After the Fall: markets without regulation

(Counterpunch) We have only a little knowledge how the federal government intervenes in financial markets. What we do know is that since the fall, US Treasury and Federal Reserve policy makers have been flying blind, sailing in uncharted waters: pick whatever metaphor you choose to dissolve the fabrication of markets based on supply and demand, and, free.

In fact, one’s metaphor is an excellent place to start. Comparing two seemingly unrelated subjects is a perfect way to begin decoding how wrong we were to trust that fiscal prudence guided the nation’s premier financial institutions.

The power of metaphor explains in part the value of gold (as distinguished from price). Gold is the currency whose price is being suppressed: a rapid bull run in gold means a run on credibility and order. The value of gold endures and reflects the same lack of confidence that somber fiscal conservatives once assigned to excessive regulation by government. Put another way, there has been metaphorical gold in demonizing government.
Now, in consideration of the failure of financial institutions, there is need for a new understanding. Perhaps that understanding also starts with metaphor and not necessarily the belief that a trillion dollar investment will re-package the good times.
There is a chance Congress and the White House will get it right. But there is equally a chance they won’t, and given the stakes, it is imperative that time and thoughtfulness take into account what a trillion dollars of fiscal stimulus without clear and adequate controls will do.
So in respect to the power of metaphor, presumably not carried by President-elect Obama in one of his two overstuffed briefcases, consider the federal court sentencing hearing scheduled for Monday of Jorge and Carlos de Cespedes.
The de Cespedes brothers are facing prison time for using their Miami-based company, Pharmed, once one of the largest Hispanic businesses in America, to bilk millions from the Kendall Regional Medical Center. The federal judge has received more than 180 letters expressing support of a lenient sentence (‘180 letters urge leniency for former Pharmed owners in fraud charge’, Miami Herald, Jan. 2, 2009).
The Miami Herald article describing the de Cespedes’ travails notes that in 1998– the year Jeb Bush became governor of Florida– Carlos de Cespedes was one of “25 community leaders who signed a public letter decrying corruption in South Florida.” (The connection between the Cespedes, big Republican donors, and Jeb Bush is not incidental.)
The Jeb Bush “laissez faire” doctrine of government is in tatters; the result of the misplaced faith that commerce could do better than government in protecting free markets. Gov. Bush described what he believed to be the foundation for Florida’s future in his 2003 inaugural speech: “There will be no greater tribute to our maturity as a society than if we can make these buildings around us empty of workers; as silent monuments to the time when government played a larger role than it deserved or could adequately fill.”
His audience did not mistake his meaning: get the regulators out of the way of progress.
In its outstanding 2008 eight month investigation, “Borrowers Betrayed”, The Miami Herald details the lack of regulatory supervision of mortgage brokers by the state of Florida, allowing convicted felons easy access to prey. Miami Herald editors unfortunately kept the series’ focus on poor victims exploited by greedy mortgage brokers and lax bureaucrats; they pointedly did not trace that corruption up the political food chain. Had they done so, they would have tracked readers straight to the governor’s mansion and powerful Republicans banking on a permanent majority in Congress and the White House.
In the New York Times, Michael Lewis puts this reality in appropriate context of the calamity: “Americans enter the New Year in a strange new role: financial lunatics.” (‘The End of the Financial World as We Know It, NY Times, January 4, 2009)
The history of political malfeasance in places like Miami rarely rises to volumes of criminal prosecutions, but the bits and pieces – like the 1998 letter from the signatories of the Mesa Rodonda against corruption– should be scrutinized for what it says about the capacity of wealthy, well-heeled lawyers, lobbyists, and speculators to game the system.
