million lawsuit by Enron over an energy contract the utility said was based on fraud.


NOVA | The Big Energy Gamble | PBS



By Jacob Goldstein
Did Goldman Sachs make money or lose money when the housing market collapsed? There's been a lot of hand waving about this question in the runup to today's Senate hearings on Goldman.
But the question is largely irrelevant.

Carl Levin, who chairs the subcommittee that's holding the hearings, says Goldman made money in 2007 from betting that housing prices would fall.
"Goldman Sachs made billions of dollars from betting against the housing market, and it placed those bets in some cases at the same time it was selling mortgage related securities to its clients," Levin said in a statement.
This overview from Goldman suggests the firm did make money from the housing market in 2007 -- then lost a lot of money in 2008, as the housing market continued to decline.
"During the two years of the financial crisis, while profitable overall, Goldman Sachs lost approximately $1.2 billion from our activities in the residential housing market," Lloyd Blankfein says in his testimony prepared for today's hearing.
It's possible that both men are right -- Goldman may have made a profit on its mortgage bets in 2007, then lost enough in 2008 to wipe out the previous year's profits.
But it doesn't really matter who's right.
Some of Goldman Sachs's clients were betting the housing market would rise in 2007 and 2008. Some were betting it would fall. Goldman itself made some bets that would pay off if the market rose, and others that would pay off if the market fell.
In a sense, a company like Goldman -- which is in the middle of all sorts of transactions, and is also making its own bets on the market -- is always betting in the same direction as some of its clients, and betting in the opposite direction as others.
Somehow, this seems to inspires less ire when Goldman takes a long position -- that is, when it bets that the market will go up. Suppose Goldman had been long the housing market during the entire crisis, and had clearly lost a lot of money. It seems unlikely that anyone would be saying that Goldman improperly "bet against" its clients that were short the housing market at the time.
So the key question isn't whether Goldman was net short or net long the housing market. It's whether the company told its clients everything it should have told them.
The issue of disclosure is at the center of the SEC's fraud lawsuit against Goldman. The SEC says Goldman wrongly failed to tell its clients about the role of a hedge fund that took a short position on a mortgage-related security. Goldman denies the charges.
Beyond the single transaction at issue in the SEC lawsuit, questions about what Goldman told its clients -- whether it told them the truth, and whether it kept secret facts it should have disclosed -- may ultimately be more important than whether the bank was short or long.

AlterNet

Taibbi: The Lunatics Who Made a Religion Out of Greed and Wrecked the Economy

By Matt Taibbi, The Guardian
Posted on April 26, 2010, Printed on April 27, 2010
http://www.alternet.org/story/146611/

