A simple explanation of how the economy really works, and a story about how Wall Street banks have taken over the U.S. Treasury (and much more of the U.S. government).
The Koch Brothers have every right to spend their money in any legal way. The point is that our entire government is increasingly being run by big money, and that can only be a bad thing.
WASHINGTON — Among the thousands of demonstrators who jammed the Wisconsin State Capitol grounds this weekend was a well-financed advocate from Washington who was there to voice praise for cutting state spending by slashing union benefits and bargaining rights.
The visitor, Tim Phillips, the president of Americans for Prosperity, told counterprotesters in what was otherwise a largely union crowd that the cuts were not only necessary, but they also represented the start of a much-needed nationwide move to slash public-sector union benefits.
“We are going to bring fiscal sanity back to this great nation,” he said.
What Mr. Phillips did not mention was that his Virginia-based nonprofit group, whose budget surged to $40 million in 2010 from $7 million three years ago, was created and financed in part by the secretive billionaire brothers Charles G. and David H. Koch.
State records also show that Koch Industries, their energy and consumer products conglomerate based in Wichita, Kan., was one of the biggest contributors to the election campaign of Gov. Scott Walker of Wisconsin, a Republican who has championed the proposed cuts.
Even before the new governor was sworn in last month, executives from the Koch-backed group had worked behind the scenes to try to encourage a union showdown, Mr. Phillips said in an interview on Monday.
State governments have gone into the red, he said, in part because of the excessively generous pay and benefits that unions have been able to negotiate for teachers, police, firefighters and other state and local employees.
“We thought it was important to do,” Mr. Phillips said, adding that his group is already working with activists and state officials in Indiana, Ohio and Pennsylvania to urge them to take similar steps to curtail union benefits or give public employees the power to opt out of unions entirely.
To union leaders and liberal activists in Washington, this intervention in Wisconsin is proof of the expanding role played by nonprofit groups with murky ties to wealthy corporate executives as they push a decidedly conservative agenda.
“The Koch brothers are the poster children of the effort by multinational corporate America to try to redefine the rights and values of American citizens,” said Representative Gwen Moore, Democrat of Wisconsin, who joined with others in the union protests.
A spokesman for Koch Industries, as well as Mr. Phillips, scoffed at that accusation. The companies owned by Koch (pronounced Coke) — which include the Georgia-Pacific Corporation and the Koch Pipeline Company — have no direct stake in the union debate, they said. The company has about 3,000 employees in Wisconsin, including workers at a toilet paper factory and gasoline supply terminals. The pending legislation would not directly affect its bottom line.
“A balanced budget will benefit Koch Industries and its thousands of employees in Wisconsin no more and no less than the rest of the state’s private-sector workers and employers,” said Jeff Schoepke, a Koch Industries lobbyist in Wisconsin. “This is a dispute between public-sector unions and democratically elected officials over how best to serve the public interest.”
Certainly, the Koch brothers have long used their wallets to promote fiscal conservatism and combat regulation, another Koch Industries spokesman said Monday.
But the push to curtail union benefits in Wisconsin has been backed by many conservative groups that have no Koch connection, Mr. Phillips noted.
Americans for Prosperity came to Wisconsin more than five years ago and has thousands of members, he said. The state chapter organized buses on Saturday for hundreds of Wisconsin residents to go to the Capitol to support the governor’s proposals.
“This is a Wisconsin movement,” said Fred Luber, chief executive of the Supersteel Products Corporation in Milwaukee, who serves on Americans for Prosperity’s Wisconsin state advisory board. “Obviously, Washington is interested in this. But it is up to us to do.”
Political activism is high on the list of priorities for Charles Koch, who in a letter last September to other business leaders and conservatives explained that he saw no other choice.
“If not us, who? If not now, when?” said the letter, which invited other conservatives to a retreat in January in Rancho Mirage, Calif. “It is up to us to combat what is now the greatest assault on American freedom and prosperity in our lifetimes.”
Campaign finance records in Washington show that donations by Koch Industries and its employees climbed to a total of $2 million in the last election cycle, twice as much as a decade ago, with 92 percent of that money going to Republicans. Donations in state government races — like in Wisconsin — have also surged in recent years, records show.
