Sunday
Sep212014

Gateway Policies: ISIS, Obama and US Financial Boots-on-the-Ground

President Obama’s neo-Cold War is not about ideology or respect for borders. It is about money and global power. The current battle over control of gateway nations - strategic locations in which private firms can establish the equivalent of financial boots-on-the-ground - is being waged in the Middle East and Ukraine under the auspices of freedom and western capitalism (er, “democracy”). In these global gateways, private banks can infiltrate resource-rich locales fortified by political will, public aid and military support to garner lucrative market advantages. ISIS poses a threat to global gateway control that transcends any human casualties. That’s why Congress decided to authorize funds to fight ISIS despite the risk.

The common thread of today’s global gateway nations appears to be oil. But even more valuable are the multitude of financing deals that would accompany building new pipelines, arming allies, and reconstructing civil-war-torn countries. Indeed, hundreds of billions of dollars are at stake in America’s wars of  “principle.”

Middle-East Gateways: ISIS and Money

Obama’s recent public address on fighting ISIS  had a dash of economy sprinkled in. For him, US economic policy is foreign policy. It is also a product of an American political-financial expansionary land-and-resource grab that has been going on for decades. Obama’s execution may be far less authoritative than President Eisenhower’s. But his neo-financial Cold War has similar elements to those initiated by Eisenhower and the American banking elite in the 1950s when they collaborated to project American power into more countries, using the military and a combination of public and private capital, as tools.

The second World Bank President and 1950s Chairman of Chase Bank, John McCloy, and ascending and later Chase Chairman David Rockefeller both had aspirations to financially penetrate the Middle East. So did other major bankers. The US government and its banks first focused on Beirut as a gateway to the Middle East. Eisenhower dispatched military personnel to Beirut in 1958 not because he cared about the Lebanese, but because of the attractiveness of the country’s potential as a gateway to the region. By the 1970s, oil and money relationships between Chase and Saudi Arabia and Egypt grew, as they did with Iran and the Shah. Rockefeller's relationship with the Shah, who kept his family money with Chase, ignited the Iranian hostage crisis in 1979. Before that, the US government and its military contractors made billions of dollars from arms deals with Iran. 

Citigroup opened its first Iraq branch in September 2013, ten years after George W. Bush began his Iraq War while facing a recessed American economy. A decade ago, the Bush administration selected JPM Chase to manage billions of dollars of financing for Iraq imports and exports. JPM Chase also opened a branch in Iraq last year to compete with Citigroup for current gains. Billions of dollars in new pipeline funding and other projects are now up for grabs in Iraq. If the US supports the Iraqi government (against ISIS), these banks, as well as oil and infrastructure-building companies are poised to get more of a chunk of that money. Citigroup is already a forerunner for arranging a $2 billion loan for Boeing Jets to Iraq. As Iraq's Deputy Transport Minister Bangen Rekani said in April, “We need a lot of funds...we’re in a race to complete the maximum number of projects in a short time.” 

Regarding Syria, Obama’s plea for showing strength worked. Congress voted in rare bipartisan fashion to fund the moderate Syrian rebels or “free Syrian army rebels.” According to Defense Secretary Chuck Hagel, initial assistance would be “small arms, vehicles and basic equipment like communications, as well as tactical and strategic training.” That could just be the beginning. He also said, “as these forces prove their effectiveness on the battlefield, we would be prepared to provide increasingly sophisticated types of assistance."  We’ve been down this road before, positioning the military to gain financial access to an area relative to our competition. It’s lasted for years and killed thousands of people, while not accomplishing the stated goal of curtailing terrorist threats or activities.

It gets complicated from there. Moderate Syrian rebels have been fighting against Syrian President Bashar al-Assad, whom the US would support against ISIS. The US thinks these forces would cease fighting against al-Assad to fight ISIS instead, though the US claims it is not directly cooperating with  al-Assad. 

Despite this, the US financial hope is that once the dust clears from all these regime changes we support militarily, there will be demand for massive reconstruction and resource extraction projects that our private banks can take care of alongside the IMF and World Bank. At a press conference in Beirut in June, World Bank President Jim Yong Kim told the international community that the World Bank would help to rebuild Syria (at a cost of $150 billion after an “internationally recognized government” was put in place) as well as Jordan, Lebanon, Turkey and Iraq during their 'recovery' from years of war. Mega reconstruction profits are at stake for private firms in symbiotic partnerships  with these international entities. So too, are the requirements for austerity and loosely regulated financial markets as the Western “reform” bargains that accompany them. 

