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The meltdown on Wall Street, II

Weissman Robert Weissman is editor of Multinational Monitor, a corporate watchdog publication founded in 1980 by Ralph Nader. I'm republishing the latest post from his blog. It's a good primer on what ought to happen next with regards to the meltdown on Wall Street. I've been reading Weissman for years and he knows his stuff.

As the Federal Reserve and Treasury Department careen from one financial meltdown to another, desperately trying to hold together the financial system - and with it, the U.S. and global economy -- there are few voices denying that Wall Street has suffered from "excesses" over the past several years.

The current crisis is the culmination of a quarter century's deregulation. Even as the Fed and Treasury scramble to contain the damage, there must be a simultaneous effort to reconstruct a regulatory system to prevent future disasters.

There is more urgency to such an effort than immediately apparent. If the Fed and Treasury succeed in controlling the situation and avoiding a collapse of the global financial system, then it is a near certainty that Big Finance - albeit a financial sector that will look very different than it appeared a year ago - will rally itself to oppose new regulatory standards. And the longer the lag between the end (or tailing off) of the financial crisis and the imposition of new legislative and regulatory rules, the harder it will be to impose meaningful rules on the financial titans.

The hyper-complexity of the existing financial system makes it hard to get a handle on how to reform the financial sector. (And, by the way, beware of generic calls for "reform" -- for Wall Street itself taken up this banner over the past couple years. For the financial mavens, "reform" still means removing the few regulatory and legal requirements they currently face).

But the complexity of the system also itself suggests the most important reform efforts: require better disclosure about what's going on, make it harder to engage in complicated transactions, prohibit some financial innovations altogether, and require that financial institutions properly fulfill their core responsibilities of providing credit to individuals and communities.

Here are a dozen steps to restrain and redirect Wall Street and Big Finance:

1. Expand the scope of financial regulation. Investment banks and hedge funds have been able to escape the minimal regulatory standards imposed on other financial institutions. Especially with the government safety net - including access to Federal Reserve funds - extended beyond the traditional banking sector, this regulatory black hole must be eliminated.

2. Impose much more robust standards for disclosure and transparency. Hedge funds, investment banks and the off-the-books affiliates of traditional banks have engaged in complicated and intertwined transactions, such that no one can track who owes what, to whom. Without this transparency, it is impossible to understand what is going on, and where intervention is necessary before things spin out of control.

3. Prohibit off-the-books transactions. What's the purpose of accounting standards, or banking controls, if you can evade them by simply by creating off-the-books entities?

4. Impose regulatory standards to limit the use of leverage (borrowed money) in investments. High flyers like leveraged investments because they offer the possibility of very high returns. But they also enable extremely risky investments -- since they can vastly exceed an investor's actual assets -- that can threaten not just the investor but, if replicated sufficiently, the entire financial system.

5. Prohibit entire categories of exotic new financial instruments. So-called financial "innovation" has vastly outstripped the ability of regulators or even market participants to track what is going on, let alone control it. Internal company controls routinely fail to take into account the possibility of overall system failure  -- i.e., that other firms will suffer the same worst case scenario - and thus do not recognize the extent of the risks inherent in new instruments.

6. Subject commodities trading to much more extensive regulation. Commodities trading has become progressively deregulated. As speculators have flooded into the commodities markets, the trading markets have become increasingly divorced from the movement of actual commodities, and from their proper role in helping farmers and other commodities producers hedge against future price fluctuations.

7. Tax rules should be changed so as to remove the benefits to corporate reliance on debt. "Payments on corporate debt are tax deductible, whereas payments to equity are not," explains Damon Silvers of the AFL-CIO. "This means that, once you take the tax effect into account, any given company can support much more debt than it can equity." This tax arrangement has fueled the growth of private equity firms that rely on borrowed money to buy corporations. Many are now going bankrupt.

8. Impose a financial transactions tax. A small financial transactions tax would curb the turbulence in the markets, and, generally, slow things down. It would give real-economy businesses more space to operate without worrying about how today's decisions will affect their stock price tomorrow, or the next hour. And it would be a steeply progressive tax that could raise substantial sums for useful public purposes.

