Seize and Liquidate Goldman Sachs

Webster G. Tarpley
TARPLEY.net
April 27, 2010

Today’s Senate hearings, carried on CNBC, Bloomberg, and C-SPAN, represent the first major exposure of the American people to the scandalous frauds of the derivatives casino, including synthetic collateralized debt obligations (synthetic CDOs or CDO²). These are things most people have heard very little about. They begin to open up the shocking reality behind such shopworn euphemisms like “toxic assets,” “exotic instruments,” and “troubled assets.” Reactionaries in general and Republicans in particular have done everything possible to hide the role of derivatives, which must be considered the main cause of the financial panic of September 2008 which brought down Lehman Brothers, Merrill Lynch, and AIG, after felling Bear Stearns in March of the same year. The reactionary legend, repeated yesterday on the Senate floor by financier minion GOP Sen. Gregg of New Hampshire, is that the crisis was caused by poor people taking out subprime mortgages and then defaulting, bringing down the entire Anglo-American banking system and triggering the bailouts. Either that, or too much government spending was too blame.

A mass of kited derivatives blew up in September 2008

This Big Lie has come from such propaganda sources as the Limbaugh Institute of Retarded Reactionary Ranting. But the $1.5 trillion in subprime mortgages were dwarfed by the $15 trillion US residential real estate market, to say nothing of the $1.5 thousand trillion world derivatives bubble. But, starting with Bush-Goldman Sachs Treasury Secretary Henry Paulson, the talk has been of a “housing correction,” not a derivatives panic. It must be pointed out that derivatives are nothing but wagers, bets placed from a distance on securities which themselves are often not mortgages, but rather other derivatives. The bettor buying a synthetic CDO or CDO² does not own the underlying mortgages or mortgage-backed securities, any more than someone who bets on a racehorse owns part of the horse. Blankfein and others tried to portray derivatives as a service to hedgers and end-users, but it’s clear that the vast majority of derivatives involve neither hedgers nor users, but only bettors on both side of the transaction. It is in any case this mass of kited derivatives which blew up in 2008, bringing on the present world economic depression.

Goldman Sachs executives are babbling cretins

The mystique of Goldman Sachs is based in large part on their reputation as the smartest financiers on Wall Street. After today’s hearings, this mystique has permanently dissipated. The Goldman executives babbled. They sounded dumb. They stalled and stammered and went into contortions to avoid giving straight answers to simple questions. They were mendacious and evasive when they did speak. Financial powers around the world will note carefully the refusal of three out of four Goldman executives on one panel to state that they had a duty to defend the interests of their clients. Who will want to do business with such a gang? Goldman Sachs got $10 billion of taxpayer money in low-interest loans under the Bush-Paulson TARP. Part of that money went to pay for obscene bonuses for Goldman executives like the ones on display today. The argument for bonuses is that they must be paid to retain the highly talented personnel, virtual geniuses, who are indispensable for Wall Street speculative success. But these are no geniuses, they are imbeciles. No more bonuses should be paid by banks saved through public money.

Don’t buy any used cars from Lloyd Blankfein

Sleaziest of all was Goldman’s risk-monger in chief, Lloyd Blankfein, who pretended not to know that derivatives are often kept hidden off balance sheet. The morally insane Blankfein testified that his role was to provide the firm’s clients with “the risk they wanted.” Other GS witnesses represented the firm’s role as “distributing risk.” But it turned out that they were manufacturing risk through the very existence and activities of Goldman Sachs, which had the result of pyramiding the total risk of the US financial system into intergalactic space. It is time to regulate much of that unbearable risk out of existence with appropriate regulatory legislation. In the meantime, no sane person would buy a used car from Blankfein. Nor should they believe his assurance that the “recession” has ended.

But when at the end of the day Blankfein finally suggested to Sen. Tester that synthetic CDOs might be outlawed, we should accept his proposal immediately.

Today’s hearings reveal the Goldman Sachs gunslingers and whiz kids as ignorant gangsters and con artists, notable only for their ability to practice massive fraud with impudence. These sleazy mediocrities do not deserve bonuses paid for by taxpayers. Rather, it is time to shut them down and put them in the dock.

If Goldman Sachs had cared about is clients, it would have urgently warned them to unload their subprime risk by late 2006 or thereabouts. Instead, Goldman was busily increasing its clients’ risk by selling them more toxic CDOs out of its own inventory warehouse.

Goldman Sachs: bookies who stack the deck and fix the games

As the philandering Sen. Ensign pointed out, comparing Wall Street to Las Vegas is a slander on the croupiers of Las Vegas, where everyone knows or should know that the game is rigged so that the house always wins. To use the comparison introduced by Sen. McCaskill, Goldman Sachs was operating as the gambling house, or the bookie. At the same time, Goldman was betting for their own account. But much worse was the fact that Goldman was stacking the decks, loading the dice, fixing the games on which the bets were placed, and bribing the umpires.

As Ensign put it in a rare moment of lucidity, the subprime mortgage was bad. But the collapse of subprime would not have had anything like its actual destructive effect on the US economy if it had not been compounded by the mass of synthetic derivatives that were piled on top of subprime.

No national or social purpose served by Goldman Sachs and toxic derivatives bets
The broader issue raised by today’s hearing is: what human purpose is served by the existence of Goldman Sachs, which concocts toxic synthetic CDOs for the purpose of allowing speculators, who are often lied to and duped, to bet for or against them. Goldman Sachs can only be described as a speculative parasite which promotes the activities of other speculative parasites, such as the John Paulson hedge fund at the expense of the public and of its other clients. It was a crime to inject $10 billion of Treasury money into Goldman Sachs. It was another crime for the Fed to lend Goldman untold billions (just how many billions Bernanke still refuses to disclose) to keep them afloat and enable more predatory profits. These crimes must stop, and the public money must be clawed back. Most important, it is time to shut down the derivatives rackets.

