Character

“Character cannot be developed in ease and quiet. Only through experiences of trial and suffering can the soul be strengthened, vision cleared, ambition inspired and success achieved.” Keller

Character "The ability to carry out the decision after the emotion of making it has passed"

Why Rich Parents Don't Matter

How much do the decisions of parents matter? Most parents believe that even the most mundane acts of parenting—from their choice of day care to their policy on videogames—can profoundly influence the success of their children. Kids are like wet clay, in this view, and we are the sculptors.
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As wealth increases, adults play a much smaller role in determining the mental ability of their children.

Yet in tests measuring many traits, from intelligence to self-control, the power of the home environment pales in comparison to the power of genes and peer groups. We may think we're sculptors, but the clay is mostly set.

A new paper suggests that both metaphors can be true. Which one is relevant depends, it turns out, on the economic status of families.

For a paper in Psychological Science, researchers at the University of Texas at Austin and the University of Virginia looked at 750 pairs of American twins who were given a test of mental ability at the age of 10 months and then again at the age of 2. By studying the performance of identical versus fraternal twins, the scientists could tease out the relative importance of factors such as genetics and the home environment. Because the infants came from households across the socioeconomic spectrum, it also was possible to see how wealth influenced test scores.
When it came to the mental ability of 10-month-olds, the home environment was the key variable, across every socioeconomic class. But results for the 2-year-olds were dramatically different. In children from poorer households, the choices of parents still mattered. In fact, the researchers estimated that the home environment accounted for approximately 80% of the individual variance in mental ability among poor 2-year-olds. The effect of genetics was negligible.

The opposite pattern appeared in 2-year-olds from wealthy households. For these kids, genetics primarily determined performance, accounting for nearly 50% of all variation in mental ability. (The scientists made this conclusion based on the fact that identical twins performed much more similarly than fraternal twins.) The home environment was a distant second. For parents, the correlation appears to be clear: As wealth increases, the choices of adults play a much smaller role in determining the mental ability of their children.

Children from wealthy households get all the advantages that money can buy, from music lessons to SAT tutors. Although parents might fret over the details of such advantages—is it better to play the piano or the violin?—these details are mostly insignificant, subject to the law of diminishing returns. As the science blogger Razib Kahn notes, "When you remove the environmental variance, the genetic variance remains."

These results capture the stunning developmental inequalities that set in almost immediately, so that even the mental ability of 2-year-olds can be profoundly affected by the socio-economic status of their parents. As a result, their genetic potential is held back.

Though this latest study doesn't speculate about the causes of these class differences, previous research has focused on a panoply of factors, such as the variety of words directed toward the child (more variety leads to higher test scores), the number of books in the home and even the ratio of encouraging remarks to discouraging warnings. By the age of 3, children from wealthier households hear, on average, about 500,000 encouragements and 80,000 discouragements. The ratio is reversed in households on welfare.
Such statistics have led many researchers to highlight the importance of improving the early-childhood environments of poor children. Economists such as James Heckman, a Nobel laureate at the University of Chicago, have long advocated for increased investments in preschool education, but this latest study suggests that interventions need to begin even earlier. One possible model is the "Baby College" administered by the Harlem Children's Zone, which seeks to equip brand-new parents with better parenting skills.

Eliminating such inequalities in the early years of life would simply create a new kind of inequality, driven by genetics. But such a world would at least let more children come closer to their mental potential, unconstrained by the mistakes or impoverishment of their parents. The greatest luxury we can give our children, it turns out, is the luxury of being the type of parent that doesn't matter at all.

Viveme - Song by Laura Pausini Translated to English

Listen here: http://www.youtube.com/watch?v=kLuGqg_igO8

Viveme "Live Me" - Laura Pausini
[lyrics translation by Milt Anderson]

I do not need anything now that
your immense love lights me up outside and in
Believe me this time
Believe me ..because..
Believe me and you will see
there won't be an end

I have a desire written on high
Flying now
My thought is not dependent on my body
Believe me this time
Believe me ..because..
I'd hurt myself now
I know

There is plenty of room in you and me
an open heaven... that now
closes on us two
...we know what's needed now

Live me without fear now
Whether a lifetime or one hour
Do not leave me here free and naked
My new space that is now yours
I pray
Live me without shame
even if the whole world is against it
Leave appearances and embrace feeling
And feel what I have inside

And you become a room
Within me
Covering my white, tired walls
Believe me this time
Believe me ..because..
I'd hurt myself again and again

Yes, come into my reality
Today I have something more
than i ever had yesterday
you need to live me a little more

Live me without fear now
Whether a lifetime or one hour
Do not leave me here free and naked
My new space that is now yours
I pray
Live me without shame
even if the whole world is against it
Leave appearances and embrace feeling
And feel what I have inside
You opened my fantasy
Days of unlimited happiness await me
it's your script
-My life
you focus me, you direct me
your ideas in me

Live me without shame
even if the whole world is against it
Leave appearances and embrace feeling
And feel what I have inside

The Power of Vulnerability Brene Brown

A couple years ago, an event planner called me because I was going to do a speaking event. And she called, and she said, "I'm really struggling with how to write about you on the little flier." And I thought, "Well, what's the struggle?" And she said, "Well, I saw you speak, and I'm going to call you a researcher, I think, but I'm afraid if I call you a researcher no one will come, because they'll think you're boring and irrelevant." (Laughter) Okay. And she said, "But the thing I liked about your talk is you're a storyteller. So I think what I'll do is just call you a storyteller." And of course the academic, insecure part of me was like, "You're going to call me a what?" And she said, "I'm going to call you a storyteller." And I was like, "Why not magic pixie?" (Laughter) I was like, "Let me think about this for a second." I tried to call deep on my courage. And I thought, I am a storyteller. I'm a qualitative researcher. I collect stories; that's what I do. And maybe stories are just data with a soul. And maybe I'm just a storyteller. And so I said, "You know what? Why don't you just say I'm a researcher-storyteller." And she went, "Haha. There's no such thing." (Laughter) So I'm a researcher-storyteller, and I'm going to talk to you today -- we're talking about expanding perception -- and so I want to talk to you and tell some stories about a piece of my research that fundamentally expanded my perception and really actually changed the way that I live and love and work and parent.

And this is where my story starts. When I was a young researcher, doctoral student, my first year I had a research professor who said to us, "Here's the thing, if you cannot measure it, it does not exist." And I thought he was just sweet-talking me. I was like, "Really?" and he was like, "Absolutely." And so you have to understand that I have a bachelor's in social work, a master's in social work, and I was getting my Ph.D. in social work, so my entire academic career was surrounded by people who kind of believed the life's messy, love it. And I'm more of the, life's messy, clean it up, organize it and put it into a bento box. (Laughter) And so to think that I had found my way, to found a career that takes me -- really, one of the big sayings in social work is lean into the discomfort of the work. And I'm like, knock discomfort upside the head and move it over and get all A's. That was my mantra. So I was very excited about this. And so I thought, you know what, this is the career for me, because I am interested in some messy topics. But I want to be able to make them not messy. I want to understand them. I want to hack into these things I know are important and lay the code out for everyone to see.

So where I started was with connection. Because, by the time you're a social worker for 10 years, what you realize is that connection is why we're here. It's what gives purpose and meaning to our lives. This is what it's all about. It doesn't matter whether you talk to people who work in social justice and mental health and abuse and neglect, what we know is that connection, the ability to feel connected, is -- neurobiologically that's how we're wired -- it's why we're here. So I thought, you know what, I'm going to start with connection. Well you know that situation where you get an evaluation from your boss, and she tells you 37 things you do really awesome, and one thing -- an opportunity for growth? (Laughter) And all you can think about is that opportunity for growth, right. Well apparently this is the way my work went as well, because, when you ask people about love, they tell you about heartbreak. When you ask people about belonging, they'll tell you their most excruciating experiences of being excluded. And when you ask people about connection, the stories they told me were about disconnection.

So very quickly -- really about six weeks into this research -- I ran into this unnamed thing that absolutely unraveled connection in a way that I didn't understand or had never seen. And so I pulled back out of the research and thought, I need to figure out what this is. And it turned out to be shame. And shame is really easily understood as the fear of disconnection. Is there something about me that, if other people know it or see it, that I won't be worthy of connection. The things I can tell you about it: it's universal; we all have it. The only people who don't experience shame have no capacity for human empathy or connection. No one wants to talk about it, and the less you talk about it the more you have it. What underpinned this shame, this "I'm not good enough," -- which we all know that feeling: "I'm not blank enough. I'm not thin enough, rich enough, beautiful enough, smart enough, promoted enough." The thing that underpinned this was excruciating vulnerability, this idea of, in order for connection to happen, we have to allow ourselves to be seen, really seen.