So Goldman Sachs, the world's greatest and smuggest investment bank, has been sued for fraud by the American Securities and Exchange Commission. Legally, the case hangs on a technicality.
Morally, however, the Goldman Sachs case may turn into a final referendum on the greed-is-good ethos that conquered America sometime in the 80s – and in the years since has aped other horrifying American trends such as boybands and reality shows in spreading across the western world like a venereal disease.
When Britain and other countries were engulfed in the flood of defaults and derivative losses that emerged from the collapse of the American housing bubble two years ago, few people understood that the crash had its roots in the lunatic greed-centered objectivist religion, fostered back in the 50s and 60s by ponderous emigre novelist Ayn Rand.
While, outside of America, Russian-born Rand is probably best known for being the unfunniest person western civilisation has seen since maybe Goebbels or Jack the Ripper (63 out of 100 colobus monkeys recently forced to read Atlas Shrugged in a laboratory setting died of boredom-induced aneurysms), in America Rand is upheld as an intellectual giant of limitless wisdom. Here in the States, her ideas are roundly worshipped even by people who've never read her books or even heard of her. The rightwing "Tea Party" movement is just one example of an entire demographic that has been inspired to mass protest by Rand without even knowing it.
Last summer I wrote a brutally negative article about Goldman Sachs for Rolling Stone magazine (I called the bank a "great vampire squid wrapped around the face of humanity") that unexpectedly sparked a heated national debate. On one side of the debate were people like me, who believed that Goldman is little better than a criminal enterprise that earns its billions by bilking the market, the government, and even its own clients in a bewildering variety of complex financial scams.
On the other side of the debate were the people who argued Goldman wasn't guilty of anything except being "too smart" and really, really good at making money. This side of the argument was based almost entirely on the Randian belief system, under which the leaders of Goldman Sachs appear not as the cheap swindlers they look like to me, but idealized heroes, the saviors of society.
In the Randian ethos, called objectivism, the only real morality is self-interest, and society is divided into groups who are efficiently self-interested (ie, the rich) and the "parasites" and "moochers" who wish to take their earnings through taxes, which are an unjust use of force in Randian politics. Rand believed government had virtually no natural role in society. She conceded that police were necessary, but was such a fervent believer in laissez-faire capitalism she refused to accept any need for economic regulation – which is a fancy way of saying we only need law enforcement for unsophisticated criminals.
Rand's fingerprints are all over the recent Goldman story. The case in question involves a hedge fund financier, John Paulson, who went to Goldman with the idea of a synthetic derivative package pegged to risky American mortgages, for use in betting against the mortgage market. Paulson would short the package, called Abacus, and Goldman would then sell the deal to suckers who would be told it was a good bet for a long investment. The SEC's contention is that Goldman committed a crime – a "failure to disclose" – when they failed to tell the suckers about the role played by the vulture betting against them on the other side of the deal.
Now, the instruments in question in this deal – collateralized debt obligations and credit default swaps – fall into the category of derivatives, which are virtually unregulated in the US thanks in large part to the effort of gremlinish former Federal Reserve chairman Alan Greenspan, who as a young man was close to Rand and remained a staunch Randian his whole life. In the late 90s, Greenspan lobbied hard for the passage of a law that came to be called the Commodity Futures Modernisation Act of 2000, a monster of a bill that among other things deregulated the sort of interest-rate swaps Goldman used in its now-infamous dealings with Greece.
Both the Paulson deal and the Greece deal were examples of Goldman making millions by bending over their own business partners. In the Paulson deal the suckers were European banks such as ABN-Amro and IKB, which were never told that the stuff Goldman was cheerfully selling to them was, in effect, designed to implode; in the Greece deal, Goldman hilariously used exotic swaps to help the country mask its financial problems, then turned right around and bet against the country by shorting Greece's debt.
Now here's the really weird thing. Confronted with the evidence of public outrage over these deals, the leaders of Goldman will often appear to be genuinely confused, scratching their heads and staring quizzically into the camera like they don't know what you're upset about. It's not an act. There have been a lot of greedy financiers and banks in history, but what makes Goldman stand out is its truly bizarre cultist/religious belief in the rightness of what it does.
The point was driven home in England last year, when Goldman's international adviser, sounding exactly like a character in Atlas Shrugged, told an audience at St Paul's Cathedral that "The injunction of Jesus to love others as ourselves is an endorsement of self-interest". A few weeks later, Goldman CEO Lloyd Blankfein told the Times that he was doing "God's work".
Even if he stands to make a buck at it, even your average used-car salesman won't sell some working father a car with wobbly brakes, then buy life insurance policies on that customer and his kids. But this is done almost as a matter of routine in the financial services industry, where the attitude after the inevitable pileup would be that that family was dumb for getting into the car in the first place. Caveat emptor, dude!
People have to understand this Randian mindset is now ingrained in the American character. You have to live here to see it. There's a hatred toward "moochers" and "parasites" – the Tea Party movement, which is mainly a bunch of pissed off suburban white people whining about minorities consuming social services, describes the battle as being between "water-carriers" and "water-drinkers". And regulation of any kind is deeply resisted, even after a disaster as sweeping as the 2008 crash.
This debate is going to be crystallised in the Goldman case. Much of America is going to reflexively insist that Goldman's only crime was being smarter and better at making money than IKB and ABN-Amro, and that the intrusive, meddling government (in the American narrative, always the bad guy!) should get off Goldman's Armani-clad back. Another side is going to argue that Goldman winning this case would be a rebuke to the whole idea of civilisation – which, after all, is really just a collective decision by all of us not to screw each other over even when we can. It's an important moment in the history of modern global capitalism: whether or not to move forward into a world of greed without limits.

