Corporate Justice Blog

Mortgage Bond Traders to be Charged

noreply@blogger.com (dré cummings) — Wed, 01 Feb 2012 18:30:00 +0000

Former Credit Suisse mortgage bond traders will reportedly be criminally charged in coming days. The criminal charges will purportedly allege that these Wall Street traders misstated the value of mortgage bonds, purposely misleading Credit Suisse investors, all in an effort to boost their own bonuses in the run-up to the mortgage crisis.

According to the Wall Street Journal: "Federal prosecutors are preparing to file criminal charges against former Wall Street traders alleging they misstated the value of mortgage bonds, an issue central to the 2008 financial crisis, according to people familiar with the matter.

The Manhattan U.S. Attorney's office is planning to allege in a criminal complaint that several former traders at Credit Suisse Group AG, a major global investment bank, misled the bank's investors by booking inflated prices of mortgage bonds to boost their bonuses, despite knowing the values of those securities had dropped, according to the people familiar with the matter. Credit Suisse itself won't be charged in the case, these people say. The names of the traders couldn't be determined. Charges could be filed as early as Wednesday, these people say."

Most agree that valuation of mortgage bonds and Wall Street's efforts to securitize and package these mortgages into collateralized debt obligations played a major role in the collapse of the global markets in 2008-2009. Misleading investors as to the accurate valuation of these mortgage bonds and the credit rating agencies failure to truly rate the mortgage backed securities as risky, amongst many other issues, led to near financial calamity.

Again, per the WSJ: "Wall Street valuations of mortgage securities were a major factor in the market turmoil of 2008. For years, financial firms had packaged hundreds of billions of dollars of subprime mortgages into securities. When those mortgages soured, investment banks resisted taking losses, fearing that their own investors and clients would panic.

They ultimately took big write-downs on their mortgage portfolios—totaling hundreds of billions of dollars—throwing markets into turmoil and triggering losses that toppled financial giants Bear Stearns Cos. and Lehman Brothers Inc."

Perhaps efforts to hold rogue traders accountable will be a first step in policing Wall Street excess and recklessness.

2012 Foreclosures Expected to Rise

noreply@blogger.com (dré cummings) — Wed, 01 Feb 2012 02:00:00 +0000

With banks in “full-delay” mode in connection with foreclosures during 2011, California homeowners can expect a change—for the worst—in 2012 as banks look to aggressively pursue seriously delinquent mortgages this year. The foreclosure rate is expected to rise significantly, based on the second-half surge of initial default notices sent in 2011, but the rate should remain below the peak of 2010. Nonetheless, it remains disconcerting.

The Federal Reserve is working to stabilize the housing market. The Fed has urged Congress to help underwater borrowers by reducing their loan principal and it has requested that Fannie Mae and Freddie Mac rid themselves of the backlogged foreclosures in bulk sales. With increased foreclosures comes decreasing home values.

According to the Los Angeles Times: “California and other states are likely to see an enormous wave of long-delayed foreclosure action in the coming year as banks deal more aggressively with 3.5 million seriously delinquent mortgages. And experts said that dealing with the foreclosure process, from issuing notices of default to selling repossessed homes, is likely to push housing prices lower this year before the real estate market has a chance to recover."

Proxy Season Promises to Challenge Executive Pay

noreply@blogger.com (dré cummings) — Fri, 27 Jan 2012 14:00:00 +0000

The Wall Street Journal reports that in a year where executive compensation has plateaued, Wall Street firms can still expect challenges from shareholders during the upcoming proxy season. According to the WSJ: "Investors ranging from charitable foundations to large state pension funds are preparing to challenge large financial firms on their pay practices. As a result, this year's 'proxy season'—the period, usually in the spring, when companies hold annual shareholder meetings—promises to be an eventful one in the financial sector, compensation consultants and corporate-governance experts say."

Activist shareholders in recent months have filed proxy proposals asking large Wall Street firms to study the potential negative impact that exorbitant executive compensation policies might have on the firm's reputation and growth potential. Again, according to the WSJ: "In December, the Nathan Cummings Foundation—a private charitable organization and institutional shareholder—filed proposals asking that directors at Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. address potential reputational damage that big pay packages could bring to the banks, said Laura Campos, director of shareholder activities at the foundation. The proposals also request that they study how such awards could reduce banks' ability to spend money on other areas, and report those findings to shareholders."

The upcoming proxy season promises to be an interesting one as recent Dodd-Frank legislation requires firms to hold nonbinding shareholder votes on their executive pay policies (once every three years). Six of the largest Wall Street firms held these votes last year (J.P. Morgan, Wells Fargo, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America), with all six receiving symbolic shareholder approval for their pay packages (as indicated in the chart above, courtesy of the Wall Street Journal). Each expects to hold nonbinding votes again this year.

"Three Years After Lehman" Symposium

noreply@blogger.com (dré cummings) — Thu, 26 Jan 2012 04:35:00 +0000

Three years after Lehman Bros. filed the largest Chapter 11 bankruptcy in U.S. history, world financial markets are still wobbly, unemployment in the U.S. remains stubbornly high, and Europe may be on the brink of financial disaster. On February 24, 2012 the University of Utah S.J. Quinney College of Law will host a special symposium, “Three Years after Lehman: Assessing the Regulatory Reforms of the Next Financial Crisis,” that will consider the role Lehman Brothers’ failure played in the current economic downturn and whether reforms enacted in the wake of the failure are adequate to protect economic markets going forward.

"Symposium organizer Christian Johnson, Professor of Law at the College of Law, said, 'The conference attempts to put into perspective the Lehman failure (and the crisis generally) and to understand the effectiveness of the reforms that were enacted in the crisis’s aftermath. Given the general state of the U.S. and the global economy, such reflection and analysis becomes critical as regulators and policy makers further consider their options and responsibilities.'"

Corporate Justice Blog contributors Steven Ramirez and andré douglas pond cummings will be featured speakers at the symposium.

Post-Racial?

noreply@blogger.com (dré cummings) — Fri, 20 Jan 2012 15:30:00 +0000

A favored argument by market fundamentalists is that capital markets are efficient, and will find equilibrium if left unfettered. For this argument to find root, issues of inequality, discrimination and racism must be ignored (or pushed aside), because, as the argument goes, efficient markets will themselves deal with discriminatory participants by eventually sifting them out of the system as inefficient market players. Additionally, law and economics proponents favor "post-racial" rhetoric that suggests that in 2012, the United States has entered a colorblind era of post-racialism. With an African American President and markets more advanced than at any time in history, issues of economic inequality and continuing racial division are simply no longer important considerations, per the post-racialist.

