Monday, January 12, 2009

Financial Fraud

A recent column on the legacy of disaster left by the Bush Administration brings to mind some of the history behind that legacy, for the truth is, Bush didn’t sink the country on his own. His stealth attacks on both the economy and the bill of rights were prepared by previous administrations, in particular the two terms of the Reagan Administration. This is made clear by several things I’ve read recently, in particular, Thom Hartmann’s 2006 book, Screwed: The Undeclared War Against the Middle Class, and Katherine Austin Fitts’ stunning account of her time as a mortgage banker and later a high official in HUD, “Dillon Read and the Aristocracy of Profits.” Both shed important light on the staggering economic crisis the United States now faces.

            Hartmann makes clear that it was Ronald Reagan—the front man conservatives have hyped as our greatest modern president—that instituted a host of economic inequities that enabled first one Bush and then the other to enrich their friends and plunge the rest of us into a sinkhole of monumental proportions. Reagan, that is, cut the top tax rates on the wealthiest Americans from 70% in 1981 down to 28% by the end of his term in 1988. The result was not only the greatest transfer of wealth in U.S. history—from the middle classes to the very rich—but also the greatest debt in world history. This is because with the resultant shortfall in taxes, and therefore income, the government was forced to borrow to cover its expenses.

            Now, of course, this borrowing was a very big public relations problem for Republicans, who always tout themselves as fiscal conservatives—you know, pay as you go, i.e. don’t go giving away money to poor people and “welfare queens.” So Alan Greenspan came up with a clever ploy to hide part of this debt: just take a few hundred billion a year from the Social Security Trust Fund. This is the money that comes in from current wage earners via the FICA tax, which for most of Social Security’s life has outpaced the money paid out to retirees; the resulting surplus was meant to stay in the “bank” so that when more people retired (as when Baby Boomers retire) there would still be a reserve fund to pay out. Reagan, of course, thought that raiding this unused money was a great idea, and “borrowed all the money in the fund from 1982 to the present” to help cover his embarrassing budget deficits. The only problem was, Social Security had to be paid back. Greenspan’s commission on Social Security had another great idea to cover this: raise the FICA tax on working people, and raise the amount of income subject to Social Security tax from $30,000. to $90,000. This again seemed like a great idea, because it would be mainly middle class people whose incomes would be hit the hardest, while the bulk of millionaire income (all earnings over $90,000. annually) would be exempt.

            The long and the short of both these strategies (Hartmann calls them the CON game, after the neocons who became famous during W’s presidency) made the rich vastly richer. As Hartmann and many others have noted, “from 1980 to 1990, the income of the wealthiest 5% of Americans rose by 25% while the income of the bottom 40% stayed absolutely flat.” This trend has continued almost unabated, and even gotten worse since then. A recent article in Harper’s Magazine, by Linda Bilmes and Joseph Stiglitz, about the devastating effects of the Bush Administration, notes that “Between 2002 and 2006, the wealthiest 10 percent of households saw more than 95 percent of the gains in income…According to one study, the nation’s 15,000 richest families doubled their annual income, from $15 million to $30 million.” Corporate profits also shot up “by 68 percent.” Meantime, those at the center and bottom of the income spectrum—those hit by new FICA taxes, disappearing manufacturing jobs, and Reagan’s simultaneous assault on the unions that allowed workers to reach middle class solvency in the first place—saw their incomes actually shrink. To top it off, the safety net that Social Security was supposed to represent for middle class Americans has been vanishing. As Hartmann points out, in April of 2005, President George Bush admitted that “There is no trust ‘fund’—just IOUs that I saw firsthand.” These IOUs amount to some $2 trillion “borrowed” from Social Security. Is there anyone who, given our current economic crisis and the billions the government has been giving to bankers and automakers, as well as the estimated $10.35 trillion debt that Stiglitz and Bilmes estimate the Bush Administration ran up on its own, still thinks that the government will or can make good on all those IOUs?

            The trouble is, the shenanigans don’t end there. In her article noted above, and accessible at, Katherine Austin Fitts details how large investment bankers like Dillon Read not only derived much of their income from laundered criminal money, mostly from drugs, but also from investing heavily in the prison-industrial-complex via a company named Cornell Industries, whereby privatized prisons lobby for more severe criminal penalties to increase the prison population—and their profits.  Here is her summary:

Thanks to the successful efforts of the Clinton Administration to pass new crime legislation and ensure DOJ bureaucracy support for outsourcing contracts to run federal prisons to private prison companies — including a gush of contracts to Cornell from the fall of 1995 to the spring of 1996 — Dillon Read’s Cornell stock purchased at an average price between $2-3 per share, was now (July-Oct 1996) worth $12 a share, a 400–600% increase. In addition to their stock profits, Dillon pocketed big underwriting fees as well as the lead investment bank arranging the stock offering. In nine months, the Clinton Administration’s increase in contracts and acquisition of entities with contracts supporting 1,726 prisoners had literally made the company. The IPO reflected a stock market valuation of $24,241 per prisoner. What that means is that every time HUD’s Operation Safe Home dropped swat teams into a community and rounded up 100 teenagers for arrest, the potential value to the stockholders of the prison companies that managed the juvenile facilities and prisons was $2.4 million.
Furthermore, Fitts’ time at HUD exposed her to equally obscene fiscal shenanigans, this time involving the actual disappearance of huge amounts of money.  Here is how she puts it in one summary:

In October 1997, the federal fiscal year started. It was the beginning of at least $4 trillion going missing from federal government agency accounts between October 1997 and September 2001. The lion’s share of the missing money disappeared from the Department of Defense accounts. HUD also had significant amounts missing. According to HUD OIG reports, HUD had “undocumentable adjustments” of $17 billion in fiscal year 1998, and $59 billion in 1999.
Now Katherine Austin Fitts is not some latter-day Ronald Reagan attacking government as THE PROBLEM. Rather, she is pointing out that the unholy alliance between government and big business—the corporatocracy—leads to enormous waste, fraud and fiscal disaster. And where Reagan and his successors up to Bush have advocated “privatization” as the solution to government waste, Fitts advocates better oversight and punishment of those who are in the pockets of their corporate sponsors and lobbyists. Indeed, in her rendering, it is precisely the massive move by Republicans and Clinton Democrats towards privatization that has caused much of the problem. She gives the example, from her HUD days, of what happened to her suggestion to save money in construction projects for the poor:

When I suggested to the head of HUD’s Hope VI public housing construction program during the Clinton Administration that she could spend $50,000 per home to rehab single family homes owned by FHA rather than spending $250,000 to create one new public housing apartment in the same community, she got frustrated and said “How would we generate fees for our friends?”

Fitts goes on to explain that privatization really meant transferring assets “out of governments worldwide at significantly below market value in a manner providing extraordinary windfall profits, capital gains and financial equity to private corporations and investors….The financial equity gained by private interests was often the result of financial, human, environmental and living equity stripped and stolen from communities…This is why I now refer to privatization as “piratization.” And of course, Fitts’ experience while at Dillon Read with Cornell Corrections, makes this same point, with an even greater impact. Privatized prisons depend on more inmates. Prison corporations, with contacts in government, are the biggest lobbyists for harsher criminal penalties for even non-violent crimes. Why? Because the more inmates there are, the greater their profits. The so-called wars on crime and drugs, therefore, are as much if not more the result of the corporate need to stock their prisons with more inmates, than the alleged need to keep the public safe. The darkest side of this whole complex involves the U.S. government’s role in providing the drugs that spark the crime that provides the inmates.

            Thom Hartmann agrees in locating the recent rush to privatization as the heart of many problems. Where the CONS contend that they are for “smaller government,” Hartmann explains what smaller government really means: government of, by and for corporations and inherited wealth. Thus the Bush administration’s move to privatize K-12 education, which urged replacing free public schools with tuition vouchers for private schools, was just another way to cripple public education serving mainly poor and middle class families, and to expand private education that has traditionally served the rich. Unfortunately, many Americans have bought into this conservative propaganda that private corporations will be more efficient than government bureaucracies. Thus, from 1992 to 2002, Hartmann points out, “the U.S. government eliminated 48,000 civil service jobs while adding 730,000 contract positions.” The same CON game has mushroomed during Bush’s tenure, with pet corporations like Halliburton, Dick Cheney’s old company, making billions in military contracts to do what GIs used to do themselves. The transfer of Department of Defense dollars from what used to be a citizen military to a corporate-run military-industrial complex has been a virtual tsunami.

            Privatization’s most serious consequences may have occurred in medical care. Where hospitals used to be largely non-profit corporations whose primary mission was to care for patients, today most hospitals are part of giant corporations whose primary mission is to generate profit. A 1989 study in the New England Journal of Medicine made this clear. It found that middlemen like health insurance companies and HMOs, with their enormous and constantly rising operating costs, have put health care out of the reach of huge numbers of Americans, especially compared to a government-run program like Medicare. Where administration costs for Medicare take only 2% to 3% of the medical budget, corporations and HMOs gouge as much as 34% for administrative costs like CEO salaries, lobbying, and advertising. In other words, money that should and could go to medical care, is siphoned off to support a profit-driven corporatocracy.  George W. Bush’s showpiece Medicare bill of 2005 only added to this bonanza for the privateers. Because it mandated that Medicare cannot negotiate wholesale prices with drug companies and must always pay full retail, the enormous rise in the cost of prescription drugs is encouraged rather than mitigated. Again, privatization means a victory for the corporate giants and those who run them (including those who profit from their rising stock prices) rather than a better delivery system of health care for most Americans.

            The collapse of the financial and stock markets has put a halt to much of the CON game, at least for a time. But we can rest assured that those whose interests lie in keeping the CON going will not be sidelined for very long. Indeed, the damage they have done may already have compromised our system beyond repair. As the President of the CalPers pension fund—the largest in the nation—told Katherine Austin Fitts as early as 1997, when she and her company proposed investing pension funds in small communities, small farms and small businesses so as to keep the money working in the United States, rather than financing exploitative plants in foreign countries like China:

            “You don’t understand. It’s too late. They have given up on the country. They are moving all the money out in the Fall. They are moving it to Asia.”

            The events of the last few months seem to confirm that “they” had indeed given up on the country. The only question now is, will the rest of us get outraged enough and active enough to salvage what’s left?


Lawrence DiStasi

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