Guest Post: Sheldon Adelson’s Israel Gamble

sheldon adelson in sun glasses

[ED: If Adelson represents in 2012 the new face of unlimited political ‘speech’ in US Politics following the Citizens United ruling, he’s even further along in influencing Israeli politics.  My friend The Professor presents a fuller picture of Adelson than I had painted earlier with his rational bet on the Romney campaign]

By: “The Professor”

In a post earlier this month, The Banker analyzed the personal financial math behind Sheldon Adelson’s vow to double down on his (losing) bets on Republican political candidates in the next round of elections, presenting a convincing case that any monetary investment Adelson might make in candidates who support his views on tax policy would be amply rewarded were enough of those candidates to win to make those policies a reality.

However, The Banker ignored Adelson’s stated primary reason for supporting Republican candidates, which has nothing at all to do with tax policy.  In an op-ed in the Wall Street Journal published days before the presidential election, Adelson dismissed the claim that his support for Republicans was the result of the “conservative caricature” of him as a tax-evading oligarch and insisted that it stemmed from the fact that “the Democratic Party has changed in ways that no longer fit with someone of my upbringing.”  His primary evidence of this change?  His claim that more Republicans than Democrats “sympathize with Israel” (for which he provides an uncited statistic), which he calls the “sole liberal democracy in the region.”

It seems to me that The Banker’s account of Adelson’s rationality in betting on Republican candidates is undercut by Adelson’s wholly financially irrational commitment to influencing both the American-Israeli relationship and, more importantly, domestic Israeli politics.  Setting aside the question of whether a country that arrests women for praying openly in public places and allows religious authorities to control questions of citizenship and marriage can be considered a liberal democracy, Adelson’s involvement in Israeli politics and his unqualified support for Benjamin Netanyahu (hereafter known as Bibi, which is how he’s pretty much exclusively referred to in Israel) defies both financial logic and his supposed commitment to Israel as a “liberal democracy.”

In July 2007, a new daily newspaper debuted in Israel.  Called Yisrael Hayom, or “Israel Today,” it was (and is) bankrolled by Sheldon Adelson and distributed for free around the country.  By 2010, only three years after its inception, it had a circulation of over 350,000 and by 2011 had surpassed all other daily newspapers in Israel in its share of readership.

According to the Israeli business site Globes, Adelson lost 250 million NIS (about $70 million) on the paper from 2007-2010.  While this amount is considerably less than what Adelson spent in just the current election cycle in the United States, it nonetheless represents a significant chunk of change.  More importantly, what Adelson bought with his investment is somewhat more significant than what he got out of the last U.S. election cycle.[1]

With a 40% share of the Israeli newspaper market, Adelson now has the ear of the Israeli public, and has caused a crisis in Israeli journalism, with the third and fourth most popular papers in Israel, Ma’ariv and Ha’aretz, facing serious questions about their futures.[2]

Yisrael Hayom’s dominance of the Israeli newspaper market has raised two serious questions in Israeli politics, both of which impinge on the liberal democratic character of Israel that Adelson himself extols: first, whether Yisrael Hayom, which has a clear ideological bent (Americans need only know that the day after the most recent presidential election the headline on the front page read, “The U.S. chose socialism” to know what that ideological bent is, at least with regard to American politics), is constraining public political discourse with its dominance of the newspaper market, a dominance won through free distribution and lower advertising rates.  Second, whether the money Adelson has poured into Yisrael Hayom essentially amounts to a shadow contribution to Bibi’s campaign coffers, since the paper offers propagandistic and one-sided support to Netanyahu and his policies.

Ehud Olmert, then still the prime minister of Israel, accused Adelson of political purposes in starting the paper and of supporting Netanyahu when he was still the opposition leader.  In Israel, Yisrael Hayom is commonly referred to as “Bibiton,” a portmanteau word that basically means “Bibi’s paper,” and writers and editors at the paper have strong ties to (and have sometimes been simultaneously employed by) the prime minister’s office under Netanyahu.[3]

There’s no question that Adelson is losing considerable amounts of money on Yisrael Hayom, and that his goal is to advance (perhaps to the exclusion of all others) the political viewpoints of Bibi Netanyahu and his government.

The political positions with which Bibi is now synonymous have two components: international and domestic.

Internationally, Bibi is a hawk who has advanced policies that have solidified the continued Israeli occupation of Palestinian territories, despite voicing his ostensible support for a two-state solution.  His government’s recent declaration of their intention to begin building in the disputed territory around Jerusalem known as E1, presumably in retaliation for the successful Palestinian bid for upgraded status at the U.N., is recent evidence of this policy.