9. Impose restraints on executive and top-level compensation. The top pay for financial impresarios is more than obscene. Executive pay and bonus schedules tied to short-term performance played an important role in driving the worst abuses on Wall Street.

10. Revive competition policy. The repeal of the Glass-Steagall Act, separating traditional banks from investment banks, was the culmination of a progressive deregulation of the banking sector. In the current environment, banks are gobbling up the investment banks. But this arrangement is paving the way for future problems. When the investment banks return to high-risk activity at scale (and over time they will, unless prohibited by regulators), they will directly endanger the banks of which they are a part. Meanwhile, further financial conglomeration worsens the "too big to fail" problem - with the possible failure of the largest institutions viewed as too dangerous to the financial system to be tolerated - that Treasury Secretary Hank Paulson cannot now avoid despite his best efforts. In this time of crisis, it may not be obvious how to respect and extend competition principles. But it is a safe bet that concentration and conglomeration will pose new problems in the future.

11. Adopt a financial consumer protection agenda that cracks down on abusive lending practices. Macroeconomic conditions made banks interested in predatory subprime loans, but it was regulatory failures that permitted them to occur. And it's not just mortgage and home equity loans. Credit card and student loan companies have engaged in very similar practices - pushing unsustainable debt on unreasonable terms, with crushing effect on individuals, and ticking timebomb effects on lenders.

12. Support governmental, nonprofit, and community institutions to provide basic financial services. The effective governmental takeover of Fannie Mae, Freddie Mac and AIG means the U.S. government is going to have a massive, direct stake in the global financial system for some time to come. What needs to be emphasized as a policy measure, though, is a back-to-basics approach. There is a role for the government in helping families get mortgages on reasonable terms, and it should make sure Fannie and Freddie, and other agencies, serve this function. Government student loan services offer a much better deal than private lender alternatives. Credit unions can deliver the basic banking services that people need, but they need back-up institutional support to spread and flourish.

What is needed, in short, is to reverse the financial deregulatory wave of the last quarter century. As Big Finance mutated and escaped from the modest public controls to which it had been subjected, it demanded that the economy serve the financial sector. Now it's time to make sure the equation is reversed.

(For more detailed discussion of these issues - all in plain, easy-to-understand language, see these comments from Damon Silvers of the AFL-CIOThe American Prospect editor Robert Kuttner, author of the The Squandering of America and Obama's Challenge; and Richard Bookstaber, author of A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation).

The state's money pipeline from Wall Street

I came across a startling number Tuesday: New York State depends on Wall Street for about 20 percent of its revenues.

Which means that, as Wall Street's day of reckoning has arrive, so has the Empire State's.

The meltdown will not be short-lived. As a headline in Tuesday's New York Times said, A Sense That Wall St.'s Boom Times Are Over. That means the state will be forced to tighten its belt, not just for the next year or two, but for the foreseeable future.

Alfred_e_nuemanThat's not a bad thing. Even facing a huge deficit this year, the governor and legislature kept spending like Alfred E. Neuman - "What us, worry?"

At a special session in July the state trimmed some of the added spending. But we're still not seeing anything out of Albany that reflects real fiscal discipline, the governor's tough talk notwithstanding. If anything can change that, it's the meltdown on Wall Street.

I don't pretend to understand all the nuances behind the crisis. My takeaway: comeuppance to a lot of folks who resisted regulation and paid themselves way too much.

How too much? The Washington Post reported a while ago:

Wall Street bonuses totaled $33.2 billion in 2007, down just 2 percent, by the estimates of the New York state comptroller's office.

Seven of Wall Street's biggest firms boosted their total compensation and benefits to a combined $122 billion, up 10 percent since 2006, despite seeing their net revenue collectively fall 6 percent, according to Equilar, an executive-compensation research firm based in California. Mortgage-related losses reported by the seven firms totaled $55 billion and wiped out more than $200 billion in shareholder value.