Matt Taibbi is a writer for Rolling Stone.
© 2010 The Guardian All rights reserved.
View this story online at: http://www.alternet.org/story/146611/

Sunday, April 25, 2010

The White Stripes- One More Cup of Coffee

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Tuesday, April 13, 2010

Why Working People Are Angry And Why Politicians Should Listen | | AlterNet
April 12, 2010  |  
Remarks by AFL-CIO President Richard L. Trumka at the Institute of Politics, Harvard Kennedy School.

Rollingstone.com
Back to Looting Main Street

Looting Main Street

How the nation's biggest banks are ripping off American cities with the same predatory deals that brought down Greece

MATT TAIBBI
Posted Mar 31, 2010 8:15 AM
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If you want to know what life in the Third World is like, just ask Lisa Pack, an administrative assistant who works in the roads and transportation department in Jefferson County, Alabama. Pack got rudely introduced to life in post-crisis America last August, when word came down that she and 1,000 of her fellow public employees would have to take a little unpaid vacation for a while. The county, it turned out, was more than $5 billion in debt — meaning that courthouses, jails and sheriff's precincts had to be closed so that Wall Street banks could be paid.
As public services in and around Birmingham were stripped to the bone, Pack struggled to support her family on a weekly unemployment check of $260. Nearly a fourth of that went to pay for her health insurance, which the county no longer covered. She also fielded calls from laid-off co-workers who had it even tougher. "I'd be on the phone sometimes until two in the morning," she says. "I had to talk more than one person out of suicide. For some of the men supporting families, it was so hard — foreclosure, bankruptcy. I'd go to bed at night, and I'd be in tears."
Homes stood empty, businesses were boarded up, and parts of already-blighted Birmingham began to take on the feel of a ghost town. There were also a few bills that were unique to the area — like the $64 sewer bill that Pack and her family paid each month. "Yeah, it went up about 400 percent just over the past few years," she says.
The sewer bill, in fact, is what cost Pack and her co-workers their jobs. In 1996, the average monthly sewer bill for a family of four in Birmingham was only $14.71 — but that was before the county decided to build an elaborate new sewer system with the help of out-of-state financial wizards with names like Bear Stearns, Lehman Brothers, Goldman Sachs and JP Morgan Chase. The result was a monstrous pile of borrowed money that the county used to build, in essence, the world's grandest toilet — "the Taj Mahal of sewer-treatment plants" is how one county worker put it. What happened here in Jefferson County would turn out to be the perfect metaphor for the peculiar alchemy of modern oligarchical capitalism: A mob of corrupt local officials and morally absent financiers got together to build a giant device that converted human shit into billions of dollars of profit for Wall Street — and misery for people like Lisa Pack.
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And once the giant shit machine was built and the note on all that fancy construction started to come due, Wall Street came back to the local politicians and doubled down on the scam. They showed up in droves to help the poor, broke citizens of Jefferson County cut their toilet finance charges using a blizzard of incomprehensible swaps and refinance schemes — schemes that only served to postpone the repayment date a year or two while sinking the county deeper into debt. In the end, every time Jefferson County so much as breathed near one of the banks, it got charged millions in fees. There was so much money to be made bilking these dizzy Southerners that banks like JP Morgan spent millions paying middlemen who bribed — yes, that's right, bribed, criminally bribed — the county commissioners and their buddies just to keep their business. Hell, the money was so good, JP Morgan at one point even paid Goldman Sachs $3 million just to back the fuck off, so they could have the rubes of Jefferson County to fleece all for themselves.
Birmingham became the poster child for a new kind of giant-scale financial fraud, one that would threaten the financial stability not only of cities and counties all across America, but even those of entire countries like Greece. While for many Americans the financial crisis remains an abstraction, a confusing mess of complex transactions that took place on a cloud high above Manhattan sometime in the mid-2000s, in Jefferson County you can actually see the rank criminality of the crisis economy with your own eyes; the monster sticks his head all the way out of the water. Here you can see a trail that leads directly from a billion-dollar predatory swap deal cooked up at the highest levels of America's biggest banks, across a vast fruited plain of bribes and felonies — "the price of doing business," as one JP Morgan banker says on tape — all the way down to Lisa Pack's sewer bill and the mass layoffs in Birmingham.
