The Most Dangerous “1%” ?

The Occupy Wall Street movement, recently attacked by law enforcement in Oakland, is all about the 99%, as opposed to the 1% of wealthy folks that enjoy a Newt Gingrich-sized portion of the nation’s wealth.

Now it appears we have another 1% to worry about, this time in the world of multinational or transnational corporations.

A commenter on this blog (HLGaskins) directed me to a most fascinating story from New Scientist: “Revealed—the capitalist network that runs the world.”  What the story amounts to is that some very smart people (“complex systems theorists at the Swiss Federal Institute of Technology in Zürich”) decided to analyze how,

The structure of the control network of transnational corporations affects global market competition and financial stability.

The analysts studied “the architecture of the international ownership network” and their admittedly tentative conclusion is this:

We find that transnational corporations form a giant bow-tie structure and that a large portion of control flows to a small tightly-knit core of financial institutions. This core can be seen as an economic “super-entity” that raises new important issues both for researchers and policy makers.

It turns out, from the article, that it just might be that “a few bankers control a large chunk of the global economy,” or in the words of one of the researchers:

In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network.

Those companies, as we should have expected, are mostly financial institutions like JPMorgan Chase (bailed out with $25 billion), and Goldman Sachs (bailed out with $10 billion) and Barclays Bank (beneficiary of other bailed-out banks).

The article notes that the Zürich analysts say concentration of power is not good or bad in itself, but the interconnectedness of the core group of companies could pose a risk for the stability of the world’s economy because,

If one suffers distress, this propagates.

That, of course, is a description of the 2008 financial disaster. And as the article points out, the real point of this kind of analysis is to identify “the architecture of global economic power” and find “vulnerable aspects of the system” so that “economists can suggest measures to prevent future collapses spreading through the entire economy.”  In other words, we should use this type of science to find ways to make the system more stable. 

Finally, besides stressing that this analysis is not without its critics (read the article), I also want to stress that there is no support for some kind of notion of world-wide conspiracy here, as some protesters in the Occupy Wall Street movement may want to maintain. The article pointed out:

..the super-entity is unlikely to be the intentional result of a conspiracy to rule the world.

Why? Because, as one complex systems expert avers, such super-entities are “common in nature.” The article explains:

Newcomers to any network connect preferentially to highly connected members. [Transnational corporations] buy shares in each other for business reasons, not for world domination. If connectedness clusters, so does wealth…

So, the super-entity may not result from conspiracy. The real question, says the Zürich team, is whether it can exert concerted political power…

Yes, that is the real question, and that is why the Occupy Wall Street movement—which is exerting its own form of concerted political power—is so important.


The Secrets Behind The Financial Bailout of 2008

In a stunning article yesterday, Vermont Senator Bernie Sanders, who finally succeeded in forcing the Federal Reserve to reveal some of its secrets, gave us some details of the “Fed’s multi-trillion-dollar bailout of Wall Street and corporate America.”

We have learned that the $700 billion Wall Street bailout signed into law by President George W. Bush turned out to be pocket change compared to the trillions and trillions of dollars in near-zero interest loans and other financial arrangements the Federal Reserve doled out to every major financial institution in this country.

Those institutions included:

Goldman Sachs$600 billion

Morgan Stanley—$2 trillion

Citigroup—$1.8 trillion

Bear Stearns—$1 trillion

Merrill Lynch—$1.5 trillion.

Sanders continued:

We also learned that the Fed’s multi-trillion bailout was not limited to Wall Street and big banks, but that some of the largest corporations in this country also received a very substantial bailout. Among those are General Electric, McDonald’s, Caterpillar, Harley Davidson, Toyota and Verizon.

Perhaps most surprising is the huge sum that went to bail out foreign private banks and corporations including two European megabanks — Deutsche Bank and Credit Suisse — which were the largest beneficiaries of the Fed’s purchase of mortgage-backed securities.

Deutsche Bank, a German lender, sold the Fed more than $290 billion worth of mortgage securities. Credit Suisse, a Swiss bank, sold the Fed more than $287 billion in mortgage bonds.

Sen. Sanders main point in all this is,

that despite this huge taxpayer bailout, the Fed did not make the appropriate demands on these institutions necessary to rebuild our economy and protect the needs of ordinary Americans.

As examples of such demands, he asked:

Why didn’t the Fed require these institutions to increase lending to small- and medium-sized businesses as a condition of the bailout?

Why didn’t the Fed require the bailed-out mortgage banks to reduce mortgage payments for distressed homeowners as a condition of receiving these secret loans?

Why didn’t the Fed require credit card issuers to lower interest rates as a condition of the bailout?

Sanders also said he will get to the truth about something I have heard for months, that I find nearly impossible to believe:

I intend to investigate whether these secret Fed loans, in some cases, turned out to be direct corporate welfare to big banks that used these loans not to reinvest in the economy but rather to lend back to the federal government at a higher rate of interest by purchasing Treasury Securities. Instead of using this money to reinvest in the productive economy, I suspect a large portion of these near-zero interest loans were used to buy Treasury Securities at a higher interest rate providing free money to some of the largest financial institutions in this country. That is something that we have got to closely examine.

Thankfully, because Democrats will still retain control of the Senate for the next two years, Bernie Sanders may be able to get some answers regarding how the government engineered the salvation of capitalism.

