Billions in bonuses on Wall Street at the expense of Main Street

Seven years after the traumatic 2008 financial crisis, millions of Americans still have not recovered. But a few others are doing quite well, thank you. One of the first signs of the impending implosion in financial markets occurred in the summer of 2007 when two Bear Steams hedge funds with major investments in mortgage-backed securities collapsed. It was the beginning of the end for the world’s fifth largest investment bank, which, during its 90-year run, had developed a maverick reputation in the white-shoe culture of investment banking.

During the wee hours of March 24, 2008, just before Asian markets opened, the federal government forced Bear to announce its sale for a few pennies on the dollar to JPMorgan Chase, an offer that would not have been made without government assistance.

The deal was backstopped by the Federal Reserve’s commitment to buy upwards of $30 billion worth of mortgage-based securities in Bear’s portfolio that Morgan regarded as “too toxic to touch.” It was hoped that the Bear rescue would stem any fallout from spreading into the larger financial world, which many policymakers viewed as likely following the failure of a major investment bank.

Bear’s collapse was a critical event signaling the start of a great unraveling. One of the things that made Bear’s demise such a watershed event was the federal government’s direct involvement in orchestrating the deal that saved the company from having to file for bankruptcy.

Previously, the federal government would become so intimately involved only when a deposit-taking commercial or savings bank got into financial trouble.

If they screwed up and failed? Others would learn from their mistakes. That’s what was supposed to happen under capitalism. That is until the federal government got bushwhacked by Bear, a “don’t get no respect” underdog, and found itself in a jam.

So the feds had to throw out the standard game plan, even if it meant the Federal Reserve buying $30 billion worth of mortgage-backed securities from Bear that nobody else would touch as the financial tsunami of 2008 began rolling across the globe.

Bear Steams may have ceased to exist on March 24, 2008, but it continued to haunt the financial world like Marley’s ghost for months thereafter as the global meltdown continued, marked by formerly solid financial institutions turning into basket cases that could no longer survive on their own – after years of shooting up on short-term borrowings and boozing away on risky trades that blew up in their faces.

At the beginning of 2008, Merrill Lynch, Goldman Sachs, Morgan Stanley, Lehman Brothers and Bear were the five largest stand-alone investment banks in the world. By the end of the year all would be gone.

Goldman Sachs and Morgan Stanley were converted to bank holding companies while Lehman Brothers filed for bankruptcy and Merrill Lynch was acquired by Bank of America. These supposedly omnipotent institutions proved to be giants with feet of clay.

The financial crisis precipitated the worst economic downturn since the Great Depression, costing millions of Americans their jobs, homes, life savings and hopes for decent retirements. Since then, workers’ median incomes have effectively stayed unchanged while inequality between the top and bottom of the income scale has risen sharply.

Meanwhile, we recently learned from the New York State comptroller that Wall Street banks handed out $28.5 billion in bonuses in 2014. The average bonus was $172,860, more than three times the median household income of about $52,000. To say that anyone is surprised would be selling the truth below wholesale.

It’s reassuring to know that some folks have recovered very nicely from the financial crisis. But Main Street America will apparently have to learn to live with the wounds from the financial crisis.

originally published: March 28, 2015

Boston 2024’s shadow government of connected players

Boston Mayor Marty Walsh opposes a referendum on whether Boston should host the 2024 Summer Olympics. So does state Senate President Stan Rosenberg, who says people should trust elected representatives when those officials say they won’t support public money going to the Olympics.

But it’s hard to have much trust in what increasingly looks like a money-grab by a shadow government of connected players.

The MBTA’s recent meltdown under the weight of snow and ice allowed Boston 2024 to argue that the Olympics could be a catalyst to upgrade the area’s public transit. But fixing a system that owes nearly $9 billion in debt and interest and with a maintenance backlog of at least $6.7 billion could cost real money.

At first, Boston 2024 organizers claimed that taxpayers’ only Olympic-related cost would be transportation improvements already in the pipeline. But it turns out they meant any projects included in a $13 billion bond bill Gov. Patrick signed last year. The problem is that bond bills only authorize the commonwealth to borrow money, and just a fraction of the projects in them actually fit within state borrowing limits.

