In the campaign to persuade Kettering voters to approve a new 6.9 mill property tax for Kettering Schools, I received six pieces of literature through the mail urging a “Yes” vote — all of impressive professional quality.  I’m on the list to receive all of the information sent to board members.  Most Kettering voters did not receive all six pieces of literature, but were targeted with specific literature according to a marketing strategy based on voter demographics. This was an expensive campaign.  As of early April, almost $19,000 was spent by the Political Action Committee, “Citizens for Kettering Schools.”  The levy request failed, but received 48% “Yes” votes.  A new levy campaign is planned for November.

• The Blue Ribbon Report (Sent to all Kettering households and paid for with District funds, not PAC funds.)
• Letter from former school superintendents Jim Trent and Chet Rousch (Mr Trent is the current school board president.)
• A three fold flyer
• A testimonial from Kettering parents Mike and Victoria Delman
• A testimonial from Kettering parents Sondra and Harry Vearn
• A letter from Oakview School Elementary Principal, Margaret Engelhard

Written by Mike Bock

I’m reading Simon Johnson and James Kwak’s new book — “13 Bankers, the Wall Street Takeover and the Next Financial Meltdown” — and posting a summary and excerpts of each chapter.

In chapter two, “Other People’s Oligarchs,” Johnson and Kwak give details of financial meltdowns in the 1990’s — Mexico, Russia, the Czech Republic and Urkraine in 1994 and Southeast Asia, Korea, Brazil and Russia in 1997-1998.  They write that oligarchs who controlled the finances of those countries were blamed.

Johnson and Kwak write that it was widely assumed that the United States was immune from financial problems of of  countries with “emerging markets.”  But, “In September-October 2008, when Lehman Brothers collapsed and panic seized the U.S. economy, money flooded out of the private financial system in what looked like a classic emerging market crisis.”

They write, “When the federal government began rescuing major banks presided over by ultra-wealthy executives — while letting smaller banks fail by the dozens — it began to seem as if our government was bailing out is own uniquely American oligarchy.”

Here is an excerpt from the conclusion of this chapter:

“In similar situations in the 1990s, the United States had urged emerging market countries to deal with the basis economic nd political factors that had created devastating crises.  This advice was often perceived as arrogant, but the basic logic was sound:  when an existing economic elite has led a country into a deep crisis, it is time for change.  And the crisis itself presents a unique, but short-lived, opportunity for change.

“As in Korea a decade before, a new president came to power in the United States in the midst of the crisis.  And just like Kim Dae-jung in Korea, Barack Obama had campaigned as a candidate of change.  Yet far from applying the advice it had so liberally dispensed to others, the U.S. government instead organized generous financial support for its existing economic elite, leaving the captains of the financial sector in place.”

Previous posts about this book:

• “13 Bankers” — Introduction
• “13 Bankers” — Chapter One: Thomas Jefferson and the Financial Aristocracy

In testimony, May 4, 2010, from Jamie Galbraith before the Subcommittee on Crime on the role that fraud played in the financial crisis, Mr. Galbraith said sub-prime mortgage was a “license to steal.” He said, “Given a license to steal, thieves get busy. And because their performance seems so good, they quickly come to dominate their markets; the bad players driving out the good.:

Galbraith said, “At its heart, the financial crisis was a breakdown in the rule of law in America.” And he warns, “If fraud – or even the perception of fraud – comes to dominate the system, then there is no foundation for a market in the securities. They become trash. And more deeply, so do the institutions responsible for creating, rating and selling them. Including, so long as it fails to respond with appropriate force, the legal system itself.”

Galbraith recommends: “There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.”

Other Excerpts:

• I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis.
• Economists have soft- pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the dot.com bubble. They continue to do so now.
• The criminologist-economist William K. Black of the University of Missouri-Kansas City is our leading systematic analyst of the relationship between financial crime and financial crisis. Black points out that accounting fraud is a sure thing when you can control the institution engaging in it: “the best way to rob a bank is to own one.”
• The experience of the Savings and Loan crisis was of businesses taken over for the explicit purpose of stripping them, of bleeding them dry. This was established in court: there were over one thousand felony convictions in the wake of that debacle.
• In California in the 1980s, Charles Keating realized that an S&L charter was a “license to steal.” In the 2000s, sub-prime mortgage origination was much the same thing. Given a license to steal, thieves get busy. And because their performance seems so good, they quickly come to dominate their markets; the bad players driving out the good.
• The complexity of the mortgage finance sector before the crisis highlights another characteristic marker of fraud. … An efforts a year ago by Representative Doggett to persuade Secretary Geithner to examine and report thoroughly on the extent of fraud in the underlying mortgage records received an epic run-around.
• When sub-prime mortgages were bundled and securitized, the ratings agencies failed to examine the underlying loan quality. Instead they substituted statistical models, in order to generate ratings that would make the resulting RMBS acceptable to investors.
• An older strand of institutional economics understood that a security is a contract in law. It can only be as good as the legal system that stands behind it. Some fraud is inevitable, but in a functioning system it must be rare. It must be considered – and rightly – a minor problem.
• If fraud – or even the perception of fraud – comes to dominate the system, then there is no foundation for a market in the securities. They become trash. And more deeply, so do the institutions responsible for creating, rating and selling them. Including, so long as it fails to respond with appropriate force, the legal system itself.
• Control frauds always fail in the end. But the failure of the firm does not mean the fraud fails: the perpetrators often walk away rich. At some point, this requires subverting, suborning or defeating the law. This is where crime and politics intersect. At its heart, therefore, the financial crisis was a breakdown in the rule of law in America.
• Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: “liars’ loans,” “ninja loans,” “neutron loans,” and “toxic waste,” tells you that people knew. I have also heard the expression, “IBG,YBG;” the meaning of that bit of code was: “I’ll be gone, you’ll be gone.”
• Let us suppose that the investigation that you are about to begin confirms the existence of pervasive fraud, involving millions of mortgages, thousands of appraisers, underwriters, analysts, and the executives of the companies in which they worked, as well as public officials who assisted by turning a Nelson’s Eye. What is the appropriate response?
• You have to act. The true alternative is a failure extending over time from the economic to the political system. Just as too few predicted the financial crisis, it may be that too few are today speaking frankly about where a failure to deal with the aftermath may lead.
• In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case. Thank you.

Written By Mike Bock