Goldman got $12.5 billion from taxpayers for AIG credit default swaps

Useful questions from GOP Sen. Coburn pointed to another kind of derivative: the infamous credit default swap (CDS). These CDS are what brought down AIG, whose London hedge fund had issues $3 trillion in derivatives. When the government bailed out AIG, part of that $180 billion of taxpayer money was used for payouts to the CDS counterparties of AIG, biggest among them Goldman, which got $12.5 billion from the US taxpayer. That was 100 cents on the dollar on a mass of toxic CDS. Coburn wanted to know why Goldman got all their money back, while GM bondholders took a bath as GM went bankrupt. That was, of course, a matter of Goldman’s political clout through GS alum Henry Paulson and Obama Car Czar Steve “The Rat” Rattner, backed up by the historic preponderance of finance capital over industrial capital in this country since Andrew Carnegie sold out to JP Morgan over a century ago.

Derivatives and zombie banks: the toll

Thanks to Goldman Sachs, the other Wall Street zombie banks, and their derivatives, the financial panic of 2008 has turned into a world economic depression of unimaginable proportions. The unemployed and underemployed in the US alone are surely in excess of 20 million. Five to six million home foreclosures are already done or in the pipeline, throwing tens of millions of Americans out of their homes. World trade has been seriously impacted. The budgets of California, New York, Illinois, and many other states are in crisis, with massive layoffs of teachers and other state employees. An entire generation is being destroyed. Now, Greek bonds are trading at junk levels under the attack of speculative predators including Soros, Greenlight Capital, SAC, and the protagonists of today’s hearings – Paulson and Co and Goldman Sachs itself. The attack on Greece and the euro represents the leading edge of the second wave of the depression, which is now arriving in much the same way that the second wave of the 1930s depression was unleashed by the Vienna Kreditanstalt bankruptcy in May of 1931, about 79 years ago and just a year and a half into that depression.

The goal of the Republicans is to portray themselves as stern judges of Wall Street, even as they line up in a unanimous phalanx to protect the finance jackals from any meaningful regulation whatsoever — as seen in yesterday’s vote to block cloture on derivatives re-regulation and reform. The goal of the Democrats is to expose the sociopathic evil of Goldman Sachs and the rest of Wall Street while preening themselves as defenders of the public interest, without however banning credit default swaps, banning synthetic CDOs, and imposing a Wall Street sales tax on all remaining derivatives and asset transactions.

To this degree, today’s hearings are being conducted in bad faith by both major parties. However, the dynamic of the resulting spectacle has the result of educating and mobilizing public opinion against the predatory practices which are the essence of Wall Street, even a year and a half after the banking panic of September 2008 and the monster bailout of zombie banks which soon followed. What is required is a new edition of the anti-banker sentiment set off by the Senate Banking Committee hearings conducted from January 1933 to May 1934 by committee counsel Ferdinand Pecora, which unmasked the corruption of Wall Street. Persons of good will need to get active now to push this process as far as possible while these social dynamics are working. It is time to hit the zombie banks, the hedge funds, and their derivatives as hard as possible, before the second wave of the depression hits. The program necessary to fight the depression and break the strangle-hold of Wall Street on the US economy and political system is given on my web site.

Mitch McConnell on the bailout: “Harry, I think we need to do this, we should try to do this, and we can do this.”

During a break the senators filed out, and the GOP reactionary lockstep once again blocked cloture for a final debate on the Wall Street reform bill, weak as it is. Many activists of the Tea Party naively believe that they have been fighting for a year and a half that they have been fighting to take back the Republican Party. If that is what they believe, today’s second cloture vote proves that they have gotten nowhere in their efforts. Despite their charades, the GOP are the bodyguards of the Wall Street predators. Tea baggers who think they can break the Wall Street grip on the Republicans are pathetic dupes, and they need to wake up, pronto.

When Paulson went to the leaders of Congress to demand a $700 billion bailout for Goldman and his Wall Street cronies, GOP Senate majority leader Mitch McConnell was “deeply frightened” by the apocalyptic briefing delivered by Paulson and Bernanke. When Democratic Majority Leader Harry Reid started talking about how difficult it would be to get so much money in a hurry, McConnell urged an immediate bailout, saying: “Harry, I think we need to do this, we should try to do this, and we can do this.” (Andrew Ross Sorkin, Too Big to Fail [New York: Viking, 2009], p. 442) The GOP was the original party of the bailout, and they have not repented, as best seen through the continuance of McConnell, one of the key midwives of the bailout, as Republican Senate Majority Leader. This is the same McConnell who went to Wall Street recently to meet with zombie bankers and hedge fund hyenas, pledging to block derivatives reforms in exchange for big bucks contributed to the GOP’s campaign coffers. Tea baggers who think the GOP has changed or is moving to their side are sadly deluded.

Today, the market fetishism of the crackpot Austrian school has taken a severe blow. Now that Blankfein‘s public image has been soiled by Goldman’s scurrilous and scatological emails, the time is ripe for the radical reform of derivatives and the zombie banks. This is a matter of national survival.

Now that Goldman Sachs is masquerading as a bank holding company, it is subject to FDIC rules. If Goldman’s derivative hoard is marked to market, it is bankrupt. The FDIC should therefore seize Goldman and liquidate it under chapter 7 of the US Code. Sheila Bair should not wait for Friday.






http://tarpley.net/2010/04/27/seize-and-liquidate-goldman-sachs/

Fight the Derivatives Cancer with a Wall Street Sales Tax, Plus Bans on Hedge Funds, Credit Default Swaps, and Synthetic CDOs

The Obama administration has been posturing this week about the life and death issue of Wall Street reform. Obama’s predicament is that of a Wall Street puppet who has been put into the White House thanks among other things to almost $1 million of contributions from the infamous Goldman Sachs – but who now needs to make a show of fighting his own Wall Street patrons for political reasons. Of course, Obama’s health-care reform was largely a bailout of insurance companies, which are themselves a key part of Wall Street. But Obama is now pretending to quarrel with Wall Street to shore up his waning credibility, partly because many House Democrats are desperately seeking anti-banker, economic populist street creds in order to avoid defeat in November. So far, the results have been largely feckless and inadequate.