Blanche Lincoln: A New Hero Of The Left?

A story today by The New Republic about the financial reform efforts in Congress begins ominously:

Some two dozen executives from large corporations will be descending on Capitol Hill today to make the case against over-regulating derivatives.

Oh, no.  This financial stuff is hard enough to follow without also having to worry about a legion of Wall Street defenders assaulting our legislators.

The source of the latest angst among Chamber-of-Commerce types apparently comes from none other than Blanche Lincoln, the Democrat that lefties hate for her role in the health care reform fiasco in Congress, who now appears to be out-leftying other more liberal Senators on financial reform.

Lincoln has a new proposal to regulate derivatives, described by Andy Kroll of Mother Jones as,

…those tricky financial products, whose value is linked to the price of commodities or interest rates, used to hedge risk and also make risky gambles.

Calling for transparency in derivatives trading, something now lacking in the system, Lincoln proposes an exchange that will, if enacted, protect against another “AIG-esque collapse” because the inherent risk in such trading will not be concentrated in one place, but spread throughout the members of the clearinghouse.

Another important feature of Lincoln’s proposal, according to Kroll:

Lincoln’s bill would also call for swaps outfits [derivatives trading] to be cut out of big investment banks and essentially made into separate operations. This, of course, would prevent crippling losses on a swap desk from dragging down the rest of the firm—again, a la AIG’s Financial Products division mortally wounding the entire company.

Kroll quotes Felix Salmon, a financial journalist and blogging editor at Reuters, who is not exactly optimistic about Lincoln’s proposal suceeding:

…it’s also pretty clear that none of this is going to happen. Never mind Republican support: this is going to have a hard time even getting Democratic support. It’s all a good idea, but it’s far too radical: while it might have had more of a chance if it had been introduced during the height of the crisis, at this point the banks have got their mojo working again and will quite easily be able to ensure that the beating heart of Lincoln’s proposals is surgically excised before it even gets anywhere near a vote.

The reference to “banks” and “mojo” leads us back to today’s article in The New Republic. As the TNR article makes clear, Lincoln’s proposal rightly exempts from onerous regulation, “derivatives used in commercial activity,” such as when an airline tries to lock in future fuel prices by signing a contract today and betting prices will be higher later:

What the Lincoln bill would regulate is the use of derivatives for more speculative purposes, like a straight-up bet between two Wall Street firms on the future price of oil.

So, why would corporate leaders, who engage in the kind of derivative trading exempted by Lincoln’s bill, make a well-orchestrated appearance in Washington D.C.? TNR writer, Noam Scheiber, explains:

Big financial firms like Goldman Sachs and JP Morgan generate billions of dollars each year as derivatives dealers. But, over the past several weeks, as Democrats’ have escalated their rhetoric and explicitly targeted Wall Street, the big banks have had trouble getting their message out on Capitol Hill. All the more so thanks to Friday’s SEC complaint accusing Goldman of fraud. “The banks’ credibility, their ability to influence this, is limited,” says one derivatives industry lawyer.

And so, instead of mostly making the pitch against regulation themselves, the big derivatives dealers are counting on their corporate clients to do a lot of heavy lifting for them…

In other words, these days no one would believe anything proceeding from the mouths of bankers* who almost bankrupted the nation through, among other things, unfettered trading in derivatives, so they have to go to the bullpen for some help, namely corporate leaders who can leverage the fact that they “employ hundreds of thousands of people across the country.”

While this tactic may seem cynical, worse yet is an even more cynical argument designed to water down any final reform bill, as reported by Scheiber:

…top Wall Street executives have conveyed directly to senior White House officials in recent days, that the administration faces almost as much peril as Wall Street does if it brings a partisan bill to the Senate floor. Should that happen, the argument goes, Senate liberals like Maria Cantwell and Byron Dorgan could triumph on amendments that would move the bill well to the left of where even the administration wants it.

Let’s hope that the high-rollers on Wall Street are once again wrong about their calculations and this time their gambling failures will result not in the near-collapse of our financial system, but in legislation that will finally address their irresponsibility and profligacy, funded most recently by American taxpayers.


*”Bankers” is a term used loosely here. Just to illustrate what’s at stake for the so-called bankers, here are some facts from
Globally, the $450 trillion over-the-counter derivatives market is big business for the banks. Scaling back these operations, or forcing high-volume contracts to move to exchanges, could make trading much less profitable for dealers. Customized contracts would continue but face higher costs.
Lawmakers have sought ways to rein in the opaque world of over-the-counter derivatives after the financial instruments were blamed for exacerbating the financial crisis and prompting the U.S. government bailout of companies such as American International Group (AIG.N).
Jamie Dimon, chief executive of JPMorgan Chase & Co (JPM.N), told bank analysts on Wednesday that forcing dealers to trade derivatives on exchanges could cost his firm up to a couple of billion dollars in revenue annually.
“It will be a negative,” he said. JPMorgan has the largest derivatives exposure of the U.S. banks.
Just five banks account for 97 percent of the total $212.8 trillion worth of derivatives contracts held by U.S. commercial banks, according to a fourth-quarter survey by the Office of the Comptroller of the Currency.


Can anyone say, “Too big to fail?”

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