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Think Debtors Must Pay and Austerity is the Way?

(h/t Philip Pilkington)

FDR’s Second Bill of Rights: An Unrealized Dream

By Stephanie Kelton

Sixty-eight years ago today, Franklin Delano Roosevelt laid out what he referred to as a “Second Bill of Rights” in his State of the Union address to Congress.  Those of us who’ve been part of the MMT movement for well over a decade have worked tirelessly to advance an understanding of the way modern monetary systems operate so that we might one day replace suffering with opportunity and a minimum standard of economic security for all.  
Roosevelt’s Second Bill of Rights
“This Republic had its beginning, and grew to its presentstrength, under the protection of certain inalienable political rights—amongthem the right of free speech, free press, free worship, trial by jury, freedomfrom unreasonable searches and seizures. They were our rights to life andliberty.
As our Nation has grown in size and stature, however—as ourindustrial economy expanded—these political rights proved inadequate to assureus equality in the pursuit of happiness.
We have come to a clear realization of the fact that trueindividual freedom cannot exist without economic security and independence.”Necessitous men are not free men.” People who are hungry and out ofa job are the stuff of which dictatorships are made.
In our day these economic truths have become accepted asself-evident. We have accepted, so to speak, a second Bill of Rights underwhich a new basis of security and prosperity can be established for allregardless of station, race, or creed.
Among these are:
The right to a useful and remunerative job in theindustries or shops or farms or mines of the Nation;
The right to earn enough to provide adequate food andclothing and recreation;
The right of every farmer to raise and sell hisproducts at a return, which will give him and his family a decent living;
The right of every businessman, large and small, totrade in an atmosphere of freedom from unfair competition and dominationby monopolies at home or abroad;
The right of every family to a decent home;
The right to adequate medical care and theopportunity to achieve and enjoy good health;
The right to adequate protection from the economicfears of old age, sickness, accident, and unemployment;
The right to a good education.
All of these rights spell security. And after this war iswon we must be prepared to move forward, in the implementation of these rights,to new goals of human happiness and well-being. ”

A Cri du cœur in Defense of English from Cerro Gordo, Iowa

By William K. Black

Rick Perry is now pledging to save conservative IowaRepublicans from a great peril – accidentally reading a phrase on a productlabel on one’s soup can before realizing that it is written in a language otherthan English.
  Read and be amazed:

December 30, 2011

Perry Supports English as Official Language in US

“Perry, whosecampaign needs a boost before Tuesday’s lead-off Iowa caucuses, spoke at aCerro Gordo County GOP fundraiser and took questions from the audience at theMason County Country Club.

The voter who toldthe Texas governor he was tired of multilingual directions for products drewapplause when he said he’d like to see English become the official language ofthe U.S. government.

“I don’t knowhow the rest of the conservatives in the room feel, but personally, I’m fed upwith seeing the directions on every single product on every single shelf ofevery single store written in four languages,” said the man, who didn’tgive his name.

Perry replied,”That is a statement, that’s not a question, and I can agree with it.””

The Art of Generating a “Moral Panic”

Meredith Willson, author, composer, and songwriter of themusical The Music Man made Iowafamous.  The musical is famous amongcriminologists and sociologists because it simultaneously exemplifies andsatirizes the deliberate creation of “moral panics.”  The phrase is reasonablyself-explanatory.  The creator of thepanic simultaneously generates fear of and loathing for “the other.”  Famous examples in movies are “ReeferMadness” (smoking grass makes one depraved) and “Birth of a Nation” (blacks areout to rape white women and the KKK are the heroes).  Willson’s flawed protagonist, a not veryelite white-collar criminal, “Professor” Harold Hill, pretends to be a musicianand band leader.  He needs to convincenormally conservative Iowa parents to purchase expensive musical instrumentsand uniforms from him.  Hill’s solutionis to create a moral panic, which he does through the song “Ya’ Got Trouble!”  Hill’s song explains that the youth of RiverCity, Iowa are headed toward damnation because the town has a new pooltable.  Yes, a pool table.  Indeed, to accentuate the absurdity of themoral panic he is generating, Hill’s song differentiates between people playingbilliards (high-class, desirable) and those who play pool (low-class,delinquents).  Meredith Willson grew upin Mason City, Iowa, the county seat for Cerro Gordo, and based his play on hisexperiences there.  In the musical, Mrs.Paroo, “Marian the Librarian’s” mother, despairs that her daughter reads foreignauthors.  Mrs. Paroo shares the distressof modern Cerro Gordo residents with languages other than English.

Mrs. Paroo:
But, darlin’–when a woman has a husband
And you’ve got none,
Why should she take advice from you?
Even if you can quote Balzac and Shakespeare
And all them other highfalutin’ Greeks.

SavingCerro Gordo and the English Language

Putting aside the major imponderable – why is the “Cerro Gordo County GOP fundraiser [meeting]at the Mason County Country Club – one must delight in the exquisite irony thata conservative Republican who is driven to rant by the fact that some productshave labels describing the product in multiple languages chooses to live in“Cerro Gordo.”  Perhaps he is scarred byhaving to use these two Spanish words so frequently in America.  One must concede that it is un-American tofail to despise languages other than English. I have often been driven to paroxysms of rage when I see that my currencyhas been defiled by a foreign language.

Indeed, I havebeen scarred for decades by living in a city with an un-American name.  During my time in law school I lived in aYpsilanti, Michigan, which was named after a Greek hero of their war forindependence from the Ottoman Empire.  Ofcourse, Ypsilanti’s other claim to fame, the “brick dick” (a building voted themost phallic structure in a survey) may have been even more responsible for myfeelings of inadequacy.  In any event, Ifeel the pain of the Cerro Gordo resident beset by un-American languages on hiscan of soup.      

I urge thecitizens of Cerro Gordo to change the county’s name to “Fat Hill.”   

How an Iowa County was Given aSpanish Name

I can reassurereal Americans that the handful of citizens of Iowa that named their newlycreated county “Cerro Gordo” roughly 150 years ago did not do so out ofpolitical correctness or any love of the Spanish language.  They named their County to celebrate a greatvictory by the United States over Mexico. This was a very different era with no parallels to our own.  President Polk actively sought a pretext toinvade another nation, Mexico.  The U.S.had just annexed Texas, in violation of a treaty with Mexico.  The annexation followed the Texas war forindependence from Mexico, a struggles won largely by U.S. expats demanding thefreedom to own slaves.  Mexico, being abackward nation, had made slavery unlawful.   

Polk wasuncomfortable that his general, Zachary Taylor, won the initial battles in theU.S. invasion of Mexico (launched south form Texas) so decisively that hebecame a potential political rival.  (TheU.S. contemporaneously made multiple successful land grabs from Mexico in NewMexico and California.)  Polk, therefore,ordered General Windfield Scott to invade Mexico via the sea with the missionto capture the port of Veracruz (“True Cross”) and then march to Mexico Cityand capture it.  Scott’s siege ofVeracruz in 1847 was successful, but it gave time for substantial Mexicanforces outnumbering Scott’s forces to establish a strong defensive positionanchored on the heights of Cerro Gordo on the Federal Highway blocking Scott’sroute of march to Mexico City.  TheMexican defenders had the advantages of being on the defense of their ownnation, control of the high ground, prepared positions, limited frontage,greater numbers, greater artillery (in defilade)commanding the approaches to their main line of defense, and (what should havebeen) superior knowledge of the terrain. Scott’s forces should have been decisively defeated.  U.S. engineers, however, with Captain Robert E.Lee playing an important role, engaged in bold scouting that revealed a meansof flanking the Mexican forces commanded by Santa Anna.  The US flanking movement allowed Scott’sforces to attack the defenders in enfilade,which allowed them to rout the Mexicanforces.  The U.S. victory at Cerro Gordoopened the door for Scott’s capture of Mexico City, which led to Mexico’scapitulation in the Treaty of Guadalupe Hidalgo.  The war was as ignoble as any the U.S. hasever fought, but the U.S. army performed brilliantly at Cerro Gordo. 

