Deep Capture, Cramer and the story of Dendreon

This story, like too many others, begins with Jim Cramer, the CNBC personality, making “a mistake.”

On September 26, 2005, Cramer announced to his television audience the sad news (punctuated by funny sound effects – a clown horn, a crashing airplane) that Provenge, an experimental treatment for prostate cancer, had flopped. Thousands of end-stage patients had been pinning their hopes on Provenge, but according to Cramer the treatment had just been rejected by the Food & Drug Administration. It would never go to market.

This seemed odd, because Dendreon (NASDAQ: DNDN), the company developing Provenge, had not yet submitted an application for FDA approval. As everybody in the biotech investment community knew, Dendreon had, in fact, only recently completed Phase 3 clinical trials and probably would not face scrutiny from an FDA advisory panel for at least another year.

As for the likelihood that the advisory panel would eventually vote in favor of Provenge, the odds looked quite good. The Phase 3 trials had demonstrated that Provenge significantly increased patient survival with only minimal side-effects, such as a few days of mild fever. Moreover, Provenge was an altogether different sort of treatment – one that fought tumors by boosting patients’ immune systems rather than subjecting them to the ravages of chemotherapy.

Provenge was not a magical elixir of life, but Dendreon was doing more than just developing a new technology. It was pioneering a treatment that could revolutionize the way that doctors fight prostate cancer. By some conservative estimates, the market for Provenge alone could reach more than $2 billion a year. If the treatment could be applied to other cancers, the market would be even larger.

The morning after Cramer declared Dendreon and Provenge to be dead in the water, Mark Haines, the anchor of CNBC’s “Squawk Box” program, apologized for Cramer’s “mistake.” That afternoon, at an important UBS investor conference, Dendreon presented still more promising data. This would normally have given a significant boost to the company’s stock price, but the value of Dendreon’s shares stayed flat for the day, and then began a gradual decline.

This had partly to do with Cramer. The next evening, on his “Mad Money” program, the journalist (or entertainer, or self-confessed criminal, or… whatever Cramer is) acknowledged that the FDA had not yet rejected Provenge, but drawing upon his medical expertise, Cramer maintained that Provenge was not effective. In characteristically level-headed fashion, he announced that Dendreon shareholders were drunken, carousing, gambling Falstaffs who “might as well take their money to Vegas.”

Dendreon, Cramer added (rather ominously), was a “battleground stock.”
* * * * * * * *

What Cramer meant by “battleground ” has since become all too apparent. For the past four years, Dendreon has been one of the most manipulated stocks on NASDAQ. During some periods the volume of trading in the shares of this little company has exceeded the trading in America’s largest corporations – a good sign that hedge funds have been churning the stock to move the market.

And with every burst of good news, the company has faced waves upon waves of naked short selling – hedge funds illegally selling millions of shares that do not exist to flood the market and drive down the stock price. Along with the phantom stock, people seeking to diminish Dendreon have deployed false financial research , biased media, bogus class action lawsuits, Internet bashers, dubious science, and other familiar weapons of the “battleground.”

The denouement of this stock market “battle” occurred recently, on April 28, 2009, when Dendreon was to present all-important results at the American Urological Association’s annual meeting in Chicago. Some days prior, Dendreon’s CEO, Mitch Gold, had announced that the results of an Independent Monitoring Committee study were “unambiguous in nature…a clear hit” for Provenge.

If a CEO uses language like that and does not produce the data to back it up, he is guaranteed a visit from the Securities and Exchange Commission. Unless the CEO or his allies have juice with the SEC, the commission will usually charge the CEO with making false statements to pump his stock. Gold was unlikely to take that risk, so it was clear to most people that the meeting in Chicago was going to be a triumph for Dendreon.

And it indeed it was. The data presented that day showed that Provenge lowers the risk of prostate cancer death by 22.5 percent, with little or no toxicity. With a few notable exceptions (some of whom are to appear as prominent characters in this story), nearly every medical professional on the planet now concurred that Provenge was a blockbuster drug – one that should receive FDA approval and make Dendreon a highly profitable company.

But the hedge funds weren’t finished. In the days following Gold’s announcement, short sellers piled on with a vengeance, returning Dendreon to the leagues of the world’s most heavily traded stocks. The firm once again found itself on the SEC’s “Reg Sho” list of companies whose stock was “failing to deliver” in excessive quantities –a sign of illegal naked short selling.

On CNBC, meanwhile, Cramer had hammered Dendreon. On April 6, 2009, amidst ear-rattling sound effects –dogs fighting, and (inexplicably) a baby crying — Cramer had said “I don’t like Dendreon.” He had shouted that Provenge had no chance of getting FDA approval and Dendreon shareholders should “SELL! SELL! SELL!”

Then, on April 28, at 10:01 am central time — just hours before Dendreon’s triumph in Chicago – an anonymous message board author on Yahoo! Finance posted this message: “HIGH PROBABILITY OF MASSIVE BEAR RAID…DNDN [Dendreon] could easily drop 50% on a massive bear raid…its coming today@12:30 pm central.”

Just minutes before 12:30 pm central, Dendreon’s stock price began to fall. It didn’t just fall–it nosedived from $24 to under $8 … in 75 seconds. That’s correct, during a period of 75 seconds, more than 4,000 trades were placed, totaling 3 million shares, or about 50% of Dendreon’s (spectacularly high) average daily volume. Given that the message board poster knew what was coming more than two hours beforehand, and predicted the timing almost precisely, it is a safe bet that this was a coordinated, illegal naked short selling attack. And just in case you still didn’t get this – it caused Dendreon’s share price to lose more than 65% of its value – in just 75 seconds flat.

“My desk was floored,” one trader wrote on a message board. “We all just stood up swearing, headsets and other assorted desk items being thrown at monitors…I haven’t heard that much swearing in years…”

It was, say others, one of the strangest occurrences in Wall Street history.
* * * * * * * *

In fact Dendreon had witnessed even stranger occurrences – brutal naked short selling attacks occurring simultaneously with antics that simply have no precedence in the world of medicine. As will be described presently, these strange occurrences very nearly destroyed Dendreon in 2007. These strange occurrences have also prevented patients from having access to Dendreon’s treatment – a treatment that, as will become clear, should have reached the market some time ago.

And from the day of that first strange occurrence in September 2005, when Cramer predicted that Dendreon would become a “battleground” stock, to the latest strange occurrence in April 2009, when Dendreon’s stock nosedived by 65% in 75 seconds, more than 60,000 men in the United States died of prostate cancer.