Several events in the past few weeks belie this post-racial sentiment, the following being one of the most egregious:

In Georgia this week, third and fourth grade students at Beaver Ridge Elementary School were given math problems, MATH PROBLEMS, that asked students to consider if a slave was beaten twice per day, how many beatings would the slave receive in one weeks' time? Another question on the elementary students' math homework asked them to calculate how many bushels of cotton Frederick picked? Outraged parents are meeting with school officials, who were quick to claim that nothing "malicious" was intended by these math questions, though they have opened an investigation into which teachers drafted the questions.

Post-racial?

Childhood Poverty in America 2012

noreply@blogger.com (Steven Ramirez) — Thu, 19 Jan 2012 18:44:00 +0000

The above chart graphically depicts the relative standing of the U.S. in terms of childhood poverty. The U.S. simply cannot lay claim to economic greatness nor to being the land of economic opportunity in the face of this reality. With nearly 25 percent of our children living in poverty we are more on par with Bulgaria and Mexico than economically advanced nations such as Denmark, Australia, Luxembourg and Norway.

Interestingly, those advanced nations also sport far higher per capita income (in U.S. dollars) than the U.S.: Denmark produces $63,000 per capita, Australia $67,000, Luxembourg $122,000, and Norway $97,000 per capita. The U.S. suffers weak per capita GDP of $48,000 (and holding for about 15 years). While one can always nitpick the data (for example, should we really count incarceration costs as GDP, as we currently do, which fattens the weak U.S. performance) the picture suggests the creeping third world reality gripping the U.S., due largely to its laissez faire economic policies and corrupt politics where money rules over law.

Thus, Dr. King's commitment to fight against poverty and in favor of economic opportunity is as relevant today as ever, and is both morally and economically compelling. The U.S. cannot be either a moral or economic leader of the world with one in four children impoverished. Perhaps our new claim should be land of childhood poverty.

Professor Steven A. Ramirez
Loyola University Chicago
School of Law

"King" of All Nations

noreply@blogger.com (dré cummings) — Tue, 17 Jan 2012 22:48:00 +0000

Martin Luther King, Jr., American hero, is also an international icon. An op-ed in the New York Times describes Dr. King's influence both in the United States and in nations around the world. From the NY Times:

"Indeed, it was King’s 'I Have a Dream' speech that sealed his global fame. We’ve all seen photos of the hundreds of thousands marching in 1963 Washington. But thousands also marched that day in London, Tel Aviv and Accra, Ghana. In my home country, Britain, support for the march was overwhelming. Many watched King’s speech live via the newly launched Telstar satellite. In London, demonstrators marched to the American Embassy carrying a banner that read, 'Your fight is our fight.'"

The article continues by chronicling how King's influence has been used by parties the world over to advocate for causes that King would undoubtedly have supported and for those that he no- doubt would have quailed to learn his name was being invoked to support. For example, activists that support affirmative action often invoke King's legacy to support race-based remedies to resolve stubborn and persisting racial discrimination and racial inequality. Simultaneously, King's "dream" is used by those that would end affirmative action and race-based remedial programs by invoking his "color-blind" rhetoric as a signal that the era of race-based remedies should end.

Despite the contradictory messaging, it is clear that toward the end of Dr. King's life, with many civil rights advances secured, including passage of the 1965 Civil Rights Act, he turned his life and leadership toward economic opportunity and economic justice. Dr. King believed that our country would "reach the promised land" and lived his life trying to secure equal opportunity for all.

MLK's Vision of Social Justice

noreply@blogger.com (Steven Ramirez) — Mon, 16 Jan 2012 22:06:00 +0000

The greatest warrior for social justice in the last century in the US was Martin Luther King, Jr. With great respect to dre cummings, I do not think that MLK ever argued in favor of economic equality. Instead he simply argued for equality of opportunity and equality of rights. Thus, in his most famous speech, above, he wanted to free people of color from police brutality, poverty, segregation, and impaired political rights. His dream consisted of universal freedom for all where people were not judged "by the color of their skin but by the content of their character." You may scour this speech for any reference to economic equality and come up empty.

Having said that, there is no doubt that King would be alarmed, angered and disappointed by the state of economic inequality present in America today. For example, King would be outraged by the fact that more than one in five American children now live in poverty, including nearly 40 percent of black children, 35 percent of Latino children, and more than 12 percent of white children. How can we live with this sin against our children? How can we tolerate three time more black children than white children living in poverty over four decades after the King assassination? Only the continued sway of race can explain the continuation of such moral degeneracy. Today is a good day to do something about this heinous reality, and I suggest this. If nothing else, King commands that we see to it that no child starves in America, yet up to 33 percent do not get enough to eat. Allowing childhood poverty to fester is not just morally reprehensible, it is economic suicide. Only a nation that empowers all of its human resources to reach their highest productive use can ever be the most productive and prosperous nation. King understood this.

Indeed, this quote best summarizes King's vision of social justice, from his speech "Social Justice" delivered at Western Michigan University on December 18, 1963:

"All I'm saying is simply this, that all life is interrelated, that somehow we're caught in an inescapable network of mutuality tied in a single garment of destiny. Whatever affects one directly affects all indirectly. For some strange reason, I can never be what I ought to be until you are what you ought to be. You can never be what you ought to be until I am what I ought to be. This is the interrelated structure of reality. John Donne caught it years ago and placed it in graphic terms. "No man is an Island, entire of itself; every man is a piece of a Continent, a part of the main." He goes on toward the end to say "Any man's death diminishes me because I am involved in mankind; and therefore never send to know for whom the bell tolls; It tolls for thee." It seems to me that this is the first challenge. This emerging new age."

Economically, that which diminishes any human, diminishes the economic prospects of all humans because contracted opportunity for one contracts the demand for what all others offer for sale in terms of goods or services. Poverty anywhere means fewer law students for me to teach, for example. Poverty lessens the demand for innovation. Poverty destroys our ability to produce new ideas. Poverty incites violence and crime. The more poverty, therefore, in any society, the less prosperous that society will be. On this point, King echos Adam Smith who stated in 1776: "No society can surely be flourishing and happy of which by far the greater part of the numbers are poor and miserable."

Poverty anywhere is a threat to prosperity everywhere.

Professor Steven A. Ramirez
Loyola University Chicago
School of Law
sramir3@luc.edu

MLK "Dreamed" of Economic Equality

noreply@blogger.com (dré cummings) — Mon, 16 Jan 2012 02:55:00 +0000

Known most for his inspired leadership during the Civil Rights Movement, Dr. Martin Luther King, Jr., was a fierce advocate for economic equality. Prior to his assassination in 1968, Dr. King had focused his leadership efforts on economic justice and equality.