The Rich White Sparkling Whine forthe New Year

Press reports call the Cerro Gordo resident’s statements toPerry a “rant,” but this is unfair.  Itwas a whine.  As a resident of CerroGordo the man has chosen to live in an area where he will rarely hear anylanguage other than English.  The CensusBureau informs us that while 95% of the residents of Cerro Gordo are white,they are being overrun by the 3.8% of the population that are Latinos – a fifthcolumn of roughly 1500 dedicated to the sole purpose of reversing thehumiliation of Mexico at Cerro Gordo over 150 years ago.  Mexican-Americans have long memories and aburning desire to bring about a Reconquista.  Mexican-Americans are not the onlyforeign threat to real Americans living in Cerro Gordo.  Roughly one-thousand county residents (2.4%)are “foreign born.”  Nearly one-in-twentyhouseholds (4.9%) in Cerro Gordo speaks a language other than English in thehome – the better to plot against America. Cerro Gordo is a veritable Tower of Babel. 

The Cerro Gordo resident who shared his pain with Perry wasnot suffering because he was forced to patronize the 1.8% of Cerro Gordo firmsowned by Latinos.  (Fewer than 100 firmsare owned by black or Asian residents of Cerro Gordo.)  It must be Cerro Gordo firms owned by real(mono-lingual, white) Americans that caused the valiant Cerro Gordo speaker’scry of distress by stocking products with labels that include languages otherthan English. 

TheIncident puts the Lie to the Canard that Conservatives Oppose SensibleRegulation

The U.S. does not require companies to label consumer goodsin multiple languages.  Many U.S. andforeign manufacturers print labels and product information in multiplelanguages so that they can increase sales and minimize costs.  It gives the producer more flexibility tosell its goods in whatever nation and region offers the producer the greatestprofit opportunity. 

Most so-called American consumers, unlike the real Americanhero of Cerro Gordo who brought this great moral crisis to Perry’s attention,do not have enough respect for the purity of the English language to be upsetthat the jar of mustard they purchase also says Senf on it.  It has come tothis in our once great nation – the language of the Third Reich is on ourmustard.  Why did we bother to fightWorld War II if we were going to capitulate to German demands for lebensraum on our product labels?  It gets worse – I saw bottles in the storeyesterday labeled Zinfandel and Champagne that did not even have anEnglish translation!  Wahnsinnig! 

The real American hero of Cerro Gordo who brought his cryfrom the heart about the assault on English on our soup cans to Perry’sattention, reminds me of that great patriot, General Jack D. Ripper in the movie“Dr. Strangelove.”  General Ripper, like theunknown patriot of Cerro Gordo that inspired Perry, was the first to understandthat the “loss of [English] essence” indicated that we were entering a fin de siècle.  “Purity of English” must be ourmantra.  As true conservatives we mustmake the preservation of the exclusivity of English in America our raison d’être.        
Only faux conservativeswould oppose regulation in these circumstances. Yes, consumers could just refuse to buy products defiled by the presenceof un-American languages on their labels. Entrepreneurs could enter the market and offer English-only labelspreserving the Purity of (English) Essence. But we should not rely on freedom of consumer choice when the assault onEnglish and America poses such an existential threat.  One cannot overstate the trauma caused to areal American when he tries to read a word or two in English before realizingthat he has been exposed to seeing a foreign language.  Our children are helpless absent a lawforbidding foreign words on products sold in America.  The danger of a pool table in Cerro Gordo,Iowa is de minimus compared to thescourge of seeing French on the label of cans of consommé.  RealAmericans believe in bullion, not bouillon.  

Why did Perry endorse the proposal to purify the labels ofour soup cans?  He is the chief executiveof a state with millions of citizens who prefer to have Spanish and English ontheir soup cans.  It is a testament tohis political courage that he would side with a single resident of Cerro Gordo,Iowa who is phobic about seeing languages other than English rather than sidewith those millions of citizens of Texas who would continue to betray ourEnglish language by purchasing soup with multilingual labels.  Only extensive government regulation of allproduct labels led by a Language Czar can rid us of these accursed languages.          

Control Frauds Continue to Maim and Kill

By William K Black

The financial scandal and the Great Recession that it causedhave understandably captured the bulk of our attention, but we must not losesight of the fact that “control frauds” continue to maim and kill enormousnumbers of people and damage the environment and society throughout theworld.  Several examples of these fraudshave led to recent press reports.  Iwrite to point out that control fraud is the common feature of thesescandals.  I address four recentmanifestations of control fraud:  theFrench manufacturer of defective silicone breast implants, the death of manyFillipinoes in floods made lethal by illegal deforestation, the deaths anddevastation caused by illegal seizure and exploitation of mines in the Congo,and the scrap metal dealers who put the profit in the theft of metals in theUK.  This first column explains theFrench breast implant fraud.

Varietiesof Control Fraud

Control frauds occur when the persons controlling aseemingly legitimate entity use it as a “weapon” to defraud.  Such frauds occur in the private, NGO, andpublic sector.  I write primarily aboutaccounting control frauds because accounting is the “weapon of choice” forfinancial control frauds.  (Liar’s loanswere the best ammunition, and subprime liar’s loans were the equivalent ofteflon-coated bullets designed to pierce protective armor.)  Shareholders and creditors are the primaryintended victims of accounting control fraud, which creates record, but fakeprofits.  Other forms of control fraudcreate real profits.  Anti-purchasercontrol frauds target the customer and involve deception as to the qualityand/or quantity of the product. Anti-public control frauds target the public.  Illegal logging, the illegal seizure andexploitation of mines, and purchasing goods one knows are likely to be stolenare examples of frauds designed to harm primarily the public. 

TheFrench Manufacturer of Defective Breast Implants

Poly Implant Prothese (PIP) was a French manufacturer ofsaline and silicone breast implants.  TheFDA found severe problems with PIP’s production of saline implants a decade agoand alerted PIP and its French regulatory counterpart to the problems in 2000.  The FDA described the saline implants as“adulterated” due to eleven flaws in its manufacturing processes.     

Learning about Jean-Claude Mas, PIP’s CEO, should serve as anecessary caution.  Far too many peoplecannot believe that people who run corporations can be “real” criminals.  CEOs can be despicable, and their approach totheir customers can be loathsome.  MasCEO knowingly put the health of hundreds of thousands of women at risk.

“Haddad[Mas’ lawyer] said that Mas freely admits using unapproved silicone gel, butremains adamant it is safe.

