Economic Warrior's Blog

I almost had a heart attack when I was at the check out counter during one of my late night supermarket runs. There in front of me, next to the People Magazine–was the Time magazine May 24, 2010 edition. On the cover were three very influential women. The first was Elizabeth Warren, Harvard law professor and overseer of the $700 billion government bailout of the banking system.  Secondly, there was Sheila Bair, head of the Federal Deposit Insurance Corporation. Lastly there was Mary Shapiro, front and center,  the new chairman of the Securities and Exchange Commission.

I like Elizabeth Warren a lot. She is gutsy and tells the truth. Feisty, like a junk-yard dog.  Feel pretty much the same about Sheila Bair, she is her own person. But Mary Shapiro, a sheriff? You got to be kidding me Time. Are you smoking your new hydroponic stash or just Northern California semsimilla?

Time states, “Unlike many of the men they oversee, the new sheriffs of Wall Street never aspired to eight figure compensation packages or corporate suites.”  Time magazine is  joking. It is apparent that the press, like much of Congress does not understand the revolving door practice between Wall Street and the regulators, and  the oxy moron self-regulation business. For starters, they could have drilled down a little bit about Finra–where Mary Shapiro was the former CEO.

Shapiro may have not looted shareholders like Stan O’Neil from Merrill Lynch, Dick Fuld from Lehman Brothers, Jim Cayne from Bear Stearns–but  she did not leave the self-regulator Finra with an empty pail. Finra is the self-regulatory body that missed Bernie Madoff’s $50 billion scandal and the  R. Allen Stanford  $7.2 billion fraud. It has huge oversight of over 4,900 broker dealers and more than 664,975 registered representatives. Often Finra has been accused  of letting the big Wall Street broker-dealers get away with miscreant behaviour while crushing the little guy.  I know, some years back  Finra’s  predecessor the NASD put me through hell on a mistake they made. It was a traumatic experience and they never apologized.

While investors see all red in their retirement accounts, self-regulators at Finra see all green.

In 2008,  the last year Mary Shapiro was CEO  Finra she made $3.2 million at the not-for-profit regulator. In 2009, Shapiro received $7.2 million as part of her accumulated retirement plan benefits package ( not-for-profit?). Shapiro’s compensation package also included $20 thousand for club memberships, $20 thousand for personal and financial and tax consulting–as well as a car and driver in Washington D.C. and New York.  Yet Shapiro’s compensation is not the highest, Robert Glauber, Shapiro’s former boss and now a law professor at Harvard Law School, got $6 million in 2006. But get this one, Salvadore Sodano, who retired from the NASD in 2005, got his final $3 million of his $22 million exit package he got in 2005! Oh yeah, Douglas Shulman, who is now the Internal Revenue Service Commissioner, received $2.74 million for working a partial year at Finra in 2009.  Total benefits and compensation costs for Finra jumped to $541.7 million in 2008, with 2,800 employees, brings average compensation to $204 thousand per employee.

Mary Shapiro, while she was at Finra appointed Mark Madoff, Bernie Madoff’s son, to the National Adjudicators Council–the regulatory body that reviews disciplinary action by Finra. Shana Madoff, Bernie’s niece, was the compliance officer at Madoff’s firm, but also a member of the compliance committee of Finra.

It gets worse. Lena Stinson, was the director of compliance for R. Allen Stanford’s Ponzi scheme, served on Finra’s membership committee. Frederick Fram, chief operating officer of Standford Group Holdings, served on Finra’s education committee.

What sparked it off was that afternoon during lunch, I–forever the CSPAN junkie–was watching the new Finra chairman Richard Ketchum testify before Congress about the recent market meltdown which lost one thousand points in a nano second. Ketchum said he was just a regulator. Yikes.Several months earlier Ketchum was testifying before Congress lobbying for Finra to get more regulatory authority. Yet where was Ketchum before he was at Finra? Ketchum was former General Counsel for the investment bank at Citigroup–which is undoubtably the worse managed bank in history, although at this point it is a toss-up  between UBS, Royal Bank of Scotland, Wachovia or Bank of America.

