For traders, their bonus is paramount, obligations to their employer are secondary, and consideration of other people is not even on the radar screen.
But beginning in the s, many of these restrictions were removed, with the capstone being the Gramm-Leach-Bliley Act of But even the Fed does not believe it. Special Tax Break for Hedge Fund and Private Equity Managers Hedge fund managers and private equity executives get a big break on their personal income tax. It served this purpose well for nearly 50 years. But in the s, Congress decided to privatize it.
As private companies, they paid their shareholders tens of billions of dollars in dividends by taking enormous risks. The harm that may be done by the companies invested in is considered irrelevant. Robo-Signing and the Settlement After the collapse of the housing market, banks had many mortgages in default.
When they took the bail-out money, the banks assured the government that they would work with the borrowers to make the best of the situation. But many banks decided neither to work with borrowers nor to go through the pains-taking process of lawfully foreclosing on them.
This came to be called the robo-signing scandal. When the robo-signing scandal came to light, the banks were let off with light settlements and no prosecutions. In a very real sense, that is what the law understands corporations are for. As we have discussed, especially since the bankruptcy amend58 ments, the ability of human beings to get out from under their debts, especially loans to pay for college, is almost non-existent.
Say what you may about whether someone should sign such documents, a signature on a loan or a mortgage means what it means: you are obligated to repay. This is not so for corporations. Because they are really not things at all, but just names on registries, they can easily go out of business, leaving whomever they owed money to, such as their workers, in the lurch. Again, the motivation here is that companies are entities that are designed to run-up debts.
Not only did the CEOs keep their jobs, they even kept their bonuses, their stock options, and their corporate jets. In many cases, the CEOs should have been prosecuted. This is not true. Despite extensive lawbreaking, there were actually fewer criminal prosecutions after than after the comparatively tiny s savings and loan scandals see Chapter 4.
In many cases since , no prosecution was brought at all. In others, there was a settlement on terms that amounted essentially to a slap-onthe-wrist. Although some try to justify the inaction or light penalties by arguing it would have been hard to prove the crimes, this is not an adequate excuse.
Attorney General, Eric Holder, explain why. They are just too big and too important to be bothered with having their crimes punished. The preferential treatment of capital gains should not exist at all. It is not at all clear why capital should be taxed less than labor. Reagan abolished in with no ill effects.
Unfortunately, it was brought back under Bush I. But, even if there is a preferential rate for capital gains, it is clear that carried interest should not qualify. Mason Tenders Dist. Council Welfare Fund v. Thomsen Constr. See Donovan v Bierwirth F.
Of course, every bet involves risks, and not all bets will be correct. You will sometimes get burned, but over time, you hope, the wins will exceed the losses, and what really matters is that, relative to the risk you take on, your profits are good.
Instead of understanding each bet individually, a bank or hedge fund, generally speaking, tries to keep track of only the risk that each of their trading groups is taking on as a whole. Each group is required to have a risk model which measures their risks in various ways.
All of this is a way to keep things reasonably safe for the firm. Then the risk guy would be kicked out of the group. No model is perfect so every model has blind spots, namely risks that are ignored, overlooked, or underestimated. By taking these positions, they could potentially make more money while remaining technically within the risk limit.
Even better for risk takers and common at the time, the market would change and 62 new instruments would be created. The game went like this: it was important to always stay within the preset risk limits — as measured by the risk model — even while the group took larger and larger bets on things that were invisible to the risk model. Individual members of the group would get rewarded for this. What are CDOs anyway? What follows is a very simplified version. In the late s through the mid-to-late s, there were not that many securitizations outside of the federal arena namely Freddie Mac, Fannie Mae,and Ginnie Mae , and they were pretty useful because they made pools of mortgages more predictable and tradable than individual mortgages.