The urgent problem raised by all this is the $1.5 quadrillion derivatives bubble. The financial crisis which struck the United States and the world in September and October 2008 was in fact a world a derivatives panic. This panic marked the first phase of a world economic depression caused by derivatives speculation. The second phase of this depression, which is now beginning, can also be attributed in large part to derivatives, since derivatives are the main tool being used in the speculative attacks on Greece, Spain, Portugal, Italy, Ireland, and other nations, building up towards a chaotic collapse of the euro.

Derivatives are the Cause of the World Depression of Our Time
Far from being some arcane or marginal activity, financial derivatives have come to represent the principal business of the financier oligarchy in Wall Street, the City of London, Frankfurt, and other money centers. A concerted effort has been made by politicians and the news media to hide and camouflage the central role played by derivative speculation in the economic disasters of recent years. Journalists and public relations types have done everything possible to avoid even mentioning derivatives, coining phrases like “toxic assets,” “exotic instruments,” and – most notably – “troubled assets,” as in Troubled Assets Relief Program or TARP, aka the monstrous $800 billion bailout of Wall Street speculators which was enacted in October 2008 with the support of Bush, Henry Paulson, John McCain, Sarah Palin, and the Obama Democrats.

Asset-Backed Securities
Derivatives can be defined as any financial paper which is based on other financial paper. In other words, they are financial instruments whose value depends upon or is derived from the value of other financial instruments. Any kind of securitization results in the creation of derivatives. If individual mortgages are wrapped up and packaged together as a mortgage-backed security (MBS), that is a derivative. Any asset-backed security (ABS), be it based on car loans, credit card debt, or anything else, also qualifies as a derivative.

Beyond this, there are generally speaking two kinds of derivatives. The first type includes the derivatives which are traded more or less openly on exchanges like the Chicago Board Options Exchange, etc. These include options, futures, and indices, plus all the combinations of these. These are what expire in each quadruple witching hour in the markets. This type of derivative has generally amounted to about $600 trillion of speculation in recent years.

OTC Derivatives
Then there are the so-called over-the-counter (OTC) derivatives, otherwise known as structured notes, counterparty derivatives, or designer derivatives. These often take the form of contracts which are kept secret by the counterparties, and which are often not included on the balance sheets of banks and other institutions which enter into these contracts. This type of derivative is currently not reportable to any regulatory agency. This secrecy is a result of the successful effort by Robert Rubin, Larry Summers, and Alan Greenspan to block the modest proposal of Brooksley Born of the Commodity Futures Trading Commission to bring the OTC derivatives into the sunlight during the second Clinton administration. Since these derivatives are not reportable at the present time, we must guess at their amount, and the best guess is that OTC derivatives make up almost $1 quadrillion of ultra-toxic speculation.

CDOs, CDS, and SIVs
OTC derivatives include collateralized debt obligations (CDOs),which often represent the packaging together of large numbers of mortgage backed securities, along with other debt instruments. A CDO can also be concocted out of other CDOs, in which case it qualifies as a synthetic CDO or CDO squared (CDO²). Notice that a synthetic CDO is not really an investment, but rather a form of gambling, in which a speculator in effect places a bet on the performance of some other financial instruments. This fact exposes the big lie inherent in the widespread reactionary myth that the current depression was caused by poor people taking out subprime mortgages on slum properties and then defaulting on these loans, thus bringing down the US and British banking systems. This fantastic story ignores the fact that derivatives were only a wager placed by speculative bettors from afar on mortgage backed securities which included some subprime notes.

Credit default swaps represent bets on whether a given asset or company will go bankrupt or not. As such, they can be used as insurance against such an eventuality, or else they can be used to make money on the insolvency. CDS are therefore a form of insurance, but they are issued by counterparties who have not registered as insurance companies and who have not met the legal and capital requirements which are necessary to function as an insurance company. It ought therefore to be clear that CDS have been totally illegal all along, and have flourished only because of an outrageous failure by state insurance regulators to enforce applicable laws against the privileged class of financiers.

Structured investment vehicles (SIVs) are another type of derivative, commonly used to wrap up masses of CDOs and synthetic CDOs and then to park them off-balance sheet, where they can be hidden from regulatory and public scrutiny.

All Derivatives Illegal under the New Deal, 1936-1982
All kinds of derivatives, be they exchange traded or over-the-counter, were strictly banned and outlawed in the United States between 1936 and 1982 thanks to a wise measure enacted under the New Deal of President Franklin D. Roosevelt. In the wake of several attempts by predatory and sociopathic speculators to manipulate the prices of wheat and corn during the First Great Depression, the Commodities Exchange Act of 1936 outlawed the selling of options on agricultural products. This law had the effect of blocking most derivative speculation, until the counterattack of free-market fanatics gathered steam under the presidency of Ronald Reagan, an ideological zealot of the Austrian and Chicago schools. The very existence of derivatives today and their resulting ability to bring on a new world depression are thus directly attributable to the reckless and irresponsible dismantling of the New Deal regulatory regime. It should be added that derivatives were also banned in many states as a result of laws prohibiting gambling or forbidding bucket shops, which were betting parlors in which side bets could be placed on stock market fluctuations.

If Obama wants to pretend to have something in common with Franklin D. Roosevelt, he ought to be proposing measures to ban at least the most poisonous types of derivatives, and to discourage the others. Notice that he does nothing of the kind. Obama’s Cooper Union speech of April 22, 2010 approvingly cites Warren Buffett’s remark that derivatives represent financial weapons of mass destruction. But Obama then says that derivatives nevertheless have an important and legitimate role to play. So which is it? Some years back, French President Jacques Chirac rightly referred to derivatives as “financial AIDS.” What useful purpose can these toxic instruments possibly serve?

