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Monday, October 24, 2011

Has the Dying Bank of America Managed to Ensure Its Next Taxpayer Bailout?


Has the struggling financial giant found a way to commit financial suicide and leave taxpayers picking up the bill?

Bob Ivry, Hugh Son and Christine Harper have written an article that needs to be read by everyone interested in the financial crisis. The article (available here) is entitled: BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit. The thrust of their story is that Bank of America’s holding company, BAC, has directed the transfer of a large number of troubled financial derivatives from its Merrill Lynch subsidiary to the federally insured bank Bank of America (BofA). The story reports that the Federal Reserve supported the transfer and the Federal Deposit Insurance Corporation (FDIC) opposed it. Yves Smith of Naked Capitalism has written an appropriately blistering attack on this outrageous action, which puts the public at substantially increased risk of loss.

I write to add some context, point out additional areas of inappropriate actions, and add a regulatory perspective gained from dealing with analogous efforts by holding companies to foist dangerous affiliate transactions on insured depositories. I’ll begin by adding some historical context to explain how B of A got into this maze of affiliate conflicts.

Ken Lewis’ “Scorched Earth” Campaign against B of A’s Shareholders

Acquiring Countrywide: the High Cost of CEO Adolescence

During this crisis, Ken Lewis went on a buying spree designed to allow him to brag that his was not simply bigger, but the biggest. Bank of America’s holding company – BAC – became the acquirer of last resort. Lewis began his war on BAC’s shareholders by ordering an artillery salvo on BAC’s own position. What better way was there to destroy shareholder value than purchasing the most notorious lender in the world – Countrywide. Countrywide was in the midst of a death spiral. The FDIC would soon have been forced to pay an acquirer tens of billions of dollars to induce it to take on Countrywide’s nearly limitless contingent liabilities and toxic assets. Even an FDIC-assisted acquisition would have been a grave mistake. Acquiring thousands of Countrywide employees whose primary mission was to make fraudulent and toxic loans was an inelegant form of financial suicide. It also revealed the negligible value Lewis placed on ethics and reputation.

But Lewis did not wait to acquire Countrywide with FDIC assistance. He feared that a rival would acquire it first and win the CEO bragging contest about who had the biggest, baddest bank. His acquisition of Countrywide destroyed hundreds of billions of dollars of shareholder value and led to massive foreclosure fraud by what were now B of A employees.

But there are two truly scary parts of the story of B of A’s acquisition of Countrywide that have received far too little attention. B of A claims that it conducted extensive due diligence before acquiring Countrywide and discovered only minor problems. If that claim is true, then B of A has been doomed for years regardless of whether it acquired Countrywide. The proposed acquisition of Countrywide was huge and exceptionally controversial even within B of A. Countrywide was notorious for its fraudulent loans. There were numerous lawsuits and former employees explaining how these frauds worked.

B of A is really “Nations Bank” (formerly named NCNB). When Nations Bank acquired B of A (the San Francisco based bank), the North Carolina management took complete control. The North Carolina management decided that “Bank of America” was the better brand name, so it adopted that name. The key point to understand is that Nations/NCNB was created through a large series of aggressive mergers, so the bank had exceptional experience in conducting due diligence of targets for acquisition and it would have sent its top team to investigate Countrywide given its size and notoriety. The acquisition of Countrywide did not have to be consummated exceptionally quickly. Indeed, the deal had an “out” that allowed B of A to back out of the deal if conditions changed in an adverse manner (which they obviously did). If B of A employees conducted extensive due diligence of Countrywide and could not discover its obvious, endemic frauds, abuses, and subverted systems then they are incompetent. Indeed, that word is too bloodless a term to describe how worthless the due diligence team would have had to have been. Given the many acquisitions the due diligence team vetted, B of A would have been doomed because it would have routinely been taken to the cleaners in those earlier deals.

That scenario, the one B of A presents, is not credible. It is far more likely that B of A’s senior management made it clear to the head of the due diligence review that the deal was going to be done and that his or her report should support that conclusion. This alternative explanation fits well with B of A’s actual decision-making. Countrywide’s (and B of A’s) reported financial condition fell sharply after the deal was signed. Lewis certainly knew that B of A’s actual financial condition was much worse than its reported financial condition and had every reason to believe that this difference would be even worse at Countrywide given its reputation for making fraudulent loans. B of A could have exercised its option to withdraw from the deal and saved vast amounts of money. Lewis, however, refused to do so. CEOs do not care only about money. Ego is a powerful driver of conduct, and CEOs can be obsessed with status, hierarchy, and power. Of course, Lewis knew he could walk away wealthy after becoming a engine of mass destruction of B of A shareholder value, so he could indulge his ego in a manner common to adolescent males.

Acquiring Merrill Lynch: the Lure of Liar’s Loans

Merrill Lynch is the quintessential example of why it was common for the investment banks to hold in portfolio large amounts of collateralized debt obligations (CDOs). Some observers have jumped to the naïve assumption that this indicates that the senior managers thought the CDOs were safe investments. The “recipe” for an investor maximizing reported income differs only slightly from the recipe for lenders.

  1. Grow rapidly by
  2. Holding poor quality assets that provide a premium nominal yield while
  3. Employing extreme leverage, and
  4. Providing only grossly inadequate allowances for future losses on the poor quality assets

Investment banks that followed this recipe (and most large U.S. investment banks did), were guaranteed to report record (albeit fictional) short-term income. That income was certain to produce extreme compensation for the controlling officers. The strategy was also certain to produce extensive losses in the longer term – unless the investment bank could sell its losing position to another entity that would then bear the loss.

The optimal means of committing this form of accounting control fraud was with the AAA-rated top tranche of CDOs. Investment banks frequently purport to base compensation on risk-adjusted return. If they really did so investment bankers would receive far less compensation. The art, of course, is to vastly understate the risk one is taking and attribute short-term reported gains to the officer’s brilliance in achieving supra-normal returns that are not attributable to increased risk (“alpha”). Some of the authors of Guaranteed to Fail call this process manufacturing “fake alpha.”

The authors are largely correct about “fake alpha.” The phrase and phenomenon are correct, but the mechanism they hypothesize for manufacturing fake alpha has no basis in reality. They posit honest gambles on “extreme tail” events likely to occur only in rare circumstances. They provide no real world examples. If risk that the top tranche of a CDO would suffer a material loss of market values was, in reality, extremely rare then it would be impossible to achieve a substantial premium yield. The strategy would diminish alpha rather than maximizing false alpha. The risk that the top tranche of a CDO would suffer a material loss in market value was highly probable. It was not a tail event, much less an “extreme tail” event. CDOs were commonly backed by liar’s loans and the incidence of fraud in liar’s loans was in the 90% range. The top tranches of CDOs were virtually certain to suffer severe losses as soon as the bubble stalled and refinancing was no longer readily available to delay the wave of defaults. Because liar’s loans were primarily made to borrowers who were not creditworthy and financially unsophisticated, the lenders had the negotiating leverage to charge premium yields. The officers controlling the rating agencies and the investment banks were complicit in creating a corrupt system for rating CDOs that maximized their financial interests by routinely providing AAA ratings to the top tranche of CDOs “backed” largely by fraudulent loans. The combination of the fake AAA rating and premium yield on the top tranche of fraudulently constructed (and sold) CDOs maximized “fake alpha” and made it the “sure thing” that is one of the characteristics of accounting control fraud (see Akerlof & Romer 1993; Black 2005). This is why many of the investment banks (and, eventually, Fannie and Freddie) held substantial amounts of the top tranches of CDOs. (A similar dynamic existed for lower tranches, but investment banks also found it much more difficult to sell the lowest tranches.)

Merrill Lynch was known for the particularly large CDO positions it retained in portfolio. These CDO positions doomed Merrill Lynch. B of A knew that Merrill Lynch had tremendous losses in its derivatives positions when it chose to acquire Merrill Lynch.

Given this context, only the Fed, and BAC, could favor the derivatives deal

Lewis and his successor, Brian Moynihan, have destroyed nearly one-half trillion dollars in BAC shareholder value. (See my prior post on the “Divine Right of Bank Profits…”) BAC continues to deteriorate and the credit rating agencies have been downgrading it because of its bad assets, particularly its derivatives. BAC’s answer is to “transfer” the bad derivatives to the insured bank – transforming (ala Ireland) a private debt into a public debt.

Banking regulators have known for well over a century about the acute dangers of conflicts of interest. Two related conflicts have generated special rules designed to protect the bank and the insurance fund. One restricts transactions with senior insiders and the other restricts transactions with affiliates. The scam is always the same when it comes to abusive deals with affiliates – they transfer bad (or overpriced) assets or liabilities to the insured institution. As S&L regulators, we recurrently faced this problem. For example, Ford Motor Company attempted to structure an affiliate transaction that was harmful to the insured S&L (First Nationwide). The bank, because of federal deposit insurance, typically has a higher credit rating than its affiliate corporations.

BAC’s request to transfer the problem derivatives to B of A was a no brainer – unfortunately, it was apparently addressed to officials at the Fed who meet that description. Any competent regulator would have said: “No, Hell NO!” Indeed, any competent regulator would have developed two related, acute concerns immediately upon receiving the request. First, the holding company’s controlling managers are a severe problem because they are seeking to exploit the insured institution. Second, the senior managers of B of A acceded to the transfer, apparently without protest, even though the transfer poses a severe threat to B of A’s survival. Their failure to act to prevent the transfer contravenes both their fiduciary duties of loyalty and care and should lead to their resignations.

Now here’s the really bad news. First, this transfer is a superb “natural experiment” that tests one of the most important questions central to the health of our financial system. Does the Fed represent and vigorously protect the interests of the people or the systemically dangerous institutions (SDIs) – the largest 20 banks? We have run a real world test. The sad fact is that very few Americans will be surprised that the Fed represented the interests of the SDIs even though they were directly contrary to the interests of the nation. The Fed’s constant demands for (and celebration of) “independence” from democratic government, combined with slavish dependence on and service to the CEOs of the SDIs has gone beyond scandal to the point of farce. I suggest organized “laugh ins” whenever Fed spokespersons prate about their “independence.”