The lower tranches had lower ratings such as BBB and were harder to sell, which limited the size of the overall market. Starting around the lower-rated, harder-to-sell tranches started getting re-securitized into new instruments, which were called Collateralized Debt Obligations, otherwise known as CDOs. So, just as the mortgage-backed securities took questionable mortgages and converted them into securities that people were willing to buy, CDOs were the next step: they took the very worst mortgage-backed securities and repackaged them into new securities.
To sell these profitably, they needed the stamp of approval from the rating agencies who are supposed to be independent, objective evaluators of the credit-quality securities. However, as securitization became widespread, the agencies became severely compromised.
Issuers pay the rating agencies to rate their securities. But with securitizations, massive amounts of securities were being issued by the banks. In addition, rating agencies are low in the food chain and so pay less compensation than the banks and hedge funds.
So employees of rating agencies would see the banks as potential employers and so would be particularly disinclined to ask questions.
Everyone at the rating agencies had large incentives to please the banks by putting the highest ratings on the securities. They were convinced that because many mortgages, or CDOs, were being pooled together, they would benefit from the magic of diversification and the risk would go away. They would not personally take the losses. And AAA-rated securities had been safe in the past. The riskiest securities received the highest rating.
It made no sense then and it makes no sense now. First, what is a CDS? People have correctly described it as an insurance contract on a bond. So, for some quarterly fee, you can insure the value of a bond you purchased against the risk of default. Say, for example, that you own a 5-year bond issued by a large company like Sears. Then you might be worried about the possibility of Sears having financial problems and defaulting on this bond.
That is, you can bet that Sears will default on its bond, since you can pay a quarterly fee for the chance to make a bunch of money in the case of default.
Also, you could buy CDSs for financial instruments other than bonds. It was also possible, and common, to buy CDSs to protect the tranches of securitized products, like mortgage-backed securities or CDOs.
Remember the discussion about how risky these investments were, standing by themselves? Now a product had been invented to remove the risk from these financial time bombs. Well, actually not to remove it but to pass it on to someone else. Who ended up with this risk?
Read on. So how did traders use CDSs in their bets surrounding the mortgage market? Because the higher tranche was supposed to be less risky, protection on it was cheaper and so they could buy more protection than they sold without actually having to pay any money. In other words, if all the tranches failed, then the traders would be paid more money on the higher tranche than they lost on the lower tranche, so they would end up far ahead.
Moreover, the income on the lower rated tranche, i. Which they did. The money paid out from a mortgage-backed CDO comes from a bunch of mortgages somewhere, even though it takes a few twists and turns to get there. But what if the demand for CDOs outstrips the supply? In fact there was more demand than could be sustained by the large but finite mortgage market at the time. Once synthetic CDOs were invented, the banks could create more CDOs synthetic ones without even going to the trouble of issuing more mortgages.
Who was doing this stuff? This makes sense since CDSs are like insurance. Later, after AIG stopped being involved — not soon enough, as we later saw — that side of the CDS market was entered into by all sorts of unsophisticated investors with help from the complicit ratings agencies who kept awarding AAA ratings because they were being well paid to do so.
Magnetar Even so, there was still a problem for this re-re-bundled heavily synthetic CDO market. This tranche contained mortgages that no sane person expected to pay out, which is why it was considered toxic. They set up deals that were designed to fail so they could profit by betting against them. Banks were willing to allow anyone willing to buy the equity tranche to design the synthetic CDO themselves. By agreeing to buy the equity tranche, Magnetar got to create CDOs designed to fail.
Why would they do this? Because they could make much bigger bets against the AAA-rated tranches. Also, the equity tranche, because it was risky, paid out a lot of cash quickly. If they were lucky, they could get enough cash out to pay for their bets.
In any case, they would win big as long as the CDOs failed catastrophically — which they did — exactly as they had been designed to do. The CDOs that Magnetar designed to fail were then sold by banks to pension funds and other global investors. The banks selling them did not consider it relevant to tell the buyers that the deal was designed by a hedge fund that was making a huge bet on their failing.
