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In the fashion world,
the rule is: "One day you’re in, and the next day you’re
out." Or so says says Heidi Klum, the beautiful blonde host of the
television series, "Project
Runway."
But this cruel reality
doesn't only apply in the case of this or other creative arts. The
movers-and-shakers on Wall Street have also experienced their share of abrupt
popularity shifts through the years, though the fickleness tends to be
broad-based.
During the boom times,
those who know how to make and accumulate large sums of money are lionized
and fawned over, in the hope that their golden touch might somehow rub off on
the minions below.
Eventually, when the
bubble bursts and conditions turn sour, so does the mood of the public. Former
"masters of the universe" are villified and singled out for a
growing share of the blame. In a sense, castigation replaces coronation.
In a commentary at
TomDispatch.com, "The
'Best Men' Fall: How Popular Anger Grew, 1929 and 2009," Steve Fraser, a
visiting professor at New York University, co-founder of the American Empire
Project, and the author of Wall Street:
America's Dream Palace, discusses the sentiment shift that is now
under way and contrasts it with that which took place almost 80 years ago.
Obtuse hardly does
justice to the social stupidity of our late, unlamented financial overlords. John
Thain of Merrill Lynch and Richard Fuld of Lehman Brothers, along with an
astonishing number of their fraternity brothers, continue to behave like so
many intoxicated toreadors waving their capes at an enraged bull, oblivious
even when gored.
Their greed and
self-indulgence in the face of an economic cataclysm for which they bear
heavy responsibility is, unsurprisingly, inciting anger and contempt, as
daily news headlines indicate. It is undermining the last shreds of their
once exalted social status -- and, in that regard, they are evidently fated
to relive the experience of their predecessors, those Wall Street "lords
of creation" who came crashing to Earth during the last Great
Depression.
Ever since the
bail-out state went into hyper-drive, popular anger has been simmering. In
fact, even before the meltdown gained real traction, a sign at a mass protest
outside the New York Stock Exchange advised those inside: "Jump, You
F*ckers."
You can already buy
"I Hate Investment Banking" T-shirts on line. All the Caesar-sized
salaries and the Caligula-like madness as the economy crashes and burns, all
the bonuses, dividends, princely consulting fees for learning how to milk the
Treasury, not to speak of those new corporate jets, as well as the government
funds poured down the black hole of mega-mergers, moneys that might otherwise
have spared citizens from foreclosure -- all of this is making ordinary
Americans apoplectic.
Nothing, however, may
be more galling than the rationale regularly offered for so much of this
self-indulgence. Asked about why he had given out $4 billion in bonuses to
his Merrill Lynch staff in a quarter in which the company had lost a
staggering $15 billion dollars, ex-CEO John Thain typically responded:
"If you don't pay your best people, you will destroy your franchise. Those
best people can get jobs other places, they will leave."
Apparently it never
occurs to those who utter such perverse statements about rewarding the
"best people," or "the best men," that we'd all have been
better off, and saved some serious money, if they had hired the worst men. After
all, based on the recent record, who could possibly have done more damage
than the "best" Merrill Lynch, Wachovia, Wamu, Citigroup, A.I.G.,
Bank of America, and so many other top financial crews had to offer?
The "Best
Men" Fall
Now even the new
powers in Washington are venting. Vice President Biden has suggested that our
one time masters of the universe be thrown "in the brig"; Missouri
Senator Claire McKaskill has denounced them as "idiots… that are
kicking sand in the face of the American taxpayer," and even the new
president, a man of exquisite tact with an instinct for turning the other
cheek, labeled Wall Street's titans as reckless, irresponsible, and shameful.
To those who remember
the history, all this bears a painfully familiar ring. Soon enough, that
history tells us, Congressional investigators will start hauling such people
into the public dock and the real fireworks will begin. It happened once
before -- a vital chapter in the ongoing story of how an old regime dies and
a new one is born.
After the Great Crash
of 1929, those at the commanding heights of the economy who had enriched
themselves and deluded others into believing that, under their leadership,
the United States had achieved "a permanent plateau of prosperity"
-- sound familiar? -- were subject to a whirlwind of anger, public shaming,
and withering ridicule. Like the John Thain's of today, Jack Morgan, Charles
Mitchell, Richard Whitney, Albert Wiggins, and others who headed the
country's chief investment and commercial banks, trusts, insurance companies,
and the New York Stock Exchange never knew what hit them. They, too, had been
steeped in the comforting bathwaters of self-delusion for so long that they
believed, like Thain and his compadres, that they were indeed the "best,"
the wisest, the most entitled, and the most impregnable men in America. Even amid the ruins of the world they had made, they were incapable of recognizing
that their day was done.