From today's San Jose Mercury News: "Michael Honey, a historian who chronicled King's campaign for economic justice in two books, said the civil rights leader's fateful trip to Memphis was undertaken to improve job security and pension benefits. 'And on that score we haven't moved very far forward,' Honey said. 'The assault now on public employee unions is directly hitting the black middle class.'

Though King's eye was on the prize of civil rights until 1965, he began writing and speaking to union groups about the tyranny of poverty long before that. 'What he says in those labor speeches is that the civil rights movement was the first phase of the freedom movement,' Honey said. 'In fact, he saw that as a down payment. His basic point was that the idea of equality in the Declaration of Independence was not just about civil rights. It was about everybody having an equal chance.'"

Dr. King believed that gaining basic civil rights for African Americans was simply the beginning, a down payment, and that gaining equal economic opportunity was the ultimate goal. Still, forty-four years following his death "economic justice remains elusive for many Americans. While poverty gradually declined in the decades since King's death - 32.4 million Americans lived below the threshold in 1986, the year the King holiday was first celebrated - the numbers have climbed in recent years as the economy soured. Today, as the nation celebrates MLK Day for the 27th time, 46.2 million of its people have slid into the misery that King spent his final years fighting, with blacks experiencing the highest [poverty] rate of any group: 27 percent. . . .

'In some ways, things are worse than when Martin was alive,' said Clayborne Carson, founding director of the King Institute at Stanford University. 'If he was concerned about the distribution of wealth in 1968, the lack of opportunity for poor people and the lack of commitment to eliminating poverty as a social problem at that point, it seems obvious that those issues have become more pressing today.'"

Income Inequality

noreply@blogger.com (dré cummings) — Thu, 05 Jan 2012 07:16:00 +0000

According to the Congressional Research Service, the income gap between the wealthy and the poor has grown even wider between 1996 and 2006. The report released by the Congressional Research Service points to the Bush tax cuts and the performance of the stock market between 1996 and 2006 as the primary reasons that the income gap grew between the rich and the middle and lower classes during that span.

According to CNN Money: "After-tax income for the top 1% of taxpayers soared 74%, on average, between 1996 and 2006. The top 0.1% benefited even more, nearly doubling their income over that decade. By comparison, the bottom 20% of taxpayers saw their income fall by 6%, while the middle quintile experienced a meager 10% gain."

Happy 2012

noreply@blogger.com (dré cummings) — Sat, 31 Dec 2011 22:31:00 +0000

To our Corporate Justice Blog readers, friends, and commentators, we wish everyone a happy new year and a prosperous and blessed 2012. We genuinely hope that 2012 brings fiscal responsibility and equal opportunity and justice for all, across the United States and world.

Dodd-Frank Redux: The Fed Strikes a Blow for Rationalized Corporate Governance

noreply@blogger.com (Steven Ramirez) — Wed, 28 Dec 2011 00:30:00 +0000

On December 20, 2011, the Federal Reserve Board issued proposed regulations under section 165(h) of the Dodd-Frank Act requiring all large financial institutions to create enterprise-wide risk management committees complete with independent chairs and direct shared supervision of the chief risk officer. While I take issue with the definition of the term "independent," these proposed new rules embody a strong regulatory initiative to rationalize corporate governance in the US, starting with the megabanks. The proposed rules do not apply to every publicly held company; nevertheless, the Fed's clear endorsement of the theoretical underpinnings of enterprise-wide risk management could operate as a game-changer for limiting excessive CEO autonomy for all public firms. Let me explain, by way of a short history of ERM.

As Betty Simkins and I wrote, in Enterprise-Wide Risk Management and Corporate Governance, there is a powerful empirical and theoretical basis for actively managing all risks that a business enterprise faces in a coordinated way at the highest managerial levels. Enterprise-wide risk management (or "ERM") arose as natural evolution of the best means of managing risk within the modern firm that emerged in the 1990s. After the Enron series of corporate governance failures, it was apparent that firms needed to think about risk across all business functions. As we stated in 2008, "under ERM, all risk areas function as parts of an integrated, strategic, and enterprise-wide system. While risk management is coordinated with senior-level oversight, employees at all levels of the organization using ERM are encouraged to view risk management as an integral and ongoing part of their jobs." We identified a number of ERM best practices. For example, we argued in favor of diverse perspectives on risk and against allowing the CEO to act as a risk silo. Too often, the CEO faces distorted incentives to maximize short term profits regardless of risk. The CEO necessarily holds limited expertise regarding the full range of risks a large firm may face. Board involvement is therefore crucial. Nevertheless, we did not advocate any regulatory mandates with regard to ERM due to its relative infancy and lack of any empirical basis for any particular detailed approach. Instead, we argued in favor of SEC rulemaking to require disclosure of risk management policies to facilitate a market based outcome.

In December 2009, the SEC obliged, issuing rules to require disclosure of risk management policies within public firms. Specifically, the SEC directed that all public firms disclose the extent of the board’s role in the risk oversight of the firm, such as how the board administers its oversight function and the effect that this has on the board’s leadership structure. In addition, the SEC noted that in some cases firms should consider disclosing: "whether the individuals who supervise the day-to-day risk management responsibilities report directly to the board as a whole or to a board committee or how the board or committee otherwise receives information from such individuals." The SEC's approach to risk management, while laudatory, seemed too little and too late. After all, by late 2009, it was clear that American firms actually pursued risk mismanagement as a business model as I documented here, and as the Financial Crisis Inquiry Commission confirms here.

The shocking depths of the dementia revealed by the financial meltdown of 2008, caused me to reassess the law's role in fostering rational risk management within the public firm (among other things) in Lessons From the Subprime Debacle. There, I advocated that "every financial firm that is publicly held should now be required to have an independent risk management committee, comprised of experts in some field of risk management." I further argued that the independent risk management committee enjoy the power to promulgate and enforce risk management policies, appoint and supervise the chief risk management officer, and retain experts as needed to achieve the mission of the committee.

The Fed largely adopted this approach. Here is the Fed's own summary of its proposal:

"The Board is proposing to address the risk management weaknesses observed during the recent crisis and implement the risk management requirements of the Dodd-Frank Act by establishing risk management standards for all covered companies that would (i) require oversight of enterprise-wide risk management by a stand-alone risk committee of the board of directors and chief risk officer (CRO); (ii) reinforce the independence of a firm’s risk management function; and (iii) ensure appropriate expertise and stature for the chief risk officer. The proposal would also require bank holding companies with total consolidated assets of $10 billion or more that are publicly traded. . . to establish an enterprise-wide risk committee of the board of directors. . . .The proposal sets out certain responsibilities of a risk committee, which include the oversight and documentation of the enterprise-wide risk management practices of the company. The proposal also would establish various requirements for a risk committee, including membership with appropriate risk management expertise and an independent chair. The proposed rule also requires a covered company to employ a CRO who will implement appropriate enterprise-wide risk management practices and report to the covered company’s risk committee and chief executive officer."

