Abolish the debt that is drowning Puerto Rico

We need to organize for immediate disaster relief for Puerto Rico–but we can also expose and oppose the debt disaster that came before the hurricanes.

October 11, 2017

Families begin to rebuild after the hurricane in Patillas, Puerto Rico (Andrea Booher | Wikimedia Commons)

SOCIALIST WORKER supports President Trump in his call to cancel Puerto Rico’s punishing debt.

We can pretty much guarantee you’ll never see the first five words of that sentence here ever again–and the supervisors of the “adult day care center” at 1600 Pennsylvania Avenue are obviously trying like hell to make sure we never have reason to.

But it says a lot about the Wall Street-made catastrophe that has plagued Puerto Rico for years before Hurricane Maria that even a reactionary fanatic like Trump didn’t think twice before stating the obvious.

“They owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out,” Trump said in an interview last week with Geraldo Rivera of Fox News. “I don’t know if it’s Goldman Sachs, but whoever it is, you can wave goodbye to that.”

“Wall Street promptly freaked out,” Politico reported the next day. That was an understatement. Heavy trading on the normally stable bond market pushed the value of Puerto Rico’s general obligation bonds–already devalued to 56 cents on the dollar after the island effectively declared bankruptcy earlier this year–down to 37 cents on the dollar.

The White House then “move[d] swiftly to clean up Trump’s seemingly offhand remarks,” Politico continued. Again an understatement. Office of Management and Budget Director Mick Mulvaney was rushed in front of a television camera to tell CNN: “I wouldn’t take it word for word with that.”

Just to make sure Wall Street got the message that no one in the Trump administration had any intention of doing what the head of the Trump administration had just said, Mulvaney was more explicit–and more contemptuous of the Puerto Rican people–in a second interview with Bloomberg: “We are not going to bail them out. We are not going to pay off those debts.”

Anyone want to bet that Trump doesn’t talk about “saying goodbye” to Puerto Rico’s debt again?

But the simple fact is that justice demands exactly that: The cancelation of all of Puerto Rico’s debt repayments, by the action of the U.S. government, taking responsibility for the Wall Street loan sharks who inflicted the damage in the first place.

Puerto Rico is caught in the same kind of debt trap that has ensnared poor countries in hock to the International Monetary Fund and World Bank–or more advanced economies like Greece, at the hands of European bankers and bureaucrats. The aim is to force vulnerable societies to knuckle under to the will of the ruling class.

And now, the devastation of neoliberal policies has made Puerto Rico’s crisis following Hurricanes Irma and Maria much, much worse.

People who want to show solidarity with Puerto Rico today will rightly focus on ways to provide immediate relief to communities desperate for food, water and critical supplies. SW hopes its readers will raise what money they can to donate to grassroots efforts–see the What You Can Do box with this article.

But we have another job to do now, while Puerto Rico lingers in the media spotlight: expose the debt trap that made the island more vulnerable when Maria struck and demand that it end.

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IN MAY of this year, Puerto Rico’s government went to federal court to file for the equivalent of bankruptcy on a debt that includes over $74 billion in repayments on government bonds and $49 billion in pension obligations. But in return for immediate relief, Puerto Rico will have to abide by even harsher austerity dictates.

The debt burden–which is larger than the annual economic output of the island when pension obligations are added in–is one consequence of a recession that has lasted for more than a decade.

The economic slump began when Corporate America–after many years of making super-profits off operations in Puerto Rico, particularly pharmaceutical production–abandoned the island after favorable tax incentives for investment were phased out starting in the early 2000s. Annual corporate investment in Puerto Rico peaked at 20.7 percent of gross domestic product in 1999–it has fallen to under 7.9 percent as of 2016.

Successive governments–whether led by New Progressive Party, which is aligned with the U.S. Republicans, or the Popular Democratic Party, tied to the Democrats–imposed policies that were guaranteed to make the crisis worse: neoliberal austerity.

Social spending was cut drastically–reductions in the island’s education budget led to hundreds of schools being closed, for example. Public-sector workers have been under intense pressure, with tens of thousands of layoffs and attacks on their unions. Regressive taxes have been hiked, making the sales tax of 11.5 percent higher than any U.S. state.

A succession of state assets were privatized on terms guaranteed to benefit the private purchasers: Back in the 1990s, conservative Gov. Pedro Rosselló González sold off hospitals that were part of a public health care system that was once fairly accessible and affordable at around half their market value.

Austerity measures propelled the vicious circle: Continuing economic decline made shortfalls in government revenues worse, leading to more spending cuts and regressive taxes that caused further economic contraction, and on and on.

The consequences even before Hurricane Maria were dire: Official unemployment is 11.7 percent, well over double the rate in the U.S. as a whole. Just under half of people on the island live in poverty, including three in five children.

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THROUGH IT all, debt was the straitjacket to make sure Puerto Rico didn’t stray from austerity.

Faced with declining revenues as a result of the contracting economy, various branches and agencies of the Puerto Rican government issued bonds to raise money–but these came not only with the usual obligation to repay the cash with interest, but increasing pressure to intensify neoliberal measures.

The vultures of Wall Street were eager to set up the increasingly complex bond issues. They paid better than most municipal issues, and interest on income from Puerto Rico bonds is exempt from city, state and federal taxes.

But the biggest gamblers on Wall Street see more than a tax loophole in the suffering of the people of Puerto Rico. A 2015 report from the Hedgeclippers.org website paints an ugly picture:

Several groups of hedge funds have bought up large chunks of Puerto Rican debt at discounts and have also pushed the island to borrow at extremely favorable terms for creditors. Hedge fund managers are also recommending the implementation of austerity measures.

Known as “vulture funds,” these investors have followed a similar game plan in other debt crises, in countries such as Greece and Argentina. The spoils they ultimately seek are not just bond payments, but structural reforms and privatization schemes that give them extraordinary wealth and power–at the expense of everyone else.

It’s been obvious for several years that Puerto Rico’s debt burden is unpayable, but the hedge-fund vultures are counting on enforcers in the form of the U.S. government.