Moreover some of the projects in Boston 2024’s successful bid to the U.S. Olympic Committee aren’t in the bond bill at all, and only a portion of the included projects are actually funded. Building them all would roughly double the $4.5 billion backers claim taxpayers would have to kick in to host the games.

Then there’s the cost of operating and maintaining the assets, which advocates routinely ignore, even though it’s far greater than the initial construction costs over the life cycle of the assets. Remind you of the MBTA?

The people Boston 2024 is bringing on don’t exactly instill confidence. With former Gov. Patrick no longer in power, his supporters’ access to jobs and lucrative consulting gigs is dramatically diminished. Boston 2024 is looking a lot like a lifeboat for a government in exile.

Both Gov. Charlie Baker and Mayor Walsh were blindsided by the announcement that Patrick would serve as a “global ambassador” for Boston 2024. An annoyed Walsh called on the group to come clean about their payroll. When they did, it was unseemly at best to learn that Patrick will earn a mind­ boggling $7,500 for each day he spends traveling on behalf of Boston’s Olympic bid.

He certainly is surrounded by familiar faces. Richard Davey, his former transportation secretary is Boston 2024’s $300,000 per year CEO. His former political consultant Doug Rubin is collecting $15,000 per month and John Walsh, who headed the state Democratic Party under Patrick, is making $10,000 per month. All told, Boston 2024 has 16 consultants on the payroll, in addition to 10 employees earning a total annual salary of $1.4 million.

The fact that Patrick’s second term was a management debacle further diminishes confidence in Boston 2024’s ability to safeguard taxpayer dollars. It was beset with scandals at the Department of Children and Families, the Department of Unemployment Assurance, and the state drug lab, among others. The more than $750 million budget gap Gov. Baker had to close soon after taking office was largely the result of the Patrick administration’s mishandling of the commonwealth’s Affordable Care Act website.

All this is in an effort to land the Summer Olympics, which, since 2000, have cost an average of more than $19 billion to host. Boston 2024 says taxpayers will only need to kick in $4.5 billion but final costs have averaged about three times the estimates included in initial bids during that period.

Under the best of circumstances, hosting the Summer Olympics is a pretty sketchy proposition. But when billions of dollars are on the line and the effort is in the hands of what amounts to an unaccountable shadow government, taxpayers should have the right to guard their own wallets, not trust that elected officials will protect them.

originally published: March 21, 2015

Healthy pork: Earmarks may help solve transportation problems

The American Society of Civil Engineers recently estimated that traffic bottlenecks will cause a $1 trillion loss in sales over the next eight years. The report makes the point that America can no longer put off dealing with the growing backlog of transportation projects whose costs have long outstripped the dollars the existing transportation funding mechanism generates.

It should be noted that these are the same people who published the 2013 report card that gave America’s infrastructure a grade of D+. They obviously have never heard of grade inflation.

With the current highway bill set to run out of money by May 31, the current report comes as federal lawmakers are debating a new transportation funding bill. Congress has struggled to come up with a transportation funding bill that funds needs beyond those that can be addressed with revenue from the 18.4-cent-per-gallon federal fuel tax, which has not been increased since 1993.

While the infrastructure community is holding its collective breath for Congress to agree on a bipartisan solution, perhaps it is time to revisit the use of limited earmarks to lubricate the legislative process.

Earmarks are congressional directives that money be spent on specific projects, which are often derided as “pork barrel” projects. They basically ended in 2011 after the public outcry about a $223 million earmark to fund the construction of a “bridge to nowhere” in Alaska.

Critics argue that earmarks are basically used to buy votes, curry favor with special interests and help politicians get re-elected by showing constituents they are bringing home the bacon even when America is broke. For sure, there are plenty of people who say that earmarks are pork and the money is being wasted.

To further add to the demonization, they claim it’s ad hoc policymaking at best and illegal graft at worst. For them, earmarks are like a four-letter word and are reflective of congressional corruption, even if they help legislators overcome ideological differences and pass major legislation by earmarking money to buy key votes from recalcitrant colleagues.

Like it or not, earmarks and horse trading are part of the human condition and for ages were part of the legislative process at every level of government. Trading for votes in Congress, not to mention lubricating the process with funding for special projects that the legislators in question consider important, has always been an essential element of American democracy. Since when has the average politician made a virtue out of surrendering his or her career for putting the country’s interest first?

Let’s not get hung up on appealing to the better angels of human nature. Legislators put pragmatism over principle. As that prolific writer Anonymous said: They understand that when you have to choose between voting for the people or the special interests, stick with the special interests. They remember; the people forget.

Stained-glass, Pollyanna-ish types may cringe and complain that this is little more than bribery, the distribution of taxpayer dollars based on political considerations rather than merit. If the use of such a pejorative term makes them feel nobler, so be it. You get merit in the afterlife; here in the present you get politics. As former House Speaker Tip O’Neil once quipped, “I’m against any deal I’m not in on.”

Far from being ashamed of earmarks, proponents argue that lawmakers are a better judge of what benefits their districts than unelected bureaucrats. They ask if we really believe that the bureaucrats responsible for fiascos like the Veterans Affairs scandal and the screwed-up Obamacare rollout should control allocating taxpayer dollars.

Would it really be a mortal sin to reintroduce some limited bribery to grease the legislative process and smooth over differences that preclude in this case the transportation funding shortfall? In the current environment of gridlock, it may be exactly what the country needs. 

originally published: March 14, 2015

The MBTA’s snow job: Lack of accountability

Amid endless discussion about the MBTA’s damnable inattention to maintenance and its indulgent over expansion, accountability has not been mentioned as one of the causes of the T’s meltdown. Lack of accountability may in fact be the organization’s biggest weakness.

A raw fact of life is that the public sector is awfully good at ducking accountability. It’s no wonder then that people feel increasingly distrustful of political institutions. And the governor has now created the obligatory commission to assess the MBTA’s problems and make recommendations for fixing them, a Sisyphean task to be sure. One can only hope they will address the question of why this essential, non-discretionary service has consistently failed to be accountable to its customers.

In the meantime, thousands of disgusted customers are demanding refunds for a service that was not rendered. They want the MBTA held accountable for failing to keep their promise to provide the safe and reliable service that, to many, is just as basic as access to water, education and health care.

At the heart of accountability is a promise that obligates you to a course of action. When you are paid for a product or service, you are accountable for delivering it. If you don’t fulfill your promise, you are expected to take responsibility for failing to deliver on it and expected to compensate the other party. This creates a modicum of credibility; a promise made is a promise kept.

Sure, the MBTA board of directors is not responsible for creating private gains, their quasi-public structure means the MBTA has no owners to whom the board is primarily accountable. But they are accountable to taxpayers and customers for creating societal benefits and satisfying the promises made to their multiple constituencies.

If board members are confused about how and why they should be making good on this promise, the new commission should figure it out for them. Commission members should also keep in mind that they cannot expect the MBTA board of directors to perform surgery on themselves. The commission would be wise to recall Einstein’s words that you can’t fix today’s problems with the folks who created the problems in the first place.

One obvious imperative for the nice people on the MBTA board is to acknowledge their failure to deliver a basic service. The stewards at the MBTA can’t make up for lost wages and all the other collateral damage done to the average Joe and Jane. But if they are serious about customer service and want to be viewed as legitimate, they should move at the speed of light and provide customers with refunds for the services those customers haven’t received. What’s to discuss? Just do it.

Even better still, going forward, a money-back guarantee would make public transportation much more attractive to customers and also be the acid test for accountability. And why not a money-back guarantee, it is routinely used by successful private firms that distribute goods and services though the marketplace.

Of course, this principle can only be implemented after Hercules has cleaned out the Augean stables at the MBTA. To expect anything less is to be as amateurish as the folks who are currently in charge.

originally published: February 28, 2015