"In a year when shareholders have lost nearly half the value of their holdings, it strains one's imagination how the firms can continue to give such pay," said Michael Garland, director of value strategies at CtW Investment Group, which works with pension funds on corporate governance. "You've got Wall Street guys engineering derivatives securities that destabilized broader financial markets -- it's hard to understand why anyone should get paid for that."

The seven large firms -- Merrill Lynch, Citigroup, Bear Stearns, Morgan Stanley, J.P. Morgan Chase, Lehman Brothers and Goldman Sachs -- richly compensated their employees and executives even as three of those firms suffered their biggest losses ever in the final months of 2007. Employee compensation at those firms was equal to 47 percent of net revenue in 2007.

A whole lot of folks are hitting the bricks. Reports the New York Times:

Approximately 11,000 jobs were lost in New York's finance and insurance sectors between July 2007 and July 2008. More recent data will likely show this number continues to grow and based on past data, approximately 40,000 jobs in the financial services industry in the New York City area can be expected to be lost in the current downturn. All told, approximately 120,000 jobs may ultimately be directly and indirectly affected as a result of financial sector turmoil.

In a press release the other day, the governor's office announced it was rushing to help those losing their jobs obtain unemployment insurance.

The Labor Department will dispatch its rapid response specialists to assist displaced workers in New York City’s financial industry. These rapid response sessions will provide workers with basic information on how to file an unemployment claim, possible training opportunities, labor market information, and workshops covering everything from resume writing to interviewing skills.

Excuse me while I snicker.

The problem with all this is that the rest of us will pay the price for Wall Street's excesses. I'm afraid to look at what it's done to my 401-K balance.

This story hurts to think about

You've got to read newspaper stories all the way to the end. Witness this ditty, near the bottom of of a story last week on the latest action by the Erie County Industrial Development Agency.

The agency's Regional Development Corp. affiliate approved a $25,000 working capital loan to Art N Body, a Williamsville tattoo and body-piercing parlor at 5407 Sheridan Drive.

Yeah, that's right, a tattoo and piercing parlor.

I guess this is the IDA's idea of economic development.

Think the piercing parlor offers health care coverage and a pension to employees?

Could this be the beginning of a new business cluster?

I don't know, maybe the loan makes sense. I mean, a community can never have too many tattoo artists, to say nothing of piercing practitioners.

Perspective on the primary

My take-away from the primary last week:

1) Byron Brown is potentially -- potentially -- vulnerable as he faces re-election next year.

2) Tom Golisano can be an effective player if he keeps his nose clean.

First, the mayor.

His key people running for Democratic Party committee seats lost left and right. Peter Cutler, his spokesman. Janet Penksa, his budget director. Alisa Lukasiewicz, the city's top attorney. Brian Reilly, his economic development chief.

Probably the most noteworthy loser was Steve Casey, who not only serves as deputy mayor, but vice chairman of the party.

Question: What does it say when the vice chairman can't even win his committee seat?

Answer: He's alienated a lot of people, even his neighbors. (No word on how his wife voted).

The losses didn't end there.

Grassroots, his political base, lost committee seats on the East Side. As it's been explained to me, there is a growing division in the black community and anti-Grassroots forces, or, at least the non-Grassroots folks, now hold a slight edge in committee seats.

As a result of losses on Tuesday, Brown supporters now hold about one-third of the weighted voting power of committee seats in the city. (Seats are weighted, based on results of 2006 gubernatorial election).

Countywide, Brown forces hold about 10 percent of the weighted vote. Doesn't sound like a lot of clout, does it?

Mind you, Brown has some things going for him as the incumbent.

He's raised a lot of money and has the ability to raise more. His alliance with Steve Pigeon holds the promise of yet more cash through Golisano.

Brown's got an effective PR machine, thanks in part to his exploitation of the city's government public access channel.

And he'll be able to deploy a good portion of the City Hall workforce to campaign on his behalf, unless the Common Council passes a proposed reform bill that is currently one short vote of passage and two of overriding a veto.