Domestically, since his first stint as prime minister in the 1990s and his later turn as Finance Minister in the early 2000s (a post from which he resigned in protest against the unilateral Israeli withdrawal from Gaza overseen by Ariel Sharon), Bibi has been in favor of a variety of “pro-market” financial reforms that have been largely credited with strong Israeli growth even at times of international financial crisis but have also been largely reviled by the general Israeli public.  These include the reduction of income-tax rates, particularly for corporations and high earners, and the privatization of state-owned corporations.  Public opposition to these reforms (and other domestic policies supported by Netanyahu and his right-wing coalition partners, like continued government subsidies and military exemptions for the ultra-Orthodox) culminated in a series of protests in the summer of 2011 over the rising cost of living, housing and food prices, and the aforementioned subsidies.

Since Adelson doesn’t pay taxes in Israel, Bibi’s market and tax reforms do not affect him personally, and so unlike his contributions to Republican candidates in the U.S., who might be able to affect tax policy (if they were to actually achieve office) that would benefit him, his investment in Bibi via Yisrael Hayom cannot be similarly justified.  Clearly, Adelson’s ideological commitment to either Israeli military and political dominance in the Middle East and with relation to the Palestinians or to pro-capitalist market and tax reform (regardless of its personal effect for him) has been sufficient to justify his commitment of more than $70 million to the cause.

Paradoxically, however, since he has justified his commitment to Israel on the basis of its ostensible status as the only “liberal democracy” in the Middle East, Adelson’s meddling in the Israeli newspaper market, and in its politics, seems rather to have contributed to the illiberalization of Israel’s democracy.  If one agrees that a democracy cannot survive without a strong and diverse free press, then Adelson’s Yisrael Hayom, with its infiltration of the Israeli newspaper market and one-sided cheerleading for Bibi’s administration, has only contributed to the weakening of one of the pillars of Israeli democracy.  In addition, the right-wing parties with which Bibi has maintained a governing coalition (and which promise to move further to the right after the January elections) have continued the government’s strong support for the religious stranglehold on certain aspects of Israeli law governing marriage, divorce, and the right to worship freely, among other things, which have caused many people inside and outside Israel to question whether Israel is indeed a liberal democracy at all, or rather a democratic theocracy.

In this respect, then, Sheldon Adelson’s financial support for what he calls “the sole liberal democracy in the region” seems highly suspect, and his gamble on Israeli politics less like a gamble than a stake in a style and type of governance in accordance with a personal ideology that values a capitalist, theocratic, militarist Jewish state.  And unlike his commitment to Republican candidates in the U.S. in the last election cycle, Adelson’s investment in Israeli politics is likely to offer him highly favorable returns come January 22.

 


[1] Opensecrets.org breaks out the roughly $93 million Adelson made in PAC donations during the 2012 US election cycle.  The PAC names indicate that he dedicated at least some of his investment to Congressional campaigns, even if he unsuccessfully burned the majority on the presidential campaigns of Gingrich and Romney.

[2] In September Ma’ariv had to sell its printing equipment to make its payroll and was sold the same month.  Ha’aretz, Israel’s oldest daily, sold a 20% stake in the Haaretz Group to the Russian-Israeli businessman Leonid Nevzlin and in October, as a result of a strike protesting layoffs, the paper did not go to press one day, marking the first time since 1965 that they had missed an issue.

[3] NPR reports, “According to a report in Haaretz, Dror Eydar, a senior columnist at Israel Hayom, receives an additional salary from the prime minister’s office. And Netanyahu adviser Nathan Eshel left his job in the prime minister’s office to work at Israel Hayom during its launch, only to rejoin Netanyahu’s staff last year.”

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Local “Economic Development”: Subsidies All The Way Down

solar panels money

“The earth isn’t floating in space, it just rests on a Giant Turtle,” said the lady. “But what,” the scientist asked gamely, “does the Giant Turtle rest on?” “My dear boy,” she replied as if to a child, “It’s just turtles all the way down!”

 

My local city council recently approved more than $12 Million in tax abatement subsidies to attract a Korean solar-panel manufacturer Nexolon America LLC to a repurposed area of land called Brooks City Base.  This kind of deal makes my morning coffee taste particularly bitter and I’ve been trying to figure out why.  I realize it comes down to math.

Now, there are two kinds of unfortunate math in the deal the City cut for Nexolon and Brooks City Base.

First is the mathematic equation that I’ve been teaching my 7-year-old daughter: when you subtract a negative, the result is a positive. How does that relate to Nexolon? When you remove the obligation to pay taxes, you’ve “subtracted a negative” and the taxpayer undoubtedly receives a mathematically positive benefit: they get to keep more of their money than they would have without the abatement.

Mathematically, this also means that public coffers are poorer by that same amount because the businesses that receive abatements aren’t paying into the system.[1]

In plain English, when public officials award a tax abatement, it’s the same thing, in math and money terms, as handing out cash from the public coffers.[2]

I find this math noncontroversial, but everybody I’ve talked to who works in “economic development” in San Antonio refuses to agree that tax abatements equal public handouts for private gain.

The second kind of math associated with Nexolon gets even worse. The Express-News quotes Mayor Castro, who supports the deal because of the “400 good paying manufacturing jobs” it is supposed to bring to San Antonio in return for the incentives.

Let’s briefly examine the math that the Mayor has not clarified for the public: The City is willing to pledge more than $12 million over 10 years to incentivize Nexolon’s move. That’s $30,000 per job.

Why does this make sense to anyone?

I’ve got a different proposal. We count out the amount to be spent to “create” one job – $30,000 in $1 bills – we make a huge pile in the middle of HemisFair Park during Luminaria, and light it on fire as a public spectacle. I suspect the economic impact of that performance art will be greater than these “green manufacturing jobs” being touted on the South Side.

But allow me to step back from the Nexolon deal for a moment and discuss the larger issue that’s really bothering me. San Antonio and Texas have a pervasive pattern of awarding benefit to private entities from public coffers.

I acknowledge the need, sometimes, to confer, sell, or award public goods to private entities for the public benefit. But in those cases, government officials ought to be careful to observe a process that ensures a clear, compelling, public benefit from the privatization of the public good, and maximizes the price of the privatization, for the benefit of the public budget.

Too often we watch as a group of insiders conducts public policy by awarding private benefits without maximizing the public good, or even without feeling the need to justify the use of scarce public resources – otherwise needed for schools and roads and public safety and courts and parks – in the form of private handouts.

When I talk to economic development experts in San Antonio, they argue in favor of these schemes from two angles. They argue that San Antonio cannot attract the kind of companies we need without dangling sweet tax subsidies to lure companies away from perceived municipal competitors like Denver, Austin, and Portland. And they insist tax incentives and grants pay for themselves over time, as the new corporate residents eventually pay higher taxes, phased in over years.

In my business experience, however, successful for-profit businesses do not make important decisions like where to locate based on tax incentives.[3]

In my opinion, if economic development experts want to attract sustainable, for-profit companies rather than future tax-welfare recipients, they’re going about it the wrong way. Because guess what?  When you dangle generous tax incentives to convince companies to move to your city, you attract companies that make decisions for the wrong reasons. You attract companies interested in tax-avoidance decisions, rather than sound business decisions.

City leaders talk about encouraging an entrepreneurial, tech-oriented city, but what they incentivize through deals like Nexolon almost by design are lobbyist-driven, private-handout-oriented companies.

What if our leaders focused on building a city that attracts companies and people on its own merits – through top-notch public amenities, an educated work-force, and transparency in public-private negotiations – instead of public giveaways to private entities? If you do the big stuff right you don’t need to cut your local tax rates to be attractive.

I want to be careful to point out that the type of corporate welfare exemplified by the Nexolon deal is not a Democrat v. Republican or a Right v. Left problem in San Antonio, or in Texas.

While Nexolon bears the indelible mark of Democratic patronage (note attractive phrases like “South Side”, “Manufacturing Jobs”, and “Green Energy”) we know from excellent New York Times reporting that Republican Governor Rick Perry’s Texas is a virtual candy store of corporate goodies.

If you care about a consistent political philosophy,[4] Perry’s corporate welfare policy is gross. He professes a belief in free markets, but believes government needs to intervene in markets through bigger business incentives – $19 Billion per year – than any other state in the nation. Tax consultant G. Brint Ryan stars in the New York Times article as the successful state lobbyist for tax breaks for private corporations who just coincidentally fundraises for Governor Perry ($250,000), Comptroller Susan Combs ($600,000), and Lt. Governor David Dewhurst ($150,000) – all of whom insist donations have no influence on them.  Seriously.  That’s what they said.