“PIP knew it wasn’t in compliance, but it wasn’t a toxic product,” the lawyersaid, adding it “had not been proven” the implants were any more likely toleak.

“The fact that it’s an irritant (when ruptured) is the same for all siliconegels….”

PIPused two types of silicone in its implants, Haddad said. One of them was anapproved gel made by American firm Nusil, but it also used an “identical”homemade gel that was five times cheaper.

According to PIP’s 2010 bankruptcy filing, it had exported 84 percent of itsannual production of 100,000 implants.”

But the substitute gel was not “identical” and whilemedical-grade silicone is an “irritant” when an implant ruptures thenon-medical gel posed a substantially greater risk.  PIP’s production quality problems continued,so PIP’s poor quality implants were also more likely to leak.  Indeed, PIP began putting the unlawfulsilicone in its products in 2001, shortly after it received the FDA warningabout its unsafe production methods (see here).

TheoclassicalEconomists Assume that Greater Consumer Choice is Unambiguously Good

Why would PIP continue to purchase some medical-gradesilicone at five times the price?  

“The tycoon at the heart of the breast implantsscandal that has affected hundreds of thousands of women has admitted hiscompany deliberately used inferior silicone gel.

The owner of bankrupt company Poly Implant Prothese(PIP) Jean-Claude Mas revealed that PIP sold protheses with industrial-gradesilicone that had not been approved by health authorities to be sold atdiscounted prices.

But wealthier clients were sold implants withhigh-quality gel, The Times newspaper reported.
Mr Mas, 72, explained through his lawyer, YvesHaddad, that the reason behind the product was that his company had an’economic objective’ and that his management aimed to get ‘the best cost’.

He also admitted that the industrial-grade siliconeimplants, which could cause health problems if they burst or leak, ‘did notformally receive approval’ and regulations were violated.
France’s medical safety regulators AFSSAPS werenever asked to inspect or approve the products.

Mr. Mas said there was a basic and a high-endversion of the implant, but that the cheaper version – which was ‘five timescheaper’ – was just as effective as the costlier version.”

PIP did not inform its poorer customers that it was illegally selling theminserts made with cheaper, unapproved industrial-grade silicone (see here).

PIP also did not inform its customers that “the casingaround the filling was also faulty and prone to rupture or leakage’” (see here).

Interpol’sImplicit View of the Seriousness of various Crimes

There were a flurry of press reports that Interpol had issued an arrestrequest for Mas, but it turned out that Interpol’s action was unrelated to Mas’placing the health of hundreds of thousands of women at risk through fraud. (see here)

“International police agency Interpol has beenissued a “red notice” for Mas, however it’s for an unrelated case — he wasarrested in June 2010 for drunk driving, but left the country and did not showup for a scheduled court date.”

That Interpol incident illustrates brilliantly thedifference in societal reactions to different varieties of crimes, but it alsooffers some hope.  Drunk driving is aserious crime that often maims and kills. An individual impaired driver of a car can put dozens of lives atrisk.  A fraudulent CEO running a medicalequipment company can put hundreds of thousands of lives at risk.  Only a few decades ago it was rare for lawenforcement to take drunk driving seriously, particularly if the driver waselite.  A social movement, MothersAgainst Drunk Driving (MADD), worked for many years to get society and lawenforcement to think of drunk driving as grave crime.  We need a similar social movement to getsociety and law enforcement to see control fraud as a grave crime worthy of anInterpol “red notice.”   


What separates the most destructive fraudulent CEOs fromtheir lesser counterparts is audacity. The French (naturally) have a saying that captures the conceptperfectly.  “L’audace, encore l’audace,toujours l’audace” (audacity, more audacity, always audacity).  Mas is off the scale when it comes toaudacity.  Mas exemplifies the Spanishmeaning of his name (“more”).  No soonerhad he (for the second time) been found to have endangered his customers, thanhe was planning to go back into the business of producing and selling breastimplants. (see here)

“The French head of the company at the centre of theinternational breast implant scare was employed by a second firm making [breastimplants] set up by two of his children.
The plan described Mas, 72, as a “creativegenius” and says its collaborators have “30 years of experience inthe field of quality, research and development, production andcommercialisation of breast implants”.
It stated its aim was to produce 400 silicone gelimplants every day at the former PIP production site in the south-east ofFrance, to be sold to “the European, South American and Chinesemarket”.”

It takes a special kind of depravity to describe oneself asa “creative genius” after a life of defrauding one’s customers through meansthat put their health at undue risk.  Iwrote an earlier column discussing what ring of hell Dante would make thefrauds that drove the financial crisis reside in if he were able to write amodern Divine Comedy.  After a career of preying on women, Masshould pray fervently that there is no physical or spiritual hell.  

President Obama Negotiates our Formal Surrender to Crony Capitalism – and the Nation Yawns

By William K. Black

On December 13, 2011, the Wall Street Journal published an article entitled “Banks in Pushfor Pact.” It was an obscure article buried in the real estatesection.  The article contained thisclause:  “Under the proposal, banks wouldbe released from legal claims tied to servicing delinquent mortgages as well ascertain mortgage-origination practices….” Opponents of this proposed amnesty for mortgage-origination fraud havecharged repeatedly that the federal government and Tom Miller, the AttorneyGeneral of Iowa, who is leading the settlement negotiations, support theamnesty.  Previously, Miller’s keylieutenant, but not the Obama administration, angrily denounced thecharge. 

TheFour Levels of Control Fraud Involving Mortgages

Home lenders, particularly those making liar’s loans,typically committed endemic “accounting control fraud” on multiple levels.  Control fraud occurs when the personscontrolling a seemingly legitimate entity use it as a “weapon” to defraud.  Accounting is the “weapon of choice” forfinancial control frauds.  Mortgagefrauds can be grouped into four levels, each of them exceptionallywidespread:  loan origination fraud bythe lenders and their agents, the fraudulent sale of fraudulent mortgages, thefraudulent pooling and sale of collateralized debt obligations (CDOs) in whichthe underlying was largely fraudulent mortgages, and foreclosure fraud. 

LoanOrigination Fraud

The classic economics article describing such frauds isGeorge Akerlof and Paul Romer’s “Looting: the Economic Underworld of Bankruptcyfor Profit” (1993).  The recipe” foraccounting control fraud by a lender (or purchaser) has four ingredients.

  1. Extreme growth by making (or purchasing)
  2. Loans of extremely poor quality at a premium yield
  3. While employing extreme leverage, and
  4. Providing grossly inadequate allowances for loan and lease losses (ALLL)
Origination fraud involved a series of mutually supportivefrauds: inflating the borrower’s income, inflating the appraised value of thehome, providing grossly inadequate allowances for loan and lease losses (ALLL),and failing to recognize losses on fraudulent loans held in portfolio.  It was also common for federally insuredlenders to file false reports with and make false statements to theregulators.  Lenders that made liar’sloans were “accounting control frauds.” Their CEOs cause them to create perverse incentives to suborn thesupposedly independent experts to provide opinions that inflate values andunderstate risk in order to aid and abet the underlying accounting fraud.  These perverse incentives create a“Gresham’s” dynamic in which bad ethics drives good ethics out of themarketplace.  The result is “echo” fraudepidemics.  Each of these fraudsconstitutes a federal felony.  Most ofthe frauds I have described are also felonies under state law.  Collectively, there were millions oforigination frauds with a total dollar amount of fraudulent originations wellin excess of $1 trillion.