But the most aggressive expansion of the Koch brothers’ effort to influence public policy has come through the Americans for Prosperity, which runs both a charitable foundation and a grass-roots-activists group. Mr. Phillips serves as president of both branches, and David Koch is chairman of the Americans for Prosperity Foundation.
The grass-roots-activists wing of the organization today has chapters in 32 states, including Wisconsin, and an e-mail list of 1.6 million supporters, said Mary Ellen Burke, a spokeswoman. She would not say how much of last year’s $40 million budget came from the Koch family, but nationwide donations have come in from 70,000 members, she said, offering it as proof that it has wide support.
The organization has taken up a range of topics, including combating the health care law, environmental regulations and spending by state and federal governments. The effort to impose limits on public labor unions has been a particular focus in Ohio, Indiana, Pennsylvania and Wisconsin, all states with Republican governors, Mr. Phillips said, adding that he expects new proposals to emerge soon in some of those states to limit union power.
To Bob Edgar, a former House Democrat who is now president of Common Cause, a liberal group that has been critical of what it sees as the rising influence of corporate interests in American politics, the Koch brothers are using their money to create a façade of grass-roots support for their favorite causes.
“This is a dangerous moment in America history,” Mr. Edgar said. “It is not that these folks don’t have a right to participate in politics. But they are moving democracy into the control of more wealthy corporate hands.”
During a demonstration outside the Wisconsin Capitol Monday, one protester made a similar point, holding a sign saying: “Gov. Walker: Kick the Koch Habit.”
But Mr. Phillips and members of his group and other conservative activists, not surprisingly, see it very differently.
Just as unions organize to fight for their priorities, conservatives are entitled to a voice of their own.
“This is a watershed moment in Wisconsin,” Mr. Phillips said. “For the last two decades, government unions have used their power to drive pensions and benefits and salaries well beyond anything that can be sustained. We are just trying to change that.”
Steven Greenhouse contributed reporting from Madison, Wis.
WHAT does it take to hold your powerful bosses accountable if they try to bully you out the door?
Documents, e-mails, a former deputy district attorney as your lawyer — and a never-say-die approach.
Such was the lesson learned by Michael G. Winston, a former executive at the Countrywide Financial Corporation. Mr. Winston spent three years in a legal battle against Countrywide, the once-mighty mortgage giant, and its current owner, Bank of America, contending that he was punished and pushed out for not toeing the company line. On Feb. 4, he won: a jury in California awarded him $3.8 million in damages.
“It is the littlest of Davids beating the biggest of Goliaths and taking two of them on at once,” Mr. Winston said. “This is the story of somebody who tried to set a company right. But it was frightening to them for me to shine the light from the inside out.”
Mr. Winston’s story provides a glimpse into how business was done at Countrywide at the height of the subprime craziness — and how assiduously Angelo R. Mozilo, the company’s fallen leader, worked to quash dissent in the ranks. Mr. Winston had the audacity to question Countrywide practices. Mr. Mozilo was not pleased and, before long, Mr. Winston was marginalized and later dismissed.
Mr. Winston, a prominent executive in the field of organization management, is a rarity among corporate whistle-blowers. Most of them get run over by their former companies. A fascinating detail in his case: after providing to the opposition his list of witnesses, which included former colleagues who had also been let go by Bank of America, the bank hired several of them back. Then they testified against him.
Mr. Winston’s lawyer was Charles T. Mathews, a former prosecutor in the Los Angeles district attorney’s office. “This case is about holding these scoundrels accountable and it is absolutely vital that these people be brought in front of a jury,” Mr. Mathews said. “They hired these huge law firms with unlimited budgets, but when plain, ordinary citizens see the evidence and hear the facts they are repulsed by what these people did.”
The jury heard from an array of former Countrywide executives, including Mr. Mozilo, in a rare courtroom appearance. David Sambol, Countrywide’s former president, also testified.
Sam Usher, 73, was a juror on the case. A former human resources executive at General Motors, he is a program manager for addiction treatment centers at several hospitals in Los Angeles. Asked about the trial, Mr. Usher said the witnesses for Countrywide and Bank of America were unpersuasive.
