Monthly Archives: March 2018

AVOIDING ANOTHER ROUND OF “TOO BIG TO FAIL”

Here is a thought-provoking commentary by Rodney Johnson, President of Dent Research, an investment advisory firm.  Here is Rodney’s story:

“It’s no secret I can’t stand banks, particularly Bank of America.  The institution is doing its best to get rid of any customer service that ever existed (fewer tellers, pushing clients to online services, etc.) while airing sappy ads about how much they care.  Care about what?  Their bonuses?  Certainly not their customers.

“But even with my long-standing grudge against B of A, I’m not joining the chorus calling for increased regulation or busting them up along with the other big banks.

“I’ve got a better idea.  Hold them responsible for their actions.

“In 2008 the financial world was in a tailspin.  JPMorgan, Bank of America, Citigroup, and Wells Fargo were desperate for capital as short-term lending dried up and the value of their assets fell.  The Fed and U.S. Treasury came to their rescue, providing much-needed loans and seemingly unlimited support.  The thinking at the time was that such banks were “too big to fail,” meaning that if they went under, they could damage the entire financial system.  They had to be saved.

“This happened right after all the lending giants Fannie Mae and Freddie Mac were taken over—and bailed out—by the U.S. government.

“Both are instances of privatized profits and socialized losses.  The years of gains earned by these banks and the mortgage companies were paid out in dividends to shareholders as well as salaries and bonuses to staff.  When everything went south, shareholders took a hit in their share price and some staff were fired or saw their bonuses cut, but the pain was short-lived.  Bank share prices rebounded some, and banks again paid seven figures to some of the same people who oversaw the crisis.

“Over at Fannie and Freddie, the story is a little different, and provides a cautionary tale.

“These companies were placed in conservatorship by the U.S. Treasury and given $187 billion in loans.  In return, the Treasury demanded certain payment terms, which it eventually scrapped and said simply, ‘Give us all your profits.’  Since the crisis, Fannie and Freddie have paid the U.S. (top line of page 2 got cut off) Treasury $240 billion.

“Not one percent of it reduced their $187 billion loan, which they still owe.  Under the current arrangement, Fannie and Freddie can NEVER repay their loans, because all net income must be paid to the U.S. Treasury for the price of bailing them out.

“There is no doubt that U.S. taxpayers were burned by allowing these companies to book private profits in the years before the crisis, and then required to bail them out with public funds in the time of need.

“But now we’re getting burned again because the government is using the profits from these companies as a slush fund to pay for ongoing operations, saving itself from the hard work of balancing the U.S. budget.  Now we have socialized losses and socialized profits.

“Anyone who thinks the government can efficiently run for-profit businesses without succumbing to political pressures, raise your hand—and check your sanity.

“A case in point, Fannie Mae recently unveiled a new initiative to promote lending, a 3% down payment loan.  That sounds suspiciously like some of the mortgage offerings that created the last crisis.  I’ve no doubt this will end badly.

“As for the big banks, all of our teeth-gnashing and Congressional hearings brought about precious little change.  These institutions controlled 44% of deposits in 2006, and now 51%.  They grew from $5.18 trillion in assets to $8.01 trillion.  How’s that for taming the Leviathan?

“The problem is that, because of their Systemically Important Financial Institute (SIFI) status, which is Congressional-speak for too-big-to-fail, everyone believes that when the next crisis hits, these banks will be supported by taxpayer funds.

“And it could get worse.  Instead of pushing the banks farther away, the government could pull them closer, where they end up in the weird world of Fannie Mae and Freddie Mac.

“A better solution for all of these companies would be to draw clear lines of responsibility, outlining what will happen when capital requirements aren’t met.  If more capital couldn’t be raised, junior bondholders would be wiped out, then senior bondholders.  After that, depositors would start taking haircuts.

“If these steps were illustrated, depositors would quickly realize that there isn’t much of a bondhold cushion between them and a haircut.

“And it’s not individual depositors that would be alarmed.  While some people do hold more than the insured maximum of $250,000 in their account, it’s mostly companies that have uninsured funds.