TheFraudulent Sale of Fraudulent Loans

The second level of fraud is the fraudulent sale by thelenders of the fraudulent loans.   Thisform of fraud required endemic false “reps and warranties.”  Roughly 90 percent of liar’s loans were sold,so this second level of fraud also constitutes millions of federal and statefelonies and roughly $1 trillion in fraudulent sales.

TheFrauds involved in Pooling Fraudulent Loans to Create and Sell Fraudulent CDOs

The third level of fraud is the sale of collateralized debtobligations (CDOs) “backed” by fraudulent liar’s loans through falsedisclosures.  This level of fraudconstitutes tens of thousands of federal felonies and roughly $1 trillion infraudulent sales.


The fourth level of fraud is foreclosure fraud.  The best known of these frauds involved thecommission of hundreds of thousands of felonies through the filing of falseaffidavits to secure foreclosures (inaptly called “robo signing”).

MassiveForeclosure Fraud Generated the Global Settlement Discussions

It was this last level of fraud that prompted the settlementdiscussions.  What one must keepconstantly in mind when dealing with lenders that are control frauds is thatthey and their senior officers will be represented by the best criminal defenselawyers.  America still does many thingssuperbly, and we do lawyers really well. The fraudulent officers who control banks engaged in control fraud willspend bank funds like water for their defense lawyers.  The old joke is that when one is dealt lemonsone should make lemonade.  In law school,however, we consider that the “C minus” answer. When dealt lemons; the best lawyers seek to make Dom Perignon. 

Consider the setting – you represent a systemicallydangerous institution (SDI) that was the beneficiary of a federal bailout.  Your client has made hundreds of thousands offraudulent liar’s loans and fraudulently sold the great bulk of them.  If your client is held responsible for thesefrauds it will have to reveal that it is massively insolvent and facereceivership.  Your client is also one ofthe largest mortgage loan servicers in the world.  A small law firm representing a borrower hastaken the deposition of one of your client’s key employees who signed theaffidavits necessary to support roughly ten thousand foreclosures a month – andadmitted that the key statements she has made in each of those affidavits isfalse.  The somnolent federal governmenthad finally been forced to admit that the banks have engaged in endemic foreclosurefraud.  The states are alsoinvolved.  This would be a nightmarescenario for any normal client.  For anSDI, however, it was an opportunity. 

L’audace,encore l’audace, toujours l’audace!
(Audacity,more audacity, always audacity: the white collar defense lawyer’s creed)

One of the secrets to being an extraordinarily effectiveelite criminal is also true of their lawyers – audacity.  Elite white-collar criminals can frequently getaway with grotesque criminal conduct if they use their exceptional advantagesprovided by wealth, privilege, and seeming legitimacy.   Even within the ranks of elite white-collarcriminals, however, the CEOs who control SDIs – particularly during a financialcrisis that they caused – are unique in their power to commit crimes withimpunity.  They hold the national, evenglobal, economy hostage.  TreasurySecretary Geithner has made this strategy simple by displaying the “StockholmSyndrome.”  He has fallen in love withthe criminals that are holding our economy hostage.  Geithner claims that the fraudulent SDIs areso fragile that they would collapse if they were even investigated seriouslyfor fraud.  He conveniently ignores thefact that the primary reason for the SDIs’ fragility is that their CEOs lootedthe banks.  

They can also use “their” bank to buy the modern equivalentof indulgences for even the most destructive frauds.  There are two non-exclusive means of buyingindulgences.  The most obvious means ispolitical contributions.  The financeindustry is the leading funder of both political parties. The less obvious means of buying immunity arises from thedysfunctional nature of DOJ policies for (not) prosecuting major firms forserious felonies and the ability of the CEO to use corporate funds to purchasepersonal immunity from criminal prosecutions. Five facts about the criminal defense of large firms must be keptprominently in mind when considering the defense of banksters.  First, the CEO will gladly trade off billionsof dollars in payments by the bank and its liability insurers in order tosecure immunity from criminal charges against the CEO and the senior officerswho could implicate the CEO.  

Second, the Department of Justice (DOJ) has essentiallyceased to prosecute large firms for serious felonies.  DOJ was so traumatized by the consequences ofprosecuting Arthur Andersen that it has decided to allow large firms to enterinto “deferred prosecution” agreements (in which prosecution is, in reality,perpetually deferred).  Arthur Andersenhad entered into two deferred prosecution agreements, and DOJ offered it athird, when AA refused the agreement and went to trial.  

Third, while I have referred to the firm as the “client” andthe firm and its insurers typically pay for the attorney fees and fines, it isthe CEO that can hire and fire outside counsel. Outside counsel, therefore, are chosen by fraudulent CEOs because theyare willing to aid and abet the CEO in looting the real client (the firm).  This is a classic example of the fraudulentbank CEO deliberately creating a Gresham’s dynamic in which the least ethicalmembers of the “independent” profession drive the most ethical out of lucrativerepresentations.  In criminology jargon,control frauds are criminogenic. Fraudulent CEOs use their ability to make compensation for officers,employees, and independent professionals perverse in order to createenvironments that cause widespread frauds that aid and abet the lender’s fraudscheme.  To put it in plainer, biblicalEnglish:  fraud begets fraud.

Fourth, the settlement payments are typically deductiblefrom taxes.  This means that thedefendant’s actual burden of paying the fine is much smaller than the announcedamount of the fine.

Fifth, defense counsel typically promise to pay some portionof the fines to the victims of the fraud. This is a brilliant tactic.  Itmakes the government attorneys feel good about the settlement and it allowsthem to bash opponents of the settlement as blocking relief for the victims.  The tactic, of course, is cynical and dishonest.  The weak settlement is what prevents a fargreater recovery for the victims of the fraud. The government does not have to wait for a settlement to aid the victimsof foreclosure fraud.   
Settlement discussions by counsel for control frauds withthe government and shareholders are all about exceptionally able and zealouslegal representation of the CEO at the expense of the client, its shareholders,and the public.  Only vigorous regulatorsand prosecutors can protect the firm, shareholders, and public from looting bythese CEOs and the allies they generate.    

TheProposed Deal: The $1 Trillion Lagniappe

The obvious deal that criminal defense counsel for banksalways seek is to trade a showy amount of fines for de facto or even formal immunity for the CEO and other seniorofficers who led the frauds and became wealthy through the frauds.  Here, the defense counsel were far moreaudacious – they are demanding immunity not only from prosecution, but even frominvestigation, and they are demanding immunity for crimes they committed thathave never been investigated by the state and local prosecutors.  The foreclosure fraud cases, while enormous,are by far the least of the banksters’ worries. The potential loss exposure from the foreclosure fraud is measured inthe tens of billions of dollars.  Thepotential loss exposure from fraudulent home loan originations is in thetrillions of dollars – and a trillion is a thousand billion.  The banks’ CEOs are demanding, for a puny $25billion, a release from liability for foreclosure fraud.  That is obscene on multiple levels.  Even President Obama concedes that the bankstreat such fines as a mere “cost of doing business” (by which he means the“small tax on the wealth obtained by elites through doing fraudulentbusiness”).  The senior officers involvedin the fraud should be imprisoned. Giving them immunity, allowing them to keep their bonuses “earned”through fraud, and keeping them in leadership roles are all despicable actsthat should be anathema to every prosecutor. 