Second, I would bet large amounts of money that I do not have that neither B of A’s CEO nor the Fed even thought about whether the transfer was consistent with the CEO’s fiduciary duties to B of A (v. BAC). We took depositions during the S&L debacle in which senior officials of Lincoln Savings and its affiliates were shocked when we asked “whose interests were you representing – the S&L or the affiliate?” They had obviously never even considered their fiduciary duties or identified their actual client. We blocked a transaction that would have caused grave injury to the insured S&L by taking the holding company (Pinnnacle West) off the hook for its obligations to the S&L. That transaction would have passed routinely, but we flew to the board of directors meeting of the S&L and reminded them that their fiduciary duty was to the S&L, that the transaction was clearly detrimental to the S&L and to the benefit of the holding company, and that we would sue them and take the most vigorous possible enforcement actions against them personally if they violated their fiduciary duties. That caused them to refuse to approve the transaction – which resulted in a $450 million payment from the holding company to the S&L. (I know, $450 million sounds quaint now in light of the scale of the ongoing crisis, but back then it paid for our salaries in perpetuity.)

Third, reread the Bloomberg column and wrap your mind around the size of Merrill Lynch’s derivatives positions. Next, consider that Merrill is only one, shrinking player in derivatives. Finally, reread Yves’ column in Naked Capitalism where she explains (correctly) that many derivatives cannot be used safely. Add to that my point about how they can be used to create a “sure thing” of record fictional profits, record compensation, and catastrophic losses. This is particularly true about credit default swaps (CDS) because of the grotesque accounting treatment that typically involves no allowances for future losses. (FASB: you must fix this urgently or you will allow a “perfect crime.”). It is insane that we did not pass a one sentence law repealing the Commodities Futures Modernization Act of 2000. Between the SDIs, the massive, sometimes inherently unsafe and largely opaque financial derivatives, the appointment, retention, and promotion of failed anti-regulators, and the continuing ability of elite control frauds to loot with impunity we are inviting recurrent, intensifying crises.

I’ll close with a suggestion and request to reporters. Please find out who within the Fed approved this deal and the exact composition of the assets and liabilities that were transferred.

Wednesday, October 19, 2011

Report: GM Crops Destroying Food System, Creating Crises


Published on Wednesday, October 19, 2011 by The Guardian/UK

Report finds genetically modified crops fail to increase yields let alone solve hunger, soil erosion and chemical-use issues

by John Vidal

Genetic engineering has failed to increase the yield of any food crop but has vastly increased the use of chemicals and the growth of "superweeds", according to a report by 20 Indian, south-east Asian, African and Latin American food and conservation groups representing millions of people.

The so-called miracle crops, which were first sold in the US about 20 years ago and which are now grown in 29 countries on about 1.5bn hectares (3.7bn acres) of land, have been billed as potential solutions to food crises, climate change and soil erosion, but the assessment finds that they have not lived up to their promises.

The report claims that hunger has reached "epic proportions" since the technology was developed. Besides this, only two GM "traits" have been developed on any significant scale, despite investments of tens of billions of dollars, and benefits such as drought resistance and salt tolerance have yet to materialise on any scale.

Most worrisome, say the authors of the Global Citizens' Report on the State of GMOs, is the greatly increased use of synthetic chemicals, used to control pests despite biotech companies' justification that GM-engineered crops would reduce insecticide use.

In China, where insect-resistant Bt cotton is widely planted, populations of pests that previously posed only minor problems have increased 12-fold since 1997. A 2008 study in the International Journal of Biotechnology found that any benefits of planting Bt cotton have been eroded by the increasing use of pesticides needed to combat them.

Additionally, soya growers in Argentina and Brazil have been found to use twice as much herbicide on their GM as they do on conventional crops, and a survey by Navdanya International, in India, showed that pesticide use increased 13-fold since Bt cotton was introduced.

The report, which draws on empirical research and companies' own statements, also says weeds are now developing resistance to the GM firms' herbicides and pesticides that are designed to be used with their crops, and that this has led to growing infestations of "superweeds", especially in the US.

Ten common weeds have now developed resistance in at least 22 US states, with about 6m hectares (15m acres) of soya, cotton and corn now affected.

Consequently, farmers are being forced to use more herbicides to combat the resistant weeds, says the report. GM companies are paying farmers to use other, stronger, chemicals, they say. "The genetic engineering miracle is quite clearly faltering in farmers' fields," add the authors.

The companies have succeeded in marketing their crops to more than 15 million farmers, largely by heavy lobbying of governments, buying up local seed companies, and withdrawing conventional seeds from the market, the report claims. Monsanto, Dupont and Syngenta, the world's three largest GM companies, now control nearly 70% of global seed sales. This allows them to "own" and sell GM seeds through patents and intellectual property rights and to charge farmers extra, claims the report.

The study accuses Monsanto of gaining control of over 95% of the Indian cotton seed market and of massively pushing up prices. High levels of indebtedness among farmers is thought to be behind many of the 250,000 deaths by suicide of Indian farmers over the past 15 years.

The report, which is backed by Friends of the Earth International, the Center for Food Safety in the US, Confédération Paysanne, and the Gaia foundation among others, also questions the safety of GM crops, citing studies and reports which indicate that people and animals have experienced apparent allergic reactions.

But it suggests scientists are loath to question the safety aspects for fear of being attacked by establishment bodies, which often receive large grants from the companies who control the technology.

Monsanto disputes the report's findings: "In our view the safety and benefits of GM are well established. Hundreds of millions of meals containing food from GM crops have been consumed and there has not been a single substantiated instance of illness or harm associated with GM crops."

It added: "Last year the National Research Council, of the US National Academy of Sciences, issued a report, The Impact of Genetically Engineered Crops on Farm Sustainability in the United States, which concludes that US farmers growing biotech crops 'are realising substantial economic and environmental benefits – such as lower production costs, fewer pest problems, reduced use of pesticides, and better yields – compared with conventional crops'."

David King, the former UK chief scientist who is now director of the Smith School of Enterprise and the Environment at Oxford University, has blamed food shortages in Africa partly on anti-GM campaigns in rich countries.

But, the report's authors claim, GM crops are adding to food insecurity because most are now being grown for biofuels, which take away land from local food production.

Vandana Shiva, director of the Indian organisation Navdanya International, which co-ordinated the report, said: "The GM model of farming undermines farmers trying to farm ecologically. Co-existence between GM and conventional crops is not possible because genetic pollution and contamination of conventional crops is impossible to control.

"Choice is being undermined as food systems are increasingly controlled by giant corporations and as chemical and genetic pollution spread. GM companies have put a noose round the neck of farmers. They are destroying alternatives in the pursuit of profit."

Friday, October 14, 2011

How Bank of America Covered Up Fraud by Silencing Whistleblowers


Countrywide made life hard for an internal investigator, and a court ruled that when BofA took over, she was illegally fired in retaliation.

In the summer of 2007, a team of corporate investigators sifted through mounds of paper pulled from shred bins at Countrywide Financial Corp. mortgage shops in and around Boston.

By intercepting the documents before they were sliced by the shredder, the investigators were able to uncover what they believed was evidence that branch employees had used scissors, tape and Wite-Out to create fake bank statements, inflated property appraisals and other phony paperwork. Inside the heaps of paper, for example, they found mock-ups that indicated to investigators that workers had, as a matter of routine, literally cut and pasted the address for one home onto an appraisal for a completely different piece of property.

Eileen Foster, the company’s new fraud investigations chief, had seen a lot of slippery behavior in her two-plus decades in the banking business. But she’d never seen anything like this.

“You’re looking at it and you’re going, Oh my God, how did it get to this point?” Foster recalls. “How do you get people to go to work every day and do these things and think it’s okay?”

More surprises followed. She began to get pushback, she claims, from company officials who were unhappy with the investigation.

One executive, Foster says, sent an email to dozens of workers in the Boston region, warning them the fraud unit was on the case and not to put anything in their emails or instant messages that might be used against them. Another, she says, called her and growled into the phone: “I’m g--d---ed sick and tired of these witch hunts.”

Her team was not allowed to interview a senior manager who oversaw the branches. Instead, she says, Countrywide’s Employee Relations Department did the interview and then let the manager’s boss vet the transcript before it was provided to Foster and the fraud unit.

In the end, dozens of employees were let go and six branches were shut down. But Foster worried some of the worst actors had escaped unscathed. She suspected, she says, that something wasn’t right with Countrywide’s culture — and that it was going to be rough going for her as she and her team dug into the methods used by Countrywide’s sales machine.

By early 2008, she claims, she’d concluded that many in Countrywide’s chain of command were working to cover up massive fraud within the company — outing and then firing whistleblowers who tried to report forgery and other misconduct. People who spoke up, she says, were “taken out.”

By the fall of 2008, she was out of a job too. Countrywide’s new owner, Bank of America Corp., told her it was firing her for “unprofessional conduct.”

Foster began a three-year battle to clear her name and establish that she and other employees had been punished for doing the right thing. Last week, the U.S. Department of Labor ruled that Bank of America had illegally fired her as payback for exposing fraud and retaliation against whistleblowers. It ordered the bank to reinstate her and pay her some $930,000.

Bank of America denies Foster’s allegations and stands behind its decision to fire her. Foster sees the ruling as a vindication of her decision to keep fighting.

“I don’t let people bully me, intimidate me and coerce me,” Foster told iWatch News during a series of interviews. “And it’s just not right that people don’t know what happened here and how it happened.”

‘Greedy people’

This is the story of Eileen Foster’s fight against the nation’s largest bank and what was once the nation’s largest mortgage lender. It is also the story of other former Countrywide workers who claim they, too, fought against a culture of corruption that protected fraudsters, abused borrowers and helped land Bank of America in a quagmire of legal and financial woes.

In government records and in interviews with iWatch News , 30 former employees charge that Countrywide executives encouraged or condoned fraud. The misconduct, they say, included falsified income documentation and other tactics that helped steer borrowers into bad mortgages.

Eighteen of these ex-employees, including Foster, claim they were demoted or fired for questioning fraud. They say sales managers, personnel executives and other company officials used intimidation and firings to silence whistleblowers.

A former loan-underwriting manager in northern California, for example, claimed Countrywide retaliated against her after she sent an email to the company’s founder and chief executive, Angelo Mozilo, about questionable lending practices. The ex-manager, Enid Thompson, warned Mozilo in March 2007 that “greedy unethical people” were pressuring workers to approve loans without regard for borrowers’ ability to pay, according to a lawsuit [3] in Contra Costa Superior Court.

Within 12 hours, Thompson claimed, Countrywide executives began a campaign of reprisal, reducing her duties and transferring staffers off her team. Corporate minions, she charged, ransacked her desk, broke her computer and removed her printer and personal things.

Soon after, she said, she was fired. Her lawsuit was resolved last year. The terms were not disclosed.

Bank of America officials deny Countrywide or Bank of America retaliated against Foster, Thompson or others who reported fraud. The bank says Foster’s firing was based only on her “management style.” It says it takes fraud seriously and never punishes workers who report wrongdoing up the corporate ladder.

When fraud happens, Bank of America spokesman Rick Simon says, “the lender is almost always a victim, even if the fraud is perpetrated by individual employees. Fraud is costly, so lenders necessarily invest heavily in both preventing and investigating it.”

When it uncovers fraud, Simon says, the bank takes “appropriate actions,” including firing the employees involved and cooperating with law-enforcement authorities in criminal investigations.

Mozilo’s attorney, David Siegel, told iWatch News it was “unlikely that Mr. Mozilo either would have had a direct role with, or would recall, specific employee grievances, and it would be inappropriate for him to comment on individual employment issues in any event.” Siegel added that “any implication that he ever would have tolerated much less condoned to any extent misconduct or fraudulent activity in loan production and underwriting … is utterly baseless.”


closed-door testimony a year ago, the ex-CEO defended his company, telling the federal Financial Crisis Inquiry Commission that Countrywide “probably made more difference in society, in the integrity of our society, than any company in the history of America.”

Foster says that, in her experience, Mozilo urged managers to crack down on fraud. If he saw an email about a fraudster within the ranks, she says, he would hit “reply all” and type, “Track the bastard down and fire him.”

She says, though, that others within the company often screened his emails, and it’s likely Mozilo never saw Thompson’s email or many other messages about fraud.

“My sense is they kept things from Angelo,” she says.

‘An old matter’

When Bank of America announced in January 2008 that it was going to buy Countrywide at a fire-sale price, some analysts thought it was a great move, one that would leave the bank well positioned once the home-loan market recovered.

Almost three years later, defaults on loans originated by Countrywide have soared and Bank of America’s stock price has plunged as investors and government agencies have pursued mortgage-related claims totaling tens of billions of dollars.

Federal and state officials are pressing Bank of America and other big players to settle charges they used falsified documents to speed homeowners through foreclosure. Lawsuits filed on behalf of investors claim Countrywide lied about the quality of the pools of mortgages that the lender sold them during the home-loan boom.

Bank of America says issues related to Countrywide are old news. Last year a spokesman described fraud claims by state officials as “water under the bridge,” noting that the bank settled with dozens of states soon after buying Countrywide.

When federal officials announced Foster’s victory last week, Bank of America dismissed the case as “an old matter dating from 2008.”

Accounts from Foster and other former employees, however, put the bank in an uncomfortable position. These accounts, as well as lawsuits pushed by investors, borrowers and government agencies, raise questions about how diligently the bank has worked to clean up the mess caused by Countrywide — and whether the bank has tried to curtail its legal liability by papering over the history of corruption at its controversial acquisition.

In Foster’s case, the Labor Department notes [4]that two senior Bank of America officials — not former Countrywide executives — made the decision to fire her.

The agency says the investigations led by Foster found “widespread and pervasive fraud” that, Foster claimed, went beyond misconduct committed at the branch level and reached into Countrywide’s management ranks.

Foster told the agency that instead of defending the rights of honest employees, Countrywide’s employee relations unit sheltered fraudsters inside the company. According to the Labor Department, Foster believed Employee Relations “was engaged in the systematic cover-up of various types of fraud through terminating, harassing, and otherwise trying to silence employees who reported the underlying fraud and misconduct.”

In government records and in interviews with iWatch News , Foster describes other top-down misconduct:

  • She claims Countrywide’s management protected big loan producers who used fraud to put up big sales numbers. If they were caught, she says, they frequently avoided termination.
  • Foster claims Countrywide’s subprime lending division concealed from her the level of “suspicious activity reports.” This in turn reduced the number of fraud reports Countrywide gave to the U.S. Treasury’s Financial Crimes Enforcement Network.
  • Foster claims Countrywide failed to notify investors when it discovered fraud or other problems with loans that it had sold as the underlying assets in “mortgage-backed” securities. When she created a report designed to document these loans on a regular basis going forward, she says, she was “shut down” by company officials and told to stop doing the report.

In Foster’s view, Countrywide lost its way as it became a place where everyone was expected to bend to the will of salespeople driven by a whatever-it-takes ethos.

The attitude, she says, was: “The rules don’t matter. Regulations don’t matter. It’s our game and we can play it the way we want.”

Bank of America declined to answer detailed questions about Foster’s allegations. Simon, the bank spokesman, told iWatch News “we are certain” that Foster’s claims “were properly and fully investigated by Countrywide and appropriate actions were taken.”

And not all former Countrywide workers say that fraud was condoned by management.

Frank San Pedro, who worked as a manager within the investigations unit from 2004 to 2008, told the Financial Crisis Inquiry Commission the company worked hard “to root out all the fraud that we could possibly find. We continued to get better and better at it.”

He said most of the fraud was “external” — outsiders trying to rip off the lender — and in-house sales staffers who tried to push through fraudulent loans “seldom got away with it.”

Gregory Lumsden, former head of Countrywide’s subprime division, Full Spectrum Lending, says there are thousands of ex-Countrywiders who can vouch for the company’s honesty. When bad actors were caught, he says, Countrywide took swift action.

“I don’t care if you’re Microsoft or you’re the Golf Channel or Dupont or MSNBC: companies are going to make some mistakes,” Lumsden told iWatch News. “What you hope is that companies will deal with employees that do wrong. That’s what we did.”

The American Dream

In February 2003, Countrywide’s founder and CEO, Angelo Mozilo, gave a lecture hosted by Harvard’s Joint Center for Housing Studies titled “The American Dream of Homeownership: From Cliché to Mission.”

Mozilo, the Bronx-born son of a butcher, had started Countrywide with a partner in 1969 and built it into a home-loan empire that was now on the verge of becoming the nation’s largest home lender.

But he saw trouble on the horizon. Before his audience of academics and business people, he complained that a “regulatory mania” was hurting Countrywide and other “reputable” mortgage lenders. Overreaching predatory lending laws, he said, were threatening shut the door to homeownership for hard-working low-income and minority families. Industry and citizenry needed to work together to

prevent government from strangling the mortgage market, he said.

It wasn’t, Mozilo added, that he was against cracking down on bad apples that took advantage of vulnerable borrowers.

“These lenders,” the CEO said, “deserve unwavering scrutiny and, when found guilty, an unforgiving punishment.”

Around the time Mozilo was giving his speech back east, one of his employees was finding what she later claimed to be evidence of serious fraud at Countrywide’s Roseville, Calif., branch.

Employees were falsifying loan applicants’ salaries in mortgage paperwork and forging their names on loan documents, according to a lawsuit [5] filed by Michele Brunelli, who was a loan processor and later a branch operations manager for Countrywide. In March 2003, Brunelli recalled, she used the company’s “ethics hotline” and lodged what she thought was a confidential complaint.

Immediately after, Brunelli claimed, her regional manager yelled at her for calling the hotline. Then, she said, her immediate supervisor called her in and reprimanded her for making the complaint.

“Not everyone’s hands are clean in this office,” the branch manager said, according to Brunelli. “Are you ready for that?”

Brunelli didn’t back down. She continued reporting evidence of fraud to the executives above her, her lawsuit said. They dismissed her concerns, she said, saying she was having “emotional outbursts” and accusing her of being “on a witch hunt.”

In court papers, the company flatly denied her allegations, accusing Brunelli of acting in “bad faith.” Her lawsuit was resolved in 2010.

Two other former Countrywide workers, Sabrina Arroyo and Linda Court, claimed they lost their jobs in 2004 after they complained supervisors were directing them to forge borrowers’ signatures on loan paperwork. After they informed Employee Relations about the forgeries, the company quickly fired them, they claimed.

“Corporate came in. We told them the story. We told them everything,” Arroyo told iWatch News. “They said don’t worry, whatever you say, you’re going to be covered. A month or so later, I was let go.”

Arroyo and Court sued [6]Countrywide in state court in Sacramento, but Countrywide won an order forcing the case into arbitration. They decided to drop their claim because the odds are stacked against workers in arbitration, their attorney, William Wright, said.

Some ex-employees say they went high up Countrywide’s chain of command to raise red flags about fraud. Mark Bonjean, a former operations unit manager in Arizona, complained to a divisional vice president, according to a lawsuit [7] in state court in Maricopa County. Within two hours of sending the VP an email about what he believed were violations of the state’s organized crime and fraud statutes, the suit said, he was placed on administrative leave. The next day, according to the lawsuit, he was fired.

Another ex-Countrywider, Shahima Shaheem, claimed she took her complaints to the very top. Like Enid Thompson before her, she said she wrote an email directly to Mozilo, the CEO, about fraud and retaliation. She never heard back from Mozilo, according to her lawsuit [8] in Contra Costa Superior Court. Instead, the suit said, she was subjected to a campaign of harassment by company executives and human-resources representatives that forced her to leave her job.

Shaheem’s case was settled out of court, her attorney said.

A Bank of America spokesman declined to respond to questions about allegations by Shaheem, Bonjean and other former Countrywide employees, noting that their claims “are related to situations and investigations that took place at Countrywide prior to Bank of America acquiring the company.”

‘Fund the loans’

Countrywide had been slower than many other mortgage lenders to fully embrace making subprime loans to borrowers with modest incomes or weak credit. By 2004, though, Countrywide had become a player in the market for subprime deals and many other nontraditional mortgages, including loans that didn’t require much documentation of borrowers’ income and assets.

These loans were part of the plan for meeting its CEO’s audacious goal of growing his company from a giant to a colossus. Mozilo had vowed that his company would double its share of the home-loan market to 30 percent by 2008.

Some former Countrywide employees say the pressure to push through more and more loans encouraged an anything-goes attitude. Questionable underwriting practices often helped risky loans sail through the lender’s loan-approval process, they say.

In one example, Countrywide approved a loan for a borrower whose application listed him as a dairy foreman earning $126,000 a year, according to a legal claim later filed by Mortgage Guaranty Insurance Co., a mortgage insurer. It turned out that the borrower actually milked cows at the dairy and earned $13,200 a year, the lawsuit alleged.

The borrower provided the correct information, but the lender booked the loan based on data that inflated his wages by more than 800 percent, the legal claim said.

In another instance, according to a former manager cited as a “confidential witness” in shareholders’ litigation [9]against the company, employees appeared to be involved in a “loan flipping” scheme, persuading borrowers to refinance again and again, giving them little new money, but piling on more fees and ratcheting up their debt. The witness recalled that when the scheme was pointed out to Lumsden, Countrywide’s subprime loan chief, the response from Lumsden was “short and sweet”: “Fund the loans.”

Such episodes weren’t uncommon, the witness said. In early 2004, he claimed, he discovered that Nick Markopoulos, a high-producing loan officer in Massachusetts, had cut and pasted information from the Internet to create a fake verification of employment for a loan applicant. Markopoulos left the company of his own accord, the witness said, but he was soon rehired as a branch manager.

The witness said he contacted a regional vice president to object to rehiring an employee with a history of fraud. But he said the regional VP — citing Markopoulos’s high productivity — overruled his objections.

Markopoulos couldn’t be reached for a response. Lumsden says he doesn’t recall any incident involving “loan flipping” allegations.

Brushed off

Eileen Foster knew little about Countrywide’s fraud problems when she took a job with the company in September 2005.

For Foster, the

move seemed like a natural progression. She’d accumulated 21 years’ experience in the banking business, starting out as a teller at Great Western Bank and working her way up to vice president for fraud prevention and investigation at First Bank Inc.

Countrywide brought her on as a first vice president and put her in charge of a high-priority project: An overhaul of how the company handled customer complaints.

The company’s systems for handling complaints, Foster recalls, were disjointed and ineffective. Various divisions had differing policies and there wasn’t much effort to ensure that complaints got addressed. Things had gotten so bad, she says, federal banking regulators ordered the company to do something about the problem. Foster’s task was to standardize the company’s procedures and ensure that people with complaints didn’t get brushed off.

As she set about fixing the problems, she says, she encountered things that gave her pause.

The company’s mortgage fraud investigation unit, Foster says, refused to share data about the complaints it received. Each time she requested the stats, she says, she hit a brick wall.

Foster says she also ran into a hitch when she began distributing a monthly report that broke down complaint data for each of the companies’ operating divisions.

Countrywide Home Loans Servicing, which collected borrowers’ payments each month, was the subject of complaints about its foreclosure practices and other issues. The volume of serious complaints involving the servicing unit topped 1,000 per month, dwarfing the number for other divisions.

This upset officials with the servicing unit, Foster recalls. The complaints weren’t “real complaints,” the servicing execs argued, and Foster was making the unit look bad by including them in her reports.

The upshot: Foster was ordered, she says, not to include many of the complaints about the servicing unit in her reports. She thought it was odd, she says, but she didn’t think it was evidence of a larger pattern. She figured it was mostly an exercise in backside-covering.

“When we lost at the meeting, I was like, ‘OK, they want to just cover this up,’” Foster says. “But it wasn’t anything to the scale that I thought it would cause great harm.”

Only later — after she took over the mortgage fraud investigation unit — did she realize, she says, that cover ups were part of the culture of Countrywide, and that efforts to paper over problems had less to do with bureaucratic infighting and more to do with hiding something darker within the company’s culture.

“What I came to find out,” she says, “was that it was all by design.”

Bouquets and handbags

State law enforcers would later charge that Countrywide executives designed fraud into the lender’s systems as a way of boosting loan production. During the mortgage boom, critics say, Countrywide and other lenders didn’t worry about the quality of the loans they were making because they often sold the loans to Wall Street banks and investors. So long as borrowers made their first few payments, the investors were usually the ones who took the hit if homeowners couldn’t keep up with payments.

Countrywide treated borrowers, California’s attorney general later claimed, “as nothing more than the means for producing more loans,” manipulating them into signing up for loans with little regard for whether they could afford them.

Countrywide’s drive to boost loan production encouraged fraud, for example, on loans that required little or no documentation of borrowers’ finances, according to a lawsuit by the Illinois attorney general. One former employee, the suit said, estimated that borrowers’ incomes were exaggerated on 90 percent of the reduced-documentation loans sold out of his branch in Chicago.

One way that Countrywide booked loans was by paying generous fees to independent mortgage brokers who steered customers its way. Countrywide gave so little scrutiny to these deals that borrowers often ended up in loans that they couldn’t pay, the state of Illinois’ suit said.

In Chicago, the suit said, Countrywide’s business partners included a mortgage broker controlled by a five-time convicted felon. One Source Mortgage Inc.’s owner, Charles Mangold, had served time for weapons charges and other crimes, the suit said.

One Source received as much as $100,000 per month in fees from Countrywide, banking as much as $11,000 for each loan it steered to the lender. Mangold, in turn, showered a Countrywide branch manager and other employees with expensive gifts, including flowers and Coach handbags, the suit said.

Countrywide in turn funded a stream of loans arranged by One Source, the suit said, even as the broker misled borrowers about how much they’d be paying on their loans and falsified information on their loan applications. One borrower provided pay stubs and tax returns showing he earned no more than $48,000 per year, but One Source listed his income as twice that much, according to the suit.

Mangold couldn’t be reached for comment. His attorney said in 2007 that Mangold denied all of the state’s allegations against him.

Countrywide, the state’s suit said, kept up its partnership with One Source for more than three years. It didn’t end the relationship until the state sued One Source for fraud and slapped Countrywide with a subpoena seeking documents relating to the broker.

As questionable practices continued, Countrywide’s fraud investigation unit had trouble keeping up, according to Larry Forwood, who worked as a California-based fraud investigator for Countrywide in 2005 and 2006, before Foster took over the fraud unit. His personal caseload totaled as many as 100 cases at a time, many of them involving dozens or hundreds of loans each.

Some cases involved mortgage brokers or in-house staffers who pressured real-estate appraisers to inflate property values. The company maintained a “do not use” list of crooked appraisers who’d been caught falsifying home values, but the sales force often ignored the list and used these appraisers anyway, Forwood says.

Countrywide’s fraud investigation unit did have some successes during Forwood’s tenure. It shut down a branch in the Chicago area, he said, after a rash of quick-defaulting loans sparked a review that uncovered evidence of bogus appraisals and

forged signatures on loan paperwork. One manager, Forwood says, tried to rationalize the fraud, telling investigators: What was the big deal if, say, five out of every 30 loans was fraudulent?

When the unit shut down a branch in southern California after uncovering similar evidence of fraud, Forwood recalls, it got some pushback. It came all the way from the top, he says, via a phone call to the fraud unit from Mozilo.

“He got very upset,” Forwood says. “He basically got on the phone and said: ‘Next time you need to do that, clear it with me.’”

Mozilo’s attorney didn’t respond to questions from iWatch News about Forwood’s account.

For Part 2 of Eileen Foster’s story, go to iWatch News and read Mortgage industry tanks, fraud continues at Countrywide

Michael Hudson, a former Wall Street Journal reporter, is a staff writer at the Center for Public Integrity (http://www.publicintegrity.org), a nonprofit journalist organization. He is the author of "" (2010, Times Books)

Sunday, October 9, 2011

The Military-Industrial Complex 2.0


US Navy X-47B Unmanned Stealth Bomber, 03/07/11. (photo: US Navy)
US Navy X-47B Unmanned Stealth Bomber, 03/07/11. (photo: US Navy)

The Military-Industrial Complex 2.0

By Barrett Brown, Guardian UK

09 October 11

A virtual secret state: the military-industrial complex 2.0. US reliance on private contractors is seeing a sinister focus on surveillance of citizens instead of defense against cyber attack.

n Friday, Wired revealed that a virus of unknown origin has been consistently tracking the remote piloting of US military drones down to each keystroke, and that attempts to remove the intrusion have failed. Although the origin and intent of this virus remain unknown, with military analysts positing that it may be typical malware rather than a successful espionage bid, the incident provides the media with a practical opportunity to finally start examining the processes that determine our republic's ability to protect itself from foreign cyber threats. That examination needs to focus on a particular system of the sort that is most dangerous to any republic - a system that grows ever more consequential while remaining largely invisible even to those who are charged with overseeing it.

Even most members of Congress are unaware of the extent to which both the military and intelligence community have come to depend on private contractors to provide the software and ingenuity necessary for both conventional and information warfare in the 21st century. In 2005, experts estimated that 30% of the US intelligence budget was being outsourced, and this intelligence contracting industry has grown markedly since.

On the surface, this practice makes sense; the modern military tends not to attract sufficient technical talent for its needs, and in a few notable cases, the once-legendary hackers who run crucial firms have felony convictions that would prevent them from doing equivalent work from inside the state. Meanwhile, competition for projects promotes the incubation of new and more powerful capabilities from within the industry, and the bidding system ensures that the US gets the best of these for the least money - at least, in theory.

But as evidenced by the drone virus affair and other, more serious incidents, the overall contracting process is deeply flawed. The "free market" competition for contracts that would otherwise bring gains is corrupted by the industry's thorough overlap with its state customers. Former Department of Homeland Security head Michael Chertoff joined the board of directors of contractor BAE Systems ahead of that firm being awarded a $270 million contract last week, followed by another US Army contract for $67 million; before bringing on the well-connected ex-secretary, the firm was becoming notorious for losing such crucial business.

A glance at the boards and executive listings of similar firms, replete with former military officers and government officials, reveals the revolving door that connects potential clients with a state customer for which money is no object, such money being taxed from an electorate too distracted by other offenses to notice. Of course, America's penchant for overspending on defense would be more defensible if it received what it paid for. The revelations regarding the failure of Halliburton, Mantech and other state-intertwined contractors to provide invoiced services to troops have been so endless as almost to be discounted, rather than add to the popular outrage.

This familiar tendency on the part of the US government to spend money it doesn't have on things it doesn't get is now directed at developing procedures it shouldn't use. The intelligence contracting industry, which includes firms that provide security applications to the entire US government and military, has been encouraged lately to direct more of its collective time and capabilities to the task of monitoring, misinforming and sometimes outright attacking American citizens and others abroad - and benefit from the protection of the state and the incompetence of the media in order to make such attacks with impunity.

The Team Themis affair, which united three such firms to go after journalists, activists and WikiLeaks was revealed by Anonymous earlier this year thanks to the seizure of 70,000 emails from coordinating firm HBGary Federal. The little-known and sinister persona management capability - a state-sponsored "sockpuppet" propaganda program - has been found in widespread development; the National Security Agency-linked Endgame Systems has been revealed to offer comprehensive offensive cyber capabilities, with targets in place, to customers other than the US government; a few months ago, I released a report on a worrying surveillance apparatus known as Romas/COIN.

The shift from infrastructure defense to surveillance and offensive capability comes in the wake of the Chinese-orchestrated Aurora attacks against US state and corporate targets - an operation that continues to reveal itself as even more damaging than initially thought as additional targets admit theft of crucial data. The problem with the changing priorities of the US's cyber-contractor complex are two-fold: by neglecting government systems' vulnerabilities - and the drone virus provides a perfect instance - the state loses face with adversaries, real or potential, who respect only force; and by treating its own citizenry as the leading threat to its security, it loses the loyalty of those who respect truth and the rule of law.

Friday, October 7, 2011

Guarding America's Bull-Crap!

Dissident Voice: a radical newsletter in the struggle for peace and social justice

Occupy Wall Street: Surrounding the Bull

Hundreds of cops, some on horsebacks, are now protecting Wall Street 24 hours a day. At Bowling Green Park, they have also blocked access to the Merryll Lynch bull. To be warmed by the methane gas of a healthy market, no doubt, a group of New York’s Finest gathered near their sacred bovine’s digestive exit, just below its up-lashing tail.

“They’re all guarding the bull’s asshole,” I said to this middle aged black woman standing across the street.

“Yeah, they’re all guarding the bullshit!” She laughed.

It was nearly 10PM. At Wall Street and Broadway, I met a young protester from Austin. Twenty five years old, he’d been sleeping at Liberty Park since September 24th.

“What do you guys do when it rains?”

“We just have to deal with it. We sleep under tarps.”

“Man, that must really suck. You probably can’t sleep too well.”

“Yeah, sometimes I get up and my body aches all over, but we just have to deal with it. We’re not leaving.”

“And it’s fucked up they won’t let you guys use tents.”

“Yeah, it’s fucked up, so we’ll have to set up tents at some point. It’s getting colder, and we can’t just sleep like that if it snows.”

“You think the cops will come in and get rid of the tents?”

“I don’t know. Who knows.”

“You know in California and other places, cops have slashed tents of the homeless.”

“Yeah, I know, but the whole world is watching us now, so if they do that, the whole world will see it.”

I asked him about demands, about how everyone is demanding that these protesters make demands, but so far, nothing.

“We did put out a Declaration.”

“Yeah, but that’s a long list of grievances, without concrete demands.”

“Well, we don’t want to narrow it down to a few demands, because each community has issues that it wants to address. This protest is spreading, and a list of demands from here can’t address all the problems.”

“But what about educating the public? If you can highlight a few key issues, then the public will have a clearer idea of what is wrong?”

“I hear you, but there are already people doing that. Writers. They may not be in our group but they are sympathetic to us. The explanations are out there. There are already people explaining what is wrong.”

Naomi Klein was scheduled to speak at Liberty Park the next day, as a matter of fact, so he was right. All the explanations are out there, if only people would pay attention. I then asked about them having no leaders or spokesmen.

“We don’t want to designate a spokesman or a leader, because we don’t want all the pressure to be on him. We don’t want him to be harassed by the FBI, for the FBI to tap his phone. Look at all the protest leaders from the past. Look at how they killed Martin Luther King and Malcolm X. If they want to tap the phone, they’ll have to tap all of our phones.”

“Yeah, but some people are better at speaking than others, so these will emerge naturally, right?”

“You’re right, and they already have, but we can all talk. We all know what to say. We’ve taught each other what to say.”

He believed the country was solidly behind this protest, and support will only grow, “People love us, man. They send us all kinds of stuff. They send us money. People love us.”

Speaking of solidarity, I wouldn’t have been able to observe the protest if a dozen readers of my blog hadn’t sent me hundreds of dollars this past month alone. Part of this cash was used to fix my broken camera. With a poisoned media, untrained citizens must anoint themselves journalists.

Though protesters have released no official demands, many of the signs at Liberty Park are clear enough, “END THE WARS,” “END THE FED” and “TAX THE RICH.” These demands are also shouted out by protesters on their marches.

And the marches are getting larger and more representative. Everyone is here, basically, from tiny children to senior citizens, egg heads to hard hats, pacifists to war veterans. Black, white, yellow or brown, they are all here shouting in unison, “Wall street got bailed out. We got sold out,” “Tax the rich! End the wars!” and, “This is what real democracy looks like!”

About the only types who aren’t marching are Wall Street suits and, well, cops. It is sad to see so many policemen protecting the very people who have also ripped them off. At a Starbucks near the New York Stock Exchange, some cops have even become bouncers.

Running around trying to find a place to charge my camera batteries, I saw a Starbucks, but its entrance was blocked by a police-manned barricade spanning the street. I approached, “Can I go in?”

“I need to see an ID,” a cop said.

In the new America, one needs to show an ID just to enter a Starbucks? I pulled out my long expired Virginia driver’s license.

“So you’re not from New York?” The cop interrogated.

“No, I live in Philadelphia.”

“What are you doing in New York?”

“Just visiting.”

“Why did you come up?”

“Just to hang out in the city. No reason.”

This cop gave me a long hard look. I had neither tattoos nor piercings, and my hair and clothes were more or less neutral. I mean, I don’t dress to make a statement, and I don’t like to wear slogans on my person. He gave me a long, hard look, and I could tell that he didn’t quite believe I wasn’t a trouble maker of some kind, or maybe even a terrorist ready to plant a robust pipe bomb inside Ben Bernanke’s lying quiche hole, but goddamn it, this was only a stupid Starbucks, though it happened to be within sight of the New York Stock Exchange.

Had the cops moved their barrier five feet back, the public could enter this business unmolested, but they couldn’t do that, you see, because that would inconvenience the Wall Street denizens arriving from the other direction.

So there you have it. While 99% of us are losing our present and future, as we’re harassed and groped and sleep in the rain, in protest or for good, as some of us are sent overseas to get our nuts blown off, a banker must never be made uncomfortable, even when his errand, or, rather, even when his secretary’s errand is nothing more than to grab her (and the cops’) boss a frappucino.

Linh Dinh is the author of two books of stories, five of poems, and a just released novel, Love Like Hate. He's tracking our deteriorating socialscape through his frequently updated photo blog, State of the Union. Read other articles by Linh.

Wednesday, October 5, 2011

Corporate Reform in an Age of Intensified Class Warfare

Corporate Reform in an Age of Intensified Class Warfare

In a system where corporations are central in economic activity, economic crises have always and necessarily produced plans and programs of renovation and improvement designed to make corporations more responsive to the public interest. Of course, there have always been some who urged nationalization or worker control; i.e., the replacement of the corporate system with a genuinely new order. Thus far, the system has been able to fend off all such demands, although government ownership has sometimes spurted in emergencies, so far only briefly (e.g., during World War II and as a result of the Savings & Loan crisis), followed by subsequent divestment. Over time, government ownership has declined as the business system has sought to occupy all space in which profits can be made. Thus, as the military budget has grown, in-house arms production has largely disappeared, displaced by the "contract state." The triumph of neo-liberalism and the parallel intensified class war has been associated with further "privatization," which has not only opened up more avenues for private profits, but also weakened the state as a potential agent of ordinary citizens.

A similar point can be made as regards worker control. It does not fit well into a neoliberal system in which worker protection at all levels tends to be eroded in favor of "flexible" labor markets. Workers' rights got a major boost during the Great Depression, with the Wagner Act and the federal government serving to some extent as an employer of last resort. But class warfare was renewed with the 1947 Taft-Hartley Act and the "red scare" and purges of the Truman-McCarthy era. It subsided for the next decade or so, but the Vietnam War, peace and civil rights protests, and new competition from abroad revitalized business class war aggressiveness. The resultant decline of the labor movement and reduced labor bargaining power has manifested in a weakened safety net, stagnant wages, greater inequality, and increased worker insecurity and loss of control.

Other long-standing reform strategies have been decentralization—breaking up the large corporations so as to reduce their political muscle and enhance competition—and regulation, sometimes involving the establishment of government bodies to oversee corporate activities and approve or disapprove corporate decisions. These have a long history, reflected in antitrust laws and policies and regulatory authority over many activities, from railroads, banks, and public utilities to alcoholic beverages and waste dumps. Regulation surged in the Great Depression, forcing the separation of commercial and investment banks and establishing the SEC and securities regulation. Antitrust was revitalized and public utility holding companies were broken up.

Today there is talk of breaking up the giant financial conglomerates that are "too big to fail" and there is some possibility that large companies like GM and Chrysler, as well as AIG, might be sold off in pieces as part of bankruptcy proceedings (and government ownership actions as regards AIG). But with respect to the largest financial institutions, there has been a tendency to favor them with extraordinary subsidies and guarantees and to encourage them to merge into still larger entities. The situation is still volatile, but major decentralizations would appear less likely than greater concentration, along with an increased unwillingness to allow the super-giants to fail and an even closer relationship between big finance and big government.

Regulatory changes in the 1930s included the splitting off of commercial and investment banks, required disclosure of corporate developments, bans on insider trading, tightened supervision of banks and bank holding companies, and the regulation of investment companies (mutual and closed-end funds). Equally important, of course, was that the regulators in the early years tended to believe in regulation and often actually tried to enforce the law. We had William Douglas in charge of the SEC in the 1930s, a rather marked contrast with the regulation-hostile (and incompetent) Christopher Cox chairing the SEC in the Bush-Cheney era.

Regulation in the 1930s and afterwards put a fair amount of weight on disclosure in the belief that compelling business to reveal all the relevant business facts would protect buyers of securities and other products from abuses like insider trading and market manipulation and would make markets work more efficiently. In the oft-quoted line by Louis D. Brandeis, "Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman." There is some truth in this and there is little doubt that required disclosure has been economically beneficial. But it has its limitations, as truth can be buried in an avalanche of irrelevancies ("kitchen-sinking"), important facts may not be meaningful without context, and weak regulation may make it good business to suppress inconvenient truths. The explosion in executive (over-)compensation took place in a world of theoretical "full disclosure," but with the media and government doing their duty for the vested interests, this explosion was only brought under some limited constraint by the 2007-2009 economic collapse.

In the midst of each economic crisis, there is also a regular outcry at the failure of corporate boards to keep managers in line and prevent their suddenly more evident and better publicized personal aggrandizement and mistaken policies. There is also criticism of large investors, individual and corporate, who failed to press the boards and managers to do the right thing. There is a demand for new laws and improved regulation of corporations, more independent directors, and a change in the outlook and sense of responsibility of these directors and stakeholders who should be guiding and constraining the managers.

There also has been an important line of thought that the managers themselves should take a more generous and community-oriented view and self-transform the system. This kind of thinking was encouraged by the 1932 publication of The Modern Corporation and Private Property by A.A. Berle and Gardiner Means, which argued and gave empirical evidence for the view that the wide dispersion of stock and management control of the proxy machinery led to the dominance of managers in the leading corporations. This gave the managers a fair amount of discretion, and, arguably, they could use it to benefit a range of stakeholders.

This line of argument was pursued later by A.A. Berle in articles and books on corporate responsibility and managers as trustees. The phrase "corporate soul" is traceable back to Berle, who thought corporations had them and whose soulfulness and trustee service in the larger social interest should be encouraged and would develop further. It should be noted that these ideas were evolving in the 1930s crisis, at a time when the corporate system was very much on the defensive and regulation and antitrust thinking was on the upswing. The corporate soul and corporate trustee role for society were last gasp ideas of a system and ideology in retreat, and Berle, who was an official in the New Deal and later a noted Cold War hawk, served that ideology, which later made such a spectacular comeback.

As we know, the reformers of the 1930s didn't depend on soulful managers doing their duty to society, but from then up to the present corporate law was grounded in the belief that the directors, and especially the independent directors, would keep managers in line, and in particular help make them agents of the shareholders. This has never worked, because the directors are not very independent—they are selected or approved by the top managers, who may be their friends, are well paid, lack the knowledge or time needed for effective surveillance or challenge, and who may have or want business relationships with the companies they serve as directors. Deference by leaders of other companies may be part of a system of reciprocal behavior. It is especially hard to actively intervene and constrain managers when companies prosper.

Of course, in theory and law the directors represent the shareholders, but the managers themselves are also supposedly agents of the shareholders. There is a long tradition of belief that, especially with the growth of large institutional holdings of stock by mutual funds, pension funds, bank trust departments, and other substantial investors, that these would intervene, individually or collectively, to press the directors and keep managers from looting or making grave decision errors. This also has never worked because the big holders don't have the staff to intervene and, more important, don't want to disaffect the managers and lose access to useful corporate information. When they lose faith in the managers, they sell the companies' stock and go elsewhere. This is called the "Wall Street Rule."

It is interesting and even amusing to see Gretchen Morgenson in the New York Times building the case for activating those big investors as the route to corporate reform, using as her source John Bogle, the retired head and founder of the Vanguard Group of money managers and mutual funds ("He doesn't Let Money Managers Off the Hook," April 12, 2009). Bogle complains that the big investors have failed to serve as shareholder agents, as they did 50 years ago. He calls for passing a law "establishing the basic principle that money managers are there to service their shareholders...[and that] fiduciaries act with due diligence and high professional standards."

As it happens, in 1962 a Wharton School group, of which I was a member, working under the auspices of the SEC, published "A Study of Mutual Funds," the first large-scale study of that rapidly growing institution. John Bogle was one of a group of mutual fund representatives who met with the group and worked hard to soften any criticisms of the industry. The study was critical of the high management fee rates charged by the funds, which often failed to decline as a rate even with major asset growth; and it pointed up the fact that investment advisers charged higher fees to their affiliated mutual funds than to outside clients (a continuing problem mentioned by Bogle to Morgenson, but definitely not new). The study also described the wide use of mutual fund brokerage to reward people who sold a lot of mutual fund shares, a use of brokerage fees that served the advisers but surely not the mutual fund shareholders.

Most interesting, the 1962 study featured the fact that the mutual funds were quite inactive in using their holdings to discipline portfolio company managers (this was a part of the study that I worked on and wrote). Rather than intervening to serve the fiduciary interests of the company's shareholders, they followed the Wall Street Rule when managerial behavior displeased them. So there was no golden age of mutual fund (or other institutional investor) behavior 50 years ago. John Bogle has changed and become something of a moral force and conscience in the industry, but he remains an exception. Laws and exhortations are not going to make institutional investors into manufacturers of a corporate soul.


Edward S. Herman is an economist and media analyst. He is professor emeritus of finance at the Wharton School at the University of Pennsylvania and author of numerous articles and books, among them Manufacturing Consent (with Noam Chomsky).

From: Z Net - The Spirit Of Resistance Lives
URL: http://www.zcommunications.org/corporate-reform-in-an-age-of-intensified-class-warfare-by-edward-herman

Tuesday, October 4, 2011

The Big Picture: A 40-Year Scan of the Right-Wing Corporate Takeover of America or the Hard Right Turn


Author and public intellectual Colin Greer tells us how we got where we are today. It's not a pretty picture, but hope is on the way.

At this moment, there are growing protests on Wall Street in Manhattan, in Boston at the Bank of America, and in cities around the country. These embryonic and creative efforts are targeting the greed of the banks, the collusion of the corporate class with their corrupt elected officials, the high level of unemployment, the huge burden of student loans in a time of diminished opportunities, the increasing numbers of poor and hungry people, and much more. These protests, along with those earlier in Wisconsin, Michigan and Ohio, are signs of revival of a long tradition of popular revolt against excesses of wealth and the corporate class.

The new protests come after a long dark period -- specifically the last 11 years of George W. Bush and Barack Obama -- during which time conservatives have gained more power and ability to control the national debate than they have in the past 75 years. The current right-wing power presence, spiked by the corporate media's obsession with Tea Party protests, came most immediately as a result of the Great Recession caused by the housing bubble and obscene corruption of the banks. This crisis was exacerbated by large-scale anger about the subsequent bank bailout, and corporate-backed attacks on the health care reform package passed by Congress. But that is just part of the latest political news.

The conservative ascendancy is hardly an overnight phenomenon. Rather, it represents a dynamic shift in American politics that has taken place over more than 40 years, beginning in the 1970s. During this time, conservative billionaire donors, corporations and the Chamber of Commerce, all invested in conservative think-tanks and communications infrastructure, while Fox News, Rush Limbaugh and a broad and deep media network of right-wing pundits have come to dominate the public discourse.

Subsequently, the liberal/progressive side of the political equation has lost much of its influence from the period of the 1970s and early '80s. How this has happened over time is little understood. In fact, the lack of protest and effective organizing against the right wing during the Tea Party ascension especially has been a mystery to many, and a source of great frustration.

Colin Greer, a transplanted Brit, has observed and engaged in every phase of progressive politics. Greer is the author of a number of books (with his best-known being The Great School Legend), has been a professor at Brooklyn College of CUNY, and for many years has served as president of the New World Foundation, known in the philanthropic world for its commitment to supporting grassroots organizing and providing seed money for many of the most effective progressive political efforts over the last decades. Over this long period, Greer has had a cat-seat view of all the forces that have shaped our last 40-plus years. He has a big-picture take on the turmoil and politics of this period, as major shifts -- globally, economically and culturally; the tectonic plates of change and reaction -- have reshaped our world in ways we have yet to fully understand. AlterNet sat down with Colin Greer in his office in New York in late September.

Don Hazen: Why have conservatives succeeded so dramatically in this period, and liberals and progressives are arguably the weakest in decades?

Colin Greer: There is no single causal factor. The shaping of these two divergent paths begins in the 1980s when you had the last flourish of an expansive society. But the last three years of the '70s were characterized by stagflation and disappointment and took a great toll, forfeiting a real sense that the constant growth of openness in American society and economy was endlessly sustainable. Fast-forward to the present and we have the twin dominance of austerity, i.e. eviscerating public spending as the solution to economic crises; and aristocracy, represented by the protected tax and profit oasis of the wealthiest 1 percent.

It’s instructive to note that events in the U.S. are not in isolation. Back in the '60s and '70s when progressive movements were in ascendency, the liberation themes of the time were part of a global anti-colonial uprising, and broad disgust at the war in Vietnam. Today, trade policies and globalization means that the other major economies of the world are also in the grips of a greed and hyper-profit which is in the process of discarding hard won values, rights and decent living conditions.

DH: That was Carter and also the hostage crisis too at the end of the '70s, yes?

CG: Yeah, it’s about how social and economic consciousness changed. Carter’s inability to act effectively in the hostage crisis or to defeat stagflation reinforced a national feeling of malaise and weakness. That’s why Reagan campaigned on "hope in America" versus Carter's kind of dismal, high-standing morality, an apparent inability to act from strength. It was the beginning of a long term of undermining the presumption of multi-dimensional social and economic expansion, which had flourished since World War II.

So in the 1980s you had Reagan, along with the last flourish of direct political action on the left and the last gasps of the global social change that characterized the 1960s and '70s; i.e. the fight against apartheid, which succeeded in turning the Reagan administration around to support the anti-apartheid/ divestment movement, and you had the Nuclear Freeze movement.

DH: These were the last grassroots successes of the left?

CG: Yes. Although one can never do a one to one equation, the Freeze was a factor in Reagan's shift in nuclear arms negotiations with the Russians and the anti-apartheid divestment strategies, fueled by a popular movement with strong student leadership, which created shantytowns on campuses throughout America, helped win that struggle.

But then there was a dramatic change in direction when the air traffic controllers went on strike. Reagan seized the moment, and fired the air traffic controllers, destroying PATCO, their union. That was the beginning of the end of the labor deal with capital; a deal that was carved out in the Cold War in which labor got negotiated settlements here at home for its support for the Cold War abroad. In a sense it was anti-red internationally and social democratic here in the United States. And that deal went through the beginning of the 1980s, until Reagan, responding to the conservative base, changed the ground rules. And with it, labor's guaranteed negotiating strength ended.

We have seen a diminishing power of labor since. And we've also seen a shrinking power of popular movements on the left as well, so that by the time we got to the invasion of Iraq, a million people in the street could be ignored. How different that was from the last gasps of enduring popular protest against Reagan’s contra-aid and its illegal processes.

DH: Those demonstrations against the Iraq invasion seemed like a big deal at the time, a major accomplishment, and around the world as well.

CG: Yeah, but for only one day. What is required is the ability to constantly bring people out and not end it when there’s no popular response. You need to get the news story, and push the politicians to shift. We're up against the kind of new politics in which they didn't shift and we didn't come out with continual resistance, and that inability to resist played out in the 1990s when you have a Democratic president who was disappointing over and over, with no popular mobilization against his deregulation of the finance industry or his welfare reform initiative.

DH: Is it possible to have a popular movement against a disappointing Democratic president?

CG: I think it was in 1992, but only theoretically; it didn't happen. By the 1990s, because progressives in a sense had been disciplined by the reduced power of labor, by the new power of the right, the visceral fear that Republicans would be worse, and the fact that a certain amount of administration figures came from progressive organizations and might still influence policy, all contributed to a lack of action against Clinton policies And there is another crucial point: by the time we get to late 1980s and 1990s, social movements on the left were essentially demobilized into NGOs and legislative agendas, so progressive politics became more about winning elections, seeking legislative reform, and building not-for-profit institutions that represented progressive vision and options. There no longer was a base beyond labor, which was itself shrinking.

DH: How sudden was this shift from more popular movements to foundation-funded projects?

CG: It happened over time. The trends were growing in the early '70s because progressives had control over a lot of federal spending, and a lot of activists had access to all the major agencies. There was a kind of flourish of success and even progress under Nixon. Legislative efforts were working. We especially got environmental legislation, and it looked like the courts were on our side. Meanwhile the right, in earnest, started building both its base and its options, with think tanks, organizations and communications capacity. But by 1990, the left so to speak, except for labor, had become almost entirely dependent on foundation support, which was based in the IRS 501 (c) (3) tax structure which required grant recipients to be non-partisan. But it was influential at the level of government and so it felt like it could deliver through the lobbying capacity of NGOs and by winning in the electoral, legislative and judicial spheres.

In the '80s, when they saw the right-wing agenda through Reagan taking serious root, many groups worked on voter registration to expand the electorate, but were constrained again by the IRS rules. It took a Jesse Jackson presidential campaign as a reminder that you need a popular base to move an agenda and to build a popular base to undercut the climate of low taxes, high profits, and the growing transfer of public assets into private control. Jackson created a social movement—he went to organized farmworkers, he worked with gay activists, he really did see that campaign as a progressive, social movement campaign.

But after Jackson (‘84 and ‘88) that kind of campaign mobilization didn't happen again until Obama. And Jackson did exactly what Obama did. He demobilized his campaign agency. He turned into a kind of not-for-profit organization, and Obama turned it into the Democratic Party. But they are two moments -- and it's interesting that both black figures produced the sense of a national movement. But the end of the Jackson campaign coincided with end of '80s, and that was where the Democratic Leadership Council, that Clinton led, emerged strongly and represented the shift to a "new progressive politics" where they made progressive mean something else. Imagine if the Jackson campaign had remained mobilized in relation to the Clinton administration and/or if the Obama campaign had remained live going into the 2010 elections when victories on the right were won by small margins.

DH: I assume when you say progressive came to mean something else, it meant moderate?

CG: In a sense once you had Murdoch and Fox and a growing conservative infrastructure, it labeled the DLC—transfused Democratic party—as the left. Any real left was marginalized into virtual invisibility and anonymity, the center was moved significantly to the right, and progressives increasingly pushed into protecting eroding rights and benefits, without a political infrastructure or national leadership of its own. In the electoral arena, in the media, and in the mainstream foundation world, moderate was called left or liberal, and leaders in pursuit of public office more and more have eschewed the liberal label by moving ever so profoundly to the right.

DH: So the middle became the left, and the conservatives keep moving successfully to the right -- a trend we have seen reach the present moment of the far, far right influencing the political process. And there has been no pendulum swinging back, that's for sure.

CG: Yes, and one of the critical ingredients in this huge shift rightward over the last few decades, as I inferred earlier, was the end of the Cold War. The collapse of the Soviet Union had a profound effect on two things: 1) the idea that there was a left alternative, and that there was a path to reform that had the best interest of the public at large as its highest priority, and had the "state" involved directly in business and the interest of public; and 2) the shift of states in the Soviet orbit to capitalism basically made capitalism the world model. So then it was a question of what you did in the framework of capitalism, not challenging its framework. That's been the umbrella for China, India, Brazil. All over, left groups moved into the electoral arena, and didn't challenge the capitalist model. As a result, we now have a global context that advances austerity and aristocracy in support of a global capitalism that has declared war on the social contract.

In the Scandinavian model, they're more responsive to public conditions, but not to challenging capitalism itself. I'm not arguing that we need a left to challenge capitalism because it isn't clear that we do have that option. But what we're faced with now is that any system that has monopoly status moves toward tyranny. So we're now seeing that 40 years of the rogue rise of the right has produced a tyrannical right. All of the conditions, the improvements around tolerance and cultural openness and responsibility for the poorest of the poor, the perspective that a healthy society is one that has a priority to care for all its people -- those standards have so diminished so that you have candidates now talking about the fact that people may have to starve. And that’s now a legitimate thing to say. Killing gets cheered by the GOP grassroots. The four GOP debates so far are really interesting because they indicate something really seriously bad.

DH: The rise of the Tea Party, aided by its intense promotion by the corporate media, has given the public the sense that there is a powerful angry grassroots movement underway. How does that play out?

CG: Tyranny grows first of all in the establishment of a legitimation of its point of view, even on the margins. You can see it in Swift Boat attacks on John Kerry, a war hero, and with Murdoch and Roger Ailes growing Fox. There is the constant testing of a model that is very similar in tone to the most successful moment of progressives in the 1960s. It reaches into high levels of rhetorical hysteria. When we were on the streets 40 years ago there was a kind of hysteria -- police were the enemy. There's a similar level of hysteria now. What that means is basically that on the road to power, most people committed to power will use the "crowd" -- they construct a crowd. You need the crowd, even if it's only a tiny fraction of the population. If the crowd is visible through spectacle then you start conditioning the public's readiness to act, and you encourage readiness of others not to act.

So in the present political reality, you have the convergence of the crowd's mentality, with the readiness to be tyrannical in leadership, with leaders in Congress like Jim DeMint, Eric Cantor, and of course funding for it all from the Kochs. This tyrannical style of leadership has grown through the Bush years to a dramatic level, and has not been effectively challenged by Obama. You have the growth of the crowd and the paralysis of public at large. When you look at poll data there is no way in which the public agrees with the Tea Party or with right-wing political figures, but it is paralyzed, and paralyzed serially over time.

A million people on the street didn't get listened to over the Iraq invasion, or the defeat of Kerry through usurping of the public stage by Swift Boat in 2000. Then the inability of Gore to fight for his election followed by the Supreme Court decision which gave us eight years of Bush. The choice to fight or not is rarely a popularly held prerogative until the public bursts forth as perhaps in the Arab Spring. Until such moments, leadership is top down, especially in the electoral arena, where money and incumbency determine authority and good judgment.

The Tea Party is the latest in a series of experiments -- remember the Promise Keepers and the Christian Coalition back in the '80s -- to advance right-wing politics from the margins to a new center. We've been holding them off time and time again but not by producing anything for the future. Instead we have benefitted from the cultural victories of the '70s and '80s that have become enshrined in entertainment conventions and interpersonal lifestyles. In both realms we have taken great strides to persuade Americans that young people should have the vote at 18, that women are equal, that abortion is pretty much something you can argue rhetorically but hard to lose practically, but now we're losing ground on everything. The death penalty for a while looked like we were humane, we don't just kill people -- we're losing ground on that. We didn't go to war casually -- we've lost ground on that.

DH: Without tension of competing systems, is there an inevitable march to the extreme? Is there a theory that most extreme seems to always win out?

CG: The fact is, a society grows into tyranny over time as the most powerful cultivate extreme crowd behavior, which, unless resisted can have a contagion effect into the public at large, paralyzing resistance and recruiting frightened supporters. While clearly minority politics, the Tea Party zealots who cheered at death and execution much as Sarah Palin once called on us to “Drill, baby, drill!”ought to be a reminder and a warning. But I don’t know any mainstream media that treated the cheers for the death penalty and barbarous inhumanity to the sick as a story truly worth engaging. The crowd is the critical thing that tyranny requires eventually -- the mobilization of the crowd. With recessions every 10 years, the circumstances periodically creates the possibility for angry people to be organized into a crowd. Progressives did that. The New Deal was about using the circumstance of the depression to organize a progressive crowd.

DH: Mostly organized by the Communist Party. But we have no capacity to do that now?

CG: and the Socialist party. But there was a plethora of organizations. And no, we have no apparent capacity do that now, although we desperately need it. New protests and organizing efforts are definitely sparks of hope. But that kind of action is primarily on the right.

DH: It's a resource question, too?

CG: Yes, and it's also a planning and leadership question. The Socialist party, Catholic Workers, Communists -- they were planners, they had an agenda not limited by electoral and legislative politics, and not dependent on foundation resources for scale. Forty years ago a dozen small progressive foundations could help support strong action and analysis. The big checks now come from professionalized, very mainstream foundations that do not, as was the case with the earlier funders, institutionally identify with a progressive world view.

DH: The Kochs write the big checks for the right today. So is the weakness primarily an issue of class -- resources staying in the educated class?

CG. No. It is that and it is something deeper, more psychological. When I was in England a bit ago, I was talking to a Syrian cab driver, this was in the middle of the Arab Spring. I said, why is it that you've got (this was before the riots) English kids protesting at Trafalgar Square against tuition increases? You've got women in Rome -- a million people -- protesting against Silvio Berlusconi. The next day they've all gone home, the kids have gone home. In America we had the resistance against the Iraq war, they went home. But in Egypt they came back every single day. In Yemen they come back every day. And he said, "Well, we in the West have freedom. They don't have the freedom."

So there is someway in which we have the consciousness here that we have something that could be lost that we don't want to risk. In the Middle East, there is nothing left to be lost.

DH: So fast-forward to the present. How has the right-wing philosophy which has dramatically increased its influence, changed the nature of government?

CG: What we are up against is the constant reduction of compassion as the highest priority in how you make public policy and deliver public goods. The right wants to take public space. They want to take public resources. In response, progressives get lost in the message of to trying to re-instill belief in government. With the government argument, I think we're missing the point, both in terms of compassion but also that it's not not about belief in government. It's about who owns government and what it's for. Despite the right's anti-government rhetoric, their practice is pro government. But it is government for them. So we must challenge the principle of who owns government. We are saying they've diminished the belief in government, but why does Rick Perry want to become president of the United States and, in effect, CEO of the nation’s investment engine, that is, government.

It's not because he doesn't believe in government, it's because he wants to control government. They want to control and privatize government resources. Capitalism is exhausted here. It needs more public money. It’s always needed public money, it needs more now. When you look at the growth of capitalism in America from railroads all the way to the computer, it's publicly funded. I say to people what do Velcro and GPS have in common? They were both created by the military. And who is making a profit from that? Does the public get any return for its investment?

But if we had a conception of government that was not only tax agent, service deliverer, but also an investor in the economy like a bank, and it was entitled to a return just the way a bank gets return, we'd have plenty money. But we don't treat ourselves as the investor. But every major technological growth has been publicly invested in. If we were a shareholder in Microsoft because we invented the computer, it would be a very different terrain. So the reinvention of capitalism is the issue, and the reinvention of government is what is happening. So capitalism is directly claiming public investment now.

DH: Can you provide a current example of the privatization impulse?

CG: Charter schools are a very good case study for the impulse. Forget anti-unionism; forget whether or not they work, because they don't. But even if they did they are not cheaper. Charter schools are simply the transfer of public money to profit-making activity. That's the system they are steadily building -- prisons, schools, public parks, there's a conversion of the whole system into an investment of capital which is a major extension of what's always been true.

It's a way of government supporting the expenditure of money, but it has been organized so that it stays in private control. And in private control it's become increasingly privileged in how the decisions are made. So you've got hedge fund people now funding charter schools -- they are the largest engine behind charter schools. And so they care about education. Some of them even believe public schools are so bad we need this alternative.

But there's not a lot of thinking about about whether profit is compatible with learning. If profit is the major goal and keeping costs down is the major goal, then how do you have learning be the major goal? That's exactly the contradiction. If you're going to have learning be the major goal, you have to invest in it like you would a war. You don't in a war say the major goal is how to make profit and we'll only fight the war according to the profit.

DH: With the enormous investment in military arms, and more recently mercenaries, it seems like we are headed there.

CH: Well, that is one reason we have more war. But in the end you can't sell to the public that the measure of our success here is profit. And in education, were saying basically you can trust profit. The market will give you better results. There's no reason to believe that. The public hasn't accepted it, although it's getting pushed on them because of the power that's established in the state houses. Also, what's not well understood, is there are three kinds of charters. So the privatization has three identities and they're being merged. One is public school experiments with the charter system. The second is not-for-profit charters run by not-for-profit organizations are closer to the base. The third is the for-profit charter.

The first two models are perfectly fine. We have private schools and parochial schools which have tax exemptions so they're only quasi private. Those two forms are part of the American education fabric, so having another thing called charters wouldn't be a problem. It's nice to experiment with different forms of government organization and curriculum. But the for-profit charter is a very different entity and to allow it to be conflated with the other two is basically to let the Trojan horse in.

DH: As a longtime foundation executive, how has philanthropy exacerbated the progressive weakness?

CG: Foundations mostly gave money according to sociology or class, so people gave money to organizations led by people most like them, or slowly there was entry of people who were not like them but were being identified by people like them, and also very little money when you think about it. If you take the most successful community based organization in philanthropy at community based building level, it's probably SCOPE in Los Angeles.

And they went from a $5,000 grant to its founder from New World Foundation to a $3 million, maybe a $4 million budget, which took 25 years to get to. We have a number of very strong local and state organizations that have built powerful bases to influence local politics, pioneering such inventions as “living wage,” and “community benefits.” But to date this is a record of policy reform and some electoral victories for local leaders, all of which is very important. It is, however, not yet a coherent, comprehensive and compelling base for challenging the structural realignment of capitalism in our time.

DH: What are the consequences of that lack of a base to challenge the excesses of capitalism?

CG: So middle-income workers and people in impoverished communities are all under serious attack by this realignment, and are not yet organized in an aggressive agenda of their own within a worldview they share. I think there’s a sense that we have more to lose than to gain in such action at this time, but time may be running out on that one. Most people do have a certain level of freedom, they have a lot of harassment -- but they have a certain level of freedom. And for the average African American who is now 25 -- they have family that experienced the change so they are freer than they were.

They don't get off the street curb when they're coming up to a white person. They can be on the street with a white date or partner. There have been significant changes, not necessarily lasting changes, but changes that make you feel you've got something. The real danger is now that the economy can't produce the benefits it was producing, and the greed in capitalism has gone to such an extreme, that the Captains of capitalism seem not to be concerned about the social order dangers that the extreme inequalities create, which opens the gates to fascism.

When you have the a tyrannical crowd, you have the tendency to tyranny, you have the crowd behaving the way they did in those four Republican debates. So while they're only a minority, they're setting a tone. In the first debate nobody was willing to say that a dying child, a very ill child, should get medical care. In the second debate you've got cheering for the death penalty. In the third debate you've got the call to kill, for a young man who's on life support. And in the fourth debate the gay soldier is booed. So you've got this extreme hysteria that is not being challenged.

DH: So you can imagine serious political repression here in the USA? Where is the hope?

CG: I think we know what’s going to come down. I think people know. People are afraid. There's an implicit fear. And also there are moments when spontaneity breaks out. Who knows, we may be lucky enough that spontaneity e.g. at Occupy Wall Street that will help produce a social movement. And all that's been funded and developed will be ready to move. We don't have that now. There was a kind of serial violence that you couldn't have predicted, when Martin Luther King was assassinated. The Nuclear Freeze movement was not predictable when it suddenly flourished. You can't predict them. But it's obvious why after they happen.

So we don't know that we don't have the ground for something major to happen. In almost every state, strong organizations have been developed that might well be the basis for movement capacity when forces outside of their own terrain call them to new and unified action. If one looked at the black churches before the Civil Rights Movement flourishes of the 1960s, they probably would not have looked as strong one by one as they did when called to unified action. So too with their leaders. Indeed, so too with the Tea Party and right-wing movements. The external call for the latter has been heavy duty private money and a driving corporate agenda that is committed to reversing the deals it made since the 1930’s.

But what’s observable is the right has established an ideology and a worldview, a sense of what’s right and what’s wrong that has captured enough of public to dominate news with visible activism, and to paralyze public at large. That doesn't mean they can hold onto it, but that’s the phenomenon were facing. The economy has no ability to buy the public back into the equation. This recent disaster relief controversy is an example. We are unable to buy back into the equation of what looked like we had won forever -- that is the public good. We've lost a major piece of the ideology that was built over 40 or 50 years -- that we care about people in pain. If we don't have the ideolology that we care about people in pain as your basic ethical compass, then you have the kill mentality. Because we're always balancing between compassion and fear. If compassion doesn't dominate and you don't have resources to feel you can be compassionate without paying a high price yourself, then you're going to turn to fear to protect what you've got, or reach your hand out for what you can get.

I think the health care debate is an interesting case to consider in all this. Obviously, the social benefit is intrinsic to a progressive perspective. The kind of health care reform we’ve received is, for a variety of reasons, insufficient and insecure. Foundation funding for advancing public education and lobbying ran to the millions of dollars but it was all silo policy oriented and for the most part, top down. If that kind of money could have been used to help build a comprehensive foundational commitment to social welfare and organizational capacity, a partial achievement might well have helped produce a powerful movement advance.

DH: Does that loss of the moral compass, along with the fear, have to translate into passivity? How do we combat that?

CG: Well, I don't know that were not doing some of what is necessary. We have to reinvest in the ideology… lots of organizations have gotten lost in the idea that you have to invest in resurrecting belief in government. This is about messages. Elections may be fought on messages. Social movements are about consciousness. We have still to invest psychically, financially and organizationally in rebuilding a shared consciousness for a threshold number of Americans that is characterized in the idea that we want a compassionate society and that government is the best vehicle to deliver that.

One thing I didn't mention about the '80s that the assault on government that Reagan led, the left created earlier. We talked about problems of welfare system, about the ineffectiveness of the education system -- that was us. Cloward and Piven, me, everybody. We undermined that system. We didn't have a sense, probably because we were young, that you win a victory and then you evolve the maturity of that victory. We wanted it to be correct, and the right will suffer the same hubris -- they're moving way beyond their ideological reach, beyond the ability to deliver it.

DH: So, what happens in the interim? What about political repression?

CG: As Eric Cantor said, "People could starve." He said, "If you haven't saved for a rainy day yourself, that's your responsibility."

That's the opposite of compassion; that generates fear. And if you have violence on the street, they will have their own excuse for political repression. If there is an excess of even the right-wing on the street you could have the excuse of police intervention that looks like it's in public interest. But we have work to do, not least is to protect the moment. By that I mean, we should give serious thought about the impact of colluding in the electoral defeat of this president by undermining him publicly and reducing his viability as a candidate. The alternative is truly dangerous.

At the same time, we must think of ourselves in a political era that calls for breaking from the conventions of recent political discourse that has narrowed our social and political vision. It’s time to name what is happening in our country without hysteria, but to be clear that the next elections are part of a struggle for a social and cultural threshold that will determine the quality of life and democracy in this country.

And we need to keep in mind what's always been true in the politics of social movements -- they are the province of the young. Just look for example at how the brave young people in the Dream Act campaigns have actually won victories against inhumane ICE practices. They took and they take risks. Now, as other young people are stepping up to make powerful statements, take risks, try new tactics, they need our support and understanding.

Don Hazen is the executive editor of AlterNet.

Colin Greer is president of the New World Foundation in New York. Among his books is A Call to Character (HarperCollins, 1995).