“There was an air of arrogance about them,” he said. “The attorneys for the plaintiff caught most of them in little lies that cracked their credibility. Meanwhile, Mr. Winston’s witnesses had credibility and the documentation kind of supported his testimony.”
Mr. Winston did not win on all his claims. For example, the jury rejected his contention that Countrywide had reneged on an oral agreement to provide him with substantial stock awards in future years after he agreed to a relatively modest starting salary.
But the jury voted 9 to 3 that Bank of America’s dismissal was motivated by two of Mr. Winston’s actions — both essentially refusals to play the game that Countrywide wanted him to.
“The acquisition by Bank of America provided an opportunity to drop him off the cliff,” Mr. Usher said.
A spokeswoman for Bank of America said the bank would ask the trial court to reverse the jury verdict and enter judgment in the company’s favor. “We believe that the jury’s verdict finding liability on the wrongful-termination claim is not supported by any evidence, let alone ‘substantial evidence’ as is required by law,” she said.
MR. WINSTON joined Countrywide in May 2005, when the lender was riding the mortgage wave. He was hired as an executive vice president in the leadership development area to help Countrywide grow even bigger and groom better managers. His boss, he recalled, told him that the lender wanted to become “Goldman Sachs on the Pacific.” Soon after, he was promoted to managing director and enterprise chief leadership officer.
Mr. Winston’s career experience included successful stints at Motorola, McDonnell Douglas and Lockheed. He also worked previously as the global head of worldwide leadership and organizational strategy at Merrill Lynch in New York but resigned from that position in 2003 to take care of his parents, who were terminally ill.
It wasn’t long after he joined Countrywide that Mr. Winston began to worry about its business strategy, he said. He still recalls an episode from late 2005 that raised red flags for him. He found himself parked next to a man in the Countrywide lot whose car had vanity plates that read, “Fund’Em.” “I said: ‘I’m not familiar with that expression. What is this about?’ ” Mr. Winston recalled. The man replied that the term described the company’s growth strategy for 2006 — to fund all loans. “I was brand new and I said, ‘What if the person has no job?’ ” Mr. Winston said. The answer: “Fund ’em.”
“What if the person has no assets?”
Again: “Fund ’em.”
Mr. Winston said he immediately relayed his fears about what he saw as an anything-goes strategy to Drew Gissinger, chief production officer of Countrywide Home Loans. “I told him that you need to focus on customer satisfaction, on the quality of the loan portfolio and on building leaders who would focus their people on that,” Mr. Winston said. “I wrote him a very comprehensive proposal on how to reward people properly.”
Then, in late July 2006, nine days after he was promoted to managing director, something strange happened at the office building where Mr. Winston and his colleagues worked. In his description of the event to the jury, he was sitting in his office when orange-pink vapors and droplets of who-knows-what dripped on him. He became nauseated and left the building with his employees.
“I returned the next day, after I had some testing and went around to find out how my guys were,” he said. “People were not only sick but frightened about working in the building.”
He reported the situation to his superiors; many workers began to report symptoms of illness. In early August, Mr. Winston asked a buildings official what had been done about the problem. He said he was told it was a one-off event. Case closed.
“I went to my office closed the door and called Cal OSHA,” Mr. Winston said, referring to the occupational safety agency in the state. (Cal OSHA produced a report, and Countrywide said it addressed the problem, but Mr. Winston said he never learned the details.)
Soon, Mr. Winston said, his budget was frozen. He began to be uninvited to meetings. He was forced to relocate his office four times in seven months.
In September 2006, he told his boss, Leora Goren, the head of human resources, that he was fearful of losing his job and that he had consulted a lawyer.
Mr. Winston’s final mistake for Countrywide came two months later. As he tells it, he refused to misrepresent Countrywide’s corporate governance practices in a report to analysts at Moody’s Investors Service, the ratings agency.
On Nov. 20, Mr. Winston received a copy of an unpublished report on Countrywide by Moody’s. It expressed concerns about executive pay and succession planning at the lender. “We view governance as a credit challenge that constrains future ratings improvement at Countrywide,” the report said.