So we must ask: Who did this? Who stood to profit from Dendreon’s demise? Were the extremely odd delays in getting Provenge to market purely accidental? Or, were the remarkable trading patterns and volatility accompanying those delays in fact an expression of stock manipulation, and if so, who were the manipulators? Since we know that Dendreon experienced naked short selling, and naked short selling is a crime, who are the criminals? And when much of the medical community rallied around Provenge last month, which manipulators crashed the stock to single digits – possibly to make the company ripe for a hostile takeover by the very people who once sought to destroy it?
* * * * * * * *

It is one of the peculiarities of the Securities and Exchange Commission that while it is ever-eager to hassle CEOs of small companies, it goes to considerable lengths to protect billionaire hedge fund managers. The SEC has publicly stated that naked short selling is a crime. It has said that it has evidence that illegal naked short selling occurs on a large scale and does serious damage to public companies. But it almost never says which hedge funds are responsible. It never says who is flooding the market with phantom stock.

As far as the SEC is concerned, it’s all a big secret. As the commission states on its website, the naked short selling statistics “of individual firms and customers is proprietary information and may reflect firms’ trading strategies.” It seems not to matter to the SEC that those “proprietary” trading strategies are illegal.

Meanwhile, the SEC does not require hedge funds to disclose even their legal short positions. As a result, it is impossible for any journalist to present photo-perfect portraits of attacks on companies like Dendreon.

But brokers and other sources can tell us who some of the short sellers are. And by analyzing public information (such as data that hints at various hedge funds’ options strategies) we can make educated guesses as to who has the most to gain from a company’s decline. We can also come to understand the relationships that bind certain hedge fund managers and miscreants, and ask whether these people might have been acting in concert.

If the relationships are few in number, or separated by six degrees, we must abandon the project – a spatter of dots on the wall is not a work of art. But if the dots are plentiful, precise, and show a recognizable pattern, then we have something valuable – a sort of pointillist painting of market behavior.

In the case of Dendreon, we have such a painting. And when we look at this painting, with its dozens of data points, we can see quite clearly the familiar smirk of Michael Milken, the famous “junk bond king” and criminal stock manipulator.

During the times when Dendreon has been most evidently a “battleground stock,” nearly every hedge fund known to have placed large bets against Dendreon and a significant number of Dendreon’s detractors — esteemed medical professionals, financial research analysts, government officials, and Jim Cramer himself – have been tied to Milken or his close associates.

Most of the hedge fund managers who appear in this story are part of a tight network that has been in operation – exchanging information, attacking the same stocks, employing the same tactics – for upwards of twenty years. This is the same network that attacked the major financial institutions in 2008, possibly contributing to the collapse of the American financial system. And though I recognize that some people find this hard to absorb, I will present further evidence that a good number of the people in this network have ties to organized crime – the Mafia.

As for Milken, he was released from prison in 1993, at which point he went to considerable lengths to rebrand himself as a “prominent philanthropist.” One of the “philanthropic” outfits that he founded is the Prostate Cancer Foundation, and for this he has received widespread applause from the media, government officials, and the business elite. Because Milken has effectively bathed himself in the glow of his “philanthropy” (and because his public relations machine is so indisputably clever), many people find themselves saying that Milken’s financial crimes were but misdemeanors – the slight over-exuberance of a “market innovator.”

But the Dendreon story raises serious questions about the nature of Milken’s “philanthropy” – and about a society that venerates and even seeks guidance and favor from the most destructive financial criminal the world has ever known.

http://www.deepcapture.com/michael-milken-60000-deaths-and-the-story-of-dendreon-chapter-1-of-15/

Summers. He's just an average person in a world where the average person is a crook.

And the sickening stench hasn't ended. The same greedy, destructive Boomers and Gen-Xers who brought about this disaster are continuing to do so and continuing to lie about it.

One of the slimiest performances I've seen was last week's presentation at Washington's Economic Club by Lawrence Summers, White House National Economic Council. Summers bragged about his life's accomplishments and then, smiling smugly, he said, "I think the sense of a ball falling off the table -- which is what the economy has felt like since the middle of last fall -- I think we can be reasonably confident that that's going to end within the next few months and you will no longer have that sense of freefall."

Well, you can just look at the above graph and see that he's lying. Industrial production figures in all the G7 (developed) countries have been like "a ball falling off the table." And you can look at all sorts of other data. There's absolutely nothing to justify Summers' claims.

Now, I don't really care if someone makes a lot of money, even someone like Summers, who made $5.2 million in 2008 from hedge funds, plus $2.7 million in speaking fees, and who also consulted for hedge funds when he was President of Harvard University. If the Harvard University trustees don't care, then why should I care?

But I'm offended when someone like that becomes the economic front man for the Administration, and then openly lies, especially after a year of hearing a lot of crap during the campaign that the Obama administration was going to be completely open and honest, without even the appearance of impropriety.

But I don't mean to pick on just Summers. He's just an average person in a world where the average person is a crook. The same generations of people who perpetrated the fraud, who created the worthless mortgage-backed securities and worthless CDS securities contracts, and sold them to the public as risk-free AAA securities are still in charge. Those people haven't disappeared; they're still pulling scams. They're just using new variations, to take advantage of this year's opportunities.

I've been writing about these scams for years, as regular readers of this web site know. One of the most disgusting was the subprime mortgage company that I wrote about last year in January. They had made huge sums of money by defrauding thousands of people by talking them into lying on their mortgage applications, and had defrauded the lenders through these falsehoods.

The reason that that story caught my attention was that the Boomer executive vice president Walter Buczynski, 59, was married to a Gen-X wife, 37. When the company went bankrupt, the wife decided to dump the husband and take the kids (why not?), in order to get as much money as possible. Buczynski killed his wife, then killed himself.

And even after all this, the remaining company officers were in bankruptcy court requesting that all remaining money be split among them as bonuses, rather than give it to some of the people who had been defrauded.

For some reason, this story epitomizes all that's been going on. Greedy, selfish, destructive Boomers and Gen-Xers, willing to destroy anyone else's life for their own gain, and committing further destruction when their attempts are foiled. The standard today in government, business and journalism is of dishonesty and unethics (is that a word?).

I recall a job interview from late 2007, just after the credit crisis began. (For why I was looking for a job, see "Boomers and Gen-Xers: Dumbing down IT / How Digimarc Corp. self-destructed.") I was talking to a company VP, and as was my obsessive habit, I warned him that there was a great deal of fraud going on in the world, and that he should make sure that his company's assets were safe. He said, "So you think everyone in the world is a crook?" I knew he thought I was nuts, and of course I didn't get the job.