And you know how I feel about vulnerability. I hate vulnerability. And so I thought, this is my chance to beat it back with my measuring stick. I'm going in, I'm going to figure this stuff out, I'm going to spend a year, I'm going to totally deconstruct shame, I'm going to understand how vulnerability works, and I'm going to outsmart it. So I was ready, and I was really excited. As you know, it's not going to turn out well. (Laughter) You know this. So I could tell you a lot about shame, but I'd have to borrow everyone else's time. But here's what I can tell you that it boils down to -- and this may be one of the most important things that I've ever learned in the decade of doing this research. My one year turned into six years, thousands of stories, hundreds of long interviews, focus groups. At one point people were sending me journal pages and sending me their stories -- thousands of pieces of data in six years. And I kind of got a handle on it.

I kind of understood, this is what shame is, this is how it works. I wrote a book, I published a theory, but something was not okay -- and what it was is that, if I roughly took the people I interviewed and divided them into people who really have a sense of worthiness -- that's what this comes down to, a sense of worthiness -- they have a strong sense of love and belonging -- and folks who struggle for it, and folks who are always wondering if their good enough. There was only one variable that separated the people who have a strong sense of love and belonging and the people who really struggle for it. And that was, the people who have a strong sense of love and belonging believe they're worthy of love and belonging. That's it. They believe they're worthy. And to me, the hard part of the one thing that keeps us out of connection is our fear that we're not worthy of connection, was something that, personally and professionally, I felt like I needed to understand better. So what I did is I took all of the interviews where I saw worthiness, where I saw people living that way, and just looked at those.

What do these people have in common? I have a slight office supply addiction, but that's another talk. So I had a manila folder, and I had a Sharpie, and I was like, what am I going to call this research? And the first words that came to my mind were whole-hearted. These are whole-hearted people, living from this deep sense of worthiness. So I wrote at the top of the manila folder, and I started looking at the data. In fact, I did it first in a four-day very intensive data analysis, where I went back, pulled these interviews, pulled the stories, pulled the incidents. What's the theme? What's the pattern? My husband left town with the kids because I always go into this Jackson Pollock crazy thing, where I'm just like writing and in my researcher mode. And so here's what I found. What they had in common was a sense of courage. And I want to separate courage and bravery for you for a minute. Courage, the original definition of courage when it first came into the English language -- it's from the Latin word cor, meaning heart -- and the original definition was to tell the story of who you are with your whole heart. And so these folks had, very simply, the courage to be imperfect. They had the compassion to be kind to themselves first and then to others, because, as it turns out, we can't practice compassion with other people if we can't treat ourselves kindly. And the last was they had connection, and -- this was the hard part -- as a result of authenticity, they were willing to let go of who they thought they should be in order to be who they were, which you have to absolutely do that for connection.

The other thing that they had in common was this. They fully embraced vulnerability. They believed that what made them vulnerable made them beautiful. They didn't talk about vulnerability being comfortable, nor did they talk about it being excruciating -- as I had heard it earlier in the shame interviewing. They just talked about it being necessary. They talked about the willingness to say "I love you" first, the willingness to do something where there are no guarantees, the willingness to breathe through waiting for the doctor to call after your mammogram. They're willing to invest in a relationship that may or may not work out. They thought this was fundamental.

I personally thought it was betrayal. I could not believe I had pledged allegiance to research -- the definition of research is to control and predict, to study phenomena, for the explicit reason to control and predict. And now my mission to control and predict had turned up the answer that the way to live is with vulnerability and to stop controlling and predicting. This led to a little breakdown -- (Laughter) -- which actually looked more like this. (Laughter) And it did. I called it a breakdown, my therapist calls it a spiritual awakening. A spiritual awakening sounds better than breakdown, but I assure you it was a breakdown. And I had to put my data away and go find a therapist. Let me tell you something: you know who you are when you call your friends and say, "I think I need to see somebody. Do you have any recommendations?" Because about five of my friends were like, "Wooo. I wouldn't want to be your therapist." (Laughter) I was like, "What does that mean?" And they're like, "I'm just saying, you know. Don't bring your measuring stick." I was like, "Okay."

So I found a therapist. My first meeting with her, Diana -- I brought in my list of the way the whole-hearted live, and I sat down. And she said, "How are you?" And I said, "I'm great. I'm okay." She said, "What's going on?" And this is a therapist who sees therapists, because we have to go to those, because their B.S. meters are good. (Laughter) And so I said, "Here's the thing, I'm struggling." And she said, "What's the struggle?" And I said, "Well, I have a vulnerability issue. And I know that vulnerability is the core of shame and fear and our struggle for worthiness, but it appears that it's also the birthplace of joy, of creativity, of belonging, of love. And I think I have a problem, and I need some help." And I said, "But here's the thing, no family stuff, no childhood shit." (Laughter) "I just need some strategies." (Laughter) (Applause) Thank you. So she goes like this. (Laughter) And then I said, "It's bad, right?" And she said, "It's neither good, nor bad." (Laughter) "It just is what it is." And I said, "Oh my God, this is going to suck."

(Laughter)

And it did, and it didn't. And it took about a year. And you know how there are people that, when they realize that vulnerability and tenderness are important, that they surrender and walk into it. A: that's not me, and B: I don't even hang out with people like that. (Laughter) For me, it was a yearlong street fight. It was a slugfest. Vulnerability pushed, I pushed back. I lost the fight, but probably won my life back.

And so then I went back into the research and spent the next couple of years really trying to understand what they, the whole-hearted, what choices they were making, and what are we doing with vulnerability. Why do we struggle with it so much? Am I alone in struggling with vulnerability? No. So this is what I learned. We numb vulnerability -- when we're waiting for the call. It was funny, I sent something out on Twitter and on Facebook that says, "How would you define vulnerability? What makes you feel vulnerable?" And within an hour and a half, I had a 150 responses. Because I wanted to know what's out there. Having to ask my husband for help, because I'm sick, and we're newly married; initiating sex with my husband; initiating sex with my wife; being turned down; asking someone out; waiting for the doctor to call back; getting laid-off; laying-off people -- this is the world we live in. We live in a vulnerable world. And one of the ways we deal with it is we numb vulnerability.

And I think there's evidence -- and it's not the only reason this evidence exists, but I think it's a huge cause -- we are the most in-debt, obese, addicted and medicated adult cohort in U.S. history. The problem is -- and I learned this from the research -- that you cannot selectively numb emotion. You can't say, here's the bad stuff. Here's vulnerability, here's grief, here's shame, here's fear, here's disappointment, I don't want to feel these. I'm going to have a couple of beers and a banana nut muffin. (Laughter) I don't want to feel these. And I know that's knowing laughter. I hack into your lives for a living. God. (Laughter) You can't numb those hard feelings without numbing the affects, our emotions. You cannot selectively numb. So when we numb those, we numb joy, we numb gratitude, we numb happiness. And then we are miserable, and we are looking for purpose and meaning, and then we feel vulnerable, so then we have a couple of beers and a banana nut muffin. And it becomes this dangerous cycle.

One of the things that I think we need to think about is why and how we numb. And it doesn't just have to be addiction. The other thing we do is we make everything that's uncertain certain. Religion has gone from a belief in faith and mystery to certainty. I'm right, you're wrong. Shut up. That's it. Just certain. The more afraid we are, the more vulnerable we are, the more afraid we are. This is what politics looks like today. There's no discourse anymore. There's no conversation. There's just blame. You know how blame is described in the research? A way to discharge pain and discomfort. We perfect. If there's anyone who wants their life to look like this it would be me, but it doesn't work. Because what we do is we take fat from our butts and put it in our cheeks. (Laughter) Which just, I hope in a hundred years, people will look back and go, "Wow."

(Laughter)

And we perfect, most dangerously, our children. Let me tell you what we think about children. They're hardwired for struggle when they get here. And when you hold those perfect little babies in your hand, our job is not so say, "Look at her, she's perfect. My job is just to keep her perfect -- make sure she makes the tennis team by fifth grade and Yale by seventh grade." That's not our job. Our job is to look and say, "You know what? You're imperfect, and you're wired for struggle, but you are worthy of love and belonging." That's our job. Show me a generation of kids raised like that, and we'll end the problems I think that we see today. We pretend that what we do doesn't have an effect on people. We do that in our personal lives. We do that corporate -- whether it's a bailout, an oil spill, a recall -- we pretend like what we're doing doesn't have a huge impact on other people. I would say to companies, this is not our first rodeo people. We just need you to be authentic and real and say, "We're sorry. We'll fix it."