How big was this? Magnetar Capital accounted for the majority of the synthetic CDO issuance in , which was one of the biggest years in this market. And everything they did was legal, although the banks committed fraud when they sold the deals without mentioning who designed them and why.
The same thing happened here, except instead of individual traders fooling the company they were working for, Magnetar was fooling the entire market. How predictable was this whole scheme? Some people at Goldman Sachs and Deutsche Bank knew exactly what was happening and what was likely to happen.
They made a very intelligent bet that if and when the housing market went under, AIG would be backed by the government. In essence this entire market was an enormous bet on a government bailout. Not everyone knew this, of course, especially the guys who were still betting on the mortgage market when it collapsed, but lots of people knew.
These are some of the same people who, right now, are lobbying against reasonable financial regulation. This story argues for, at the very least, the treatment of CDS as insurance with the associated regulations. Any thinking human being should recognize that you first need to own something in order to buy insurance protection on it, just like with home and fire insurance.
President Abraham Lincoln, Nov. William F. Predatory Public Finance First, it should come as no surprise that with local and state governments collecting billions of dollars from various tax streams, Wall Street was not going to leave this taxpayer money alone. Some of the most outrageous stories concern what happens when local governments — the ones we rely on to provide services like road maintenance, education, and policing — have had to turn to Wall Street for capital. Because of the Wall Street-induced recession, our municipal governments have suffered both a decline in tax receipts and an increase in social service spending.
At times, Wall Street banks have employed methods, when dealing with our towns and cities, that are only a bit — and just sometimes — more nuanced than those the 19th Century Tammany Hall gangsters used to rob New York City.
Municipal bonds are a 3. To understand how big that is, the Gross National Product for the whole country was about 15 trillion dollars in So a smart thief should not be looking to steal a lot from every town or county bond offering. A little should do to make him very rich. They ultimately went on trial and were convicted for it in U. GE Capital was competing with the likes of Bank of America and Chase to invest the money of various municipalities that were collecting revenue from the issuance of bonds meant to support new or renovated libraries, schools, roads, and such things.
The towns did not immediately need the money coming in from the bonds, probably because whatever projects they were funding were not yet ready enough to necessitate major expenditures. As you can see, it is a kind of subtle thievery. If you prefer an example of more old fashioned skullduggery, consider, too, the tale of how JPMorgan recently milked corrupt Jefferson County Alabama administrators to such an extent that the entire county government ended up in bankruptcy.
Where better to go for funding than Wall Street? Accounts of the motivation differ, however, because things went very wrong. But in , their other not-so-great deals the ones related to mortgage-backed securities sent them into what was probably technical insolvency and almost collapsed the American economy. And that was what caused the interest rates to swing against Philly school kids: bad economies mean less demand for money and lower interest rates. Yet in the midst of this, who gets bailed-out?
In any sane society, you would say… the kids, of course. As we know, the banks got the bail-out, funded, in part, by the tax dollars of the parents of the very same Philly school kids to whom the banks had shown no mercy. These days governments need banks. Bankers know it and frequently use that advantage to make deals which, in retrospect and probably often in advance, too , demonstrate the negotiating imbalance between them.
Financial transactions involving governments are often complex. A bond sale, for instance, can involve a small legion of bankers and lawyers and take several steps to execute. This offers a maze of nooks and crannies into which fees can be tucked and costs hidden. There are also many transactions, like the Philadelphia ones, which are intended to transfer risk always for a fee and risk is notoriously hard to quantify. So even when cases are not as obviously corrupt as in the earlier examples of auction-fixing and county-official-bribing bankers, we need to press the issue and not let the questioning and analysis just end there.
But if we are going to teach our kids in Philly and other school systems about the democratic ideals of equal opportunity and civil rights, we also ought to be explaining to them the other dynamic of modern American civics, e. Privatization and the Securitization of What Was Previously Public Stealing from and getting the better of local governments is not all Wall Street is doing to undermine our civic institutions.
