An Interview with Occupy the SEC About Their Volcker Rule Comment Letter

Feb 16, 2012Mike Konczal

February 13 was an important deadline for comment letters relating to the implementation of the Volcker Rule. One group that submitted a comment letter was Occupy the SEC, an Occupy Wall Street-affiliated working group that has an excellent web presence outlining their objectives.  The site also includes their comment letter (available as a pdf here) -- all 325 pages of it.

February 13 was an important deadline for comment letters relating to the implementation of the Volcker Rule. One group that submitted a comment letter was Occupy the SEC, an Occupy Wall Street-affiliated working group that has an excellent web presence outlining their objectives.  The site also includes their comment letter (available as a pdf here) -- all 325 pages of it.

Felix SalmonMatt YglesiasSwamplandThe NationJosh Harkinson, and Dave Dayen, among many others, have all said great things about it. I was most impressed with the point-by-point, aggressive answering of the regulators' questions -- the stuff that can make a difference. Felix suggests reading the introduction if nothing else, particularly pages 3-6, and I agree.

Since this blog is a fan of all things financial reform, Volcker Rule, and the Occupy movement, I was very fascinated with the backstory on this letter. I was able to speak with two members of Occupy the SEC, Alexis Goldstein (@alexisgoldstein), a former Wall Street technology VP, and Caitlin Kline, a former credit derivatives trader.

Mike Konczal: What is Occupy the SEC? And what is the Volcker Rule?

Alexis Goldstein: Occupy the SEC is a working group inside Occupy Wall Street, which has been focused on writing a comment letter on the Volcker Rule.

The high-level overview is that the Volcker Rule is meant to keep federally-backed banking entities from proprietary trading and from owning more than 3 percent of any given hedge fund or private equity fund.

MK: How did you end up getting involved in Occupy the SEC?

AG: I was going down to Occupy Wall Street every day and one day Naomi Klein came and gave an open forum talk. And I asked a question, over the people's mic, on whether we should bring back Glass-Steagall, and she said yes.

Afterwards, all these people came up afterwards and asked me "What's Glass-Steagall?" And I thought I could help out and do a teach-in. After announcing an upcoming teach-in at a General Assembly, Akshat emailed me and asked if I was interested in forming a group to write a comment letter.

Caitlin Kline: A friend of mine who was involved in the movement called me up one day and told me that he had just seen a teach-in, and that the woman “spoke about derivatives the way you do!” So he put me in touch with Alexis, and I started attending the book club meetings.

MK: How much of the group are people currently or formerly in the financial industry?

AG: Probably a slight majority. Not everyone -- we had people who were leaders or people who wanted to learn and get up to speed. But it definitely had a strong industry contingent.

MK: How did you start focusing the letter?

CK: It took a long time to get our minds around all the different elements of the Volcker Rule and what kind of comment letter we wanted to write. We decided early that we wanted to write about the nitty-gritty of the rule and focus on the specifics, so it required a really deep dive into the material to leverage everyone’s expertise. Right off the bat, we decided that this rule was a good idea, and it has to actually be meaningful. That's how we attacked it -- we wanted to strengthen it as much as possible.

MK: Some people (usually not in the movement) complain about the General Assembly and consensus-driven procedures as not workable for a complex task, like writing hundred of pages responding to regulatory rules. What was your procedure and how well did it work?

AG: There were two tasks. The first task was much like a book club. We treated the Volcker Rule as our book, and we'd assign readings and times for discussion. At first we were meeting once a week, then later twice a week for marathon sessions. During those marathon sessions we'd go through all the questions the agencies asked about the rule.

MK: How many questions were there?

AG: 395. But each of those questions had around three or four questions in it. But 395 numbered questions.

CK: So a total of around 1,200 to 1,400 individual questions.

AG: It's easiest to visualize this. So we are all there in the atrium with our laptops. We are going through this question by question, discussing them, debating what we think the answer should be. Once we all agree on something we put it in a bullet or several bullets. And sometimes we'd go off on these huge tangents and have debates on the best way to address the topic. We'd often have to say "let's move on to the next topic," but we always tried to work from consensus.

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When we went to try and write the initial draft of the letter we'd work collaboratively on these online documents that everyone could see at all times. That way if there was something someone didn't agree with they could leave a comment or send an email to the group and we could talk it out. For the most part we tended to agree -- though there were many instances where we clashed horns.

After that initial pass we broke it up section by section so everyone had their focus area. From there we could embellish those central consensus bullet points we had come up with.

MK: How many people are involved?

AG: There was a core group of seven people, with a variety of people coming in and out. There were many experts in an area who couldn't commit to all the meetings but wanted to work on very narrow areas. They'd drop in and drop out.

There was one person who was very interested with the metrics section. So she attended one meeting where we were going to talk about that and she gave us some great ideas. There was a gentleman who used to work at a special purpose vehicle and was really involved with securitizations. He did a really great job writing and giving insights on those topics via e-mail, even though he couldn't make the groups.

CK: In a lot of cases we pooled our resources to find people with certain expertise on issues we wanted to address in the letter.

MK: What are you worried about with the implementation of the Volcker Rule?

CK: The one that comes up often is that liquidity is going to evaporate overnight, crippling markets. This is the base of the lobbyists' efforts. We spent a while debunking that argument.

MK: How do you respond to that?

CK: Well the whole theory is predicated on the idea that these federally-backstopped banks are the only institutions that can provide liquidity. It is a profitable business, especially the market-making end of it, and any number of firms will step in in order to take this.

MK: Were the members of Occupy the SEC involved broadly with the movement?

AG: It depends on the person. For me I was highly active in the woman's caucus. I would go to the General Assembly often, I'd go to the Spokes Council meetings. I was very involved in the day-to-day. When this letter got started I had to take a step back and focus on that instead.

We had some people that weren't involved with the letter but they'd help us by coming to the meetings, organizing and planning direct actions. Others were involved in the Politics and Electoral Reform group, the Direct Action working group, and the Think Tank, which conducts open air discussions on various topics.

CK: This was the first time that I thought that I could jump in and get involved. Particularly as an ex-trader, I could do this, and be involved with the movement in a meaningful way. Since we started, I've met so many smart people and encountered so many issues that I'm going to continue to be involved with, and I think most of the group has had a similar experience.

MK: There's a saying that goes "Occupy Everything, Demand Nothing." You've written a document giving very technical advice to regulators. Part of Occupy is about creating alternatives instead of making demands, yet your group set out to reform a system very resistant to reform. How do you handle that tension?