But there's another way, and I leave you with this. This is what I have found: to let ourselves be seen, deeply seen, vulnerably seen; to love with our whole hearts, even though there's no guarantee -- and that's really hard, and I can tell you as a parent, that's excruciatingly difficult -- to practice gratitude and joy in those moments of terror, when we're wondering, "Can I love you this much? Can I believe in this this passionately? Can I be this fierce about this?" just to be able to stop and, instead of catastrophizing what might happen, to say, "I'm just so grateful, because to feel this vulnerable means I'm alive." And the last, which I think is probably the most important, is to believe that we're enough. Because when we work from a place I believe that says, "I'm enough," then we stop screaming and start listening, we're kinder and gentler to the people around us, and we're kinder and gentler to ourselves.

That's all I have. Thank you.


This is a TED talk... and can be found on youtube

the end of Wall Street, summarize the economic failure

Book Excerpt: Roger Lowenstein's "The End of Wall Street"
The Street isn't dead—but a certain laissez-faire idea of it is. So argues Lowenstein in his new book
"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief." — Alan Greenspan, testimony before the House Committee on Oversight & Government Reform, Oct. 23, 2008

The crash of 2008 put to rest the intellectual model that inspired, and to a large degree facilitated, the bubble. It spelled the end of the immodest faith in Wall Street's ability to forecast. No better testimony exists than the extraordinary recanting of former Federal Reserve Board Chairman Alan Greenspan, the public official most associated with the thesis that markets are ever to be trusted.

In October 2008, 10 days after the first round of Troubled Asset Relief Program (TARP) investments, Greenspan appeared in the House of Representatives in effect to repeal the credo by which he had managed the nation's economy for 17 years: "In recent decades a vast risk management and pricing system has evolved, combining the best insights of mathematicians and finance experts supported by major advances in computer and communications technology. A Nobel prize was awarded for the discovery of the pricing model that underpins much of the advance in derivative markets....The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria."

This remarkable proclamation, close to a confession, was the intellectual counterpart to the red ink flowing on Wall Street. Just as Fannie Mae (FNM), Freddie Mac (FRE), and Merrill Lynch (BAC) had undone the labors of a generation—had lost, that is, all the profits and more that they had earned during the previous decade—Greenspan undermined its ideological footing. And even if he later partly retracted his apologia (in the palliative that it wasn't the models per se that failed but the humans who applied them), he was understood to say that the new finance had failed. The boom had not just ended; it had been unmasked.

Why did it end so badly? Greenspan's faith in the new finance was itself a culprit. The late economist Hyman P. Minsky observed that "success breeds a disregard of the possibility of failure." Greenspan's persistent efforts to rescue the system lulled the country into believing that serious failure was behind it. His successor, Ben Bernanke, was too quick to believe that Greenspan had succeeded—that central bankers had truly muted the economic cycle. Each put inordinate faith in the market and disregarded its oft-shown potential for speculative excess. Excessive optimism naturally led to excessive risk.

The Fed greatly abetted speculation in mortgages by keeping interest rates too low. Meanwhile, the willingness of government to abide teaser mortgages, "liar loans," and home mortgages with zero down payments, amounted to a staggering case of regulatory neglect.

The government's backstopping of Fannie and Freddie, along with the federal agenda of promoting homeownership, was yet another cause of the bust. Yet for all of Washington's miscues, the direct agents of the bubble were private ones. It was the market that financed unsound mortgages and collateralized debt obligations (CDOs) that spread their contagion globally; the Fed permitted, but the market acted. The banks that failed were private; the investors who financed them were doing the glorious work of Adam Smith.

Rampant speculation in mortgages was surely the primary cause of the bubble, which was greatly inflated by leverage in the banking system, in particular on Wall Street. High leverage and risk taking in general was fueled by the Street's indulgent compensation practices.

The system of securitizing mortgages lay at the heart of Wall Street's unholy alliance with Main Street, and several links in the chain made the process especially risky. Mortgage issuers, the parties most able to scrutinize borrowers, had no continuing stake in the outcome; the ultimate investors, dispersed around the globe, were too remote to be of any use in evaluating loans. These investors (as well as various government agencies) relied on the credit agencies to serve as a watchdog, and the agencies, being cozy with Wall Street, were abysmally lax.

Wall Street's penchant for complexity was itself a risk. Abstruse securities were more difficult to value, and multitiered pyramids of debts were far more susceptible to collapse. Individual malfunctions were indicative of a larger failure: The market system came undone. What truly failed was the postindustrial model of capitalism. The market's tools for measuring risk simply did not work. The most sophisticated minds on Wall Street proved no wiser than country loan officers. All in, the big Wall Street banks were stuck with an estimated 30% of subprime losses....

Counter to the view of its apostles, the market system of the late 20th and early 21st centuries did not evolve in a state of nature. It evolved with its own peculiar prejudices and rites. The institution of government was nearly absent. In its place had arisen a system of market-driven models, steeped in the mathematics of the new finance.

The rating agency models were typical, and they were blessed by the Securities & Exchange Commission. The new finance was flawed because its conception of risk was flawed. The banks modeled future default rates as though history could provide the odds with scientific certainty—as precisely as the odds in dice or cards.

But markets are different from games of chance. The cards in history's deck keep changing. Prior to 2007 and '08, the odds of a nationwide mortgage collapse would have been seen as very low, because during the previous 70 years it had never happened.

What the bust proved, or reaffirmed, was that Wall Street is (at unpredictable moments) irregular; it is subject to uncertainty. Greenspan faulted the modelers for inputting the wrong slice of history. But the future being uncertain, there is no perfect slice, or none so reliable as to warrant the suave assurance of banks that leveraged 30 to 1.

In particular, the notion that derivatives (in the hands of American International Group (AIG) and such) eradicated risk, or attained a kind of ideal in apportioning risk to appropriate parties, was sorrowfully exposed. When mortgage securities were introduced, they were applauded because they enabled lenders to issue loans without retaining risk. And this they did. They also created new vulnerabilities. The ability of Countrywide Savings & Loan and Washington Mutual to parcel out loans to Wall Street encouraged them to issue more and riskier loans than had no securitization channel existed. The perception of decreased risk to the individual firm thus increased risk for society at large.

Then-Treasury Secretary Henry M. "Hank" Paulson gave voice (on Sept. 15, 2008, the day Lehman Brothers failed) to the need for reform, and President Barack Obama, as well as Congress, avidly pursued it. In general, there was greater agreement that reform was necessary than there was over what it should entail. Legislative attention focused on four areas: protecting consumers of financial products such as mortgages and credit cards; regulating complex instruments such as derivatives; obviating the need for future government bailouts, either by keeping banks from becoming too big to fail or ensuring that big banks did not assume too much risk; and limiting Wall Street bonuses.

The public embraced only the last of these. Early in 2009, after revelations of continued outsize bonus payments at AIG and Merrill Lynch, an uproar ensued. Astonishingly, Merrill had paid million-dollar bonuses to approximately 700 employees in 2008, a year in which the firm lost $27 billion and in which both it and its acquirer were rescued with federal TARP monies. And Merrill was far from alone. Goldman Sachs' (GS) bonus machine barely paused for breath.

Popular outrage was manifest; briefly, a vigilante spirit obtained. A bus tour organized by the Connecticut Working Families Party carried tourists through local suburbs to see the homes of bonus recipients, as if in hopes of dragging the bonus takers to the guillotine.

A few of those judged complicit were actually sacked. John A. Thain, the Merrill chief, was denied in his quest for a $30 million bonus; his mere asking sealed his end. Kenneth D. Lewis, the Bank of America CEO with whom Thain had previously hit it off, fired him. When it emerged later that the bonuses paid by Merrill had been approved by Bank of America (BAC), Lewis resigned as well.

The problem of executive pay did not admit to an easy fix. Well into the crisis period, when banks such as Citigroup (C) were operating on federal investment and when Citi's stock was in single digits, Vikram Pandit, the CEO, was observed with a lunch guest at Le Bernardin, one of the top-rated restaurants in New York. Pandit looked discerningly at the wine list, saw nothing by the glass that appealed, and ordered a $350 bottle so that, as he explained, he could savor "a glass of wine worth drinking." Pandit drank just one glass; his friend had none.