“Wars on terror” serve as a distraction in public and media discourse from a bipolar economy. The September releases of the US Census Report and the Federal Reserve Consumer Finance Survey revealed an ongoing trend toward greater income and wealth inequality. We remain 8 million jobs below pre-crisis levels, adjusted for population growth. Real wages have stagnated or declined. Employers have no incentive to provide well-paying jobs amidst ample desperation in the ranks of the unemployed. We are a mess at home.

Rather than deal with this, the US is trying to prevent terrorism from blocking private bank and corporate expansions and profit elsewhere. ISIS has already caused Iraq to delay its first mega project-finance deal. The $18 billion Basra-Aqaba oil pipeline would extend through Jordan to the Red Sea, pumping a million barrels of crude oil per day, as well as 258 million cubic feet of gas.  That’s a hefty financial incentive for which to use public funds.

Truth be told, the game of global gateway finance is a closed one. And there’s still Russia (and China) playing at the same table. In August 2014, Russia’s biggest oil company, Lukoil, estimated construction of the first branch of a pipeline to Iraq’s West Qurna-2 field at a cost of up to $1 billion. Lukoil holds a 75% stake in West Qurna-2 and has invested over $4 billion in the project, which is already producing more than 200,000 barrels of oil per day.

Cold-War Gateways: From Cuba to the Ukraine

The narrative of Russia's aggression vs. America’s fight for freedom dovetails with the turmoil going on in the Middle East. Both situations deflect attention from our country, which has greater inequality today than before Obama took office, despite a soaring stock market buoyed by the Fed's stimulus policy of pumping zero-interest rate money into banks providing them capital for all of these international adventures.

After Ukrainian President Poroshenko, a former banker and chocolate mogul, proclaimed the situation with Russia was much improved following his truce with Vladimir Putin, President Obama ratcheted up sanctions against Russia and corralled the rest of the Euro-squad to join him. This action was not about saving Kiev from pro-Russian rebels, but to reinforce the notion that the US is in financial control of the country. Poroshenko is no financial dummy, which is why he threw Putin and any potential Russian economic support under the bus, and high-tailed it to Washington for photo-ops and handouts.

These will come in the form of US government aid, more loans from the IMF and World Bank, plus complex transactions with US banks seeking more areas in which to funnel foreign capital, finance projects, and down the line, maybe securitize the resources of a new corner of the world and sell them to a fresh bunch of hungry speculators. The US has already provided $60 million in aid including food, body armor and communications equipment to the Ukraine to secure its place at this gateway table later.

Stepping back in time, my book, All the Presidents' Bankers illustrates how President Eisenhower's 1950s doctrine promoted a combination of US military and economic support to its non-communist allies. Aid from the then-new World Bank and IMF was provided in return for their commitment to provide open trade relationships and adapt policies advantageous to private western banks and corporations. The US government could thus achieve a dual military and financial stronghold. One such country was Cuba, which under Fulgencio Batista became a favorite spot from which to access Latin and South America. National City Bank (now Citigroup) established 11 branches in Havana alone, becoming Cuba’s principle US depository for American companies involved in the sugar industry and other businesses there. That changed with the Cuban revolution and Fidel Castro, who, in 1960, nationalized foreign bank assets. Bankers looked elsewhere to expand, as did the US government.

In Obama’s political-financial strategy, similar gateway strategies are in play. Obama, like all US presidents since Castro came into power, did the communist-bravado thing and extended sanctions. US bankers will reenter Cuba when US policy changes after Castro is truly gone, as they have during several periods before, notably when National City Bank sent an entourage of bankers led by Chairman Charles Mitchell in the 1920s to explore sugar, nickel, and other deals that eventually soured in the 1929 Crash.

The Ukraine is a modern Cuba with more lucrative resources. As with other US financial gateways, Obama supported the Ukraine faction amenable to financial relationships with the US and Europe relative to Russia. Ten years ago, the Bush administration supported Ukrainian leaders sympathizing with the US vs. Russia as well.  None of this was because of any purported interest in dispersing democracy, but because the right leadership offers more capital market, foreign investment and resource control opportunities to private US firms.