AG: There's two points. The first is that all working groups at Occupy are autonomous. Since no one can speak for Occupy Wall Street, each group can choose their own goals that they want to work for as long as you don't say you speak for Occupy Wall Street (without going to the New York City General Assembly). So there's a lot of freedom to work on Occupy Wall Street on whatever projects you want.

The second thing is that though the system is broken and difficult to repair, you don't have to choose between abandoning it or reforming it. I think you can do both -- try to reform it from within while building a new system. This particular effort is about reforming the current system, but that doesn't mean, at all, that we aren't interested in alternative systems. There's another group called Occupy Bank thinking through a completely new banking system from scratch.

CK: From those of us who saw how big and screwed up the financial system is, it's very difficult to know, or even understand, what it would take to fix it. Some people would say to us "why are you even bothering with this? Why not go back to Glass-Steagall?" Well, that's not on the table right now, but this is. And the Volcker Rule is something very real and concrete. It's good intellectual work to think through alternative systems and I want to be a part of it and see where it goes, but in an immediate way there's ways to clean up things right in front of us. A lot of people I know get stuck on this -- "it's really screwed up and there has to be another way" -- and you end up thinking about that other way forever.

MK: Quick question: did your group do the twinkles during meetings?

AG: Yes. In fact when Caitlin was just talking with you I was twinkling.

MK: Over the phone?

AG: Yes, it is such a habit I can't break it.

MK: What are you excited about for Occupy in 2012?

AG: As an activist you are often isolated to your particular cause. Let's say you are an environmental activist and your cause is sustainability. You fight the same fights with the same people, you go against the same industries, and it is easy to burn out. You are stuck in this little bubble. My favorite thing about Occupy Wall Street is that there is this cacophony of causes. You come together for the things that matter the most to you, but you are surrounded by all these other people fighting for all these other causes, with their own expertise, and all those passions amplify each other. If you need a break from your topic, you can jump into another one. And there's so many new people, fresh faces all the time, it gives you courage and the strength of purpose to continue. Because it's so tough to fight a fight and think you are the only one who cares.

Also, I really hope we can retake more public spaces.

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The Mortgage Settlement's Missing Piece: Will Banks Now Follow The Law?

Feb 10, 2012Bruce Judson

home-foreclosure-documentIf the ability for independent monitors to impose fines for failing to follow the law is eviscerated, we'll be back where we started -- or worse.

home-foreclosure-documentIf the ability for independent monitors to impose fines for failing to follow the law is eviscerated, we'll be back where we started -- or worse.

The country's banks agreed to change their behavior as part of the robo-mortgage settlement announced earlier this week. The announcement, however, leaves open a central question: Does the settlement include new, pre-defined penalties for banks that fail to uphold their new promises? Since a change in bank behavior is a vital piece of the settlement, the absence of an answer is highly disconcerting.

When the deal was announced, the Associated Press reported, "The conditions will be overseen by Joseph A Smith Jr., North Carolina's banking commissioner. Lenders that violate the deal could face $1 million penalties per violation and up to $5 million for repeat violators." The initial impression on reading this report is that there are real teeth to it. It sounds like the banks are agreeing to pay $1 million dollars each time they fail to perform as promised.

However, the actual press release from the Department of Justice announcing the deal reads (emphasis added):

Compliance with the agreement will be overseen by an independent monitor, Joseph A. Smith Jr. Smith has served as the North Carolina Commissioner of Banks since 2002... The monitor will oversee implementation of the servicing standards required by the agreement; impose penalties of up to $1 million per violation (or up to $5 million for certain repeat violations); and publish regular public reports that identify any quarter in which a servicer fell short of the standards imposed in the settlement.

There are two open questions. First, what does "up to" mean? Does the independent monitor have discretion over the size of each penalty? This could effectively make the million dollar figures announced by the Justice Department meaningless. Banks have argued that the tens of thousands of robo-mortgage signatures and well-documented servicing errors were all technical violations that harmed no one. Undoubtedly, they will argue that any single violation was a meaningless error.

This provision would have real meaning if we applied the same standard our nation has applied in other areas: a zero tolerance rule. What would happen if each bank knew that any violation would result in a minimum fine of $1 million? I suspect bank behavior would change significantly.

Second, can banks contest these fines? Have the banks agreed that they will pay any fines assessed by the independent monitor? If not, then once again the provisions have the potential to be meaningless. The monitor will assess fines for violations and the banks will challenge the fines through whatever venues, the courts or otherwise, have been established by the settlement. The judgment and ability of the independent monitor to set fines will have been eviscerated.

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Efforts to determine answers to these and related questions have seemingly been rebuffed. The Huffington Post reported on its efforts to understand the details of the enforcement provisions of the settlement:

Details of how the states will make sure banks follow the deal's guidelines haven't yet been released... The announcement on Thursday did not include any new information on bank penalties. A call to the Smith's office was not immediately returned. A HUD spokesman did not immediately return an e-mailed request for comment.

There appears to be near universal agreement that this settlement will do little for homeowners who have been the victims of past bad bank behavior. But there may be real value in the deal if it successfully changes bank behavior going forward. The New York Times quoted the Attorney General of North Carolina as saying, "This agreement is more important for the foreclosures we're hoping to prevent."

At the same time, The New York Times wrote, "Advocates for homeowners facing foreclosure expressed cautious optimism," but indicated that these same advocates believe rigorous enforcement is essential for the program to work:

"We're hopeful," said Joseph Sant, a lawyer at Staten Island Legal Services' homeowner defense project. "But we had a lot of programs that are good on paper. What will make the difference is that it's vigorously enforced."

The stakes here are enormous. They extend beyond the housing market to the nature of American society itself. The banks' blatant malfeasance with regard to the robo-mortgage scandal and other foreclosure-related activities has been a clear example of unequal justice. The banks have knowingly and repeatedly violated laws (such as providing tens of thousands of false affidavits to the courts) that would have landed an ordinary citizen in jail.

At the same time, successful capitalism itself depends on the enforcement of rules and contracts in a fair bargain. When powerful players are permitted to alter pre-established rules at will, capitalism ultimately collapses. Contracts and the idea of a fair bargain become meaningless as less powerful parties to an agreement know their rights will not be enforced. Over time, citizens lose faith in government and their own ability to thrive in what becomes a corrupt economy.