Once you follow that trail and understand what took place in Jefferson County, there's really no room left for illusions. We live in a gangster state, and our days of laughing at other countries are over. It's our turn to get laughed at. In Birmingham, lots of people have gone to jail for the crime: More than 20 local officials and businessmen have been convicted of corruption in federal court. Last October, right around the time that Lisa Pack went back to work at reduced hours, Birmingham's mayor was convicted of fraud and money-laundering for taking bribes funneled to him by Wall Street bankers — everything from Rolex watches to Ferragamo suits to cash. But those who greenlighted the bribes and profited most from the scam remain largely untouched. "It never gets back to JP Morgan," says Pack.
If you want to get all Glenn Beck about it, you could lay the blame for this entire mess at the feet of weepy, tree-hugging environmentalists. It all started with the Cahaba River, the longest free-flowing river in the state of Alabama. The tributary, which winds its way through Birmingham before turning diagonally to empty out near Selma, is home to more types of fish per mile than any other river in America and shelters 64 rare and imperiled species of plants and animals. It's also the source of one of the worst municipal financial disasters in American history.
Back in the early 1990s, the county's sewer system was so antiquated that it was leaking raw sewage directly into the Cahaba, which also supplies the area with its drinking water. Joined by well — intentioned citizens from the Cahaba River Society, the EPA sued the county to force it to comply with the Clean Water Act. In 1996, county commissioners signed a now-infamous consent decree agreeing not just to fix the leaky pipes but to eliminate all sewer overflows — a near-impossible standard that required the county to build the most elaborate, ecofriendly, expensive sewer system in the history of the universe. It was like ordering a small town in Florida that gets a snowstorm once every five years to build a billion-dollar fleet of snowplows.
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The original cost estimates for the new sewer system were as low as $250 million. But in a wondrous demonstration of the possibilities of small-town graft and contract-padding, the price tag quickly swelled to more than $3 billion. County commissioners were literally pocketing wads of cash from builders and engineers and other contractors eager to get in on the project, while the county was forced to borrow obscene sums to pay for the rapidly spiraling costs. Jefferson County, in effect, became one giant, TV-stealing, unemployed drug addict who borrowed a million dollars to buy the mother of all McMansions — and just as it did during the housing bubble, Wall Street made a business of keeping the crook in his house. As one county commissioner put it, "We're like a guy making $50,000 a year with a million-dollar mortgage."
To reassure lenders that the county would pay its mortgage, commissioners gave the finance director — an unelected official appointed by the president of the commission — the power to automatically raise sewer rates to meet payments on the debt. The move brought in billions in financing, but it also painted commissioners into a corner. If costs continued to rise — and with practically every contractor in Alabama sticking his fingers on the scale, they were rising fast — officials would be faced with automatic rate increases that would piss off their voters. (By 2003, annual interest on the sewer deal had reached $90 million.) So the commission reached out to Wall Street, looking for creative financing tools that would allow it to reduce the county's staggering debt payments.
Wall Street was happy to help. First, it employed the same trick it used to fuel the housing crisis: It switched the county from a fixed rate on the bonds it had issued to finance the sewer deal to an adjustable rate. The refinancing meant lower interest payments for a couple of years — followed by the risk of even larger payments down the road. The move enabled county commissioners to postpone the problem for an election season or two, kicking it to a group of future commissioners who would inevitably have to pay the real freight.
But then Wall Street got really creative. Having switched the county to a variable interest rate, it offered commissioners a crazy deal: For an extra fee, the banks said, we'll allow you to keep paying a fixed rate on your debt to us. In return, we'll give you a variable amount each month that you can use to pay off all that variable-rate interest you owe to bondholders.
In financial terms, this is known as a synthetic rate swap — the spidery creature you might have read about playing a role in bringing down places like Greece and Milan. On paper, it made sense: The county got the stability of a fixed rate, while paying Wall Street to assume the risk of the variable rates on its bonds. That's the synthetic part. The trouble lies in the rate swap. The deal only works if the two variable rates — the one you get from the bank, and the one you owe to bondholders — actually match. It's like gambling on the weather. If your bondholders are expecting you to pay an interest rate based on the average temperature in Alabama, you don't do a rate swap with a bank that gives you back a rate pegged to the temperature in Nome, Alaska.