So what's interesting to me now is that the stories behind all of these frauds that I've been writing about for years are starting to come out. If anything, what I wrote in the past underestimated the situation.

I've written about the "culture of complicity" that pervades today, and the overwhelming circumstantial evidence that proves that people were knowingly committing fraud.

In a airing of Bill Moyer's journal, William K. Black, the former senior regulator who cracked down on banks during the savings and loan crisis of the 1980s, described what's been going on:

"BILL MOYERS: Is it possible that these complex instruments were deliberately created so swindlers could exploit them?


WILLIAM K. BLACK: Oh, absolutely. This stuff, the exotic stuff that you're talking about was created out of things like liars' loans, that were known to be extraordinarily bad. And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That's why it's toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years. So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it's scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I'm quoting Fitch, the smallest of the rating agencies, "the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined."

BILL MOYERS: So if your assumption is correct, your evidence is sound, the bank, the lending company, created a fraud. And the ratings agency that is supposed to test the value of these assets knowingly entered into the fraud. Both parties are committing fraud by intention.

WILLIAM K. BLACK: Right, and the investment banker that — we call it pooling — puts together these bad mortgages, these liars' loans, and creates the toxic waste of these derivatives. All of them do that. And then they sell it to the world and the world just thinks because it has a triple-A rating it must actually be safe. Well, instead, there are 60 and 80 percent losses on these things, because of course they, in reality, are toxic waste."


Black doesn't name any names, unfortunately, but makes a general argument like the one I'm making -- that the fraud was so massive, that everyone must have been involved.

In another part of the interview, he does name two government regulators who failed to do their jobs:

"WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine.


These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because...

BILL MOYERS: What do you mean?

WILLIAM K. BLACK: Well, Geithner has, was one of our nation's top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he's a failed legacy regulator."

Black indicts both Treasury Secretaries -- Hank Paulsen and Timothy Geithner -- and I can only agree. In this "culture of complicity," neither of them could blow the whistle or tell the truth without exposing their own complicity in the repeated fraud.

Another article, written in December, does name names, and gives specifics for how the fraud was perpetrated.

The article was written by Michael Lewis. In the 1980s, at age 24, with no business experience whatsoever, he stumbled into a job paying him a six-figure salary to advise investment bankers about something he knew nothing about. After a few years, he got out while the getting was good, and wrote a book called Liar's Poker about his experiences:

"I had no great agenda, apart from telling what I took to be a remarkable tale, but if you got a few drinks in me and then asked what effect I thought my book would have on the world, I might have said something like, “I hope that college students trying to figure out what to do with their lives will read it and decide that it’s silly to phony it up and abandon their passions to become financiers.” I hoped that some bright kid at, say, Ohio State University who really wanted to be an oceanographer would read my book, spurn the offer from Morgan Stanley, and set out to sea.
Somehow that message failed to come across. Six months after Liar’s Poker was published, I was knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share about Wall Street. They’d read my book as a how-to manual."

Lewis was shocked at this response at the time, and indeed it's still shocking today. These were Generation-X students at Ohio State University looking for ways to get into the business of defrauding people. What kind of college must Ohio State University be to graduate a class of crooks? It's pretty safe to say that ethics is not a strong point at Ohio State...

Generational dynamics

Veteran journalist William Greider on the current financial crisis and what he calls "the great deflation of Wall Street."

Watch the program here.



BILL MOYERS: With me now is one of America's leading chroniclers of money, power, and politics, who says what's happening is the disgrace of Wall Street, its excesses paid for by people like those in Cleveland and millions like them around the country.

William Greider has spent forty years examining how powerful institutions affect ordinary people. Once a top editor of THE WASHINGTON POST, a columnist for ROLLING STONE, and now National Affairs Correspondent for THE NATION, he has produced a series of best-selling books: SECRETS OF THE TEMPLE: HOW THE FEDERAL RESERVE RUNS THE COUNTRY, ONE WORLD, READY OR NOT: THE MANIC LOGIC OF GLOBAL CAPITALISM, WHO WILL TELL THE PEOPLE: THE BETRAYAL OF AMERICAN DEMOCRACY, and this one, THE SOUL OF CAPITALISM. He's working on a new book with the title: COME HOME, AMERICA.

Good to see you in person.

WILLIAM GREIDER: Thanks Bill.

BILL MOYERS: What were you thinking as you saw that report from Cleveland?

WILLIAM GREIDER: Made me angry all over again, even though I know the story. And then I thought, "This is usury." This is a living example of what the Bible prohibited, which is the sin of usury. Most Americans have never heard of it probably.

BILL MOYERS: Usury?

WILLIAM GREIDER: Usury, to be clear about it, is rich people taking advantage of poor people by lending them money on terms that are sure to make them fail. All three of the great religions, Judaism, Christianity, Islam, had a moral prohibition against usury because they recognized that society can't function like that. People of great wealth and their institutions like banks naturally have the power to overwhelm people of lesser means. And you can't allow that in a decent society. It won't survive.

BILL MOYERS: Where were the gatekeepers? Where were the watchdogs? Why did it take the Fed so long to put an end to-

WILLIAM GREIDER: Well-

BILL MOYERS: -predatory practices?

WILLIAM GREIDER: To make the story overly crude, Congress repealed the law against usury. It was done in 1980 by a Democratic Congress, Democratic President. And, of course, the Republicans all piled on and voted for it. And that was the first stroke, only the first of many, in which they stripped away the regulatory laws from the financial system and from banking.

And that allowed the free market modernized gimmicks of one kind or another, all these things we're now reading about, to flourish. And that's where we are. I mean, the gatekeepers said to the banking industry and to the financial industry, "We don't think federal control or regulation is good for you, so we're, therefore, liberating you to do your own thing."

BILL MOYERS: So why did they do that in 1980? I mean, there was, of course, the rise of the backlash to regulation from 40 years of Democratic rule-

WILLIAM GREIDER: The-

BILL MOYERS: -there was the rise, the arrival of the conservatives with their free market ideology.

WILLIAM GREIDER: Right, right.

BILL MOYERS: What was the issue?

WILLIAM GREIDER: Well, the driver then, and it was a powerful driver, was inflation. And through the '70s, for lots of reasons inflation, which tends to undermine the value of financial wealth and money, was out of control. The Federal Reserve had lost control of it, not entirely its fault. But that set up a political climate that said the government is not working and that wasn't wrong at the moment. Let's get the government out of the way.