Perry’s version of Texas capitalism encourages the worst sort of influence-peddling, in which public goods get privatized, and then private companies pay him back directly to keep him in office. Similarly, when you’ve got a local project like Nexolon[5] on Brooks City Base built entirely on tax abatements, my spidey sense just starts tingling about the opportunities for local public officials. [6]

 


[1] For example, if you offered me a tax abatement of $10K on my property taxes this year, would you like to know how much I’d pay for that abatement?  Um, well, I’d pay up to $9,999 cold hard cash for that.  So, yeah, it’s the same thing as handing out free money.

[2] Sometimes the cash handout is a good thing.  Sometimes the cash handout is a bad thing.  But it’s a cash handout, obscured slightly, and called a tax abatement.

[3] As my accountant first told me when I started my own business: “Never make a business decision based on the tax implications.  Just focus on making money, and the taxes will take care of themselves.”   In a related story, have you wondered why San Antonio doesn’t have a grocery store downtown despite at least a $1 million incentive package from the City?  It’s because local grocery company H.E.B. is run like a successful, for-profit business, and they know that a downtown grocery story is a money loser right now.  Not enough people live downtown to make it profitable, despite the sweet government incentives.  Companies like HEB don’t let local governments make important decisions for them.

[4] I know, it’s kind of quaint, but still, I do care about these things.

[5] I haven’t even gotten into the issue that a big public investment in solar panel manufacturing, right next door to the Eagle Ford’s Natural Gas Revolution, makes about as much business sense in 2012 as investing in Ty Beanie Babies collectibles, for profit.

[6] The solar energy market – and by extension a solar panel manufacturer like Nexolon – is entirely driven by public subsidies.  The Federal government offers tax breaks to electric utilities (via Investment Tax Credits, or  ITCs) to purchase solar power, bringing it to within twice the cost of other energy sources.  From there a package of Federal ,State, and Local subsidies helpfully described here and here try to make up the difference and incentivize the purchase of solar power.  It’s a pile of subsidies on top of subsidies, with nary a market-clearing foundation in sight.  Which is a perfect opportunity for influence peddling, since everything depends on government largesse all up and down the chain.  I’m reminded of Dr. Seuss’ Yurtle the Turtle story, a reference to the old saw about the Earth resting on Turtles, and it just being ‘Turtles All The Way Down.”  With the addition of Nexolon at Brooks City Base, it’s just “Subsidies All The Way Down.”

turtles all the way down

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Interview Part II: Frack Jobs – Plentiful but Rough

Oil Field workersIn this interview Bryant talks about the difficulty of employing oilfield workers, who often look for trouble.

Bryant:           Hello, my name is Bryant, and I presently work for a company that develops and operates frac-sand silo terminals in the Eagle-Ford shale.

Bryant and I spoke about his views working on the fracking world in an earlier podcast but we also spoke extensively about the impact of the Natural Gas Revolution on jobs in South Texas. The first point is that there are a ton of jobs created.  The second is that it turns out the work-force can be pretty rough.

Bryant:          The extracting of natural gas from the earth does create a lot of jobs, which is something that obviously this country is starving for at this time. You know people tell me, “I don’t want to work as a rig hand.” No, I’m talking complete cities are developing because of this stuff. An oilfield comes in first: you need restaurants, you need hotels, you need rent-a-cars. You start to develop quite a bit of economy — you have an economy wherever this stuff really starts to kick off, and I think that’s good. You need welders. You start to then develop actual skilled workers.

Michael:         I went on the site of this company and everything was provided seemingly by something else. There were the Schlumberger signs, the Halliburton signs, the guys guarding the entrance to the ranch that they were drilling on. There was the catering guys. This is being done in an area where it’s basically raw ranchland for a hundred years, and they have to basically import services for everything. It was kind of amazing.

Bryant:           Everything, generators, electricians — any time I have an issue with my silos and I need an electrician, it’s not easy. If you need a skilled worker in some of these areas they’re very difficult to come by. Like I said, labor, that’s why the Eagle Ford is so attractive. You’ve got San Antonio, Houston, you’ve got major cities that people are leaving and flocking to these smaller towns, really in the middle of nowhere, and providing all the services needed.

This stuff, fracking, it employs a lot of people that may not have education. It employs a lot of people that have a lot of mouths to feed, that may not have really the education to go and get an office job. I think that’s really important for the world. A lot of people don’t have the opportunities to get the job they really desire. They just need a paycheck. This really helps. I would hate to see all these towns I deal with, all those people not working. We’d have a serious problem on our hands. I mean by just violence, and upset people.

