Equal opportunity destroyer

Barry Ritholtz is lamenting the wasted days and nights and opportunities of Barak Obama:

The Tragedy of the Obama Administration

On election night six years ago, I wrote The Tragedy of the Bush Administration.

The rest of that piece went on to lament how George W. Bush was granted that rare opportunity to grab the brass ring, to rise to the occasion — and failed miserably.

Here we sit, not half a century later as originally surmised, but a mere six years later. I once again find myself lamenting the opportunities wasted by a US President in response to a great cataclysm. In the case of President Obama, it was his response to the financial crisis. The opportunity for greatness presented itself, and was . . . ignored.

And what an opportunity it was: Over the prior 3 decades, the economy of the United States had been “financialized.” We became much more involved in ‘financial engineering’ than any other more productive engineering. Along with this financialization came increased revenue for the biggest banks and investment houses; greater profits, influence, and power. A wave of deregulation swept over the sector, freeing the banks from meddling oversight.

Thus, as the finance sector got larger and more important, it was paradoxically under ever less scrutiny, supervision, and regulation. With that new found freedom from oversight, the banks promptly blew themselves, and the global economy, to smithereens.

This was the environment in which the President came into office. What did he do in this scenario?

• He appointed two of the architects of the crisis to major White House economic positions: Lawrence Summers as CEA Chair, and Timothy Geithner as Treasury Secretary.

• He made the enormous tactical error of focusing on Health Care Reform, while the banking crisis was still in full flower.

• He failed to marshall adequate resources to respond to the worst economic recession since the Great Depression.

Yes, like his Yale, Rhodes Scholar and other predecessors, President Obama (Harvard) has shown that Wall Street is an equal opportunity destroyer.

How big banks helped to greece the wheels of commerce

Banks Shared Clients’ Profits, but Not Losses

Here is the deal: Pension funds and mutual funds lend some of their stocks and bonds to Wall Street, in return for cash that banks like JPMorgan then invest. If the trades do well, the bank takes a cut of the profits. If the trades do poorly, the funds absorb all of the losses.

The strategy is called securities lending. Mr. Evangelisti said, all of the investments had been permitted under guidelines negotiated with the bank’s clients. JPMorgan, he said, did not take undue risks.

In addition to losing money for New Orleans workers and others, securities lending also played a central role in the near-collapse of the American International Group. Through securities lending, pensions and mutual funds borrow money to make trades, adding to the risks within the financial system.

Despite such troubles, the securities lending business has rebounded after plummeting during the crisis. Today shares with a combined value of $2.3 trillion are out on loan, according to SunGard, which provides technology services to financial companies. In 2007, before the bubble burst, the total on loan was worth $2.5 trillion.

The quick revival of securities lending raises concerns about whether banks and their pension customers have learned any lessons.

“What happened was the banks got greedy and they looked at the return they were getting on the collateral and said, ‘Why don’t we go further with this?’ ” said Steve Niss, the managing partner at the NFS Consulting Group, an executive search firm specializing in investment management. “But the clients got greedy right along with the banks.”

The banks did not do it on their own. What we have is fund managers and bank managers playing with other people's money. The can half-rightly point fingers at each other as they try to duck responsibility for their own distractions. But the fingers end up pointing in the eyes of the beholding fund beneficiaries.

Who wins and who loses? The people who saved. Who's accountable? Dunno.

And it's not just the savings funds managers. It's other managers of people's money, right down the Main Street from the savers who live there.

Looting Main Street (with a shadow copy posted here.)

The sewer bill, in fact, is what cost Pack and her co-workers their jobs. In 1996, the average monthly sewer bill for a family of four in Birmingham was only $14.71 — but that was before the county decided to build an elaborate new sewer system with the help of out-of-state financial wizards with names like Bear Stearns, Lehman Brothers, Goldman Sachs and JP Morgan Chase. The result was a monstrous pile of borrowed money that the county used to build, in essence, the world's grandest toilet — "the Taj Mahal of sewer-treatment plants" is how one county worker put it.

What happened here in Jefferson County would turn out to be the perfect metaphor for the peculiar alchemy of modern oligarchical capitalism: A mob of corrupt local officials and morally absent financiers got together to build a giant device that converted human shit into billions of dollars of profit for Wall Street — and misery for people like Lisa Pack.

The original cost estimates for the new sewer system were as low as $250 million. But in a wondrous demonstration of the possibilities of small-town graft and contract-padding, the price tag quickly swelled to more than $3 billion.

County commissioners were literally pocketing wads of cash from builders and engineers and other contractors eager to get in on the project, while the county was forced to borrow obscene sums to pay for the rapidly spiraling costs.