Under the merciless
glare of Congressional hearings, above all the Senate's Pecora Committee
(named after its bulldog chief counsel Ferdinand Pecora), it was revealed
that Jack Morgan and his partners in the House of Morgan hadn't paid income
taxes for years; that "Sunshine" Charlie Mitchell, head of National
City Bank (the country's largest), had been short-selling his own bank's
stock and transferring assets into his wife's name to escape taxes; that
other financiers just like him, who had been hero-worshiped for a decade or
more as financial messiahs, had regularly engaged in insider-trading schemes
that made them wealthy and fleeced legions of unknowing investors.
The Pecora Committee
was not the only scourge of the old financial elite. Franklin Delano
Roosevelt, as publicly mild-mannered as and perhaps even more amiable and
charming than President Obama, began excoriating them from the moment of his
first inaugural address. He condemned them in no uncertain terms for misusing
"other people's money" and for their reckless speculations; he
blamed them for the sorry state of the country; he promised to chase these
"unscrupulous money changers" from their "high seats in the
temples of American civilization."
Jack Morgan, called to
testify by yet another set of Congressional investigators, had a circus
midget plopped in his lap to the delight of a swarm of photo-journalists who
memorialized the moment for millions. It was an emblematic photo, a visual
metaphor for a once proud, powerful elite, its gravitas gone, reduced to
impotence, ridiculed for its incompetence, and no longer capable of
intimidating a soul.
What happened to Jack
Morgan or later Richard Whitney -- a crowd of 6,000 turned out at New York's Grand Central Station in 1938 to watch the handcuffed former president of the
New York Stock Exchange be escorted onto a train for Sing Sing, having been
convicted of embezzlement -- was the political and social equivalent of a
great depression. It represented, that is, a catastrophic deflation of the
legitimacy of the ancien régime. It was part of what made possible the
advent of something entirely new.
Speculators and Con
Men
Under normal
circumstances, most Americans have been perfectly willing to draw a
relatively sharp distinction between the misguided speculator and the
confidence man's outright felonious behavior. One is a legitimate banker gone
astray, the other an outlaw.
Under the
extraordinary circumstances of terminal systemic breakdown, that distinction
grows ever hazier. That was certainly true in the early years of the first
Great Depression, when a damaging question arose: just exactly what was the
difference between the behavior of Charles Mitchell, Jack Morgan, and Richard
Whitney, lions of that era's Establishment, and outliers like
"Sell-em" Ben Smith, Ivar Kreuger, "the match king,"
Jesse Livermore, "the man with the evil eye," William Crappo
Durant, maestro of investment pool stock kiting, or the one-time Broadway
ticket agent and stock manipulator Michael Meehan, men long barred from the
walnut-paneled inner sanctums of white-shoe Wall Street?
Admittedly, their
dare-devil escapades had often left them on the wrong side of the law and
they would end their days in jail, as suicides, or in penury and disgrace. Nonetheless,
as is true today, many Americans then came to accept that between the
speculating banker and the confidence man lay a distinction without a
meaningful difference. After all, by the early 1930s, the whole American
financial system seemed like nothing but a confidence game deserving of the
deepest ignominy.
In that sense, Bernie
Madoff, a former chairman of the NASDAQ stock exchange, already seems like a
synecdoche for a whole way of life. Technically speaking, he ran a Ponzi
scheme out of his brokerage firm, as strictly fraudulent as the original one
invented by Charles Ponzi, that Italian vegetable peddler, smuggler, and
after he got out of an American jail, minor fascist official in Mussolini's
Italy.
Ponzi, however, was a
small-timer. He gulled ordinary folks out of their five and ten dollar bills.
Madoff's $50 billion game was something else again. It was completely
dependent on his ties to the most august circles of our financial
establishment, to major hedge funds and funds of funds, to top-drawer
consulting firms, to blue-ribbon nonprofits, and to a global aristocracy of
the super-rich. True enough, people of middling means, as well as public and
union pension funds, got taken too. At the end of the day, however, Madoff's
scheme, unlike Ponzi's, was premised on a pervasive insiderism which had
everything to do with the way our financial system has been run for the past
quarter century.