Michael:         You and I talked about your earlier job in the Eagle Ford that was with a buddy of yours…Can you just describe for me the part about what it’s like to manage a bunch of guys in an oilfield work environment, and how different it was from what you’d expected, or where you come from?

Bryant:           It’s tough. It’s probably the hardest part of my job still to this day. I came from working before I moved to Texas to work in this industry I worked for the publishing industry in New York City for five years. I was constantly surrounded by people that probably like to read a lot of books and keep up with current events, etc. I came into an industry where not a lot of the workers on the ground have college educations.

Michael:         What about high-school educations?

Bryant:           Not a lot of them have high-school education as well, so it’s very difficult, at least for me just to bridge that gap between office work and someone that’s been driving a truck for their whole lives, and who don’t really understand why there are procedures that can’t be broken, and why there are rules that need to be maintained. They just seem to care about it’s my truck, I want my money, and that’s it or I don’t want to work today because I didn’t get a good night’s sleep last night.

So, it is very difficult. I hate to use the word unruly, but you come across a lot of people that they sometimes don’t really care as much as you’d like them to. Now it also is very difficult in that a lot of these towns you get fired or you quit from one place, you just walk across the street and they’ll hire you immediately to do the same thing you were just doing. There’s such a need for drivers and people with experience. Workers know this. So, they know if they don’t show up because they went out and they blew their check and got drunk, and just didn’t wake up, and they come in two days later and you fire them, they’re just going to walk across the street and get fifteen, twenty dollars an hour doing the same exact thing for somebody else.

That environment is difficult. A lot of companies are trying to adapt, trying to have the medical insurance and 401(k), trying to maybe have a little signing bonus. You have to do things to keep good workers because it’s very competitive. But it is very difficult to manage people in the oilfields sometimes. They can be a little rough around the edges, but that’s why I think managing in this industry actually pays pretty well. It’s not an easy task.

Michael:         I’m afraid you don’t have enough tattoos to be running this kind of crew.

Bryant:           I definitely change my attitude a bit, depending on who I’m with. If I’m not in the field, you kind of change a little bit. You try to blend in a little more and probably in the vocabulary. I use a lot more oilfield jargon than when I’m probably doing a sales call or some kind of meeting at a corporate level. So again, I think that’s what makes it a fun job for me. You’re constantly a chameleon and you’re in between two different worlds all the time.

A lot of these guys can be pretty irresponsible. They make really good money, so a lot of times they come from places where they don’t make — they come from poorer backgrounds and all of a sudden you’re making twenty, twenty-five bucks an hour, you’re clocking twenty, thirty hours of OT because it is twenty-four hour drilling. This stuff never stops, so you’re making a lot of money. You probably didn’t learn money management much and kind of start getting into trouble.

Michael:         Is there trouble to be had in South Texas?

Bryant:           Oh yeah, there’s always trouble. I’ve never actually been up to North Dakota. They say it’s like stepping onto the moon, it’s so barren. I do know people that have been up there and they said, “Honestly, you get to some of these places, and the only thing there is, is like a barbecue joint, a trailer park, and a prostitution house. That’s all you need is drinks, and money, and women, and these guys probably stay pretty happy for a while.” There is trouble. There is a lot of trouble.

I used to actually give out paychecks on Mondays instead of Fridays because workers tended not to show up on Saturday. They’d get their money on Friday, they’d go and get drunk, and I’d get a call maybe somebody was in jail, or somebody was drunk, and I really had to just change my rules. I said everyone gets paid on Monday. You don’t go out and get in as much trouble on a weekday. Yeah, there’s a lot of trouble.

 

Bryant and I spoke of the difficulty of managing the low-end of the labor market, but then he described the other end of the labor market, the scientists and engineers providing the brainpower for the shale play.  As much as the story job-wise is mostly positive, I couldn’t help but think of the idea that we’re in the role of a 3rd world country…we provide the low-end cheap labor, and the rest of the world provides the brains.

 

Bryant:           I’m going to tie this into politics a little bit, but you meet all these engineers for the big three: Halliburton, Schlumberger, and Baker, and not a lot of them are from the U.S. You meet a lot of them from India. You know, Asian and South American. It’s crazy. You actually sometimes walk into these offices and it’s like the United Nations. It’s people from all over the world, which is great, I’m all for it, but I think it shows that we are slipping more and more, like everyone has been saying, in our math skills, in our education, period. We have a great technology but we’re not really creating people or educating people to do it. We’re kind of letting it get away.

Michael:         So, the high-end intellectual jobs, the engineering jobs, the people inventing this stuff or figuring it out are not necessarily trained here. They train somewhere else and then they get here.

Bryant:           This is definitely the testing ground. The U.S. is where it’s happening, but a lot of those times it’s being created by an engineer that’s not from here. You’re getting people from other countries that are seeing an opportunity to come into the industry and make some money. The industry is eating them up. The industry has money to pay for the best, so they’re buying the best minds they can buy to make their work more efficient so they can make more money.

Please also listen to Part I: Fracking and Regrets

 

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Interview on BBC Radio: $1.5B UBS LIBOR Manipulation Penaty

UBS Libor pictureI’ve linked here to Bankers Anonymous’ Worldwide Radio Debut today with the BBC’s “World Have Your Say,” in the wake of UBS’ reported $1.5Billion penalty for fixing LIBOR rates between 2005 and 2010.

 

 

http://www.bbc.co.uk/programmes/p011x4l8

The Bankers Anonymous portion of the show starts at minute 40:20, and goes until the end.

I talk about the role of LIBOR for banks, how much profit they extracted by manipulation, and why certain people would have wanted to manipulate rates.

I also attempt to answer a question from a very persistent Canadian who wanted to make a point about the vast global conspiracy of banking, while at the same time denying he was describing a vast global conspiracy.  As always, I blame Canada.

I recommend this posting for a fuller description of LIBOR manipulation, based on last summer’s Barclay’s $453 million fine.

Also, in the BBC interview I mention why I think Barclays’ Bob Diamond acted relatively honorably, so I’m linking to that as well.

Finally, the FSA report on the UBS penalty includes devastating email traffic from these traders, who should really know better than to write any of that stuff down.

The more emails like that you write, the more your bank pays.  We learned that stuff in the first month of Bond Sales and Trading training.

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Less Lawyers and Guns, But More Money, Please.

guns and money“Why did this happen and what can we do?” ask my fellow parents of young children this week.  At school drop-off, in the kitchen, on social media.  Anyplace slightly out of hearing of the kids.

I have a one-track mind when it comes to an issue like gun control.  My singularly tracked mind says “follow the money.”

What kind of money comes to play on the issue of gun control?

The National Rifle Association ranks 50th on the list of ‘Heavy Hitter’ lobbyists, and in the top 1.5% of all organizations tracked by The Center for Responsive Politics’ OpenSecrets.org website, which tracks the biggest contributors to political campaigns since 1989 through 2012.

Tens of millions of dollars contributed to campaigns from the NRA since 1989 tend to have a focusing effect on our nation’s elected officials, as well as on media outlets which carry targeted pro-gun advertisements.

How much money is spent, in contrast, on gun control?  Well, for starters, there’s no brand-name organizational leader in gun control with the stature to counter-balance the NRA.  I suppose the Brady Campaign to Prevent Gun Violence comes as close to any group to carrying the flag for gun control. The Brady Campaign spent a reported $20,000 on lobbying in 2012, compared to the NRA’s $2.2 million in 2012.

So…when you raise and spend 1% of the money your opponent spends, you can be reasonably certain to get squashed like a bug on your legislative issue.  How did this happen?  Follow the money.

For me the absolute nadir of the last electoral cycle was the Obama and Romney mutually-agreed-upon dodge of the gun control issue.  When asked during the town hall debate his view of an assault weapons ban, Obama spent 75% of his time pledging allegiance to the 2nd Amendment.  Romney, for his part, mostly spoke about the ‘Fast and Furious’ debacle from the Justice Department, and oddly enough, the importance of two-parent homes.[1]  You could see the moderator squirming in her frustration with their dodges, just as I did in my living room.

Obama and Romney are not bad guys, and they’re certainly not insensitive or stupid.  They see the same horrific, repeated tragedies we do, and I believe they grieve just like us.  But too much money weighs in on the pro-gun side without a countervailing gun control side for an ambitious politician to do the right thing.

What can we do?  Send money to the anti-gun lobby.  Our elected leaders just can’t focus otherwise.



[1] That one was a real head-scratcher.

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Book Review: Bailout; An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street

If every novel or Hollywood movie starts with either the premise of “A Man Walks Into a Town” or “A Man Goes On a Journey,” Bailout by Neil Barofsky begins with the former.  Neil Barofsky plays the leading Jimmy Stewart hero role in this modern update to Mr. Smith Goes To Washington.

In late 2008, the outgoing Bush administration nominated Barofsky, a federal prosecutor from the US Attorney General’s Office in New York, to head up the Special Investigator General of the Troubled Asset Relief Program (aka SIGTARP).  After then-Treasury Secretary Paulson pushed through Congress the approval of $700 Billion in government cheese dedicated to propping up the US financial system, Congress had the foresight to demand someone who could, in Barofsky’s turn of phrase, “catch the rats” inevitably attracted to the cheese.

Much of the humor and pathos of Bailout derives from Barofsky’s naïve outsider status[1] crashing awkwardly into – or exploding spectacularly against – the self-interested forces of Washington.  Time and again, he brings his moral outrage and laugh-or-you’ll-cry innocence to a self-interested, power hungry town.

He’s brutally harsh on well-known characters such as Treasury Secretary Tim Geithner[2], Paulson protégé Neil Kashkari[3], and Treasury deputy Herb Allison[4], as well as lesser known players who make up the DC financial policy world.  He’s also hilariously open about his own deficiencies for the SIGTARP job, in his role as a bridegreoom,[5] or as an initially clumsy political player on the Washington scene.

I’m not in the least surprised that I loved this book, as I’ve been a dedicated fan-boy[6] of Barofsky’s SIGTARP reports on this site (here, here, here and here), trying my hardest to make more people aware of how good and rare a job he did as SIGTARP.

I am surprised, however, at how much this book should be the book everyone reads to understand our federal government in the early 21st Century.  I’m not going to insist yet that Barofsky’s Bailout is the Washington DC version of Michael Lewis’ Liar’s Poker, but the parallels are strong enough that I’m putting the comparison into the conversation.

Both relate hilarious and cringe-inducing stories of ambitious, smart, successful, and powerful jerks acting badly, for personal gain, to the public’s detriment.  Both walked away from short stints in their respective centers of power with the guts to risk complete ostracism from that center of power by eviscerating the players in hilarious character sketches and painful interactions.

Throughout Bailout, Barofksy reminds us that the only possible way he could succeed as the Top Cop of TARP would be to act with complete indifference toward his next job.  Any personal consideration of the professional consequences of his actions – like money or advancement or power or prestige or making friends – would keep him from pursuing his investigatory role to its fullest extent.

It helps that Barofsky, by his own description, has an almost Aspergers-syndrome disregard for niceties like human feelings or sympathetic tones when they get in the way of what he believes to be right.  He exudes a super-hero focus on righteousness – even more than I had realized when I first dubbed him the Norse God of Financial Accountability.

If Barofsky demonstrates any character flaw in Bailout, it’s this same self-righteousness, his personal conviction that he’s got the right answers that nobody else except he (and his SIGTARP deputy Kevin Puvalowski[7]) had in Washington.  He mocks the Treasury creators of TALF[8] and PPIP[9] for not fully understanding the potential for fraud in these programs or flays them for pushing plans with overly Wall Street-friendly terms.

On the one hand I have no doubt Barofsky’s mostly right (and neither does Barofsky), but on the other hand we hear the righteousness in his voice that must have rubbed the sleep-deprived-and-making-it-up-as-they-went-along TARP bailout folks in the Treasury department the wrong way.

To nitpick a bit more, Barofsky tends not to give much credence to the Wall Street view of the world throughout Bailout.  As a former Wall Streeter, my own instinct tells me that simply ignoring Wall Street’s concerns in late 2008 and early 2009, and pursuing the purer prosecutorial approach seemingly favored by Barofsky, could have led to its own disastrous consequences as well.  I’m not happy with Paulson’s and Geithner’s coddling of the Street, but Barofsky’s hard line might not have been optimal for the public good in the long run either.

Overall though, I admire his consistent choice to be right over being liked, and his consistent choice to push public welfare over private advantage.

Why don’t more people go to Washington and do the right thing?  Barofsky clearly provides the answer: Because everybody is always looking to the next job.  You don’t uproot bad actors if those bad actors might actually help you get the next plum position.

At Bankers Anonymous I remain obsessed with the nexus of finance and politics that brought us to the brink of financial apocalypse in 2008.  Bailout isn’t the book for understanding the Wall Street side of the crisis, but it’s the best so far for understanding what deeply embedded conflicts of interest prevent government officials from doing the right thing to prevent a Credit Crisis.

Nothing I’ve seen shows any resolution of those conflicts of interest.

 

Please see related post: All Bankers Anonymous Book Reviews in one place.

 

 


[1] I have to admit his Mr. Smith Goes to Washington naiveté throughout the book has to be a bit of a pose, given that he’s a badass prosecutor who went after Colombian drug lords and white color financial criminals, experience which I imagine prepared him for interacting with the less savory aspects of human behavior.

[2] Barofsky argues that the original tax evasion problem that came up at Geithner’s confirmation hearing in 2009 illustrates Geithner’s basic disrespect for law and truthfulness.  Let’s just say that based on Bailout we should be glad to see the back of Treasury Secretary Tim Geithner in a second Obama administration.  I’m still going to be so pissed when Geithner announces he’s joining Goldman Sachs as senior partner upon leaving office next month.

[3] Barofsky grudgingly calls TARP architect Kashkari a reasonably straight-shooter.  I love this typical Barofsky backhanded compliment: “Sure, he was combative, not always forthcoming, and excessively deferential to Wall Street, but Kashkari had generally been straightforward with me.  I don’t think he ever flat-out lied to me, which in Washington put him into rarefied air.”

[4] The book’s forward alone, in which Barofsky relays Herb Allison giving him a classic drug-lord choice of “Gold or Lead” is worth the price of the book.  Barofsky sums up – with that one anecdote – everything you need to know about Washington DC in the 21st Century, and why people so rarely act for the public good when that conflicts with their private interest.  Allison opens his Gold-or-Lead proposals with “[Y]ou’re a young man, just starting out with a family, and obviously this job isn’t going to last forever.  Have you thought at all about what you’ll be doing next?”  When Barofsky professes only an interest in doing this job well, not focusing on the next job, Allison gets nastier, saying his tone is losing him credibility, people are talking badly about him.  Barofsky calls his bluff, after which Allison reverts to bribery again, asking him what kind of job he’d like?  An appointment?  A judgeship?  Basically anything to get Barofsky to play ball.

Powerful people worry too much about their potential next job to do the right thing in their current job.  In fact, the better-selling but largely uninteresting Andrew Ross Sorkin book Too Big To Fail suffers from precisely this problem.  Sorkin was too worried about enhancing his future journalistic career by protecting future sources such as the CEOs of Wall Street to criticize any of them in any interesting way.  Which is why the book should have been called Too Connected to Criticize.

[5] You have to love the story he tells on himself on the night of his own wedding rehearsal, unable to tear himself away from engaging over Blackberry in political fights with Treasury colleagues.  “Even when Karen tried to walk me through the drill for the ceremony, I couldn’t stop.  As she explained, ‘So we’ll come down this elevator and then walk down these stairs to this area, where we’ll have the ceremony,’ I responded, annoyingly, ‘Treasury is going to fight this.  Kevin’s right, they’re going to flip.  It’s going to shine a light in an area they want to keep dark.’  ‘And this is where the band will set up,’ Karen said, ignoring me and pointing out where the party would occur. ‘Treasury could just go out and tell the banks to respond with the ‘all money is green’ argument, and the banks will just say that they can’t respond to the request.  We’re going to have to get real specific in the subpoena,’ I blurted out, more to myself than her.  ‘This is where the buffet will be; we can taste some of the food tonight at dinner if you’d like,’ Karen placidly continued.  She very smartly refused to engage with my obsession, and she finally got some degree of peace after I walked into the pool with my Blackberry still clipped to my bathing suit, frying it.”

[6] For example, the post in which I named him the Norse God of Financial Accountability.

[7] Puvalowski is Barofsky’s buddy from the US Attorney’s office in New York who became his deputy at SIGTARP.

[8] Term Asset-Backed Securities Loan Facility.  A Federal Reserve program to lend public money to restart private investment in asset-backed securities after that portion of the market froze in the second half of 2008.  TALF proposed to provide loans of 95 cents on every private dollar invested, with non-recourse to the borrower.  For an introduction to some other non-recourse lending handouts from Washington to Wall Street, please read footnote #3 to this posting.

[9] Public-Private Investment Fund.  A Wall Street-friendly program providing 92 cents of federal funds for every dollar invested via PPIP to encourage private fund managers to purchase distressed assets off the balance sheets of big banks.  Also non-recourse to the borrower.  Again, see footnote #3 on this post for why that’s so awesome for Wall Street.

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