Jefferson County, in effect, became one giant, TV-stealing, unemployed drug addict who borrowed a million dollars to buy the mother of all McMansions — and just as it did during the housing bubble, Wall Street made a business of keeping the crook in his house. As one county commissioner put it, "We're like a guy making $50,000 a year with a million-dollar mortgage."

These [bankers] aren't number-crunching whizzes making smart investments; what they do is find suckers in some municipal-finance department, corner them in complex lose-lose deals and flay them alive. In a complete subversion of free-market principles, they take no risk, score deals based on political influence rather than competition, keep consumers in the dark — and walk away with big money.

"It's not high finance," says Taylor, the former bond regulator. "It's low finance." And even if the regulators manage to catch up with them billions of dollars later, the banks just pay a small fine and move on to the next scam.

Building wealth

When the Oil-for-food scandal first began to break, blame was laid at the feet of Saddam and the UN for all the corruption, with criticism especially vitupritive from the Bush administration, Fox News and like-minded cheerleaders. There was certainly blame enough to spread there, too, fair cop. But there would have been no corruption, notwithstanding the best efforts of Saddam or the worst efforts of the UN, without the willing and facilitating participation of business (much of it French and Russian), some of which is finally being "outed". (http://guambatstew.blogspot.com/2005/10/bad-saddam-bad-kofi-and-shame-on-rest.html) You might also cast your mind back to the Bush administration's handling of FEMA and the NOLA experience (e.g., http://guambatstew.blogspot.com/2005/09/buck-doesnt-stop-its-lying-in-wait-for.html). Bear that in mind whilst reading the following.

WASHINGTON (Reuters) - Corruption continues to cost Iraq billions of dollars each year, and Washington and Baghdad should be doing far more to stop it, the top U.S. auditor for Iraq's reconstruction said in a report released on Sunday. Stuart Bowen, special inspector general for Iraq reconstruction, said U.S. efforts to help Iraq build strong anti-corruption institutions were urgently needed and called for an American-Iraqi summit to battle a legacy of corruption. "Creating an effective anti-corruption structure within Iraq's government is essential to the long-term success of Iraq's fledgling democracy," Bowen wrote in his seventh quarterly report to Congress.

"Bowen's office, which has 20 auditors and 10 investigators in Iraq plus staffers in the United States, has made significant progress on cases charging fraud, bribery and kickbacks involving U.S. citizens -- government officials and contractors -- in Iraq, he said. The report said investigators had gathered "an enormous amount of evidence" in these investigations but gave no details on any possible indictments. Bowen said his office, created by Congress in November 2003 to oversee the Iraq Reconstruction and Relief Fund, recently transferred $2 million to the Justice Department to fund prosecution efforts, and four prosecutors were now working full-time on Iraq reconstruction cases. He said it was crucial for the United States to strengthen Iraq's new domestic anti-corruption agencies, noting that Iraq lost more than $2 billion each year in stolen gasoline and diesel fuel supplies. The report said Iraq's Bureau of Supreme Audit charged that up to $1.27 billion from some 90 contracts was lost from June 2004 to February 2005 because deals were given to "favored suppliers" and cash was given to third-party firms to work out contracts.

"Overall, the report said the United States had made steady progress in its $30 billion drive to rebuild Iraq, billed as the biggest U.S. foreign aid operation since the post-World War Two reconstruction of Europe."
http://today.reuters.com/news/NewsArticle.aspx?type=topNews&storyID=uri:2005-10-30T211014Z_01_KRA076157_RTRUKOC_0_US-IRAQ-RECONSTRUCTION.xml&pageNumber=1&summit=


"As the money runs out on the $30 billion American-financed reconstruction of Iraq, the officials in charge cannot say how many planned projects they will complete, and there is no clear source for hundreds of millions of dollars a year needed to operate the projects that have been finished, according to a report to Congress released on Sunday. The report, by the special inspector general for Iraq reconstruction, describes an array of projects that went awry, sometimes astonishingly, like electrical substations that were built at great cost but never connected to the country's electrical grid. With more than 93 percent of the American money now committed to specific projects, it could become increasingly difficult to solve those problems. Issues like those "should have been considered before," said Jim Mitchell, a spokesman for the inspector general's office. "It's very critical right now, with so little of the U.S. money left to be committed, that they're going to have to make these determinations very quickly."

"Overall, the report says, there have been 4,208 death and injury claims filed through the insurance coverage that United States law requires for contractors of any nationality who work on American bases abroad. Although that number includes claims from bases around the world, the majority are believed to originate from Iraq and Afghanistan. Those death and injury tolls, which in the chaos of Iraq are probably underreported to begin with, especially among Iraqi contractors, have come about even though more than a quarter of the reconstruction money has actually "been spent on security costs related to the insurgency," the report says. The security costs have "proportionately reduced funds for other reconstruction projects," the report continues, leading to the cancellation of many initiatives.