If the settlement enforcement provisions turn out to lack substance, these forces will be reinforced rather than counteracted. We must wait for the details. Like homeowner defense advocates, I am cautiously optimistic -- but terrified that ultimately I will be disappointed.

Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.

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Seven Questions Begging to Be Answered Before a Foreclosure Settlement is Reached

Feb 2, 2012Bruce Judson

foreclosure-gavel-150Why the secrecy? Why the haste? Rushing into an ill-advised settlement with the banks may undo one of our last chances to avert another economic catastrophe.

foreclosure-gavel-150Why the secrecy? Why the haste? Rushing into an ill-advised settlement with the banks may undo one of our last chances to avert another economic catastrophe.

Tomorrow is the deadline for state attorneys general to sign on to a joint federal and multi-state $25 billion settlement of the robo-mortgage scandal. The settlement will involve Ally Financial Inc. (formerly GMAC), Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co., and Wells Fargo & Co. The details of the proposed settlement have not been released. However, one thing is clear: This settlement puts the nation at further risk of another systematic financial crisis and runs counter to any notion that the actions of the Obama administration will reflect the president's newly energized populist rhetoric.

As a nation, we need to ask several questions. As a participatory democracy, we also have the right to the answers before any settlement is inked:

1. In his State of the Union Address, President Obama announced a new financial crimes taskforce, yet the administration is rushing to finalize this settlement before the taskforce begins its work. Why?

2. What is the public interest in releasing banks that have openly admitted they broke the law in tens of thousands of separate instances from liability?

3. The bank narrative has been that the robo-mortgage scandal reflected procedural issues of no consequence (despite the fact that they constituted fraud, perjury, conspiracy, and a knowing effort to mislead the court). Recently, a new narrative has emerged that suggests these activities were actually the back-end of even greater malfeasance involving tax evasion and the banks' failure to comply with basic rules in securitizing mortgages. If we are a nation where justice is blind, should we not investigate the full truth before we give the offending financial institutions another free pass?

4. Why are the terms of this settlement secret? Prosecutorial negotiations are normally secret in order to prevent the disclosure of evidence that might or might not be relevant to a later trial if the negotiations collapse. This concern does not apply here.

5. This settlement has far more of the characteristics of legislation than of prosecutorial activities. The offending banks have destroyed the wealth, livelihood, and dreams of millions of Americans. Shouldn't the public at least have two weeks to view the proposed terms of the settlement and make their views known to their state's attorney general? And at a time when trust in government is at historic lows, isn't secrecy for this type of activity the wrong way to build the much-needed confidence of the American people?

6. The press also has a constitutionally guaranteed role in our system of governance. In these unusual circumstances, isn't this precisely the type of situation where the nation would benefit from careful scrutiny of the intended settlement by the press?

7. Officials have indicated that the settlement will require banks to write down the principal on homeowner loans. Unfortunately, a portion of the $25 billion allocated for this purpose is far too little, spread across a large number of homeowners, for any write-downs to make an effective difference. So either these statements are effectively meaningless, or the settlement is based on promises of future activities by banks. To date, the nation has witnessed repeated and egregious failures by the banks to live up to promises of future behavior, with no subsequent penalties for such failures. For any release from liabilities to be effective, shouldn't it be contingent on the banks actually delivering on these promises?

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Since the start of the economic crisis, none of the administration's housing policies have succeeded. Each policy initiative has been fatally flawed. As a consequence, there's no reason to believe that the policy pursued in the current settlement will aid, rather than hurt, the housing market. Meanwhile, the secrecy surrounding this policy initiative makes its potential positive contribution to the crisis even more suspect.

A month ago, I wrote that we were a nation in denial with regard to housing prices and the impact of ongoing foreclosures. Despite a favorable rent to buy ratio, ultra-low interest rates and an "all time low cost of owning a home," housing prices are continuing downward. There is a simple explanation. With foreclosures and the so-called shadow inventory of homes, our housing supply will overshadow demand for many years to come.

With 29 percent of homeowners already underwater, this creates a massive risk for the economy. Some analysts predict that home prices will drop another 10 to 20 percent, which will put many borrowers deeply underwater. With additional price declines, underwater homeowners may start to simply walk away in droves. This will create havoc for our economy, the mortgage securities markets, and it will destroy solvency of the banks as they are forced to write-down their portfolios. The nation will be plunged into another economic crisis.

Unfortunately, all indications over the past several weeks are that this risk is continuing to grow. Indeed, the most recent reports on housing prices showed larger than expected declines in November. This reflected the third month in a row of declines. "The trend is down and there are few, if any, signs in the numbers that a turning point is close at hand," said David M. Blitzer, chairman of the S&P's home price index committee.

In his State of the Union speech, President Obama stressed assistance for "responsible homeowners." Yet the current definition of a responsible homeowner is someone with a job. (Although yesterday the president did say, "We're working to make sure people don't lose their homes just because they lost their job." ) So, at least for the moment, continued unemployment woes will keep this vicious cycle going.

Here's how this relates to the proposed settlement: All of the activities covered by the settlement took place after the crisis began. They were not unforeseen effects of once-in-a-lifetime systematic risk. They reflected willful, knowing, and egregious malfeasance and disrespect for the rule of law. There is no question that laws were broken on a massive scale with potentially enormous civil liabilities and with criminal offenses. The essence of capitalism is responsibility and accountability. The settlement ignores both.

I suspect that the existing testimony of bank officials in open court, which are effectively admissions of guilt, provides sufficient evidence to lead to state and federal suits that would make the banks insolvent. This means that, because of the banks' malfeasance and greed, the nation has the leverage to bargain for a massive write-down of mortgages -- thereby preventing an economic catastrophe. I am not advocating this option, nor am I saying it is good policy. But I do believe it would be a scandal to limit whatever leverage we have to save our economy by once again permitting gross malfeasance.

In late May, my eldest daughter will graduate from college and join the labor force. Will there be jobs for her and her classmates? Will she come of age in a decade of limited employment opportunities, the collapse of the middle class, and unequal justice while a privileged few live lives of abundance because they have corrupted our democracy? As someone who reveres our system of justice, what is the advice I should give her about working hard and playing by the rules? There is still a chance that we can turn all of this around. But rushing to settle with law-breaking banks is certainly not the way to solve the issue of inequality -- which President Obama called the defining issue of our time. It is also the antithesis of capitalism, which is based on adherence to law, a fair bargain, and accountability.

Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.

