Economic Warrior's Blog

U-su-ry (y00′zha-re) 1. The act or practice of lending money at an exorbitant or illegal rate of interest. b. Such an excessive rate of interest. 2. The act or practice of lending at any rate of interest.  3.  Archaic. Interest charged or paid on a loan.  American Heritage Dictionary, Second College Edition

“The rich rule over the poor, and the borrower the servant to the lender.”  Proverbs 22:  22 & 23

“Those who understand interest, earn it. Those who don’t, pay it.”  Albert Einstein

In my travels of late, going in and out of airports, and occasionally a train or two, I continue to be disturbed how debt is marketed in America.  It is a non-stop tsunami of blitzkrieg advertising for credit cards, student loans, mortgage re-financings and auto loans. The predator state of debt is alive and well in America.

Banks no longer want to teach people the benefit of saving, they want people in debt because selling debt is very profitable to them.  We are brainwashed with incessant credit cards. Visa, the credit card giant, says ,”Find the Right Card for You.”  “Life Takes Visa.” “More People Go With Visa.”  And to give Visa that granddaddy you can trust me touch,  Morgan Freeman narrates the commercials.

MasterCard is not much better, but with Madison Avenue advertising, it puts shine on a debt guillotine. “Priceless”…”There are somethings money can’t buy…” Have we forgotten that it was unregulated predatory debt which has gotten America in trouble in the first place? Hello, is anyone out there?

The point is,debt advertising is everywhere, but it is perhaps no more in your face than in the airports throughout America. HBSC, the British banking giant, has  its  life-sized white and red letters splashed on gangways feeding out to jet airplanes. In one airport, maybe Newark, New Jersey  it looks like HSBC logo  was painted on every gangway in the airport.  Electric blue Chase ATM machines are at airport gates. And while eating an in flight sandwich on Continental, a JP Morgan Chase napkin is buried on the bottom of the food tray. Fifth Third Bancorp ATMs are at the airport in Memphis.  Citigroup ads and Citi themes are everywhere.  A flight out west solicits Bank of America, by the stewardess no less.

But on a recent flight, there was a particularly hard sell by U.S. Air, when you apply on board the aircraft, you receive an additional 500 bonus miles. Earn 500 miles just for applying when I am in the air, one place, quite frankly, I do not want to be solicited for.  Leave me alone.  The country is already $12 TRILLION in debt, and the airline–with their bank partner–the British bank Barclay’s wants to market me credit on U.S. Airways Premier World MasterCard credit card. So what does the bank charge the consumer, when they cannot even get 1% on a savings account? Lets summarize.

Annual Percentage Rate:  15.24% or 18.24%

Annual Percentage Rate for Cash Advances: 21.99%

Penalty Annual Percentage Rate When it Applies:  Up to 30.24%

Annual Fee: $79 for Premier Word MasterCard, $49 for Platinum

Balance Transfer:  $10 or 4% , the amount of each transfer, whichever is greater

Cash Advance: Either $10 or 3% the amount of each cash advance, whichever is greater

Purchase of Money Order, Travelers checks, etc:  $10 or 3% whichever is greater

Foreign transactions: 3% of each transaction

Late payment: $15-$39.95 ( the amount varies by state, see more fine print for more details)

Returned payment: $15-$39.95 ( the amount varies by state, see more fine print for more details).

Sky High Usury in the Friendly Skies. And we are $12 trillion in debt, the banks that brought us this crisis, the greatest economic crisis since the Great Depression, are still peddling mountains of debt. They are essentially getting money for nothing from the government. They want low-interest rates on money they get from the government and consumers, but they want sky-high usury in the friendly skies…

“Anybody who plays the stock market not as an insider is like a man buying cows in the moonlight.”  Daniel Drew, 19th century speculator

“But private-equity players are quintessential Wall Streeters whose grasp of the concept of reasonable limits is quite limited. For them, the whole purpose of doing business is to make money, so if a strategy works, each success is just an encouragement to raise the ante and be a bit more daring next time.”  Josh Kosman, “The Buyout of America, How Private Equity Will Cause the Next Great Credit Crisis”, 2009

If you want to really understand how Wall Street and their private equity offspring totally exploit the tax code, the companies they purchase and the massively underfunded state pension funds, then you have to look at the giant California pension fund known as CalPERs. CalPERs funds the pension benefits for about 1.6 million workers, making it one of the largest in the U.S.

 State pension funds are in the final analysis, the pot of gold for Wall Street suppliers such as big time broker dealers, hedge funds and masters of the universe private equity firms. Private equity firms or leveraged buyout shops are investment partnerships that use massive amounts of debt to purchase companies and real estate investments. In the process, they collect hefty management fees of 2%  and when they sell or recapitalize the firms, the private equity titans swipe 20% off the top profits for themselves  from managing other peoples money–and get to take their take in at capital gains rates!!

Investment firms covet  state pension funds because that is where the money is, and generally they get to hold on to this money for long periods of time. CalPERs, the pension fund with over $200 billion in assets, has  14% of its assets invested in alternative investments, and roughly half of that is invested in private equity. What is a looming problem that CalPERs, with roughly $23 billion or so in alternative investments as also on the hook for another committed or non invested amount of $23 billion liability–a monstrous cash call if there ever was one. Its sister the California State Teachers Retirement System or CalSTRS, has about $8.2 billion in alterative investments, with a committed not invested liability of about $19.8 billion. The New York State Pension fund, another big pension fund, has about $10.3 billion in alternative investments, with a committed not invested liability of $12.6 billion.

The relationship between private equity firms, state pension funds and the nation’s big center money banks is a dysfunctional showcase of greed on the one hand, and hubris on the other. Pension funds like the troubled CalPERs have only made an investment return of  3.25% over ten years by 2009.  and it is a tad less for New York State.  Private equity firms acting as general partners put the deals together, limited partners such as state pension funds and college endowments put up the real money, and the banks put up all the bank financing and bond deals to fund the deal.  The target company or the real estate properties acquired insiders make a killing.  The private equity firms make money even if the company goes bankrupt. The state pension and college endowments may make money, or lose billions. Employees of target companies lose benefits and jobs, and are saddled with monstrous amounts of new debt. Classically, before a company is approached by a private equity firm, the target company–as the private equity likes to call them, has 80% in equity and 20% in debt. After the private equity firm purchases the company, the company ends up with 80% debt and 20% equity.

 If you think problems are bad with subprime mortgages are bad, wait until the private equity loans start coming due in a couple of years. There were roughly 100 private equity deals to go bankrupt in 2009 as companies struggled with monstrous debts.

And now CalPERs, the California pension giant is coming into the spotlight, as it should. For the record, CaLPERs, the pot of the gold for Wall Street at the end of the rainbow, not only invests billions in private-pirate equity deals, it also has ownership stakes in Apollo Management Group, The Carlyle Group, Silver Lake Partners and Yucaipa–the firm owned by billionaire Ronald Burkle , the firm where former President Bill Clinton went to work after the presidency to make a $100 million or so. But CalPERs investment of $600 million in Apollo in July 2007 has been a dud for a 9% interest in the firm, the value in Apollo has dropped about 66%.

At issue is the recent suit brought by California’s attorney general Jerry Brown’s office about placement agents–middlemen–used to secure business from the lucrative CalPERs pension fund.  It appears Arvco Capital Research LLC, which employed former CalPERs chief executive Fred Buenrosto and Alfred Villalobos, a former CalPERs board member, for its role in allegedly bribing or trying to bribe CalPERs officials to purchase a stake in the Apollo Global Management–which it did.

Arvco obtained more than $47 million in fees from money managers  in dealing with CalPERs between 2005 and 2009, the attorney general suit maintains. The suit also maintains that when CalPERs was contemplating a purchase in Apollo, Arvco’s Villalobos rented a private jet and flew Senior Investment Officer Leon Shanian to New York City to attend a fund-raiser honoring Leon Black, founder of the Apollo Group at the Museum of Modern Art in May 2007, as CalPERs did fork over $700 in July.

A Superior court judge in Los Angeles on May 5 ordered Mr Villalobos bank account and other assets frozen. Jerry Brown’s office said assets included two Bentleys, two BMWs, a Hummer, art work and 14 pieces of property. A good case to watch…a black eye for CaLPERS and private equity…

“In gambling, the many must loose so that the few may win.” George Bernard Shaw

Las Vegas, Nevada. In visiting Las Vegas, arriving at the airport, I am pleasantly surprised by the new sparkle of much of the airport terminal. Later, I am totally mesmerized at the immensity of Las Vegas. Having never visited, I take a cab downtown. The sprawl and massive proportions of all the casinos as far as I can see. One casino is  the shape of a giant pyramid. I think to myself, what will Las Vegas look like 100 years from now? Will its fate be like the great pyramids of Egypt, with nothing left but immense scale , sand, faded poker chips and hallucinations of Elvis?

I wonder. I am totally hypnotized by the bright lights of Las Vegas, the light shows. If there is such a thing as American ingenuity to entertain, ground zero has to be Las Vegas. We are the masters of the universe. It is showtime 365 days a year, 24 hours a day. It is the brothel to America. The ultimate party. You can drink, smoke, gamble and eat non stop.  The only thing to stop you is running out of money. 

 And in another cab ride I take after a night on the town, I realize again all of us in America have much to be grateful for. The cabbie  was born in Cuba, got an industrial engineering degree in Russia. Escaped Cuba over twenty years ago with nine close friends of his in a  small boat. In the end, only five of them made it, four of them died..  They drifted off course in the Gulf of Mexico,  spent 23 days at sea, and where their small boat was swamped most of the time. The Mexican Coast Guard picked them up, and later they were picked up by the U.S. Coast Guard. My cab drive spent 31 days in a hospital recuperating. He loves America and democracy. He realizes it is tough  in America, but he loves it nevertheless.  Another cabbie who gave me a ride earlier in the week originally came from Ethiopia. He loves America too, but he said he is also quite worried. He says wealth in America seems to go to the very few, like the casino operators.

It was not always that way.

Las Vegas reminds me  of Wall Street and the capitalism we have in America today. Casino capitalism. Casino America. The Casino Age. A Casino Age which has shifted into overdrive, an economy that moves from one bubble to the next, with a media and population, because elites control the media, in a continual state of denial and amnesia. Continual. What bubble?  Eighteen months ago people’s savings in mutual funds took a haircut of biblical proportions. Yet today,  the cable television business stations tell us, party on, the water is fine, come on in Garth.  Yet the media does a shitty job in educating the public.   Their job is to sell advertising to the very companies that want to control your money.

It is winner take all capitalism. A predator state, as James Galbraith, reminds us. In the nineties we had the technology bubble where technical geeks turn into multimillionaires selling companies that never turned a profit. In only a half-dozen more years later, we creat zombie gazillionaires by essentially looting the public by selling crappy mortgages with government blessings. And when you look at it, it always flows back to Wall Street and the banks. Always. Follow the money. Joe Six-Pack, who is leveraged to the hilt, puts $500 bucks a month into his volatile mutual 401(k) because the Empire tells him to do so. 401(k) money is sent to a mutual fund company, who in turns buys shares of banks like Citigroup, Bank of America, Goldman Sachs, Wachovia, Moody’s, New Century Financial, Countrywide and so on. These companies make massive amounts of money, swiping more than 50% of profits of the top for themselves in the form of compensation. Mutual funds prove to be useless in overseeing companies, which they are. Government gets in be with the mutual fund companies, making mutual funds default investments for 401(k)s. Market collapses in 2008, and Joe Six-Packs account gets hammered, not the executive nor the fund company. Joe Six-Pack is now underwater with his Alt A or subprime mortgage, and may lose his home. But the companies that helped create the collapse, well, Joe Six-Pack has to bail them out.

Then some of the banks that fail are bought by private equity firms, with assistance from the taxpayer. But in the end, the private equity leveraged buyout play is to flip the bank again into the markets, back again to the mutual fund companies. Financier gets to get his income taxed at capital gains rates, a sweetheart deal if there ever was one.  A vicious circle with other people’s money, and in the press trumpeted as a virtue of the American financier.  Joe Six-Pack does not own a home anymore, can’t send his kids to college, and the retirement savings bin is empty, he had to cash out the hammered 401(k) and get clobbered in taxes just to pay his bills.

What do I also see in Las Vegas? I see people who should not be gambling, smoke too much, have tattoos from head to toe and body piercings which make them look like Zulu warriors.  I see some very overweight people, who if they are not already diabetic, are well on their way. I see a troubled casino industry built on pyramids on junk bond debt like Harrah’s which went private with over $30 billion in debt commandeered by the so-called financier experts, the Apollo Group and Texas Pacific Group, who in turn sold these risky bonds to the very mutual funds But those bonds have not reset yet, but they are an income tidal wave, in a year or two. Joe Six-Pack owns these bonds in his mutual fund and does not even know it.

 And these folks are not alone, Morgan Stanley just walked away from a $2.6 billion investment in Revel Casino in Atlantic City.Then there is the Trump Resorts there, last we heard they were in bankruptcy.  Colony Capital is involved, Credit Suisse is involved, heck even Avenue Capital, where Chelsea Clinton used to work, is involved. Casino gambling was sold as a panacea to New Jersey’s financial ills…

But heck, I am in Las Vegas. And what happens in Las Vegas, stays in Las Vegas.

“Chancellor University in Cleveland, which counts Jack Welch as an investor and features a weekly video for students by the former General Electric chief executive, explicitly focused recruiting efforts on local shelters after it realized that Phoenix, owned by Apollo Group, was doing so.” David Golden, Bloomberg Businessweek, May 3-9 2010

In 2008, a group of investors bought a not- for- profit Myers University in Cleveland out of receivership, and renamed the school Chancellor.  A year later, Jack Welch, once know as “Neutron Jack” for his nickname as he would fire employees at the drop of a hat while he was at General Electric, acquired a stake in Chancellor and had the school name a new masters degree in business administration program after him.

Welch is a very wealthy man, and when he retired from General Electric in 2002, according to the compensation consultant Graef Crystal, he was worth about $900 million. By various estimates, General Electric unfunded pension liabilities are some of the largest in U.S. industry, yet in 2002 Welch received a pension of $9 million for life.  And when he was going through his second divorce, as part of his retirement, it came out that he got use of GE’s Manhattan Central Park West apartment which reportedly cost $80 thousand a month to operate.  He also got use of a Boeing 737 which would cost $291 thousand per month to operate, floor level tickets to the New York Knicks, court side seats to the U.S. Open, satellite TV in all of his four homes. By the way, all costs associated with the New York apartment including from wine to laundry were also included. As Crystal went on to say to assert, and according to SEC documents, Welch’s benefits were “unconditional and irrevocable.” As Crystal the compensation consultant went on, “This is an indictment of G.E.’s board of directors. This is the most appalling use of corporate assets. No one had any idea of the magnitude of what the company was giving him.”

Even with General Electric loosing about half of its market value in the past few years, Welch is still a very wealthy man. He went on to become a special partner in the private equity firm  of Clayton, Dublier & Rice in 2007.  He gets to grab the microphone on CNBC business channel pretty much as will.  And he gets to write supposedly witty columns with his new wife….

Yet the idea that Welch is trying to make a profit in his retirement years exploiting students living in homeless shelters and halfway houses is disgusting. For more information, read the May 3, 2010 article by David Golden, “Hardselling for the Homeless” in Bloomberg Businessweek. www.businessweek.com.

Oh well, Jack, you can always to Nantucket, it is that time of the year, and there are The Pirates of Nantucket…far away from the homeless from Cleveland.

Jon Winkelreid, the retiring co-president from Goldman Sachs, who made $67.5 million in total compensation in 2007, and who had $318 million in Goldman stock, $40 million in hedge funds and private equity, had to put his Nantucket house up for sale for a paltry $55 million in 2008. Appears Winkelreid was getting short on cash. Winkelreid’s Nantucket estate had 5.75 acres, a home which included six bedrooms, a wine room, cedar closets, a billiard room and three fire places. The second home on the property included four bedrooms and four and one half baths.

Jeffrey Peek, the former CEO of CIT Group, the New York financial company which crashed into the rocks despite getting $2.33 billion in TARP money, has a home on Nantucket and Westchester, and is known for his lavish parties at his Upper East Side apartment. Peek used to work at Merrill Lynch and Credit Suisse, and now that the company has collapsed, John Thain runs CIT.

David Rubinstein, the co-founder of the giant private equity firm the Carlyle Group, a former deputy policy advisor under Jimmy Carter, is so wealthy he has a Georgian-styled home in Bethesda Maryland. Rubinstein also has a 10,000 square foot chalet in Beaver Creek Colorado as well as a Nantucket compound capable of sleeping 30 people overnight. Carlyle Group also has a $1 billion investment with Apollo Group, another for profit college which was just fined $78.5 million for its over aggressive college loan lending practices. Appears all the big money is in education these days…Goldman Sachs now owns 38% of Education Management Corp in Pittsburg. JPMorgan Chase and Citigroup, are the biggest private student loan lenders behind Sallie Mae.

Former IBM president Louis Gerstner, also a Carlyle Group private equity titan, also summers in Nantucket. And Abigail Johnson, heir to the Fidelity fortune, summers there. So does the very wealthy senator John Kerry and his very wealthy wife Teresa Heinze.

And then there is Gerald W. Schwartz, CEO of the giant Canadian private equity firm Onex, which purchased Raytheon aircraft division renaming it Hawker for $3.3 billion in 2007…with Goldman Sachs as its co-investor…

And so it goes…Jack Welch and The Pirates of Nantucket…people are homeless, and they are gassing up the G-4 and heading to Nantucket.