“Hopefully the real possibility of a deposit haircut would motivate these large bank clients to demand better risk management from bankers.  They might even take their businesses to smaller banks with less complicated balance sheets.

“Unfortunately, as long as there is a perceived safety net from public sources for the largest banks then the largest customers will use them, perpetuating the system, and putting our tax dollars at risk.”

On the other hand, Rodney, wouldn’t it be simpler and easier to reinstate the Glass-Steagall Act.  Let me explain:

In 1933, in the wake of the 1929 stock market crash and during a nationwide commercial bank failure, as well as the Great Depression, Congress passed what is known today as the Glass-Steagall Act (GSA).  This act separated investment and commercial banking activities.  At the time, “Improper banking activity,” or what was considered overzealous commercial bank involvement in stock market investment, was deemed the main culprit of the financial crash.  According to that reasoning, commercial banks took on too much risk with depositors’ money.  Additional and sometimes non-related explanations for the Great Depression evolved over the years, and many questioned whether the GSA hindered the establishment of financial services firms that can equally compete against each other.

Reasons for the Act – Commercial Speculation

Commercial banks were accused of being too speculative in the pre-Depression era, not only because they were investing their assets but also because they were buying new issues for resale to the public.  Thus, banks became greedy, taking on huge risks in the hope of even bigger rewards.  Banking itself became sloppy and objectives became blurred.  Unsound loans were issued to companies in which the bank had invested, and clients were encouraged to invest in those stocks.

Sounds pretty much like what we saw in the 2008 financial debacle and what appears to be heading in the same direction today.

As a collective reaction to one of the worst financial crises at the time, the GSA set up a regulatory firewall between commercial and investment bank activities, both of which were curbed and controlled.  Banks were given a year to decide on whether they would specialize in commercial or in investment banking.  Only 10% of commercial banks total income could stem from securities; however, an exception allowed commercial banks to underwrite government-issued bonds.  Financial giants at the time such as JP Morgan, which were seen as part of the problem, were directly targeted and forced to cut their services and, hence, a main source of their income.  By creating this barrier, the GSA was aiming to prevent the banks’ use of deposits in the case of a failed underwriting.

Sounds like a good idea to me and a far better way to avoid the “too big to fail” problem!

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PERSONAL REPORT FROM GUANTANAMO

The following is an excerpted report from Elisa Alcabes (my niece), a lawyer with a big Wall Street firm, who, as part of her pro bono work, had the opportunity to visit and view some of the proceedings at Gitmo, the U.S. detention center on the island of Cuba.

“I am a new member of the Military Affairs & Justice Committee of COMAJ.  I jointed the committee because of my work with disabled veterans, who I have represented on a pro bono basis before the Dept. of Veterans Affairs.  I am currently engaged in reform litigation on behalf of the massive number of veterans waiting inordinate amounts of time for the VA to resolve their appeals of the denial of disability benefits.

“I did not expect to visit Guantanamo Bay.  It was never on my mind.  I was generally aware of the detention center, the horror stories, and the fact that some detainees were being tried, including those alleged to have planned and carried out the 9/11 attacks.  I attended my first COMAJ meeting in January 2018.  It was eye-opening.  They needed a volunteer to attend Gitmo in February.  My hand shot up.  This was an opportunity to witness history in a remote place that had been the subject of so much controversy that seemed compelling.

“I was going to be attending pre-trial proceedings in the Hadi case.  I knew nothing about Abd al Hadi or the military commissions.  I gave myself a crash course in both, using resources provided by the coordinator for the observer missions for COMAJ, news articles written by Carol Rosenberg of the Miami Herald, who is a constant at GTMO, and the considerable amount of material available online about the proceedings and the detainees.  I deliberately steered clear of detailed commentary about the wisdom of holding the proceedings at Guantanamo and the issues involved.  I wanted to travel there with a clean slate, an open mind.

