The incessant chatter about financial industry legislation reveals more talk and less action. Opponents of financial reform stand to lose big bucks if the status quo is changed. Okay, so they have the right to free speech in the USA, but why would anyone of sound mind and independent means bother to listen to that tired old rant? If you are not working for the Big Four Banks that currently control monetary policy in America or any of its subsidiary arms or lobbyists, then logic should compel you to join the public campaign for financial reform.

For the sake of American economic security, the financial system needs to transition from anti-public to pro-public by ceasing to favor private interests over public concerns. What we need is a Ralph Nader of consumer financial products. (I nominate Elizabeth Warren, chairwoman of the TARP Oversight Committee and a staunch advocate of the new Consumer Financial Product Agency.) Ms. Warren’s activism aside, establishing an independent agency is vital for the health and welfare of consumer finance.

Back in the zippy American sports car hey day circa 1960s, the hot car of the decade was a jazzy little number called the General Motors Corvair. The car sold in record numbers allowing consumers to live out their American dreams of sexy convertibles and high speed travel. Yet the sports car’s poor safety record was hidden from the public and put unsuspecting drivers at risk. Enter Harvard educated lawyer Ralph Nader. The consumer superhero wrote an expose in 1965 entitled Unsafe at Any Speed detailing flagrant safety issues like unstable driver control, spinouts and rollovers.

While the report damaged sales for GM’s wundercar, it conceivably saved lives. Perhaps the most important advance from Nader’s activism was the establishment of the National Traffic and Motor Vehicle Safety Act in 1966 which transferred the onus of quality and safety from consumers to manufacturer.

The Act effectively changed centuries of English common law based on Caveat Emptor i.e. Buyer Beware. Caveat Emptor declares that if a seller withholds information in a transaction, it does not constitute fraud. The rule declares that buyers are responsible for their own due diligence. Nader’s law changed that perception in a dramatic way.

The concept of consumer protection was so foreign at the time of Nader’s activism that corporate executives such as W.R Murphy, the president of Campbell Soup, claimed that consumer advocacy was “a fad” that would disappear in six months. Nader was considered such a threat to the bottom line that he was harassed, coerced, and investigated by automakers. Rather than spend their money on building safer vehicles, top brass spent pots of gold trying to discredit Nader’s character including unsuccessful attempts to get him to solicit prostitutes. His passionate defense of the public welfare posed a genuine challenge to the profit and loss statements of the Big Three.

A New Day

The result of the changes in the auto industry literally shifted the way we think as a culture. The Lemon Laws that Nader’s work inspired made it illegal to defraud car customers by withholding information. It reinforced the view that sellers were responsible for product quality. CARFAX disclosure (used car history) and the recent Toyota recall are direct results of the changes in law established four decades ago.

The cultural support for consumer rights that escalated in the 1960s inspired drug and food testing, air and water pollution control, aviation, trading and commerce laws, and the environmental movement. We accept it as normal to regulate products for quality on the open market.

In 2010, we would not consider Nader’s consumer advocacy radical in any sense of the word. It represents the status quo. Standard operating procedure in 21^st century America guarantees public safety comes before private profits in the airline, food, pharmaceutical, medical and education industries. We created complex government departments like the Food and Drug Administration (FDA) whose sole job it is to protect your daily quality of life.

Yet somehow one enormously important area of society we have failed to adequately supervise is the financial industry. In the quest to preserve the sanctity of “free markets,” we continue to follow a buyer beware philosophy in finance. No where else in society do we sacrifice consumer rights to private interests except in the areas of banking, credit, lending, and mortgages.

Common myth dictates you should do your homework before you sign a mortgage document. If you don’t know that you are signing your own financial death warrant, well…tough luck. You shouldn’t be playing with the big boys.

Yet America is made up of ordinary folks like you and me. We should not be dodging bullets to buy a home, preserve our savings or safeguard our futures. That is the job of the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC), Office of Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS).

Unlike the FDA and similar government agencies, the banking regulatory agencies OTC and OCC are not funded by the U.S government. Instead these “federal agencies” derive their income directly from the institutions they monitor. (That would be like the FDA getting paid by pharmaceutical companies to approve medicines.) One of the unfortunate blunders of the subprime years was that competition for market share was so fierce, it drove the two regulators to focus on profits rather than quality of mortgage lending.

The financial industry regulators, SEC and CFTC are funded by the government; yet their offices are stacked with so many industry executives they have become a revolving door for conflicting interests.