In any individual case, this can seem benign. When these kinds of things happen, there is a problem. Something we all would otherwise hold in common, something with respect to which we would maintain rights as citizens rather than as customers, disappears. It is critical to remember that the rights we most value in our Constitution are about, and only about, our relationship with a government.
So when you hear a Congressman reading the full text of the U. Constitution to open a Congressional session, remember and be careful : there is more than one way to erode the Constitution. The hard way is to go right at it and change what it says or means, but the easier way is to pretend you love it perhaps by reading it aloud in a public forum but then shrink the only things to which it ever applied, e.
The answer is: quite a lot. Recall the basic argument from Chapter 3 regarding the mechanics of the fractional-reserve banking system. They can just as well be made to individuals to 74 capture, in the present, substantially all of their future earning capacity.
In addition, loans can fund the purchase of existing public functions, which however valuable to society when they were public, were not contributing to the above-referenced money-creation cycle. For example, the American public school system — whatever you may think about its quality relative to some foreign ones — is a thing of real value in our country.
Sure, teachers and janitors got paid for their services, but this did not create money, it was just a means by which existing money could circulate. Once a school district, like that of Chicago or New York City, decides to let private entities run previously public schools, all of this changes.
In other words, as far as the financial system is concerned, cannibalizing us and our existing public institutions, regardless of whether they were previously working well, is actually just as good a moneymaking strategy and takes much less imagination as funding something new that has societal value. Given this, it should come as no surprise that the extraordinary rise we have seen in the size of the financial sector over the past 25 years has been contemporaneous with a similar rate of increase in the extent to which things we previously held in common have been privatized and securitized.
For example, while we have become accustomed to thinking of our medical system as private compared to that of Europe or Canada, as recently as the s most hospitals were non-profit or public institutions. Thomas F. Frist, the father of later U.
Senate majority leader Bill Frist , and experienced its exponential growth in the s and s as it acquired hundreds of American hospitals, at one point owning facilities and managing another Frist, Jr. Wall Street has recently been looking for the next big, previously public, enterprise to cannibalize. The push has been relentless and thus too varied to entirely capture here, but consider the following two notable ongoing examples.
The education industry, the bank concluded, represents the largest market opportunity since health care services were privatized during the s. EMOs [… are] the Big Enchilada. EMOs are often not the public face of charter schools, but they hold contracts to do all, or substantially all, of the actual work of running a school, from leasing space, to paying teachers, to managing the operation in its entirety.
As of , there were 5, charter schools in the U. At one point, it was trading at a mere 14 cents per share after the NASDAQ charged that it had over-stated its earnings by as much as 41 percent. The privatization of prisons in the United States might go all the way back to when, after the Civil War, southern farmers and businessmen turned to convict-leasing because they needed a replacement workforce for their freed slaves.
However, it took the s to really get this business revving. The U. CCA and its competitors have dramatically expanded since then. Instead, they can just give it to people set on encroaching into once-public spaces.
The Financialization of Politics and De-Politicization of Finance Money and Politics As you would expect, all of this plundering of public functions does not happen without corporate lobbyists who pressure and pay our legislators to adopt policies that undermine public functions. Board of Education became the symbol of the far prouder Civil Rights era. In addition, desperation can make people unreliable co-workers when they are pressed by bosses not to unionize.
Back in the day, populist champions like Andrew Jackson who no doubt had plenty of faults too and William Jennings Bryan achieved wide support expressly campaigning on issues like the merits of having a national bank and the extent to which alternate currencies should, or should not, be permitted to proliferate. Andrew Jackson would be turning over in his grave. Money, throughout history, has always been intensely political. They have not. Christopher Petrella testimony on Vermont bill H 28 www.
These rare, special creatures ought to be compensated for sharing their talents with us in a way that makes us all better off via innovation! But note that this narrative depends on two questionable assumptions.
