Ethics II

Hey everyone. Thanks to everyone for trying to follow last weeks flustered class; hopefully we won't have any unexpected visitors joining us this week. Another ethics class so here's your article: http://healthland.time.com/2012/02/28/why-the-rich-are-less-ethical-they-see-greed-as-good/
Hopefully having the word ethical in the title will help everyone see how it related to ethics!

Not required, but I'd really like you to take a look at this too - http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?_r=2&pagewanted=all (If you do then you should see this funny parody - http://www.thedailymash.co.uk/news/society/why-i-am-leaving-the-empire-by-darth-vader-201203145007)

See you Thursday. Lots of extra reading if you want http://www.scientificamerican.com/article.cfm?id=how-wealth-reduces-compassion ; http://www.guardian.co.uk/commentisfree/2012/jun/30/fintan-otoole-banking-decency-corrupt-system ; plus an extra from Plato himself http://classics.mit.edu/Plato/republic.3.ii.html

Why the Rich Are Less Ethical: They See Greed as Good

By Maia SzalavitzFeb. 28, 2012Add a Comment

While stereotypes suggest that poor people are more likely to lie and steal, new research finds that it’s actually the wealthy who tend to behave unethically. In a series of experiments — involving everything from dangerous driving to lying in job negotiations and cheating to get a prize — researchers found that, across the board, richer people behaved worse. But, rather than class itself, the authors suggest that it’s views about greed that may largely explain the difference.
In the first two experiments, University of California, Berkeley, psychologists positioned observers at San Francisco intersections to watch for drivers who didn’t wait their turn at lights or yield for pedestrians. The researchers noted the make, age and appearance of cars — a marker for the drivers’ socioeconomic status — as well as the drivers’ gender and approximate age.
If you ever thought that the guy driving a late-model Mercedes is more of a jerk than the one behind the wheel of a battered Honda, you’d be right. Even after controlling for factors like traffic density and the driver’s gender and perceived age (younger men tend to drive faster and often rudely), drivers of the newest, most high-status cars were much more likely to cut other drivers off.
“The drivers of the most expensive vehicles were four times more likely to cut off drivers of lower status vehicles,” says Paul Piff, a doctoral student at Berkeley and lead author of the study published in the Proceedings of the National Academy of Sciences.
Drivers in fancy cars were also three times more likely than those in beaters to threaten pedestrians by failing to yield when the walkers had the right of way at a crosswalk. So much for the theory that owners of expensive cars try to protect their vehicles from being sullied by common blood!

In five further experiments, researchers looked at moral behavior in more controlled lab settings. The experiments were designed to determine what made people lapse into bad behavior, and how difficult it would be to change it. The results offer some hope in an otherwise bleak picture.
In one study, participants reported their own socioeconomic status and then read descriptions of people stealing or benefiting from things to which they were not entitled. When asked how likely they would be to engage in similar behavior, the richest of 105 undergraduates were more likely admit that they would do so, compared with those from middle-class or lower-class backgrounds. Of course, this finding could simply reflect the fact that the rich are more likely to get away with such things — and therefore may feel more comfortable admitting it — so the researchers also studied actual behavior.
In the next experiment, researchers asked 129 students to compare themselves with those who were either far richer or far poorer than they were. Previous studies have found that this manipulation influences people’s perceptions of class and their own behavior, with those primed to feel wealthy behaving less generously and becoming less sensitive to the emotions of others, regardless of their actual socioeconomic class.
The participants were then offered candy from a jar that they were told would otherwise be given to children in another lab. Those primed to feel rich took more candy than those who were made to feel disadvantaged. Fortunately, there were no children actually waiting for the sweets.

But why would people who feel socially elevated behave less ethically? The next set of experiments sought to examine this question, finding a connection between wealth and positive perceptions of greed. Among adults who were recruited online for one such experiment, those who were wealthier were more likely to lie in a simulated job interview scenario. The participants — acting as managers — were told that their hypothetical applicants would be willing to take a lower salary in exchange for job security. The applicants wanted a two-year contract position, but the managers knew that the available job would last only six months before being eliminated — and that they could get a bonus for negotiating a lower salary. People of high social class were more likely to lie to the job seekers, researchers found.
The reason for this was not necessarily their class, but the fact they agreed with Wall Street‘s Gordon Gekko that greed is good. When the researchers examined the connection between beliefs about greed and unethical behavior, they found that class was no longer a significant variable. In other words, rich people tended to take advantage of others primarily because they saw selfish and greedy behavior as acceptable, not just because they had more money or higher social status.
To confirm this, another experiment examined whether a person’s attitudes about greed or his class status would predict cheating on a dice game. Researchers recruited 195 adults on Craigslist, queried them about their backgrounds and greedy attitudes, and then had them play a computerized dice game in which higher rolled scores meant a higher chance of winning $50. Unbeknownst to them, the computer always generated the same score: 12. People who believed greed was good were more likely to cheat and report inflated scores of 15 or higher.
Then, in a final study in which the researchers primed participants by having them talk about either the benefits of greed or something neutral (what they did that day), they found that poor participants were just as likely as rich ones — if they were primed to think greed was good — to support bribery or to cheat unsuspecting customers. In the neutral prime, rich participants were more likely to support unethical behavior.

Fortunately, people can also be easily primed to behave more generously. In an earlier study, Piff and his colleagues found that rich people were less likely to help a person who entered the lab in distress — except when they’d just watched a video about child poverty. “We’re not arguing that rich people are bad at all, but that psychological features of wealth have these natural effects,” says Piff. “There are simple things you can adjust, which suggest that rich people are fairly sensitive and just need little reminders.”
He notes that billionaire Warren Buffett made a similar point in a New York Times op-ed last year, calling for higher taxes on the wealthiest. “I know well many of the mega-rich and, by and large, they are very decent people,” Buffett wrote. “Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.”
In a comment for WebMD, George Mason University professor of education Martin Ford praised Piff’s study. “It is particularly compelling when the same basic phenomenon is demonstrated using a wide variety of experimental methods,” he said.
The findings got me thinking that if we are concerned about negative media content harming the moral development of children, we might want to place positive depictions of greed near or even above sex and violence on the list of exposures that are unsuitable for youth.

Self-Interest Spurs Society’s ‘Elite’ to Lie, Cheat on Tasks, Study Finds

By Elizabeth Lopatto - Feb 28, 2012 6:01 AM GMT+0100

Feb. 28 (Bloomberg) -- Bloomberg's Elizabeth Lopatto reports that the "upper class," as defined by a research in the Proceedings of the National Academy of Sciences, were more likely to break the law while driving, lie in negotiation, and take candy from children. She spoke yesterday on Bloomberg Television's "Street Smart."

That question spurred Paul Piff, a Ph.D. candidate in psychology at the University of California, Berkeley, to explore whether higher social class is linked to higher ideals, he said in a telephone interview.
The answer Piff found after conducting seven different experiments is: no. The pursuit of self-interest is a “fundamental motive among society’s elite, and the increased want associated with greater wealth and status can promote wrongdoing,” Piff and his colleagues wrote yesterday in the Proceedings of the National Academy of Sciences.
The “upper class,” as defined by the study, were more likely to break the law while driving, take candy from children, lie in negotiation, cheat to raise their odds of winning a prize and endorse unethical behavior at work, the research found. The solution, Piff said, is to find a way to increase empathy among wealthier people.
“It’s not that the rich are innately bad, but as you rise in the ranks -- whether as a person or a nonhuman primate -- you become more self-focused,” Piff said. “You can change that by reminding upper-class people of the needs of others. That may not be their default, but have them do it is sufficient to increase their patterns of altruistic behavior.”
That theory will be the basis of his next study. Piff is curious to know how to change patterns of greed and selfishness when they emerge.

Ethics Courses

Previous research has shown that students who take economics classes are more likely to describe greed as good. Pairing ethics courses with economics may be beneficial, Piff said.
“It might be as simple as not only stressing individual performance, but the value of cooperation and improving the welfare of others,” he said. “That goes a long way.”
In the research reported yesterday, the experiments suggest at least some wealthier people “perceive greed as positive and beneficial,” probably as a result of education, personal independence and the resources they have to deal with potentially negative consequences, the authors wrote.
While the tests measured only “minor infractions,” that factor made the results “even more surprising,” Piff said.
One experiment invited 195 adults recruited using Craigslist to play a game in which a computer “rolled dice” for a chance to win a $50 gift certificate. The numbers each participant rolled were the same; anyone self-reporting a total higher than 12 was lying about their score. Those in wealthier groups were found to be more likely to fib, Piff said.