A law pushed through Congress last year by Barack Obama and the Democrats established a seven-person Fiscal Control Board with broad powers to direct government agencies on the island and dictate laws and policies. It has ordered, for example, exemptions to federal standards on the minimum wage, Medicaid and Temporary Assistance to Needy Families.

To top it off, the seven members of the board include some of the same financiers who imposed neoliberal policies and arranged the deals that caused the debt burden.

Bondholders may still be forced to take a “haircut”–that is, accept less than what they are owed on Puerto Rico’s bonds. But the mission of the Fiscal Control Board is to make sure working people on the island, not investors, pay as much of the price as possible.

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ALL THIS “reads like the 21st century equivalent of the metropolitan looting of wealth from the colonies,” as Lance Selfa wrote for SocialistWorker.org after Hurricane Maria struck Puerto Rico head on.

And we know who the looters and their accomplices are.

The hedge-fund parasites who are trying to inflict more suffering on Puerto Rico rather than lose a penny from their investment gambles should face pickets outside their offices. Members of Congress–Republican and Democrat alike–should be greeted at public events by solidarity activists demanding that they remove the noose that is strangling the island.

There is much work to be done to organize for immediate relief in Puerto Rico after the hurricane catastrophe. But the left has an opportunity to also expose and oppose the unnatural disaster that came before Irma and Maria.

We may not hear any more about canceling the debt from Donald Trump, but we can raise our own voices to demand that this crushing burden be lifted off the people of Puerto Rico.

https://socialistworker.org/2017/10/11/abolish-the-debt-that-is-drowning-puerto-rico

What is driving the stock market panic?

18 January 2016

Banks, hedge funds and governments all over the world are entering a new week of trading with fear and trepidation. The US markets are closed Monday for the Martin Luther King Jr. holiday, but one can be certain that the Federal Reserve, the major Wall Street banks and the Obama administration will continue to be involved in intensive behind-the-scenes discussions with their international counterparts following the most disastrous two-week start of a new year in history.

Friday’s panic sell-off on stock markets from China and Europe to the US, with the Dow giving up 391 points and crashing through the 16,000 point barrier, capped off two weeks that erased $5.7 trillion from global share values.

The current sell-off, which has officially thrown stocks in the US and Europe into correction territory (more than 10 percent below recent highs) and the Chinese exchanges into bear market mode (down by more than 20 percent), has been fueled by mounting signs of stagnation and slump in the real economy. These include a sharp slowdown in China, plummeting prices for oil and other industrial commodities and new signs of economic deceleration in the US.

The mood spreading within financial circles was summed up by the Royal Bank of Scotland’s credit team, which sent a note advising clients that 2016 could be a “cataclysmic year” and urging them to “sell everything except high quality bonds.”

Warning that “in a crowded hall, exit doors are small,” the note predicted that major stock markets could fall by 20 percent and oil could drop from its current already depressed level of $29 a barrel to $16. “China has set off a major correction and it is going to snowball,” the note added.

The mood of foreboding is compounded by the intersection of economic turmoil with intensifying geopolitical conflicts and escalating wars, alongside political crises and mounting social tensions in country after country. The fact that the financial eruptions are playing out against the backdrop of a presidential election in the US that is already revealing a profound crisis of the American two-party system heightens the general sense of apprehension.

Whatever the short-term turn in the markets, the turbulence that has marked the new year reflects profound and deepening contradictions within the world capitalist system. After more than seven years of bailouts and trillions in virtually free cash for the banks and financial markets, compliments of central banks and governments in the US, Europe and Asia, the real economy has not only not recovered from the Wall Street crash of 2008, it is rapidly deteriorating.

The working class has been hammered with mass layoffs, wage cuts and austerity, while the rich and the super-rich have gorged themselves with profits derived from parasitic and socially destructive financial activities such as stock buybacks and mergers and acquisitions.

Wal-Mart’s announcement Friday that it is shutting 269 stores and slashing 16,000 jobs, including 154 stores and 10,000 jobs in the US, exposes the real state of economic and social conditions in America behind the official talk of economic “recovery”—epitomized just three days before in President Obama’s delusional State of the Union depiction of the US economy. “Anyone claiming that America’s economy is in decline is peddling fiction,” the president boasted.

The closure of these stores—coming on the heels of multi-store closure announcements by Macy’s and Sears-Kmart—means severe hardship for communities where Wal-Mart is the main employer and retail outlet. US industry is in a recession, as is freight transport. Some 40,000 coal mining jobs have been wiped out and coal production has fallen by 15 percent since 2008.

Now, record high levels of debt, in the form of emerging market corporate bonds, energy junk bonds and speculative bets on currencies and commodities, are threatening to implode along with inflated stock values. The underlying and deepening crisis in the real economy—starved of investment in the productive forces and the social infrastructure—is undermining the massive edifice of financial assets that has been built up on the basis of speculation, debt and outright swindling.

The decision of the Federal Reserve to begin raising interest rates, despite its intention to do so gradually and incrementally, intensifies the debt crisis and sends new shock waves through global currency markets, already roiled by a 35 percent rise in the dollar since 2011.

Even more fundamentally, profit rates are being squeezed. Last Monday, Alcoa reported a $500 million net loss in the fourth quarter of 2015. The earnings of Standard & Poor’s 500 companies are estimated to have fallen 4.7 percent during the quarter, the second straight quarterly decline. S&P 500 firms are expected to show zero profit growth for all of 2015.

The focus of attention is on the slowdown and crisis in China because the world’s second largest economy and major cheap-labor manufacturing platform has played such an oversized role in propping up world capitalism, especially since the 2008 crash. But the problems in China are an expression of a global crisis whose real center is the United States.

The rise of China as a global economic force is bound up with the precipitous decline of American capitalism, which is at the heart of the world capitalist crisis. The transformation of the Maoist-ruled country into a bastion of cheap labor and super-exploitation for the transnational corporations is the obverse of the decay of American industry and the increasingly predominant role of financial speculation in the US economy.