The point to consider: how misdirection by state leaders like Jeb Bush in furtherance promoted the blurring of edges, made it larger and instead of bright lines– lines like Miami’s Urban Development Boundary separating developable land from land unfavorable to development—and allowed corruption to flourish. In many respects, the equation is intact and thriving; spending down principal until help arrives.
That help? The trillion dollars of your money and mine.
“We believe there is much we can do as a community to clean up our act”, proclaimed Hispanic business leaders in June 1998 under the umbrella of Mesa Rodonda to express outrage against rampant corruption in Miami-Dade County. “We have had it!” begins their letter. “Once regarded as the crime capital of America, we are now perceived as its corruption capital.” (“Hispanic business leaders call summit to fight corruption”, Miami Herald, June 2, 1998) Carlos de Cespedes was among the signers.
A week later the Miami Dade State Attorney’s Office announced: the arrest of Antonio J. Reyes, Director and Chief Operating Officer of Thermoplastic & Signs, Inc., in connection with a joint investigation by the State Attorney’s Office and the Miami-Dade Police Department Public Corruption Unit. “(Investigators) uncovered numerous circumstances wherein Reyes and his company submitted bills, under the County’s paving contract, with Church & Tower, for roadway striping work that was never done. Reyes’ company was hired as a sub-contractor under the County contract to do this work and submitted invoices for payment to the Contractor, and ultimately the County. These instances of over billing resulted in an overpayment by the County in excess of $1,000,000.” (June 10, 1998)
Church and Tower is a division of the corporate interests of the family of the late Jorge Mas Canosa, founder of the Cuban American National Foundation. Mas Canosa’s son, Jorge Mas, was another signer of the Mesa Rodunda letter. Another was Sergio Pino, listed as president of Century Plumbing. Plumbing, in this case, is a metaphor of its own. Slightly more than a year later, The Miami Herald would amplify:
“Miami International Airport, rated among America’s worst for passengers, is being used by Miami-Dade politicians as a billion-dollar piggy bank to enrich their friends and campaign contributors. They manipulate rules so favored firms get airport deals. … Key findings: Virtually all major deals at MIA go to companies that give political contributions and employ lobbyists who are key fund-raisers and advisors for county politicians. (“The airport mess: Miami’s tourism industry is threatened by politicians”, Miami Herald, October 17, 1999)
The Herald continues, “If passengers aren’t winning at MIA, who is? Often, it’s a small group of political insiders who reap millions in airport spoils without ever showing up for work, investing significant cash or bringing industry experience to the table. Developer Sergio Pino is one of the main fund-raisers for Miami-Dade Mayor Alex Penelas and has contributed to at least 11 of the 13 commissioners. Last year, at Penelas’ request, he hosted a $238,000 fund-raiser for Commissioner Miriam Alonso.”
“In 1998, Miami-Dade Commissioner Miriam Alonso penned an editorial bemoaning the plague of corruption scandals then afflicting the county, and lashing out at “the venality of certain corrupt officials.” On Thursday, some eight years later, Alonso’s own venality was finally laid bare: She pleaded guilty to 20 felonies for looting campaign accounts in 1998 and 1999 and trying to cover up the crimes. (“Alonso pleads guilty, says she is sorry”, Miami Herald, Oct. 27, 2006)
In “Airport Mess”, the Herald noted, “One of South Florida’s biggest builders, Pino owns a waterfront home and a 54-foot yacht and has a net worth of at least $19 million. Yet in 1995, he was cut into the airport’s duty-free shops as a “disadvantaged businessman” to meet airport rules requiring minority partners. With his business interests now pulling in more than $32 million a year, Pino no longer qualifies as a minority entrepreneur, but he has kept his place in the duty-free deal: The county decided he could stay in under a grandfather clause. Pino readily acknowledges his political ties, but said his team won because it offered the best return. His inclusion as a disadvantaged businessman? “I didn’t make the rules,” he said. “I played by the law. . . . To me, it was a business opportunity.”