Finra did not only look out for the common man’s money, it could not even look out for its own.  When Finra was formed with its merger with the National Association of Securities Dealers (NASD) and the regulatory arm of the then New York Stock Exchange (NYSE) it inherited–some say took–about $2.24 billion in cash by 2007.   Finra, like Homer Simpson, followed the market frenzy like the rest of Wall Street, under Shapiro and then CEO Robert Glauber, who is now a Harvard law professor. Finra–with the assistance of Harvard’s endowment manager Jack Meyer–invested the billions with 60 different money managers, including 10 unregulated hedge funds and private equity leveraged buyout shops.  Can’t believe it–regulator loses a bundle in unregulated investments. Investment included  infrastructure bets and Russia funds, with opaque disclosures and vague rates of return.  Based upon 990 tax filings, Finra went on to lose about $696 million or 27% of its portfolio in unregulated investments!

An internal report by Finra’s board of governors, entitled “Report of the 2009 Special Review Committee on Finra’s Examination Program in Light of the Standford and Madoff Schemes,” was not  kind to Finra either.  It revealed that the self-regulator was bogged down in bureaucracy and  inept staff  that  lacked the basic understanding of the scope of their jobs. In February 2010, the Project on Government Oversight (POGO) slammed Finra as well for its incestuous relationships  between self-regulatory agencies (SROs) and the financial service industry. All true, but I guess it makes no sense to Time.

The last time Time pulled this, they put up “Committee to Save the World” with Alan Greenspan, Larry Summers and Robert Rubin in February 1999. For Elizabeth Warren and Sheila Bair, I guess two out of three ain’t bad.

New York.  How do we help the next generation?  What is their future? What are we leaving as a power of example?  Are we telling are young to buy companies with debt instead of trying to build something useful to life?  Why are we genuflecting to financiers who saddled companies with so much debt they capsize? Why do they get on Charlie Rose? Why does the American media idolize them?

I certainly know one thing, we certainly don’t need any more financiers…who’s sole purpose in life seems to be only making money.  They get their seed money from very sick state underfunded–over extended–over generous public sector union  pension plans like CaLPERs, and get Wall Street to finance the rest. If they are successful in their vulture capital schemes, they get to buy a new Gulfstream jet,  an island in the Caribbean and a building at an Ivy League school with their name on it. But if they fail they still get paid, while their investors and bond  holders take the pipe. Great work if you can get it.  Then they get on Charlie Rose like Jonathan Nelson did on Charlie Rose television show on May 18, 2010.

Follow the money. This grab bag capitalism–the world of financiers and private equity—is interwoven into our highest offices here and abroad. George H.W. Bush, special partner, The Carlyle Group. Dan Quayle, special partner Cerberus Group. Bill Clinton, partner, Ron Burkle’s Yucaipa Partners. John Snow, former Treasury Secretary,  special partner, Cerberus Capital. Jeb Bush, former governor, private equity division, Lehman Brothers. Mitt Romney, righteous Mormon, one time Massachusetts governor, Bain Capital. Hank Paulson, former Goldman CEO–shit–Goldman is the biggest goddam private equity firm in the world with $90.7 billion, surpassing the Carlyle Group, according to The Wall Street Journal and Dow Jones.

Carlyle Group–shit–that private equity firm is like the United Nations of greed.  James Baker III worked at Carlyle. So did Frank Carlucci, don’t forget former SEC director Arthur Levitt. Former British prime minister John Major worked there. Norman Pearlstine former editor-in-chief of Time Inc. hung a shingle. Charles Rossotti, former head of the IRS, Carlyle partner.  Fidel Ramos, former President of the Philipines, Carlyle. Former Thai Premier Anand Panyarachum–the country with riots probably worse than Greece worked at Carlyle. Former JPMorgan Douglas “Sandy” Warner is doing a stint at Carlyle. Robert Essner, the former CEO of drug giant Wyeth, joined Carlyle as a senior advisor in 2010. Louis V. Gerstner Jr., who used to run IBM  now it the chairman of Carlyle. Follow the money.We are very bad in the U.S. private equity now controls about 10% of the economy, but the British are worse…private equity guys control 20% of that economy.

America  is becoming more like Europe, where the increasing divide between the rich and poor is becoming increasingly evident. Nothing is more of an example of this divide more than financiers in general and private equity in particular. As Elizabeth Warren, Harvard law professor, overseer of TARP says “the middle class is being hollowed out.”  Regular people are finding it increasing difficult to own  a home, educate a child, afford medical care. Credit, for a small business owner, forget it. But if you are a financier or a private equity titan, credit is a plenty. Like throwing gasoline on to the fire.

Taxes, forget it. If you are self-employed, between social security FICA , federal and state taxes– you are easily at 50% taxation rate when you throw property and sales on top.

But if you are an elite king of private equity like Jonathan Nelson of Providence Equity Partners…the world is your oyster. Nelson is one of the richest men in America.  Richard Parsons, the chairman of Citigroup, which is one of the worse run and most predatory financial institutions of all time–and would be out of business if it was not for the taxpayer bailouts–is one of Jonathan Nelson’s special partners. Yet Parsons announced he was joining Providence Equity back in September 2009. Holy shit. And he is still chairman of Citigroup? Hello, any conflicts here? What about the ongoing disaster of Citigroup funding the leveraged buyout of Guy Hand’s Terra Firma Partners very troubled EMI–the record business?

Follow the money.  Private equity guys have at least a half of trillion of it–they like to call it dry powder while people are losing their homes. Huh? Is anyone in the media really paying attention? Do lobbyists really control everything?

Citigroup was a ready supplier of cheap credit for people like Jonathan Nelson. Cheap credit by the billions for leveraged buyouts where all interest expense is deductible, where all risk has been shifted onto shareholders and ultimately the taxpayer. Now the Citigroup chairman is partner in a leveraged buyout shop.  Follow the money. MGM is at best a disastrous $5 billion leveraged buyout over indebted movie studio Nelson’s Providence Equity is involved. MGM studios has roughly $12.5 billion in overall debt. But Providence Equity has more partners…Texas Pacific Group (TPG) who lost $7 billion on Washington Mutual. And Providence Equity, well, it is involved in the troubled Univision leveraged buyout–the country’s largest Spanish station which was purchased for over $12 billion with over $10 billion in debt…others involved include Haim Saban,  the Canadian Pension Plan, Thomas H. Lee Partners…Bill & Hillary Clinton.

One thing is for sure, Jonathan Nelson gets to have face time on Charlie Rose. Nelson’s Providence Equity is one of the largest cable TV operators in Europe.  So many businesses, excuse me, portfolio companies, that he does not understand them all. Yet look at MGM, this is a disaster. Univision. Leverage buyout gone bad. Over leveraged.  But in the end, all the risk has been shifted, more likely than not to bond holders….to banks we have to bail out…not to Providence Equity. We don’t need anymore financiers. We need more machinists…Charlie Rose.

“The real truth of the matter is, as you and I know, that a financial element in the large centers has owned the government ever since the days of Andrew Jackson…” –Franklin D. Roosevelt (in a letter to Colonel House, dated November 21, 1933).

For a number of years I surmised  that the largest scandal involving Bill Clinton, was not Monica Lewinsky or Jennifer Flowers, but the largest scandal–better yet long-term love  affair–  was the Clinton’s deep relationships  with bankers, financiers and Hollywood for over two decades. 

The recent  article  by Connie Bruck in The New Yorker  (May 10, 2010) entitled “The Influencer, An Entertainment Mogul Sets His Sights on Foreign Policy” confirms  how much influence  financiers, Hollywood and bankers have on our government in general and Hillary & Bill Clinton in particular.

Background.  When William Jefferson Clinton  was a young law professor at the University of Arkansas, he wrote a “friend of the court” brief supporting Worthen Bank which wanted to own a piece of both MasterCard and Visa franchises.  When the Clinton campaign for governor in Arkansas was in jeopardy, Worthen orchestrated a loan to help fund a media campaign.  Worthen Bank also help fund a $2 million loan for Clinton’s presidential campaign in 1992,  and  helped to fund a media blitz to counter the Jennifer Flowers controversy. In 1994, there was a fire at Worthen Bank headquarters where some of the Whitewater documents were stored, another controversy which surrounds the Clintons.  Worthen Bank also had ties with the billionaire Stephens family  that has a vast empire in natural gas, real estate and finance–an investment bank which placed many investments with public pension plans, a field which Bill Clinton would later be involved in after he left the office of president.

Hillary Clinton came  into the spotlight for cattle futures trading in 1994.  Starting with  about an  $1 thousand investment, turning it into $6300 overnight, Hillary would  go on to make about $100 thousand in about 10 months–only keeping the good trades. 

When  Bill Clinton was president, he would retain Robert Rubin, former co-CEO of Goldman Sachs to be his Treasury Secretary. Rubin, along with Alan Greenspan and Larry Summers would be fundamental in tearing down Glass-Steagall Act in 1999–would lay the ground work for today financial crisis. Robert Rubin, after leaving the government, would go on to work at Citigroup, making over $100 million dollars, as one the banks that benefited the most from financial deregulation on the one hand, and on the other, Citigroup became the poster child for bank malfeasance which include mutual fund corruption, Enron, conflicts of interest with analysts–too many problems to list

In addition, when  Bill Clinton was president, his financial staff under Larry Summers would  include Timothy Geithner and Gary Gensler. Now Summers is Barack Obama’s top economic advisor.   Geithner, though he was  found  guilty of not paying $34 thousand  self employment taxes while working for the International Monetary Fund (IMF) between 2001 and 2004, would go on  to become President of The Federal Reserve Bank of New York.  Geithner is now the Treasury Secretary of the United States. Gary Gensler, would go on to work at Goldman Sachs after Clinton,  but now Gensler is chairman of the Commodities Futures Trading Commission, the agency which overseas derivatives trading which completely failed to regulate them.

When Bill Clinton left office, in debt for legal fees of defending himself for his various trysts,  headed out west and partnered with Ronald Burkle, the billionaire private equity leveraged buyout tycoon.  Burkle would make billions taking over supermarkets with the aid of state pension fund money. Burkle’s  firm Yucaipa Partners–would be seeded by a $500 million investment committment  from CaLPERs in 2002, the California pension fund. CaLPERs would also go on  to make a $35 million investment for a minority interest in the company. No doubt decision was at least in part  influenced by having a former U.S. president as a partner to Burkle.  Burkle owns one of the largest estates in Hollywood called Green Acres, the famed Golden Age slap-stick giant film home once owned by Harold Lloyd. Burkle’s home is worth $55 million, with  44 rooms, in a Mediterrean-Italian style manse. According to LA Weekly, the former president Bill Clinton stayed at Green Acres at least 80 times since 1990. Burkle has a customized Boeing 757 jet to fly around the world, and counts Leonardo Caprio and Bono rock star as friends.  Burkle has also invested $50 million in Al Gore’s Current TV, and $75 million into Sean “Diddy” Combs clothing line. Burkle would later get into the troubled spotlight when he hired as a consultant, Raffaello Follieri, the now jailed Italian developer who claimed to be the CFO for the Vatican.  In Bill Clinton’s book My Life , Clinton said Burkle was “one of his best friends and best supporters.”

 All told, after leaving office Clinton would make upwards of $109 million from investment income, speaking fees, taxpayer pensions, and book rights.  Bill Clinton received $300 thousand in the fall of 2006 from Citigroup for two talks, $120 thousand from Lehman Brothers for a talk in Kiwah Island, S.C. in 2006, and $650 thousand for three speeches for Goldman Sachs in 2005.

Hillary Clinton, who would go on to become U.S. Senator from the State of New York and have a run for the U.S. presidency is now Secretary of State. Clinton would go on to raise presidential and senate political contributions of $333.57 million between 1989 and 2008 according to Open Secrets www.opensecrets.org. Clinton’s largest financial contributors include Citigroup, Goldman Sachs, Morgan Stanley, JPMorgan Chase, Lehman Brothers, Merrill Lynch, Credit Suisse and General Electric.