But what came next went beyond scandal as usual.  The banks then demanded a lagniappe – a little something extra,for free, in a New Orleans restaurant – they wanted immunity for loanorigination fraud.  The slight differenceis that this lagniappe is worthtrillions of dollars to the frauds.  Itsickens me to inform the reader that the Obama administration is eager toprovide the frauds with this lagniappe.  The Department of Housing and UrbanDevelopment (HUD), led by Secretary Shaun Donovan, is actively pushing thisscandalous deal, with strong support in the background from Treasury SecretaryGeithner.  The silence of AttorneyGeneral Holder, and President Obama, on this travesty is exceptional.

Worse, the banks are seeking immunity even frominvestigation of the over trillion dollars in mortgage origination fraud – andthe Obama and Bush administrations’ supposed “investigations” of mortgageorigination fraud by the large lenders that made the mass of liar’s loans areall unworthy of the word “investigations.” It would take roughly 100 investigators, working for years, to do aserious investigation of any of the largest liar’s loan lenders.  There has never been, remotely, such aninvestigation by the federal government of the any large liar’s loan lender.  The Obama administration is reported tosupport the fraudulent financial CEOs’ dearest dream – de facto immunity even from investigation of over a trilliondollars in fraudulent liar’s loans origination.  

The Republican Party and its candidates for the Party’spresidential nomination are not criticizing Obama’s proposed formal surrenderto crony capitalism.  They only wish theywere in complete power and could cash in even more heavily on the tidal bore ofcampaign contributions flowing out of the finance industry.   

Miller,and everyone involved, knows there was endemic origination fraud

Miller no longer denies that he has joined theadministration in favoring the banks’ most cherished dream – amnesty fororiginating a trillion dollars in fraudulent home loans.   Indeed, the settlement is designed toprevent even investigations of themortgage origination fraud.

I confess that I am so naïve that I would have believed itimpossible that any federal or state governmental entity would enter into suchan abject surrender to crony capitalism. Once I learned that they were seriously contemplating such a travesty Icould not believe that Miller would support it. I believed his lieutenant’s (Mr. Madigan’s) denunciation of criticism ofthe proposed amnesty.  (I have reviewedMadigan’s comments in preparing this piece and I see that they were artfullycrafted to be disingenuous.)
The testimony of Thomas J. Miller, Attorney General of Iowa, at a 2007Federal Reserve Board hearing shows that he knows that the lenders engaged inmassive origination fraud.

Over the lastseveral years, the subprime market has created a race to the bottom in whichunethical actors have been handsomely rewarded for their misdeeds and ethicalactors have lost market share…. The market incentives rewarded irresponsiblelending and made it more difficult for responsible lenders to compete. Strongregulations will create an even playing field in which ethical actors are nolonger punished.
Despite thewell documented performance struggles of 2006 vintage loans, originatorscontinued to use products with the same characteristics in 2007.
[M]anyoriginators … invent … non-existent occupations or income sources, or simplyinflat[e] income totals to support loan applications. A review of 100 statedincome loans by one lender found that a shocking 90% of the applicationsoverstated income by 5% or more and almost 60% overstated income by more than50%. Importantly, our investigations have found that most stated income fraudoccurs at the suggestion and direction of the loan originator, not theconsumer.

Miller, T.  2007.  “Comments to the Federal Reserve Board ofGovernors on Adopting Regulations to Prohibit Unfair and Deceptive Acts andPractices under the Home Ownership and Equity Protection Act (HOEPA).” (August14).  Miller was correct.  We know that it was overwhelmingly lenders andtheir agents that put the lies in “liar’s” loans.  We know that 90 percent of liar’s loans werefraudulent.  We know that the industrymassively increased the number of liar’s loans after warnings that the loanswere endemically fraudulent.  The growthrate of liar’s loans was so rapid (over 500% from 2003-2006) that thesefraudulent loans caused the housing bubble to hyper-inflate.  We know that no government entity ever causedany entity to make or purchase (and that includes Fannie and Freddie) liar’sloans.  Indeed, the government repeatedlywarned of the dangers of liar’s loans. We know that by 2006 roughly one-third of all home loans made that yearwere liar’s loans – which means there were millionsof fraudulent loans made annually and, collectively, trillions of dollars in fraudulently originated home loans.

Whatmust be done

Our economy and our democracy cannot succeed under cronycapitalism.  Please join me in writing toCongress, the administration, your state attorney general, the media, and anycourt that must approve this proposed settlement.  It is a disgrace.  President Obama is, of course, correct thatsome actions can be illegal but exceptionally unethical and damaging.  He is about to take precisely such an actionin derogation of his oath of office to defend and protect the constitution ofthe United States of America.  Thefraudulent CEOs of the banks that became wealthy by causing the financialcrisis and the Great Recession are treating us as fools who will give trilliondollar plus gifts to the least deserving, most arrogant, and least ethicalelites.  Have we fallen so low as apeople that we will allow this to happen? 

Please join me in supporting the Attorney Generals of NewYork, Delaware, and California who have opposed this settlement.  

As for President Obama, I hope that he will make this NewYear’s resolution:  “I resolve to honormy oath of office and faithfully execute the laws of the United States anddefend its constitution, which is premised on justice and the rule of law.  No person, no matter how elite, is above thatlaw.  I have today asked Messrs.Bernanke, Geithner, and Donovan for their resignations because oftheir support for bailing out the elite banks and granting de facto amnesty to fraudulent financial CEOs.  I, and my new Attorney General and newSecretary of the Treasury, have mutually resolved to make the vigorousprosecution of the elite financial frauds that drove the ongoing crisis ourmission. ”


Did OFHEO Fix Fannie and Freddie’s Compensation Systems after discovering their Frauds?

By William K. Black

I have been chastised by a friend and former colleague forwriting:

“Here is the crazy thing – theSEC, OFHEO, and Department of Justice all failed to demand that Fannie andFreddie end their perverse executive compensation system that made theexecutives wealthy through fraud and put the entities and the government atrisk.”

My friend notes that Fannie, under pressure from OFHEO andwith its prior approval, changed its compensation system after the initialaccounting fraud.  

My sentence would beclearer if it was revised to read as follows:

“Here is the crazy thing – theSEC, OFHEO, and the Department of Justice all failed to prevent Fannie andFreddie from using perverse executive compensation systems that made theexecutives wealthy through fraud and put the entities and the government atrisk.”

The new compensation systems at Fannie and Freddie remainedexceptionally perverse after the changes. Their CEOs continued to cause them to engage in systematic accountingfraud by not providing remotely adequate loss reserves and allowances for loanlosses despite purchasing massive amounts of fraudulent liar’s loans andfraudulent subprime liar’s loans.  The samescam that made the officers rich was certain to destroy Fannie and Freddie.

I have alsoexamined a number of statements by both of OFHEO’s leaders during the relevantperiod, concerning compensation and the initial Fannie accounting fraud.  James Lockhart issued a hard hitting releaseon May 23, 2006 accompanying OFHEO’s report on its investigation of Fannie entitled:  “FANNIE MAE FAÇADE: Fannie MaeCriticized for Earnings Manipulation.” The release begins with this passage that directly ties the accountingfraud to the controlling officers’ desire to trigger bonuses.  