Again: in his 1936 re-election speech in Madison Square Garden in New York City, Franklin D. Roosevelt famously noted that the forces of organized money hated him, and that he welcomed their hatred. Obama, in sharp contrast, called on the Wall Street predators to join him in his efforts, compounding this with the monstrous thesis that Wall Street and Main Street are in the same boat. Nothing could be farther from the truth. The recent Goldman Sachs scandal has underlined once again that the Wall Street investment houses serve no useful social purpose whatsoever. They exist solely for the purpose of pursuing speculative profits through a process of looting and pillaging the rest of the economy. The Wall Street zombie banks are monopolizing US credit, while Main Street goes broke.

Thanks no doubt to the efforts of certain House Democrats, the reform bill is likely to contain two points which can qualify as positive half measures.

Force Derivatives Out in the Open
The first is the effort to end the secrecy of OTC derivatives by forcing these instruments to be traded on public exchanges or through clearing houses. This is a step in the right direction. But this provision needs to be strengthened by making all derivatives of any type whatsoever reportable to a central regulatory authority. This would include, for example, the derivatives held by hedge funds. In 1998, the Connecticut-based hedge fund Long-Term Capital Management went bankrupt with more than $1 trillion worth of derivatives, blowing a huge hole in the international banking system, and causing Greenspan to rush in with a crony bailout. Nobody has any idea of the amount of derivatives held by hedge funds today. Highly leveraged hedge funds are perfectly capable of causing a worldwide systemic crisis with derivatives, so they must emphatically be made to report their holdings.

This reporting requirement should also include the derivatives held by non-financial corporations, whose shareholders deserve to know if and when management is dabbling in these toxic instruments. Some years back, the Gibson Greeting Card Company took a huge loss on derivatives, so this is no theoretical danger.

In addition, all derivatives must henceforth be clearly listed ON the balance sheets of banks and all other financial institutions. The intolerable practice of hiding derivatives off-balance-sheet must be immediately brought to an end.

The other positive half measure which might survive Obama’s usual quest for a “bipartisan” sellout is the so-called Volcker Rule, which specifies that commercial banks with insured deposits are not allowed to engage in proprietary speculation with their own money. Depending on how this is worded, this may include a long overdue ban on derivatives speculation by commercial banks. Senator Blanche Lincoln of Arkansas, the chair of the Senate Agriculture committee—who is fighting for her political life against a primary challenge this spring—has been backing a provision that would explicitly prohibit commercial banks from engaging in derivatives speculation. These ideas go in the right direction. But we need to do much more. We need to go back to the full New Deal regulations embodied in the Glass-Steagall Act. This law stated that a financial institution could be either or a commercial bank, or an investment house, or an insurance company, but never more than one of these. In other words, the suicidal folly of the Gramm-Leach-Bliley Act of 1999, which repealed Glass-Steagall, must be rolled back.

Outlaw Credit Default Swaps
Beyond this, we must urgently address the catastrophic effects and obvious illegality of credit default swaps. More than a year ago, Senator Warner of Virginia asked Fed boss Bernanke about the advisability of creating a “bright line prohibition” against these CDS. Remember that CDS are already illegal, because they always involve an investor masquerading as an insurance company without having fulfilled the legal and capital requirements that would be demanded from a real insurance company. Credit default swaps have cost the US taxpayer almost $200 billion in the case of AIG alone, because of the bankruptcy of the AIG London-based hedge fund which had issued more than $3 trillion of derivatives – a total greater than the gross domestic product of France.

Credit default swaps are also a clear and present danger today, since they are the principal tool being used by wolf packs of banks and hedge funds against Greece and other nations, accelerating the arrival of the dreaded second wave of the world economic depression. Unless credit default swaps are banned now, they will be increasingly used for speculative attacks against the bonded debt of American states like California, New York, Illinois, and all the others. Before long, credit default swaps will be used by international speculators to attack the value and integrity of United States Treasury securities, threatening our country with the calamity of national bankruptcy. If the United States fails to shut down credit default swaps with timely legislation now, credit default swaps will be used to help destroy the United States and human civilization in general.

Ban Synthetic CDOs
The synthetic CDO or CDO² must also be outlawed. These are the toxic instruments which brought down Bear Stearns, Merrill Lynch, and Lehman Brothers in the great derivatives panic of 2008. What are we waiting for to ban this kind of highly destructive derivative? Such a ban is easy to formulate: “Any collateralized debt obligation which contains other collateralized debt obligations is hereby prohibited.” End of story. This language recalls the approach of the very successful Public Utility Holding Company Act of the New Deal. One layer of CDO is more than enough risk, and it must not be further compounded.

Another ban which is long overdue and which should be included in the current legislation is the outlawing of the Adjustable Rate Mortgage (ARM). The ARM is another catastrophic innovation of recent decades which inherently carries with it an intolerable risk for any homeowner. No American family should be deprived of a roof over their heads because of the unpredictable and volatile fluctuations of interest rates over the life of a mortgage. These ARMs shift an unacceptable risk to the mortgage buyer. Fixed-rate mortgages should be the only legal kind, and any reset or change in interest rates on a residential mortgage should be strictly outlawed. While we are at it, we also need to outlaw the high-interest payday loan, a type of devastating usury to which the poorest and most defenseless parts of our population are now exposed. The outlawing of payday loans should take the form of a de facto federal usury law establishing an upper limit of no more than 10% on any promissory note or credit card. This was the limit traditionally set by state usury laws before the coming of the Volcker 22% prime rate three decades ago, and it should be restored. This simple prohibition of adjustable rate mortgages and payday loans will be far more effective than the proposed creation of an inefficient and unwieldy consumer protection bureaucracy, especially one that is located inside the Federal Reserve. The Federal Reserve has repeatedly struck out when it comes to recognizing systemic risk, when it comes to preventing financial bubbles, and when it comes to protecting ordinary Americans. The Federal Reserve failed in the run-up to the crash of 1929, in the run-up to the banking crisis of 1933, in the run-up to the stock market crash of 1987, in preventing the dot com bubble of 1999-2000, and in regard to the financial derivatives which caused the banking panic of 2008. Locating any consumer protection bureaucracy inside the privately owned Federal Reserve is simply to guarantee that such a bureaucracy will be subject to regulatory capture by Wall Street at the earliest possible moment.