Brown_and_higginsIn addition, he and Congressman Brian Higgins, pictured at left, still seem to be tight. Higgins has the ability to help deliver South Buffalo, and thus blunt an opposition candidate.

In March I covered the St. Patrick's Day appearance here of Sinn Fein President Gerry Adams, where Brown made a cameo at the event sponsored by the Valley Community Association. Brown, when introduced, drew a bigger cheer than anyone on the dais, save Adams himself.

Who would have thunk that, in South Buffalo? Granted, much of the crowd was well into their cups by then, but still.

On the debit side, Brown and Casey have been sniping at Democratic Party HQ since shortly after winning the mayor's race. They've taken on Len Lenihan and Company, and if the committee races are any indication, have failed miserably.

Here's a link to the results.

Moreover, most of the city's progressive community has soured on Brown, not that the activists were keen on him to begin with. The business community has mixed emotions. Support has slipped in the black community and is "broad but shallow," according to one operative I spoke with.

The best thing Brown may have going for him is the absence of a major opponent at this juncture.

Mickey Kearns, who represents South Buffalo on the Council, has made noises about running. But he's a first-termer and not part of the Higgins crowd.

Some folks have mentioned Henry J. Nowak , the City Housing Court judge and son of the retired Congressman. He's played to good reviews and certainly has the political pedigree, but that's not to say he wants to be mayor. I've heard conflicting reports about his interest.

My sense is that Brown will win a second term without too much difficulty if he and Higgins remain a pair and the mayor avoids making any major missteps between now and next summer. But if he slips up, and a credible opponent emerges, well, it could get interesting.

Certainly, primary results last week show Brown's base is shrinking, not growing. Kind of surprising for a first-termer. For the mayor, the election can't come soon enough.

On to Golisano.

He went one for two in the local races he invested in heavily. Won with Baby Joe Mesi, lost, in more ways than one, in trying to unseat Sam Hoyt.

The lessons: Pigeon's dirty politics don't play well, no matter how much of Golisano's dough he spends. But when he keeps it clean, at least mostly clean, Golisano's money can make a difference.

Take away the Ward Family Feud and the TV ad blitz the final week of the campaign and Michele Iannello, rather than Baby Joe, could have come away with the victory.

Clearly, Golisano's money helped.

What do you glean from last week's returns? Any potential mayoral candidates come to mind?

Golisano's impact

A former colleage, James Madore, now with Newsday, has this analysis of the impact of Responsible New York on the primaries this week.

His bottom line:

The political committee started by Rochester billionaire Thomas Golisano to shake up state government produced mixed results in Tuesday's primary elections.

I'll offer an analysis of the local primary results on Monday.

Toning down politics in City Hall

So, four members of the Common Council want to prohibit City Hall employees from politicking - no campaign donations, no circulating nominating petitions, and so on. The proposal is being advanced by members who are on less friendly terms with the Brown administration, although you'd never know it by their voting record.

“I don’t think City Hall should be a political arm,” said Niagara District Council Member David A. Rivera. “People feel compelled to donate money, collect petitions and take days off to work on campaigns. People’s arms are almost twisted off.”

It's been that way for years, not only in City Hall, but in government offices across Western New York. But some veteran City Hall types maintain things have gotten worse since Brown took office as mayor in 2006.

Small wonder: Deputy Mayor Steve Casey functioned as Brown's campaign manager in 2006, putting in long hours while claiming to be putting in a full-days work as a member of Brown's state Senate staff. Casey may be the most political person a mayor has had in the No. 2 job in recent times. I question how much city time Casey already spends attending to political matters.

Brown_and_caseyThere are some pretty pointed examples of how the Brown administration is using the city work force.

For example, Brian Reilly, the new economic development chief, is among those passing petitions. The poor fellow. Brown hires him to do one job, then saddles him with the work of two or three people and also expects him to knock on doors to collect signatures on nominating petitions of favored candidates. I'd leave him alone to scarf up some jobs - after all, we are the third-poorest city in the nation.