And that was very appealing as framed by Ronald Reagan and other conservatives. But I think it's fair to say most Democrats yielded to it against whatever their original instincts were because of political necessity. And then the third dimension, maybe the most important, was that you had this very powerful industrial sector, that is banking and finance, that wanted and had pushed for years to get out from under the regulatory controls, limits on interest rates, the law against usury, the merger of commercial banks with investment banks, which had been prohibited in the New Deal because it caused the disaster of 1929.

I can go on and on. But you see the pattern. And the point I keep trying to make to people is that history learned the hard way that you do need prudential controls on industries like banking 'cause they're so central to everybody's well being.

BILL MOYERS: Left to their own devices, they go too far?

WILLIAM GREIDER: Yeah. They will use their power to their own advantage. And that's what we're witnessing now, a kind of recklessness that was set free by political retreat and people, some of them were sincere. Some of them were just on the make. But here's our great American tension. We want an economy that's dynamic, that's growing, puts more jobs out there for people to get, rising wages, all that good stuff. And at the same time, we want an economy that's stable. And that means no inflation, steady as you go, so forth and so on.

And this is the, you know, this is the mortal condition. You're not going to escape that tension. Government is a powerful intervener that tries, ought to try, to balance those two desires. For many years, the Federal Reserve served that role and tried to strike a balance.

BILL MOYERS: And then what happened?

WILLIAM GREIDER: During the last generation, 25, 30 years ago, the Federal Reserve, the central bank that regulates money and credit, tipped hard in one direction.

BILL MOYERS: Toward?

WILLIAM GREIDER: Crudely put, toward capital, in favor of capital and against labor. It not only hardened the value of money by suppressing inflation, but it participated very aggressively in the role of stripping away regulatory breaks on financial system and banks. Declined to enforce many of its own regulatory powers that exist in law. And meanwhile, sort of kept a foot on the brake about economic growth and full employment and all those good things that might help working people by encouraging rising wages.

BILL MOYERS: So at the same time the Fed was helping to keep wages down in order to keep inflation from escalating, its policies were, nonetheless, helping banks and investors to inflate the cost of their-

WILLIAM GREIDER: Right.

BILL MOYERS: -the value of their assets beyond reality-

WILLIAM GREIDER: That's it.

BILL MOYERS: -right?

WILLIAM GREIDER: That's it. At one point, writing in "The Nation," I somewhat playfully and wickedly referred to Alan Greenspan, the Federal Reserve chairman, as the "one-eyed chairman." He can see inflation and wages and goods and services, the prices that consumer prices, even when it doesn't exist. And he'll put his foot down on the brake. But he doesn't see the inflation in the financial system at all.

And the inflation in the financial system is the value, the prices, of financial assets, most obviously stock, rose fantastically over 20, 25 years, two, three times the growth in the real underlying economy. Something's wrong there, right? How do these financial assets, which supposedly reflect the economy, suddenly become worth three times more?

BILL MOYERS: Yes. How did they?

WILLIAM GREIDER: Well, now we're back in the game, aren't we? With deregulation, with the help of the Fed, and with the success of the Super Bull market, everybody's animal spirits in the financial system became more animal. And they and they went for it, and they said, "If you'll get this rule out of the way or you let us make this kind of weird little gimmicky paper innovation, we'll do even better."

BILL MOYERS: Yeah, you-

WILLIAM GREIDER: And you had this force rising up, driving things higher in the stock market while, in many sectors of the economy, if not everywhere, people are saying, "Gee, this doesn't feel that good to us." And particularly working people.

BILL MOYERS: You've written about a fantasy, an illusion that led to the housing bubble. You wrote about a fantasy that was sold, an illusion that led to the housing bubble. Whose interest was it to sell a fantasy?

WILLIAM GREIDER: Well, the merchants of financial paper, to put it bluntly. I mean, the illusion was that you could dismantle or disregard fairly old-time traditional rules of proper banking and stewardship and that that would definitely allow prices, profits, everything to go still higher. But that they could somehow dissolve the risk in that for the society, not just for the society but for themselves.

One example of that was what you heard about in the sub-prime mortgage thing. Who is holding this mortgage that's been lent to these people who we know are going to fail 'cause their incomes just aren't sufficient? Well, it's kind of hard to say because this mortgage is designed as a securitized package of 1,000 mortgages. And you sell it in the financial market to investors all over the world.

And then they sell it to somebody else, and it moves round literally. So what you've done with this innovation is you've distanced the lender from the borrower. Each party, the guy who sold the mortgage, the bank, then the next, the guy who buys the bond, takes his returns upfront, sells it on, and you stripped away the responsibility for that lending. And that's a pretty good microcosm of what happened generally in the financial system.

BILL MOYERS: How is it that these banks wind up holding the rotten mortgage securities that of Fannie Mae and Freddie Mac?

WILLIAM GREIDER: There is a level of fraud here which shouldn't be neglected that, I mean, people lied to their customers' banks-

BILL MOYERS: -mortgage-

WILLIAM GREIDER: -banks, mortgage houses, lied to the people they were selling these bonds to. But as we heard, they also lied to the people who were borrowing the money. I mean, this is fraud with the conflicts of interest. There's an investigation underway now with a number of the biggest banks stuck with all this bad paper, this rotten mortgage securities. Who can they sell them to?

The otherwise savvy investors around the world have gotten burned already, so they won't touch them. I know. Let's sell them to our customers. And so they're literally taking the bonds out of their own portfolio as a bank and selling them to the banks' closed customers. Now, that's going to stop, too, because now everybody's onto the secrets.

WILLIAM GREIDER: I think you can get lost in the mechanics of how all this works. And it's pretty sometimes pretty dizzying stuff. I think the bigger message is that what some of our old folks knew turns out still to be true.

BILL MOYERS: Which is?

WILLIAM GREIDER: Which is the process of lending, borrowing, investing, all of those things, require a personal hands-on knowledge of what you're doing but also a level of integrity that, put it bluntly, does not exist at this time in our financial system.

BILL MOYERS: You see a direct connection between what happened to those people in Cleveland and across the country and the cozy relationship that you've often written about between Wall Street and Washington?

WILLIAM GREIDER: Yeah. Yeah. The point I want to make, though, is that this is deeper than politician rolling over for his campaign contributor, the guys who finance the Democratic Party or the Republican Party. They do that, too. But they were sold a fantasy, an illusion, which sounded wonderful about how markets make better judgments than government and the public. And that liberating finance and business from prudential rules that society imposes upon them will produce a bigger, better economy and better returns for everyone.

All those fantasies have been destroyed by these events, I mean, wiped out. And if you think about it, as we go through the hard months ahead, America's going to have to take some pain, right? In one form or another. The government's going to have to probably ask for some sacrifices.