Back in 1998, Pino’s key business colleagues were in the midst of a pitched battle on the no-bid 99 year lease they had secured from the county commission, before the US military had even decided how to dispose of the property, for the former Homestead Air Force Base: Greenberg Traurig attorney Miguel De Grandy was the principal lawyer representing HABDI; a newly formed company constituted from board members of the Latin Builders Association. Ramon Rasco, now chairman of US Century Bank that Pino founded in 2002, was a principal organizer of the HABDI fiasco. 
Caesar Alvarez, managing partner of Greenberg Traurig, one of the nation’s largest law firms, was another signer of the Mesa Roduna letter. Today, Alvarez is chairman of the charitable John S. and James L. Knight Foundation. The foundation, a premier institution defending independent journalism, failed to censure one of its grantees in 2008—the Miami International Film Festival—when last year, at the last minute, the festival director refused to air a documentary highly critical of Dominican Republic sugar operations owned by Miami’s billionaire Fanjul family interests.
Another signatory of the Mesa Rodunda letter, US Century board member Jose Cancela, a lobbyist to move the Urban Development Boundary in Miami-Dade for development projects that are partly owned by other US Century board members including Rodney Barreto (Gov. Bush’s appointee, now chairman, of the Florida Wildlife Commission), Armando Guerra and the Herran brothers.
In 1998, political corruption was seemingly everywhere. Miami City Commissioner Humberto Hernandez did time in the Big House. Former state senator Al Gutman was indicted in 1999, along with his wife and 23 others, on charges of Medicaid fraud and conspiracy despite allegations swirling around his successful re-election bid a year earlier, supported by the panoply of Florida business campaign contributors. Gutman, who was chairman of the Florida Senate Health Care Committee, pleaded guilty to felony conspiracy charges that he helped set up home health care companies that never did any legitimate business, got names of purported patients from voter lists, and received over $800,000 in Medicare payments. He resigned from the Florida Senate as part of the plea bargain and was sentenced in 2000 to five years in prison.
Pino, in 2006, turned up in a federal probe of Miami Dade County Commissioner Jose “Pepe” Diaz. The investigation resulted in no charges. It centered on a fishing trip that Diaz took to Cancun aboard Pino’s private jet. Carlos de Cespedes was the other passenger on the trip (“Pepe Diaz Cancun Visit is Probed”, Miami Herald, June 10, 2006). A few months after the trip, Diaz and the rest of the commission voted for a Pino development project called Grand Bay. The Herald political blog noted, “Miami-Dade Commissioner Jose ”Pepe” Diaz received $20,000 in 2004 from what federal prosecutors describe as a shell company used to conceal fraudulent proceeds from a hospital kickback scheme — a payment the commissioner says was a legitimate bonus. The company, Kaufman Medical Products, was cited in a document filed in federal court Tuesday about healthcare fraud charges against Carlos and Jorge de Céspedes, owners of the bankrupt Doral medical-supply firm Pharmed. Diaz listed on his 2004 public disclosure form that he had received $19,795 from Kaufman. Diaz said Wednesday the money was a bonus for work performed for the de Céspedes brothers’ venture capital firm, Astri Group.” (‘Naked Politics’, Miami Herald, July 24, 2008)
“In a separate matter, the Miami Daily Business Review reported last week that it had obtained corporate bank records showing that Pino’s companies may have reimbursed $29.500 to 59 contributors to Governor Jeb Bush’s 2002 re-election campaign. It is a violation of Florida election law for a person to make a donation in another person’s name.” (‘Crist ally cuts ties amid grand jury investigation’, St. Pete Times, July 27, 2006) Pino was a Bush-Cheney “Ranger” for having raised at least $200,000 for the president’s 2004 re-election campaign and, according to the St. Pete Times, “is a major donor to Gov. Bush’s non-profit educational foundation.”