Not unless you're a fucking moron. Or your banker is JP Morgan.
In a small office in a federal building in downtown Birmingham, just blocks from where civil rights demonstrators shut down the city in 1963, Assistant U.S. Attorney George Martin points out the window. He's pointing in the direction of the Tutwiler Hotel, once home to one of the grandest ballrooms in the South but now part of the Hampton Inn chain.
"It was right around the corner here, at the hotel," Martin says. "That's where they met — that's where this all started."
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They means Charles LeCroy and Bill Blount, the two principals in what would become the most important of all the corruption cases in Jefferson County. LeCroy was a banker for JP Morgan, serving as managing director of the bank's southeast regional office. Blount was an Alabama wheeler-dealer with close friends on the county commission. For years, when Wall Street banks wanted to do business with municipalities, whether for bond issues or rate swaps, it was standard practice to reach out to a local sleazeball like Blount and pay him a shitload of money to help seal the deal. "Banks would pay some local consultant, and the consultant would then funnel money to the politician making the decision," says Christopher Taylor, the former head of the board that regulates municipal borrowing. Back in the 1990s, Taylor pushed through a ban on such backdoor bribery. He also passed a ban on bankers contributing directly to politicians they do business with — a move that sparked a lawsuit by one aggrieved sleazeball, who argued that halting such legalized graft violated his First Amendment rights. The name of that pissed-off banker? "It was the one and only Bill Blount," Taylor says with a laugh.
Blount is a stocky, stubby-fingered Southerner with glasses and a pale, pinched face — if Norman Rockwell had ever done a painting titled "Small-Town Accountant Taking Enormous Dump," it would look just like Blount. LeCroy, his sugar daddy at JP Morgan, is a tall, bloodless, crisply dressed corporate operator with a shiny bald head and silver side patches — a cross between Skeletor and Michael Stipe.
The scheme they operated went something like this: LeCroy paid Blount millions of dollars, and Blount turned around and used the money to buy lavish gifts for his close friend Larry Langford, the now-convicted Birmingham mayor who at the time had just been elected president of the county commission. (At one point Blount took Langford on a shopping spree in New York, putting $3,290 worth of clothes from Zegna on his credit card.) Langford then signed off on one after another of the deadly swap deals being pushed by LeCroy. Every time the county refinanced its sewer debt, JP Morgan made millions of dollars in fees. Even more lucrative, each of the swap contracts contained clauses that mandated all sorts of penalties and payments in the event that something went wrong with the deal. In the mortgage business, this process is known as churning: You keep coming back over and over to refinance, and they keep "churning" you for more and more fees. "The transactions were complex, but the scheme was simple," said Robert Khuzami, director of enforcement for the SEC. "Senior JP Morgan bankers made unlawful payments to win business and earn fees."
Given the shitload of money to be made on the refinancing deals, JP Morgan was prepared to pay whatever it took to buy off officials in Jefferson County. In 2002, during a conversation recorded in Nixonian fashion by JP Morgan itself, LeCroy bragged that he had agreed to funnel payoff money to a pair of local companies to secure the votes of two county commissioners. "Look," the commissioners told him, "if we support the synthetic refunding, you guys have to take care of our two firms." LeCroy didn't blink. "Whatever you want," he told them. "If that's what you need, that's what you get. Just tell us how much."
Just tell us how much. That sums up the approach that JP Morgan took a few months later, when Langford announced that his good buddy Bill Blount would henceforth be involved with every financing transaction for Jefferson County. From JP Morgan's point of view, the decision to pay off Blount was a no-brainer. But the bank had one small problem: Goldman Sachs had already crawled up Blount's trouser leg, and the broker was advising Langford to pick them as Jefferson County's investment bank.
The solution they came up with was an extraordinary one: JP Morgan cut a separate deal with Goldman, paying the bank $3 million to fuck off, with Blount taking a $300,000 cut of the side deal. Suddenly Goldman was out and JP Morgan was sitting in Langford's lap. In another conversation caught on tape, LeCroy joked that the deal was his "philanthropic work," since the payoff amounted to a "charitable donation to Goldman Sachs" in return for "taking no risk."