How do they do that when the American people have just seen the government rush in three days, five days or less, to bail out the biggest, most powerful institutions in the country? That is, the financial investment houses and banks and major banks.

BILL MOYERS: In your opinion, the bailout of Freddie Mac and Fannie Mae, good or bad?

WILLIAM GREIDER: I think it's bad. I mean, I think the way they're doing it is terrible. It's not done in the public interest. The bailout is necessary. They are failing at the bailout. And I believe they're failing because they haven't gone far enough.

They need to start thinking of, okay, how do we save the folks? That is, the broad interests of the American people as a nation, as workers, as family, blah, blah, blah. And the way to deal with Fannie Mae and Freddie Mac and some others like it is to nationalize them. Make them agencies of the federal government. That's what they were originally. And they performed for many years a really valuable service to housing markets.

They sort of re-circulated the capital and the mortgages and so forth. Make them a sub-agency of government. Let the shareholders of Fannie Mae and the rest eat their losses. They were playing risk taker shareholders. Let them suffer the consequences of their wrong bets. And go back to a more normal configuration.

Not a casino. No private shareholders. Look, the bailout of Fannie Mae that they're proposing says, somewhat generously I think, we'll put $300 billion on the table to buy the shares of stockholders in Fannie Mae and Freddie Mac. And just us saying that should give them a lot of confidence. Well, yeah, wouldn't it if you've just had the federal government promise to buy your shares if you don't want to hold them anymore.

BILL MOYERS: Maybe that's why all the foreign investors rushed in yesterday to buy Fannie Mae and Freddie Mac-

WILLIAM GREIDER: It might have some connection, yes.

BILL MOYERS: -if they know the taxpayers are going to put the money in, they've got a pretty good-

WILLIAM GREIDER: They've got what you might call a no-lose proposition. And the other part of that, and this would be simple. You could pass this in three days. Restore the federal law against usury. That won't have too many details to it at first. But it'll be a general statement that the federal government is prohibiting the kind of outrageous predatory practices, which have become general in this country, of not just banks but other financial firms.

BILL MOYERS: Credit card companies and-

WILLIAM GREIDER: Credit card - yeah, it's a long list. We know those abuses.

BILL MOYERS: Put some limits, some boundaries?

WILLIAM GREIDER: Well, eventually you have to draw very precise boundaries, I think, and restore some structure that says, okay, you can get a return of X on credit cards, but you can't get a return of triple X, right? And that kind of regulation. And that's not easy to draw. It takes a while.

But the first law that would just reassure the public, we're against usury. Muslims are against it. Christians are against it. Jews are against it. And we're going to develop a government laws that prohibited and penalized these institutions when they get caught doing it.

BILL MOYERS: Excessive interest, owned loans.

WILLIAM GREIDER: Excessive-

BILL MOYERS: That's what you mean by usury?

WILLIAM GREIDER: That's the narrowest meaning. But the larger meaning is wealthy people, whether they're banks or individuals, ought not to be able to use their power, their wealth to exploit people who don't have wealth, great wealth. That's not too complicated. And I'm not being utopian here. I'm just saying that you can reestablish legal-slash-moral limits on the behavior of finance and their wealthy patrons. And if they don't want to observe those rules then they need not apply for emergency loans at the Federal Reserve or the Treasury Department.

BILL MOYERS: In other words-

WILLIAM GREIDER: You see what I'm getting at? And-

BILL MOYERS: Yeah, in other words, so-

WILLIAM GREIDER: -and this is a-

BILL MOYERS: -if there's a bailout, certain conditions on that bailout.

WILLIAM GREIDER: Absolutely.

BILL MOYERS: Not just a free pass.

WILLIAM GREIDER: And what they've done in the last year, now two or three times and they're going to do more is to say, "Oh, my goodness, the biggest investment bank, houses are in trouble. We don't usually lend directly to them. We only lend to big banks, but they're in trouble, too. Let's lend to both of them. Let's open the windows and pour out the capital, the liquidity, and so forth." And there wasn't a day that where they paused to say, "What are we getting in return? That these guys promise not to fail?" You see what I'm getting at? It's-

BILL MOYERS: I do.

WILLIAM GREIDER: -it's a wildly grotesque transaction where the public guarantees the life of these firms, and there isn't any effort that we know of to say, "And in return, you're going to behave in the following ways for the next ten years or maybe forever. We'll pass a law later that spells that out more clearly, but this is our starting demand." And I suppose they would say, "Well, we don't have time to do that. This is a crisis, blah, blah, blah." I don't buy that. I think that's a way to avoid those questions is not even mention them.

BILL MOYERS: You have been writing for a long time now that America's moving toward a corporate state. If we become one, can we exercise the self-correcting faculty that prevents us from hitting the iceberg out there?

WILLIAM GREIDER: One of the reasons I think politics is going to change fairly dramatically is that the Federal Reserve, accompanied by the Treasury Department and I think will be accompanied by the Congress, has crossed a very dangerous line in their bailout. They have essentially said, "We will put money on the table, taxpayers' money on the table, for any financial institution or business that is too big to fail." That is, if it fails, it'll send dangerous ripples through the economy.

And we've got a list now of maybe 30, 40, depending on how you count them, that we will be there to save you. I regard that as profoundly dangerous for the American Republic because once you cross that line and you have this special club that's privileged, that has benefits from government that nobody else can get, where do you stop it?

I mean, if I were running a big manufacturing company, I would have quickly run out and buy a subsidiary that's a bank or a financial firm that looks like a bank. And I would then try to get myself on that list. Who wouldn't? What's going on right now it's gotten a little attention - the union SEIU is fighting it, is these private equity firms, which are huge money pots of investors that take over and change corporations and come away with huge profits. The private equity firms are trying to buy into the banks and financial firms.

BILL MOYERS: And what would that mean?

WILLIAM GREIDER: That would mean that this private unregulated equity fund would be participating behind the door, so to speak, in the management of our regulated banks. But it would also, in a pinch, if it's big enough, maybe have a tap into that federal guarantee that if you're too big to fail, we'll be there for you.

BILL MOYERS: Even if-

WILLIAM GREIDER: You see what I'm getting at? And-

BILL MOYERS: I do. This morning in the "New York Times" one of the big stories in the business section is the financial industry is organizing to stop Congress from trying to regulate excessive speculation on oil and energy. They don't want this capacity for exploiting-

WILLIAM GREIDER: Well-

BILL MOYERS: -people's needs.

WILLIAM GREIDER: Well, I could lay us alongside that the Securities and Exchange Commission, which, remember in olden days, was supposed to defend us innocent investors against the guys running corporations. And that's why we have all these reports and so forth and so on. They announced this past week that they're going to go after the short sellers in the stock market.