Bankers vigorously sought to defend their pay, and their perks. Setting wages is a function of labor markets; the best reform would have aimed at making the market work better. (For instance, forcing companies to seek shareholder approval of their executive pay arrangements would have restored proper control over wages and countered the executives' sense of entitlement.)

The government chose instead to supervise compensation, in various but limited ways. Congress banned cash bonuses for TARP recipients, and a "pay czar," appointed by Treasury Secretary Timothy F. Geithner, restricted executive salaries at government-controlled companies such as General Motors and Citi....

The issue of "too big to fail," which Bernanke had called "a top priority" for reform, hung over Washington like a dark cloud. The crisis had bequeathed precisely the moral hazard that Paulson had feared. Post-crash, markets presumed that the government would, if necessary, bail out important banks.

Being among the circle of the protected was considered such a boon that both the Administration and Representative Barney Frank (D-Mass.), who managed the bill in the House, initially proposed keeping the list of "too big to fail" institutions secret. Experts consulted by Congress sensibly advised an opposite tack—that the government discourage banks from becoming (or being) too big by making it undesirable.

They proposed that stricter capital requirements and hefty insurance premiums be imposed as a price for bigness. Greenspan reckoned that regardless of official policy, the market would conclude that every big bank enjoyed a federal safety net. Therefore, the surest way to prevent moral hazard was to break up Big Banking à la Standard Oil. But pending final passage of the legislation, Wall Street institutions emerged from the crisis more protected than ever....

The Fed also elevated the role of regulation. At the Greenspan Fed, only monetary policy mattered. After the crash, the agency returned to the job of assessing bank loans and balance sheets, and with a more skeptical eye toward risk models. Daniel K. Tarullo, the first Fed governor appointed by Obama, tartly informed a Senate panel in October 2009 that "things [for banks] are going to change. That means business models. That means the way of assessing risk. That means how you run your institution."

The central bank emerged from the crash sorely humbled. Bernanke conceded publicly that the crisis had caught him off guard. The Fed has a huge stake in ensuring that it is not embarrassed by a bubble again. Presumably, after the economy does recover, the Fed is unlikely to flirt with ultralow interest rates as it did in the '00s....

Finance was reborn when the panic subsided, but in many respects it was a changed industry—more sheltered, more regulated, more concentrated, and less competitive. The scrappier, smaller firms that previously challenged Goldman Sachs were licking their wounds or had disappeared altogether. Goldman's only true rival was JPMorgan Chase (JPM), now the king of Wall Street. (Goldman and Morgan were among the first to repay their TARP monies.)

Commercial banking was exceptionally concentrated, with the four biggest banks claiming almost 40% of deposits and two-thirds of credit cards. Effectively, the Wild West model was supplanted by a more European-seeming arrangement, in which a few elite players thrived within the government's embrace. Goldman still took big risks, but now with the backing (if needed) of the taxpayers. The banks were like Fannie and Freddie before the crash: for-profit institutions with a presumptive lifeline to the Treasury.

Post-crash, consumer habits shifted abruptly. Households had heavy debts to work through, a process expected to take years. Americans relied more on income, less on Wall Street financings. For regulatory and also societal reasons (such as high unemployment), expectations downshifted. Wall Street's impression on American culture seemed to have eroded, its glossy optimism worn to a thrifty nub.

Higher saving was itself a rejection of the Wall Street credo; it signaled Americans' unease about the future. For almost their entire adulthood, baby boomers had assumed that even small accounts (or their homes) would build into appreciable savings and provide for retirements. Now they were mere squirrels, storing acorns for winter.

The drop in spending revived an essential puzzle, prevalent in the Depression years and also in Japan in the '90s: How to create sufficient demand for goods and labor? As compared with Wall Street's golden age, government seemed destined to supply more of the answer, bankers less. After all, the recovery had been purchased with massive public-sector spending and loans, and the federal pipeline showed no sign of shutting down. The Administration was anointing preferred industries (energy, the environment) for investment, a throwback to the fad for industrial planning of the '70s.

Unemployment was higher, the government's role as a social guarantor larger. Obama, though only with a bruising fight, muscled through a new health-care law, a goal pursued by liberals since the New Deal. Indeed, John Maynard Keynes, the 20th century British economist and statesman famous for his skepticism of the market, was reinstated to his previous perch in the canon. A trio of timely books argued that the way out of the recession was to heed Lord Keynes, who emphasized the uncertainty of economic life, and prescribed government fine-tuning as a permanent feature of industrial societies, necessary to balance the ups and downs of the economic cycle. The Obama stimulus itself was pure Keynesian economics, a standard tool of American policymakers through the 1970s that had been shelved during the bubble years.

Spending policies had a dark side—they shredded government finances. Among the Group of 20 nations, deficits soared from an average of 1% of total gross domestic product to 8%. The U.S. was among the worst offenders, with a deficit equal to 10% of GDP. In the year after Lehman's collapse, America's debt rose by $1.9 trillion.

"In our opinion," wrote Robert L. Rodriguez, CEO of First Pacific Advisors who had issued early warnings of the bubble, "this is a very dangerous road we have chosen."

It is arguable that the U.S. government resolved the crisis simply by appropriating Wall Street's debts, transferring a private-sector problem to the public. In any case, its "solution" further depreciated its international account.

The failure of America's model stirred a geopolitical realignment. Europe no longer slobbered to imitate the U.S.; Asian economies were ascendant. Americans at the 2009 economic summit in Davos, accustomed to preaching the wonders of the market, were subjected to lectures by the potentates of command economies....

The legacy of the bust—what Wall Streeters called the "new normal"—entailed, prospectively, a weaker dollar, a greater government presence, more joblessness, and higher taxes. It was a world of pinched horizons. From roughly the 1980s on, no horizon had been deemed necessary. Ronald Reagan had decreed that government was the problem, not the cure. Markets were viewed as self-regulating ecosystems.

The province of regulation shrank, the volume of market innovations commensurately expanded. By the 2000s, the market's innovations were no longer even questioned: Anything invented on Wall Street was, perforce, good. Complex creations such as securitized assets basked in the presumption of safety. Greenspan's 1998 testimony, recall, was that "regulation of derivatives transactions that are privately negotiated by professionals is unnecessary." The notion that the Street should run a casino, taking bets on which companies will live and which will die, did not strike observers as even mildly objectionable.

A generation invested a higher proportion in stocks, fed on the nostrum that risk was outmoded. Just as the fall of the Iron Curtain supposedly ended history, Wall Street's smooth rise through most of the '90s and the '00s was to have ended market history. (No more earthquakes—just steady gains.) The crash of 2008 spelled the end of that end....

Previous to the crash, it was assumed that no statutes or rules were needed to prevent banks from making foolish loans; after all, the theory went, why would institutions ever jeopardize their own capital? This cornerstone of efficient market theory—the view of economic man as always rationally self-interested—was rather embarrassingly upended. Similarly, the faith that bankers know best, that they could be counted on to preserve their firms, was shattered.

It may be too much to expect that, in the future, economists take forecasting models with a grain of salt, or that executives refrain from relying on "liquidity" to bail them out of a jam. But the worst recession in 70 years—unsuspected by most economists even when it had been under way for more than six months—should inspire a modicum of humility. Speculation will return, of course, and so will bubbles. The question is whether Americans will treat them so lightly.

Overseas, the notion that central banks should restrain speculation is hardly controversial. In the U.S., it was. Both Greenspan and Bernanke devoted many words to rebutting the idea that bubbles should be "pricked."

Instead, they endorsed a policy of cleaning the mess up afterward. This reflected their doubts that mere humans, even Fed governors, could detect whether an elevated market was irrational—whether any market was irrational. Even after the crash, Bernanke could barely bring himself to utter the word "bubble."

The formative lesson that Bernanke drew on in 2008 had been sketched prior to and during the Great Depression, when, he believed, the Fed had erred in clamping down on credit formation, including the credit used to speculate in stocks. In other words, the Fed had been too restrictive. Future central bankers may draw an opposite lesson from 2008: The Fed let speculation go on far too long.


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religious people stop the hatefulness, Rush and Glenn Beck are like prof wrestlers:have abilities but it's a show

It's time for religious people to stop the hatefulness
By Norris Burkes

Florida Today

Published: Friday, March 26, 2010 5:00 p.m. MDT
In my head, I've made this imaginary 911 call a dozen times.

"Hello, 911? I'd like to report a drive-by hating."