Mr. Winston said that Countrywide scrambled to try to refute Moody’s take and that Mr. Sambol, Countrywide’s president, asked him to write a report countering the analysis and providing chapter and verse on the extensive succession planning at the company.
Trouble was, Mr. Winston had never seen that extensive succession plan. In fact, as with so many subprime loans, he never saw any documentation at all, even after he asked for it, he said. He testified that he told Mr. Sambol he could not do the report. “I’m not your guy,” he told him.
BY now, Mr. Winston had a target on his back. On Jan. 24, 2007, Mr. Mozilo wrote an e-mail to Ms. Goren, the head of human resources whom Mr. Winston had told about hiring a lawyer for himself.
“As I expressed to you, I am concerned about the motivations and overall attitude and demeanor of Michael Winston,” Mr. Mozilo wrote. “I want him terminated effective immediately.”
Testifying before the jury, Mr. Mozilo said he wanted Mr. Winston gone “because I concluded that he was not the type of individual that I wanted at a senior level at the company.”
But Ms. Goren advised Mr. Mozilo against the firing. “I strongly believe that terminating Michael would not be in the best interest of the company,” she replied in an e-mail to him, “as doing so would cause us the loss of an extremely talented, albeit eccentric individual.”
Mr. Winston remained at Countrywide with two people reporting to him, down from 178 previously. When Bank of America took over in 2008, he was let go.
Today, Mr. Winston, 60, is hoping to go back to work.
“I want to do my part to promote vision-driven, values-based leadership that is a force for good,” he said.
And now for the bad news:
U.S. Ends Probe of Countrywide Ex-CEO Mozilo, L.A. Times Says
By Dan Hart - Feb 19, 2011 8:08 AM PT
U.S. prosecutors have ended a criminal investigation into former Countrywide Financial Corp. Chief Executive Officer Angelo Mozilo after finding no evidence of any crime, the Los Angeles Times reported.
A federal grand jury began a probe of Mozilo in 2008, the newspaper said. The investigation ended without any indictments of Mozilo or others at the mortgage lender based in Calabasas, California, the newspaper said, citing unidentified people familiar with the prosecution and defense attorneys.
Mozilo declined to comment to the newspaper. Countrywide was acquired by Bank of America Corp. in 2008
Earlier this month, he and former Chief Operating Officer David Sambol agreed to a $6.5 million settlement to resolve a predatory lending lawsuit filed by California.
PRESIDENT OBAMA'S fiscal 2012 budget includes $8 billion for high-speed rail next year and $53 billion over six years. In the president's view, the United States needs to spend big on high-speed rail so that we can catch up with Europe, Japan - and you-know-who. "China is building faster trains and newer airports," the president warned in his State of the Union address. But of all the reasons to build high-speed rail in the United States, keeping up with the international Joneses may be one of the worst. In fact, experience abroad has repeatedly raised questions about the cost-effectiveness of high-speed rail.
China would seem to be an especially dubious role model, given the problems its high-speed rail system has been going through of late. Beijing just fired its railway minister amid corruption allegations; this is the sort of thing that can happen when a government suddenly starts throwing $100 billion at a gargantuan public works project, as China did with rail in 2008. Sleek as they may be, China's new fast trains are too expensive for ordinary workers to ride, so they are not achieving their ostensible goal of moving passengers from the roads to the rails. Last year, the Chinese Academy of Sciences asked the government to reconsider its high-speed rail plans because of the system's huge debts.
Of course, if the Chinese do finish their system, it is likely to require operating subsidies for many years - possibly forever. A recent World Bank report on high-speed rail systems around the world noted that ridership forecasts rarely materialize and warned that "governments contemplating the benefits of a new high-speed railway, whether procured by public or private or combined public-private project structures, should also contemplate the near-certainty of copious and continuing budget support for the debt."
That's certainly what happened in Japan, where only a single bullet-train line, between Japan and Osaka, breaks even; it's what happened in France, where only the Paris-Lyon line is in the black. Taiwan tried a privately financed system, but it ended up losing so much money that the government had to bail it out in 2009.