“First, my impressions and experiences:

“The island is beautiful—stunning really.  Rolling hills dip down to rocky, peaceful beaches.  There are few people around and vast expanses of empty space.  The sunsets are breathtaking, turning the sky a deep orange-pink-blue.  Windmill Beach is the largest of the beaches.  It’s a  rocky, gravelly beach that spreads out in a curve and is punctuated by small cliffs on either side.  On one of the cliffs sits a gate and gatehouse—apparently the entrance to the detention center.

“There were five NGO representatives on my trip, all deeply engaged in the process and eager to watch the Hadi hearings unfold.  Three representatives were law students—one held a PhD in political geography, another was a former U.S. Marine, and the third, a former physical therapy student seeking a joint business/law degree.  A fourth representative was a professor at the University of Southern California.  I was the NGO representative with litigation experience.

“Hadi is accused of serving as a high-level al-Qaeda commander who, among other things, allegedly led and executed lethal attacks on U.S. forces in Afghanistan, funded suicide bombings, and ordered roadside bomb attacks.  One of his defenses is that he is not Hadi but, rather, someone named Nashwan al Tamir.  In other words, he is not who the government says he is.  The week I observed Hadi’s military commission proceeding, the key issue was a recorded deposition provided by Ahmed al Darbi, another detainee.  Darbi had reached a plea agreement with the government and was about to board a plane to travel back to Saudi Arabia to finish out his sentence.  During this deposition in August 2017, Darbi identified Hadi as a former al-Qaeda commander.  Darbi was now being treated as a cooperating witness.  He was due to take the stand in the Hadi case to be cross-examined by Hadi’s defense team.

“The Hadi case is not a death case, which makes it somewhat easier to proceed.  His defense team is comprised of military and civilian lawyers, highly skilled, experienced and effective advocates.

“On Day 1, we toured the courtroom facilities.  No proceedings were in session.  My first impression:  How can we—the United States of America—expect to portray ourselves as a country of laws when we have built this courtroom in a remote location off the mainland in the backyard of a detention center notorious for torturing terrorists?  I was willing to keep an open mind, though.  I had promised myself I would not judge right away.

“On Day 2, there was a Sunday session.  A witness took the stand.  He was a neurosurgeon.  They called him “Neuro 1” because he did not want to disclose his name.  The week before I arrived, Hadi’s defense team argued that Hadi was physically incapable of attending court—because he was suffering the after-effects of four recent back surgeries and may need further surgery.  The military judge—Marine Colonel Peter S. Rubin—refused to make a determination regarding Hadi’s ability to sit in court without first hearing a medical opinion.  Judge Rubin directed a doctor who recently treated Hadi to attend the hearing and provide testimony.  The doctor did not show up, essentially claiming that he was too busy with patients.  Reading between the lines, he had not treated Hadi for a sufficient amount of time to provide an opinion.

“Back to Neuro 1.  He was obviously reluctant to disclose his name because he was about to tell the court that Hadi was medically cleared to attend the hearings.  Yes, he might need surgery at some point in the future, but he has been improving since his last surgeries, and no further surgery was recommended at this time.  This is not what Hadi’s defense team wanted to hear.  After arguing that the anonymity of the witness made it impossible for the defense to evaluate his testimony, defense cross-examined Neuro 1.  The witness stood his ground, with nuanced testimony indicating that Hadi may be in pain and will find it difficult to sit for prolonged periods of time, but he is medically able to attend.  His presence in the courtroom, as opposed to sitting in his cell, would do nothing to exacerbate his back problem.  The judge took under advisement the defense’s motion to abate the hearings based on Hadi’s medical condition.

“After Neuro 1 left the stand, Hadi’s defense team argued two other motions.  The first was a motion to permit the defense to retain a consulting expert on enhanced interrogation techniques.  The defense argued that the expert was needed to help prepare Hadi’s team to cross-examine Darbi, who admittedly had been subjected to severe instances of torture.  The government countered that a consulting expert was unnecessary.  The defense had been in possession of the Darbi testimony for months and did not need expert help to undertake an effective cross-examination.  The defense also sought access to psychiatric records for Darbi, which were privileged.  The judge took these motions under advisement as well.