For decades, Wall Street has fueled one speculative bubble after another—the “Asian tigers,” the dot.com frenzy, the subprime mortgage scam—each of which has collapsed and given way to the next financial bubble. Meanwhile, the social infrastructure of the country has been left to rot and the working class driven ever deeper into economic insecurity and poverty.

The most significant underlying factor behind the threatened collapse of the current financial house of cards is the growth of working class resistance. The Chinese regime, corrupt to its bones, is fearful of the social and political implications of carrying through the scorched earth privatizing and job-slashing policies demanded by international capital and favored by the present ruling clique.

The massive Chinese working class is already stirring. Last year, the number of strikes and labor protests more than doubled compared to the previous year, and December saw a record high total of such struggles.

In the US, the ruling class is acutely aware of the growth of working class resistance, reflected in the mass opposition of autoworkers to the contracts rammed through by the United Auto Workers at the end of 2015, and this month by the sickouts organized by Detroit teachers independently of and in opposition to the teachers union. The growth of working class militancy and anti-capitalist sentiment, and the erosion of the grip of the right-wing corporatist unions, fills the corporate-financial elite and its political mouthpieces with dread.

Barry Grey

 

http://www.wsws.org/en/articles/2016/01/18/pers-j18.html

Robert Reich: Martin Shkreli is just a product of American capitalism

WEDNESDAY, DEC 23, 2015 12:15 AM PST

The only thing that set the pharmaceutical exec apart was his brashness, laments the former secretary of labor

ROBERT REICH, ROBERTREICH.ORG

This originally appeared on Robert Reich’s blog.

Martin Shkreli, the former hedge-fund manager turned pharmaceutical CEO who was arrested last week, has been described as a sociopath and worse.

In reality, he’s a brasher and larger version of what others in finance and corporate suites do all the time.

Federal prosecutors are charging him with conning wealthy investors.

Lying to investors is illegal, of course, but it’s perfectly normal to use hype to lure rich investors into hedge funds. And the line between the two isn’t always distinct.

Hedge funds are lightly regulated on the assumption that investors are sophisticated and can take care of themselves.

Perhaps prosecutors went after Shkreli because they couldn’t nail him for his escapades as a pharmaceutical executive, which were completely legal – although vile.

Shkreli took over a company with the rights to a 62-year-old drug used to treat oxoplasmosis, a devastating parasitic infection that can cause brain damage in babies and people with AIDS. He then promptly raised its price from $13.50 to $750 a pill.

When the media and politicians went after him, Shkreli was defiant, saying “our shareholders expect us to make as much as money as possible.” He said he wished he had raised the price even higher.

That was too much even for the Pharmaceutical Research and Manufacturers of America, Big Pharma’s trade group, which complained indignantly that Shkreli’s company was just an investment vehicle “masquerading” as a pharmaceutical company.

Maybe Big Pharma doesn’t want to admit most pharmaceutical companies have become investment vehicles. If they didn’t deliver for their investors they’d be taken over by “activist” investors and private-equity partners who would.

The hypocrisy is stunning. Just three years ago, Forbes Magazine praised Shkreli as one of its “30 under 30 in Finance” who was “battling billionaires and entrenched drug industry executives.”

Last month, Shkreli got control of a company with rights to a cheap drug used for decades to treat Chagas’ disease in Latin America. His aim was to get the drug approved in the United States and charge tens of thousands of dollars for a course of treatment.

Investors who backed Shkreli in this venture did well. The company’s share price initially shot up from under $2 to more than $40.

While other pharmaceutical companies don’t raise their drug prices fiftyfold in one fell swoop, as did Shkreli, they would if they thought it would lead to fat profits.

Most have been increasing their prices more than 10 percent a year – still far faster than inflation – on drugs used on common diseases like cancer, high cholesterol, and diabetes.

This has imposed a far bigger burden on health spending than Shkreli’s escapades, making it much harder for Americans to pay for drugs they need. Even if they’re insured, most people are paying out big sums in co-payments and deductibles.

Not to mention the impact on private insurers, Medicare, state Medicaid, prisons and the Veterans Health Administration.

And the prices of new drugs are sky-high. Pfizer’s new one to treat advanced breast cancer costs $9,850 a month.

According to an analysis by the Wall Street Journal, that price isn’t based on manufacturing or research costs.

Instead, Pfizer set the price as high as possible without pushing doctors and insurers toward alternative drugs.

But don’t all profit-maximizing firms set prices as high as they can without pushing customers toward alternatives?

Unlike most other countries, the United States doesn’t control drug prices. It leaves pricing up to the market.

Which enables drug companies to charge as much as the market will bear.

So what, exactly, did Martin Shkreli do wrong, by the standards of today’s capitalism?

He played the same game many others are playing on Wall Street and in corporate suites. He was just more audacious about it.

It’s easy to go after bad guys, much harder to go after bad systems.

Hedge fund managers, for example, make big gains from trading on insider information. That robs small investors who aren’t privy to the information.

But it’s not illegal unless a trader knows the leaker was compensated – a looser standard than in any other advanced country.

Meanwhile, the pharmaceutical industry is making a fortune off average Americans, who are paying more for the drugs they need than the citizens of any other advanced country.

That’s largely because Big Pharma has wielded its political influence to avoid cost controls, to ban Medicare from using its bargaining clout to negotiate lower prices, and to allow drug companies to pay the makers of generic drugs to delay their cheaper versions.

Shkreli may be a rotten apple. But hedge funds and the pharmaceutical industry are two rotten systems that are costing Americans a bundle.

 

 

 

http://www.salon.com/2015/12/23/robert_reich_martin_shkreli_is_just_a_product_of_american_capitalism_partner/?source=newsletter

The Tech Industry Bubble Is About To Burst

Posted Jun 26, 2015 by Tallat Mahmood

Tallat Mahmood is founder and managing director of SkyPanther Capital and founder of Funding Your Tech Startup.

Euphoric reaction to superstar tech businesses is rampant — so much so that the tech industry is in denial about looming threats. The tech industry is in a bubble, and there are sufficient indicators for those willing to open their eyes. Rearing unicorns, however, is a distracting fascination.

The Perfect Storm

Raising funding for tech startups has never been so easy. Some of this flood of money has been because of mutual funds and hedge funds, including Fidelity, T. Rowe Price and Tiger Global Management. This is altering not only the funding landscape for tech startups, but also valuation expectations.

There are many concerns that valuations for businesses are confounding rationale. Entrepreneurs and their investors are deviating from more traditional valuation and performance metrics to more unconventional ones. Another cause cited for increasing valuations is the trend of protections for late investors that cause valuations to inflate further. The combination of a number of these factors has put the sector into a state of artificial valuations.

Meanwhile, the companies themselves are burning through cash like there is no tomorrow. Throwing money at marketing, overheads and, in particular, remuneration has become the accepted investment strategy for startup growth. All this does is perpetuate the vicious cycle of raising more money and spending more money. For the amounts that some of these businesses have raised, the jury is still out on actual profitability.

Unicorn Season

CB Insights publishes information on unicorns (companies with a valuation above $1 billion), which shows that access to the club has become increasingly less exclusive in the last couple of years. The chart below shows that the number of companies valued at $1 billion or above in 2014 exceeded previous years by quite some margin (47 unicorns joined the club in 2014 vs. 7 and 8 in 2012 and 2013, respectively). In addition, for the first 5 months of 2015, this trend shows no signs of abating (32 new unicorns as of June 1, 2015).

Different Experts, Same Conclusion

In the face of these trends, a small group of well-respected and influential individuals are voicing their concern. They are reflecting on what happened in the last dot-com bust and identifying fallacies in the current unsustainable modus operandi. These relatively lonely voices are difficult to ignore. They include established successful entrepreneurs, respected VC and hedge fund investors, economists and CEOs who are riding their very own unicorns.

Mark Cuban is scathing in his personal blog, arguing that this tech bubble is worse than that of 2000, because, he states, that unlike in 2000, this time the “bubble comes from private investors,” including angel investors and crowd funders. The problem for these investors is there is no liquidity in their investments, and we’re currently in a market with “no valuations and no liquidity.” He was one of the fortunate ones who exited his company, Broadcast.com, just before the 2000 boom, netting $5 billion. But he saw others around him not so lucky then, and fears the same this time around.

A number of high-profile investors have come out and said what their peers all secretly must know. Responding to concerns raised by Bill Gurley (Benchmark) and Fred Wilson (Union Square Ventures), Marc Andreessen of Andreessen Horowitz expressed his thoughts in an 18-tweet tirade. Andreessen agrees with Gurley and Wilson in that high cash burn in startups is the cause of spiralling valuations and underperformance; the availability of capital is hampering common sense.

The tech startup space at the moment resembles the story of the emperor with no clothes.

As Wilson emphasizes, “At some point you have to build a real business, generate real profits, sustain the company without the largess of investor’s capital, and start producing value the old fashioned way.” Gurley, a stalwart investor, puts the discussion into context by saying “We’re in a risk bubble … we’re taking on … a level of risk that we’ve never taken on before in the history of Silicon Valley startups.”

The tech bubble has resulted in unconventional investors, such as hedge funds, in privately owned startups. David Einhorn of Greenlight Capital Inc. stated that although he is bullish on the tech sector, he believes he has identified a number of momentum technology stocks that have reached prices beyond any normal sense of valuation, and that they have shorted many of them in what they call the “bubble basket.”

Meanwhile, Noble Prize-winning economist Robert Shiller, who previously warned about both the dot-com and housing bubbles, suspects the recent equity valuation increases are more because of fear than exuberance. Shiller believes that “compared with history, US stocks are overvalued.” He says, “one way to assess this is by looking at the CAPE (cyclically adjusted P/E) ratio … defined as the real stock price (using the S&P Composite Stock Price Index deflated by CPI) divided by the ten-year average of real earnings per share.”

Shiller says this has been a “good predictor of subsequent stock market returns, especially over the long run. The CAPE ratio has recently been around 27, which is quite high by US historical standards. The only other times it is has been that high or higher were in 1929, 2000, and 2007 — all moments before market crashes.”

Perhaps the most surprising contributor to the debate on a looming tech bubble is Evan Spiegel, CEO of Snapchat. Founded in 2011, Spiegel’s company is a certified “unicorn,” with a valuation in excess of $15 billion. Spiegel believes that years of near-zero interest rates have created an asset bubble that has led people to make “riskier investments” than they otherwise would. He added that a correction was inevitable.

What Does A Bubble Look Like?

To shed light on how close we may be to the tech bubble bursting, it is worthwhile trying to understand what determines being in a bubble. Typically, this refers to a situation where the price of an asset exceeds by a large margin its fundamental value.

In his 1986 book Stabilizing an Unstable Economy, economist Hyman Minsky’s theory of financial instability attracted a great deal of attention, and gathered an increasing number of adherents following the crisis of 2008-09. Minsky identified five stages that culminate in a bubble, as described in this Forbes article: displacement, boom, euphoria, profit taking, and panic.

Uber is an enviable company for much of what it has achieved, and the team is to be commended for how they have grown this business, as well as their previous successes. However, it serves as a good example to illustrate the dynamics of the tech bubble.

Displacement:Investors’ excitement with a new paradigm, such as advances in technology or historically low interest rates. The explosion of the “sharing economy” has resulted in companies such as Uber, Lyft and Airbnb growing exponentially in recent years by taking advantage of this new mode of operation.

Boom:Prices rise slowly at first, but then gain momentum as more participants enter the market. Fear of missing out (FOMO) attracts even more participants. Consequently, publicity for the asset class in question increases. Reviewing investment rounds for Uber since 2010 when they completed their seed round shows a large variety of investors wanting a piece of the action, perhaps in part due to a fear of missing out on the golden goose. The introduction of hedge funds and investment banks funding the business can also be seen, which underlines the facelift happening in this sector.

Euphoria:Asset prices increase exponentially; there is little rationale evident in decision making. During this phase, new valuation measures and metrics are touted to justify the unrelenting rise of asset prices. Uber’s increased valuation between funding rounds symbolizes the euphoria around the business. The chart below shows the evolution of Uber’s pre-money valuation over the last number of funding rounds.

 

Although the pace of revenue growth at Uber is astounding (doubling approximately every 12 months at the moment), profitability is less certain. Profitability margins should increase over time as recognition and saturation are achieved in newer markets, but it is difficult to ignore the regulatory burdens and lawsuits the business is facing, which could steer it off course.

Profit taking:The few that have identified what’s going on are making their profit by selling their positions. This is the right time to exit, but is not seen by the majority. This is the next indicator on the horizon that will underline that we are in a tech bubble, and that it is about to burst. The catalyst for profit taking could be regulatory strains or excessive cash consumption that isn’t reflected by profitability gains in startups. Savvy investors will take the opportunity to exit while valuations are still high. The exits may well be too late for investors who are further behind on the FOMO curve or new types of investors who don’t appreciate that the market has moved.

Panic:By now it’s too late and asset prices collapse as rapidly as they once increased. With everyone trying to cash in realizing the situation, supply outstrips demand and many face big losses. Watch this space for the unfortunately impending examples.

Conclusion

The fact that we are in a tech bubble is in no doubt. The fact that the bubble is about to burst, however, is not something the sector wants to wake up to. The good times the sector is enjoying are becoming increasingly artificial. The tech startup space at the moment resembles the story of the emperor with no clothes. It remains for a few established, reasoned voices to persist with their concerns so the majority will finally listen.

 

The Tech Industry Is In Denial, But The Bubble Is About To Burst

Wall Street buybacks: Another expression of parasitism

29 May 2015

In the biological world, a parasite lives at the expense of the host, sucking out its nutrients and life forces, and sometimes killing it. Analogies of course have their limits, but nonetheless they can be suggestive. And this is certainly so in the case of the rampant financial parasitism that has become the dominant feature of the American economy and, by extension, the world economy as a whole.

An article published in the Wall Street Journal this week details some of the impact of hedge funds on the operations of major US corporations, and the way in which their insatiable drive for profit through financial manipulations is sucking the lifeblood out of the economy and contributing to its deepening breakdown.

The article is based on a study conducted for the newspaper by S&P Capital IQ. It found that companies in the S&P 500 index had “sharply increased their spending on dividends and [share] buybacks to a median 36 percent of operating cash flow in 2013, from 18 percent in 2003.” The doubling of this rate was accompanied by a fall in spending by those companies on plant and equipment, from 33 percent to 29 percent over the same period.

The study found that in companies targeted by so-called “activist investors”—that is, hedge funds that hold hundreds of millions and sometimes billions of dollars on behalf of their wealthy investors—the figures were even higher. Targeted companies reduced capital spending from 42 per cent to 29 percent of operating cash flow and increased spending on dividends and share buybacks to 37 percent of operating cash flow from 22 percent.

One of the main factors facilitating these operations has been the provision of ultra-cheap money by the US Federal Reserve, which has kept official interest rates at almost zero, leading to historically low interest rates in financial markets. Hedge funds are able to use borrowed money to acquire major share holdings in corporations and then push for share buybacks and the payment of increased dividends. The buybacks, in turn, can be financed through borrowed funds at low interest rates.

The aim is to produce a rise in the share price of the company or generate an increased dividend flow returning large profits for the “activists,” often accompanied by job cuts or the outright closure of parts of the targeted company deemed not to be making a sufficient contribution to “shareholders’ funds.” At the end of the process, vast profits have been pocketed, without a single atom of new wealth being created, while productive capacity has been curtailed.

The consequences of these vampire-like operations are most prominent in major industries. The US energy giants, which have splurged billions on buybacks, dividends and mergers, have refused for decades to invest in infrastructure, leading to a situation where workers are subjected to 16-hour days and increasingly unsafe working conditions. Likewise, the auto industry firms and telecoms are notorious for their resistance to wage increases, while engaging in the same financial manipulation.

The deeper the economic crisis, the more frenzied the speculation. The article noted that since 2010 the number of activist campaigns directed at securing buybacks and increased dividends had risen by 60 percent. Last year there were 348 such campaigns, the most since 2008, and a further 108 in the first quarter of this year. Hedge funds now control $130 billion in assets, more than double the amount they held in 2011. This means that once they leverage these funds through borrowing at ultra-low rates, they can target virtually any corporation.

Would-be reformers of the capitalist economy will no doubt argue that these dangers can be overcome through the development of mechanisms or increased regulations to promote the “good” side of corporate activity—research and development and real investment—while taking action to control the “bad” side—parasitism. But the question remains: Why has it emerged now?

Underlying tendencies at the very center of the capitalist economy are at work. The long-term downward pressure on the rate of profit, which has led to the continuous restructuring of the American and global capitalist economy over the past four decades, is the driving force behind the rise of speculation and parasitism.

Well-known voracious hedge-fund investor Carl Icahn, cited in the Wall Street Journal article, pointed to these trends saying the economy was “being dragged down by too many mediocre CEOs, and it’s dangerous if profitability is going down despite interest rates being at zero.”

However, his resort to a “bad man” theory of economics does not pass even a preliminary examination. The same tendencies are also clearly visible in Europe and throughout the world’s major capitalist economies where, despite ultra-low interest rates, investment remains at historically depressed levels, reflecting a lack of profitable outlets.

Furthermore, any attempt to separate out the “good” and the “bad’ sides of corporations runs up against the fact, as Marx explained at the time of the emergence of joint stock companies in the middle of the 19th century, that the origin of parasitism is lodged in their very structure. The formation of such companies, he wrote, “reproduces a new financial aristocracy, a new kind of parasite in the guise of company promoters, speculators and merely nominal directors: an entire system of swindling and cheating with respect to the promotion of companies, issuing of shares and share dealing.”

For a whole period of capitalist development, notwithstanding swindling and cheating, the corporation or joint-stock company facilitated the development of the productive forces through the aggregation of capital to finance large-scale developments, which sustained the living standards of the mass of the population. Those days have long gone.

The elevation of parasitism to the basic mechanism of profit accumulation is bound up with the objective crisis of capitalism and, connected to this, the absolute stranglehold of the financial aristocracy over every aspect of economic and political life. Swindling, cheating and the destruction of the productive forces—above all through the impoverishment of the most important productive force of all, the working class—is a symptom of the rot and decay of the entire socioeconomic order.

It establishes the unanswerable case for the taking into public ownership of the major corporations, the banks and the entire finance industry as part of the socialist restructuring of economic life. This is the prerequisite for establishing a society where the productive forces, created by the labor of the working class, can be used for social advancement.

Nick Beams

 

http://www.wsws.org/en/articles/2015/05/29/pers-m29.html

Counting Dollars the Rich Want Uncounted

 

 

	November 11, 2013
THIS WEEK
Back in 1980, the richest 1 percent of New Yorkers took in 12 percent of their city’s total personal income. The current top 1 percent share: 39 percent. New York has become the most unequal major city in America. New Yorkers have noticed. Last week, by a landslide margin, they voted to replace their three-term billionaire mayor, Michael Bloomberg, with Bill de Blasio, a “fiery voice of New York’s disillusionment with a new gilded age.” That disillusionment first exploded out onto America’s political center stage two years ago with Occupy Wall Street. Now this resistance to inequality has a real foot in the door, an opportunity to start remaking a great city. Seventy years ago, with the fiery Fiorello LaGuardia, the people of New York helped fashion a new middle class America. Can they repeat that performance? Maybe. The one certainty: We all have a stake in their success. In upcoming issues of Too Much, we’ll be closely tracking their New York story.
GREED AT A GLANCE
Feeling depressed? Analysts with the Harvard School of Public Health can make an educated guess where you probably live: in an distinctly unequal place. They’ve just published the latest research that links depression to income distribution. Residing in a state “with higher income inequality,” the researchers behind the new study find, “increases the risk for the development of depression among women.” Their research controlled for a wide range of other possible explanations, including prior family history of depression. Women in unequal states — like New York — turned out to be “nearly twice as likely” to experience depression as those in Utah, Alaska, and other much more equal states . . . The U.S. Justice Department has shut down a major hedge fund. In a settlement announced last week, SAC Capital has pled guilty to insider trading and will shell out $1.8 billion in penalties. The settlement bans SAC from managing money for outside investors. From now on, the fund will essentially manage only the $7 billion personal fortune of Steven Cohen, SAC’s owner and top exec. Cohen will likely enjoy his fortune in peace. Prosecutors may still file criminal charges against him, but they’ve ruled out a long-jail-time racketeering case. The guilty plea from SAC they’ve extracted instead, complains New Yorker analyst John Cassidy, “perpetuates the myth” that corporate abstractions “rather than flesh-and-blood humans are responsible for financial wrongdoing.” If you run a financial institution eager to get your hands on rich people’s money, how can you best establish your street cred with the deep-pocket crowd? More and more banks these days are choosing to become scorekeepers — of grand fortunes. Last week Switzerland’s UBS entered the scorekeeping sweepstakes with its inaugural global “Billionaire Census.” As of June 2013, this new census pronounces, a record 2,170 individuals could legitimately claim billionaire status. The world’s fastest-growing billionaire hotspot: Asia. That’s great news for mega movie-screen maker IMAX. The company has just signed a deal to market home IMAX screens in China and environs. The installations will start at $250,000 each.	Quote of the Week “We will bring an end to inequality in this city.” Bill de Blasio, New York mayor-elect, Bill de Blasio addresses troops in war on inequality, November 6, 2013
PETULANT PLUTOCRAT OF THE WEEK
Eddie Lampert used to think he could do anything. He made billions in hedge funds, then decided he’d show the world how to turn corporate dreck into a world-class company. In 2005, he bought up K-Mart and Sears and vowed to create a global retail powerhouse. But no powerhouse ever materialized, and Lampert has blamed everything from the weather to worker pensions. Observers point instead to Lampert’s preference for buying back shares — to inflate his share price — over updating “his tired lineup of stores and merchandise.” In 2012, an analysis last week noted, Lampert invested just $1.46 per square foot in his stores. His competitors average $9.45. Lampert seems to invest far more liberally in himself. Last year he spent $40 million for a winter pad in Florida.
IMAGES OF INEQUALITY
Anna Healy Fenton, an enterprising journalist on the wealth beat, has come up with a new list of “Christmas toys for wealthy boys.” Among her featured items: the exotic poker boxes of London’s Lancelot Lancaster White. This UK box maker bills itself as the “world’s most exclusive recycling company.” One of its limited-edition poker boxes uses “redundant wood removed from the hull of Lord Nelson’s battleship HMS Victory.” The firm’s poker boxes can top $165,000 each.	Web Gem Income Share of the Top 1 Percent, 1913-2012/ An annotated chart from historian Colin Gordon that helps explains why America’s income distribution became much more equal over the first half of the past century — and much less equal since.
PROGRESS AND PROMISE
Another sign of inequality’s rising profile in public policy circles: A long-time Washington insider with ties to both Presidents Clinton and Obama is launching a new research center to explore the causes — and impact — of America’s growing economic divide. The moving force behind the new center, Center for American Progress founder John Podesta, says he hopes the new Washington Center for Equitable Growth will bring policy makers the most rigorous inequality research available. Heather Boushey, a veteran progressive economist with a background in inequality work, will direct the new center, and a number of insightful scholars on inequity — like Berkeley’s Emmanuel Saez — have already enlisted.	Take Action on Inequality Top U.S. corporate execs routinely fatten their corporate bottom lines — and own paychecks — by stiffing Uncle Sam on taxes. U.S. senator Carl Levin’s Stop Tax Haven Act would close some of the tax code’s worst loopholes. Sign on your support.
inequality by the numbers
	Stat of the Week You don’t have to live in a major metropolitan area to live in an staggeringly unequal one. Working off Census Bureau 2012 income data, 24/7 Wall St. has calculated America’s ten most unequal metro areas. Number one on the list: Sebastian-Vero Beach in Florida, where 17.2 percent of local households rate as officially poor and 33.8 percent rate within the nation’s top 5 percent.
IN FOCUS
Counting Dollars the Rich Want Uncounted Americans are gaining, ever so slowly, a more accurate picture of just how wide the gap has stretched between the nation’s most fabulously privileged and everyone else. How unequal have workplaces in the United States become? Our best answer happens to come from an unlikely source: the Social Security Administration. Social Security statisticians each year tally up how much compensation gets reported on W-2s, those forms that employers have to file for all their employees, from clerks to chief executives. Social Security reports these numbers out, by income level, once a year — and in the process paints an incredibly detailed pay portrait of the contemporary American workplace. For typical Americans workers, this workplace has become steadily less rewarding. The latest Social Security figures, released last month, show annual wages for the typical American worker down $980 in 2012 from five years earlier. David Cay Johnston, the nation’s top analyst of Social Security’s wage data, last week placed that total in a paycheck perspective. The median American worker — an employee at the nation’s exact pay midpoint — labored 52 weeks last year, notes Johnston, “but earned about the equivalent of working just 50 weeks at 2007 pay levels.” Over in America’s elite corner offices, by contrast, the pay keeps pouring in. The ranks of Americans making over $5 million a year grew 27 percent in 2012, the new Social Security figures show, to nearly 9,000 most fortunate souls. The actual compensation this cohort collected soared 40 percent over what the $5 million-plus crowd pocketed in 2011. But these numbers, we need to keep in mind, don’t tell America’s full income inequality story. Social Security statisticians only tally paycheck data. Their work leaves uncounted income from dividends and interest, as well as capital gains and profits from business operations. For income totals that take these and other non-wage income streams into account, we need to dive into data the Internal Revenue Service collects. University of California economist Emmanuel Saez has done that diving. His latest calculations, released this past September, show that taxpayers in America’s most affluent 0.01 percent grabbed 993 times more income in 2012 than taxpayers in America’s bottom 90 percent averaged. In 1975, this lofty top 0.01 percent only averaged 114 times the income of America’s bottom 90 percent. These IRS numbers tell us a great deal about America’s grand income divide. Do they tell us everything? Not quite. The dramatic IRS figures on high incomes only count what America’s rich want the government to count. They don’t count all the income the wealthy harvest from secret tax havens overseas. Like this article? Sign up to receive the Too Much weekly in your email inbox. How much income are these secret stashes generating? We’re slowly getting a better idea, thanks in part to a federal amnesty program for tax evaders. Affluent tax evaders can currently avoid criminal prosecution if they pay up all their taxes overdue on their secret income, plus interest and penalties. With this amnesty program in effect, the Wall Street Journal reports, IRS officials are now seeing “a new rush by U.S. taxpayers to confess secret offshore accounts.” What’s driving this rush? To a surprising degree, Swiss banks. Four years ago, the long-standing Swiss bank secrecy wall started cracking when officials at the Swiss banking giant UBS found themselves forced to admit they’d been helping Americans conceal assets. UBS had to pay out $780 million in penalties. Other Swiss banks, eager to avoid a similar fate, are now pushing their secret American depositors to end the error of their tax-evading ways, and this banker pressure is apparently having an impact. Just one New York attorney, Bryan Skarlatos, has already handled over a thousand confessions. Skarlatos used to receive just a couple confession calls a week. How he’s getting two to three a day. Many of the wealthy Skarlatos takes to the IRS have over $10 million in their secret stashes, a few over $100 million. We don’t know yet how many billions the current amnesty will eventually produce. As of last year, 38,000 U.S. taxpayers had revealed undeclared offshore assets. The declarations from these tax evaders, the IRS reports, figure to bring in $10.5 billion. But this total doesn’t cover the recent confession surge. The final collections will undoubtedly dwarf the sums so far collected — and fill in still another chapter in America’s deeply distressing inequality story.	New Wisdom on Wealth John Ketchum, Income inequality and the pursuit of un-happiness, Marketplace, November 5, 2013. New OECD data reinforce the link between unhappiness and maldistributions of income. Paul Buchheit, Five ways the super rich are betraying America, Salon, November 5, 2013. Wealthy “takers” are giving up on the nation that enabled their fortunes. Neil deMause, No Class Warfare, Please, We’re Americans, Fairness & Accuracy in Reporting, November 2013. An excellent analysis of recent U.S. media coverage — and avoidance — of America’s widening economic divide. David Callahan, De Blasio’s Opportunity: A Local Attack on Inequality, Policy Shop, November 6, 2013. Solid ideas for tackling New York City’s near-record inequality are sitting on the drawing board. Robert Reich, What Tuesday’s Election Results Really Mean, Common Dreams, November 6, 2013. Americans are catching on to the scourge of the nation’s raging inequality. Vikas Bajaj, Protesting Twitter, New York Times, November 8, 2013. The Twitter initial stock offering places the divide between San Francisco’s haves and have-nots in stark relief. Carol Morello and Ted Mellnik, Washington: A world apart, Washington Post, November 10, 2013. A detailed look at increasing economic segregation in the nation’s capital and beyond. Get the scoop on this new history of the struggle America’s plutocrats lost.
NEW AND notable
A New Take on Inequality and Crime Hector Gutierrez Rufrancos, Madeleine Power, Kate Pickett, and Richard Wilkinson, Income Inequality and Crime: A Review and Explanation of the Time-Series Evidence, Sociology and Criminology, October 2013. Do crime and inequality run together? Sociologists, psychologists, and epidemiologists — scientists who study the health of populations — have over recent decades released serious research that does show a strong connection. But most of this research has been what investigators call “cross-sectional.” Researchers have compared different places and found that these places — be they nations or U.S. states or metro areas — will be more likely to have higher crime rates if they also have higher rates of income inequality. British investigators Hector Gutierrez Rufrancos, Madeleine Power, Kate Pickett, and Richard Wilkinson have chosen a different focus. In this new paper, they probe whether “time-series” data confirm the crime-inequality connection. In other words, does crime increase over time as inequality increases? This new analysis reviews 17 different time-oriented research efforts and “very strongly” confirms an inequality link with property crime. The link with violent crime turns out to depend on the type of violence. Homicides, murders, and robberies show a sensitivity to rising inequality. Other violent crimes don’t. That finding may, the authors of this Inequality and Crime study note, reflect criminal incident “measurement error.” High-profile violent crimes like homicides typically get reported comprehensively. Other violent crimes — most notably rape — tend to get underreported. Just how does inequality impact crime? We still have, the researchers note, “no conclusive evidence” on the exact mechanism linking inequality and crime rates. That remains, the four add, an area “where future research would be valuable.”

The SAC insider trading case and the US financial aristocracy

9 November 2013

SAC Capital Advisors, one of the most profitable hedge funds in history, pleaded guilty to security and wire fraud charges Friday as part of a $1.2 billion settlement with US prosecutors. No criminal charges have been filed against Steven A. Cohen, who wholly owns and manages the hedge fund group.

Prosecutors said SAC carried out insider trading “on a scale without known precedent.” The firm built its entire business model on carrying out massive bets on corporate securities, many of which were based on illegally obtained secrets.

This system made SAC massively profitable, generating returns that averaged thirty percent per year over the past two decades. To put this figure in perspective, the average hedge fund had returns of eight percent last year, while the Ponzi scheme operated by Bernard L. Madoff had returns of around ten percent—one third of those regularly obtained by SAC.

Just one of SAC’s transactions, conducted by a single portfolio manager on the basis of insider knowledge of clinical pharmaceutical trials, netted SAC $276 million, in what prosecutors called “the most lucrative insider trading scheme ever charged.”

The firm used illegally obtained information to place bets on Research in Motion, Dell, NVIDIA, Marvell, Avnet, Fairchild, Atheros, Broadcom, Elan and Wyeth, and other companies according to prosecutors. Company policies were designed around the cover-up of illegal activities, with instant message records wiped every 36 hours and emails deleted after one month.

This vast empire of fraud made Steven A. Cohen rich almost beyond description. With a 2012 net worth of $9.4 billion, Cohen’s hobbies include collecting palatial estates and mansions and hoarding over $700 million worth of art.

One of Cohen’s properties, in Greenwich, Connecticut, according to Forbes, occupies over 18 acres and “includes Cohen’s 35,000-square-foot main home plus a neighboring home purchased for $5 million in 2006, a full-size indoor basketball court, a glass-enclosed pool, a 6,700-square-foot ice skating rink, [and] a two-hole golf course.”

Cohen also occupies the only duplex in New York City’s Bloomberg Tower, a property worth $115 million, and two beach houses in the Hamptons, one of which is worth $62.5 million. Last year Cohen paid over $155 million for Picasso’s “La Rêve,” in one of the most expensive art purchases in history.

The $1.2 billion settlement is less than the $1.3 billion SAC earned last year, and the company is likely to turn a profit this year even after paying the settlement.

Since Cohen is the sole owner of the company, the settlement will diminish his personal fortune to just over $7 billion, which will remain under management by SAC. The Wall Street Journal reported that, “according to people familiar with the probe… Prosecutors, despite having long had Mr. Cohen in their sights, won’t charge him personally with any crime unless new evidence surfaces.”

The net result is that, after obtaining billions of dollars through fraudulent means, Cohen remains not only free from criminal charges, but also retains four-fifths of his fortune intact.

This is in a country where, according to one survey by the American Bar Association, there were 360 people serving life sentences for shoplifting small amounts of merchandise in California alone, as a result of the state’s draconian three strikes law.

The only reason that SAC was investigated and charged in the first place was that its flagrant, daily insider trading activities became too egregious to simply sweep under the rug. The very size of the settlement—the largest insider trading penalty in history—is a testament to the extent of the crimes.

However, the reality is that the types of crimes carried out by SAC, while perhaps more extensive and aggressive, are not fundamentally different than the day-to-day activities of the major Wall Street banks and hedge funds, whose vast profits are based on the types of fraudulent and speculative activity that led to the 2008 crash.

This is why, despite the enormous evidence of illegal activity by SAC, Cohen has remained, at least for now, immune from prosecution. The US ruling class and its political representatives recognize in him one of their own, perhaps requiring a dressing down of sorts, but nothing more.

This social layer has vastly expanded its wealth, power and influence since the financial crash precipitated by their activities. Even as incomes have fallen for the bottom 95 percent of American society, the collective wealth of the world’s billionaires has doubled since 2009, according to a new report by Wealth-X. The combined fortunes of these 2,170 individuals now stand at $6.5 trillion, which is nearly equivalent to the gross domestic product of China.

The vast enrichment of this social layer has been facilitated by state policy, including that of the Obama administration and the Federal Reserve, which continues to pump $85 billion into the financial system every month. At the same time, both parties of big business are waging an unrelenting attack on the social programs that benefit the working class.

Five years into the worst financial crisis since the Great Depression, not a single major financial executive has been criminally prosecuted, despite overwhelming evidence of their complicity in fraud. To the extent that the government takes any action against the criminality that pervades Wall Street, it is to charge a few low-level traders and agree to settlements amounting to a fraction of companies’ yearly profits, while shielding executives from criminal prosecution.

The de facto legal immunity granted to Wall Street kingpins like Cohen and JPMorgan’s Jamie Dimon is an expression of the dominance of a financial aristocracy over society. In the end, the actions of SAC simply express the basic functioning of American capitalism.

Andre Damon