Risks of Cheating

“A $50 prize is a measly sum to people who make $250,000 a year,” he said in a telephone interview. “So why are they more inclined to cheat? For a person with lower socioeconomic status, that $50 would get you more, and the risks are small.”
Poorer participants may be less likely to cheat because they must rely more on their community to get by, and thus are more likely adhere to community standards, Piff said. By comparison, “upper-class individuals are more self-focused, they privilege themselves over others, and they engage in self- interested patterns of behavior,” he said.
In the traffic tests, about one-third of drivers in higher- status cars cut off other drivers at an intersection watched by the researchers, about double those in less costly cars. Additionally, almost half of the more expensive cars didn’t yield when a pedestrian entered the crosswalk while all of the lowest-status cars let the pedestrian cross. These experiments involved 426 vehicles.

Employment Test

Another test asked 108 adults found through Amazon.com Inc.’s (AMZN) work-recruiting website Mechanical Turk to assume the role of an employer negotiating a salary with someone seeking long-term employment. They were told several things about the job, including that it would soon be eliminated. Upper-class individuals were more likely not to mention to the job-seeker the temporary nature of the position, the research found.
“Support for free-market capitalism will collapse if those who do well don’t do good,” said Arthur Caplan, director of the Center for Bioethics at the University of Pennsylvania. “Rapacious, intolerant, nonempathetic capitalism that says lie, cheat, steal, it’s only the bottom line that matters -- aside from being morally repugnant, it’s got a dim future.”

Study Design Criticized

Meredith McGinley, an assistant professor at Chatham University in Pittsburgh who wasn’t involved in the study, was critical of how some of the experiments were designed.
The car test complicates the results because having a flashy car doesn’t necessarily mean the driver is wealthy, said McGinley, who studies positive social behavior. In the experiment involving candy, the participants were told they could have it even though children were waiting for it. They may have felt they were doing nothing wrong, she said.
In the candy test, 129 undergraduates were manipulated to view themselves as wealthy or poor. They were then presented with a jar of individually wrapped candy, which researchers said would go to children in a nearby lab, though the participants could take some if they wanted. The undergraduates believing themselves to be upper income took more than those believing themselves to be low income, the study found.
Erik Gordon, a business professor at the University of Michigan in Ann Arbor, wasn’t surprised by the results, he said.

Greed ‘on Upswing’

“Greed has been on the upswing for 20 years,” Gordon said in a telephone interview. “Wealth or power that comes with high socioeconomic status means you are indeed enabled to ignore other people and might think that rules that apply to other people don’t apply to you.”
Gordon, though, thinks the research has its limits. It isn’t as much about wealth, he said, as it is about greed, a behavior that can be changed.
The very wealthy, who “tend to drive 8-year-old cars” and “don’t wear logos,” may offer a very different profile, he said, suggesting that the group targeted by Piff’s experiments with cars are more likely the “nouveau riche.”
To be sure, Piff and his colleagues said there are exceptions to the associations they found, pointing to Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., who has pledged the majority of his holdings to the Bill & Melinda Gates Foundation and other charities.
Less wealthy individuals also can behave badly, they wrote, noting the relationship between poverty and violent crime in previous research.
The study urged further research to determine the “boundaries” of bad behavior spurred by greed. Adam Smith, the 18th century author of “The Wealth of Nations,” may provide an example, as his first book, “The Theory of Moral Sentiments,” was about ethics.
“A long time ago, you couldn’t leave the university without having a course in ethics,” Caplan said. “One of the things college should do is provide you with the moral framework to operate in a capitalist society. When people ask about the value of philosophy, I point them there.”

Ethics

Hey. Thursday we'll start the next unit, ethics. It'll be like deja vu all over again though as the article focuses on the financial industry. I'll repeat to those who missed last class, it's more than a good idea to watch the movie you missed, the link is here. Oh, it's more than a good idea to start coming to class, too! Here's your (long) article:
http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216

Of course, not being punished has led to even more egregious criminal activity. Here's something I wrote about 6 months ago on some of the crimes committed in just the past year. At least I think it's worth a read!:
http://theendisalwaysnear.blogspot.com/2012/08/the-hazardous-morals-of-bankers.html

Oh, you really should read some of this. Just the first paragraph would be enough - http://www.pogo.org/our-work/reports/2013/big-businesses-offer-revolving-door-rewards.html

If you really wanna be smart, you'll get a lot of insight from watching this PBS show...http://www.pbs.org/wgbh/pages/frontline/untouchables/

...then reading this article - http://www.nationaljournal.com/politics/mary-schapiro-and-lanny-breuer-give-us-the-ultimate-dog-bites-man-story-20130403

Aaaah, ain't the revolving door grand? - http://www.businessinsider.com/wall-street-washington-revolving-door-2011-4?op=1

Why Isn't Wall Street in Jail?

Financial crooks brought down the world's economy — but the feds are doing more to protect them than to prosecute them

By Matt Taibbi

February 16, 2011 9:00 AM ET

Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.
"Everything's fucked up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that."
I put down my notebook. "Just that?"
"That's right," he said, signaling to the waitress for the check. "Everything's fucked up, and nobody goes to jail. You can end the piece right there."
Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world's wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people.

The rest of them, all of them, got off. Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked, fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it was selling. What's more, many of these companies had corporate chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured investors they would not lose even "one dollar" just months before his unit imploded, to the $263 million in compensation that former Lehman chief Dick "The Gorilla" Fuld conveniently failed to disclose. Yet not one of them has faced time behind bars.

Instead, federal regulators and prosecutors have let the banks and finance companies that tried to burn the world economy to the ground get off with carefully orchestrated settlements — whitewash jobs that involve the firms paying pathetically small fines without even being required to admit wrongdoing. To add insult to injury, the people who actually committed the crimes almost never pay the fines themselves; banks caught defrauding their shareholders often use shareholder money to foot the tab of justice. "If the allegations in these settlements are true," says Jed Rakoff, a federal judge in the Southern District of New York, "it's management buying its way off cheap, from the pockets of their victims."

To understand the significance of this, one has to think carefully about the efficacy of fines as a punishment for a defendant pool that includes the richest people on earth — people who simply get their companies to pay their fines for them. Conversely, one has to consider the powerful deterrent to further wrongdoing that the state is missing by not introducing this particular class of people to the experience of incarceration. "You put Lloyd Blankfein in pound-me-in-the-ass prison for one six-month term, and all this bullshit would stop, all over Wall Street," says a former congressional aide. "That's all it would take. Just once."
But that hasn't happened. Because the entire system set up to monitor and regulate Wall Street is fucked up.
Just ask the people who tried to do the right thing.

Here's how regulation of Wall Street is supposed to work. To begin with, there's a semigigantic list of public and quasi-public agencies ostensibly keeping their eyes on the economy, a dense alphabet soup of banking, insurance, S&L, securities and commodities regulators like the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency (OCC) and the Commodity Futures Trading Commission (CFTC), as well as supposedly "self-regulating organizations" like the New York Stock Exchange. All of these outfits, by law, can at least begin the process of catching and investigating financial criminals, though none of them has prosecutorial power.
The major federal agency on the Wall Street beat is the Securities and Exchange Commission. The SEC watches for violations like insider trading, and also deals with so-called "disclosure violations" — i.e., making sure that all the financial information that publicly traded companies are required to make public actually jibes with reality. But the SEC doesn't have prosecutorial power either, so in practice, when it looks like someone needs to go to jail, they refer the case to the Justice Department. And since the vast majority of crimes in the financial services industry take place in Lower Manhattan, cases referred by the SEC often end up in the U.S. Attorney's Office for the Southern District of New York. Thus, the two top cops on Wall Street are generally considered to be that U.S. attorney — a job that has been held by thunderous prosecutorial personae like Robert Morgenthau and Rudy Giuliani — and the SEC's director of enforcement.
The relationship between the SEC and the DOJ is necessarily close, even symbiotic. Since financial crime-fighting requires a high degree of financial expertise — and since the typical drug-and-terrorism-obsessed FBI agent can't balance his own checkbook, let alone tell a synthetic CDO from a credit default swap — the Justice Department ends up leaning heavily on the SEC's army of 1,100 number-crunching investigators to make their cases. In theory, it's a well-oiled, tag-team affair: Billionaire Wall Street Asshole commits fraud, the NYSE catches on and tips off the SEC, the SEC works the case and delivers it to Justice, and Justice perp-walks the Asshole out of Nobu, into a Crown Victoria and off to 36 months of push-ups, license-plate making and Salisbury steak.
That's the way it's supposed to work. But a veritable mountain of evidence indicates that when it comes to Wall Street, the justice system not only sucks at punishing financial criminals, it has actually evolved into a highly effective mechanism for protecting financial criminals. This institutional reality has absolutely nothing to do with politics or ideology — it takes place no matter who's in office or which party's in power. To understand how the machinery functions, you have to start back at least a decade ago, as case after case of financial malfeasance was pursued too slowly or not at all, fumbled by a government bureaucracy that too often is on a first-name basis with its targets. Indeed, the shocking pattern of nonenforcement with regard to Wall Street is so deeply ingrained in Washington that it raises a profound and difficult question about the very nature of our society: whether we have created a class of people whose misdeeds are no longer perceived as crimes, almost no matter what those misdeeds are. The SEC and the Justice Department have evolved into a bizarre species of social surgeon serving this nonjailable class, expert not at administering punishment and justice, but at finding and removing criminal responsibility from the bodies of the accused.
The systematic lack of regulation has left even the country's top regulators frustrated. Lynn Turner, a former chief accountant for the SEC, laughs darkly at the idea that the criminal justice system is broken when it comes to Wall Street. "I think you've got a wrong assumption — that we even have a law-enforcement agency when it comes to Wall Street," he says.
In the hierarchy of the SEC, the chief accountant plays a major role in working to pursue misleading and phony financial disclosures. Turner held the post a decade ago, when one of the most significant cases was swallowed up by the SEC bureaucracy. In the late 1990s, the agency had an open-and-shut case against the Rite Aid drugstore chain, which was using diabolical accounting tricks to cook their books. But instead of moving swiftly to crack down on such scams, the SEC shoved the case into the "deal with it later" file. "The Philadelphia office literally did nothing with the case for a year," Turner recalls. "Very much like the New York office with Madoff." The Rite Aid case dragged on for years — and by the time it was finished, similar accounting fiascoes at Enron and WorldCom had exploded into a full-blown financial crisis. The same was true for another SEC case that presaged the Enron disaster. The agency knew that appliance-maker Sunbeam was using the same kind of accounting scams to systematically hide losses from its investors. But in the end, the SEC's punishment for Sunbeam's CEO, Al "Chainsaw" Dunlap — widely regarded as one of the biggest assholes in the history of American finance — was a fine of $500,000. Dunlap's net worth at the time was an estimated $100 million. The SEC also barred Dunlap from ever running a public company again — forcing him to retire with a mere $99.5 million. Dunlap passed the time collecting royalties from his self-congratulatory memoir. Its title: Mean Business.