The Ukraine signed a $10 billion shale gas deal with US oil giant Chevron to explore its Olesky gas deposit around the time it expressed a desire for closer partnerships with the EU. Its ousted ex-President Viktor Yanukovych's decision to subsequently shun an EU trade agreement in favor of  Putin's offer of cheaper gas and a $15 billion aid package provoked internal unrest, as did its weak economy. The US denounced Russian-backed President Yanukovych, until he left his post, for he represented a potential loss of money, power and more financial access. Ukraine stands between Russian oil producers and European and Asian consumers, and is poised to profit from any growing energy demands from Western Europe, as could Western private firms.  It also serves as a potential financial out-post for US banks hunting for the next hot resource-saturated capital market.

Ironically, on September 17, 2014, the National Bank of Ukraine did a 180 spin on its economic forecasts and promised positive growth of 1% next year. The government said this economic expansion would come through more favorable corporate and income tax laws that would attract outside investors along the lines of what the US and IMF and World Bank has wanted. (More private relationships of bankers with these entities are in All the Presidents’ Bankers.) The Ukraine received two parts of a $17 billion IMF bailout this year with the IMF saying it may need $19 billion more. This means a greater call on Ukraine’s future revenues in return for austerity measures and deregulated financial markets to private foreign interests.

The real battle between the US and Russia is over the gateway countries in political flux. The real winners will be the private banks and oil companies that will reap the strategic benefits from gateway control over related markets and resources, supported by military and political might, and augmented with speculative capital for years to come. American and global citizens, oblivious to all this, will be the losers in this global shell game.

 

 

 

 

 

 

Monday
Sep152014

From Voting on Scottish Independence to Taming Speculation

In a dead heat and with three days to go before the Scottish referendum on independence, most media and economist arguments - beyond those regarding emotional debates of identity, heritage and autonomy – are increasingly fear-driven. 

For those advocating Scotland embrace its status quo, the panic-inducing exchange goes like this:  if Scotland votes for independence, it will become a debt-saddled wannabe player with no control over its currency or means to raise extra funds during financial crises, the EU will close its doors and NATO will balk at membership unless Scotland continues to house nuclear arms within its borders.

Many mainstream articles, including the recent New York Times op-ed by Nobel laureate, Paul Krugman have poured added more economic panic to the fire. Writing “Be afraid, be very afraid” Krugman promoted a big brother as protector argument. The UK may not make decisions, or allocate tax or resource revenues along the majority of Scottish people’s desires, but when the financial excrement hits the fan, it will save its sidekick. This the UK has done through measures like bailouts and quasi-bank-nationalization (aka Northern Rock), not necessarily on behalf of the population, but for the banks. The Royal Bank of Scotland (RBS) was a recipient of the UK government’s generosity during the 2008 crisis.

Ironically, having received a 46 billion pound bailout from the UK government, RBS has now threated to move its registered headquarters to the UK for fear of higher taxes, greater regulations, or lack of future bailouts, in the event that Scotland votes for independence. This, to me, is a point in favor of independence.  Iceland did well deploying its independent status to divert monies to benefit its citizens rather than foreign banks.

If an independent Scotland does embrace strategies for broad-based economic stability and reduced income inequality, it could become a stronger country. This would be a positive outcome, even considering the limitations of currency-setting control that Krugman mentions. Protection from the most risky capital flows and practices is a cheaper crisis preventative measure in today's complex, private-bank driven global financial system, than the ability of a central bank to manipulate currency levels anyway.

As far as Krugman is concerned, an independent Scotland would be saddled with similar economic pain to Spain, but without the sunshine. Having just spent several weeks in Spain, and many in Scotland during the 7 years I lived in London, I am an enthusiastic supporter of sunshine and Scottish deerhounds,  but it must be said that both countries enjoy stunning landscapes. But first, Scotland isn’t seeking to give up use, or proportionate control, of the pound; it is merely seeking a more autonomous position from which to influence the pound. Plus, its resource revenues dwarf those of Spain, so its footing would be stronger in that regard. Secondly, Spanish banks, kneecapped by bad real estate debt, certainly suffered in recent years. The Spanish economy and public suffered more.  But this was mostly due to the flow of foreign speculative capital that had no allegiance to Spain or any country. Unlike Scotland, Spain had fewer reserves to make up for the financial shortfalls that followed these aggressive capital movements.

It seems Krugman's contends that if Scotland severs politically from the United Kingdom, it will face trouble trying to control its currency and all hell will break loose. But the situation in Spain wasn’t about currency control or lack thereof. Government choices and risky banking policy hurt Spain. After the collapse of its real estate bubble that German banks (along with UK banks) helped to inflate, Germany pressed the ECB to bail out certain big Spanish banks in which Germany had a financial interest. The public was not a consideration. The Euro was an excuse.