“Day 3, Monday morning.  The judge found Hadi was medically capable of attending court with accommodations.  Judge Rubin denied the defense motions to retain an expert and obtain Darbi’s psychiatric records.  Defense then argued a motion to continue the Darbi cross-examination until April.  This would post-date the scheduled departure of Darbi.

“Day 4, Tuesday.  The judge announced his rulings and the way forward on the Darbi cross-examination.  The hearing would be continued to Saturday, giving the defense three more days to prepare.  In addition, the schedule would entail two half-day sessions followed by a day off for Hadi to rest, then resume with two half-day sessions and a rest day until the cross-examination was complete.

“Our NGO group was deflated.  We had seen Darbi in court.  He sat in the back of the courtroom during the defense arguments seeking his psychiatric records.  We had heard so much argument on the Darbi deposition, we were eager to hear the Miami journalist’s cross-examination.  But we were scheduled to leave on Saturday morning, the day the cross would start.  We sought permission to stay until Sunday, but we were told this was not workable.

“We made the most of our next few days, scheduling meetings with Carol Rosenberg, the Miami journalist, a walking encyclopedia of all facts—past and present—pertaining to the military commissions proceedings, the detainees, the prosecution and defense teams, the detention center and all things GTMO.  We met with the defense team.  And finally, we met with Wendy Kelly, who oversees the operations of the military commissions.  During these meetings, I learned much about the military commissions in general and the challenges all the constituents faced.

“By the end of the week, my initial impression had changed significantly.  Did I get used to the island?  To some extent, living there for even a week enables you to see the base as more than its shadow.  It is a living, breathing town.  My closing observations:

  • The residents, whether living there full or part-time, act with dignity and self-respect.
  • The legal process is underway, but the pace is excruciatingly slow.
  • The prosecution, defense and military judges are doing everything they can to handle the proceedings with professionalism.
  • The military judge is highly-qualified, diligent and respectful of the parties. His task is a difficult one, though, as the military commissions process is virtually impossible to manage efficiently.

“In March 2016, a New York City bar association report appropriately and pointedly questioned the effectiveness of the military commissions as the forum in which to hold these proceedings, noting the vastly more efficient and open process that takes place in federal court.  I came away with similar questions.  The process is slow and takes place outside the public eye.  Without Carol Rosenberg’s astute journalism—at times minute-to-minute reports via Twitter—the American public would have little knowledge of what goes on at the military commissions.  Ideally, the cases pending in the military commissions would be moved into federal court on the mainland or at GTMO.  In light of significant resistance to bringing the trials back home, coupled with the current political climate, the question is how, if at all, this may be achieved.”

Wow!  What a great experience!  Thanks for sharing!

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THE IDES OF MARCH ARE UPON US

Tomorrow is the anniversary of the day on the Roman calendar that became known as the “Ides of March.”  It marked the date of the assassination of Julius Caesar and the turning point in Roman history.  It was also a day for the common people to celebrate and feast in honor of the goddess of the year.

We don’t pay much attention to the death of Julius Caesar nowadays, but we mourn the death of civil debate in our national arena.  We have no feast to celebrate the popularity of any current political office holder, but only the bitter taste of discourse so harsh that we turn away in exasperation and disgust.

Donald Trump was duly elected under the existing electoral rules, yet the losing side of voters, politicians and media appear devoted not to accept the electoral outcome but to demean and find some way, anyway to dethrone him.

As a leader and healer, Trump is the elephant-ego who has a derogatory nickname for friend and foe alike.  He contradicts himself regularly and only seems coherent and mentally stable when reading from a teleprompter.

The Democrats, under the hysterical minority leadership of Chuck Schumer and Nancy Pelosi, don’t bother with too many nicknames, or offer any alternative proposals, but declare every Republican achievement as a total disaster.

With little else to do, they lead the parade of fierce non-Trump voters and the media to trash his every move and desperately search for some way to unseat him.