Then there's hitting up city employees for contributions. Council members said Brown has raised some $53,000 from them so far this year alone.

Here's a link to the Brown's latest financial disclosure reports filed with the state Board of Elections. Brown For Buffalo, which has raised $199,125 so far this year, and Mayor Brown's Leadership Council, which has raised $23,540.

Again, none of this is new. Been going on for decades.

So the question is, should it stop? After all, don't city employees have a right to engage in political activity?

And if it stops in City Hall, what about county halls and town and village halls and board of educations across the region?

To me, the Council proposal begs a larger question: What could or should be done to clean up the region's, even the state's, political culture?

"Its a culture of entitlement that has evolved into a culture of aggression," said reform advocate Kevin Gaughan. "They're milking the system for everything they can, and taxpayers foot the bill."

The options are many.

Term limits. Campaign finance reforms. Simplified petition requirements. Downsizing of city councils and town and village boards. Consolidation of towns, villages and school districts. Limits on bulk mail privileges for incumbents. Prohibitions on pols soliciting vendors for contributions. No-nepotism rules.  Disclosure of payroll practices that grant employees paid time off by accumulating comp time off to work on campaigns. Ending exemptions to the state Freedom of Information Law.

Wouldn't it be something if a grassroots movement put a reform package before voters across the region? Gaughan is making some headway on the issue of government consolidation, but that's only a piece of the puzzle.

What do you think?

Change of plans

I was going to live blog the primary tomorrow night, but The News is going to update results through the "Lastest Local News" on the home page of the Buffalo News. I'll probably weigh in with some analysis later in the week.

Regardless, I'll have a fresh post Tuesday morning.

What is Tom Golisano thinking?

Tom Golisano has built a good reputation in this town since he bought the Sabres five years ago and became an adopted Western New Yorker in the process.

He's run the franchise in a smart, fan-friendly way and otherwise has displayed an interest in the community. In a town generally lacking in genuine leadership, he's been a welcome addition.

But, given the past month, I've got to ask: What is Tom Golisano thinking?

Golisano3His reputation -- in the political community, anyway -- appears to be taking a big hit over the tactics his Responsible New York is using in the effort to unseat  Sam Hoyt.

I blogged and reported Friday on how Golisano's organization, managed by Steve Pigeon, has tried to mask their involvement in the latest spate of attacks under the banner of "Mothers and Fathers Demanding Answers." Real gutter-level stuff.

Despite protests to the contrary, is there much doubt about Responsible New York's complicity in Joe Illuzzi's initial publication of incriminating e-mails between Hoyt and his girlfriend and and his demand that Hoyt quit the race or face continuing revelations?

Hoyt is not universally loved, by any means. And let's face it, his past personal conduct has made him vulnerable to the smear tactics being used against him. But there's a widespread feeling in the political community that Golisano and Pigeon have crossed a line. It's been that vicious.

Golisano is not the author of the dirty work. Pigeon has a reputation for that, however. It's one reason why he got run off as chairman of the Erie County Democratic Party.

Tom Golisano is no dummy. He's a smart businessman, a self-made billionaire. He knows what he has in Pigeon. He's got to know what Pigeon is up to. After all, he's the one writing the checks.

It's not just the barer-than-bare-knuckle tactics used on Hoyt. It's Golisano's use of an independent, unauthorized committee as the vehicle for supporting candidates. It gets Golisano out from under a lot of limitations, such as what he can spend to assist candidates, provided Responsible New York doesn't coordinate activities with the office seekers.

Problem is there are several instances of political operatives flipping between Responsible New York and the campaigns of candidates Golisano is helping. Hoyt's not the only one with a beef. That, coupled with Pigeon's reputation, leaves a lot of people skeptical that Golisano is indeed operating on the straight and narrow.

To some, he comes off as a rich kid who doesn't want to play by the rules. And by surrounding himself with political operatives, tossing around a lot of money and recruiting candidates who in some cases have very thin resumes, Golisano has left some wondering if his real intent is to push reform or simply make himself into a 900-pound gorilla.