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Jeff Madrick and Tom Ferguson Sound Off on Real Messages of the SOTU

Jan 27, 2012Bryce Covert

After Obama's State of the Union on Tuesday, Roosevelt Institute Senior Fellows Jeff Madrick and Tom Ferguson took to the airwaves to dissect it. Was there substance behind the soaring rhetoric? Can the proposed policies really solve our economic ills?

Jeff Madrick joined Eliot Spitzer on Keith Olbermann's Countdown, and his analysis could be summed up as: "It was a tougher speech than I expected."

After Obama's State of the Union on Tuesday, Roosevelt Institute Senior Fellows Jeff Madrick and Tom Ferguson took to the airwaves to dissect it. Was there substance behind the soaring rhetoric? Can the proposed policies really solve our economic ills?

Jeff Madrick joined Eliot Spitzer on Keith Olbermann's Countdown, and his analysis could be summed up as: "It was a tougher speech than I expected."

Despite what some naysaying economic advisers may be telling President Obama, "he said forget about all those constraints," Jeff pointed out. "Let me go after the Chinese, let me develop some tax breaks, let me develop some tax penalties." Those FDR fans among us may remember his famous welcoming of Wall Street's hatred, a stance Obama has mostly shied away from. Yet, as Jeff notes, not only did he go after Republicans in Congress and big oil, "he said some pretty nasty things about Wall Street."

His policy proposals were important too, Jeff said. "Few things are as unambiguous as a need as updating the American infrastructure," and that was a big part of his "constant mention of jobs." Plus there was a heavy emphasis on bringing back manufacturing, although the question remains as to whether that's really possible.

Meanwhile, Tom Ferguson, while "intrigued" by some of the policies, was "underwhelmed" overall. He told Paul Jay of the Real News Network that "when you start to look at the details" of Obama's proposals, they're "almost meaningless."

More at The Real News

Take the plan to have a massive mortgage refinancing program. That could be "a really striking thing and it would likely have a huge effect on the economy," Tom said. But "their record in the last three years is they keep announcing programs and they all fail." Plus the taskforce on mortgage abuses "looks to me like an effort to to rein in the attorneys general" at the state level, he said.

Things were worse when it came to the "utter tameness" of the ideas around money in politics, Tom said. While banning Congress from insider trading is a good idea, "he's not really touching the essence of the money in politics problem," he points out. "He's basically punted on that one." What could he have proposed that would work? "You could do a lot by simply making the federal election commission a serious part of the civil service to get it out from under its ridiculous domination by Congress," Tom suggests. It's not just Citizens United that should be on reformers' radars.

And overall, while some of the economic policies may sound good, the underlying push from the administration for austerity and a focus on the deficit went unaddressed. "My guess is that these folks are not planning to change course on the economy," he concludes.

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Funding the Academic War on Financial Reform

Jan 26, 2012Wallace Turbeville

mortar-board-and-money-150Wall Street is funneling money toward error-riddled studies that stand to muddy the important conversation about implementing Dodd-Frank.

mortar-board-and-money-150Wall Street is funneling money toward error-riddled studies that stand to muddy the important conversation about implementing Dodd-Frank.

"The moon so long has been gazing down
on the wayward ways of this wayward town
my smile becomes a smirk, I go to work" - Cole Porter

Over the holidays, I finally watched the film Inside Job and was struck by the final section highlighting the corruption of academics by the financial services industry. It was a good thing that I had waited so long to drop the DVD into the player. Real life experience had provided important context.

A year ago, I became deeply involved in the issue of position limits and the effects of trading structures on commodities prices. As time wore on, the regulators made clear that any action beyond the bare bones, historic approach would require academic studies supporting the policy. It was a political necessity. My colleague David Frenk and I undertook a study using the techniques of these experts and found statistically significant relationships between the boom/bust cycle in commodities prices and the structural trading practices of commodity index fund sponsors.

Many like-minded advocates warned of formidable hurdles in this effort, since so many academics were beholden to the financial services industry. I was a skeptic, having spent my career in investment banking and trading, shielded from the corruption of experts by a self-interested industry. I learned that an uncomfortably large percentage of study opinion is molded by venality. And I also understand the weight ascribed to the work of experts, with an astounding disregard for quality and even relevance. Eventually, the CFTC sponsored a two-day academic "battle of the bands" (our study was excluded since we are not academics), which led to nothing.

Decision makers enjoy the cover provided by expert studies using statistical methodologies. If a study uses math and accepted procedures to test the robustness of conclusions, it is imbued with a sanctity that can be critically important in a policy fight. Opponents are cowed by assertions about the economy and financial markets that are figuratively cloaked in white lab coats by use of statistics. The all-important questions of the subject matter and scope of the study and underlying assumptions too often go unchallenged, and conflicting interests are largely ignored.

The legitimate appeal of expert analysis is the assumption that the expert is ethically and intellectually committed to independence of thought and is capable of using rigorous and accurate techniques for measuring cause and effect. On the other hand, if the expert serves an interested paymaster, he or she can use this capability to most effectively rig the results and camouflage the deed. They assume the pop culture role of evil mad scientist, opposing the forces of justice. Who would have thought that the danger would come from regression analyses instead of death rays?

It is troubling when biased research is used to influence regulatory outcomes and to wobble the knees of members of Congress inclined to support sensible regulation. But a far more powerful use of biased studies has emerged. The primary legal challenge to financial reform regulation will assert an inadequate consideration of costs and benefits by the regulators. On this field of battle, expert analysis is a powerful weapon.

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Last week, I testified at a hearing before subcommittees of the House Financial Services Committee along with Simon Johnson and six advocates of the industry's positions. The subject was the economic cost of the centrally important Volcker Rule. Before the hearing, Oliver Wyman consultants, on behalf of industry advocate SIFMA, produced a study that measured the cost of the Volcker Rule in terms of the liquidity that would be "lost" if proprietary trading by banks benefitting from the Federal safety net were prohibited. Professor Johnson and I both submitted testimony that pointed out that the major assumptions of the study that were both illogical and assured a conclusion that costs would be large. (We both were economical in our critiques, recognizing that a full catalogue of errors would have challenged the attention span of readers.)

Perhaps we were able to head off the use of the study in oral presentations by the industry advocates. Professor Johnson later wrote a useful article on the study that might discourage further dissemination, but far more is required. Committee members cited it and it is still floating around in the ether. It will no doubt be used in many private conversations in which no one will challenge its veracity.