The pattern of inaction toward shady deals on Wall Street grew worse and worse after Turner left, with one slam-dunk case after another either languishing for years or disappearing altogether. Perhaps the most notorious example involved Gary Aguirre, an SEC investigator who was literally fired after he questioned the agency's failure to pursue an insider-trading case against John Mack, now the chairman of Morgan Stanley and one of America's most powerful bankers.
Aguirre joined the SEC in September 2004. Two days into his career as a financial investigator, he was asked to look into an insider-trading complaint against a hedge-fund megastar named Art Samberg. One day, with no advance research or discussion, Samberg had suddenly started buying up huge quantities of shares in a firm called Heller Financial. "It was as if Art Samberg woke up one morning and a voice from the heavens told him to start buying Heller," Aguirre recalls. "And he wasn't just buying shares — there were some days when he was trying to buy three times as many shares as were being traded that day." A few weeks later, Heller was bought by General Electric — and Samberg pocketed $18 million.
After some digging, Aguirre found himself focusing on one suspect as the likely source who had tipped Samberg off: John Mack, a close friend of Samberg's who had just stepped down as president of Morgan Stanley. At the time, Mack had been on Samberg's case to cut him into a deal involving a spinoff of the tech company Lucent — an investment that stood to make Mack a lot of money. "Mack is busting my chops" to give him a piece of the action, Samberg told an employee in an e-mail.
A week later, Mack flew to Switzerland to interview for a top job at Credit Suisse First Boston. Among the investment bank's clients, as it happened, was a firm called Heller Financial. We don't know for sure what Mack learned on his Swiss trip; years later, Mack would claim that he had thrown away his notes about the meetings. But we do know that as soon as Mack returned from the trip, on a Friday, he called up his buddy Samberg. The very next morning, Mack was cut into the Lucent deal — a favor that netted him more than $10 million. And as soon as the market reopened after the weekend, Samberg started buying every Heller share in sight, right before it was snapped up by GE — a suspiciously timed move that earned him the equivalent of Derek Jeter's annual salary for just a few minutes of work.
The deal looked like a classic case of insider trading. But in the summer of 2005, when Aguirre told his boss he planned to interview Mack, things started getting weird. His boss told him the case wasn't likely to fly, explaining that Mack had "powerful political connections." (The investment banker had been a fundraising "Ranger" for George Bush in 2004, and would go on to be a key backer of Hillary Clinton in 2008.)
Aguirre also started to feel pressure from Morgan Stanley, which was in the process of trying to rehire Mack as CEO. At first, Aguirre was contacted by the bank's regulatory liaison, Eric Dinallo, a former top aide to Eliot Spitzer. But it didn't take long for Morgan Stanley to work its way up the SEC chain of command. Within three days, another of the firm's lawyers, Mary Jo White, was on the phone with the SEC's director of enforcement. In a shocking move that was later singled out by Senate investigators, the director actually appeared to reassure White, dismissing the case against Mack as "smoke" rather than "fire." White, incidentally, was herself the former U.S. attorney of the Southern District of New York — one of the top cops on Wall Street.
Pause for a minute to take this in. Aguirre, an SEC foot soldier, is trying to interview a major Wall Street executive — not handcuff the guy or impound his yacht, mind you, just talk to him. In the course of doing so, he finds out that his target's firm is being represented not only by Eliot Spitzer's former top aide, but by the former U.S. attorney overseeing Wall Street, who is going four levels over his head to speak directly to the chief of the SEC's enforcement division — not Aguirre's boss, but his boss's boss's boss's boss. Mack himself, meanwhile, was being represented by Gary Lynch, a former SEC director of enforcement.
Aguirre didn't stand a chance. A month after he complained to his supervisors that he was being blocked from interviewing Mack, he was summarily fired, without notice. The case against Mack was immediately dropped: all depositions canceled, no further subpoenas issued. "It all happened so fast, I needed a seat belt," recalls Aguirre, who had just received a stellar performance review from his bosses. The SEC eventually paid Aguirre a settlement of $755,000 for wrongful dismissal.
Rather than going after Mack, the SEC started looking for someone else to blame for tipping off Samberg. (It was, Aguirre quips, "O.J.'s search for the real killers.") It wasn't until a year later that the agency finally got around to interviewing Mack, who denied any wrongdoing. The four-hour deposition took place on August 1st, 2006 — just days after the five-year statute of limitations on insider trading had expired in the case.
"At best, the picture shows extraordinarily lax enforcement by the SEC," Senate investigators would later conclude. "At worse, the picture is colored with overtones of a possible cover-up."