“The report details an arrogant andunethical corporate culture where Fannie Mae employees manipulated accountingand earnings to trigger bonuses for senior executives from 1998 to 2004. Thereport also prescribes corrective actions to ensure the safety and soundness ofthe company.”

Note that the release emphasizes that the OFHEO report “prescribescorrective actions.”  The purpose of therelease, of course, is to emphasize the most important aspects of the lengthyOFHEO report.  The release makes it clearthat executive compensation drove the fraud.

 “The combination of earnings manipulation,mismanagement and unconstrained growth resulted in an estimated $10.6 billionof losses, well over a billion dollars in expenses to fix the problems, andill-gotten bonuses in the hundreds of millions of dollars.”    

“By deliberately andintentionally manipulating accounting to hit earnings targets, seniormanagement maximized the bonuses and other executive compensation theyreceived, at the expense of shareholders. Earnings management made asignificant contribution to the compensation of Fannie Mae Chairman and CEOFranklin Raines, which totaled over $90 million from 1998 through 2003. Of thattotal, over $52 million was directly tied to achieving earnings per sharetargets.”

When it comes to the steps that Lockhart consideredcritical, however, executive compensation was not specifically mentioned.

The report ends with recommendations fromOFHEO’s staff to [Lockhart], which he has accepted. Some of the keyrecommendations include:

Fannie Mae must meet all of its commitments forremediation and do so with an emphasis on implementation – with dates certain –of plans already presented to OFHEO.

Fannie Mae must review OFHEO’s report todetermine additional steps to take to improve its controls, accounting systems,risk management practices and systems, external relations program, dataquality, and corporate culture. Emphasis must be placed on implementation ofthose plans.

Fannie Mae must strengthen its Board ofDirectors procedures to enhance Board oversight of Fannie Mae’s management.

Fannie Mae must undertake a review ofindividuals currently with the Enterprise that are mentioned in OFHEO’s report.

Due to Fannie Mae’s current operational andinternal control deficiencies and other risks, the Enterprise’s growth shouldbe limited.

OFHEO should continue to support legislation toprovide the powers essential to meeting its mission of assuring safe and soundoperations at the Enterprises.

Similarly, on June 6, 2006, Lockhart testified before theHouse on Fannie’s fraud.  He explainedhow Fannie’s executive compensation system created the perverse incentives thatdrove the massive accounting fraud.  Heended by listing how OFHEO responded to the frauds by ordering changes atFannie.  None of these changes discussedexecutive compensation.  The failure ofthis excerpt to discuss executive compensation is particularly striking.

“Fannie Mae must takeadditional steps to improve its internal controls, accounting systems,operational and other risk management practices and systems, data quality, andjournal entries. Emphasis must be placed on implementation with dates certain.”

Executive compensation, the most critical problem at Fannieand Freddie, the problem that drove their accounting control frauds, receivedminimal attention from OFHEO’s head. Fannie and Freddie’s CEOs proceeded to become wealthy through bonuses“earned” through business strategies that were sure to destroy Fannie andFreddie.  OFHEO took no effective actionto remove these perverse incentives.

Armando Falcon, Lockhart’s predecessor as head of OFHEO,achieved the remarkable – his revulsion for Fannie’s controlling officersexceeded Lockhart’s.  “While all of thispolitical power satisfied the egos of Fannie and Freddie executives, itultimately served one primary purpose: the speedy accumulation of personalwealth by any means.”  Testimony ofArmando Falcon, submitted to the Financial Crisis Inquiry Commission (April 9,2010).  His testimony details howFannie’s controlling officers used accounting fraud to attain massive bonuses.

TheTerrible Cost of Failing to Understand Accounting Control Fraud

The sad irony is that immediately after Falcon explained theperverse incentives arising from Fannie’s compensation system he went on to beonly half right in his analysis of Fannie and Freddie’s eventual failure.  The half he got wrong stemmed from hisfailure to understand the interplay of accounting control fraud and perverseexecutive compensation. 

“Your letter also asked me about the impact of the affordablehousing goals on the enterprises’ financial problems. In my opinion, the goalswere not the cause of the enterprises demise. The firms would not engage in anyactivity, goal fulfilling or otherwise, unless there was a profit to be made.Fannie and Freddie invested in subprime and Alt A mortgages in order toincrease profits and regain market share. Any impact on meeting affordablehousing goals was a byproduct of the activity.”

In addition, OFHEOmade it very clear to both enterprises that safety and soundness was always ahigher priority than the affordable housing goals. They should not take onexcessive risk in order to meet any one of the goals.”

Falcon almost gets this right, but his failureto understand the most destructive financial fraud mechanism leads him to misswhat happened at Fannie and Freddie even with the benefit of hindsight.  His analytical failures exemplify OFHEO’scentral analytical failure.  He iscorrect that only the exceptionally naïve could believe that Fannie andFreddie’s controlling officers based their business decisions on meeting theaffordable housing goals.  He isgrotesquely incorrect in assuming that their controlling officers only engagedin an activity if “there was a profit to be made.”  His error is bizarre given the fact that hehad explained that Fannie’s controlling officers engaged in activity thatcaused large losses and then used accounting fraud to transmute real lossesinto fictional gains in order to maximize their bonuses. 

Falcon is correct that Fannie’s controllingofficers had “one primary purpose” at all times – “thespeedy accumulation of personal wealth by any means.”  What he fails to understand is thataccounting control fraud is a “sure thing” and that the formula for maximizingfictional income (and real bonuses) maximizes real losses.  Fannie and Freddie’s controlling officers“one primary purpose” was making themselves wealthy.  Accounting fraud was their “weapon of choice”to produce great wealth very quickly. Purchasing large amounts of “liar’s” loans guaranteed that Fannie andFreddie would suffer massive losses. Purchasing large amounts of subprime liar’s loans guaranteed that theywould suffer catastrophic losses.  Liar’s(home) loans create such intense “adverse selection” that they have a sharplynegative “expected value.”  In plainEnglish, the purchaser will lose money. It’s equivalent to betting against the House, except that the odds areso bad that the expected value is more negative than playing the lottery.  Liar’s loans can only fail to produce obvioussevere losses temporarily while the bubble is expanding.  Refinancing hides the losses during the rapidexpansion phase of the bubble.  Thesaying in the trade is that “a rolling loan gathers no loss.”  Bubbles, however, are only temporary andliar’s loans will begin blowing as soon as the bubble starts inflating, whichcan be over a year prior to the bubble bursting. 

Fannie and Freddie’s CEOs chased higher nominal yields, notreal “profit” for the firms.  Theirstrategy exemplified the logic of George Akerlof and Paul Romer’s famous 1993article, captured in their title (“Looting: the Economic Underworld ofBankruptcy for Profit”).  The firm fails,but the controlling officers walk away rich because the frauds they leadproduce fictional income and real bonuses. (Akerlof and Romer’s use of the word “profit” is ironic.  It refers to gains to the controllingofficers from fraudulent business strategies that cause fatal losses to thefirm.)  Akerlof and Romer aptly termedthe accounting control fraud strategy a “sure thing.”