Late last week, I was asked to look at a new study produced by NERA consulting (as it turns out, a subsidiary of Oliver Wyman) prepared for an energy industry advocacy group. The study sought to measure the costs and benefits of energy traders being designated as "swap dealers." It was filled with errors and unfounded assumptions, even worse than the Volcker Rule piece. (For a critique see this report and the observations of Professors John Parsons and Antonio Mello).

Academics are a concern as well. Professor Darrel Duffie of Stanford published an article at the behest of SIFMA two days before the Volcker Rule hearing that was largely a discussion of his preference for increased capital over the Volcker Rule approach and expressed concerns about effects on liquidity. He appropriately recognized uncertainty about his concerns. Even more appropriately, he acknowledged that in lieu of compensation, SIFMA made a $50,000 donation to the Michael J. Fox Foundation. Nonetheless, the timing of his piece means that it will probably be conflated with the Oliver Wyman study by casual observers.

Costs and benefits will be an enormous subject as financial reform implementation grinds forward during this election year. Legal academics need to weigh in on the proper judicial approach to this issue. And economists and finance academics need both to act as watchdogs and to enlighten the discussion on both sides of the cost/benefit scale. SIFMA and their colleagues have vast resources available to challenge financial reform in the courts and in Congress. Bought and paid for studies must be challenged so they are not accepted as the truth.

Wallace C. Turbeville is the former CEO of VMAC LLC and a former Vice President of Goldman, Sachs & Co. He spent a year during the derivatives rulemaking process drafting more than 50 comment letters on proposed rules while working with Better Markets, Inc.

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Obama Makes the Case for Government

Jan 25, 2012Jeff Madrick

The president didn't go as far as he needed to, but he began to articulate an argument that the American people need to hear.

The president's State of the Union speech last night was not a progressive's delight. But it straightforwardly and strongly put forth a case for government that the president has heretofore not made. Perhaps America is again ready to listen after the dominance of an anti-government narrative for so long.

The president didn't go as far as he needed to, but he began to articulate an argument that the American people need to hear.

The president's State of the Union speech last night was not a progressive's delight. But it straightforwardly and strongly put forth a case for government that the president has heretofore not made. Perhaps America is again ready to listen after the dominance of an anti-government narrative for so long.

Last night, the president covered a lot of territory, and in fact almost all the important bases. He made several unfortunate nods to the right, including proudly boasting of his new offshore oil drilling plans and a renewed offer to use Social Security and Medicare as negotiating tools in order to raise taxes on the wealthy and cut taxes for the rest. He did not suggest that perhaps we could live with this deficit until the economy righted itself. He certainly did not suggest new stimulus, which is what we need. But the overall impact of the speech was to make a case for government.

He took on the loss of manufacturing jobs as his first item of business, after some deliberately patriotic claims about how the world is much safer today. This was important. Most mainstream economists, including many who lean Democratic, have little taste for government interference in the markets to create more manufacturing jobs. They say declining manufacturing is only natural. But Obama rightly said he would use the tax code to penalize those who send jobs overseas and reward those who bring them home. He will set up a task force on unfair trade practices. He called China out for such practices. This was pretty tough talk. Granted, he didn't call for less currency manipulation but that would have been pretty insensitive in a State of the Union address.

He made proposals regarding education, infrastructure, housing, and energy, calling for investment in clean energy as well as dirty energy like fracking and offshore drilling. But he also said in a direct attack on Republicans that we have subsidized oil too long.

He also made a deliberate, explicit case for government regulation in general -- over drilling, on Wall Street, everywhere it was needed. Aside from making the tax system more progressive, his case for regulation was perhaps his most important ideological claim for a strong government. But his case for government -- from tax subsidies to infrastructure investment to higher taxes on the wealthy to a new attack on financial fraud -- was unmistakable.

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Inequality was high on his list of problems in America. He called for a millionaire's tax. He repeated that America must work for all. He criticized Wall Street with some pretty nasty language, willing to anger more than a few donors there who still think they are doing God's business.

Many are now pointing out that the political climate has changed, less talk of deficits and more talk of inequality. Bravo Occupy Wall Street. They are even talking about inequality at Davos, sensitivity reaching the upper strata who breathe only the fumes of self-regard but now realize even they are jeopardized by the distortions created in many free market economies.

But in the end, the American economy needs the stimulus mentioned above, and the president avoided the issue. Unfortunately, the economy is not as willing to ignore sources of weakness. He did not mention the eurozone crisis, either, or other reasons for concern. But he did say he would present a new mortgage relief scheme. Other than that, is a continuation of the payroll tax cuts enough? And doesn't it now begin to undermine Social Security?

As I said, this was no progressive's delight. He wants those who make $250,000 or less to be spared of any tax increase. At some point, taxes will have to rise somewhat for the middle class if America is to do what is necessary. But in the end, Obama was running for re-election. It was in many ways an us-versus-them speech. Either you are with me or you are with them, them being the irresponsible rich blessed with a tax system so favorable that even America, where we are told (I don't believe this) everyone dreams of being rich, is sick and tired of it. The election will be fought on those terms and I think Obama is on target.

Now we await some details and some real legislative proposals. How good will the mortgage relief plan be? What will an energy policy look like? Will he offer a new infrastructure program? Will he hang tough on his message, in the end?

My view is that Obama should put up his programs as soon as possible, even if a few are politically difficult, and let the Republicans shoot them down if they must. Then he can go to the public and tell them it is the Republican opposition that is holding the nation back. And he would be right.

Yes, we need a lot more than the president is willing to do. He is still above all a moderate politician. But he has a workable plan to be reelected. And let me board the cliché train: do you really want one of the opposition to be president? Let me answer: No, you don't. Even in only four years, irreparable damage can be done to the nation. Look what Reagan did in his first term.

Roosevelt Institute Senior Fellow Jeff Madrick is the author of Age of Greed.

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Fed Transcripts: Why Was Congress in the Dark During the Crafting of Dodd-Frank?

Jan 13, 2012Matt Stoller

Records of the Fed's meetings at the height of the housing bubble provide more evidence that our central bankers need to be held accountable.

Records of the Fed's meetings at the height of the housing bubble provide more evidence that our central bankers need to be held accountable.

The latest release of the Federal Reserve's Open Market Committee transcripts is a doozy. Binyamin Appelbaum read through the transcripts and wrote a great article on what he found. The people on the FOMC straight up did not understand the economy, and that becomes very obvious when you parse their nonchalance through the pivotal year of 2006. That's true as far as it goes, but there's a political angle here as well.

My question is, why don't we have the transcript for 2007? Or 2008? Or beyond that? Why didn't Congress have the evidence that Bernanke was an incompetent central banker when he was up for reconfirmation in late 2009? Why didn't Congress know any of what was revealed yesterday while it was tasked with rewriting the rules governing our entire financial architecture?!? It might have been useful to know that the Fed was staffed by an inept, embarrassing group of fools fiddling over inflation while Rome was being set ablaze.

I wrote a piece on this back in May of 2011:

There’s an easy way, however, for the Federal Reserve to lose its aura of undemocratic secrecy. It could release transcripts of its Federal Open Market Committee meetings within one year — or be compelled to do so with a congressional subpoena.

These committee meetings are the real guts of U.S. economic policymaking. You can already get a summary of each meeting within three weeks. But the actual transcripts — the debates among Fed policymakers at those meetings — are released with a minimum lag time of five years.

Rep. Darrell Issa (R-Calif.), chairman of the House Committee on Oversight and Government Reform, had pledged last year to look into this issue. But he has not acted.

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So, we still do not know what top Fed officials were debating from 2006 through 2010 as the housing bubble ballooned and the banking system collapsed. Were Fed officials privately worrying about the housing market? Were they aware of leverage in the system? Did they understand the dangers of credit default swaps?

The democratically elected Congress should have known these things before attempting to fix the financial system. Several congressional postmortems on the crisis should have had access to these records. And as Congress debates Rep. Mike Pence’s bill to change the Fed’s mandate, it should have access to this information.

Why doesn't Congress issue a subpoena to get the information about FOMC meetings from 2007-2010, so that we know what the Fed is thinking? They do not deserve the presumption of competence anymore. Darryl Issa promised this during the transition to GOP congressional rule in 2010 but he has not followed through. Perhaps he should.

Many people did get what was happening -- 2006 was the year that the big banks began cutting warehouse lines of credit to mortgage originators, which would eventually topple the whole housing ponzi scheme. Dean Baker had been trying to sound the alarm about a housing bubble as early as 2003. Yves Smith started her site Naked Capitalism in 2006 and Josh Rosner began noticing what was going on that year; moreover, the dangers of leverage had been recognized as far back as the early 1990s by such economic luminaries as Jane D'Arista.

It's not just that the people on the Federal Reserve's Open Market Committee -- the real rulers of America -- are insultingly out of touch with reality. It's also that the public does not even get to see what they are doing and that Congress doesn't really want to know. This, more than anything else, is animating figures like Ron Paul, who accuses the Federal Reserve of foisting an unwanted monetary system on the American public.

The reality of our times is that the people in charge of powerful institutions are driven by nothing so much as a desire to be the maintainers of consensus. That is what the FOMC participants were. And if we don't fix this state of affairs and hold powerful people accountable for being incompetent and wrong at least some of the time, America is done for.

Matt Stoller is a Fellow at the Roosevelt Institute and former Senior Policy Advisor to Congressman Alan Grayson.

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Josh Kosman on the Loopholes That Fuel Private Equity Buyouts

Jan 12, 2012Mike Konczal

kosman_paperback_launchAs a result of a series of attacks and counter-attacks on Republican presidential candidate Mitt Romney's work with Bain, there's been a lot of discussion about private equity, buyouts of firms, and their ultimate relation to the economy.

kosman_paperback_launchAs a result of a series of attacks and counter-attacks on Republican presidential candidate Mitt Romney's work with Bain, there's been a lot of discussion about private equity, buyouts of firms, and their ultimate relation to the economy. So far the discussion has been a back-and-forth on layoffs and "creative destruction," with very little on how laws and regulations structure the way private equity and buyouts happen in this country.

I interviewed Josh Kosman, author of The Buyout of America: How Private Equity Is Destroying Jobs and Killing the American Economy, on this topic. Bob Kuttner reviewed his book in May 2010, and Kosman was on Up with Chris Hayes last weekend. The interview has been edited for length.

Mike Konczal: What are private equity funds, and what do they do?

Josh Kosman: Private equity firms are mostly former Wall Street bankers who raise money to buy companies on credit. They used to be called leveraged buyout (LBO) firms, and when the first leveraged buyout boom went bust in the 1980s they regrouped and called themselves private equity.

The big difference between them and venture capitalist or hedge funds is that the companies that they buy borrow money to finance the acquisitions.

Private equity firms own more than 3,000 U.S. companies and employ roughly one out of every 10 Americans in the private workforce. This is just America, so it doesn't include companies or employees overseas. Some companies include HCA, the largest hospital chain, to Clear Channel, the largest radio station operator, to Dunkin' Donuts. They are in every industry.

MK: People coming to the defense of private equity from both the left-neoliberal and conservative spaces directly invoke or allude to "the market" as a natural, already existing thing. But a key progressive retort to this laissez-faire view of economics argues that all markets are deeply embedded in and constructed through legal, tax, and other regulatory government codes. Your research has found that, far from being natural, private equity exists largely due to issues with the tax code. Can you explain?

JK: The whole industry started in the mid-to-late 1970s. The original leveraged buyout firms saw that there were no laws against companies taking out loans to finance their own sales, like a mortgage. So when a private equity firms buys a company and puts 20 percent down, and the company puts down 80 percent, the company is responsible for repaying that.

Now the tax angle is that the company can take the interest it pays on its loans off of taxes. That reduces the tax rate of companies after they are acquired in LBOs by about half. Banks, also realizing this tax effect, were willing to finance these deals. At the time, you could also depreciate the assets of the company you were buying -- that's not true today.

They saw that you could buy a company through a leveraged buyout and radically reduce its tax rate. The company then could use those savings to pay off the increase in its debt loads. For every dollar that the company paid off in debt, your equity value rises by that same dollar, as long as the value of the company remains the same.

MK: So the business model is based on a capital structure and tax arbitrage?

JK: Yes. It's a transfer of wealth as well. It's taking the wealth of the company and transferring it to the private equity firm, as long as it can pay down its debt.  It think it is real - the very early firms targeted industries in predictable industries with reliable cash flows in which they by and large could handle this debt. As more went into this industry, it became very hard to speak to the original model. Now firms are taken over in very volatile industries. And they are taking on debts where they have to pay 15 times their cash flow over seven years -- they are way over-levered.

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MK: The most common argument for why Bain Capital and other private equity firms benefit the economy is that they are pursuing profits. They aren't in the business of directly "creating jobs" or "benefitting society," but those effects occur indirectly through the firms making as much money as they can.

But even here, "profits" -- how they exist, where they come from, and how they are timed -- have a crucial legal and regulatory function. A recent paper from the University of Chicago looking at private equity found that "a reasonable estimate of the value of lower taxes due to increased leverage for the 1980s might be 10 to 20 percent of firm value," which is value that comes from taxpayers to private equity as a result of the tax code. Can you talk more about this?

JK: That sounds about right. If you took away this deduction, you'd still have takeovers, but you'd have a lot less leverage and the buyer would be forced to really improve the company in order to make profits. I think that would be a great thing.

If you look at the dividends stuff that private equity firms do, and Bain is one of the worst offenders, if you increase the short-term earnings of a company you then use those new earnings to borrow more money. That money goes right back to the private equity firm in dividends, making it quite a quick profit. More importantly, most companies can't handle that debt load twice. Just as they are in a position to reduce debt, they are getting hit with maximum leverage again. It's very hard for companies to take that hit twice.

If you look at Ted Forstmann, an original private equity person who just passed away, he would rail against dividends in this manner -- borrowing money to pay out dividends. He was more interested in taking companies public and selling shares and paying down debts and collecting proceeds that way. I can respect that a lot more. The initial private equity model was that you would make money by reselling your company or taking it public, not by levering it a second time.

Private equity and buyouts started as a way to take advantage of tax gimmicks, not as a way of saying "we're going to turn around companies." And now it's out of control. I look at the 10 largest deals done in the 1990s, during ideal economic times, and in six cases it was clear that the company was worse off than if they never been acquired. Moody's just put out a report in December that looked at the 40 largest buyouts of this era and showed that their revenue was growing at 4 percent since their buyout, while comparable companies were growing at 14 percent.

In January -- so just in the past 12 days -- Hostess, the largest bakery in the country, just went bankrupt. Coach, the largest bus company, just went bankrupt. And Quizno's is about to go bankrupt. All of these were owned by private equity.

MK: This battle is part of a larger discussion of, in Henry Manne's phrase, "the market for corporate control." The tax code is set to overlever firms, which require increases in earnings to go toward debt payments instead of research and development, expansion, and other things that build the firm. What could we change to generate different outcomes?

JK: That's exactly right. Right after this goes on for a few years, you've starved your firm of human and operating capital. Five years later, when the private equity leaves, the company will collapse -- you can't starve a company for that long. This is what the history of private equity shows.

What I'd like to see Mitt Romney do is to show an example of a buyout that went well. The only success stories he's talking about on any level are venture capital investments -- Staples and Sports Authority. Personally I like venture capital, I think it provides a lot of value, but that's not what he did mostly, and that's not what these takeovers are about.

The big fix I'd encourage is an end to interest-tax deducibility for leveraged buyouts. The tax system encourages companies to borrow as much as they can. For certain industries, like telecom, these deductions might make a lot of sense. But it was never intended for financing leveraged buyouts. If you put a cap on this you would find buyouts and private equity firms that were much more focused on building companies.

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Cordray's Recess Appointment Helps Implement a Law That Already Passed

Jan 4, 2012Mike Konczal

President Obama rightfully sidestepped a GOP that insists on dismantling a law that addresses some of the fundamental breakdowns of the crisis.

President Obama rightfully sidestepped a GOP that insists on dismantling a law that addresses some of the fundamental breakdowns of the crisis.

One way to think about how the Dodd-Frank Wall Street Reform and Consumer Protection Act goes about policing finance is that it levels the playing field of rules and regulations between bank and non-bank financial firms. In the lead up to the crisis, financial firms acted like "shadow banks" without having to follow the rules regular banks did. The legal and regulatory infrastructure that evolved since the Great Depression for regular banks was never extended to these new shadow banks.

This was especially true for consumer financial products, particularly home mortgages. There's a solid regulatory network for home mortgages in place when it comes to regular banks. However, when it came to subprime mortgages made through non-bank lenders, those rules didn't apply. Many financial regulators urged Federal Reserve Chairman Alan Greenspan to have the Fed start regulating subprime and leveling the regulatory playing field. So did the GAO and a HUD-Treasury task force. Greenspan wouldn’t. Hence Dodd-Frank's emphasis on reducing regulatory arbitrage by creating a special Bureau to consolidate consumer financial protection in one place.

But the Consumer Financial Protection Bureau (CFPB) needs a director in order to start working on reducing the uneven playing field. As a recent report noted, "[w]ithout a Director, the CFPB cannot fully supervise non‐bank financial institutions such as independent payday lenders, non‐bank mortgage lenders, non‐bank mortgage servicers, debt collectors, credit reporting agencies and private student lenders." Enter our dysfunctional Senate.

In early May of 2011, 44 Republican Senators signed onto a letter that requested three specific changes before they confirmed any nominee, "regardless of party affiliation," to head the CFPB. The changes included replacing "the single Director with a board to oversee the Bureau" and subjecting "the Bureau to the Congressional appropriations process."

Dodd-Frank, signed into law in July 2010, created a Consumer Financial Protection Bureau that had a single director and was consciously funded in a very specific way. In order for the CFPB to fully work, it needs an appointed director -- certain powers don't kick in otherwise. So in effect a minority of Republican Senators say that they won't allow an act of law to be fully implemented unless certain, crucial, parts of the law are overturned.

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People are correctly referring to this as a new nullification crisis (see also here). Brookings Scholar Thomas Mann notes that insisting "that a legitimately passed law be changed before allowing it to function with a director [is] a modern-day form of nullification. Same with the director of the Center for Medicare and Medicaid Services. There is nothing normal or routine about this. The Senate policing of non-cabinet appointments is sometimes more aggressive but the current practice goes well beyond that, more like pre-Civil War days than 20th century practice." This has also gone on with the NLRB and, in a way, went on with the debt ceiling battle. Eventually the administration needed to challenge this.

So it's great to see it recess appoint Richard Cordray as director. ThinkProgress outlines the initial legal analysis as to why Obama has the power to do this. Cordray will make a great director for the CFPB and the Bureau will continue to do the excellent work that it has already done.

It's a shame that more confirmations weren't pushed through with this window. A large number of financial regulator positions need to be filled, and even more judicial spots sit empty. In terms of building a longer-term, ascendent liberalism, it is essential to appoint people such as judges and nurture them to become strong leaders in the future.