That such a blatant violation of anti-trust laws took place and neither JP Morgan nor Goldman have been prosecuted for it is yet another mystery of the current financial crisis. "This is an open-and-shut case of anti-competitive behavior," says Taylor, the former regulator.
With Goldman out of the way, JP Morgan won the right to do a $1.1 billion bond offering — switching Jefferson County out of fixed-rate debt into variable-rate debt — and also did a corresponding $1.1 billion deal for a synthetic rate swap. The very same day the transaction was concluded, in May 2003, LeCroy had dinner with Langford and struck a deal to do yet another bond-and-swap transaction of roughly the same size. This time, the terms of the payoff were spelled out more explicitly. In a hilarious phone call between LeCroy and Douglas MacFaddin, another JP Morgan official, the two bankers groaned aloud about how much it was going to cost to satisfy Blount:
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LeCroy: I said, "Commissioner Langford, I'll do that because that's your suggestion, but you gotta help us keep him under control. Because when you give that guy a hand, he takes your arm." You know?
MacFaddin: [Laughing] Yeah, you end up in the wood-chipper.
All told, JP Morgan ended up paying Blount nearly $3 million for "performing no known services," in the words of the SEC. In at least one of the deals, Blount made upward of 15 percent of JP Morgan's entire fee. When I ask Taylor what a legitimate consultant might earn in such a circumstance, he laughs. "What's a 'legitimate consultant' in a case like this? He made this money for doing jack shit."
As the tapes of LeCroy's calls show, even officials at JP Morgan were incredulous at the money being funneled to Blount. "How does he get 15 percent?" one associate at the bank asks LeCroy. "For doing what? For not messing with us?"
"Not messing with us," LeCroy agrees. "It's a lot of money, but in the end, it's worth it on a billion-dollar deal."
That's putting it mildly: The deals wound up being the largest swap agreements in JP Morgan's history. Making matters worse, the payoffs didn't even wind up costing the bank a dime. As the SEC explained in a statement on the scam, JP Morgan "passed on the cost of the unlawful payments by charging the county higher interest rates on the swap transactions." In other words, not only did the bank bribe local politicians to take the sucky deal, they got local taxpayers to pay for the bribes. And because Jefferson County had no idea what kind of deal it was getting on the swaps, JP Morgan could basically charge whatever it wanted. According to an analysis of the swap deals commissioned by the county in 2007, taxpayers had been overcharged at least $93 million on the transactions.
JP Morgan was far from alone in the scam: Virtually everyone doing business in Jefferson County was on the take. Four of the nation's top investment banks, the very cream of American finance, were involved in one way or another with payoffs to Blount in their scramble to do business with the county. In addition to JP Morgan and Goldman Sachs, Bear Stearns paid Langford's bagman $2.4 million, while Lehman Brothers got off cheap with a $35,000 "arranger's fee." At least a dozen of the county's contractors were also cashing in, along with many of the county commissioners. "If you go into the county courthouse," says Michael Morrison, a planner who works for the county, "there's a gallery of past commissioners on the wall. On the top row, every single one of 'em but two has been investigated, indicted or convicted. It's a joke."
The crazy thing is that such arrangements — where some local scoundrel gets a massive fee for doing nothing but greasing the wheels with elected officials — have been taking place all over the country. In Illinois, during the Upper Volta-esque era of Rod Blagojevich, a Republican political consultant named Robert Kjellander got 10 percent of the entire fee Bear Stearns earned doing a bond sale for the state pension fund. At the start of Obama's term, Bill Richardson's Cabinet appointment was derailed for a similar scheme when he was governor of New Mexico. Indeed, one reason that officials in Jefferson County didn't know that the swaps they were signing off on were shitty was because their adviser on the deals was a firm called CDR Financial Products, which is now accused of conspiring to overcharge dozens of cities in swap transactions. According to a federal antitrust lawsuit, CDR is basically a big-league version of Bill Blount — banks tossed money at the firm, which in turn advised local politicians that they were getting a good deal. "It was basically, you pay CDR, and CDR helps push the deal through," says Taylor.
In the end, though, all this bribery and graft was just the table-setter for the real disaster. In taking all those bribes and signing on to all those swaps, the commissioners in Jefferson County had ­basically started the clock on a financial time bomb that, sooner or later, had to explode. By continually refinancing to keep the county in its giant McMansion, the commission had managed to push into the future that inevitable day when the real bill would arrive in the mail. But that's where the mortgage analogy ends — because in one key area, a swap deal differs from a home mortgage. Imagine a mortgage that you have to keep on paying even after you sell your house. That's basically how a swap deal works. And Jefferson County had done 23 of them. At one point, they had more outstanding swaps than New York City.
