Apr 18

Obama attempts to Overcome Institutional Insolence on Oil Prices?

Yesterday President Obama stood at the White House with Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler, Treasury Secretary Timothy Geithner, Attorney General Eric Holder, Federal Trade Commission (FTC) Chairman Jon Leibowitz, and proclaimed that he will be putting “more cops on the beat” to investigate Wall Street oil price speculation and potential wrongdoing. I have written on this subject before here, here, and here. While I have little confidence that anything will come of this third call by the President for the Department of Justice, the FBI, and the CFTC to investigate oil futures speculation and other speculation in the commodity derivatives markets, he is at least taking his act public this time.

“We can’t afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage, and driving prices higher, only to flip the oil for a quick profit,”

Many argue that the President can not do much at all to influence oil prices. Many simply buy the Wall Street rhetoric hook, line and sinker, and even go so far as to turn sheer conjecture into fancy charts in order to confuse the public. I disagree. First, there is no greater motivator than personal freedom, and under current law Eric Holder can punish those found to have run afoul of the law by sending them to federal prison. Moreover, while the fines currently permitted are small change, the embarrassment that would accompany fines has consequences. I do not have any explanation for the extraordinary impotence and insolence at the Department of Justice under Eric Holder. The entire soap opera could just as easily be an elaborate act wherein the President calls for investigations of this thing or the other thing, and subsequently sends Eric Holder privately on his way with instructions to do nothing.

I find it extraordinarily difficult to believe that if Eric Holder made the decision to call in the FBI and begin interviewing the big Wall Street players in the commodity futures derivatives markets and put a few of them in prison, that the oil prices wouldn’t drop in an instant. I envision FBI agents and federal regulators walking through hallways at Goldman Sachs, owner of the Goldman Sachs Gold Index, and other large firms carrying lawfully issued subpoenas and search warrants. I have a hunch that some of the more egregious activities would stop immediately if people realized they might actually be sent to prison. Exxon Mobil, the Saudi Oil Minister, among others, are on record as believing that the current price of oil has no basis in the realities of supply and demand nor the potential disruption in delivery that could ensue following a conflict with Iran. Holder’s behavior with regard to oil futures speculation is not dissimilar from his approach to both the larger mortgage and financial instrument fraud which caused the recession, and his utter infecundity with regard to prosecuting those responsible for the BP oil spill. It is as if the entire Department of Justice loathes prosecuting anyone, for anything, at any time.

What is particularly troublesome about Obama’s footing on oil prices is that it is not Republicans who are obfuscating efforts to initiate investigations, make arrests, and prosecute those responsible. It is his own administration and administration officials who stand in his way. It is cerytainly true that Republicans, Mitch McConnell in particular that are placing the blame at Obama’s feet, but the President has the tools to demonstrate through concrete actions that he takes Wall Street fraud and price manipulation seriously. One man, let alone the President of the United States, can alone control the world price of oil, but one man can use the tools available to him to take action. Some time ago CBS’s 60 Minutes ran a piece in which it interviewed the chief prosecutor at the Department of Justice concerning the lack of criminal prosecutions stemming from the financial collapse. His response was a contemptuous “just wait.” Well, the American people have been patiently waiting for nearly four years for the administration to show that it will prosecute wrongdoing perpetrated by the golden boys of Wall Street. My guess is that the wait will continue.

Ian Masters interviewed Michael Greenberger, the former Director of Trading and Markets at the Commodity Futures Trading Commission, on this subject yesterday. It’s worth a listen.

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Apr 17

AIG Illustrates Further Treasury Department Incompetence

Timothy GeithnerEvidence of further incompetence from Timothy Geithner and friends over at the Treasury Department surfaced recently in a report that uncovered a disturbing tax deal flowing from the 2008 $182 billion bailout of AIG and other companies. A tax loophole that under normal circumstances serves the important function of providing a corporation with a mechanism to reduce its tax burden following periods of significant loss was not closed to AIG following negotiations with the Treasury Department in 2008. In fact, the loophole was expanded through a special exemption. The tax mechanism referred to as a tax loss carryforward is part of the tax code at section 382 and it allows a corporation to essentially offset future profits with past net operating losses for a period of seven years in order to reduce its tax liability. Normally corporations that acquire other entities, or are acquired as in AIG’s case, are forbidden from claiming the tax loss carryfroward in order to disincentivise purchases or sales executed for the sole purpose of claiming another companies’ losses.