The Fed's proposal is fundamentally sound. It is a positive step away from our current regime of CEO primacy because it limits CEO autonomy to manipulate a firm's risk profile for profit. I take issue with the Fed's definition of independence and other issues, and will post on these objections in due course. Today, I wish to posit that the Fed's embrace of enterprise-wide risk management for large financial companies constitutes a powerful incentive for all firms to embrace enterprise-wide risk management. The Fed's proposal is based in part on the findings of the Senior Supervisory Group's (SSG) reports on the causes of the financial crisis. That group, consisting of senior regulators from seven nations, found that firms with stronger risk management systems fared better during the financial crisis than firms with weak risk management. The SSG found that firms at the center of the crisis lacked basic risk management coordination.

Thus, the Fed's proposal amounts to an expert endorsement of fundamental enterprise-wide risk management principles, based upon a solid empirical foundation. As such, public firms subject to the SEC's disclosure mandates (as discussed above) face added pressure to adopt sound risk management precepts. Firms that do not do so will face market sanction, as well as a more difficult defense of any director liability claim. Indeed, if board members ignore solid evidence of the efficacy of enterprise-wide risk management they will essentially be subordinating the interests of the corporation to their loyalty to the CEO, and the maintenance of CEO primacy. I will be expanding on these points in a forthcoming law review article.

SEC Sues Fannie Mae and Freddie Mac

noreply@blogger.com (dré cummings) — Fri, 23 Dec 2011 13:30:00 +0000

Two interesting recent Opinion pieces in the Wall Street Journal focus on the role that Governmental Sponsored Entities Fannie Mae and Freddie Mac played in the financial market crisis of 2008. The Securities and Exchange Commission has filed a lawsuit against several Fannie and Freddie executives alleging that these executives engaged in securities fraud by significantly understating the GSE's exposure to subprime loans it held and/or securitized in the run-up to the mortgage meltdown.

What Fannie and Freddie Knew

The Financial Crisis on Trial

While both articles are editorial/opinion pieces, each uses the SEC's lawsuit against Fannie and Freddie executives to make intriguing arguments about the role of government policy in the market crisis. The articles argue that Fannie and Freddie downgraded lending standards in an effort to meet HUD guidelines in connection with making housing affordable to Americans with sketchy credit and then served as the buying agent of many of these recklessly written loans. That the GSE's played a role in the crisis is now buttressed by the SEC's lawsuit.

One problem however, that I identified in my recent Utah Law Review piece Racial Coding and the Financial Market Crisis, is that both Democrats and Republicans strain desperately to place the blame for the financial market crisis on one single cause. Here, the Op-Ed pieces in the Wall Street Journal continue, now three years later, to attempt to pin single causation blame for the market crisis on one factor, namely Fannie Mae and Freddie Mac. While the SEC's lawsuit seems to indicate that Fannie and Freddie played a larger role in the crisis, due in part to its fraudulent reporting of subprime exposure, there are at least a dozen additional factors and causes that led to a near global meltdown, including predatory lending, credit rating agency complicity, predatory borrowing, deregulation, derivatives shadow trading, credit default swaps, collateralized debt obligations, etc. It disserves the public interest to attempt to blame the market crisis on one single factor, like the Op-Ed pieces attempt to do.

Switching gears: Professor Paul Butler has written a very interesting Op-Ed in the New York Times in connection with Jury Nullification and the nation's wayward War on Drugs and sentencing policies.

Jurors Need to Know They Can Say No

Therein, Butler argues: "Jury nullification is not new; its proponents have included John Hancock and John Adams. The doctrine is premised on the idea that ordinary citizens, not government officials, should have the final say as to whether a person should be punished. As Adams put it, it is each juror’s 'duty' to vote based on his or her 'own best understanding, judgment and conscience, though in direct opposition to the direction of the court. . . .'

Nullification has been credited with helping to end alcohol prohibition and laws that criminalized gay sex. Last year, Montana prosecutors were forced to offer a defendant in a marijuana case a favorable plea bargain after so many potential jurors said they would nullify that the judge didn’t think he could find enough jurors to hear the case. (Prosecutors now say they will remember the actions of those jurors when they consider whether to charge other people with marijuana crimes.) . . .

How one feels about jury nullification ultimately depends on how much confidence one has in the jury system. Based on my experience, I trust jurors a lot. I first became interested in nullification when I prosecuted low-level drug crimes in Washington in 1990. Jurors here, who were predominantly African-American, nullified regularly because they were concerned about racially selective enforcement of the law. Across the country, crime has fallen, but incarceration rates remain at near record levels. Last year, the New York City police made 50,000 arrests just for marijuana possession."

Bank of America Settles Predatory Lending Claims

noreply@blogger.com (dré cummings) — Thu, 22 Dec 2011 02:55:00 +0000

Today, Bank of America settled discriminatory lending claims brought against it (and Countrywide Financial) by the Justice Department for steering qualified minority borrowers into subprime loans during the run-up to the mortgage crisis in 2008. Bank of America agreed to pay $335 million dollars for Countrywide's role in discriminating against minority borrowers between 2004 and 2008. According to CNN: "Attorney General Eric Holder said a federal probe found discrimination against at least 200,000 qualified African American and Latino borrowers from 2004 to 2008, during the height of the housing market boom. He said that minority borrowers who qualified for prime loans were steered into higher-interest-rate subprime loans."

The role that predatory lending and discriminatory bank practices played in the financial market crisis has been detailed many times on this blog previously. In the reckless lending period that precipitated the mortgage meltdown, minority borrowers were often targeted for subprime loans and in many instances, while qualified to receive prime loans were instead steered into more lucrative subprime loans by lending officers.

"Thomas Perez, assistant attorney general for Justice's civil rights division, said most of the victims of the discrimination were not aware that they were improperly steered to the riskier mortgages. . . . He said the discriminatory practices went to the heart of the problem with subprime mortgages and the financial market meltdown they helped set in motion. These borrowers paid on average tens of thousands of dollars more in interest and were subject to pre-payment penalties. [Perez] said while the discriminatory loans happened across the country, about 30% of the victims were in California, where Countrywide was based. About two-thirds of the victims were Latino. . . . He said that money from the settlement will go to borrowers who were identified by the probe. Details about how they will be compensated are not yet available."

According to the Wall Street Journal, Bank of America responded: "Bank of America neither admitted nor denied the allegations in the settlement. The bank said it settled to resolve issues tied to Countrywide's practices before Bank of America's July 2008 purchase of the lender. The bank said it is 'committed to fair and equal treatment of all our customers.'"