When it comes to high-speed rail, Europe, Japan and Taiwan have two natural advantages over every region of the United States, with the possible exception of the Northeast Corridor - high gas taxes and high population density. If high-speed rail turned into a money pit under relatively favorable circumstances, imagine the subsidies it would require here. Every dollar spent to subsidize high-speed rail is a dollar that cannot be spent modernizing highways, expanding the freight rail system or creating private-sector jobs. The Obama administration insists we dare not lag the rest of the world in high-speed rail. Actually, this is a race everyone loses.
The conventional wisdom has it that the final report of the Financial Crisis Inquiry Commission was a low-budget flop, hopelessly riven by internal political disputes and dissension among the commission’s 10 members. As usual, the conventional wisdom is completely wrong. Actually, the report — and the online archive of testimony, interviews and documents that are now available — is a treasure trove of invaluable information about the causes and consequences of the Great Recession.
For instance, on the exceptionally important but little understood role played by the increasingly lower prices Goldman Sachs placed on the complex mortgage securities on its balance sheet — which helped determine the fate of many of its shakier Wall Street brethren — the commission report, on page 237, is crystalline:
As the crisis unfolded Goldman marked mortgage-related securities at prices that were significantly lower than those of other companies. Goldman knew that those lower marks might hurt those other companies — including some clients — because they could require marking down those assets and similar assets. In addition, Goldman’s marks would get picked up by competitors in dealer surveys. As a result, Goldman’s marks could contribute to other companies recording “mark-to-market” losses: that is, the reported value of their assets could fall and their earnings would decline.
The first victims of Goldman’s decision in May 2007 to begin communicating its lower marks to the rest of the marketplace were the two Bear Stearns hedge funds that were heavily invested in complex and squirrelly mortgage securities. Although Goldman disputes the charge, the lower marks caused the two hedge funds to recalculate the funds’ net asset value, known in the business as N.A.V., and to re-issue to investors in June 2007 a far lower N.A.V. — down 19 percent, rather than down 6 percent. All hell broke loose. Soon enough, the funds’ investors were blocked from withdrawing their money, and by July the funds filed for bankruptcy and were soon liquidated. Investors lost much of the $1.5 billion they had invested. The liquidation of the two hedge funds led to the collapse of Bear Stearns nine months later.
The Financial Crisis Inquiry Commission report, buried by critics, is actually a must-read for those who want to understand the collapse.
In late July 2007, Goldman started a nearly 17-month dispute with A.I.G. Financial Products, a subsidiary of American International Group, the giant insurer, about the value of $23 billion of complex mortgage securities that Goldman had insured through the subsidiary by paying some $100 million in premiums. Goldman’s agreement with the A.I.G. Financial Products allowed Goldman to demand collateral payments from the firm under two conditions. First, if A.I.G., the parent company, lost its AAA credit rating, which it did in March 2005. And, second, if Goldman believed the value of the underlying securities being insured had fallen, which by mid-2007 Goldman thought — correctly — had occurred. But the consequences of Goldman’s collateral disputes with the financial products subsidiary were profound for A.I.G., and contributed mightily to the government takeover of the insurer after pumping some $180 billion into it.
The crisis commission report is chock-full of the details of how the dispute developed and progressed. On July 27, 2007, Goldman sent a $1.81 billion collateral call to A.I.G. Financial Products to make up for what Goldman — pretty much alone at that point — thought represented the decline in the value of the securities. “The $2bn margin call is driven by a massive remarking by Goldman Sachs of the underlying [mortgage] securities (down from – 6 pts to – 20-25 pts in some cases), ahead of all other dealers in the street,” Goldman’s Nicholas Friedman wrote in an internal e-mail the day before the collateral call.
When Joseph Cassano, the chief executive of A.I.G. Financial Products, first heard about Goldman’s collateral call, he was blown away and thought that it came “out of the blue,” he said in a five-hour, June 2010 interview released late last week by the crisis commission. “What in the world had changed between yesterday and today?” he wondered, to prompt the “whopper” of a collateral call from Goldman. Goldman’s marks were consistently lower than those of other Wall Street dealers — as Goldman itself admitted — and Cassano was incredulous about their accuracy. “I didn’t believe the numbers,” he said. “These aren’t real numbers. The markets had seized up.”