"We welcome and value the independent oversight," said a spokeswoman for the State Department, which now largely oversees the rebuilding effort. "Their objective findings have helped improve transparency, accountability and efficiency as we work with the Iraqi people to establish an independent, stable and prosperous Iraq." The five electrical substations examined by the inspector general's office, which is led by Stuart Bowen Jr., were built in southern Iraq at a cost of $28.8 million. "The completed substations were found to be well planned, well designed and well constructed," the report says. Unfortunately, the system for distributing power from the completed substations was largely nonexistent. "No date for installing the distribution system was given," the report says."
http://www.iht.com/articles/2005/10/30/news/rebuild.php

"BASRA, Iraq — Laura Bush's gift to the people of Iraq is rising in a dirt lot across from a sheep market here, hidden behind high concrete walls and towers with armed guards. Behind the walls, hundreds of Iraqi workers in blue jumpsuits scurry around a construction site filled with rebar, dirt and trailers. The project, funded by the U.S. government and donations raised with the first lady's help, will someday be a hospital equipped to treat pediatric cancer patients. Nobody denies that Iraq needs new hospitals, but the experts questioned the priorities of Washington's $1-billion rebuilding plan, which has focused on construction instead of basic needs such as better training for doctors and public healthcare campaigns.

"We have more important priorities to solve our urgent health problems," said Abdulamir Khafaji, the chief pediatrician at Basra's largest hospital, citing the need for additional equipment in his emergency room. Meanwhile, the number of clinics to be built has been reduced because of security costs and other problems. It is uncertain whether Iraqis will be able to staff and maintain the health centers that are being constructed.

"The U.S. spent funds on equipment that is now sitting in warehouses and on medications that later disappeared, presumably stolen, according to interviews and federal reports. Iraqis and health experts said more attention should have been paid to refurbishing the country's dilapidated network of 1,700 clinics and nearly 200 hospitals. A 2004 survey of 214 clinics found that only 10% had a regular water supply, only half had electric generators, and less than a third had "functional and relatively clean" toilets. "I saw enormous incompetence which was more costly than even Iraqi corruption," said Richard Garfield, a Columbia University health expert who worked with U.S. and international officials in Iraq last year. The U.S. "was pouring money down the drain."

"To improve things, the U.S. issued a $43-million contract in April 2003 to Abt Associates Inc., a Massachusetts-based consulting firm, to modernize the Iraqi Health Ministry and provide needed supplies. But the company, which has worked on healthcare issues throughout the developing world, quickly ran into problems, according to an audit issued this year by the USAID inspector-general. Company officials were slow to mobilize. They bickered with Iraqis and officials with the Coalition Provisional Authority, the U.S.-led agency that administered Iraq until June 2004. One Abt manager "did not recognize" the CPA as a "legitimate authority," the audit said. Medical kits intended for 600 clinics contained damaged or useless equipment, the audit said. USAID subcontractors questioned the quality of a device that Abt bought to sterilize medical tools, noting that it was manufactured by an Indian firm that hadn't made such an appliance before. The medical kits, which were supposed to be purchased by October 2003, weren't delivered to the warehouse until June 2004, eight months late, the audit said. By February 2005, some clinics still had not received the kits. One subcontractor involved in delivering the equipment said he had "never witnessed such a debacle" in 20 years of working with USAID, the audit said. The audit also criticized USAID officials for constant turnover and failing to move quickly to address problems. In the end, USAID officials cut Abt's contract, paying it only $23 million. Abt officials refused to comment, referring all questions to USAID.

"By the time the Abt contract expired in November 2004, the U.S. already had a new approach to improve healthcare: building and refurbishing hundreds of clinics and hospitals. In March 2004, the Pentagon's reconstruction agency, now known as the Project and Contracting Office, announced the award of a $500-million contract to Parsons Corp., based in Pasadena, to build 150 clinics and refurbish 20 hospitals and other facilities. But violence flared in Iraq that month, causing security costs to soar. Parsons had to relocate its headquarters inside the heavily fortified Green Zone in Baghdad and limit trips around Iraq. The U.S. recently cut eight clinics from construction plans, citing security costs. The refurbishment project also became mired in landownership disputes, problems with Iraqi officials demanding kickbacks and poor performance by Parsons' Iraqi subcontractors, State Department officials said. The first of the new clinics is supposed to be complete by the end of this year. Parsons referred questions to the government. In contrast to the delays that have beset other construction projects, Basra Children's Hospital is on track to open its doors in September 2006 — 3 1/2 years after the invasion. That may be in part because of the intense interest shown by Laura Bush and Secretary of State Condoleezza Rice."
http://www.latimes.com/la-fg-iraqhealth30oct30,0,1723256.story?page=2&track=morenews&coll=la-story-footer

Somewhat related post: http://guambatstew.blogspot.com/2005/09/waging-war.html