Fannie and Freddie’s risk officers alerted their CEOs to thefact that nonprime loans were likely to produce far greater losses, that therapid rise in home prices was temporarily suppressing default rates, and thatthe rapid rise in home prices could not continue indefinitely.  It is inconceivable that Fannie and Freddiedid not know of the FBI’s September 2004 warning that there was an “epidemic”of mortgage fraud and their prediction that the fraud epidemic would cause aneconomic “crisis” if it were not contained. Fannie and Freddie’s purchase of liar’s loans that cause severe lossesoverwhelmingly occurred after the FBI’s warning.  “The government” never required any entity tomake or purchase liar’s loans.  Most ofthe liar’s loans that caused Fannie and Freddie’s severe losses were purchasedafter MARI’s five-part warning to the mortgage industry in April 2006.  “The Mortgage Asset Research Institute’s(MARI) EIGHTH PERIODIC MORTGAGE FRAUD CASE REPORT TOthe MORTGAGE BANKERS ASSOCIATION.”  (Itis inconceivable that Fannie and Freddie’s controlling officers, or OFHEO, wereunaware of these warnings.  Louis Freeh,former head of the FBI, joined Fannie’s board of directors in mid-2007.) 

MARI paired it first two warnings:

“Stated income and reduceddocumentation loans speed up the approval process, but they are open invitationsto fraudsters. It appears that many members of the industry have littlehistorical appreciation for the havoc created by low-doc/no-doc products thatwere the rage in the early 1990s. Those loans produced hundreds of millions ofdollars in losses for their users.”

MARI’s third warning quantified the incidence of fraud insuch loans.  It paired these data withits fourth warning dealing with the revealing label the industry usedinternally for such loans.

“One of MARI’s customersrecently reviewed a sample of 100 stated income loans upon which they had IRSForms 4506. When the stated incomes were compared to the IRS figures, theresulting differences were dramatic. Ninety percent of the stated incomes wereexaggerated by 5% or more. More disturbingly, almost 60% of the stated amountswere exaggerated by more than 50%. These results suggest that the stated incomeloan deserves the nickname used by many in the industry, the “liar’s loan.””

MARI’s fifth warning reported the views of federal bankingregulators.

Federal regulators of insuredfinancial institutions have expressed safety and soundness concerns over theseloans with lower documentation requirements and other “nontraditional” loans.

To summarize, MARI warned every member of the MortgageBankers Association (MBA) in writing in early 2006 that so-called “statedincome” loans:

  1. Were “open invitations to fraudsters”
  2. Had produced hundreds of millions of dollars of losses when they became common in the early 1990s
  3. Had a fraud incidence of 90%
  4. Deserved the industry term for such loans:  “liar’s loans”
  5. Were opposed by federal banking regulators because of safety and soundness concerns
It was in this context that (1) lenders moved massively toincrease their origination of fraudulent liar’s loans and to sell such loansthrough fraudulent “reps and warranties” (2) Fannie and Freddie (and theirinvestment banker counterparts) moved massively to purchase these endemicallyfraudulent loans, and (3) OFHEO did nothing meaningful to prevent Fannie andFreddie from purchasing fatal amounts of fraudulent liar’s loans. 

Fannieand Freddie (and the FHFA) still get it wrong

Indeed, even after the second wave of accounting controlfraud caused the failure of Fannie and Freddie, OFHEO failed to end theirperverse executive compensation practices. Steve Linick, the FHFA’s Inspector General (FHFA is the successor agencyto OFHEO) reported:

“Linick said the FHFA rejected his recommendationthat it test and independently verify the annual pay packages, which are set bythe boards of Fannie and Freddie and approved by the agency in consultationwith the Treasury Department.

The FHFA “lacks key controls necessary to monitorthe enterprises’ ongoing executive compensation decisions under the approvedpackages,” the inspector general wrote. “FHFA has neither developed writtenprocedures to evaluate the enterprises’ recommended compensation levels eachyear, nor required FHFA staff to verify and test independently the means bywhich the Enterprises calculate their recommended compensation levels.”

Further, the agency “lacks independent testingand verification of the Enterprises’ submissions in support of executivecompensation packages,” the report said.”

The federal “pay czar” heavily criticized all but one of theexecutive compensation plans submitted by the bailed-out firms still subject tospecial regulation.  Executivecompensation is so typically perverse that it is one of leading causes ofcriminogenic environments for accounting control fraud.  The intellectual father of modern executivecompensation, Michael Jensen, has decried the results, which he concedesincludes rampant earnings manipulation. Fannie and Freddie are simply the most expensive failures to date causedby accounting control fraud.   

For those that can’t make it to Kansas City for this event, we will attempt to stream it live here at New Economic Perspectives.

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European Debt Crisis

Roundtable Discussion


Special Post-Program Workshop for Teachers:
Teaching Applications for the Secondary Classroom


Roundtable Panelists
John Keating
Associate Professor, Department of Economics, KU

Stephanie Kelton
Associate Professor, Department of Economics, University of Missouri-Kansas City

Robert Rohrschneider
Sir Robert Worcester Distinguished Professor in Public Opinion and Survey Research, Department of Political Science, KU
Victor Bailey
Charles W. Battey Distinguished Professor of Modern British History, Department of History, and Director, Hall Center for the Humanities, KU

Roundtable Discussion

Thursday, Nov. 17, 3:30-4:30
Alderson Auditorium, Kansas Union


Teacher Workshop

4:30-5:30, Curry Room, Kansas Union
 Participate in a discussion of the Roundtable and receive
free teaching materials and refreshments.
Sponsored by the KU Center for Economic Education


Both sessions are free.Roundtable does not require reservations.

To attend the Teacher Workshop, contactNadia Kardash [email protected] to reserve a space.Register early; limited seating and materials available.


Eurpean Debt Crisis Roundtable
Sponsored by: 

European Studies Program
Center for Global & International Studies
Hall Center for the Humanities

Departments of Classics, French & Italian, Germanic Languages

& Literatures, Slavic Languages & Literatures, and Spanish & Portuguese

A Financial Coup d’etat in the Making?

By Marshall Auerback

It is said that the EuropeanUnion is a remarkably inefficient organization in terms of organizing economicrescue packages, but when it comes to subverting democracy, they are asruthless and efficient as a well-oiled crime syndicate.
Considerthe following:  in the space of less than2 weeks, the eurocrats have managed to eliminate two troublesome electedleaders, whose actions dared to interfere with their broader objectives offinalizing the “European Project” – a project which, to put it bluntly, islooking more and more like a financial coup d’etat.