Wall Street Sales Tax of 1% on All Financial Transactions
Derivatives which escape prohibition under these blanket bans on credit default swaps and synthetic CDOs must then be subjected to their fair share of the tax burden. In a time when haircuts, bowling alleys, and restaurants are threatened with new taxation, it is simply inconceivable that the financial turnover of US financial markets should remain immune to all taxation, rather like the French aristocrats of the pre-1789 old regime. Rather than crush the US economy under an ill-advised and oppressive Value Added Tax (VAT) or national sales tax, we must institute a Wall Street sales tax of 1% on all financial transactions and turnover, including derivatives. This is the levy known as the Tobin tax, the Wall Street sales tax, the financial transactions tax, the trading tax, the securities transfer tax, or the Robin Hood tax. A low-ball conservative estimate of US financial turnover (including derivatives) in any given year might be about one quadrillion dollars. In that case, a 1% Wall Street sales tax would yield $10 trillion, $5 trillion of which could be used to confront the federal budget deficit, the costs of entitlements, and the various unfunded liabilities of the federal government. The other $5 trillion would be available for revenue sharing with the states, who could use these funds to deal with their own budget crises, which currently threaten police, firemen, health services, and other indispensable parts of the fabric of civilization itself. One of the main causes for budget deficits of all levels of government in the United States is the glaringly obvious exemption of financial turnover from all taxation, while financial speculators use various tricks to escape paying the corporate income tax. The proceeds from such a Wall Street sales tax would almost certainly decline as speculation became less attractive, but in the meantime they would provide much-needed relief for the public treasury. Needless to say, any idea of paying the proceeds of such a tax to the International Monetary Fund is out of the question. Many other countries are in the process of instituting a Tobin tax on financial turnover, so the inevitable objection that a Wall Street sales tax would represent a crippling competitive disadvantage for US financial markets is increasingly untenable.

Additional Safeguards: Bankruptcy Triage, Reserve Requirement, Hedge Fund Ban
Further safeguards against the derivatives plague are also in order. Current bankruptcy law gives special privileged treatment to derivatives. These poisonous instruments continue to exact their claims even when protection against other creditors has been provided by the federal courts. This abusive and unwarranted favoring of derivatives must be reversed. Derivatives must be made to wait their turn in bankruptcy court, and sent to the end of the line after all other creditors and claims have been satisfied. If bankruptcy triage becomes necessary, it should be at the expense of derivatives.

Another needed measure is the establishment of a reserve requirement for anyone issuing derivatives. We have seen how Goldman Sachs is accused of designing their notorious ABACUS 2007-AC1 CDO, colluding with hedge fund speculator John Paulson to load this CDO with all kinds of super-toxic paper with the intent of designing an instrument which would have the best possible chances of going bankrupt in the short run. A reserve requirement for those issuing derivatives would mean that they would have to buy and hold on their own books for the life of the investment at least 20% of any derivatives they issued. This would represent an additional deterrent against the deliberate concocting of toxic derivatives with the intention of then allowing a speculator to short them with the help of credit default swaps.

A final necessary change involves the grave risk inherent in the existence of hedge funds. Despite their name, the main business of hedge funds is pure predatory speculation. Hedge funds are currently allowed to fly below the radar of the Securities and Exchange Commission, escaping regulation because they have only a limited number of super-rich investors. It is high time that this loophole came to an end. Once a hedge fund is regulated, it is no longer a hedge fund, so the call to regulate hedge funds is for all practical purposes a call for their abolition. Hedge funds should have been subject to regulation no later than the immediate aftermath of the Long-Term Capital Management debacle of 1998. The hedge fund loophole in the SEC rules must be closed now.

Seize and Liquidate the Zombie Banks
Obama’s $50 billion resolution fund for bankrupt banks is unnecessary. What we need most of all is to have the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and other regulators enforce the applicable laws. Every Friday, Sheila Bair of the FDIC shuts down a number of small town banks because of insolvency. In her interview yesterday on CNBC, Ms. Bair blatantly admitted that she has no intention of enforcing these same public laws against the large Wall Street and other money center banks. She covers this malfeasance and nonfeasance with her opinion that bankruptcy does not work for the big banks. But there is little doubt that, if their massive derivatives holdings were priced according to mark to market rules, J.P. Morgan Chase, Citibank, and Bank of America would all be thoroughly insolvent candidates for Chapter 7 liquidation. Unless and until this is done, these zombie banks will continue to block any real economic recovery in the United States. Ms. Bair’s policies showed the destructive folly of the current administration’s illegal policies, which are all based in the final analysis on the discredited doctrine of Too Big to Fail.

Any Wall Street reform bill should also deal with the public scandal of the ratings agencies – Standard & Poor’s, Fitch, and Moody’s. These agencies enjoy a quasi-governmental status when it comes to certifying the quality of certain investments. But the failure of these agencies to provide timely warnings during the onset of the derivatives panic was nothing short of spectacular. During that crisis, the ratings agencies were certifying investments as AAA investment-grade until mere hours before they collapsed. Senator Carl Levin’s investigation of the ratings agencies has now unearthed horror stories of corruption and incompetence. The ratings agencies need to be stripped of any special role in relation to the United States government. Senator Levin’s findings merit criminal referrals to the Justice Department for prosecution of these agencies and their executives. In short, the United States government should take this opportunity to shut down these rating agencies, before these corrupt entities join in the looming speculative assault on the US Treasury, which is being prepared by George Soros and the other hedge funds.