 

1998 was a key year in the building and housing asset bubble: the politics of laissez faire “libertarianism” in service of the free market were angling to meet up with the lowest interest rates in US history (at that time); the response to the crashing dot.com bubble and the 9/11 event. Nothing could go wrong as long as free enterprise was allowed to reign. Think about what happened in Florida the decade after Cespedes put his name to the letter against corruption in Miami.

The business leaders who put their name to a letter in 1998 against corruption were about to be propelled into the boom in housing and construction that turned single digit millionaires into centi-millionaires. Pull the threads from platted subdivisions in West Miami, to infrastructure like Miami International Airport or Miami road paving contracts and the fabric of the US economy unravels straight up to the executive suites of Citigroup, Merrill Lynch, AIG, Bear Stearns, Lehman Brothers, Indymac, Fannie Mae and Freddie Mac for example. Between 1999 and 2003 in Florida, the US Army Corps of Engineers approved more than 12,000 wetlands permits and rejected one. During the same period, 84,000 acres of wetlands vanished. (“They won’t say no”, St. Pete Times, May 22, 2005)

 

“All we are looking to do is find a balance between residential needs and environmental needs,” Commissioner Pepe Diaz told Time Magazine in reference to moving the Urban Development Boundary last year. (‘Lowe’s eyes the Everglades’, Time Magazine, April 28, 2008) This notion of balance between the environment and economy is a multi-generational Ponzi scheme of its own; using later adopters to mask the shifting baselines that had been sold to an earlier generation of compromise. Put another way, it is all one mesa rotonda, forcing politics to reside a centimeter of the edge of the law while, those close to the edge blur the edge so that centimeter becomes a matter of continuous, revolving dispute; a banner crop pre-fertilized with campaign contributions for harvesting by engineering firms, consultants, and big law firms.

Again, the environment provides a clear example in Florida. In 1994, the State of Florida incorporated the settlement agreement with the federal government related to its failure to enforce against pollution of the Everglades by mandating a phosphorous standard of 10 parts per billion. The measure was to be in effect by 2006. By 2003, Gov. Bush agreed to modify the hard and fast standard with an amendment to Florida law allowing for mixing zones and numerical calculations that decimated the agreement between the state and feds. The sugar industry flooded the state capital so that as the bill was being heard in the Senate, there were more lobbyists than legislators in the halls. Bush sent his chief environmental lieutenant, environmental secretary David Struhs, to the Miami courthouse steps to falsely claim that federal agencies were in agreement. In July 2008, a federal court issued a stinging rebuke against the Florida law and said the US EPA had turned a “blind eye” to the state’s blurred standard. (‘Judge: Glades cleanup ignored’, Miami Herald, July 30, 2008)

By extension, if reasonable people can’t agree on protecting wetlands from too much fertilizer, or only agree that the line of pollution should be blurred by jimmying the scales with arithmetic averages and mixing zones, why should anyone care about bond credit ratings or risk analyses that allow insiders to fleece the nation’s financial institutions while getting paid billions and a Grade A report card for doing it? Few in public office cared while so much money was flowing outside and inside the edges of the law and into political campaigns. In key respects, this behavior is still reinforced by a permanent incumbency, insulated by gerrymandered districts, and a fading media.
So here is the point: in the first months of the Obama administration, one trillion dollars of fiscal stimulus will pour from taxpayer obligations to the states. Since everything that can go wrong in financial markets—misplaced risk, horrendous analyses by men judged to be too brilliant to fail, matched up to greed and ingenuity in the evasion of regulations and ethics; then it is not only possible but even likely to predict the worst result of the trillion dollar fiscal stimulus.
The first consideration, then, of the Obama administration should be to acknowledge the likely consequences. We have experienced—in financial markets—the radical and unexpected. So President-elect Obama must admit that the fiscal stimulus plan will put American taxpayers at even greater risk to white collar bankers who have contrived their way into the US treasury.
Not a single red cent should be appropriated by Congress for a fiscal stimulus until audit controls, checks, and balances are in place to flush fraud and systematic corruption from the distribution of government funds to private industry. That is a tall order. Making sure that the tsunami of taxpayer dollars will not end up in the pockets of the same interests who created the crisis, papering purchase orders, contracts, and further political IOU’s requires more than ethics classes. And it better get done properly or there will be strong potential for social unrest. Gov. Jeb Bush wanted to empty Tallahassee of regulators: in important respects he got what he wanted.
As a result of allowing the regulatory capacity of government to wither, we will need to quickly build from the ground-up, a civil service and accountability that rewards success and penalizes failure. New federal laws and budgets for enforcement must give teeth to public corruption investigations and prosecutions. To this I would add, “to keep democracy safe”. It shouldn’t be an after-thought, but the way things are going who can deny what we value as gold has been sold for pennies?

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2 Responses to After the Fall: markets without regulation

  1. […] Alan Farago – After the Fall: markets without regulation: “We have only a little knowledge how the federal government intervenes in financial markets. […]

  2. Joydaylok says:

    I am unable to understand this post. But well some points are useful for me.

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