Once Madoff was
exposed, everybody questioned the credulousness of those who invested with
him: why didn't they grow suspicious of such consistently high rates of
return? But the equally reasonable question was: why should they have? Not
only did you practically need an embossed invitation before you could entrust
your loot to Madoff, but the whole financial sector had been enjoying
extraordinary returns for a very long time (admittedly, with occasional major
hiccups like the Dot-com bust of 1999-2000, which somehow seemed to fade
quickly from memory).
Keep in mind as well
that these lucrative dealings were based on speculative investments in
securities so far removed from anything tangible or comprehensible that they
seemed to be floating in thin air. The whole system was a Ponzi-like scheme
which, like the Energizer Bunny, just kept on going and going and
going… until, of course, it didn't.
Locked into the Bailout State
After 1929, when the
old order went down in flames, when it commanded no more credibility and
legitimacy than a confidence game, there was an urgent cry to regulate both
the malefactors and their rogue system. Indeed, new financial regulation was
at the top of, and made up a hefty part of, Roosevelt's New Deal agenda
during its first year. That included the Bank Holiday, the creation of the
Federal Deposit Insurance Corporation, the passing of the Glass-Steagall Act,
which separated commercial from investment banking (their prior cohabitation
had been a prime incubator of financial hanky-panky during the Jazz Age of
the previous decade), and the first Securities Act to monitor the stock
exchange.
One might have
anticipated an even more robust response today, given the damage done not only
to our domestic economy, but to the global one upon which any American
economic recovery will rely to a very considerable degree. At the moment,
however, financial regulation or re-regulation -- given the last 30 years of Washington's fiercely deregulatory policies -- seems to have a surprisingly low profile in
the new administration's stated plans. Capping bonuses, pay scales, and stock
options for the financial upper crust is all well and good and should happen
promptly, but serious regulation and reform of the financial system must
strike much deeper than that.
Instead, the new
administration is evidently locked into the bail-out state invented by its
predecessors, the latest version of which, the creation of a government
"bad bank" (whether called that or not) to buy up toxic securities
from the private sector, commands increasing attention. A "bad
bank" seems a strikingly lose-lose proposition: either we, the
tax-paying public, buy or guarantee these securities at something approaching
their grossly inflated, largely fictitious value, in which case we will be
supporting this second gilded age's financial malfeasance for who knows how
long, or the government's "bad bank" buys these shoddy assets at
something close to their real value in which case major banks will remain in
lock-down mode, if they survive at all. Worse yet, the administration's
latest "bad bank" plan does not even compel rescued institutions to
begin lending to anybody, which presumably is the whole point of this new
financial welfare system.
Why this timidity and
narrowness of vision, which seems less like reform than capitulation? Perhaps
it comes, in part, from the extraordinary economic and political throw-weight
of the FIRE (finance, insurance, and real estate) sector of our national
economy. It has, after all, grown geometrically for decades and is now a
vital part of the economy in a way that would have been inconceivable back
when the U.S. was a real industrial powerhouse.
Naturally, FIRE's
political influence expanded accordingly, as politicians doing its bidding
dismantled the regulatory apparatus installed by the New Deal. Even today,
even in ruins, many in that world no doubt hope to keep things more or less
that way; and unfortunately, spokesmen for that view -- or at least people
who used to champion that approach during the Clinton years, including Larry
Summers and Robert Rubin (who "earned" more than a $115 million
dollars at Citigroup from 1999 to 2008), occupy enormously influential
positions in, or as informal advisors to, the new Obama administration.
Still, popular anger
and ridicule of the sort our New Deal era ancestors once let loose are
growing more and more common, which explains, of course, the newly discovered
voice of righteous anger of some of our leading politicians who are feeling
the heat. Certain observers have dismissed popular resistance to the bail-out
state as nothing more than right-wing, Republican-inspired hostility to
government intervention of any sort. No doubt that may account for some of
it, but much of the anger is indeed righteous, reasonable, and coming from
ordinary Americans who simply have had enough.
Progressive-minded
people in and outside of government must find a way to make re-regulation
urgent business, and to do so outside the imprisoning, politically
self-defeating confines of the bail-out state. Just weeks ago, the notion of
nationalizing the banks seemed irretrievably un-American. Now, it is part of
the conversation, even if, for the moment, Obama's savants have ruled it out.
The old order is
dying. Let's bury it. The future beckons.
Michael J. Panzner
Editor, Financialarmageddon.com
Michael J. Panzner is a 25-year
veteran of the global stock, bond, and currency markets and the author of
Financial Armageddon: Protecting Your Future from Four Impending
Catastrophes, published by Kaplan Publishing.
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