Wall Street speculators will certainly howl that the measures outlined here represent a vindictive policy of discrimination against derivatives, which they will attempt to portray as a beneficial innovation serving the public interest. But no serious analysis of the banking panic of 2008 can ignore the obvious role of financial derivatives as one of the principal causes of this disaster. As for the charge of discrimination, it should be clear that the proposals made here generally represent nothing more than ending the privileged special treatment which has been granted to derivatives so far. Derivatives have been exempted from the gambling laws. Derivatives have been given special status in bankruptcy proceedings. Derivatives have been made non-reportable, and carrying them off balance sheet has been allowed. Derivatives have been exempted from the usual laws governing the operations of insurance companies. Hedge funds have been exempted from the scrutiny of the Securities and Exchange Commission. Wall Street derivatives banks have been exempted from the usual bankruptcy laws and probably from the antitrust laws as well. Finally, derivatives, like all financial instruments, have been exempted from state sales taxes. This distorted treatment amounts to a systematic pattern of facilitating and fostering derivatives speculation under US laws and regulations. This pattern might be defensible if derivatives represented a public good. But all experience shows that derivatives are just the opposite – they are a public menace which now threatens to destroy our civilization and way of life.





http://tarpley.net/2010/04/25/fight-the-derivatives-cancer-with-a-wall-street-sales-tax-plus-bans-on-hedge-funds-credit-default-swaps-and-synthetic-cdos/

Tobin Tax, Wall Street Sales Tax, Robin Hood Tax - Britain and Europe Demand that Bankers Pay for the Depression They Have Created!

The Tobin tax or Wall Street sales tax is rapidly gathering momentum worldwide, thanks above all to a bid by British Labour Party MPs to save themselves from all but certain defeat at the hands of the Tories by playing this great economic populist card, which they have dubbed the Robin Hood Tax. If the Labour Party left succeeds with this gambit, it will tend to transform the situation in the US as well, with desperate House and Senate Democrats following the Labour Party example and embracing the Tobin tax or Wall Street sales tax as a means of getting some populist credibility and viability for November. The Republicans, by contrast, will be forced to line up in defense of their Wall Street backers, stripping away all their demagogic Tea Party camouflage. The Obama-Summers-Geithner gang will also be put into a bind: will they oppose a measure demanded by their own Congressional Democrats? I have been campaigning for the Tobin tax for a number of years, and it is an idea whose time has now come.

If a sales tax on financial transactions (Tobin tax, trading tax, securities transfer tax, Robin Hood tax) can bring New Labour back from the dead, it can also defeat Geithner, Summers, Bernanke, Wall Street, and the reactionary Republicans here in the US, while forcing Obama to go along. It is time to make this a world-wide campaign to force the bankers to pay for the world economic depression they have created.

For weeks, British public opinion polls have been unanimous in finding that Gordon Brown and the Labour Party were doomed to succumb before the triumphal march of the reactionary Tories of David Cameron. But in the past month or two, the situation has begun to change, with at least one poll showing the Tories only ahead by a couple of percentage points, meaning that a Conservative Party victory is now in doubt, and a hung parliament with no clear majority for anyone a real possibility. E. J. Dionne of the Washington Post is trying to portray Gordon Brown as a new version of “Giv’em Hell” Harry Truman. But we should remember that Gordon Brown is the politician who inaugurated the financial bailout fad on a world scale in 2007 when he pumped British taxpayer money into the bankrupt hulk of Northern Rock, followed by the Royal Bank of Scotland, Lloyds Bank, and the rest of the bankrupt City of London. So far, Gordon Brown has only flirted with the Robin Hood tax from a distance. So it is not likely that the turnaround has anything to do with Gordon Brown, although widespread fear of draconian cuts in the social safety net under the Tories is playing a major role.

Actor Bill Nighy Dramatizes the Robin Hood Tax
But the real reason may well be growing enthusiasm for the Robin Hood Tax, a version of the Tobin tax or sales tax on derivatives and financial transactions of all sorts — stocks, bonds, foreign exchange, commodity speculation, and other financial transactions. The effort for the Robin Hood tax has been started by the British Trades Union Congress or TUC, the equivalent of the US AFL-CIO. A number of well-known charities like Oxfam and elements of the Labour Party left have also joined in. The result is a website located at http://robinhoodtax.org.uk which features the famous British actor William Nighy (pronounced Nye) in the role of a greedy City of London finance oligarch who is forced to admit the essential equity and fairness of the Robin Hood Tax, along with the significant sum which a minimal levy could contribute to the public treasury without increasing the tax burden on ordinary Britons. This website is now the focal point for a large mobilization of the British public, backed up internationally by a coalition of political parties and trade unions.

European Parliament for the Tobin Tax, 536 to 80
The Tobin tax campaign also has a European dimension: on March 11, the European Parliament in Brussels approved a resolution demanding a Tobin tax across the European Union by a lopsided vote of 536 to 80 votes. This measure was supported by the Social Democrats, the Christian Democrats, the leftists, and the moderate conservatives, with only the British Tories and a few of their reactionary satellites voting in the negative. The European Commission is thus directed to come up with a plan for implementing such a tax. (In a related development, the European Commission has also announced that it will seek a worldwide ban or severe restriction on certain forms of credit default swaps, one of the most virulently toxic derivatives yet invented, and one which has cost the American taxpayer upwards of $200 billion in the case of the AIG bailout alone. This can be regarded as payback for the bear raid of economic warfare against Greek government bonds launched by hedge funds grouped around George Soros, Goldman Sachs, Bank of America, and other US institutions as a means of relieving pressure on the dollar by getting the euro to collapse faster than the battered US greenback.)