"Can you identify the perpetrators?" they ask.

"Yes. The perps are news media pundits, mostly men, with a long record of speech that incites fear and hate."

Most of you know the kind I'm talking about.

There are plenty of examples on the right and left that stir up scorn, fear and hate. Glenn Beck, for instance, posed for his new book cover wearing what appears to be a uniform from Communist Russia. Bill Maher is fond of calling people morons. Rush Limbaugh and Al Franken call everyone who won't parrot their opinion idiots. And my mom won't let me repeat what Howard Stern calls people who disagree with him.

Some of these talking heads may be your heroes, but it's time people of faith unmask them for the opportunists they are.

I know the type from the wrestling shows I watched as a kid. It took me a few television seasons to realize that while the masked wrestlers were people with amazing physical agility, they weren't true to what they were selling.

The matches weren't really a contest of strength; they were a fixed contest for ratings.

Pundits are no different than these "athletes." They are intellectually agile, but they use their intellect to accomplish dizzying acts of circular logic.

They don't want to open dialogue and find solutions. They want to drop a match in your tank and then charge you admission to watch the explosion.

If 911 fails me, perhaps I could call the Centers of Disease Control and Prevention to report an epidemic outbreak of fear because these pundits have infected everyone: our pastors, teachers and media. The most innocuous people have become carriers as they organize themselves for a tea party or a coffee klatch.

If the CDC can't help me, maybe I should call the Bureau of Alcohol, Tobacco, Firearms and Explosives to report the hate bombs being planted by these pundits among our young. The result is that college campuses are being marked with swastikas, churches are being torched, and people are toting guns to coffee shops.

Because none of these organizations can offer any practical help, I'm calling on people of faith. No matter what your religion, it's time to declare, "Stop the hatin'; it ain't helpin'!"

Tell these fear mongers to stop promoting causes and start prompting conversations. Peel off their bumper stickers. Turn off your TV, and think for yourselves. Pundits such as Rush may be right, as he says, but there are more righteous ways to be right. Maher and his camp may be brilliantly clever, but there are smarter ways to bring change.

After you've kicked these showmen out of your home, invite a neighbor in and start conversations that speak to people's needs and seek solutions. Then listen. Really listen.

I don't mean to stir the pot; I'm trying to be the chaplain walking down the middle of the battlefield telling everyone to put the guns down and talk about this. I'm calling on people of faith to stop the talk of fear and hate and find the wisdom in the words offered by the Apostle Paul in Colossians 4:5-6, in "The Message: The Bible in Contemporary Language":

"Use your heads as you live and work among outsiders. Don't miss a trick. Make the most of every opportunity. Be gracious in your speech. The goal is to bring out the best in others in a conversation, not put them down, not cut them out."

Norris Burkes is a former civilian hospital chaplain and an Air National Guard chaplain.

Back to Wall Street's Bailout Hustle - best explanation of what is going on a Goldman Sachs et al

URL: http://www.rollingstone.com/politics/story/32255149/wall_streets_bailout_hustle/print

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Wall Street's Bailout Hustle
Goldman Sachs and other big banks aren't just pocketing the trillions we gave them to rescue the economy - they're re-creating the conditions for another crash
MATT TAIBBI
Posted Feb 17, 2010 5:57 AM

On January 21st, Lloyd Blankfein left a peculiar voicemail message on the work phones of his employees at Goldman Sachs. Fast becoming America's pre-eminent Marvel Comics supervillain, the CEO used the call to deploy his secret weapon: a pair of giant, nuclear-powered testicles. In his message, Blankfein addressed his plan to pay out gigantic year-end bonuses amid widespread controversy over Goldman's role in precipitating the global financial crisis.

The bank had already set aside a tidy $16.2 billion for salaries and bonuses — meaning that Goldman employees were each set to take home an average of $498,246, a number roughly commensurate with what they received during the bubble years. Still, the troops were worried: There were rumors that Dr. Ballsachs, bowing to political pressure, might be forced to scale the number back. After all, the country was broke, 14.8 million Americans were stranded on the unemployment line, and Barack Obama and the Democrats were trying to recover the populist high ground after their bitch-whipping in Massachusetts by calling for a "bailout tax" on banks. Maybe this wasn't the right time for Goldman to be throwing its annual Roman bonus orgy.

Not to worry, Blankfein reassured employees. "In a year that proved to have no shortage of story lines," he said, "I believe very strongly that performance is the ultimate narrative."

Translation: We made a shitload of money last year because we're so amazing at our jobs, so f'k all those people who want us to reduce our bonuses.

Goldman wasn't alone. The nation's six largest banks — all committed to this balls-out, I drink your milkshake! strategy of flagrantly gorging themselves as America goes hungry — set aside a whopping $140 billion for executive compensation last year, a sum only slightly less than the $164 billion they paid themselves in the pre-crash year of 2007. In a gesture of self-sacrifice, Blankfein himself took a humiliatingly low bonus of $9 million, less than the 2009 pay of elephantine New York Knicks washout Eddy Curry. But in reality, not much had changed. "What is the state of our moral being when Lloyd Blankfein taking a $9 million bonus is viewed as this great act of contrition, when every penny of it was a direct transfer from the taxpayer?" asks Eliot Spitzer, who tried to hold Wall Street accountable during his own ill-fated stint as governor of New York.

Beyond a few such bleats of outrage, however, the huge payout was met, by and large, with a collective sigh of resignation. Because beneath America's populist veneer, on a more subtle strata of the national psyche, there remains a strong temptation to not really give a shit. The rich, after all, have always made way too much money; what's the difference if some fat cat in New York pockets $20 million instead of $10 million?
The only reason such apathy exists, however, is because there's still a widespread misunderstanding of how exactly Wall Street "earns" its money, with emphasis on the quotation marks around "earns." The question everyone should be asking, as one bailout recipient after another posts massive profits — Goldman reported $13.4 billion in profits last year, after paying out that $16.2 billion in bonuses and compensation — is this: In an economy as horrible as ours, with every factory town between New York and Los Angeles looking like those hollowed-out ghost ships we see on History Channel documentaries like Shipwrecks of the Great Lakes, where in the hell did Wall Street's eye-popping profits come from, exactly? Did Goldman go from bailout city to $13.4 billion in the black because, as Blankfein suggests, its "performance" was just that awesome? A year and a half after they were minutes away from bankruptcy, how are these assholes not only back on their feet again, but hauling in bonuses at the same rate they were during the bubble?

The answer to that question is basically twofold: They raped the taxpayer, and they raped their clients.

The bottom line is that banks like Goldman have learned absolutely nothing from the global economic meltdown. In fact, they're back conniving and playing speculative long shots in force — only this time with the full financial support of the U.S. government. In the process, they're rapidly re-creating the conditions for another crash, with the same actors once again playing the same crazy games of financial chicken with the same toxic assets as before.

That's why this bonus business isn't merely a matter of getting upset about whether or not Lloyd Blankfein buys himself one tropical island or two on his next birthday. The reality is that the post-bailout era in which Goldman thrived has turned out to be a chaotic frenzy of high-stakes con-artistry, with taxpayers and clients bilked out of billions using a dizzying array of old-school hustles that, but for their ponderous complexity, would have fit well in slick grifter movies like The Sting and Matchstick Men. There's even a term in con-man lingo for what some of the banks are doing right now, with all their cosmetic gestures of scaling back bonuses and giving to charities. In the grifter world, calming down a mark so he doesn't call the cops is known as the "Cool Off."

To appreciate how all of these (sometimes brilliant) schemes work is to understand the difference between earning money and taking scores, and to realize that the profits these banks are posting don't so much represent national growth and recovery, but something closer to the losses one would report after a theft or a car crash. Many Americans instinctively understand this to be true — but, , knowing it and actually watching the whole scene from start to finish are two very different things. In that spirit, a brief history of the best 18 months of grifting this country has ever seen:

CON #1 THE SWOOP AND SQUAT
By now, most people who have followed the financial crisis know that the bailout of AIG was actually a bailout of AIG's "counterparties" — the big banks like Goldman to whom the insurance giant owed billions when it went belly up.

What is less understood is that the bailout of AIG counter-parties like Goldman and Société Générale, a French bank, actually began before the collapse of AIG, before the Federal Reserve paid them so much as a dollar. Nor is it understood that these counterparties actually accelerated the wreck of AIG in what was, ironically, something very like the old insurance scam known as "Swoop and Squat," in which a target car is trapped between two perpetrator vehicles and wrecked, with the mark in the game being the target's insurance company — in this case, the government.
This may sound far-fetched, but the financial crisis of 2008 was very much caused by a perverse series of legal incentives that often made failed investments worth more than thriving ones. Our economy was like a town where everyone has juicy insurance policies on their neighbors' cars and houses. In such a town, the driving will be suspiciously bad, and there will be a lot of fires.