With all this disharmony, all this name-calling and all this hostile discourse, since the election of Mr. Trump in November of 2016:

  • The economy has grown about 3.2%.
  • The 2017 tax plan appears to be generating positive results in raising wages and creating economic expansion.
  • The unemployment rate is at its lowest point in almost 20 years.
  • Our military has put ISIS on its last legs.
  • The stock market is up almost 25%.
  • According to the Bureau of Labor, black unemployment has fallen to 6.9%, the second lowest number since they’ve been keeping track.
  • The president has agreed to personally meet with Kim Jong Un, the first sitting president to meet with the North Korean leader.

Probably more accomplishments we’ve seen in one year than we’ve seen since Lyndon Johnson.  Not too bad for an unpopular president.

Now for some other things going on.

Anti-Semitism

According to the Anti-Defamation League, incidents of Anti-Semitism surged 57% in the U.S. last year.  This was the largest increase since the ADL started keeping track.

Study:  The U.S. Has the Worst Quality of Life

According to a new study by U.S. News and World Reports, California has the worst quality of life of all 50 states, while North Dakota has the best.  The news magazine looked at each state’s environment, the physical and mental health of its residents, its political activism and its fiscal stability to come to its determination.

The study found the states with the best quality of life are North Dakota, Minnesota , Wisconsin, New Hampshire and South Dakota.

The states with the worst quality of life are California, New Jersey, Indiana, Illinois and Texas.

Regardless of the study, I don’t think I’ll move to North Dakota.

Homeless in California

Governor Jerry Brown is entering his final year in public life riding high in opinion polls and generally praised by government officials.  But as the spotlight shifts to a new generation, there has been an increasing focus on the blight of poverty and homelessness under Mr. Brown’s watch—by his fellow Democrats.

Major Eric M. Garcetti of Los Angeles was the latest to weigh in, discussing what he said was the absence of state assistance in helping cities deal with the homeless.  Mr. Garcetti has come under fire for a major homelessness problem in Los Angeles, in a series of editorials in the Los Angeles Times.

“I love this governor—I think he’s done a tremendous job,” Mr. Garcetti said, “but in his last State of the State address, there wasn’t one mention of homelessness.  We need the state to step up.”

At a debate of Democratic candidates looking to succeed Mr. Brown as governor, Gavin Newsom, the lieutenant governor, spoke of California as a state plagued with high poverty, noting that this has happened as government has been controlled by Democrats.  “This happened on our watch.  We own this.”

One More Time

Mitt Romney is running to be a senator from Utah, which appears to be a platform to run against Trump in 2020.  If he campaigns against Trump like he did against Obama as a well-qualified business and government official who is reluctant to fight back against unfounded personal attacks, he will lose.

Romney will have to applaud the accomplishments of the Trump/Republican administration but say it was time to have a more consistent, less antagonistic and polarizing leader at the helm…and, above all else, he cannot let the personal attacks go by unanswered.

Trade War Coming

In his usual helter-skelter way, President Trump has threatened to impose a 25% tariff on imported steel and 10% on aluminum.  Trump thinks trade wars are easy to win.

The markets aren’t so sure.  Often these raises in tariffs don’t last too long, especially if there is retaliation.  Wars are not always predictable.

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THE YEARS JUST FLEW BY

As I approach my 87th year of residence on planet Earth, I find myself thinking a lot about two things:

First, where my appearance first started and how my life grew through childhood, then through the struggles of finding an identity in the work-a-day world into what became an invigorating career as a small business entrepreneur and on into an enjoyable retirement.

Second, my birthday thoughts are about my father and his life.  We’ll get to that shortly.

So now with some fading physical agility, I guess it’s only natural to spend more time looking back.  It’s been a good life, so come along with me as I reminisce.

I was born in the Rockaway Beach Hospital on the southern shore of Long Island, New York.  Two years later, all evidence of that occasion was destroyed when the hospital burnt down.

About that same time, we moved to Jackson Heights, on the north shore of Long Island, where three of my father’s siblings and their families all held forte.