EUROZONE MELTDOWN III: The Week Ahead

noreply@blogger.com (Steven Ramirez) — Mon, 19 Dec 2011 02:07:00 +0000

The London press today is full of foreboding reports regarding the Eurozone crisis that suggest a very rough week ahead consistent with my position that we face a high probability of a financial crisis at least as bad as that which followed the failure of Lehman. Perhaps my pessimism is rooted in my penchant for reading European newspapers. In any event, here are the highlights (lowlights?) in no particular order:

First, The Telegraph reports that Britain faces deep political resistance to contributing some $40 billion to an effort to funnel bailout money thru the IMF. It really makes sense that Britain would not contribute because: a) they are merely EU members and not in the Eurozone; b) they have their own issues, including excessive austerity, and really cannot afford the $40 billion; and c) they would effectively be bailing out a rather economically stubborn and more backward Germany, and a downright nasty France that actually argued in public last week that Britain should be downgraded. Yet, if Britain pulls out it is game over for the Eurozone and western megabank capitalism as we know it. This accounts for the pain of British Prime Minister David Cameron, above.

Two sentences from this Telegraph report really show the sense of urgency in Britain over this crisis, in stark contrast to the public mood here in the US:

Yesterday it emerged that the Foreign Office was drawing up contingency plans to evacuate up to a million expats from Spain and Portugal in the event of a European banking crash. The planning was even said to include the nightmare scenario of thousands of penniless Britons sleeping at airports with no money to return to the UK.

Whatever.

Second, The Guardian reports that France faces a downgrade this week (before Christmas). As the report highlights, the whole rescue effort is premised on the AAA rating of France and Germany. So, most observers hold that this too would be game over and the end of megabank capitalism as we know it.

Third, in a second Telegraph report, it appears there is simply no way that the ECB is going to pursue the kind of massive purchase of Eurozone debt that would resolve the crisis, as I discussed here. The news is here is that Germany would essentially leave the Euro before they would allow the ECB to buy more bonds until the crisis ended. Instead, they want fiscal consolidation (austerity) until deflation takes hold and we see a vicious debt deflation downward cycle. This too could be the end of western megabank capitalism as we know it. Deflation (even when called fiscal consolidation) will not work.

Fourth, the Financial Times reports that Mario Draghi, in his first interview as ECB President, has ruled out any quantitative easing again and now speaks openly of the prospect of nations exiting the Eurozone, a prospect his predecessor declared "absurd." So no monetary fireman will rescue the Eurozone anytime soon.

Last week was bad. Fitch put a huge chunk of the Eurozone on imminent negative watch finding that: "Following the EU Summit on 9-10 December, Fitch has concluded that a 'comprehensive solution' to the eurozone crisis is technically and politically beyond reach." Ouch! Belgium suffered a two notch downgrade from Moody's. Fitch put France on negative watch. These downgrades and rumors of downgrades hurt bank capital because they trigger accounting haircuts and collateral requirements under credit derivative agreements. So, they hit the banks across the world hard and even could threaten another major financial institution failure. In Australia the banks have been warned to come up with contingency plans to deal with a Eurozone crash within 7 days. I find that disconcerting.

If we miss a big hit this week consider it an early Christmas gift.

Professor Steven A. Ramirez
Loyola University Chicago
School of Law

Election Fraud and CEO Pay

noreply@blogger.com (dré cummings) — Wed, 14 Dec 2011 18:30:00 +0000

News in recent days reveals that 2010 Chief Executive Officer pay jumped more than 36% from the previous two years (determined by averaging CEO pay at the Standard & Poor 500 companies). While unemployment continues to scourge Main Street, Wall Street executives, with what can only be described as modest performance, found their pay increased by 36%. CNN reports: "Paul Hodgson, senior research associate at GMI, said the sharp rise in pay was out of line with the relatively modest improvement that companies typically achieved in profits or share price during 2010. The most lucrative sector for CEO pay was health care, which included three of the nine top-paid executives, including the two most lucrative packages . . . ."

Next, in an under-reported story, a Republican campaign manager in Maryland was convicted of election fraud last week. As discussed by Professor Sherrilyn Ifill at The Root: "Those who are still confused about why Republicans spend so much energy making it harder for people to vote should pay some attention to a case that concluded this week in a courtroom in Baltimore. There, the campaign manager for 2010 Republican gubernatorial candidate, and former Maryland governor, Robert Ehrlich was tried and found guilty of election based on an attempt to suppress the African-American vote by authorizing the use of misleading robocalls."

EUROZONE MELTDOWN II: The Week in Review

noreply@blogger.com (Steven Ramirez) — Sat, 10 Dec 2011 18:00:00 +0000

Mario Draghi, the head of the European Central Bank, could resolve the Eurozone crisis simply by pushing the button on massive debt monetization--that is, the purchase of Eurozone sovereign debt in sufficient quantities to stabilize financial markets. In normal times, such an inflationary move would be anathema to anyone interested in long run economic growth and stability. These are not normal times. We face an epic debt crisis that threatens to destabilize global markets, constrain growth and tip the global economy into debt deflation. These threats may persist for years if not addressed vigorously at their root. If the ECB purchased massive Eurozone bonds, then moderate inflation would set in as the money supply in Europe expanded, debt loads would ease relative to GDP, and monetary expansion would accommodate growth.

In the most important (and fundamentally bearish) development of the week, Draghi moved strongly in the opposite direction. He not only ruled out monetary expansion through troubled debt purchases, he argued that such action would violate the ECB charter even if pursued indirectly--such as loaning money to the IMF to buy bonds--or through any other "legal tricks." It is hard to walk back from illegal.

The second most important development of the week involves downgrades and rumors of downgrades. Moody's downgraded the French megabanks Thursday night. And, S&P put essentially the entire Eurozone on negative watch on Monday. So, in the midst of a historic debt crisis both European banks and European sovereigns are facing a mass loss of creditworthiness. Experts suggest that France now faces a two notch downgrade, possibly very soon.

The market finds cause for optimism in the recent Eurozone agreement for consolidation of fiscal power in Brussels which may now accede to enhanced power over national finances within errant Eurozone nations. Frankly, it is hard for me to believe that any nation would cede fiscal power to such an extent. Even in the US, the federal government has very limited legal power over state finances. Yet, more fundamentally, this does absolutely nothing to help with the debt crisis at hand. I hate to dissent from market verdicts, but I think the equity market has gotten a little giddy here.

The good news is that Eurozone yields are down right now and that equity markets have responded favorably to the deal announced at the EU summit this week. We may have bought some time. But, I am convinced things got gloomier this week, not better.