First,Greece, which has in a sense provided the template:  Prime Minister George Papandreou, had theaudacity toseek the consent of his own people to decisions that would shape their livesvia referendum.  Well, judging from thepetulant reactions of German Chancellor Angela Merkel and French PresidentNicolas Sarkozy, this clearly wouldn’t do. Blatantly interfering with the internal affairs of a fellow democracy(and an ostensible ally), both lobbied (andthreatened) the Greek government, the end result being that Mr. Papandreou wasduly shoved aside after backtracking.
And look who’s the new PM in Greece: LucasPapademos, a former ECB official, (naturally, with the requisite Goldman Sachspedigree), in order to implement the latest set of “structural reforms”, whichwill almost certainly have the effect of deflating the Greek economy evenfurther into the ground.  Of course, theprivatizations will go ahead and Greece’s rapacious tax evading oligarchs willscoop them up at distressed values (presumably with the cash they’ve alreadystashed offshore in the London property market, or Swiss banks), therebyconsolidating their control of an increasingly dysfunctional Greek economy.  The vast majority of Greeks will sufferhorribly.  They have no say, in a sensebeing left with the choice of shooting themselves or a firing squad.  Still, it’s not a total loss:  no doubt Goldman Sachs will reap substantial feesas it helps to auction off these very same state assets.
Across, the Adriatic, itappears as if the “Merkozy” tandem has also played its cards successfully forRound 2, this time successfully eliminating its troublesome nemesis, Italy PM SilvioBerlusconi.  Say what you will about MrBerlusconi, but in this instance he was right to object to a crude political ploy being foisted on him by theECB, the French and Germans to accept an irrational and economicallycounterproductive program fiscal austerity program in exchange for “support”from the likes of the IMF.   Ask any Argentinean what IMF “support”entails.
AllBerlusconi had to do was cast his eyes toward Athens to see the likely effectof a renewed assault on the Italian welfare state. But the markets’ euphoric reactionto his resignation was surreal: akin to turkeys voting for Thanksgiving.
InRome, this Franco-German powerplay is being overseen by a canny ex-Communist,President Giorgio Napolitano, who is in the process of engineering  life-longeurocrat, Mario Monti, as the next PM in Italy.  Look at Monti’sbackgroundImpeccable credentials:  a virtual “lifer” within the European Union’stechnocratic governing structures, mingled with some private sector“experience” as a director of entities such as Coca Cola and, of course, an “internationaladvisor” to Goldman Sachs.
What is taking place isnothing less than a financial coup d’etat by the Eurozone’s rentier class.  And it is one of history’s sad ironies that,at least in the case of Italy, this is all being engineered by an ex-Communist,who likely would have been chased out of the Italian Government (a la JuanBerlinguer)  by a Cold War-driven CIA hadthis taken place but 30 years earlier.
How have we come to this passwithin the EU?  It is hard to point toone person.  We have seen this vastproject moved along by a handful of unelected bureaucrats for several decadesor more.  Jacques Delors was a truly seminal figure, but he did not actalone.  The whole of the Europeanproject has been increasingly driven by these unelected  tenured eurocrats, who  have rotated in and out of various positions withinthe EU’s governing structures and spent a few years’ getting the requisiteprivate sector training at a place like GS or JP Morgan. 
You could make the case thatthis started when then French President Francois Mitterrand came to power inthe early 1980s, and tried to implement a genuinely fresh progressive economicdirection for France. He was promptly undermined until he learned to “playball” with the powers behind the throne.  Since then, the game planhas largely remained the same:  EuropeanCommissioners set up multiple diktats, rules, regulations, minus, of course, anyreal kind of democratic recourse when they encounter popular resistance. You start small and build up gradually and create fait accomplis everywhere. 
Whenthere is democratic backlash via a referendum, the setback is onlytemporary.  Countries, such as Ireland,which dare to vote the “wrong” way in a national referendum, do not have theresults respected.   EU officialdom hasgenerally responded, not by reflecting on a popular expression of democraticwill, but ignoring the results until the silly peasants realize the egregiouserrors of their ways and re-vote the right way. 
Ifit takes two, or even three, referenda, so be it. Politically, theinterpretation of any aspect of the Treaties relating to European governancehave always been largely left in the hands of unelected bureaucrats, operatingout of institutions which are devoid of any kind of democraticlegitimacy.  This, in turn, has led to an increasing sense of politicalalienation and a corresponding move toward extremist parties hostile to anykind of political and monetary union in other parts of Europe.  Underpolitically charged circumstances, these extremist parties might become themainstream.

The one figure who emerges as a tragic figure here isGeorge Papandreaou.  However ineffectually, Papandreou had been deeply committedto making the October deal work.  But asHarvard economist (and Greek government advisor) Richard Parker has noted,Papandreou faced a firestorm on multiple fronts: competitors in his own partywho wanted his job; parliamentarians in his party who threatened to bolt overnew austerity measures; the wholesale intransigence of Samaras and NewDemocracy; to say nothing of economy that was deflating into the ground beforeany real help had arrived.  Calling for a referendum became his onlyinstrument to put out multiple fires at once—by forcing Greek politicians andtheir powerful backers to back down and by forcing European leaders back to thetable immediately to finalize a workable rescue plan in final form.

Of course, he was bound tofail, given the powerful opposition behind him. The Greek PM was being punished on the one hand by his”allies” in the EU, who have imposed collective punishment on theGreek people because of decades of embedded corruption in the system, in spiteof the fact that this Prime Minister had come clean. Making Greece a properfunctioning democracy was Papandreou’s raison d’etre for in getting into Greekpolitics. 
And, on the otherside, the parasite Greek oligarchs themselves, who saw his actions asfrontal attack on their control of the Greek economy, fought to destroy himpolitically and in effect moving Greece one step closer to a failed state.
And now Greece has provided aconvenient model.  You’ve now manufactured a crisis (that EASILY could have been solved by the ECB years ago – Greece is around 2.5% ofEurope’s GDP), which is now spreading, but providing ample opportunity to getrid of troublesome politicians who don’t do what they are told (effectivelyembrace this “stability culture” that the Germans bleat on about, butwhich in reality is nothing more than consolidation of the rentiers’ control ofthe various governments). 
Similarly in Italy, theEuropean Central Bank has been buying Italian bonds, but in very half-heartedfashion and certainly not enough to stem the relentless rise in rates.  The ECB’s new chief, Mario Draghi (also anex-Goldman man), kicked off his term with a blunt warning that Europe’s centralbank would not act as a “lender of last resort” (hiding behind dubious legaltechnicalities) and thereby put his fellow countryman in a position where hisresignation was the only course of action to salvage the country from animmediate financial crisis.

Berlusconi was also an easy target, given his colorfuland dubious private history.  And hislikely replacement, Mario Monti, is a perfect bagman for the financialoligarchs of Europe. He is, indeed, part of what one can rightly refer toas a “financial mafia” that has wrecked the world economy since 2008. Thesehatchet men of this murky and opaque financial world are now being appointed toimplement austerity on poor working households to save the financial sectorfrom a debt deflation — an artificial crisis created because of thearchitecture of the Euro system, which as we know these same financial“markets” so much celebrated when the euro was launched in 1999. Sadly, a largenumber of Italians still see the euro as their saviour from a corrupt past,which many associate with the Italian lire and high interest rates, even if thecorrupt Berlusconi has been himself intimately linked to the same Euro elite.
And Draghi himself has a dubious past: as wenoted in a recent post,historically, Italyactively exploited ambiguity in accounting rules for swap transactions in orderto mislead EU institutions, other EU national governments, and its own publicas to the true size of its budget deficit. 
Itseems indeed fitting that Draghi is now the man forced to deal with theconsequences of this national accounting fraud. But it’s hardly just for the people of Europe, all of whom will continueto get crushed under the boot of yet more fiscal austerity, by an increasinglydetached and democratically unaccountable elite.  No wonder the streets of Madrid, Athens, Romeand elsewhere are beginning to burn.