I was an underachieving but passable student in the relative ease of elementary school.  I was average height, but not slim.  When I fell down at about eight or so and broke my collar bone, it became clear I had very poor eyesight.

Although I loved sports, my limited sight kept me from playing baseball or football.  I helped organize and be a manager for our independently organized Spades and the Jr. Dukes.  Couldn’t we have thought of better names?

A basketball was big enough for me to see, but I was mediocre at best.  I had poor stamina; and my shooting was inconsistent at best.  I could pass, but you don’t get points for that.

From about age 11 on, I went to camp every summer—not because my parents could afford it but my mother was the year-round bookkeeper for a camp of 1,000 kids, separated in five age groups, built around a nice large lake in Port Jervis, New York.

Camp was fun over the years.  I was a camper, waiter, dishwasher and a salad chef’s flunky.

High school was kind of an entertaining merry-go-round.  I took up smoking and got involved in student government, but I have no recollection of what the politics were all about.

I failed French I with the textbook my uncle wrote.  My mother was quite upset.  My uncle thought it was a hoot.  The teacher failed me because she said I was cheating by copying from my neighbor’s final exam.  What she didn’t realize is that with my poor eyesight, I could barely see my neighbor’s paper.

So I repeated French I, and then they put me in the French Honor Class, where I sat in the back of the room reading Howard Fast novels.  By the end of French IV, the teacher realized I hadn’t been very attentive so she promoted me, but not in the Honor Class.

By the third day in Mr. Eckstein’s French V class, he said, “What are you doing here?  You don’t have a clue.  So he sent me back to French IV, where I somehow managed to get through the State Regents exam

The rest of high school was mostly uneventful.  I got away with a lot because my brother-in-law’s sister Esther always kept the attendance records (Delaney Cards) and she covered up a lot of my transgressions.  Couldn’t have made it without her!

Moving on to college at the University of Oklahoma was a venture into another culture and a different world.  Instead of moving into a college dorm, I went into an off-campus rooming house (big mistake).  I hung out with a bunch of older veterans, who gave me a different kind of education.  The only part of college life I participated in was the O.U. football games.  That was exciting!

I enrolled in the School of Drama, because I thought I wanted to pursue a career in stage design and lighting.  I had to take some beginning courses in speech and acting with all the young aspiring actors.

To be honest, they were all naïve and terrible.  I, who had no interest in these courses, was the outstanding student—and then Dr. Morteman, who oversaw my area of interest, wanted to know why I wasn’t up at school six days a week instead of going to play basketball or just hanging out.

That kind of settled it.  On to UCONN and a more familiar cultural environment, as well as my immersion with Beta Sigma Gamma I have blogged about several times.

After a crash course one summer in French, I got all the credits I needed for graduation.  The irony was, Professor Croteau, the French teacher, was probably the best teacher I ever had.  He made a year of French fun and a breeze to get through.

All in all, I was not unhappy my school days were over.  So much growing up!

As I have passed into my 80’s, I think of my father a lot and how our lives have been so different.

Through only a high school graduate, he was well-read and far more capable in the work world than he was able to demonstrate or achieve.

At age 87, he had suffered back pain for 30 years or more without the availability I had with pain management and relatively-minor corrective surgery.

For many years, prior to WWII, my father was a printing broker (independent salesman).  He met my mother at a small S&L where she was a clerk.  The war essentially put the printing business on hold.  After that, he had  series of unchallenging jobs, including his last working years with his brother in a small ceramic tile jobbing business.

Different than mine, retirement for him and my mother was not all that happy.  At age 84, he and his wheelchair became residents of a nursing home.

He didn’t write a blog.  All he did was listen to music and the weather.  I watched with great anguish his struggles to open and turn the pages of a newspaper.  I think it was more a symbol than a meaningful reading activity.  I’m starting to have that same difficulty.

Although we shared the discomfort of a bad back, my life has had much more fulfillment.

So that’s my story.  At 87, I have a lot to be thankful for—lots of good friends all over the country; a marriage that works with a partner who has been a traveling co-pilot; two independent kids, successful in their own way; and a lot of great memories.

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