I mean, he's endorsed 39 incumbent state senators. What's that about?

That said, I think Golisano is sincere in his desire to reform state government. He's certainly no Tommy Come Lately to the cause. Rather, I think he's fallen into the trap of "the ends justify the means."

In the long-run, that undermines his stated objective, because dirty politics rarely result in good government.

As for Tuesday's primary between Hoyt and Barbra Kavanaugh, it's likely the winner will emerge as damaged goods.

That's obviously the case for Hoyt. His stature has been diminished in the community -- personal humiliation will do that, and make no mistake, that's part of his enemy's MO. There's also a real chance that Shelly Silver strips him of his committee chairmanship, as a CYA move, if nothing else.

A victory by Kavanaugh would come at a price for her, as well.

She and Hoyt have historically shared much of the same base, and many of those voters are going to come away sore, in some cases, bitter, with her because of the company she's kept in this campaign and the blood-letting they've done on her behalf.

Regardless of whether his candidate wins or not, Golisano is unlikely to come away unscathed. To some degree, the damage already has been done.

Tune in Tuesday

I'll be providing live coverage of the primaries on this blog this coming Tuesday. I'll focus on the major races and hope to weave in the latest results with candidate interviews and maybe some insights from my reporter colleagues.

Polls close at 9 p.m.; I'll go live right about then, if not earlier.

What Golisano and Pigeon are "responsible" for

It turns out the publication of e-mails between Sam Hoyt and his girlfriend were just the opening salvo fired against him by his political opponents.

Responsible New York -- the Tom Golisano-funded, Steve Pigeon-managed political cabal -- has sent a series of direct mail flyers to voters in Hoyt's district taking the incumbent to task. With titles like "After 16 Years, It's Very Clear ... 'Albany Sam Hoyt' Is All Frosting and No Cake."

The flyers fall within the realm of normal attack ads loosely based on issues.

This week, his opponents got a lot nastier.

A flier went out and a Web site went up, under the banner of Mothers and Fathers Demanding Answers. A push poll was conducted. Television advertising was booked.

The subject: Hoyt's affairs. Excerpts of purported e-mails between Hoyt and his lover were published in the flyer, whose format is similar to the anti-Hoyt pieces produced by Responsible New York. The Web site includes e-mail links to Hoyt's campaign seeking responses to inflammatory questions.

These latest tactics make this the most in-the-gutter campaign I've seen in my 30 years of reporting.

Those behind it have taken care to not leave footprints.The Web site is registered through a service in Australia. The return address on the flyer from Mothers and Fathers is a direct mail service in Long Island City. The owner refuses to say who paid the bill.

But the perpetrators slipped up. The attack flyer from Mothers and Fathers uses the same bulk mail permit as ... Responsible New York.

Sloppy, sloppy.

Golisano_and_pigeon Pigeon did a lot of ducking and weaving when I called to inquire.

I asked him what he knows about Mothers and Fathers Demanding Answers.

"I'm not going to comment," Pigeon said. "I'm sure they will file their independent committee status, if it's not filed already."

Gee, Steve, how do you know they're required to do so?

"I would assume, I don't know that they do."

Pigeon then resorted to the mantra he repeated throughout the balance of the interview.

"Everything we're doing is within the law."

Followed by:

"We're not coordinating with the [Barbra] Kavanaugh campaign."

How does he explain Mothers and Fathers using the same bulk mail permit as Responsible New York?

"Independent committees can work together under the law."

So, you're working with them, right?

"I think it will all come out in the reports."

Is this the dirtiest campaign he's been involved in?

"I don't think this one is dirty."

OK, Steve.

Pigeon went to lengths to vent his outrage over reports that Hoyt had sex with a member of the Assembly staff. This is the same Steve Pigeon who has been an unwavering loyalist to Bill and Hillary Clinton through thick and thin, including the Big Dog's sexual escapades with intern Monica Lewinsky.

I guess you could say Pigeon is practicing situational ethics. Among other things.

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