A “freer” Scotland would have the opportunity to better monitor rogue capital flows and foreign bank practices in a more stable manner for its population. It could find ways to direct longer-term funds bound to the future of the country, rather than embrace short-term bets bound to nothing. 

There’s no economic reason, given current guidelines, for an independent Scotland to be sidelined from the EU, NATO, or the pound, so those fears seem far-fetched. But, perhaps if the September 18th vote supports independence, Scots will feel more empowered about having a say in their country, rather than feel disenchanted due to their economic needs not being met by Westminster’s choices. That could in turn shape the tenor of ongoing compromises. The possibility of such greater individual engagement is an exciting prospect, no matter what road bumps come along the way.

 

Monday
Sep082014

The People vs. Federal Bank Settlements and Liquidity Rules

Last week, in an interview with Bloomberg News, former Countrywide CEO, Angelo Mozilo gave the nation the middle finger. He expressed zero remorse or culpability for his very personal (and personally lucrative) role in the subprime crisis that catalyzed a global economic recession. Apparently baffled by a potential lawsuit that could be levied by the Los Angeles US Attorney’s Office, he said, ““Countrywide didn’t change. I didn’t change. The world changed.” After blaming the world, he ended his segment by stating, “We didn’t do anything wrong.”

To him, the culprit was the real estate collapse itself.  The same excuse was used by Big Six bank CEOs before multiple Congressional hearings and business news hosts. “OMG, how could we have known prices could GO DOWN?” By placing the blame on the ‘market’, they spun their actions as reactive or ancillary to its apparently random whims, as opposed to proactive on practices leading to crisis events.

The more temporal distance from those events and airtime given to the bankers that inflated the market before crashing it, and Treasury Secretaries that did ‘what they had to do’ in an emergency, the more the Mozillian narrative is cemented in the main annals of history and the plight of the public is rendered a footnote.  Yet, it was not just the loans themselves, but more so, the immense and profitable re-packaging and global re-distribution of those loans in a pyramid of toxic assets wrapped with credit derivatives that blew up in the face of the nation and the world, The economic implosion that followed ignited by the weight of such epic fraud and CEO directed salesmanship, impacted initial borrowers with conditions beyond their control, on top of initial fraud and voracious pushing of those loans to begin with. Thus, banks concocted $14 trillion worth of assets using $1.5 trillion of high-interest loans, compounding and adding to each bit of fraud, instability and risk along the way.

Forbes ranked Mozillo one of the top ten highest paid CEOs in 2006. By 2009, the SEC charged him with fraud for lying about the quality of the loans he sold to Bank of America and insider trading for pocketing $140 million from selling his stock when he knew those loans, and his company, were crumbling. He wound up paying a $22.5 million fine to settle the charge of misleading investors and $45 million for the insider trading charge – leaving him a cool $72.5 million.

But that’s in the past, and his recent denials merely reinforced the stances of Big Six bank leaders such as JPM Chase’s Jamie Dimon and Goldman Sachs' Lloyd Blankfein, who expressed a modicum of media-trained contrition only after their settlements were done and dusted.

Much of the mainstream media finally got it right though, characterizing the Bank of America’s “record” $16.65 billion settlement for the bogus deal it is. Only $7 billion of the settlement is even remotely slated for borrowers, and even that is absent any binding rules on aid reaching them. The reality is, the borrowers that should get the most assistance - not because they embellished applications as the blame-the-victim folks say - but because they were duped by bankers and then crushed by an economy turned on its head due to fraudulent bank practices that were federally subsidized - are the ones that lost their homes years ago. Absent a settlement that makes banks buy them new homes, they remain screwed.

The overall tenor of the settlements is worse than their feeble size and structure. Department of Justice Attorney General, Eric Holder’s John Wayne we-got-em attitude belies the most broken of systems – one that leaves fraud, embezzlement and grand larceny unpunished, and stokes rampant wealth inequality in the process.

So far, the Big Six banks - JPM Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs (and nominally Morgan Stanley) - and their expensive (and largely tax deductible) legal teams have successfully negotiated about $106 billion in mortgage (fraud) related settlements with federal or state governments. Of this, given the language of their settlements (not the benevolent press release versions), at the most $32 billion may get to some borrowers one day. Even that depends on banks upholding promises to do things like reduce existing principal balances that would only help people who haven’t already lost their homes. Banks might also provide minimal funds for people with the stomach for endless phone calls with "customer-service" representatives to access them. These, however, have proven relatively fruitless over the past six years since Obama unveiled his HAMP program - which was supposed to require from banks what these settlements do.

In addition, the Big Six settlements are negligible compared to the damage their practices (and the practices of the investment banks they bought at the onset of the crisis rendering them bigger) considering that since 2006, there have been foreclosure actions brought against nearly 15 million homes. With an average value of about $191,000 per home, the total value represented by those foreclosure actions is approximately $2.8 trillion - a far cry from $106 billion.

Let this sink in. Our government and bankers settled on $32 billion in maybe-aid to borrowers relative to $2.8 trillion of foreclosed properties many of which are being scooped up by hedge and private equity funds financed by the same big banks. Not only that. These banks have been able to access money at close to 0 percent interest courtesy of the Federal Reserve for nearly six years. Yet, rather than reducing mortgage principals with that extra cheap money, they stockpiled a record volume of $2.5 trillion in excess reserves at the Federal Reserve for which they are reaping 0.25% interest – higher interest than they give their mere mortal customers.  

The Big Three banks bagged some major headlines for their settlement figures. But the devil is in the details of who gets the money. Bank of America’s largest $16.65 billion settlement is part of $61.6 billion in government-negotiated mortgage-related penalties. Of these, only $15.6 billion is vaguely slated for borrowers.  

For Citigroup, the total value of federally settled penalties of $13.35 billion includes just $4.29 billion for borrowers. For JPM Chase, total federally-settled penalties tally $21. 76 billion. Of this, $8.2 billion might wind up with borrowers one day.

Of the $106 billion in Big Six bank settlements, just $1.68 billion are with the SEC whose job it is to protect the public from securities violations (which over-valued toxic assets comprised of fraudulent loans are in my book, but I don’t run the SEC.) 

Compare that with a litany of items of power and wealth inequality in motion. First, at the height of the government-sponsored bailout and subsidization period of late 2008 through early 2009, more than $23 trillion of loan facilities, subsidies and other aid were offered to mostly the Big Six Banks. Second, Wall Street bonuses for the time from the settlements and through their negotiation periods (2006-2013) were $221.6 billion

Third, the Fed has compiled a $4.4 trillion book of Treasury and mortgage securities to keep rates down and securities prices up, providing banks a metric with which to mark similar mortgage securities on their books at artificially high prices, without having to alter mortgage principals for borrowers, as part of the bargain. The Fed claims this strategy is to create jobs, not to reinvigorate banks and bank bonuses.

Finally, the total assets of the Big Six banks are valued at $9.6 trillion. On September 4th, US regulators, including the Federal Reserve, presented their idea for protecting us from future big bank risk– something called a new liquidity rule. Under this rule, each big bank would need to stash away $100 billion in cash or 'cash-like' assets in case of emergencies, a big bank piggy bank if you will.  But, all the new rule does is require big banks to hold a whopping 1% more cash then they did before the crisis.

Banks lobbied regulators the same way they settled with the justice department, ultimately getting off the hook for potentially having to hold $200 billion instead of $100 billion, less they not be able to speculate with the extra $100 billon (they argued that extra $100 billion was for extending credit to customers).  To put this new ‘safety’ rule into perspective, consider that in 2007, before the financial crisis, JPM Chase held $40 billion in cash vs. $1.5 trillion of assets, or 2.7% of them. Under the new rule, it would need to keep $100 billion in cash vs. the $2.4 trillion assets it now holds courtesy of the government triarch of former Treasury Secretary Hank Paulson, former NY Federal Reserve President-cum-Treasury Secretary Tim Geithner, and former Federal Reserve Chairman, Ben Bernanke, or 4%. This excercise is not about fashioning a broad financial safety net - it's just another regulatory mirage presented as reform by the powers that be.

Absent convictions, or at least a public trial where at least arguments over what consituties felony fraud and exortion can be exposed, these settlements reflect just 1% of the Big Six bank assets, all of which grew since the crisis began, on the back of government and Fed policy and support. Rather than being a determinant of justice, they represent a reinforcement of the power oligarchy that aligns government and banking elites on one side of the economy and the broader population on the other. None of this bodes well for the next crisis.