Episodes like this help explain why so many Wall Street executives felt emboldened to push the regulatory envelope during the mid-2000s. Over and over, even the most obvious cases of fraud and insider dealing got gummed up in the works, and high-ranking executives were almost never prosecuted for their crimes. In 2003, Freddie Mac coughed up $125 million after it was caught misreporting its earnings by $5 billion; nobody went to jail. In 2006, Fannie Mae was fined $400 million, but executives who had overseen phony accounting techniques to jack up their bonuses faced no criminal charges. That same year, AIG paid $1.6 billion after it was caught in a major accounting scandal that would indirectly lead to its collapse two years later, but no executives at the insurance giant were prosecuted.
All of this behavior set the stage for the crash of 2008, when Wall Street exploded in a raging Dresden of fraud and criminality. Yet the SEC and the Justice Department have shown almost no inclination to prosecute those most responsible for the catastrophe — even though they had insiders from the two firms whose implosions triggered the crisis, Lehman Brothers and AIG, who were more than willing to supply evidence against top executives.
In the case of Lehman Brothers, the SEC had a chance six months before the crash to move against Dick Fuld, a man recently named the worst CEO of all time by Portfolio magazine. A decade before the crash, a Lehman lawyer named Oliver Budde was going through the bank's proxy statements and noticed that it was using a loophole involving Restricted Stock Units to hide tens of millions of dollars of Fuld's compensation. Budde told his bosses that Lehman's use of RSUs was dicey at best, but they blew him off. "We're sorry about your concerns," they told him, "but we're doing it." Disturbed by such shady practices, the lawyer quit the firm in 2006.
Then, only a few months after Budde left Lehman, the SEC changed its rules to force companies to disclose exactly how much compensation in RSUs executives had coming to them. "The SEC was basically like, 'We're sick and tired of you people fucking around — we want a picture of what you're holding,'" Budde says. But instead of coming clean about eight separate RSUs that Fuld had hidden from investors, Lehman filed a proxy statement that was a masterpiece of cynical lawyering. On one page, a chart indicated that Fuld had been awarded $146 million in RSUs. But two pages later, a note in the fine print essentially stated that the chart did not contain the real number — which, it failed to mention, was actually $263 million more than the chart indicated. "They fucked around even more than they did before," Budde says. (The law firm that helped craft the fine print, Simpson Thacher & Bartlett, would later receive a lucrative federal contract to serve as legal adviser to the TARP bailout.)
Budde decided to come forward. In April 2008, he wrote a detailed memo to the SEC about Lehman's history of hidden stocks. Shortly thereafter, he got a letter back that began, "Dear Sir or Madam." It was an automated e-response.
"They blew me off," Budde says.
Over the course of that summer, Budde tried to contact the SEC several more times, and was ignored each time. Finally, in the fateful week of September 15th, 2008, when Lehman Brothers cracked under the weight of its reckless bets on the subprime market and went into its final death spiral, Budde became seriously concerned. If the government tried to arrange for Lehman to be pawned off on another Wall Street firm, as it had done with Bear Stearns, the U.S. taxpayer might wind up footing the bill for a company with hundreds of millions of dollars in concealed compensation. So Budde again called the SEC, right in the middle of the crisis. "Look," he told regulators. "I gave you huge stuff. You really want to take a look at this."
But the feds once again blew him off. A young staff attorney contacted Budde, who once more provided the SEC with copies of all his memos. He never heard from the agency again.
"This was like a mini-Madoff," Budde says. "They had six solid months of warnings. They could have done something."
Three weeks later, Budde was shocked to see Fuld testifying before the House Government Oversight Committee and whining about how poor he was. "I got no severance, no golden parachute," Fuld moaned. When Rep. Henry Waxman, the committee's chairman, mentioned that he thought Fuld had earned more than $480 million, Fuld corrected him and said he believed it was only $310 million.
The true number, Budde calculated, was $529 million. He contacted a Senate investigator to talk about how Fuld had misled Congress, but he never got any response. Meanwhile, in a demonstration of the government's priorities, the Justice Department is proceeding full force with a prosecution of retired baseball player Roger Clemens for lying to Congress about getting a shot of steroids in his ass. "At least Roger didn't screw over the world," Budde says, shaking his head.
Fuld has denied any wrongdoing, but his hidden compensation was only a ripple in Lehman's raging tsunami of misdeeds. The investment bank used an absurd accounting trick called "Repo 105" transactions to conceal $50 billion in loans on the firm's balance sheet. (That's $50 billion, not million.) But more than a year after the use of the Repo 105s came to light, there have still been no indictments in the affair. While it's possible that charges may yet be filed, there are now rumors that the SEC and the Justice Department may take no action against Lehman. If that's true, and there's no prosecution in a case where there's such overwhelming evidence — and where the company is already dead, meaning it can't dump further losses on investors or taxpayers — then it might be time to assume the game is up. Failing to prosecute Fuld and Lehman would be tantamount to the state marching into Wall Street and waving the green flag on a new stealing season.
The most amazing noncase in the entire crash — the one that truly defies the most basic notion of justice when it comes to Wall Street supervillains — is the one involving AIG and Joe Cassano, the nebbishy Patient Zero of the financial crisis. As chief of AIGFP, the firm's financial products subsidiary, Cassano repeatedly made public statements in 2007 claiming that his portfolio of mortgage derivatives would suffer "no dollar of loss" — an almost comically obvious misrepresentation. "God couldn't manage a $60 billion real estate portfolio without a single dollar of loss," says Turner, the agency's former chief accountant. "If the SEC can't make a disclosure case against AIG, then they might as well close up shop."
As in the Lehman case, federal prosecutors not only had plenty of evidence against AIG — they also had an eyewitness to Cassano's actions who was prepared to tell all. As an accountant at AIGFP, Joseph St. Denis had a number of run-ins with Cassano during the summer of 2007. At the time, Cassano had already made nearly $500 billion worth of derivative bets that would ultimately blow up, destroy the world's largest insurance company, and trigger the largest government bailout of a single company in U.S. history. He made many fatal mistakes, but chief among them was engaging in contracts that required AIG to post billions of dollars in collateral if there was any downgrade to its credit rating.
St. Denis didn't know about those clauses in Cassano's contracts, since they had been written before he joined the firm. What he did know was that Cassano freaked out when St. Denis spoke with an accountant at the parent company, which was only just finding out about the time bomb Cassano had set. After St. Denis finished a conference call with the executive, Cassano suddenly burst into the room and began screaming at him for talking to the New York office. He then announced that St. Denis had been "deliberately excluded" from any valuations of the most toxic elements of the derivatives portfolio — thus preventing the accountant from doing his job. What St. Denis represented was transparency — and the last thing Cassano needed was transparency.