The fundamental problem is this:

One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary. August 2011 saw the largest monthly decrease in eurozone industrial production since September 2009, German exports fell sharply in October, and now-casting.com is predicting declines in eurozone GDP for late 2011 and early 2012.

I have argued this point many times over the past three years. The only way out of a debt crisis is rapid growth--and that requires high-payoff fiscal policy and monetary accommodation. The Eurozone is following the austerity mantra off the cliff.

In my forthcoming law review article, I address this issue head-on. In Taking Fiscal Policy Seriously I will articulate an optimal legal framework for the operation of fiscal policy in a globalized economy. This will build on my prior work in this area, Fear and Social Capitalism which argued in favor of a depoliticized fiscal policy to complement monetary policy.

Call for Submissions - Iowa Law's Journal of Gender, Race & Justice

noreply@blogger.com (dré cummings) — Tue, 06 Dec 2011 19:25:00 +0000

The Journal of Gender, Race & Justice is seeking innovative scholarship for Volume 16. The Journal is dedicated to the living discussion of feminist inquiry and critical race analysis in legal scholarship. We explore how people are classified, stratified, ignored and singled out under the law because of race, sex, gender, economic class, ability, sexual identity and the multitude of labels applied to us. The Journal would like to invite legal authors of all perspectives to submit proposals for articles to fill Volume 16 of our publication.

For more information about the Journal please see: http://blogs.law.uiowa.edu/jgrj.

Please send article or proposal submissions, along with your curriculum vitae to Whitney Smith at whitney-e-smith@uiowa.edu

The deadline for submission of proposals is January 30, 2012.

The University of Iowa College of Law's Journal of Gender, Race and Justice's mission statement reads in part as follows: "The Journal of Gender, Race & Justice is not for the weak of heart or the timid in spirit. Feminist inquiry and critical race analysis are the touchstones of our endeavor. Our building blocks are new forms of analysis that reach beyond traditional conceptions of legal thought. We challenge our writers, our readers, and ourselves to question who we are and how the law defines us. We strive to be a transformative experience. In a spirit of openness, we explore how we are classified, stratified, ignored and singled out under the law because of our race, sex, gender economic class, ability, sexual identity and the multitude of labels applied to us. Identity is a matrix of experiences; when the law fails to recognize any one facet of our identity, both the law and the person lose invaluable dimension. Our challenge is to examine how we negotiate our identities, how the legal system negotiates them for us and how these negotiations affect our ability to attain justice."

More Cowbell . . . Occupy and Otherwise

noreply@blogger.com (dré cummings) — Mon, 05 Dec 2011 13:30:00 +0000

In catching up on important stories and links the past few days, several are noteworthy:

Occupy Wall Street: First, why has the Occupy Wall Street movement not resonated with more African American citizens? A Washington Post story offers some opinions:

Why African Americans Aren't Embracing Occupy Wall Street

Second, is it true that conservative lobbying firms are offering politicians advice on how to undermine Occupy Wall Street efforts for a price? It appears that for a cool $850k, you can pay for advice on how to effectively smear Occupy Wall Street messaging. From Forbes.com:

Lobbyists Offer An "Occupy Wall Street" Smear Campaign for Just $850,000
(Thanks to Cole W from Memphis Law for the link)

Third, a top GOP strategist is reportedly "frightened to death" over the Occupy Wall Street movement and is offering talking points to conservative politicians. From Salon.com:

GOP Message Man "Frightened to Death" of Occupy

Otherwise: On the education equality side, reportedly, Asian American students, fearing discrimination in the university application process are NOT checking the "Asian" race box in an attempt to avoid higher admissions standards being applied to them. According to the San Francisco Chronicle:

Some Asians' College Strategy: Don't Check "Asian"

From the prison industrial complex, reportedly, white Americans receive presidential pardons for their crimes at rates that far exceed other races. From the Washington Post:

ProPublica Review of Pardons in Past Decade Shows Process Heavily Favored Whites

Jon Huntsman is Right!

noreply@blogger.com (Steven Ramirez) — Fri, 02 Dec 2011 06:07:00 +0000

Last month Jon Huntsman (GOP candidate for President) wrote an excellent op-ed for the Wall Street Journal entitled "Too-Big-to Fail" is Simply Too Big. Here are some key excerpts:

"More than three years after the crisis and the accompanying bailouts, the six largest American financial institutions are significantly bigger than they were before the crisis, having been encouraged to snap up Bear Stearns and other competitors at bargain prices. These banks now have assets worth over 66% of gross domestic product—at least $9.4 trillion, up from 20% of GDP in the 1990s. There is no evidence that institutions of this size add sufficient value to offset the systemic risk they pose."

"The major banks' too-big-to-fail status gives them a comparative advantage in borrowing over their competitors thanks to the federal bailout backstop. This funding subsidy amounts to roughly 50 basis points, or one-half of a percentage point in today's market."

"The best would be to eliminate Dodd-Frank's backstop. Congress should explore reforms now being considered by the U.K. to make the unwinding of its biggest banks less risky for the broader economy. It could impose a fee on banks whose size exceeds a certain percentage of the GDP to cover the cost they would impose on taxpayers in a bailout, thus eliminating the implicit subsidy of their too-big-to-fail status. Congress could also implement tax reform that eliminates the deduction for interest payments that gives a preference to debt over equity, thus ending subsidies for excess leverage."

"Eliminating subsidies would encourage the affected institutions to downsize by selling off certain operations or face having to pay the real costs of bailouts. We need banks that are small and simple enough to fail, not financial public utilities."

In a recent policy statement, Huntsman states: "To protect taxpayers from future bailouts and stabilize America's economic foundation, Jon Huntsman will end too-big-to-fail. Today we can already begin to see the outlines of the next financial crisis and bailouts. More than three years after the crisis and the accompanying bailouts, the six largest U.S. financial institutions are significantly bigger than they were before the crisis, having been encouraged by regulators to snap up Bear Stearns and other competitors at bargain prices."

With the Eurozone approaching a meltdown that promises to more catastrophic than the failure of Lehman Brothers, and with big bailouts now too often assumed to be forthcoming in both the Eurozone and the US, there is no single issue more important in the coming election campaign than Too-Big-to-Fail. We need a President willing to let the banks fail. Once they fail, and their sound assets separated from their toxic assets we need to form new banks under competent management. Our precious public wealth is far better spent forming new banks with new managers and clean balance sheets than constantly running to the rescue of our current zombie bank sector that hoards cash and does not lend.

So, which candidate can we trust to bust up the banks? Right now, Huntsman makes sense and seems sincere. I might disagree with him on many other issues--including issues relating to financial regulation. But, I would vote for him if he were the candidate most likely to let the megabanks fail.