“Private” rating agencies like Moody’s, Fitch, and Standard & Poor’s, sell ratings to securities firms that ultimately affect the health and welfare of the entire financial system. An inherent conflict lies in the basic compensation structure of these companies. They are paid to rate client holdings. The subprime crisis revealed these “trusted” agencies sublimated standards to attract revenues. Despite this fact these agencies remain unregulated today.

The remarkable conundrum is that what is viewed as “reasonable” in finance would not be acceptable in any other area of society. For example, we don’t we allow Ecoli-tainted spinach on our supermarket shelves. Why? Because it is dangerous to our health. Vioxx was recalled when a connection to heart failure was discovered, because it endangered people’s lives. Who is held responsible when a drug is sold on the market? Certainly, not the patient. The presumption of society is that the patient relies on the expertise of doctors and pharmaceutical companies to prescribe the best medicine.

Yet in mortgage lending, an ordinary layperson is supposed to understand the 100 pages of legal and financial documents representing his or her family’s soon-to-be shelter. Do you sign a document forgoing your legal rights to product quality when you receive a doctor’s prescription? The legal system reflects that consumers are protected in medical matters.

The average homebuyer is not an expert in finance or loan products. They are relying on the mortgage broker or lender not to swindle them, but to advise them. Lenders and brokers are the experts. They should be held personally liable for withholding information or irresponsible counsel- just like a medical professional. After all, your financial health is at stake.

For example, lethal financial instruments like NegAm mortgages (zero down, low interest teaser rate balloon loan) or NINJA loans (no income, no job, no assets) were marketed to people deliberately without regard to their personal welfare or the economy as a whole. These dangerous financial products led to a defaulting mortgage epidemic that we continue to suffer from three years later. They should be outlawed under Lemon Loan Laws or pulled from the banking shelves like Vioxx.

As the laws of finance stand, who is responsible? Not the “experts” who hawked products they knew were deadly. But the lay public who were tricked by smooth talking, profit seeking mortgage “professionals” who would sell you anything in order to build a castle in Palm Beach.

A brilliant Madoff-Ponzi-like scheme without any legal protection or recourse for unsuspecting victims. The homebuying public were like lambs to the slaughter in the subprime decade. They didn’t know what hit them until the housing bubble created by unethical lenders and finance pros burst. Unlike Madoff, however, your mortgage broker or lender may have ruined your financial health, but he won’t go to jail.

Why? Because there is no adequate law protecting consumers from financial industry predators. Isn’t it time we created one?

editor@goodb.net

Small business will lead us out of the recession and fuel the recovery. That is the belief among many of the nation’s economists. To understand the role Small B plays in society, here are some basic statistics.

The Small Business Association reports that from 1993-2008, 64% of new jobs were created by firms with 1-499 employees.

“Small businesses employ just over half of U.S. workers. Of 119.9 million nonfarm private sector workers in 2006, small firms with fewer than 500 workers employed 60.2 million and large firms employed 59.7 million. Firms with fewer than 20 employees employed 21.6 million.”

The numbers reveal that supporting and strengthening our nation’s largest employer, Small Business, is a financial imperative.

The February 5, 2010 “jobs report” revealed that one million more jobs were lost in 2009 than was previously thought. The good news is the national unemployment rate decreased slightly from 10.3% to 9.7%. According to one economist, the unofficial unemployment rate is more like 17% when including all those ineligible for unemployment: sole proprietors, freelancers, consultants, long-term unemployed and temp workers. Another economist said the real numbers were closer to 22%* if underemployed workers were included (employees whose wages and hours have been substantially reduced). If we examined particular sectors like housing or retail, the numbers might double. Clearly, the state of unemployment in the U.S is in critical condition. Job growth reached its lowest level in 26 years in October 2009.

Something must be done to turn things around and fast.

Small Business Credit Frozen

Unlike big banks and big corporations, Small B does not have piles of excess cash to draw from. Limited access to liquidity is the nature of being “small.” Most owners draw capital for investment and expansion from business credit lines, corporate credit cards, personal assets, and bank loans.

Since the fall of Lehman Brothers in September 2008, small business owners are painfully aware that available credit has evaporated. For any business, other than big banks or large corporations who can simply issue debt for sale (bonds), the credit freeze is as dire in February 2010 as it was in October 2008.

Over six months, from April 2009 to October 2009, “The 22 banks receiving the most bailout money reported to the Treasury that they had decreased small business lending by $11.6 billion.” In October 2009, the U.S. Treasury reported another $1 billion for small business was eliminated,” as a consequence of the banking crisis.