For the next two weeks, Cassano’s firm disputed Goldman’s valuations and its collateral call. It “was unusual to have disputes” with Goldman, Cassano told the commission. “Goldman Sachs is a business partner of ours and an important relationship.” During that time, Goldman reduced the collateral call to $1.6 billion, then to $1.2 billion and then to $600 million. “That told me something was up with their numbers,” Cassano said. “This market is so difficult, the markets are roiling to say the least. Even Goldman Sachs — a pretty good outfit — was having a hard time getting the numbers themselves.”
Before Cassano left for a late August cycling vacation in Germany and Austria, he suggested paying Goldman a “good faith” $300 million deposit. Goldman countered with a demand for a $450 million deposit, which Cassano agreed to provide on Aug. 10. In a side letter that same day, A.I.G. Financial Products and Goldman further stipulated that the $450 million did not resolve the collateral dispute between the two firms. The payment was a way for everyone to “chill out,” an A.I.G. executive wrote.
After Labor Day, Cassano said, he initiated a meeting with Michael Sherwood, co-chief executive of Goldman Sachs International — whom he described as being “a very practical guy” — to discuss how to resolve the ongoing collateral dispute. Cassano pointed out to Sherwood that something must have been amiss because Goldman’s original collateral call of $1.8 billion got reduced in two weeks time to $450 million. Cassano says that Sherwood admitted to him that Goldman’s bankers “didn’t cover ourselves in glory during this period.”
Things quieted between Goldman and A.I.G. Financial Products until Sept. 11, when Goldman asked for another $1.5 billion in collateral based on its marks. This was the beginning of the end. On Nov. 2, Cassano said, Sherwood gave him a “heads up” that Goldman was increasing its collateral call to $2.8 billion, in addition to the $450 million it already had. “We’re not going to pay that amount,” Cassano said he told Sherwood, and that the latter replied, “Yea, I didn’t think you would.” And, according to the crisis commission report, Cassano soon faced other problems: by Nov. 14, both Société Générale, a large French bank, and Merrill Lynch had asked the A.I.G. subsidiary to post collateral to them as well, in the amounts of $1.7 billion and $610 million, respectively, based largely on the Goldman precedent.
On Nov. 23, A.I.G. Financial Products agreed to give Goldman another $1.55 billion in collateral, bringing its total posted to $2 billion. Cassano told the crisis commission that he decided to make the payment “to avoid airing dirty laundry” in the market about the disputes. A week later, based on his firm’s calculations and other market input, Cassano phoned Sherwood and demanded the money back from Goldman. Cassano recalls that Sherwood said he would think about it — but the money was never returned.
The dispute continued into January. Cassano eventually spoke with David Viniar, Goldman’s chief financial officer, to try again to get the money back. “We may have been ahead of the market,” Cassano said Viniar told him, “but the market is coming our way.” Cassano was again incredulous, and wondered if Goldman was “driving the market” down to benefit the short position it had started taking in December 2006 against the mortgage market. “There is nothing trading,” Cassano said. “You can’t even trade by appointment.”
That was Cassano’s last conversation with Goldman. By March, he had been relieved of his executive duties and became a $1 million a month consultant until the government takeover of A.I.G. Over the years, A.I.G. Financial Products had paid him more than $300 million in compensation. The Goldman collateral calls continued until the bitter end, by which time it had been paid $12.9 billion and the government had poured some $40 billion into the financial products subsidiary as part of the overall rescue of A.I.G. Cassano told the commission that if he had not been relieved of his duties, he would have continued to dispute the collateral calls with Goldman rather than agree to pay them.
As the Financial Crisis Inquiry Commission report makes convincingly clear, Goldman has to finally admit publicly the important role its marks played in exacerbating the financial woes of its competitors. The other lesson is that these kinds of complex securities, and the derivatives tied to them, should in the future be traded on public exchanges, where prices can be far more easily agreed upon between buyers and sellers. The 2010 Dodd-Frank financial reform law calls for the latter, but it hasn’t happened yet. Contrary to the critics, the commission report is the strongest argument we have to get those regulators moving.