Even very recently, we learned that the bailouts were larger than we realized--amounting to trillions and trillions in secret Fed loans alone. The next set of bailouts will be larger. It will be tens of trillions. And, it is totally unjustified economically. This is the most pressing issue of our times--and the recent coordinated action by the world's major central banks confirms my point. A major crisis is afoot. We must end TBTF right now.

Professor Steven A. Ramirez
Loyola University Chicago

Judge Rakoff Rejects Citigroup's $285 Million Settlement With the SEC

noreply@blogger.com (dré cummings) — Tue, 29 Nov 2011 07:56:00 +0000

A federal judge has once again rejected a proposed settlement between the Securities and Exchange Commission and one of the Wall Street titans that allegedly defrauded investors during the run-up to the financial market crisis of 2008. The Wall Street Journal reports "In a sharply worded order, U.S. District Judge Jed S. Rakoff rejected a $285 million deal by Citigroup Inc. to settle civil fraud charges filed by the Securities and Exchange Commission as 'neither fair, nor reasonable, nor adequate, nor in the public interest.'

The deal was agreed to earlier this year, after the SEC accused the New York company of selling investors slices of a $1 billion mortgage-bond deal called Class V Funding III, without disclosing it was betting against $500 million of those assets. Judge Rakoff, a vocal critic of SEC settlements, dismissed the . . . penalty Citi agreed to pay as 'pocket change' for a firm of its size."

In 2009, as detailed by Professor Joseph Grant previously on this blog, Judge Rakoff rejected a settlement between the SEC and Bank of America for its allegedly fraudulent activities leading up to the mortgage meltdown. In both instances, Judge Rakoff indicated in his rulings that the public was not being protected by these settlements and that the SEC was failing to uncover the truth behind each companies role in the financial crisis.

CNN reports: "Judge Jed Rakoff said that the settlement announced last month, under which Citi neither admitted nor denied the SEC's allegations, deprived the public 'of ever knowing the truth in a matter of obvious public importance.' He instead ordered Citi to face trial over the allegations in July 2012. '[I]n any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth,' Rakoff, a U.S. district judge in Manhattan, wrote in his decision."

In both the Bank of America settlement and the proposed Citigroup settlement, Judge Rakoff has chided the SEC for failing to protect the public by entering into "pocket change" settlements where the firms refuse to take responsibility for the alleged fraudulent activity.

In the case of Citigroup, the SEC alleged that Citi created and sold a collateralized debt obligation (CDO) consisting of securitized subprime mortgages that was described by its own traders and employees as an asset group that was "a collection of dogshit" and in other internal documents as "possibly the best short EVER!" However, in Citi's marketing material, the CDO was referred to as "an attractive investment[] rigorously selected by an independent investment adviser." After marketing the CDO as attractive, Citi then took a short position against the offering and as the housing market deteriorated, brought in a net profit of $160 million while investors lost more than $700 million on the CDO.

This allegation is similar to the one that Goldman Sachs was accused of and settled previously, in a settlement that gained the approval of Judge Rakoff.

EUROZONE MELTDOWN I

noreply@blogger.com (Steven Ramirez) — Fri, 25 Nov 2011 20:10:00 +0000

Things worsened in the Eurozone this week, as the graph at left vividly demonstrates (compare my post of Nov. 5, 2011, less than three weeks ago). The Italian 10 year bond yield now seems firmly over 7 percent (it closed today at 7.26), an unsustainable level. Today, Italy auctioned off three year bonds at a yield of 8.13 percent--and the auction price reflects market demand from real investors because the ECB can only buy on the secondary market. Rome now pays more to issue short term debt than Greece. These rates of interest mean that interest paid by Italy to roll-over its debt will explode and wipe-out any gains from any new austerity initiatives. Italy's budget deficit is now destined to expand, not decrease, as it faces a vicious cycle of spending cuts leading to lower growth leading to higher deficits leading to more not less interest expense. Austerity now failed in Italy just as it failed in Greece. I noted the failure of Greek austerity on Sept. 2, 2011. So, Italy now appears in train-wreck mode.

Things similarly darkened in Spain this week. As the chart at right shows, Spanish 10 year bonds now yield 6.7 percent. Spain too now pays more to rollover its debt than Greece and the market issued a negative verdict on Spanish austerity this week:

"Bond market investors have given Spain no relief despite the election victory on Sunday of Mariano Rajoy, the centre-right Popular party leader who has pledged further austerity and economic reforms once he becomes prime minister in December."

Meanwhile, the contagion from the debt problems in southern Europe has now gone viral. S&P downgraded Belgium today due to political instability and the lack of growth throughout the Eurozone. French debt yields are now surging with the expectation of a imminent downgrade. Hungary solicited an IMF bailout and was downgraded to junk yesterday. Fitch downgraded Portugal to junk. And, perhaps most ominously, Germany (yes, Germany), suffered a failed bond auction, and the Bundesbank had to step in and buy 39 percent of the bonds offered. Suddenly, pundits are discussing the possibility of a German downgrade.

A fairly horrendous week, by any standard. The market reaction confirms this. The Euro sits at a seven week low. The European stock market now has lost over 30 percent in the last six months. Over the same period, US financials are down 25 percent. Over the last two weeks, the Dow is down 7.6 percent and the S&P 500 is down 7.9 percent in just the last seven sessions. Due to the exposure of our banks to Eurozone debt and to European banks (almost $ 2 trillion), the US cannot survive a European collapse unscathed. Think MF Global times 100.

Over the next few weeks I will explain how we got into this mess, and how the Eurozone cratered. For Europe the story is excess current account imbalances and the failure of austerity as a means of addressing a debt crisis. For the US it boils down to the failure of Dodd-Frank to change any of the following:

1) Derivatives deregulation that allowed global financial institutions to manipulate the system for their personal profit;

2) Corporate governance law and regulation that continues to permit CEOs to impose huge risks upon their firms in pursuit of short term bonuses;

3) The failure to limit excess leverage in the financial sector and thus excess risk;

4) The failure to end Too-Big-to-Fail which leads to excess risk in the financial sector and excess debt in the government sector, while limiting growth;

5) The failure to institutionalize fiscal policy in an economically rational way to limit excess debt while maximizing growth.

MF Global Collapse Shows Wall Street Needs Tougher Rules

noreply@blogger.com (dré cummings) — Tue, 22 Nov 2011 09:19:00 +0000

MF Global declared bankruptcy this month. The once trusted brokerage with roots dating back to the 1700s filed the eighth-largest ever U.S. bankruptcy after a wrong-way $6.3 billion trade on its own behalf on bonds of some of Europe's most indebted nations. "While most people would have never heard of MF Global, its bankruptcy may be seen as the first shoe dropping in the European financial crisis and as a clear indicator that the regulatory infrastructure of 2011 may not be sufficiently more solid than the structure that failed so miserably in 2008."

MF Global's CEO Jon Corzine, former CEO of Goldman Sachs as well as former governor and Senator from New Jersey, expanded the companies reach in recent years from its brokerage base by making an aggressive move into proprietary trading. Many believe that this move into proprietary trading spelled its downfall.

According to Eric Lewis writing for CNN: "MF Global's Company Overview and Financial Overview, both dated October 2011, tell a story quite different from that of a company about to plunge into insolvency. At the end of September, it touted $41.05 billion in net assets, $3.7 billion in available liquidity and $2.5 billion in total capital. It was able to sell $325 million in unsecured notes in August. It claimed 'solid risk management,' a 'strong capital position,' 'strong liquidity' and an 'extremely liquid and high quality balance sheet.'

Its balance sheet was huge but terribly fragile. While it had lots of assets on its books, it also had a huge amount of borrowing. For every dollar of its own capital on its books, it had borrowed $40, a leverage even greater than that of Lehman Brothers at the time of its collapse.

Why is that a problem in a time when near-zero interest rates extend as far as the eye can see? Because leverage is always treacherous and 40-to-1 leverage is madness. Even when interest rates are low, lenders demand security. When the value of that security goes down, the demand for margin -- additional collateral to secure the debt -- goes up."

Lewis argues that too-tepid "leverage requirements" in the wake of Dodd-Frank are to blame for MF Global's downfall. "Many will view the demise of MF Capital as just another bit of the 'creative destruction' of capitalism. The Republican candidates complain that Dodd-Frank, last year's financial reform bill passed in response to the credit crisis, is stifling healthy risk-taking. The reality is that Dodd-Frank does not do enough to prevent financial institutions from taking excessive risks with investors' money. While it imposes leverage requirements on banks, those requirements are still quite limited, and institutions not regulated by federal banking agencies are not restricted in their risk-taking in any meaningful way."

As described, Corzine and his traders made very aggressive bets on European debt which would have resulted in spectacular profits had the bonds moved favorably for MF Global, even just slightly. They did not. As Lewis concludes: "Leverage is the steroid of modern finance that creates the hazardous incentives to bet big, keep the winnings and dump the losses onto others. What MF Global shows is that the problem is not too much regulation but too little. Without meaningful leverage restrictions on borrowers and meaningful lending restrictions on those who are willing to underwrite this steroidal debt expansion, MF Global is likely to be the tip of yet another iceberg. And we have yet to recover from the last financial Titanic."

Finally, as reported by Leah McGrath Goodman for CNN/Money yesterday, the MF Global mess keeps getting messier as the bankruptcy trustee announced perhaps as much as $1.2 billion may be missing from customer's accounts, indicating potential misappropriation.

The Illusion of Free Markets

noreply@blogger.com (dré cummings) — Thu, 17 Nov 2011 18:00:00 +0000

Professor Bernard Harcourt has recently released a compelling book "The Illusion of Free Markets: Punishment and the Myth of Social Order." Harcourt, a professor of law and chair of the political science department at the University of Chicago, painstakingly traces the parallel historical trend of increasing punishment during eras of strong free market advocacy. Harcourt's Illusion presents crucial historical evidence that when nations' focus on freeing their trading and capital markets, there is always a concomitant rise in that nation's imprisonment and incarceration rates. Of course, the rise in incarceration is always of the nation's poor and disempowered.

Harcourt's thesis perfectly situates the failed American War on Drugs. The explosive rise in mass incarceration in the United States over the past 25 years (imprisonment increase of 335% as a result of the War on Drugs) occurred when the presidential administrations of Reagan, Bush Sr., Clinton and Bush Jr. simultaneously worked tirelessly to deregulate the U.S. capital markets. Free market advocacy and deregulation have been occurring at exactly the same time that prison rates and populations have been skyrocketing. Harcourt describes how this is not just an American anomaly, but is a global historical reality.

The question that this historical reality begs is why? Why during eras of powerful free market advocacy do governments' radically imprison their own citizens?

From the front flap of The Illusion of Free Markets: "It is widely believed today that the free market is the best mechanism ever invented to efficiently allocate resources in society. Just as fundamental as faith in the free market is the belief that government has a legitimate and competent role in policing and the punishment arena. This curious incendiary combination of free market efficiency and the Big Brother state has become seemingly obvious, but it hinges on the illusion of a supposedly natural order in the economic realm. The Illusion of Free Markets argues that our faith in 'free markets' has severely distorted American politics and punishment practices.

Harcourt traces the birth of the idea of natural order to eighteenth-century economic thought and reveals its gradual evolution through the Chicago School of economics and ultimately into today’s myth of the free market. The modern category of 'liberty' emerged in reaction to an earlier, integrated vision of punishment and public economy, known in the eighteenth century as 'police.' This development shaped the dominant belief today that competitive markets are inherently efficient and should be sharply demarcated from a government-run penal sphere.

This modern vision rests on a simple but devastating illusion. Superimposing the political categories of 'freedom' or 'discipline' on forms of market organization has the unfortunate effect of obscuring rather than enlightening. It obscures by making both the free market and the prison system seem natural and necessary. In the process, it facilitated the birth of the penitentiary system in the nineteenth century and its ultimate culmination into mass incarceration today."

Occupy Wall Street XI: An American Oligarchy?

noreply@blogger.com (dré cummings) — Mon, 14 Nov 2011 13:30:00 +0000

America’s middle class is disappearing. The emergence of Occupy Wall Street highlights a growing oligarchy in American society. While many claim that this phenomenon—disappearing middle class and growing American oligarchy—is not happening, the reality augers otherwise. Wealth continues to grow in the United States in the hands of a very few, and with this, the middle-class is simply eroding. The bottom 80% of U.S. households receive less than half of total income paid out to Americans. An oligarchy is defined by Merriam-Webster as "a government in which a small group exercises control especially for corrupt and selfish purposes.”

Nobel laureate Paul Krugman of The New York Times opines that, even though the Occupy Wall Street movement is correctly portraying the wealth disparity in a 99% to 1% disparity, wealth concentration in the top 1% is misleading, it is more like the top thousandth (0.01%) of Americans who are seeing their income rise exponentially. From 1979 to 2005, this group, the 0.01%, which includes Wall Street executives, saw an income increase of more than 400 percent! With such a concentration of wealth in a tiny number of a select few, Krugman argues that democracy in America is becoming nothing more than a façade. The American oligarchy is growing more wealthy and influential, leaving behind most of America, and thus, threatening America’s real democracy.

Cross-posted on the Salt Law Blog