Many of the political forces in Britain which have been aghast at Gordon Brown’s policy of financial bailouts and subservience to the short-term needs of the City of London derivatives speculators are now regrouping around the Robin Hood Tax. This includes significant parts of the Liberal Democratic Party as well as Labour, along with not a few Conservatives. As Polly Toynbee comments in the London Guardian:

“So far Labour has failed to find the words to express public outrage at the financiers’ billowing wealth while the Treasury is drained. Only weeks since launching, the campaign for a Robin Hood tax on all financial transactions has gathered extraordinary support. It hasn’t been hard, so profound is the untapped public anger at the bankers. This week the European parliament voted for it overwhelmingly – 536 to 80 – supported by the social democrats and the majority conservative EPP grouping: opponents were the ECP rump rightwingers the Tories belong to. Nicolas Sarkozy and Angela Merkel support it. Vince Cable will put it into the Lib Dem manifesto. Gordon Brown supports it but, as ever, he wants US support, which is unlikely. Backed here by some 100 organisations from Oxfam to the Salvation Army, Professor Jeffrey Sachs of Columbia University came to London this week to promote the tax, urging the EU to go it alone.

Rarely has a campaign gathered such momentum in so short a time: 140,000 have joined and more gather by the day, besieging MPs (RobinHoodtax.org.uk). In this budget, campaigners want a sterling transaction tax, to come in at once. Imposing just 0.005% on every sterling deal is within Britain’s sole control, raising £4bn. If the EU agrees a wider financial transactions tax, it would bring Britain another £4bn – one estimate is £100bn across Europe, to be used at home, in foreign aid and on climate change.” [1]

Westminster Hall Meeting of Labour, Liberal Dems, Tories
An informal meeting of members of the British Parliament was held last week at Westminster Hall, close by the House of Commons, and was attended by MPs from three parties — Labour, Liberal Democrats, and Conservatives. Also present was a representative of the Treasury, the ministry controlled by Chancellor of the Exchequer Alistair Darling, another paladin of the bailout who is nevertheless scrambling to keep his post. The Treasury rep told the MPs that the Robin Hood Tax was being seriously considered.[2]

80% of Britons Want the Robin Hood Tax
A resolution in favor of the Robin Hood Tax has been signed so far by 119 Members of the House of Commons and counting. This statement reads as follows:

“That this House supports the Robin Hood tax campaign which calls for the introduction of a financial transaction tax; notes that by taking an average of 0.05 per cent. from speculative banking transactions, hundreds of billions of pounds could be raised every year to tackle poverty and climate change, at home and abroad; believes that banks, which had a large role in causing the economic crisis, should do more than just pay back the bailouts or insure against future crises; further believes that a Robin Hood tax would be an effective and popular response, with a recent poll finding that 80 per cent. of respondents supported the introduction of a Robin Hood tax; commends the work of all those organisations backing this campaign who have mobilised their supporters to increase the pressure for such change; believes that this tax is an idea that has come of age; and urges the Government to do all possible to ensure that the Robin Hood tax becomes a reality.” [3]

Some Obvious Problems In Sherwood Forest

The proposal for a Robin Hood tax in Britain and similar proposals being raised in Germany and elsewhere have a number of obvious flaws. First, the size of the tax is insufficient, both in absolute terms as well as in regard to the inevitable wear and tear of haggling and the political process. The Robin Hood tax website talks about a tax of 0.05% — just one 20th of 1%. That would be on the low side if it were the final outcome of this political battle. But it is not the final product — it is merely the starting position. By going so low to begin with, the Robin Hood supporters are leaving themselves nothing to bargain with along the way, and they are in grave danger of ending up with an infinitesimal tax asymptotically converging on absolute zero — or maybe with nothing at all. It is far better to start with 1%, a figure that seems reasonable to any normal person when they recall that ordinary people in the United States pay between 6% and 11% sales tax in most states, sometimes even on their grocery bills. Even the AFL-CIO, certainly no bastion of radicalism, is a demanding a Tobin tax of one mill or 1/10 of a cent, twice as much as the Robin Hood proposal. Again, 1% is the best starting point. But many Americans, once they realize that bankers and hedge funds do not pay any sales tax at all, insist that the existing state sales tax which they pay on shoes and clothing for their children simply be applied to financial turnover, resulting in a charge of between 6% and 11%. So perhaps we should indeed listen to the vox populi.

A second objection revolves around the vagueness of the Robin Hood tax in regard to the economic development of the Third World, the developing nations. There is grave danger here that the money obtained will be siphoned off by institutions like the International Monetary Fund, the World Bank and other international lending agencies and used for subterfuges such as paying off predatory imperialist banks who are holding defaulted loans from the less developed countries, while calling the result debt relief for poor countries. In addition, while emergency food aid and other forms of famine, epidemic, and natural disaster relief are indispensable, an extra dimension must also be added in the form of serious capital investments in modern high-technology infrastructure and industry, without which South Asia, Africa, and the poorer parts of Latin America will be condemned to endless poverty and aid dependency. It would be better to specify specific infrastructure projects such as a comprehensive fast rail network for the entire African continent, featuring Cape to Cairo, Dakar to Djibouti, Maghreb, East African, and West African lines. This could be paired with a Tennessee Valley Authority for the combined Nile and Congo River basins to provide irrigation, flood control, hydroelectric power, canal transport, malaria eradication and other benefits. The resulting rail and water systems would benefit every country in Africa, without exception.