While the global credit crisis compelled the United States government to take emergency measures to liquidate the nation’s largest financial institutions, small business was left in the cold. After three trillion dollars worth of government aid to the nation’s lenders, credit  is still not flowing beyond the top of the food chain.

Begging Banks for Money

In December 2009, President Obama urged TARP banks once again to investigate “every responsible way” to increase lending, claiming that rescued banks were “obligated” to help American business after being saved by taxpayers. They did not agree. No amount of noblesse-oblige would get “Fat Cat bankers” biting. “No matter what the President says, we are not lending,” claimed one banker anonymously.

Understanding that credit to Small B must be resuscitated as a matter of urgency for the nation’s employment rolls, the Big O is at it again with hopeful entreaties to the nation’s smaller banks.

“I‘m announcing a proposal to take $30 billion of the money that was repaid by Wall Street banks, and use it to create a new Small Business Lending Fund that will provide capital for community banks on Main Street. The more loans these banks provide to creditworthy small businesses, the better a deal we’ll give them on capital from this Fund…this will help small banks do even more of what our economy needs – ensure that small businesses are once again the engine of job growth in America.”     President Obama, February 2, 2010.

Yet community banks are not lending either. Why, you may wonder? According to finance blogger Barry Ritholz, because it is “rational.”

“Banks are not lending because the way the Fed/Treasury bailouts were structured, they are encouraged NOT TO LEND. Why? They need to rebuild their capital levels after 30 years of declining safeguards and capital ratios.”

Looking closer at the President’s “creditworthy small business” remark….If you were a bank would you lend to real-estate agencies, architect firms, housing developers, retail boutiques, or local jewelry shops? These are a few of the businesses in my neighborhood hanging on for dear life while waiting for the tide to turn. How long can they wait?

Americans are going to buy or rent homes again. Builders and architects will continue to create them. People will still want engagement rings. The neighborhood coffee shop will continue to feed the locals-in normal times at least. These are not obsolete business models, yet revenues and customers are scarce. What bank would/should risk lending to them in an uncertain economy? Yet should a recession allow us to turn our backs on businesses that have served the community for dozens of years?

Okay, there we have it. Big Banks refuse to lend. Little banks can’t afford to lend. (The FDIC has closed the doors on 140 regional banks in 2009.) Why would we try the dead-end approach of begging banks to lend one more time? From where I sit as a small business owner myself, begging banks to lend is a futile waste of energy and precious moments. Been there, done that. Time to move on. They will dance; they will murmur, but they will not lend.

“Mr. President, we are proud to be Americans and happy to collect any deposits given to us by our community, but Mr. President we are worried about the FDIC, regulation, and frankly going bankrupt. You see Mr. President. It’s either us or them. If we have to make a choice, we would rather it be them.” …yada yada.

The Real GDP

Question: How do we revive businesses and industries left hanging by a thread? Answer: With liquidity of course. The way we do for our big brothers and sisters.

Our real GDP in America is our labor market. Our best natural resources are people. Put our money behind our people and the engine will turn. Move money out of the top end of the capital markets and into the producing end where value originates. Money is derived in a capital market economy from labor.

For example: What is a mortgage? Thirty years of your labor. What is consumer spending? The fruits of your labor.  What are taxes? The spoils of your labor! We won’t have any money to spend if we don’t generate a healthy labor market. The Market System functions like this:  Work = production = consumption = distribution = investment.

Currently, “investment” is the only area fully functioning in the economic system (banks and investors who have been given large wads of taxpayer dollars). Limited liquidity is flowing through the other levels of the value chain. Supporting labor at its foundation is the most certain way to rebuild an economy and get the system back on its feet.

We don’t need another bank bailout-not even at the regional level. We need to support the nation’s largest employer directly. Small Business is simply too-big-to-fail. The big question is: What will resuscitate Small Business America?

Payroll taxes and health insurance costs have long been the bane of small business. For some inexplicable reason, small business pays 45% more than big business in employment taxes. Lowering these costs immediately and retroactively to the first of the year would relieve Small B of a continuing burden.

The cost of health benefits weighs smaller businesses down, especially in hard times. Many employers have opted for cheaper plans or dropped insurance altogether. The office of SBA Advocacy reports, “In 2007, small firm employees were almost twice as likely as large firm employees to be uninsured.” 

While cutting taxes and health care costs will help, these measures will not be enough to save the nation’s largest employer from collapse. Small business urgently needs capital.

Extraordinary Measures

Extraordinary times call for extraordinary measures. Credit is like oxygen for business. To remove small biz from the ventilator, thirty billion dollars of accessible credit would be a good start. Yet if banks refuse to lend, what is the solution?