The short sellers are the guys who say these folks at the corporate headquarters are lying to you or the folks at Citigroup are still not telling the truth about their losses and liabilities. So you see what I'm getting at. It's equivalent to saying we don't want anybody bad mouthing us in the middle of this trouble. And we'll try to penalize them if we can. Isn't that contradictory to the public interest?

BILL MOYERS: Have we hit bottom?

WILLIAM GREIDER: I don't think so. But I think the short answer is nobody knows. My sense is, partly because the rottenness, the bad assets and so forth and the inflated housing prices and all the other defaults have so much more to play out - I think they will then feed back, and are already, into real economic consequences for the general life of the economy.

BILL MOYERS: Meaning?

WILLIAM GREIDER: Well, people lose jobs. Unemployment will rise.

BILL MOYERS: Like Cleveland. Yeah-

WILLIAM GREIDER: And like, you know, a perhaps less vicious story because it'll be more gradual than what's happening in those neighborhoods in Cleveland. But then as that happens, the losses feed back into banks because they've got consumer loans, they've got car loans, they've got business loans. And even banks that have been more or less virtuous in their behavior will be impinged by that. So I'm not making some grandiose calamity prediction. I'm just saying we got a lot more pain to take in this society before this works out.

BILL MOYERS: Both parties have put the watchdogs to sleep, right?

WILLIAM GREIDER: A better metaphor, instead of putting them to sleep, would be castration.

WILLIAM GREIDER: I don't know what you want, I mean-

BILL MOYERS: Both parties of complict-

WILLIAM GREIDER: Putting them to sleep is just a metaphor that stops me-

BILL MOYERS: Both parties have been complicit in tipping the balance of power to capital, right?

WILLIAM GREIDER: I'm afraid so. That's right. I mean, if you go back over the last 20, 25 years, it was always portrayed as a cause of conservative Republicans, even right-wing Republicans. And that was, of course, true. But I think a majority of the Democrats were in collusion virtually every step of the way, and sometimes they led the way.

BILL MOYERS: Do you think Washington really knows what's going on? Do you think they really understand what's happening out there in Cleveland and places like that all over the country?

WILLIAM GREIDER: The short answer is, no, I've been in Washington as a citizen and resident for 40 years. And I'm still occasionally shocked by its ignorance of the rest of the country. And some of that is willful, of course. But some of it is just, it's a very nice life in Washington. You get used to certain protective qualities.

We saw that recently with these political players, who got good mortgages. How do they do that? Well, we know how they did it. And in any case, Washington doesn't yet see the depth of the problem.

If you ask me, well, who's figured this out? Who understands, at least in general terms, where we are? The guys in Washington? The politicians and their governing policy advisors? Or the dimwitted public? I would say the public. And I think there's a lot of evidence in that. You know, they keep seeing these polls where the public expresses doubt about this, about-

BILL MOYERS: Eighty-one percent of the people in the most recent polls say we're heading in the wrong direction.

WILLIAM GREIDER: I call that an extreme consensus. Why do the newspapers not celebrate that? They're always looking for consensus politics. Here's the American public, they've got an eighty-- you know, that's extraordinary.

WILLIAM GREIDER: We have an opening in this crisis for, this is really going to sound grandiose. We have an opening in this crisis for a deep transformation in American politics. I don't say it happens this year, next year, or it's going to take a number of years. But we are in the shock of reality. And people get it everywhere and see the blood in the streets. And you tell them how this worked and who did what to whom, and that's a basis for a new politics.

But it requires people - this is the hard part - to get out of their sort of passive resignation to, "Well, we follow the Democrats" or "we follow the Republicans" or "we let this group or that group tell us how to think" and engage among themselves in a much more serious role as citizens. And when, as they do that, they have to be willing to punish the political powers, in smart ways or crude ways, however they can, first, to get a place in the debate. But, secondly, to force the changing values of the system.

And I, this may be wishful, but I think in the next year, two years, five years, you're going to see both political parties floundering. What do we believe about all this stuff? We've told folks this, you know, lovely story for 20, 25 years about the magic of the marketplace. Do we still want to kind of prop that up? That's where they are now. They're still trying to prop up the marketplace vision and make it work again. It's over.

I think events will demonstrate that. So if they're not willing to change then we need to change the politicians. And that's all a bloody process and doesn't happen quickly. But that's why I'm optimistic.

BILL MOYERS: Bill Greider we look forward to your new book, the title of it will be-

WILLIAM GREIDER: "Come Home, America"

BILL MOYERS: And you come back to the Journal.

WILLIAM GREIDER: Thanks.

The "Disaster Stage" of the "Great Unwind"

Thx to Jesse for this one

Thirty to forty years ago, the early fruits of financialization in this country - the first credit cards, retirement accounts , money market funds and ATM machines - struck most Americans as a convenience and boon. The savings and loan implosion and junk bonds of the 1980s switched on some yellow warning lights, and the tech bubble and market mania of the nineties flashed some red ones. But neither Wall Street nor Washington stopped or even slowed down.

In August, 2007, the housing-linked crisis of the credit markets predicted the arriving disaster-stage, the Crash of September-November 2008 confirmed the debacle, and now an angry, fearful citizenry awaits a further unfolding. There is probably no need to fear a second coming of nineteen-thirties Depression economics. This is not the same thing; the day-to-day pain shouldn't be as severe.

Indeed, for all that the 1930s evoke national trauma, that decade was in fact a waiting room for national glory and wellbeing. World War Two ushered in American global ascendancy, the "Happy Days" of the 1950s and an unprecedented middle-class prosperity.

Today's disaster stage of American financialization - the bursting of the huge 25-year, almost $50 trillion debt bubble that helped underwrite the hijacking of the U.S. economy by a rabid financial sector -- won't be nearly so kind. It is already ushering in the reverse: a global realignment in which the United States loses the global economic leadership won in World War Two. The ignominy deserved by Wall Street after 1929-1933 is peanuts compared with the opprobrium the U.S. financial sector and its political and regulatory allies deserve this time.

My 2002 book, Wealth and Democracy, in its section on the "Financialization of America" noted that the "finance, insurance and real estate (FIRE) sector overtook manufacturing during the 1990s, moving ahead in the national income and GDP charts by 1995. By the first years of the next decade, it had taken a clear lead in actual profits. Back in 1960, parenthetically, manufacturing profits had been four times as big, and in 1980, twice as big." Hardly anyone was paying attention. By 2006, the FIRE sector, its components mixed together like linguine by the 1999 repeal of the old New Deal restraints against mergers of commercial banks, investment firms and insurance, had ballooned to 20.6% of U.S. GDP versus just 12% for manufacturing. The FIRE Sector, now calling itself the Financial Services Sector, lopsidedly dominated the private economy. A detailed chart appears on page 31 of Bad Money. Some New York publications and politicians try to insist that finance per se is only 8%, but the post-1999 commingling makes that absurd.