However, during the turbulent period following the bursting of the housing bubble, sub-prime mortgage debacle, and derivatives crash, Timmy Geithner hatched a plan to allow companies being asked, or asking, to take over troubled or failing companies an exception to an IRS rule amended in 1986 to specifically address the issue in controversy here. In AIG’s case, the exemption served to nullify the ownership change that took place when the United States government purchased a significant stake in the company. As such, AIG, which showed a near $20 billion profit in 2011, but will offset nearly 90% of its tax liability by writing down $17.7 billion.

“It’s an arcane and hard-to-follow way of disguising billion of dollars paid to firms that, for whatever reason, are politically favored,” says J. Mark Ramseyer, a Harvard law professor who wrote a paper on a similar tax treatment given to General Motors when it was taken over. “It’s one thing to announce through TARP that you’re going to give a firm a billion dollars. But if you issue a letter saying that the company can use a net operating loss that they would otherwise lose, that’s harder for people to follow,” he says, referring to the Troubled Asset Relief Program enacted in 2008 by the U.S. government to buy assets and equity from financial institutions to strengthen them. Besides AIG and GM, Citigroup, Fannie Mae, and Freddie Mac got tax breaks as part of their bailouts.

The Treasury Department argues that following nearly $200 billion in bailout cash, that AIG couldn’t make ends meet or attract capital, notwithstanding the obvious message that Treasury was sending to investors through the bailout: That AIG would not be permitted to fail. It is the height of arrogance to ask the American people to believe that attracting private capital would be difficult for a company guaranteed to remain viable by the United States Treasury Department. Yet Treasury continues its sell its pyramid scheme based primarily on the false idea that the entire world would have been eaten by dinosaurs if it did not funnel trillions of dollars to corporations.

“Allowing those companies to keep their NOLs made them stronger businesses, helped attract private capital and further stabilized the overall financial system,” Emily McMahon, the acting assistant secretary for tax policy, wrote in a Treasury blog post March 1. “It would have been counterproductive — and perhaps irresponsible to undermine the stability of those same institutions, at the height of the financial crisis, by imposing a tax code provision that was never intended to apply in this context,” she wrote.

Elizabeth Warren, architect of the Consumer Financial Protection Bureau (CFTC)–an agency many have high hopes will offer significant financial protections to the public–has called the AIG loophole a stealth bailout. It represents much more than that however. It represents more evidence that the Obama administration and the Treasury Department had and has in place a policy of providing any and every resource to corporations that caused the collapse of the world economy, while doing next to nothing to provide assistance to the public. Whether the efforts were conspiratorial in nature is irrelevant, as the ultimate effect is the same: The public retained its debts and losses, while the corporations were provided cash and loans to service their debts and a mechanism to further limit future liability through tax provisions not extended to the American people.

Perhaps lost in all of this is that as a result of this disturbing decisions at Treasury, that executives at AIG and other companies bailed out by the American taxpayer will receive larger bonuses, as their bonuses are tied to overall profitability. Less tax liability equals greater profits. While the Obama administration is fond of pointing out that many of the companies that were bailed our during the crisis have “paid the government back and have returned to profitability,” the bailout of AIG will ultimately cost the American people at least $22 billion. The President failed to remove Timothy Geithner after reports surfaced that he unabashedly failed to follow his directive to break up Citi. We have now learned that he cut private tax deals with AIG and other companies to guarantee limited tax liability for nearly a decade. President Obama’s retention of perhaps the most incompetent Treasury Secretary serving during my lifetime leads me to only one conclusion: That the President either tacitly or directly approved of his decisions.