It is uncertain whether this will shut down the confirmation process in the Senate, which may escalate tensions. If so, it will be a good time to reexamine how confirmations happen in the Senate more broadly. This is a part of government that was never meant to work the way it does now, and it is having serious consequences for the country.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Are the .01% Capitalists?

Dec 22, 2011Bruce Judson

money-question-150The super-rich might not be so outraged by accusations that they haven't earned their money fairly if they didn't know it was true.

money-question-150The super-rich might not be so outraged by accusations that they haven't earned their money fairly if they didn't know it was true.

Thanks to the Occupy movement, the extreme inequality in America has become a focus of the national dialogue. Recently, several of the super-rich have stepped forward to defend their place in society. Leon Cooperman, the billionaire founder of  Omega Advisors, a hedge fund sponsor and previously a senior official at Goldman Sachs, wrote a much publicized letter to President Obama, while Bloomberg News reported that Jamie Dimon, the CEO of JPMorgan Chase & Co, used a question at an investor conference as an opportunity to say that "Acting like everyone who's been successful is bad and because you're rich you're bad, I don't understand it."

For me, the question is not why there seems to be an outpouring of criticism and anger at the rich but whether it's justified. My answer is straightforward: Many of today's super-rich, particularly in the financial sector, have achieved their wealth in ways that are fundamentally anti-capitalist. As a consequence, people are justifiably wondering whether we have an economy that operates on the principles of capitalism or of oligarchy.

A central tenet of capitalism is that those who create the greatest wealth for society should receive the highest compensation. This is the ideal that has for generations motivated Americans and led to the admiration, indeed often veneration, of the rich. These wealthiest members of our society are seen as the people that have helped make us all somewhat better off.  As a result, they deserve their rewards.

What the Occupy movement and others are questioning is whether making us all better off is, in fact, what has made people "rich" and "successful" (Mr. Dimon's words) in the current era. Are the rich and successful the creators of wealth and jobs for all of us, or are they the predators and moochers (Ayn Rand's term in Atlas Shrugged), the reverse Robin Hoods who succeed by finding ways to redistribute wealth upwards?

To me, it's also notable that the most virulent complaints of the 1% seem to come from those in the financial sector. As I talk with wealthy Internet titans, I hear almost universal praise for our societal focus on income inequality. In essence, the complaints emanating from our financial titans have the ring of Shakespeare's famous phrase in Hamlet, "the lady doth protest too much, methinks."

Let's examine the ways in which many of today's highest income Americans, originating in the financial sector, are reverse Robin Hoods rather than wealth creators:

First, as I have written in earlier articles, the financial sector now operates outside all of the disciplines that are inherent in capitalism, from accountability for terrible business decisions to the enforcement of fair bargains to retribution for malfeasance. On the contrary, Bloomberg News recently disclosed massive secret Federal Reserve support for failing banks. This has led to an emerging consensus that the financial sector is socially useless or acutally destroys our overall societal wealth. Nobel Laureate Paul Krugman wrote in his New York Times column that:

[A]fter the debacle of the past two years, there's broad agreement -- I'm tempted to say, agreement on the part of almost everyone not on the financial industry's payroll -- with Mr. Turner's assertion that a lot of what Wall Street and the City [London's stock exchange] do is "socially useless."

In addition, it seems almost undeniable that, in the absence of the excessive anti-capitalist activities of the financial sector over the past decade, our entire society would now be wealthier. I wonder whether many of the "rich" and "successful" who have emerged in this arena would have achieved this wealth if they had been forced to compete on a level, fair playing field governed by the disciplines and rules of actual capitalism.

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Second, finance is an intermediary good. It is not an end in itself, but a means of greasing the wheels to make the economy run better. In a capitalist system the purpose of finance is to help limit risk (for example, by allowing a farmer to hedge against price drops in grain) or efficiently allocate investment capital in support of the long-term growth of new enterprises. According to AR Magazine, the top 25 hedge fund executives earned $22 billion in 2010. In addition, a recent report indicated that, despite the recession, Wall Street was on track for a record year in bonuses, while the financial sector now accounts for 29 percent of all U.S. corporate profits. Since the Census Bureau just reported one in every two Americans is poor or low income, this suggests some kind of massive disconnect between the operating purpose of the financial services sector and the wealth it is accumulating for itself versus the benefits is it creating for our larger economy.

Third, in a capitalist economy, all zero-sum activities which have a winner and loser with no growth in societal value,  are, at best worthless. Yet the majority of hedge funds, Wall Street traders, quants (the people who created sophisticated trading models), and issuers of so-called naked Credit Default Swaps all make money largely through zero-sum activities or high-speed trading (which now accounts for an estimated 75 percent of all equity trading in the U.S.), none of which are oriented toward creating value for society. This suggests, as David Cay Johnston pointed out in a recent column, that the entire business associated with so-called naked Credit Default Swaps is zero-sum gambling and should be illegal. At minimum, it has no value in a capitalist economy.

Moreover, the marginal societal benefits of hedge fund activities, if they exist, are almost certainly offset by the other costs they impose on our society. They create the potential for systematic risk to the overall economy, while hedge funds and other high-paying Wall Street activities also lead to the terrible allocation of talent in our nation. An important share of the nation's top talent is now gravitating to high-paying finance activities, engaged in determining new arbitrage strategies rather than creating the businesses that will create the next generation of jobs and real wealth the country so desperately needs.

In short, I would deem the billions of dollars in bonuses and earnings from hedge fund activity, several large lines of business, and high-speed trading on Wall Street to be antithetical to the capitalism that has helped to make America great. I recognize that I am undoubtedly painting with too broad a brush, but the fundamental point remains.

Finally, many of the rich are not playing by the same rules as the rest of Americans, and in our democracy people resent this basic unfairness. Hedge funds and private equity firms have used their political influence to ensure that the carried interest rule -- which allows a large portion of their earnings to be taxed at 15 percent as opposed to ordinary income rates -- remains in place.

So this brings me back to my original question: Are there a sizable number of the "rich" and "successful," particularly among the most notable members in the financial services sector, who don't meet even the most basic definitions of practicing capitalists?

If so, then perhaps the emerging dialogue over wealth in America is justified and represents an important examination of whether the country's economy has strayed from a core value in the capitalist ideal. Is the vitriol we are now hearing really fear that soon crony capitalism, socialism for the rich, and corporatism will no longer guide national policy?

Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.

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