This represented a staggering transformation of the U.S. economy - doubly staggering now because of the crushing burden of its collapse. You would think that that opinion molders and the national media would have been probing its every aperture and orifice. Not at all.

Thus, it was pleasing to read MIT economics professor Simon Johnson's piece in the April Atlantic fingering financial "elites" who captured the government for the latterday financial debacle. This is broadly true, and judging from my e.mail, even some conservatives accept Johnson's analysis and indictment. After the furor over the AIG bonuses, the public and some politicians may be ready to start identifying and blaming culprits. This would be useful. Having an elite to blame is a often prerequisite of serious reform.

Nevertheless, the extremes of financialization, together with the havoc we now know it to have wrought, represent a much more complicated historical and economic genesis, one which U.S. leaders must be obliged to confront if not fully acknowledge. Elite avarice and culpability has multiple and longstanding dimensions. It has been fifteen years since Graef Crystal, a wellknown employment compensation expert, brought out his incendiary In Search of Excess: the Overcompensation of American Executives. The data was blistering. Over the last decade, New York Times reporter David Cay Johnston has published two books - Perfectly Legal and Free Lunch - describing how the U.S. tax code, in particular, has been turned into a feeding trough for the richest one percent of Americans (especially the richest one tenth of one percent).

The backstop to avarice provided by a wealth culture and market mania from the late 1980s through the Clinton years to the George W. Bush administration, prompted another set of indictments that still resonate: William Greider's Secrets of the Temple: How the Federal Reserve Runs The Country (1987), Robert Kuttner's Everything For Sale (1997), Thomas Frank's One Market Under God (2000) and John Gray's False Dawn (1998). More recently, Paul Krugman's books have been equalled or exceeded in timeliness by his New York Times columns blasting the perversity of the Obama-Geithner financial bail-out and the malfeasance of the financial sector. James K. Galbraith, in his 2008 book The Predator State, has elaborated the valid point that too many conservatives over last few decades betrayed their free market rhetoric by supporting a relentless use of state power and government financial bail-outs to advance upper-income and corporate causes. On the other hand, some conservative economists of the Austrian school make related indictments of liberal bail-out penchants.

This could be a powerful framework. All of these critiques have merit, and ideally they might converge as earlier indictments of elite and governmental abuse did during the Progressive and New Deal eras. But I have to return to whether the public will ever be given full information on the fatal magnitude of financialization, who was responsible, and how it failed and crashed in 2007-2009. So far, political and media discussion has been so minimal that the early 21st century American electorate has much less readily available information on what took place than did the electorates of those earlier reform eras.

Towards this end, my initial emphasis in the new material included in the 2009 edition of Bad Money is on what techniques, practices and leverage the financial sector used between the mid-1980s and 2007 to metastasize early-stage financialization into an economic and governmental coup and, ultimately, a national disaster. Perhaps not surprisingly, I found that the principal building blocks that the sector used to enlarge itself from 10-12% of Gross National Product around 1980 to a mind-boggling 20.6% of Gross Domestic Product in 2004 involved essentially the same combination of credit-mongering, massive sector borrowing, highly leveraged speculation, reckless, greedy pioneering of new experimental vehicles and securities (derivatives and securitization) and mega-trillion-dollar abuse of the mortgage and housing markets that became infamous as hallmarks of the 2007-2009 disaster. During Alan Greenspan's 1987-2006 tenure as Federal Reserve Chairman, financial bubble-blowing became a Washington art and total credit market debt in the U.S. quadrupled from $11 trillion to $46 trillion.

To try to put 20-30 pages into a nutshell, the financial sector hyped consumer demand - from teen-ager credit cards to mortgages for the unqualified - to make credit into one of the nation's biggest industries; nearly $15 trillion was borrowed over two decades to leverage de facto gambling at 20:1 and 30:1 ratios; banks, investment firms, mortgage lenders, insurers et al were all merged together to do almost anything they wanted; exotic securities and instruments that even investment chiefs couldn't understand were marketed by the trillions. To achieve fat financial-sector profits, the housing and mortgage markets might as well have been merged with Las Vegas.

The principal inventors, hustlers , borrowers and culprits were the nation's 15-20 largest and best known financial institutions - including the ones that keep making headlines by demanding more bail-out money from Washington and giving huge bonuses. These same institutions got much of the early bail-out money and as of December 2008 they accounted for over half of the bad assets written off. The reason these needed so much money is that they government had let them merge, speculate, expand and experiment on dimensions beyond all logic. That is why the complicit politicians and regulators have to talk about $100 billion here and $1 trillion there even while they pretend that it's all under control and that the run-amok financial sector remains sound.

This is a much grander-scale disaster than anything that happened in 1929-33. Worse, it dwarfs the abuses of debt, finance and financialization that brought down previous leading world economic powers like Britain and Holland (back when New York was New Amsterdam). I will return to these little-mentioned precedents in another post this week.

But for the moment, let me underscore: the average American knows little of the dimensions of the financial sector aggrandizement and misbehavior involved. Until this is remedied, there probably will not be enough informed, focused indignation to achieve far-reaching reform in the teeth of financial sector money and influence. Equivocation will triumph. This will not displease politicians and regulators leery of offending their contributors and backers.

---

Kevin Phillips's 2008 book Bad Money: Reckless Finance. Failed Politics and the Global Crisis of American Capitalism has just been published in a new post-election edition by Viking Penguin


http://tpmcafe.talkingpointsmemo.com/2009/04/07/the_disaster_stage_of_us_financialization/

The Predator State

WHAT IS THE REAL NATURE of American capitalism today? Is it a grand national adventure, as politicians and textbooks aver, in which markets provide the framework for benign competition, from which emerges the greatest good for the greatest number? Or is it the domain of class struggle, even a “global class war,” as the title of Jeff Faux’s new book would have it, in which the “party of Davos” outmaneuvers the remnants of the organized working class?