The second assumption is that the market price commanded by an individual is a fair and just way of distributing income. Where does social wealth come from, actually? Is it really wholly manufactured by a few geniuses? Even expressing it this way makes it absurd on its face. The economy depends on a huge number of institutional and social realities that have no price tag. Consider this: how much of what Apple did was really because of China opening up and allowing U.
How many Chinese and Vietnamese lifetimes went into each iPhone? How much of what Apple did was because of government investment in the Internet? If we plopped Steve Jobs in medieval Germany, he would likely wind up plowing some farmland, just like everyone else.
Today, most of the extremely rich are not creating consumer products like Steve Jobs. Those maniacs blew up the economy, after all! We have an elite that is paid by organizations that fail to internalize huge externalities, from environmental costs to financial fragility. To the extent that they are making a profit by ignoring these costs, their resulting pay is not even remotely related to helping society. To the extent that the system allows you to make money by screwing people over rather than by improving society, there will continue to be a discrepancy between earning and the betterment of society.
Indeed, luck is one of the features that make markets work — the right person at the right time can make the right trade, product, or innovation. How does the element of luck square with the concept of justice? Hold on, though.
Maybe there is a loose correspondence after all. Maybe the market implements some form of meritocracy. Those frugal and thrifty people, or those talented and risk-taking people, are the ones that the market rewards. This kind of technological jump is great, in general, but it also means that the people thinking the hardest about what society already needs might not anticipate the next disruption. So capitalism is constantly pulling the rug out from under even the most thrifty, frugal, and talented people.
Keeping money. It is much more likely because some of the totally unprincipled legal rules we mentioned are resulting in a misallocation of resources, which a more progressive tax system would go a long way towards straightening-out.
Also, when, as we have earlier discussed, there are fewer and fewer goods and services in society that we hold in common, that necessarily means people are starting off their lives from vastly different baselines. Other countries address inequality in various ways: allocating public goods such as schools, universal daycare, excellent public transportation and changing the structure of the labor market. The lowest mobility places in the U. This suggests that the current structure of American inequality runs a lot deeper than just tax and redistribution policy.
And, of course, unions create a political voice for workers to balance out the over-sized modern political voice of corporations. Higher taxes and more stringent regulations are bad on this view because they make it harder for the revenue vs. But 88 thinking about it this way is like saying — because I got my sandwich faster by cutting to the front of the deli-line, everyone should do it. There are a lot of reasons to think, for example, that policies that set living wage standards at practically double the current federal minimum wage would eliminate race-to-the-bottom pricing of labor.
And a more fairly compensated private-sector workforce would actually be in a better position to go out and buy the products and services its employers sell so the system of private sector employment would actually do better. When money pools and gets stuck in nooks and crannies of the system, leaving most economic-participants little choice but to turn to public assistance or crime — it is bad for business, private and public. Second, private job creation does not account for all jobs — there are plenty of government jobs too.
We have more control over them and nothing per se makes a private sector job better than a public one. So to the extent god forbid Rahm Emanuel were to shut-down a charter school and give its teachers jobs at a resuscitated public institution, why would those jobs be worse?
We should be pretty darn proud of the work our public sector employees and other employees working on public projects do; they build and service most of what we take pride in as a society. Or does it refer to the NSA surveillance budget or the Pentagon drone budget? We really could have used more of it and spent it better. In addition, we might want to worry about climate change at least as much as government budgeting and debt.
Why compare two different things like climate change and budgets? Because of their similar time horizons. It gives bondholders too much clout and makes the government timid when it comes to projects that might prevent debt rollover.
It is also no substitute for a more thorough taxation scheme and a functional political system that can raise taxes when needed for important projects. There have been lots of projections about a severe crisis in healthcare because medical expenditures are rising at 90 an enormous rate. To the extent that government pays those costs, this is a rapidly increasing part of the budget.
There are a few reasons for this; some of them give us reason to be hopeful, and others have nothing to do with government waste. Is that actually such a bad thing? Seen in this light, the expected continuing increase in healthcare expenditures and social insurance is possibly reasonable in a rich country. Ideally, we would want to hold down cost, but if people are actually demanding more healthcare, then so be it. It is only the insurance which the government supplies.
That leaves things like wars, defense, and the unconscionable government subsidies of pet industries like big pharmaceuticals Bush II made it illegal for the government to bargain for better prices for Medicare Part D drugs and the Finance Sector the ongoing bail out to name but two. There would have to be something better, safer, and more liquid than the U. Clearly, this is not happening, and does not look like it is going to happen any time soon. What would that be? Those markets are not only heavily if inadequately regulated; they were created as a result of regulation.
All markets are regulated; indeed, without heavy regulation all you have is people conspiring to set prices and grab things away from one another without paying for them. The only question therefore is whether the current set of regulations is any good, and for all the reasons we have discussed earlier, it is not. First, investors all over the world want to invest in the U. It is hard to believe that will change any time soon, but it is even harder to believe they are coming here because we have lax capital regulations.
The economic dynamics this book has spent a lot of time exploring are doing tremendous damage to that vibrancy, and, if not checked, will ultimately make the U. But it is certainly not loose money that brings investors to our shores; and it is certainly no time soon that reasonable capital regulations are going to drive them from these shores.
Our competitors on the regulation front are also the likes of the Cayman Islands, Singapore, and Switzerland. Is that where all the money is going to go? Keep in mind that Europe is no less regulated than the U. The European Union is currently trying to pass laws about tax havens to make them less available. The replacement refs made one glaring mistake after another.
Teams that should have won lost. In fact, the abuses are continuing. Clearly, those in government are not willing to do what is needed to hold the abusers accountable for their actions. But even those with that ultimate goal must not, in the meantime, simply accede to whatever rules the corporate interests and lobbyists impose. But they illustrate that, even within the existing system, the rules could be much fairer, predatory practices could be much less prevalent, power could be much more equitably distributed, and violators could be punished even if they are rich and powerful.
These are useful steps toward getting we, the people, involved in deciding what needs to be done and how it should be done. There are also examples of good regulation that prove it is possible.
For instance, those of us who live in Los Angeles or New York City will be familiar with the letter grades A, B, or C prominently displayed on restaurant windows. This simple measure has improved restaurant hygiene and reduced severe food-borne illness. As described in chapter 5, there have been too many examples of law-breaking going unpunished.
In addition to being unfair, this also encourages future misdeeds. But the rules should demand responsible behavior well beyond abiding by the letter of the law. The more powerful or well-informed advisers should be prevented from using that information to exploit their less knowledgeable customers. Their incentives and career opportunities should support such behavior, not undermine it as these opportunities do today.
We need to appreciate the need for and the value of good regulation. Simpler regulations make it harder to embed loopholes or special privileges.
Simpler regulations will facilitate democratic involvement in the process, because regular citizens will be able to understand and critique them. Thus, you can save the mp3 file on any device. Finally, our system unequaledly ensures the best possible quality based on the downloaded video kbps most of the time.
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Joe fakaza , 50 Cent - Big Rich Town feat. Joe tubidy , 50 Cent - Big Rich Town feat. Joe juice mp3 , 50 Cent - Big Rich Town feat. Joe fakaza. I'm 23 now, will I live to see 24? The way things is going I don't know [Hook 2: LV] Tell me why are we so blind to see That the ones we hurt are you and me?
I guess they can't, I guess they won't I guess they front; that's why I know my life is out of luck, fool! Tell me why are we so blind to see That the ones we hurt are you and me? Offset From the album, "Legendary". C G Unit Records, Inc. All contents belong to its rightful owners. This is for entertainment purposes only.
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