A third problem is the constant reference to the discredited climate change/global warming hypothesis, an invention of the financial oligarchs themselves (think of George Soros and the radical environmentalist Hank Paulson). Given the political situation in Europe especially, it is perhaps understandable why these references are included. If dealing with climate change turns out to mean modern nuclear reactors and modern fast rail as a means of reducing the dependency on fossil fuels, then fine. But if it means anti-economical “green jobs” and speculative cap and trade carbon offset markets as demanded by so many in Copenhagen, then we are dealing with a cruel hoax. As a general rule, the more green jobs a country has, the poorer that country will become, since green jobs are inherently anti-economical and require endless subsidies. The entire logic of the global warming argument is to abort and deny the economic development of the Third World, and this is why Third World nations along with China and India took the lead in the Copenhagen talks in blocking the Malthusian carbon dictatorship which the US and the British were striving to impose on the world.

We have just tried to identify the points of disagreement, and give some suggestion as to how they might be resolved. But one thing is certain for all persons of good will: Wall Street and the city of London, not working people, must pay for the depression which they have created.

German and British Unions: Tobin Tax Would Provide $150 Billion
The German and British trade union federations estimate that a European Robin Hood Tax could raise £100 billion (about $150 billion) per year. TUC General Secretary Brendan Barber and DGB President Michael Sommer have called on Gordon Brown and Angela Merkel to push through a European tax on financial transactions. Barber and Sommer go on to say:

“…two markets, Frankfurt and London, account for 99% of all EU trading turnover, even though sellers and purchasers are by no means solely citizens of Germany and Great Britain. The German campaign[4] – the Tax Against Poverty[5] – started 17 October 2009 with an open letter to the German government, asking for the introduction of a Financial Transaction Tax. The open letter has so far been signed by more than 50 German organisations. The campaign unites bishops and bankers, trade unionists and developmental activists, Attac and academics and many more…. The British campaign – the Robin Hood Tax – was launched on 10 February 2010 with support from a broad range of more than 50 British organisations – trade unions, development and climate campaigners, churches and others, including economists and financial experts. Opinion polling for the Robin Hood Tax campaign shows overwhelming support for a Financial Transactions Tax…. We believe that a European Financial Transactions Tax could show leadership to the world. There is no question that the EU – as an independent economic entity – would be in a position to introduce such a tax without any problems or hiccups in trade with the USA. The bank levy discussed by the G7 Finance Ministers in Canada last month, is no alternative for a FTT, it would only pay for the costs of bailing out the banks, leaving the rest of the economic damage done by the crisis unremedied. Only a FTT puts a dampener on speculation; only a FTT makes financial markets transparent; and only a FTT brings permanent revenue. We urge you to go further and to initiate a European Financial Transactions Tax.”[6]

An EU summit in Brussels on March 26 may take up this demand. The Tobin tax is also supported by the International Metalworkers’ Federation, to which the United Auto Workers, United Steelworkers, International Association of Machinists, Communications Workers of America, Boilermakers, and IG Metall in Germany also belong.

Reactionaries Howl, Demand Tax Immunity for Speculation
The reactionaries at the United States Chamber of Commerce in Washington, DC have been howling with rage at the idea that the immunity to taxation currently enjoyed by banks and hedge funds may be lifted, and that they may have to pay some part of their fair share. The favorite argument of the enemies of the Tobin tax is that any tax on financial turnover amounts to vindictive discrimination against bankers as the villains of the hour. The reality is that virtually all other cash flows in the society are already taxed, while financial flows are not. The current situation therefore amounts to a public subsidy for speculation, which has proven once again over the last two years that it is a singularly pernicious and destructive threat to the public good. Once this strawman argument knocked down, the reactionaries are reduced to whining that the Tobin tax is somehow old-fashioned, meaning pre-globalization. The US Chamber of Commerce complains that a Tobin tax would turn the clock back to the bygone days of “disco balls, parachute pants and paper trades.”[7] With many American states, counties, and municipalities near bankruptcy, and right-wing politicians and media demanding austerity and sacrifice from the public along with mass firings and pay cuts for teachers, policemen, firemen, state workers, and other public employees, the simple fact is that Wall Street and its apologists have no cogent arguments whenever it can be made to stand up — once the proposal for a Tobin tax has been introduced.

Sachs, Kuttner, Jesse Jackson, Archbishop Of Canterbury Pro-Tobin
Economists like Jeffrey Sachs and Robert Kuttner are calling for a Tobin tax. They have been joined by Jesse Jackson, who is well aware that Obama’s pro-Wall Street policies have done nothing to alleviate unemployment in the black community. The French government is calling for a Tobin tax, although their proposal exacerbates some of the flaws mentioned above. Most recently, a call for the Robin Hood tax has been issued by Rowan Williams, the Archbishop of Canterbury, the head of the Church of England and a very important figure inside the British ruling elite. Williams and the writer Richard Curtis wrote the in London Sunday Times that a Tobin tax

“…might help to heal the breach that has opened up between banks and society at large by making the financial industry part of the solution, not just the source of the problem. There is a chance to introduce a tax that will recognise both the massive expansion of financial services in recent years and the fact that taxation has not kept pace with this — but also a tax that will generate substantial resources to deal with the urgent global needs that cannot wait for some miraculous turnaround in the economy. The plan is to tax certain transactions between financial institutions….” [8]

This campaign now represents the best available means of striking at the overweening power of the Wall Street and City of London financiers. If the Robin Hood tax reaches critical mass in Britain this spring during the general election campaign, it will automatically be placed squarely in the center of the US agenda for the November congressional elections. Democrats, now threatened with grievous losses, will flock in droves to the idea of a Wall Street sales tax. Republican demagogues will be unmasked, and forced to show their true Wall Street colors. Obama will be presented with a fait accompli which will directly challenge his loyalty to his Wall Street backers. We will not have many more chances to turn the entire US political situation around, so it is imperative to seize on this one and make the most of it, and fast. We urge all persons of good will to mobilize without stint in the framework of this growing international campaign.


http://tarpley.net/2010/03/16/tobin-tax-wall-street-sales-tax/