The doctrines of the “law and economics” movement, now ascendant in our courts, hold that if people are rational, if markets can be “contested,” if memory is good and information adequate, then firms will adhere on their own to norms of honorable conduct. Any public presence in the economy undermines this. Even insurance—whether deposit insurance or Social Security—is perverse, for it encourages irresponsible risktaking. Banks will lend to bad clients, workers will “live for today,” companies will speculate with their pension funds; the movement has even argued that seat belts foster reckless driving. Insurance, in other words, creates a “moral hazard” for which “market discipline” is the cure; all works for the best when thought and planning do not interfere. It’s a strange vision, and if we weren’t governed by people like John Roberts and Sam Alito, who pretend to believe it, it would scarcely be worth our attention.

The idea of class struggle goes back a long way; perhaps it really is “the history of all hitherto existing society,” as Marx and Engels famously declared. But if the world is ruled by a monied elite, then to what extent do middle-class working Americans compose part of the global proletariat? The honest answer can only be: not much. The political decline of the left surely flows in part from rhetoric that no longer matches experience; for the most part, American voters do not live on the Malthusian margin. Dollars command the world’s goods, rupees do not; membership in the dollar economy makes every working American, to some degree, complicit in the capitalist class.

In the mixed-economy America I grew up in, there existed a post-capitalist, post-Marxian vision of middle-class identity. It consisted of shared assets and entitlements, of which the bedrock was public education, access to college, good housing, full employment at living wages, Medicare, and Social Security. These programs, publicly provided, financed, or guaranteed, had softened the rough edges of Great Depression capitalism, rewarding the sacrifices that won the Second World War. They also showcased America, demonstrating to those behind the Iron Curtain that regulated capitalism could yield prosperity far beyond the capacities of state planning. (This, and not the arms race, ultimately brought down the Soviet empire.) These middle-class institutions survive in America today, but they are frayed and tattered from constant attack. And the division between those included and those excluded is large and obvious to all.

Today, the signature of modern American capitalism is neither benign competition, nor class struggle, nor an inclusive middle-class utopia. Instead, predation has become the dominant feature—a system wherein the rich have come to feast on decaying systems built for the middle class. The predatory class is not the whole of the wealthy; it may be opposed by many others of similar wealth. But it is the defining feature, the leading force. And its agents are in full control of the government under which we live.

Our rulers deliver favors to their clients. These range from Native American casino operators, to Appalachian coal companies, to Saipan sweatshop operators, to the would-be oil field operators of Iraq. They include the misanthropes who led the campaign to abolish the estate tax; Charles Schwab, who suggested the dividend tax cut of 2003; the “Benedict Arnold” companies who move their taxable income offshore; and the financial institutions behind last year’s bankruptcy bill. Everywhere you look, public decisions yield gains to specific private entities.

For in a predatory regime, nothing is done for public reasons. Indeed, the men in charge do not recognize that “public purposes” exist. They have friends, and enemies, and as for the rest—we’re the prey. Hurricane Katrina illustrated this perfectly, as Halliburton scooped up contracts and Bush hamstrung Kathleen Blanco, the Democratic governor of Louisiana. The population of New Orleans was, at best, an afterthought; once dispersed, it was quickly forgotten.

The predator-prey model explains some things that other models cannot: in particular, cycles of prosperity and depression. Growth among the prey stimulates predation. The two populations grow together at first, but when the balance of power shifts toward the predators (through rising interest rates, utility rates, oil prices, or embezzlement), both can crash abruptly. When they do, it takes a long time for either to recover.

The predatory model can also help us understand why many rich people have come to hate the Bush administration. For predation is the enemy of honest business. In a world where the winners are all connected, it’s not only the prey who lose out. It’s everyone who hasn’t licked the appropriate boots. Predatory regimes are like protection rackets: powerful and feared, but neither loved nor respected. They do not enjoy a broad political base.

In a predatory economy, the rules imagined by the law and economics crowd don’t apply. There’s no market discipline. Predators compete not by following the rules but by breaking them. They take the business-school view of law: Rules are not designed to guide behavior but laid down to define the limits of unpunished conduct. Once one gets close to the line, stepping over it is easy. A predatory economy is criminogenic: It fosters and rewards criminal behavior.

Why don’t markets provide the discipline? Why don’t “reputation effects” secure good behavior? Economists have been slow to answer these questions, but now we have a full-blown theory in a book by my colleague William K. Black, The Best Way to Rob a Bank Is to Own One. Black was the lawyer/whistle-blower in the Savings and Loan and Keating Five scandals; he later took a degree in criminology. His theory of “control fraud” addresses the situation in which the leader of an organization uses his company as a “weapon” of fraud and a “shield” against prosecution—a situation with which law and economics cannot cope.

For instance, law and economics argues that top accounting firms will protect their own reputations by ferreting out fraud in their clients. But, as with Enron, Tyco, and WorldCom, at every major S&L control fraud was protected by clean audits from top accountants: You hire the top firm to get the clean opinion. Moral hazard theory shifts the blame for financial collapse to the incentives implicit in insurance, but Black shows that the large frauds were nearly all committed in institutions taken over for that purpose by criminal networks, often by big players like Charles Keating, Michael Milken, and Don Dixon. And there’s another thing about predatory institutions. They invariably fail in the end. They fail because they are meant to fail. Predators suck the life from the businesses they command, concealing the fact for as long as possible behind fraudulent accounting and hugely complex transactions; that’s the looter’s point.

That a government run by people rooted in this culture should also be predatory isn’t surprising—and the link between George H.W. Bush, who led the deregulation of the S&Ls, his son Neil, who ran a corrupt S&L, and Neil’s brother George, for whom Ken Lay sent thugs to Florida in 2000 on the Enron plane, could hardly be any closer. But aside from occasional references to “kleptocracy” in other countries, economic opinion has been slow to recognize this. Thinking wistfully, we assume that government wants to do good, and its failure to do so is a matter of incompetence.

But if the government is a predator, then it will fail: not merely politically, but in every substantial way. Government will not cope with global warming, or Hurricane Katrina, or Iraq—not because it is incompetent but because it is willfully indifferent to the problem of competence. The questions are, in what ways will the failure hit the population? And what mechanisms survive for calling the predators to account? Unfortunately, at the highest levels, one cannot rely on the justice system, thanks to the power of the pardon. It’s politics or nothing, recognizing that in a world of predators, all established parties are corrupted in part.

So, how can the political system reform itself? How can we reestablish checks, balances, countervailing power, and a sense of public purpose? How can we get modern economic predation back under control, restoring the possibilities not only for progressive social action but also—just as important—for honest private economic activity? Until we can answer those questions, the predators will run wild.


James K. Galbraith teaches economics at the Lyndon B. Johnson School of Public Affairs at the University of Texas-Austin. He previously served in several positions on the staff of the U.S. Congress, including executive director of the Joint Economic Committee.

Illustration: Tim Bower