The federal government needs to step in and rescue small business much the way they did for big business-through direct discounted lending. The Fed could create a Small Business Direct Lending Facility with 0-2% interest and ease of access to funds modeled on the same formula given to big banks.

Forget banks. Forget begging. The government has to step up to the plate and start Phase Two of the economic recovery – direct government lending to small business. Life support for the nation’s largest workforce. We did for the big banks; we did it for student loans; we can do it for small business.

What, you gasp? This is not capitalism? Neither is the three trillion dollar rescue for the too-big-to-fail institutions that rode to their glory on the backs of the nation’s middle class.

This is an urgent matter of life and death-the death of small business or its resurrection. Will we have a nation comprised only of Walmart megastores? Or will we save Mom and Pop and neighbor Joan.

We have created a socio-economic tragedy with the two-tiered bailout system-a socialized commercial banking system-where the too-big-to-fail institutions are given bottomless safety nets and long ropes of capital with which to hang themselves. All this is understood as necessary and vital to the health and welfare of the economy.

On the other hand, the remaining economy is left to die on the vine. We, ordinary entrepreneurial America, operate under “unfettered” capitalism. The big banks do not. (Not when they need a capital infusion, zero percent loan or backstop for bad investments-then they are glad for government intrusion).

The system of pouring money into the coffers of the nation’s largest banks has allowed capital to pool at the top. It has not trickled down, nor even dripped into ordinary hands. Without credit our financial system will not function. Credit is how we make payroll, buy supplies, expand, innovate, and generate revenues. Money must circulate in a capitalist economy. If it ceases to flow freely through all levels, the system is at threat of collapse-this time a collapse of labor and idea-driven entrepreneurs-the nation’s middle class.

Small Business America cannot compete on an even playing field with banking institutions that are given blank checks to suck wealth out of the system and lobby against any possible reform. Unfortunately the bailout was handled without lending or compensation restrictions from the start-leaving too little too late in the form of meaningless threats and clawbacks. No time to cry over spilt geld however. Rather, we must get the economic engine running again-by supporting its vulnerable workforce.

Democracy is about equal opportunity. We have abandoned our most cherished values to become a survival-of-the-luckiest economy. We must turn that inequity around and support the rock that big banks are built on-depositors and taxpayers. Translation: The Working Public.

We can’t lend directly to small business, you say? It would be unthinkable? As Joseph Stiglitz points out- capitalism in America was irrevocably changed with the bank bailout. The old rules no longer apply.

Too much money, you say? We can’t afford it? Princeton professor and economist Paul Krugman claims to stop spending would be “pure disaster.”

I seem to remember somewhere a guarantee by our forefathers to “life, liberty, and the pursuit of happiness.” Fighting with a bailout-out bank, capitalized with your taxpayer money, to give your business credit and stop foreclosure on your home is futile and unfair. It is more than unfair; it is undemocratic.

We are all born equal under the law; it is high time America’s economic system reflects that God-given right. Because after all, the nation’s largest employer is simply Too-Big-To-Fail.

Write to the President: Small Business Direct Lending Now.

To Contact Your Representative

To Contact Your Senator

editor@goodb.net

* Dow Jones Market Watch
*Additional Source: Bloomberg Radio, December 18, 2009,
Live Interview, Credit Analyst: David Goldman

Unrestrained greed among the investment banking elite has been blamed for much of the world’s suffering in recent years. In a remarkable shift from only two decades ago, greed in all its crude reality, is no longer “good” in the eyes of the world.

Maverick thinkers have warned of the perils of unbridled greed for centuries, yet few were listening. Not until the world turned dark on September 15, 2008 with the perfect financial storm did the rest of society take notice.

That was a day of economic infamy-the day Wall Street investment banking died. Lehman Brothers, one of the most respected and powerful financial institutions in the U.S., came crashing down in an economic shock heard round the world. With its demise, the remaining investment banks went on life support resuscitated only by woeful government rescues.

With the crash of the credit and securities markets in 2008, the relationship between business and the public irrevocably changed. No longer is the old adage, “it’s not personal, it’s business” an acceptable view. The crisis resulting from the misbehavior of bankers at the expense of ordinary folks unequivocally reveals that everything we do in business is indeed personal to someone.

The official theme of this year’s World Economic Forum (WEF) in Davos, Switzerland is “Rethink, Redesign, and Rebuild.” The unofficial theme could be called, “Greed is Ugly.” We traveled a long hard road to get here from the Ivan Boesky days of last century. With it, we endured a lot of economic pain. Yet as human beings we rarely change when things are comfortable. It is the advent of crisis, either personal or public, that forces us to reexamine our values and reinvent ourselves.