AIG was the ultimate example of this dynamic. At the height of the housing boom, Goldman was selling billions in bundled mortgage-backed securities — often toxic crap of the no-money-down, no-identification-needed variety of home loan — to various institutional suckers like pensions and insurance companies, who frequently thought they were buying investment-grade instruments. At the same time, in a glaring example of the perverse incentives that existed and still exist, Goldman was also betting against those same sorts of securities — a practice that one government investigator compared to "selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars."

Goldman often "insured" some of this garbage with AIG, using a virtually unregulated form of pseudo-insurance called credit-default swaps. Thanks in large part to deregulation pushed by Bob Rubin, former chairman of Goldman, and Treasury secretary under Bill Clinton, AIG wasn't required to actually have the capital to pay off the deals. As a result, banks like Goldman bought more than $440 billion worth of this bogus insurance from AIG, a huge blind bet that the taxpayer ended up having to eat.
Thus, when the housing bubble went crazy, Goldman made money coming and going. They made money selling the crap mortgages, and they made money by collecting on the bogus insurance from AIG when the crap mortgages flopped.

Still, the trick for Goldman was: how to collect the insurance money. As AIG headed into a tailspin that fateful summer of 2008, it looked like the beleaguered firm wasn't going to have the money to pay off the bogus insurance. So Goldman and other banks began demanding that AIG provide them with cash collateral. In the 15 months leading up to the collapse of AIG, Goldman received $5.9 billion in collateral. Société Générale, a bank holding lots of mortgage-backed crap originally underwritten by Goldman, received $5.5 billion. These collateral demands squeezing AIG from two sides were the "Swoop and Squat" that ultimately crashed the firm. "It put the company into a liquidity crisis," says Eric Dinallo, who was intimately involved in the AIG bailout as head of the New York State Insurance Department.

It was a brilliant move. When a company like AIG is about to die, it isn't supposed to hand over big hunks of assets to a single creditor like Goldman; it's supposed to equitably distribute whatever assets it has left among all its creditors. Had AIG gone bankrupt, Goldman would have likely lost much of the $5.9 billion that it pocketed as collateral. "Any bankruptcy court that saw those collateral payments would have declined that transaction as a fraudulent conveyance," says Barry Ritholtz, the author of Bailout Nation. Instead, Goldman and the other counterparties got their money out in advance — putting a torch to what was left of AIG. Fans of the movie Goodfellas will recall Henry Hill and Tommy DeVito taking the same approach to the Bamboo Lounge nightclub they'd been gouging. Roll the Ray Liotta narration: "Finally, when there's nothing left, when you can't borrow another buck . . . you bust the joint out. You light a match."

And why not? After all, according to the terms of the bailout deal struck when AIG was taken over by the state in September 2008, Goldman was paid 100 cents on the dollar on an additional $12.9 billion it was owed by AIG — again, money it almost certainly would not have seen a fraction of had AIG proceeded to a normal bankruptcy. Along with the collateral it pocketed, that's $19 billion in pure cash that Goldman would not have "earned" without massive state intervention. How's that $13.4 billion in 2009 profits looking now? And that doesn't even include the direct bailouts of Goldman Sachs and other big banks, which began in earnest after the collapse of AIG.

CON #2 THE DOLLAR STORE
In the usual "DollarStore" or "Big Store" scam — popularized in movies like The Sting — a huge cast of con artists is hired to create a whole fake environment into which the unsuspecting mark walks and gets robbed over and over again. A warehouse is converted into a makeshift casino or off-track betting parlor, the fool walks in with money, leaves without it.

The two key elements to the Dollar Store scam are the whiz-bang theatrical redecorating job and the fact that everyone is in on it except the mark. In this case, a pair of investment banks were dressed up to look like commercial banks overnight, and it was the taxpayer who walked in and lost his shirt, confused by the appearance of what looked like real Federal Reserve officials minding the store.
Less than a week after the AIG bailout, Goldman and another investment bank, Morgan Stanley, applied for, and received, federal permission to become bank holding companies — a move that would make them eligible for much greater federal support. The stock prices of both firms were cratering, and there was talk that either or both might go the way of Lehman Brothers, another once-mighty investment bank that just a week earlier had disappeared from the face of the earth under the weight of its toxic assets. By law, a five-day waiting period was required for such a conversion — but the two banks got them overnight, with final approval actually coming only five days after the AIG bailout.

Why did they need those federal bank charters? This question is the key to understanding the entire bailout era — because this Dollar Store scam was the big one. Institutions that were, in reality, high-risk gambling houses were allowed to masquerade as conservative commercial banks. As a result of this new designation, they were given access to a virtually endless tap of "free money" by unsuspecting taxpayers. The $10 billion that Goldman received under the better-known TARP bailout was chump change in comparison to the smorgasbord of direct and indirect aid it qualified for as a commercial bank.

When Goldman Sachs and Morgan Stanley got their federal bank charters, they joined Bank of America, Citigroup, J.P. Morgan Chase and the other banking titans who could go to the Fed and borrow massive amounts of money at interest rates that, thanks to the aggressive rate-cutting policies of Fed chief Ben Bernanke during the crisis, soon sank to zero percent. The ability to go to the Fed and borrow big at next to no interest was what saved Goldman, Morgan Stanley and other banks from death in the fall of 2008. "They had no other way to raise capital at that moment, meaning they were on the brink of insolvency," says Nomi Prins, a former managing director at Goldman Sachs. "The Fed was the only shot."

In fact, the Fed became not just a source of emergency borrowing that enabled Goldman and Morgan Stanley to stave off disaster — it became a source of long-term guaranteed income. Borrowing at zero percent interest, banks like Goldman now had virtually infinite ways to make money. In one of the most common maneuvers, they simply took the money they borrowed from the government at zero percent and lent it back to the government by buying Treasury bills that paid interest of three or four percent. It was basically a license to print money — no different than attaching an ATM to the side of the Federal Reserve.

"You're borrowing at zero, putting it out there at two or three percent, with hundreds of billions of dollars — man, you can make a lot of money that way," says the manager of one prominent hedge fund. "It's free money." Which goes a long way to explaining Goldman's enormous profits last year. But all that free money was amplified by another scam:

CON #3 THE PIG IN THE POKE
At one point or another, pretty much everyone who takes drugs has been burned by this one, also known as the "Rocks in the Box" scam or, in its more elaborate variations, the "Jamaican Switch." Someone sells you what looks like an eightball of coke in a baggie, you get home and, you dumbass, it's baby powder.

The scam's name comes from the Middle Ages, when some fool would be sold a bound and gagged pig that he would see being put into a bag; he'd miss the switch, then get home and find a tied-up cat in there instead. Hence the expression "Don't let the cat out of the bag."

The "Pig in the Poke" scam is another key to the entire bailout era. After the crash of the housing bubble — the largest asset bubble in history — the economy was suddenly flooded with securities backed by failing or near-failing home loans. In the cleanup phase after that bubble burst, the whole game was to get taxpayers, clients and shareholders to buy these worthless cats, but at pig prices.

One of the first times we saw the scam appear was in September 2008, right around the time that AIG was imploding. That was when the Fed changed some of its collateral rules, meaning banks that could once borrow only against sound collateral, like Treasury bills or AAA-rated corporate bonds, could now borrow against pretty much anything — including some of the mortgage-backed sewage that got us into this mess in the first place. In other words, banks that once had to show a real pig to borrow from the Fed could now show up with a cat and get pig money. "All of a sudden, banks were allowed to post absolute shit to the Fed's balance sheet," says the manager of the prominent hedge fund.

The Fed spelled it out on September 14th, 2008, when it changed the collateral rules for one of its first bailout facilities — the Primary Dealer Credit Facility, or PDCF. The Fed's own write-up described the changes: "With the Fed's action, all the kinds of collateral then in use . . . including non-investment-grade securities and equities . . . became eligible for pledge in the PDCF."
Translation: We now accept cats.

The Pig in the Poke also came into play in April of last year, when Congress pushed a little-known agency called the Financial Accounting Standards Board, or FASB, to change the so-called "mark-to-market" accounting rules. Until this rule change, banks had to assign a real-market price to all of their assets. If they had a balance sheet full of securities they had bought at $3 that were now only worth $1, they had to figure their year-end accounting using that $1 value. In other words, if you were the dope who bought a cat instead of a pig, you couldn't invite your shareholders to a slate of pork dinners come year-end accounting time.

But last April, FASB changed all that. From now on, it announced, banks could avoid reporting losses on some of their crappy cat investments simply by declaring that they would "more likely than not" hold on to them until they recovered their pig value. In short, the banks didn't even have to actually hold on to the toxic shit they owned — they just had to sort of promise to hold on to it.
That's why the "profit" numbers of a lot of these banks are really a joke. In many cases, we have absolutely no idea how many cats are in their proverbial bag. What they call "profits" might really be profits, only minus undeclared millions or billions in losses.

"They're hiding all this stuff from their shareholders," says Ritholtz, who was disgusted that the banks lobbied for the rule changes. "Now, suddenly banks that were happy to mark to market on the way up don't have to mark to market on the way down."

CON #4 THE RUMANIAN BOX
One of the great innovations of Victor Lustig, the legendary Depression-era con man who wrote the famous "Ten Commandments for Con Men," was a thing called the "Rumanian Box." This was a little machine that a mark would put a blank piece of paper into, only to see real currency come out the other side. The brilliant Lustig sold this Rumanian Box over and over again for vast sums — but he's been outdone by the modern barons of Wall Street, who managed to get themselves a real Rumanian Box.
How they accomplished this is a story that by itself highlights the challenge of placing this era in any kind of historical context of known financial crime. What the banks did was something that was never — and never could have been — thought of before. They took so much money from the government, and then did so little with it, that the state was forced to start printing new cash to throw at them. Even the great Lustig in his wildest, horniest dreams could never have dreamed up this one.
The setup: By early 2009, the banks had already replenished themselves with billions if not trillions in bailout money. It wasn't just the $700 billion in TARP cash, the free money provided by the Fed, and the untold losses obscured by accounting tricks. Another new rule allowed banks to collect interest on the cash they were required by law to keep in reserve accounts at the Fed — meaning the state was now compensating the banks simply for guaranteeing their own solvency. And a new federal operation called the Temporary Liquidity Guarantee Program let insolvent and near-insolvent banks dispense with their deservedly ruined credit profiles and borrow on a clean slate, with FDIC backing. Goldman borrowed $29 billion on the government's good name, J.P. Morgan Chase $38 billion, and Bank of America $44 billion. "TLGP," says Prins, the former Goldman manager, "was a big one."

Collectively, all this largesse was worth trillions. The idea behind the flood of money, from the government's standpoint, was to spark a national recovery: We refill the banks' balance sheets, and they, in turn, start to lend money again, recharging the economy and producing jobs. "The banks were fast approaching insolvency," says Rep. Paul Kanjorski, a vocal critic of Wall Street who nevertheless defends the initial decision to bail out the banks. "It was vitally important that we recapitalize these institutions."

But here's the thing. Despite all these trillions in government rescues, despite the Fed slashing interest rates down to nothing and showering the banks with mountains of guarantees, Goldman and its friends had still not jump-started lending again by the first quarter of 2009. That's where those nuclear-powered balls of Lloyd Blankfein came into play, as Goldman and other banks basically threatened to pick up their bailout billions and go home if the government didn't fork over more cash — a lot more. "Even if the Fed could make interest rates negative, that wouldn't necessarily help," warned Goldman's chief domestic economist, Jan Hatzius. "We're in a deep recession mainly because the private sector, for a variety of reasons, has decided to save a lot more."

Translation: You can lower interest rates all you want, but we're still not f’ing lending the bailout money to anyone in this economy. Until the government agreed to hand over even more goodies, the banks opted to join the rest of the "private sector" and "save" the taxpayer aid they had received — in the form of bonuses and compensation.

The ploy worked. In March of last year, the Fed sharply expanded a radical new program called quantitative easing, which effectively operated as a real-live Rumanian Box. The government put stacks of paper in one side, and out came $1.2 trillion "real" dollars.

The government used some of that freshly printed money to prop itself up by purchasing Treasury bonds — a desperation move, since Washington's demand for cash was so great post-Clusterfuck '08 that even the Chinese couldn't buy U.S. debt fast enough to keep America afloat. But the Fed used most of the new cash to buy mortgage-backed securities in an effort to spur home lending — instantly creating a massive market for major banks.

And what did the banks do with the proceeds? Among other things, they bought Treasury bonds, essentially lending the money back to the government, at interest. The money that came out of the magic Rumanian Box went from the government back to the government, with Wall Street stepping into the circle just long enough to get paid. And once quantitative easing ends, as it is scheduled to do in March, the flow of money for home loans will once again grind to a halt. The Mortgage Bankers Association expects the number of new residential mortgages to plunge by 40 percent this year.

CON #5 THE BIG MITT
All of that Rumanian box paper was made even more valuable by running it through the next stage of the grift. Michael Masters, one of the country's leading experts on commodities trading, compares this part of the scam to the poker game in the Bill Murray comedy Stripes. "It's like that scene where John Candy leans over to the guy who's new at poker and says, 'Let me see your cards,' then starts giving him advice," Masters says. "He looks at the hand, and the guy has bad cards, and he's like, 'Bluff me, come on! If it were me, I'd bet everything!' That's what it's like. It's like they're looking at your cards as they give you advice."

In more ways than one can count, the economy in the bailout era turned into a "Big Mitt," the con man's name for a rigged poker game. Everybody was indeed looking at everyone else's cards, in many cases with state sanction. Only taxpayers and clients were left out of the loop.

At the same time the Fed and the Treasury were making massive, earthshaking moves like quantitative easing and TARP, they were also consulting regularly with private advisory boards that include every major player on Wall Street. The Treasury Borrowing Advisory Committee has a J.P. Morgan executive as its chairman and a Goldman executive as its vice chairman, while the board advising the Fed includes bankers from Capital One and Bank of New York Mellon. That means that, in addition to getting great gobs of free money, the banks were also getting clear signals about when they were getting that money, making it possible to position themselves to make the appropriate investments.

One of the best examples of the banks blatantly gambling, and winning, on government moves was the Public-Private Investment Program, or PPIP. In this bizarre scheme cooked up by goofball-geek Treasury Secretary Tim Geithner, the government loaned money to hedge funds and other private investors to buy up the absolutely most toxic horseshit on the market — the same kind of high-risk, high-yield mortgages that were most responsible for triggering the financial chain reaction in the fall of 2008. These satanic deals were the basic currency of the bubble: Jobless dope fiends bought houses with no money down, and the big banks wrapped those mortgages into securities and then sold them off to pensions and other suckers as investment-grade deals. The whole point of the PPIP was to get private investors to relieve the banks of these dangerous assets before they hurt any more innocent bystanders.

But what did the banks do instead, once they got wind of the PPIP? They started buying that worthless crap again, presumably to sell back to the government at inflated prices! In the third quarter of last year, Goldman, Morgan Stanley, Citigroup and Bank of America combined to add $3.36 billion of exactly this horseshit to their balance sheets.

This brazen decision to gouge the taxpayer startled even hardened market observers. According to Michael Schlachter of the investment firm Wilshire Associates, it was "absolutely ridiculous" that the banks that were supposed to be reducing their exposure to these volatile instruments were instead loading up on them in order to make a quick buck. "Some of them created this mess," he said, "and they are making a killing undoing it."

CON #6 THE WIRE
Here's the thing about our current economy. When Goldman and Morgan Stanley transformed overnight from investment banks into commercial banks, we were told this would mean a new era of "significantly tighter regulations and much closer supervision by bank examiners," as The New York Times put it the very next day. In reality, however, the conversion of Goldman and Morgan Stanley simply completed the dangerous concentration of power and wealth that began in 1999, when Congress repealed the Glass-Steagall Act — the Depression-era law that had prevented the merger of insurance firms, commercial banks and investment houses. Wall Street and the government became one giant dope house, where a few major players share valuable information between conflicted departments the way junkies share needles.

One of the most common practices is a thing called front-running, which is really no different from the old "Wire" con, another scam popularized in The Sting. But instead of intercepting a telegraph wire in order to bet on racetrack results ahead of the crowd, what Wall Street does is make bets ahead of valuable information they obtain in the course of everyday business.

Say you're working for the commodities desk of a big investment bank, and a major client — a pension fund, perhaps — calls you up and asks you to buy a billion dollars of oil futures for them. Once you place that huge order, the price of those futures is almost guaranteed to go up. If the guy in charge of asset management a few desks down from you somehow finds out about that, he can make a fortune for the bank by betting ahead of that client of yours. The deal would be instantaneous and undetectable, and it would offer huge profits. Your own client would lose money, of course — he'd end up paying a higher price for the oil futures he ordered, because you would have driven up the price. But that doesn't keep banks from screwing their own customers in this very way.

The scam is so blatant that Goldman Sachs actually warns its clients that something along these lines might happen to them. In the disclosure section at the back of a research paper the bank issued on January 15th, Goldman advises clients to buy some dubious high-yield bonds while admitting that the bank itself may bet against those same shitty bonds. "Our salespeople, traders and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research," the disclosure reads. "Our asset-management area, our proprietary-trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research."
Banks like Goldman admit this stuff openly, despite the fact that there are securities laws that require banks to engage in "fair dealing with customers" and prohibit analysts from issuing opinions that are at odds with what they really think. And yet here they are, saying flat-out that they may be issuing an opinion at odds with what they really think.

To help them screw their own clients, the major investment banks employ high-speed computer programs that can glimpse orders from investors before the deals are processed and then make trades on behalf of the banks at speeds of fractions of a second. None of them will admit it, but everybody knows what this computerized trading — known as "flash trading" — really is. "Flash trading is nothing more than computerized front-running," says the prominent hedge-fund manager. The SEC voted to ban flash trading in September, but five months later it has yet to issue a regulation to put a stop to the practice.

Over the summer, Goldman suffered an embarrassment on that score when one of its employees, a Russian named Sergey Aleynikov, allegedly stole the bank's computerized trading code. In a court proceeding after Aleynikov's arrest, Assistant U.S. Attorney Joseph Facciponti reported that "the bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways."

Six months after a federal prosecutor admitted in open court that the Goldman trading program could be used to unfairly manipulate markets, the bank released its annual numbers. Among the notable details was the fact that a staggering 76 percent of its revenue came from trading, both for its clients and for its own account. "That is much, much higher than any other bank," says Prins, the former Goldman managing director. "If I were a client and I saw that they were making this much money from trading, I would question how badly I was getting screwed."

Why big institutional investors like pension funds continually come to Wall Street to get raped is the million-dollar question that many experienced observers puzzle over. Goldman's own explanation for this phenomenon is comedy of the highest order. In testimony before a government panel in January, Blankfein was confronted about his firm's practice of betting against the same sorts of investments it sells to clients. His response: "These are the professional investors who want this exposure."
In other words, our clients are big boys, so screw 'em if they're dumb enough to take the sucker bets I'm offering.

CON #7 THE RELOAD
Not many con men are good enough or brazen enough to con the same victim twice in a row, but the few who try have a name for this excellent sport: reloading. The usual way to reload on a repeat victim (called an "addict" in grifter parlance) is to rope him into trying to get back the money he just lost. This is exactly what started to happen late last year.

It's important to remember that the housing bubble itself was a classic confidence game — the Ponzi scheme. The Ponzi scheme is any scam in which old investors must be continually paid off with money from new investors to keep up what appear to be high rates of investment return. Residential housing was never as valuable as it seemed during the bubble; the soaring home values were instead a reflection of a continual upward rush of new investors in mortgage-backed securities, a rush that finally collapsed in 2008.

But by the end of 2009, the unimaginable was happening: The bubble was re-inflating. A bailout policy that was designed to help us get out from under the bursting of the largest asset bubble in history inadvertently produced exactly the opposite result, as all that government-fueled capital suddenly began flowing into the most dangerous and destructive investments all over again. Wall Street was going for the reload.
A lot of this was the government's own fault, of course. By slashing interest rates to zero and flooding the market with money, the Fed was replicating the historic mistake that Alan Greenspan had made not once, but twice, before the tech bubble in the early 1990s and before the housing bubble in the early 2000s. By making sure that traditionally safe investments like CDs and savings accounts earned basically nothing, thanks to rock-bottom interest rates, investors were forced to go elsewhere to search for moneymaking opportunities.

Now we're in the same situation all over again, only far worse. Wall Street is flooded with government money, and interest rates that are not just low but flat are pushing investors to seek out more "creative" opportunities. (It's "Greenspan times 10," jokes one hedge-fund trader.) Some of that money could be put to use on Main Street, of course, backing the efforts of investment-worthy entrepreneurs. But that's not what our modern Wall Street is built to do. "They don't seem to want to lend to small and medium-sized business," says Rep. Brad Sherman, who serves on the House Financial Services Committee. "What they want to invest in is marketable securities. And the definition of small and medium-sized businesses, for the most part, is that they don't have marketable securities. They have bank loans."
In other words, unless you're dealing with the stock of a major, publicly traded company, or a giant pile of home mortgages, or the bonds of a large corporation, or a foreign currency, or oil futures, or some country's debt, or anything else that can be rapidly traded back and forth in huge numbers, factory-style, by big banks, you're not really on Wall Street's radar.

So with small business out of the picture, and the safe stuff not worth looking at thanks to the Fed's low interest rates, where did Wall Street go? Right back into the shit that got us here.

One trader, who asked not to be identified, recounts a story of what happened with his hedge fund this past fall. His firm wanted to short — that is, bet against — all the crap toxic bonds that were suddenly in vogue again. The fund's analysts had examined the fundamentals of these instruments and concluded that they were absolutely not good investments.
So they took a short position. One month passed, and they lost money. Another month passed — same thing. Finally, the trader just shrugged and decided to change course and buy.

"I said, 'F’k it, let's make some money,'" he recalls. "I absolutely did not believe in the fundamentals of any of this stuff. However, I can get on the bandwagon, just so long as I know when to jump out of the car before it goes off the damn cliff!"
This is the very definition of bubble economics — betting on crowd behavior instead of on fundamentals. It's old investors betting on the arrival of new ones, with the value of the underlying thing itself being irrelevant. And this behavior is being driven, no surprise, by the biggest firms on Wall Street.

The research report published by Goldman Sachs on January 15th underlines this sort of thinking. Goldman issued a strong recommendation to buy exactly the sort of high-yield toxic crap our hedge-fund guy was, by then, driving rapidly toward the cliff. "Summarizing our views," the bank wrote, "we expect robust flows . . . to dominate fundamentals." In other words: This stuff is crap, but everyone's buying it in an awfully robust way, so you should too. Just like tech stocks in 1999, and mortgage-backed securities in 2006.

To sum up, this is what Lloyd Blankfein meant by "performance": Take massive sums of money from the government, sit on it until the government starts printing trillions of dollars in a desperate attempt to restart the economy, buy even more toxic assets to sell back to the government at inflated prices — and then, when all else fails, start driving us all toward the cliff again with a frank and open endorsement of bubble economics. I mean, shit — who wouldn't deserve billions in bonuses for doing all that?

Con artists have a word for the inability of their victims to accept that they've been scammed. They call it the "True Believer Syndrome." That's sort of where we are, in a state of nagging disbelief about the real problem on Wall Street. It isn't so much that we have inadequate rules or incompetent regulators, although both of these things are certainly true. The real problem is that it doesn't matter what regulations are in place if the people running the economy are rip-off artists. The system assumes a certain minimum level of ethical behavior and civic instinct over and above what is spelled out by the regulations. If those ethics are absent — well, this thing isn't going to work, no matter what we do. Sure, mugging old ladies is against the law, but it's also easy. To prevent it, we depend, for the most part, not on cops but on people making the conscious decision not to do it.

That's why the biggest gift the bankers got in the bailout was not fiscal but psychological. "The most valuable part of the bailout," says Rep. Sherman, "was the implicit guarantee that they're Too Big to Fail." Instead of liquidating and prosecuting the insolvent institutions that took us all down with them in a giant Ponzi scheme, we have showered them with money and guarantees and all sorts of other enabling gestures. And what should really freak everyone out is the fact that Wall Street immediately started skimming off its own rescue money. If the bailouts validated anew the crooked psychology of the bubble, the recent profit and bonus numbers show that the same psychology is back, thriving, and looking for new disasters to create. "It's evidence," says Rep. Kanjorski, "that they still don't get it."

More to the point, the fact that we haven't done much of anything to change the rules and behavior of Wall Street shows that we still don't get it. Instituting a bailout policy that stressed recapitalizing bad banks was like the addict coming back to the con man to get his lost money back. Ask yourself how well that ever works out. And then get ready for the reload.
[From Issue 1099 — March 4, 2010]