Another clue that something was amiss with AIGFP's portfolio came when Goldman Sachs demanded that the firm pay billions in collateral, per the terms of Cassano's deadly contracts. Such "collateral calls" happen all the time on Wall Street, but seldom against a seemingly solvent and friendly business partner like AIG. And when they do happen, they are rarely paid without a fight. So St. Denis was shocked when AIGFP agreed to fork over gobs of money to Goldman Sachs, even while it was still contesting the payments — an indication that something was seriously wrong at AIG. "When I found out about the collateral call, I literally had to sit down," St. Denis recalls. "I had to go home for the day."
After Cassano barred him from valuating the derivative deals, St. Denis had no choice but to resign. He got another job, and thought he was done with AIG. But a few months later, he learned that Cassano had held a conference call with investors in December 2007. During the call, AIGFP failed to disclose that it had posted $2 billion to Goldman Sachs following the collateral calls.
"Investors therefore did not know," the Financial Crisis Inquiry Commission would later conclude, "that AIG's earnings were overstated by $3.6 billion."
"I remember thinking, 'Wow, they're just not telling people,'" St. Denis says. "I knew. I had been there. I knew they'd posted collateral."
A year later, after the crash, St. Denis wrote a letter about his experiences to the House Government Oversight Committee, which was looking into the AIG collapse. He also met with investigators for the government, which was preparing a criminal case against Cassano. But the case never went to court. Last May, the Justice Department confirmed that it would not file charges against executives at AIGFP. Cassano, who has denied any wrongdoing, was reportedly told he was no longer a target.
Shortly after that, Cassano strolled into Washington to testify before the Financial Crisis Inquiry Commission. It was his first public appearance since the crash. He has not had to pay back a single cent out of the hundreds of millions of dollars he earned selling his insane pseudo-insurance policies on subprime mortgage deals. Now, out from under prosecution, he appeared before the FCIC and had the enormous balls to compliment his own business acumen, saying his atom-bomb swaps portfolio was, in retrospect, not that badly constructed. "I think the portfolios are withstanding the test of time," he said.
"They offered him an excellent opportunity to redeem himself," St. Denis jokes.
In the end, of course, it wasn't just the executives of Lehman and AIGFP who got passes. Virtually every one of the major players on Wall Street was similarly embroiled in scandal, yet their executives skated off into the sunset, uncharged and unfined. Goldman Sachs paid $550 million last year when it was caught defrauding investors with crappy mortgages, but no executive has been fined or jailed — not even Fabrice "Fabulous Fab" Tourre, Goldman's outrageous Euro-douche who gleefully e-mailed a pal about the "surreal" transactions in the middle of a meeting with the firm's victims. In a similar case, a sales executive at the German powerhouse Deutsche Bank got off on charges of insider trading; its general counsel at the time of the questionable deals, Robert Khuzami, now serves as director of enforcement for the SEC.
Another major firm, Bank of America, was caught hiding $5.8 billion in bonuses from shareholders as part of its takeover of Merrill Lynch. The SEC tried to let the bank off with a settlement of only $33 million, but Judge Jed Rakoff rejected the action as a "facade of enforcement." So the SEC quintupled the settlement — but it didn't require either Merrill or Bank of America to admit to wrongdoing. Unlike criminal trials, in which the facts of the crime are put on record for all to see, these Wall Street settlements almost never require the banks to make any factual disclosures, effectively burying the stories forever. "All this is done at the expense not only of the shareholders, but also of the truth," says Rakoff. Goldman, Deutsche, Merrill, Lehman, Bank of America ... who did we leave out? Oh, there's Citigroup, nailed for hiding some $40 billion in liabilities from investors. Last July, the SEC settled with Citi for $75 million. In a rare move, it also fined two Citi executives, former CFO Gary Crittenden and investor-relations chief Arthur Tildesley Jr. Their penalties, combined, came to a whopping $180,000.
Throughout the entire crisis, in fact, the government has taken exactly one serious swing of the bat against executives from a major bank, charging two guys from Bear Stearns with criminal fraud over a pair of toxic subprime hedge funds that blew up in 2007, destroying the company and robbing investors of $1.6 billion. Jurors had an e-mail between the defendants admitting that "there is simply no way for us to make money — ever" just three days before assuring investors that "there's no basis for thinking this is one big disaster." Yet the case still somehow ended in acquittal — and the Justice Department hasn't taken any of the big banks to court since.
All of which raises an obvious question: Why the hell not?
Gary Aguirre, the SEC investigator who lost his job when he drew the ire of Morgan Stanley, thinks he knows the answer.
Last year, Aguirre noticed that a conference on financial law enforcement was scheduled to be held at the Hilton in New York on November 12th. The list of attendees included 1,500 or so of the country's leading lawyers who represent Wall Street, as well as some of the government's top cops from both the SEC and the Justice Department.
Criminal justice, as it pertains to the Goldmans and Morgan Stanleys of the world, is not adversarial combat, with cops and crooks duking it out in interrogation rooms and courthouses. Instead, it's a cocktail party between friends and colleagues who from month to month and year to year are constantly switching sides and trading hats. At the Hilton conference, regulators and banker-lawyers rubbed elbows during a series of speeches and panel discussions, away from the rabble. "They were chummier in that environment," says Aguirre, who plunked down $2,200 to attend the conference.
Aguirre saw a lot of familiar faces at the conference, for a simple reason: Many of the SEC regulators he had worked with during his failed attempt to investigate John Mack had made a million-dollar pass through the Revolving Door, going to work for the very same firms they used to police. Aguirre didn't see Paul Berger, an associate director of enforcement who had rebuffed his attempts to interview Mack — maybe because Berger was tied up at his lucrative new job at Debevoise & Plimpton, the same law firm that Morgan Stanley employed to intervene in the Mack case. But he did see Mary Jo White, the former U.S. attorney, who was still at Debevoise & Plimpton. He also saw Linda Thomsen, the former SEC director of enforcement who had been so helpful to White. Thomsen had gone on to represent Wall Street as a partner at the prestigious firm of Davis Polk & Wardwell.
Two of the government's top cops were there as well: Preet Bharara, the U.S. attorney for the Southern District of New York, and Robert Khuzami, the SEC's current director of enforcement. Bharara had been recommended for his post by Chuck Schumer, Wall Street's favorite senator. And both he and Khuzami had served with Mary Jo White at the U.S. attorney's office, before Mary Jo went on to become a partner at Debevoise. What's more, when Khuzami had served as general counsel for Deutsche Bank, he had been hired by none other than Dick Walker, who had been enforcement director at the SEC when it slow-rolled the pivotal fraud case against Rite Aid.
"It wasn't just one rotation of the revolving door," says Aguirre. "It just kept spinning. Every single person had rotated in and out of government and private service."
The Revolving Door isn't just a footnote in financial law enforcement; over the past decade, more than a dozen high-ranking SEC officials have gone on to lucrative jobs at Wall Street banks or white-shoe law firms, where partnerships are worth millions. That makes SEC officials like Paul Berger and Linda Thomsen the equivalent of college basketball stars waiting for their first NBA contract. Are you really going to give up a shot at the Knicks or the Lakers just to find out whether a Wall Street big shot like John Mack was guilty of insider trading? "You take one of these jobs," says Turner, the former chief accountant for the SEC, "and you're fit for life."
Fit — and happy. The banter between the speakers at the New York conference says everything you need to know about the level of chumminess and mutual admiration that exists between these supposed adversaries of the justice system. At one point in the conference, Mary Jo White introduced Bharara, her old pal from the U.S. attorney's office.
"I want to first say how pleased I am to be here," Bharara responded. Then, addressing White, he added, "You've spawned all of us. It's almost 11 years ago to the day that Mary Jo White called me and asked me if I would become an assistant U.S. attorney. So thank you, Dr. Frankenstein."
Next, addressing the crowd of high-priced lawyers from Wall Street, Bharara made an interesting joke. "I also want to take a moment to applaud the entire staff of the SEC for the really amazing things they have done over the past year," he said. "They've done a real service to the country, to the financial community, and not to mention a lot of your law practices."
Haw! The line drew snickers from the conference of millionaire lawyers. But the real fireworks came when Khuzami, the SEC's director of enforcement, talked about a new "cooperation initiative" the agency had recently unveiled, in which executives are being offered incentives to report fraud they have witnessed or committed. From now on, Khuzami said, when corporate lawyers like the ones he was addressing want to know if their Wall Street clients are going to be charged by the Justice Department before deciding whether to come forward, all they have to do is ask the SEC.
"We are going to try to get those individuals answers," Khuzami announced, as to "whether or not there is criminal interest in the case — so that defense counsel can have as much information as possible in deciding whether or not to choose to sign up their client."
Aguirre, listening in the crowd, couldn't believe Khuzami's brazenness. The SEC's enforcement director was saying, in essence, that firms like Goldman Sachs and AIG and Lehman Brothers will henceforth be able to get the SEC to act as a middleman between them and the Justice Department, negotiating fines as a way out of jail time. Khuzami was basically outlining a four-step system for banks and their executives to buy their way out of prison. "First, the SEC and Wall Street player make an agreement on a fine that the player will pay to the SEC," Aguirre says. "Then the Justice Department commits itself to pass, so that the player knows he's 'safe.' Third, the player pays the SEC — and fourth, the player gets a pass from the Justice Department."

When I ask a former federal prosecutor about the propriety of a sitting SEC director of enforcement talking out loud about helping corporate defendants "get answers" regarding the status of their criminal cases, he initially doesn't believe it. Then I send him a transcript of the comment. "I am very, very surprised by Khuzami's statement, which does seem to me to be contrary to past practice — and not a good thing," the former prosecutor says.
Earlier this month, when Sen. Chuck Grassley found out about Khuzami's comments, he sent the SEC a letter noting that the agency's own enforcement manual not only prohibits such "answer getting," it even bars the SEC from giving defendants the Justice Department's phone number. "Should counsel or the individual ask which criminal authorities they should contact," the manual reads, "staff should decline to answer, unless authorized by the relevant criminal authorities." Both the SEC and the Justice Department deny there is anything improper in their new policy of cooperation. "We collaborate with the SEC, but they do not consult with us when they resolve their cases," Assistant Attorney General Lanny Breuer assured Congress in January. "They do that independently."
Around the same time that Breuer was testifying, however, a story broke that prior to the pathetically small settlement of $75 million that the SEC had arranged with Citigroup, Khuzami had ordered his staff to pursue lighter charges against the megabank's executives. According to a letter that was sent to Sen. Grassley's office, Khuzami had a "secret conversation, without telling the staff, with a prominent defense lawyer who is a good friend" of his and "who was counsel for the company." The unsigned letter, which appears to have come from an SEC investigator on the case, prompted the inspector general to launch an investigation into the charge.

All of this paints a disturbing picture of a closed and corrupt system, a timeless circle of friends that virtually guarantees a collegial approach to the policing of high finance. Even before the corruption starts, the state is crippled by economic reality: Since law enforcement on Wall Street requires serious intellectual firepower, the banks seize a huge advantage from the start by hiring away the top talent. Budde, the former Lehman lawyer, says it's well known that all the best legal minds go to the big corporate law firms, while the "bottom 20 percent go to the SEC." Which makes it tough for the agency to track devious legal machinations, like the scheme to hide $263 million of Dick Fuld's compensation.
"It's such a mismatch, it's not even funny," Budde says.
But even beyond that, the system is skewed by the irrepressible pull of riches and power. If talent rises in the SEC or the Justice Department, it sooner or later jumps ship for those fat NBA contracts. Or, conversely, graduates of the big corporate firms take sabbaticals from their rich lifestyles to slum it in government service for a year or two. Many of those appointments are inevitably hand-picked by lifelong stooges for Wall Street like Chuck Schumer, who has accepted $14.6 million in campaign contributions from Goldman Sachs, Morgan Stanley and other major players in the finance industry, along with their corporate lawyers.
As for President Obama, what is there to be said? Goldman Sachs was his number-one private campaign contributor. He put a Citigroup executive in charge of his economic transition team, and he just named an executive of JP Morgan Chase, the proud owner of $7.7 million in Chase stock, his new chief of staff. "The betrayal that this represents by Obama to everybody is just — we're not ready to believe it," says Budde, a classmate of the president from their Columbia days. "He's really fucking us over like that? Really? That's really a JP Morgan guy, really?"
Which is not to say that the Obama era has meant an end to law enforcement. On the contrary: In the past few years, the administration has allocated massive amounts of federal resources to catching wrongdoers — of a certain type. Last year, the government deported 393,000 people, at a cost of $5 billion. Since 2007, felony immigration prosecutions along the Mexican border have surged 77 percent; nonfelony prosecutions by 259 percent. In Ohio last month, a single mother was caught lying about where she lived to put her kids into a better school district; the judge in the case tried to sentence her to 10 days in jail for fraud, declaring that letting her go free would "demean the seriousness" of the offenses.
So there you have it. Illegal immigrants: 393,000. Lying moms: one. Bankers: zero. The math makes sense only because the politics are so obvious. You want to win elections, you bang on the jailable class. You build prisons and fill them with people for selling dime bags and stealing CD players. But for stealing a billion dollars? For fraud that puts a million people into foreclosure? Pass. It's not a crime. Prison is too harsh. Get them to say they're sorry, and move on. Oh, wait — let's not even make them say they're sorry. That's too mean; let's just give them a piece of paper with a government stamp on it, officially clearing them of the need to apologize, and make them pay a fine instead. But don't make them pay it out of their own pockets, and don't ask them to give back the money they stole. In fact, let them profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year. What's next? Taxpayer-funded massages for every Wall Street executive guilty of fraud?
The mental stumbling block, for most Americans, is that financial crimes don't feel real; you don't see the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than common robberies. They're crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let's steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy. They're attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone's claims of ownership equally. When that definition becomes tenuous or conditional — when the state simply gives up on the notion of justice — this whole American Dream thing recedes even further from reality.

Business & Finance - Film

Hey y'all. Well, we haven't exactly what I'd call stellar attendance the last few classes. For both those who missed the last class and those who came, here's a site where you can stream the movie we watched. If you were in class you might want to start somewhere around the 72 minute mark where we stopped. I will have a pen drive with the movie on it (and subtitles) with me for the next few weeks if you want to get it from me that way. There will be questions from the film on the final exam.

http://www.movie2k.to/movie-525565-Inside-Job-film.html

As for the previous two classes, here are some links to help you whether you were there or not:

http://www.equalitytrust.org.uk/resources/spirit-level-slides You can download the inequality slides I used in class here. The site has other inequality stories but if you want full context there's no replacement for reading the book. I do have it if anyone wants to borrow it.
http://www.slate.com/articles/news_and_politics/the_great_divergence/features/2010/the_united_states_of_inequality/introducing_the_great_divergence.html
http://www.motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph
http://www.huffingtonpost.com/2013/02/12/top-one-percent-income-gains_n_2670455.html

I'll try to get our article for the next topic, ethics, up in the next few days.

BusFin II

I've decided to look at the situation in Cyprus and of course the rest of the banking world and how it may be pushing the use of alternative currencies. I'm guessing you don't have much idea of what money is or where it comes from so please take a few minutes to watch this before Thursday:

http://www.youtube.com/watch?v=W3hLKpKv3ME

If you prefer cartoons, this one is ok, too:

http://www.youtube.com/watch?v=W3hLKpKv3ME

Anyway, here's an article to get you started on the situation in Cyprus:

http://www.economist.com/news/leaders/21573972-bailing-out-cyprus-was-always-going-be-tricky-it-didnt-have-be-just-when-you

The euro-zone crisis

Just when you thought it was safe…

Bailing out Cyprus was always going to be tricky. But it didn’t have to be like this

Mar 23rd 2013 |From the print edition

 

EVEN by the standards of European policymaking, the past week has been a disaster. In the early hours of March 16th, nine months after Cyprus first requested a bail-out, euro-zone finance ministers, led by the Germans, offered a €10 billion ($13 billion) deal, well short of the €17 billion needed. Who ordered whom to do precisely what is not clear, but the Cypriots then said they would raise a further €5.8 billion by imposing a levy on depositors—of 9.9% on savings above the €100,000 insurance-guarantee limit, and 6.75% for deposits below it. Chaos ensued, not least among the many Russians (reputable or not) who have parked their money in the lightly regulated island. On March 19th, with crowds in the streets and all the banks firmly shut, the Cypriot parliament rejected the bail-out package (see article). As The Economist went to press, the scene had shifted to Moscow, where the Cypriots were trying to persuade Vladimir Putin and his cronies to contribute some money in exchange, perhaps, for future gas revenues.

Cyprus is a Mediterranean midget, with a GDP of only $23 billion. But this crisis could have poisonous long-term consequences. Eight months after the European Central Bank appeared to have restored stability by promising to do whatever it took to save the currency, the risk of a euro member being thrown out has returned. It has increased the chances of deposit runs (if Cyprus can grab your money, why not Italy or Spain?). And it has revealed the lack of progress towards a durable solution to the euro’s troubles. Ideally, all this will prompt the Europeans to push ahead with reforms, but with a German election in the autumn that seems unlikely.

Towards Cyprussia?

Cyprus is broke. Its debt, if it took on its banks’ liabilities, would hit 145% of GDP. This newspaper suggested recapitalising Cypriot banks, on a case-by-case basis, directly through the European Stability Mechanism (ESM), thus breaking the vicious circle where weak sovereigns bail out weak banks. We also argued for depositors and senior bondholders to be spared—not out of any particular love for rich Russians, but because of the fear of bank runs in larger weak euro economies. The Europeans instead decided to lend the money directly to the Cypriot government; and the Cypriots, perhaps bullied by some creditors, then decided to clobber all the banks’ depositors, even the insured ones.

This was ingeniously loopy. Cyprus is odd, because virtually all its banks’ liabilities are deposits (as opposed to longer-term bonds). Yet, of the 147 banking crises since 1970 tracked by the IMF, none inflicted losses on all depositors, irrespective of the amounts they held and the banks they were with. Now depositors in weak banks in weak countries have every reason to worry about sudden raids on their savings. Depositors in places like Italy have not panicked yet. But they will if the euro zone tries to “rescue” them too.

The blame for this should be shared between Cyprus and its creditors. Cyprus is guilty of a lot. It welcomed in the Russians and allowed its banks to get far too big: their assets reached 800% of GDP in 2011. The banks were in trouble even before the restructuring of Greek government bonds opened up a €4 billion hole in their accounts last year. As for the creditors, Angela Merkel’s priority seems to have been to appear stern before the German election, and the European Central Bank, whose job it is to protect financial stability, was party to a scheme that ended up jeopardising it.

What should Europe’s leaders do now? The worst outcome would be to allow the Cypriots to slide towards the exit. That would be disastrous for the island. And the euro zone would be wrong to imagine that Cyprus is tiny enough to let go safely. The currency’s credibility rests on the idea that it is irreversible.
Leaving it to the Russians to save Cyprus, by letting them recapitalise its banks and grab a slice of its gas, is an answer, but not the best one. However tricky the politics of using German taxpayers’ money to bail out Russian depositors, a deal that ends up entrenching Cyprus’s status as an offshore Russian satrapy would be a perverse outcome. A revised deal with the euro zone would be better.

The yoke of union

This newspaper would still prefer to recapitalise Cyprus’s banks directly through the ESM. That option is plainly not on the table. The best that can probably be done now is to spare the insured depositors, bail in other bank creditors and, given the economic damage caused in the past week, increase the amount of the bail-out. The financial assumptions in the rejected deal are already out of date. There will be capital flight when the shuttered banks eventually open; the island’s offshore-finance business plan is now bust. It needs to find new sources of prosperity, including faster exploitation of its recent Mediterranean gas finds—although these can be overplayed (see article). The best long-term plan for its economy would be a deal with the Turkish-Cypriots to reunify the island, which would boost tourism and GDP.

More broadly, Cyprus’s tragicomedy should prompt Europe’s leaders to get a move on. Even if only uninsured deposits are hit, a line has been crossed. A formal European bail-in regime is needed as soon as possible, one that requires banks to hold a layer of loss-absorbing senior debt designed to spare depositors, both insured and uninsured, in all but the last resort. That promises a more predictable environment, but it will also entrench fragmentation, with borrowers in weak countries finding it harder and more expensive to gain access to credit. The only solution to such fragmentation is a proper banking union and limited mutualisation of sovereign debt.

The political consequences are toxic. Cyprus is the latest peripheral country to feel mistreated by creditor countries. For their part creditors resent the fact that their financial support is summarily discounted. The euro-zone economy is stagnant. Protest parties are gaining popularity. The euro was supposed to be the manifestation of a grand political project. It feels more like a loveless marriage, in which the cost of breaking up is the only thing keeping the partners together.

Business & Finance

Hey. So, here's an article to get you started on the theme for this week:
http://www.vanityfair.com/society/features/2011/05/top-one-percent-201105





I still don't know if I'm going to be able to get a projector and the technical stuff figured out yet, so check back here before Thursday, I might post a couple short videos for you to watch.

If you're completely financially and economically illiterate, first off, congratulations, you've avoided the indoctrination. However, your ignorance is the weapon the elite use to make things worse for the rest of us. It would be helpful if you knew what the sequester is, here's a relatively good article about it that you could read:
http://www.motherjones.com/kevin-drum/2013/03/the-sequester-explained

Of course I've written something about it, though it was called the 'fiscal cliff' at the time:
http://theendisalwaysnear.blogspot.com/2012/12/its-not-end-of-world.html

If you feel you need a little lesson in economics, this post I wrote isn't too bad if I do say so myself:
http://theendisalwaysnear.blogspot.com/2011/11/crack-in-curtain.html

I've also written quite extensively about inequality, how it came about and where it's heading. If you've got the time you could browse some of these:
http://theendisalwaysnear.blogspot.com/2010/09/lessons-on-killing-golden-goose.html
http://theendisalwaysnear.blogspot.com/2011/09/let-them-eat-ipads.html
http://theendisalwaysnear.blogspot.com/2010/12/bah-humbug.html
http://theendisalwaysnear.blogspot.com/2010/12/fix-needs-leak.html

Of the 1%, by the 1%, for the 1%

Americans have been watching protests against oppressive regimes that concentrate massive wealth in the hands of an elite few. Yet in our own democracy, 1 percent of the people take nearly a quarter of the nation’s income—an inequality even the wealthy will come to regret.

By Joseph E. StiglitzIllustration by Stephen Doyle

THE FAT AND THE FURIOUS The top 1 percent may have the best houses, educations, and lifestyles, says the author, but “their fate is bound up with how the other 99 percent live.”

It’s no use pretending that what has obviously happened has not in fact happened. The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran. While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow.

Economists long ago tried to justify the vast inequalities that seemed so troubling in the mid-19th century—inequalities that are but a pale shadow of what we are seeing in America today. The justification they came up with was called “marginal-productivity theory.” In a nutshell, this theory associated higher incomes with higher productivity and a greater contribution to society. It is a theory that has always been cherished by the rich. Evidence for its validity, however, remains thin. The corporate executives who helped bring on the recession of the past three years—whose contribution to our society, and to their own companies, has been massively negative—went on to receive large bonuses. In some cases, companies were so embarrassed about calling such rewards “performance bonuses” that they felt compelled to change the name to “retention bonuses” (even if the only thing being retained was bad performance). Those who have contributed great positive innovations to our society, from the pioneers of genetic understanding to the pioneers of the Information Age, have received a pittance compared with those responsible for the financial innovations that brought our global economy to the brink of ruin.

Some people look at income inequality and shrug their shoulders. So what if this person gains and that person loses? What matters, they argue, is not how the pie is divided but the size of the pie. That argument is fundamentally wrong. An economy in which most citizens are doing worse year after year—an economy like America’s—is not likely to do well over the long haul. There are several reasons for this.

First, growing inequality is the flip side of something else: shrinking opportunity. Whenever we diminish equality of opportunity, it means that we are not using some of our most valuable assets—our people—in the most productive way possible. Second, many of the distortions that lead to inequality—such as those associated with monopoly power and preferential tax treatment for special interests—undermine the efficiency of the economy. This new inequality goes on to create new distortions, undermining efficiency even further. To give just one example, far too many of our most talented young people, seeing the astronomical rewards, have gone into finance rather than into fields that would lead to a more productive and healthy economy.

Third, and perhaps most important, a modern economy requires “collective action”—it needs government to invest in infrastructure, education, and technology. The United States and the world have benefited greatly from government-sponsored research that led to the Internet, to advances in public health, and so on. But America has long suffered from an under-investment in infrastructure (look at the condition of our highways and bridges, our railroads and airports), in basic research, and in education at all levels. Further cutbacks in these areas lie ahead.

None of this should come as a surprise—it is simply what happens when a society’s wealth distribution becomes lopsided. The more divided a society becomes in terms of wealth, the more reluctant the wealthy become to spend money on common needs. The rich don’t need to rely on government for parks or education or medical care or personal security—they can buy all these things for themselves. In the process, they become more distant from ordinary people, losing whatever empathy they may once have had. They also worry about strong government—one that could use its powers to adjust the balance, take some of their wealth, and invest it for the common good. The top 1 percent may complain about the kind of government we have in America, but in truth they like it just fine: too gridlocked to re-distribute, too divided to do anything but lower taxes.

Economists are not sure how to fully explain the growing inequality in America. The ordinary dynamics of supply and demand have certainly played a role: laborsaving technologies have reduced the demand for many “good” middle-class, blue-collar jobs. Globalization has created a worldwide marketplace, pitting expensive unskilled workers in America against cheap unskilled workers overseas. Social changes have also played a role—for instance, the decline of unions, which once represented a third of American workers and now represent about 12 percent.

But one big part of the reason we have so much inequality is that the top 1 percent want it that way. The most obvious example involves tax policy. Lowering tax rates on capital gains, which is how the rich receive a large portion of their income, has given the wealthiest Americans close to a free ride. Monopolies and near monopolies have always been a source of economic power—from John D. Rockefeller at the beginning of the last century to Bill Gates at the end. Lax enforcement of anti-trust laws, especially during Republican administrations, has been a godsend to the top 1 percent. Much of today’s inequality is due to manipulation of the financial system, enabled by changes in the rules that have been bought and paid for by the financial industry itself—one of its best investments ever. The government lent money to financial institutions at close to 0 percent interest and provided generous bailouts on favorable terms when all else failed. Regulators turned a blind eye to a lack of transparency and to conflicts of interest.

When you look at the sheer volume of wealth controlled by the top 1 percent in this country, it’s tempting to see our growing inequality as a quintessentially American achievement—we started way behind the pack, but now we’re doing inequality on a world-class level. And it looks as if we’ll be building on this achievement for years to come, because what made it possible is self-reinforcing. Wealth begets power, which begets more wealth. During the savings-and-loan scandal of the 1980s—a scandal whose dimensions, by today’s standards, seem almost quaint—the banker Charles Keating was asked by a congressional committee whether the $1.5 million he had spread among a few key elected officials could actually buy influence. “I certainly hope so,” he replied. The Supreme Court, in its recent Citizens United case, has enshrined the right of corporations to buy government, by removing limitations on campaign spending. The personal and the political are today in perfect alignment. Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. By and large, the key executive-branch policymakers on trade and economic policy also come from the top 1 percent. When pharmaceutical companies receive a trillion-dollar gift—through legislation prohibiting the government, the largest buyer of drugs, from bargaining over price—it should not come as cause for wonder. It should not make jaws drop that a tax bill cannot emerge from Congress unless big tax cuts are put in place for the wealthy. Given the power of the top 1 percent, this is the way you would expect the system to work.

America’s inequality distorts our society in every conceivable way. There is, for one thing, a well-documented lifestyle effect—people outside the top 1 percent increasingly live beyond their means. Trickle-down economics may be a chimera, but trickle-down behaviorism is very real. Inequality massively distorts our foreign policy. The top 1 percent rarely serve in the military—the reality is that the “all-volunteer” army does not pay enough to attract their sons and daughters, and patriotism goes only so far. Plus, the wealthiest class feels no pinch from higher taxes when the nation goes to war: borrowed money will pay for all that. Foreign policy, by definition, is about the balancing of national interests and national resources. With the top 1 percent in charge, and paying no price, the notion of balance and restraint goes out the window. There is no limit to the adventures we can undertake; corporations and contractors stand only to gain. The rules of economic globalization are likewise designed to benefit the rich: they encourage competition among countries for business, which drives down taxes on corporations, weakens health and environmental protections, and undermines what used to be viewed as the “core” labor rights, which include the right to collective bargaining. Imagine what the world might look like if the rules were designed instead to encourage competition among countries for workers. Governments would compete in providing economic security, low taxes on ordinary wage earners, good education, and a clean environment—things workers care about. But the top 1 percent don’t need to care.

 

Or, more accurately, they think they don’t. Of all the costs imposed on our society by the top 1 percent, perhaps the greatest is this: the erosion of our sense of identity, in which fair play, equality of opportunity, and a sense of community are so important. America has long prided itself on being a fair society, where everyone has an equal chance of getting ahead, but the statistics suggest otherwise: the chances of a poor citizen, or even a middle-class citizen, making it to the top in America are smaller than in many countries of Europe. The cards are stacked against them. It is this sense of an unjust system without opportunity that has given rise to the conflagrations in the Middle East: rising food prices and growing and persistent youth unemployment simply served as kindling. With youth unemployment in America at around 20 percent (and in some locations, and among some socio-demographic groups, at twice that); with one out of six Americans desiring a full-time job not able to get one; with one out of seven Americans on food stamps (and about the same number suffering from “food insecurity”)—given all this, there is ample evidence that something has blocked the vaunted “trickling down” from the top 1 percent to everyone else. All of this is having the predictable effect of creating alienation—voter turnout among those in their 20s in the last election stood at 21 percent, comparable to the unemployment rate.

In recent weeks we have watched people taking to the streets by the millions to protest political, economic, and social conditions in the oppressive societies they inhabit. Governments have been toppled in Egypt and Tunisia. Protests have erupted in Libya, Yemen, and Bahrain. The ruling families elsewhere in the region look on nervously from their air-conditioned penthouses—will they be next? They are right to worry. These are societies where a minuscule fraction of the population—less than 1 percent—controls the lion’s share of the wealth; where wealth is a main determinant of power; where entrenched corruption of one sort or another is a way of life; and where the wealthiest often stand actively in the way of policies that would improve life for people in general.

As we gaze out at the popular fervor in the streets, one question to ask ourselves is this: When will it come to America? In important ways, our own country has become like one of these distant, troubled places.
Alexis de Tocqueville once described what he saw as a chief part of the peculiar genius of American society—something he called “self-interest properly understood.” The last two words were the key. Everyone possesses self-interest in a narrow sense: I want what’s good for me right now! Self-interest “properly understood” is different. It means appreciating that paying attention to everyone else’s self-interest—in other words, the common welfare—is in fact a precondition for one’s own ultimate well-being. Tocqueville was not suggesting that there was anything noble or idealistic about this outlook—in fact, he was suggesting the opposite. It was a mark of American pragmatism. Those canny Americans understood a basic fact: looking out for the other guy isn’t just good for the soul—it’s good for business.

The top 1 percent have the best houses, the best educations, the best doctors, and the best lifestyles, but there is one thing that money doesn’t seem to have bought: an understanding that their fate is bound up with how the other 99 percent live. Throughout history, this is something that the top 1 percent eventually do learn. Too late.

Media Presentation

Hey guys. Here's the article for the presentation Thursday!

How Viewers Grow Addicted To Television

By DANIEL GOLEMAN
Published: October 16, 1990

THE proposition that television can be addictive is proving to be more than a glib metaphor. The most intensive scientific studies of people's viewing habits are finding that for the most frequent viewers, watching television has many of the marks of a dependency like alcoholism or other addictions.

For instance, compulsive viewers turn to television for solace when they feel distressed, rather than only watching favorite programs for pleasure. And though they get temporary emotional relief while watching, they end up feeling worse afterward.

For a decade or more, researchers have pursued the hypothesis that some television viewers are addicted to watching. But only this year have a handful of studies produced the strongest evidence yet that some compulsive viewers are indeed addicted under standard diagnostic criteria.

There is no definition of television addiction on which all researchers agree. But people who call themselves ''television addicts,'' studies find, watch television twice as much as the average viewer. One study found that self-described addicts watched an average of 56 hours a week; the A. C. Nielsen Company reports the average for adults is just above 30 hours a week.

Recent studies have found that 2 to 12 percent of viewers see themselves as addicted to television: they feel unhappy watching as much as they do, yet seem powerless to stop themselves.

Portraits of those who admit to being television addicts are emerging from the research. For instance, a study of 491 men and women reported this year by Robin Smith Jacobvitz of the University of New Mexico offers these character sketches:
A 32-year-old police officer has three sets in his home. Although he is married with two children and has a full-time job, he manages to watch 71 hours of television a week. He says, ''I rarely go out anymore.''
A 33-year-old woman who has three children, is divorced and has no job reports watching television 69 hours a week. She says, ''Television can easily become like a companion if you're not careful.''
A housewife who is 50, with no children, watches 90 hours of television a week. She says, ''I'm home almost every day and my TV is my way of enjoying my day.''

Insights on Normal Viewing

The studies also shed new light on more ordinary viewing habits, showing that people who are emotionally dependent on television simply represent extremes of behavior seen from time to time in most viewers.
In a study comparing television viewing with leisure activities like sports, reading or gardening, television fared poorly as a diversion. While ordinary viewers say television relaxes them while they watch, afterward they feel far less relaxed, less happy and less able to concentrate than after participating in sports or other leisure activities.

To be sure, many people in the television industry, as well as some researchers, object to the idea that the medium can be addictive.

''People may watch to kill time or for escapism, but I've never seen anything conclusive that shows television to be psychologically addictive,'' said Richard Ducey, senior vice president of research and planning with the National Association of Broadcasters in Washington. ''It's a proposition with no support, except in some metaphorical sense, the same way you might be addicted to dessert.''

The issue of whether the most frequent viewers of television are addicted to it is being argued against the backdrop of a larger debate within psychiatry on the nature of addiction itself. For the most part, psychiatry has held to a strict definition of ''addiction,'' restricting its use to describe dependence on a substance like heroin to which the body develops a tolerance and shows withdrawal symptoms when deprived of it.

But in the current version of the psychiatric diagnostic manual, issued in 1983, the category of addiction was redefined and broadened to include compulsive behaviors that people turned to for relief from distress, and continued to rely on despite negative effects on their emotional or social functioning.

''Under the broader definition, many kinds of compulsive behavior could be considered addictive, including obsessive sex or compulsive television viewing,'' said Dr. Allen Frances, a psychiatrist at Cornell University Medical School, who is overseeing the revision of the diagnostic manual.

Watering Down of Concept

''However, the broad definition is under debate,'' he said. ''Many of us think it has become too vague, watering down the concept of addiction.''

The most commonly used scale to measure television addiction includes using television as a sedative, even though it does not bring satisfaction; lacking selectivity in viewing; feeling a loss of control while viewing; feeling angry with oneself for watching so much, not being able to quit watching and feeling miserable when kept from watching it.

''They turn on the TV when they feel sad, lonely, upset or worried, and they need to distract themselves from their troubles,'' said Robert McIlwraith, a psychologist at the University of Manitoba. Dr. McIlwraith reported his findings on television addiction at the annual meeting of the American Psychological Association in Boston last August.

The most exhaustive data on television watching data is from studies done between 1976 and 1988 on several different groups involving close to 1,200 men and women who volunteered to fill out questionnaires about their activities and moods whenever they were alerted by beepers they carried.

In analyzing the data for people's television-watching habits, Robert Kubey, a psychologist now at the School of Communications at Rutgers University, worked with Mihaly Csikszentmihalyi, a psychologist at the University of Chicago.

Their findings are reported in ''Television and the Quality of Life,'' published this year by Lawrence Erlbaum Associates. While their conclusions are drawn from the studies involving more than a thousand people, the most detailed results come from a study in which 107 men and women reported on their experiences at randomly selected moments throughout the day for a week.

The third of the men and women in the smaller study who watched television the most were markedly different from the rest of those studied. As a group, the compulsive watchers were more irritable, tense and sad than the others, and felt they had little control over their lives.

For most people, there was a strong relationship between being in a bad mood and watching television to get out of it. The strongest pattern predicting that people would watch television in the evening was that in the morning they felt the day was going badly, and by the afternoon they were in a bad mood.

Lowered Brain Activity

For all viewers, researchers have found, television tends to elicit a state of ''attentional inertia,'' marked by lowered activity in the part of the brain that processes complex information. That inertia, said Dr. Kubey, may explain why a mediocre television show can have high ratings if it follows a popular one.

''It's common for people to say they are selective television watchers,'' said Dr. Kubey. ''They'll say they sat down just to watch 'L.A. Law,' but they're still watching three hours later. A great many people feel powerless to get up and turn it off.''

For compulsive viewers, that inertia becomes extreme, so that the longer they watch, the more passive and less discriminating they become, Dr. Kubey found.

Oddly, while most people said they were more relaxed while watching television than they had been before starting, they ended up feeling far less relaxed once they stopped. ''We found no evidence that television offers emotional rewards that extend beyond viewing,'' Dr. Kubey said. Moreover, the longer people watch television, the less rewarding they find it, the intensive study of 107 people showed.

These experiences with television were strongest among the compulsive viewers. Not only did they report feeling worse than most people as they watched television, but their spirits drooped all the more once they stopped watching. What little lift they get from television, though, is enough in many cases for most frequent viewers to become dependent on it, Dr. Kubey said.

An additional pressure to watch television for the compulsive viewers arises from feeling uncomfortable when they are alone with nothing to do, the study showed. For such people, idle time is unpleasant, making them all the more ready to seek solace from television.

Testing Addiction Theories

In other recent research, Dr. McIlwraith tested several theories of television addiction in a study of 135 students at the University of Toronto. In his study, the one in eight students who said they were addicted to television watched twice as much as the others: 21 hours a week instead of 10.

One prominnent theory of television addiction, proposed by Jerome Singer, a psychologist at Yale University, holds that people who watch too much television from childhood grow up with a deprived fantasy life. For them, watching television substitutes for their own imagination. But Dr. McIlwraith found no difference between the television addicts and other students in their abilities to have pleasant, vivid fantasies on their own.

Another theory, proposed by psychoanalytic theorists, is that television addicts have an ''addictive'' personality, which makes them vulnerable to dependencies of all kinds. But Dr. McIlwraith found no evidence for that view. ''Television addicts don't eat more junk food, or smoke or drink more alcohol than other groups,'' Dr. McIlwraith said.

Instead, his study supported the findings of Dr. Kubey. The addicts were far more likely than other students to say they watched TV when feeling lonely, sad, anxious or angry, and to use it to distract themselves from things that bothered them or when they were bored. 3 Patterns Identified From this study and another of 476 men and women done with John Schallow, a psychologist at the University of Manitoba, Dr. McIlwraith has identified three main patterns of television use. ''One common use is to alter mood,'' Dr. McIlwraith said. ''These people turn on the television when distressed. Another is to fill time when you are bored. People who feel they are addicted fall into extremes of these types.''

On the other hand, he said, ''there is a rarer group who use television selectively. They tend to watch only a few favorite shows.''