The Economic Crisis of 2008 has brought forth the Economic Epiphany of 2010. The sentiments last week among the world’s business leaders echoed the urgent need for a moral economic framework. Out of the halls of darkness comes the light. Mercy, mercy, hallelujah.

For all those skeptics out there, the 2010 Davos Forum focus on values signifies an enormous change for the year ahead. People are mad as hell and they don’t want to take it anymore.

Yet these are not ordinary angry mortals, like Joe the Plumber or moose shooting hockey moms. The outraged include the banking and business elite themselves. Members of a once admired fraternity hold errant colleagues responsible for destroying the good business model. Barclays’ President Robert Diamond said, “Those who stayed strong are angry at those who had poor management.”

Trust is your bread and butter in business. Banking is a respectable and honored profession when used to serve the community. Not a roulette wheel spun with the chips of pension-less factory workers, ninety-year-old widows, and the working poor. Where did common good values go?

Deutsche Bank CEO Josef Ackerman complained to the Davos crowd, “We should stop the blame game,” and “start looking forward.” His remarks were directed against the inevitable new taxes and industry regulation favored by those present. Ackerman did not realize that regulating banks is looking forward-toward creating a system that works for all, not just a self-serving few.

The German banking chief acknowledged the importance of public opinion. “If you lose the support of society, you are not going to realize your corporate objectives in the long run.” (A belief that seems not to be shared by all colleagues.)

As WEF’s official theme reveals, the new paradigm is to redesign the global economy to include world interest with self-interest. It is no longer okay to create suffering for others in the savage quest for more. French President Nicolas Sarkozy stated that for “those who create jobs and wealth” to “earn a lot of money is not shocking. But those who contribute to destroying jobs and wealth and also earn a lot of money (it) is morally indefensible.”

Survival-of-the-fittest naysayers have become like dinosaurs on the verge of extinction. The only ones who don’t know that seem to be employed by bailed out banks.

Yet “blame”, as distasteful as that might be on most WEF participant lips, is not altogether fruitless. If the perpetrators of this colossal calamity continue to ignore their personal responsibility, then the world will continue to point fingers and tighten the strings. Call it blame if you must, but the post-crisis behavior of unrestrained banker bonuses looks greedy to those looking on. And greed no longer looks good.

Mexico’s ex-banking chief pointed out that banks have “misjudged the deep feelings of the public.” The Wall Street Journal reported that banks returned to a “culture of high-risk-taking and lavish pay as soon as they were out of intensive care” and brought the anger on themselves.

The President of the European Central Bank, Jean-Claude Trichet, claimed bankers changed the game by using taxpayer money “to guarantee loans at banks…a gigantic amount” and could no longer dictate the new rules.

Sarkozy summed up the general sentiment of the conference stating that “indecent behavior will no longer be tolerated.” He claimed that capitalism could only be saved “by restoring its moral dimension.”

That morality is being discussed at all in the setting of the formally “greed is good” culture of Davos is extraordinary. Continuing global economic hardship is yielding remarkable changes in profit perspectives. Glimmers of hope are emerging from the depths of despair.

New economic thought has shifted to a world that cares for the poor, voiceless, and forgotten. The official message of the conference proclaims, “Now is the moment to rethink values as we rebuild prosperity. The interrelated fights against unemployment, global poverty and climate change are not just noble struggles: they are essential for long-term recovery and avoidance of future crises.”

It was not good to be a banker at the World Economic Forum this year. The chairman of Morgan Stanley Europe compared their social status to that of “terrorists.” The comparison is humorous until one thinks about the havoc reeked by what economist Joseph Stiglitz calls “negative value”. Traders, underwriters, lenders, analysts, salesmen bought and sold securities, loan products, and swaps that were based on mortgages that could/would never be repaid.

American Heritage Dictionary defines terrorism as a “state of fear and submission.” Considering the submission of millions of families to banks who took their homes and millions more who lost their incomes through no fault of their own, the fear gripping those facing foreclosure and unemployment, and the millions of investors who face uncertain retirement, the subprime mortgage debacle could undoubtedly be viewed as economic terrorism.

As we begin the second month of the year 2010, it seems clear that greed, defined as the accumulation of wealth and profit at the expense of others, is no longer ”good” to most of those observing. That is a great relief.

The outrage expressed by pillars of the global economy in Davos, as well as the general public, reflects that the new “good” is as much about serving the common good as anything else.  Now that is what I would call an epiphany!

editor@goodb.net