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Judgment Day was coming — just like it was for the Delaware River Port Authority, the Pennsylvania school system, the cities of Detroit, Chicago, Oakland and Los Angeles, the states of Connecticut and Mississippi, the city of Milan and nearly 500 other municipalities in Italy, the country of Greece, and God knows who else. All of these places are now reeling under the weight of similarly elaborate and ill-advised swaps — and if what happened in Jefferson County is any guide, hoo boy. Because when the shit hit the fan in Birmingham, it really hit the fan.
For Jefferson County, the deal blew up in early 2008, when a dizzying array of penalties and other fine-print poison worked into the swap contracts started to kick in. The trouble began with the housing crash, which took down the insurance companies that had underwritten the county's bonds. That rendered the county's insurance worthless, triggering clauses in its swap contracts that required it to pay off more than $800 million of its debt in only four years, rather than 40. That, in turn, scared off private lenders, who were no longer ­interested in bidding on the county's bonds. The banks were forced to make up the difference — a service for which they charged enormous penalties. It was as if the county had missed a payment on its credit card and woke up the next morning to find its annual percentage rate jacked up to a million percent. Between 2008 and 2009, the annual payment on Jefferson County's debt jumped from $53 million to a whopping $636 million.
It gets worse. Remember the swap deal that Jefferson County did with JP Morgan, how the variable rates it got from the bank were supposed to match those it owed its bondholders? Well, they didn't. Most of the payments the county was receiving from JP Morgan were based on one set of interest rates (the London Interbank Exchange Rate), while the payments it owed to its bondholders followed a different set of rates (a municipal-bond index). Jefferson County was suddenly getting far less from JP Morgan, and owing tons more to bondholders. In other words, the bank and Bill Blount made tens of millions of dollars selling deals to local politicians that were not only completely defective, but blew the entire county to smithereens.
And here's the kicker. Last year, when Jefferson County, staggered by the weight of its penalties, was unable to make its swap payments to JP Morgan, the bank canceled the deal. That triggered one-time "termination fees" of — yes, you read this right — $647 million. That was money the county would owe no matter what happened with the rest of its debt, even if bondholders decided to forgive and forget every dime the county had borrowed. It was like the herpes simplex of loans — debt that does not go away, ever, for as long as you live. On a sewer project that was originally supposed to cost $250 million, the county now owed a total of $1.28 billion just in interest and fees on the debt. Imagine paying $250,000 a year on a car you purchased for $50,000, and that's roughly where Jefferson County stood at the end of last year.
Last November, the SEC charged JP Morgan with fraud and canceled the $647 million in termination fees. The bank agreed to pay a $25 million fine and fork over $50 million to assist displaced workers in Jefferson County. So far, the county has managed to avoid bankruptcy, but the sewer fiasco had downgraded its credit rating, triggering payments on other outstanding loans and pushing Birmingham toward the status of an African debtor state. For the next generation, the county will be in a constant fight to collect enough taxes just to pay off its debt, which now totals $4,800 per resident.
The city of Birmingham was founded in 1871, at the dawn of the Southern industrial boom, for the express purpose of attracting Northern capital — it was even named after a famous British steel town to burnish its entrepreneurial cred. There's a gruesome irony in it now lying sacked and looted by financial vandals from the North. The destruction of Jefferson County reveals the basic battle plan of these modern barbarians, the way that banks like JP Morgan and Goldman Sachs have systematically set out to pillage towns and cities from Pittsburgh to Athens. These guys aren't number-crunching whizzes making smart investments; what they do is find suckers in some municipal-finance department, corner them in complex lose-lose deals and flay them alive. In a complete subversion of free-market principles, they take no risk, score deals based on political influence rather than competition, keep consumers in the dark — and walk away with big money. "It's not high finance," says Taylor, the former bond regulator. "It's low finance." And even if the regulators manage to catch up with them billions of dollars later, the banks just pay a small fine and move on to the next scam. This isn't capitalism. It's nomadic thievery.
[From Issue 1102 — April 15, 2010]
More by Matt Taibbi: