Davos Man and Fake News

Marcy Wheeler has a good post rebutting DCI John Brennan's denial that the intelligence community was behind the leak of the "dirty dossier" on Trump. Brennan argues that the dossier was bouncing around in the press long before it was published; therefore, you cannot lay it at the IC's doorstep. But Wheeler points out that the dossier that was released included a report that postdates all the versions known to be circulating in the press. The idea that this is a domestic color revolution is the one that makes the most sense.

Wall Street lickspittle Andrew Ross Sorkin, in Davos for the World Economic Forum, has a piece worth reading. In "What to Make of the ‘Davos Class’ in the Trump Era" Sorkin outlines an emerging understanding among the elite that globalization has become very unpopular to the voting public.

Sorkin's story has a hopeful "and this too shall pass" aspect to it. Towards the end he mentions how reviled Davos was during the efflorescence of activism around the millennium:

This is not the first time that the World Economic Forum has come under fire from critics about its globalist, free-trade message. In 2000, a group of more than 1,000 demonstrators carrying signs that said “Against the New World Order” smashed the windows of a McDonald’s franchise here in Davos just down the road from the conference, protesting open trade policies espoused by then-President Bill Clinton, who was speaking at the event.

Marcy Wheeler in another post ties the sudden elite panic over Fake News to the inability to think beyond corporate globalization:

Finally, one reason there is such a panic about “fake news” is because the western ideology of neoliberalism has failed. It has led to increased authoritarianism, decreased qualify of life in developed countries (but not parts of Africa and other developing nations), and it has led to serial destabilizing wars along with the refugee crises that further destabilize Europe. It has failed in the same way that communism failed before it, but the elites backing it haven’t figured this out yet. I’ll write more on this (Ian Welsh has been doing good work here). All details of the media environment aside, this has disrupted the value-laden system in which “truth” exists, creating a great deal of panic and confusion among the elite that expects itself to lead the way out of this morass. Part of what we’re seeing in “fake news” panic stems from that, as well as a continued disinterest in accountability for the underlying policies — the Iraq War and the Wall Street crash and aftermath especially — enabled by failures in our elite media environment. But our media environment is likely to be contested until such time as a viable ideology forms to replace failed neoliberalism. Sadly, that ideology will be Trumpism unless the elite starts making the world a better place for average folks. Instead, the elite is policing discourse-making by claiming other things — the bad true and false narratives it, itself, doesn’t propagate — as illegitimate.

As Debt Ceiling Approaches GOP Doubles Down on Bunkum

Republicans acknowledge that their decision to link the reopening of the government to the health care law is unpopular. A Washington Post/ABC News poll released Monday found that disapproval of Congressional Republicans had jumped to 70 percent, from 63 percent late last month.

But David Winston, a Republican pollster close to Mr. Boehner, said Mr. Obama’s stance was likely to prove unpopular as well. “Anyone who says he knows how this is going to turn out doesn’t know,” Mr. Winston said. “We are in a very unsettled time.”

That's from today's story, "Senate Leaders Mull Raising Debt Ceiling in Challenge to House," by Jonathan Weisman and Jackie Calmes, and it pretty much says it all. Republicans have a losing strategy on their hands, one that promises to do lasting damage to the party's already tarnished brand, and the longer they stick with it the worse it is going to get for them. But rather than change course, judging by the quote from Boehner's pollster, the GOP plans to double down, hoping that some of the ensuing gore will splatter on Obama and besmirch him as well.

People are not trusting of the Republican mantra of "Just come to the table and talk" because everyone intuitively understands extortion and exploitation when he or she sees it. If this were all merely about talking and horse trading why the closure of government? Why the threats to default on U.S. debt and thereby undercut the global gold standard? No, people understand that this is blackmail carried out by an ignorant, bitter minority.

The Dow was down close to one percent yesterday. As Republicans maintain their charade -- the odious Andrew Ross Sorkin writes in a DealBook column today about some on Wall Street who think that failure to lift the debt ceiling is no big deal -- this will worsen. It should provide some impetus to efforts in the Senate to pass a debt ceiling bill. And, assuming that Obama doesn't toss the GOP a lifeline and snatch defeat from the jaws of victory, all that will be left will be the inevitable -- for Boehner to capitulate and allow a straight up-or-down vote in the House.

Boehner might lose his speakership as a result.

And while the other option -- that Boehner stands by the Tea Party and hurls the nation into default -- remains a possibility, I think it is unlikely. The Republican Party would suffer enormous damage, probably more than its gerrymandering could withstand.

Consensus: Cyprus Crisis Won't Spread

A consensus seems to be forming that the debt crisis underway in Cyprus will not spread to vulnerable, big eurozone countries like Italy and Spain. The reason? Cyprus is unique because of the outsize role played by money-laundering Russians. Here's how Andrew Ross Sorkin, a reliable Wall Street mouthpiece, puts it in his DealBook column today:

Cyprus is unique. Besides being tiny, its banking system looks different from those in most other countries. Much of the big money deposited in its banks is from foreign investors, including Russians who have long been suspected of money laundering. Those investors had fair warning that Cypriot banks were troubled. The issue has been simmering for six months. But those investors left their money in the bank, in part because they were gambling that the banks would be bailed out at no cost to them. If the current plan is approved, depositors will have lost that bet. 

Worse, the strategy employed in the bailout of Greece — in which bondholders of its sovereign debt were paid less than face value — will not work in Cyprus. Cyprus’s banks own much of the country’s debt, so any effort to reduce that debt by forcing debt holders to accept less would only make the banks more troubled. 

Given the brutal history between Russia and so much of Europe — and speculation that so much of the money is ill gotten — it is clear why it would be so politically unpalatable to countries in the euro zone, Germany in particular, to bail out Russian depositors. And even if the move were to create a run on the banks in Cyprus, the contagion would be limited. 

There is very little chance that politicians would ever choose to use the model they developed in Cyprus in a country like Italy or Spain, where a run on the banks would have such profound implications. By the way, if you’re wondering why investors left so much money in troubled Cypriot banks, here’s a trivia question: Would you have been better off leaving your money in a bank in the United States or in Cyprus over the last five years? 

The answer: You would have been better off in Cyprus, even after the bailout, when your money was “confiscated.” If you had 100,000 euros in a Cypriot bank account over the last five years, where the interest rate has averaged about 5 percent, you would have about 127,600 euros today. Even after the bailout, which would require you to give up 10 percent of your deposit — 12,760 euros — you would be left with 114,840 euros. The American bank? The $100,000 you deposited at Bank of America five years ago is about $105,100, at the going rate of about 1 percent interest a year.

Dismissing the bank run in Cyprus as a one-off because nearly a quarter of its deposits are held by Russians seems too convenient to me, too redolent of the old cold war. The issue isn't the Russians. The issue is getting a bailout through parliament, whether in Cyprus or in other eurozone countries.

Jeroen Dijsselbloem, Labour Party member and Dutch Minister of Finance who is the current head of the Euro Group, nationalized SNS Reaal in February, wiping out its shareholders. If he can take a hard line in the Netherlands why can't he do the same to a tiny country like Cyprus? The push back came from Cypriot President Nicos Anastasiades -- as documented in today's frontpage story by James Kanter, Nicholas Kulish and Andrew Higgins -- who fought to keep confiscation on deposits of more than 100,000 euros below ten percent. This meant the small fry have to fork over more, which is the recipe for a bank run.

Contrary to Sorkin's dismissal of concern over Cyprus, it's unclear at this point that the contagion won't spread. This from today's story, "Second Thoughts in Europe as Anxiety Rises in Cyprus," by Liz Alderman and Landon Thomas Jr.:

While it is too early to tell if Italian, Spanish and Greek savers will pull out their deposits in response to the Cyprus tax, investors holding the bonds of banks in Spain and especially Italy are already taking action. 

In Italy, ravaged by a stagnating economy, banks are experiencing a steep increase in nonperforming loans — one of the highest rates in the euro zone — that worries regulators and has made an investment fad of betting against Italian bank bonds. 

For now, no one is predicting a European bailout of Italian banks. But just as problems with Spain’s smaller savings banks last year quickly escalated into a crisis requiring a European bank rescue, a growing number of analysts are warning that Italy’s most troubled banks could lead to a broader systemic threat to Italian banking.

Fraud at the Rating Agencies

Since the meltdown of the economy in 2008 a narrative has formed as to how we got there. At the center of that narrative are the rating agencies -- Standard & Poor's, Fitch, Moody's Investor Service -- because without their AAA ratings of collateralized debt obligations, CDO's, it's hard to see how the house of cards that collapsed five years ago gets erected in the first place. 

Finally, as revealed in a frontpage story today by Andrew Ross Sorkin and Mary Williams Walsh, the Department of Justice is charging one of the credit-rating agencies, S&P, with fraud: 

From September 2004 through October 2007, S.&P. “knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors” in certain mortgage-related securities, according to the suit filed against the agency and its parent company, McGraw-Hill Companies. S.&P. also falsely represented that its ratings “were objective, independent, uninfluenced by any conflicts of interest,” the suit said.

S.& P., first contacted by federal enforcement officials three years ago, said in a statement Monday in anticipation of the suit that it had acted in good faith in issuing the ratings.

“A D.O.J. lawsuit would be entirely without factual or legal merit,” it said, adding that its competitors had given exactly the same ratings to all the securities it believed to be in question.

Settlement talks between S.& P. and the Justice Department broke down in the last two weeks after prosecutors sought a penalty in excess of $1 billion and insisted that the company admit wrongdoing, several people with knowledge of the talks said. That amount would wipe out the profits of McGraw-Hill for an entire year. S.& P. had proposed a settlement of around $100 million, the people said.

S.& P. also sought a deal that would allow it to neither admit nor deny guilt; the government pressed for an admission of guilt to at least one count of fraud, said the people. S.& P. told prosecutors it could not admit guilt without exposing itself to liability in a multitude of civil cases. 

It was unclear whether state and federal authorities were looking at the other two major ratings agencies, Moody’s Investors Service and Fitch.

This morning's naked capitalism blog points out that the previous dismal track record of investor suits against the rating agencies doesn't apply here because the DOJ is relying on a new legal theory. As Sorkin and Walsh explain in their DealBook story:

The federal action will be the first time a credit-rating agency has been charged under a 1989 law intended to protect taxpayers from frauds involving federally insured financial institutions, which since the financial crisis has been used against a number of federally insured banks, including Wells Fargo, Bank of America and Citigroup.

The government is taking a novel approach by accusing S.& P. of defrauding a federally insured institution and therefore injuring the taxpayer.

Among others, the compliant includes the demise of Wescorp, a federally insured credit union in Los Angeles that went bankrupt after investing in mortgage securities rated by S.& P. Wescorp is included as one example of the contended fraud, and as a way to bring the case in California. The suit was filed in Federal District Court for the Central District of California.

The naked capitalism post says that if successful this prosecution could be a watershed moment:

As indicated, the reason this suit might fly is that the causes of action rely on different statues than previously invoked, and the focus is on SPs misrepresentation of its own process: that it presented it as objective and unbiased, when it had significant conflicts of interests and its employees believed it was concerned only about profit, and that it may also have failed to adhere to its own procedures.

While getting a ratings agency scalp is small potatoes compared to getting the executives at one of the many financial institutions that helped bring about the crisis, Ill take my victories where I can get them. Winning a case against a public company that is really keen not to lose (tons of private litigation would follow) would break a long losing streak in the DoJ and SEC on the finance front. Although the agencies have been craven, they apparently really were demoralized after losing their misguided suit against Bear Stearns hedge fund managers, and theyve been gun shy. That does not mean they would not have lost in a fight against the Treasury if they had wanted to go after any targets, but lets not kid ourselves: these fights never occurred. Breuer in a significant role was also a big part of the problem, but people who know something about the DoJ say the agencys learned timidity was an even bigger impediment. They really lost their mojo after the Bear Stearns fiasco. You could have imagined a less cowardly DoJ filing suits against safe and obvious targets like WaMu.

Lets hope that the DoJs prosecutorial efforts live up to the caliber of their filing. Too often the Feds have proven to be great draftsmen but lousy prosecutors. Well see if they can up their game.

It would be amazing -- almost too grand a thought to think -- if Obama's second term turned out to be the opposite of the usual fecklessness and avariciousness (just think Bill Clinton) that define administrations headed out to pasture.

Brooks on Health Care Spending

David Brooks' column this morning looks at the nomination of Chuck Hagel to lead the Department of Defense through the prism of budgetary battles to come.  Obama needs a Republican war hero to provide political cover for a Democratic administration to reduce the size of the Pentagon.  Brooks has been playing Cassandra when it comes to the dangers of ever-growing Medicare spending.  Soon it will blot out nearly all else that the government does:

As the federal government becomes a health care state, there will have to be a generation of defense cuts that overwhelm anything in recent history. Keep in mind how brutal the budget pressure is going to be. According to the Government Accountability Office, if we act on entitlements today, we will still have to cut federal spending by 32 percent and raise taxes by 46 percent over the next 75 years to meet current obligations. If we postpone action for another decade, then we have to cut all non-interest federal spending by 37 percent and raise all taxes by 54 percent.

As this sort of crunch gradually tightens, Medicare will be the last to go. Spending on things like Head Start, scientific research and defense will go quicker. These spending cuts will transform America’s stature in the world, making us look a lot more like Europe today. This is why Adm. Mike Mullen called the national debt the country’s biggest security threat.

This assumes that we will continue to provide and pay for health care in the manner that we do today.  We can't.  The math doesn't lie.  A shift to preventative medicine is going to have to take place.  This of course is easier said than done.  For each person to begin to take responsibility for his or her own health is akin to an Apollo program or a World-War-Two-type mobilization.  Infantile narcissism and the consumerism that makes it a defining characteristic of our culture will have to be put in check.

Andrew Ross Sorkin in a DealBook column this morning argues that the four-year delay in the implementation of the Basel III liquidity requirements was less a heinous capitulation on the part of bank regulators than an unavoidable acceptance of reality:

In truth, the reason that regulators ultimately chose to relax the rules was simple practicality: many banks in Europe and some in the United States would have never been able to meet the requirements without significantly reducing the amount of credit they were to extend to Main Street over the next two years, according to people involved in the Basel decision process.

My problem with this is it is a continuation of the Wall Street-bailout, Too-Big-to-Fail logic: Let's go easy on the banks because if we don't they'll hurt Main Street.  How is this different from calling the 1% "job creators"?