The Clinton’s daughter Chelsea, would later go to work for Avenue Capital, the distressed debt hedge fund which manages, according to its website $19 billion. Avenue Capital founder Marc Lasry is a big donator to the Democratic party, spending money on Clinton, Al Gore and friends with Bill Clinton. Lasry has also, according to The Wall Street Journal has been known to have lunch with White House Chief of Staff, Rahm Emanuel. Chelsea Clinton, who was 26 when working for Avenue, made somewhere between $100 to $150 thousand per year. Morgan Stanley has a minority interest in Avenue Capital.  Avenue Capital, like the rest of the private equity hedge fund world gets much of its investment dollars from state pension funds such as the Pennsylvania State Employees Retirement System.  

So whats the big deal? George H.W. Bush went to work as a special partner for the giant private equity firm The Carlyle Group after he was U.S. president.  Dan Quayle, former vice-president of the United States, went to work for the secretive but now quite troubled Cerberus Capital in New York, which would fail at taking Chrysler over and also drag the taxpayer into the General Motors Acceptance Corp mess–putting the taxpayer at risk for billions of losses–while creating an overtly aggressive bank, Ally Bank. Heck, former Treasury Secretary John Snow joined the private equity leveraged buyout free-for-all as well, hanging out a shingle at Cerberus as well…And George W. Bush…he sold the Texas Rangers ball club to Texas buyout king Thomas Hicks, who has a pile of financial difficulties–too much debt and now wants to unload the team as well as some British soccer teams he bought with too much debt.

But  Clinton was involved with Haim Saban, the California entertainment mogul billionaire who made his fortune amongst other things, bringing “The Mighty Morphin Power Rangers” to the U.S. Saban is a tough businessman, and as The New Yorker article brought out, Saban is an ideal businessman for the predator state, saying the best “three ways to be influential in America politics  were to make donations to political parties, establish think tanks and control media outlets” According to Connie Bruck’s piece, in 2002 Haim Saban donated $5 million to Bill Clinton’s presidential library, and has given more than $5 million to the Clinton Foundation.  In February 2010, Secretary of State Hillary Clinton delivered a major policy address at the U.S.-Islamic World forum in Doha, sponsored by the Saban Center. Saban was a long fervent supporter of Bill Clinton. In 1998 he had a dinner party at his home which raised $1.5 million for the Democratic National Convention. In The New Yorker article Bill Clinton says this, “For nearly two decades, Haim has been a good friend, a loyal supporter, and a trusted advisor to Hillary and me.”

Guess so. At a conference in Jerusalem last November, Bill Clinton, Bibi Netanyahu and Arnold Schwarzenegger would be featured speakers at the King David Hotel.

Connie Bruck , in The New Yorker article would go on to say how Haim  Saban is always on the lookout to buy a paper like the L.A. Times or even the New York Times. Saban  knows Steven Rattner, the recent black-eyed private equity baron from New York–whose Quadrangle Group  just paid millions to settle state pension investment corruption in New York for its role in using placement agents.  Rattner  was also Barack Obama’s car czar. Saban’s go-to guy to look into buying The New York Times was Rattner.

But Haim Saban hates paying taxes more than anything else. This financier mogul–who has the ears of the Hillary and Bill Clinton–spares no expense when it comes to avoiding taxes. He has set up companies in the Netherlands Antilles to avoid paying tens of millions in taxes. Yet Saban uses  the same tools to avoid taxes the way many politicians do, namely through  the private equity (leveraged buyout)  play where financiers, many times ex-government officials, purchase companies with massive amounts of debt, and inside connections.  The Carlyle Group, Cerberus Capital and  Ron Burkle’s Yucaipa Partners are perfect examples of politicians getting waist deep into the leveraged buyout business.

 In 2003, flush with cash after doing a deal with Rupert Murdoch, Saban got into the private equity business.  In 2007, he  teamed up with Providence Equity Partners,  Madison Dearborn and Thomas H. Lee  for a club deal to buy Univision…. for $12.3 billion, with $10.7 billion in debt. Univision , the country’s largest Spanish language broadcaster, struggles, like dozens of other private equity deals, with a Mt. Everest of debt…a ticking time bomb…A firm with big ties to Hillary & Bill Clinton, Wall Street and debt….Go read The New Yorker article…