Tuesday, March 31, 2009

Tiny Tim Stiffs Sparky The Wonder Penguin While Engine Charlie Spins In His Grave!

What a wonderful world: in 1953, President Dwight Eisenhower nominated Charles E. (Engine Charlie) Wilson as Secretary of Defense. During the closed hearings of the Senate Armed Services Committee on his confirmation, Wilson made a comment that was widely misquoted and was to dog him throughout his governmental years. According to the press, Wilson told the Senators: "What's good for General Motors is good for the country." What he actually said: "For years I thought that what was good for our country was good for General Motors, and vice versa." At the time of his nomination as Secretary of Defense, Wilson was CEO of General Motors. Flash forward to March 29, 2009, and we find that the Obama administration asked Rick Wagoner, the chairman and CEO of General Motors, to step down and he agreed. In a way, the POTUS was keeping faith with Engine Charlie because Rick Wagoner wasn't good for either GM or the country. Now, if only the POTUS would send the same message to Tiny Tim over at Treasury. If this is (fair & balanced) longing, so be it.

[x Salon]
This Modern World — "Elegant Non-Simplicity Or Communofascism?"
By Tom Tomorrow (Dan Perkins)

Click on image to enlarge. ♥

Tom Tomorrow/Dan Perkins

[Dan Perkins is an editorial cartoonist better known by the pen name "Tom Tomorrow". His weekly comic strip, "This Modern World," which comments on current events from a strong liberal perspective, appears regularly in approximately 150 papers across the U.S., as well as on Salon and Working for Change. The strip debuted in 1990 in SF Weekly.

Perkins, a long time resident of Brooklyn, New York, currently lives in Connecticut. He received the Robert F. Kennedy Award for Excellence in Journalism in both 1998 and 2002.

When he is not working on projects related to his comic strip, Perkins writes a daily political weblog, also entitled "This Modern World," which he began in December 2001.]

Copyright © 2009 Salon Media Group, Inc.

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Copyright © 2009 Sapper's (Fair & Balanced) Rants & Raves

Monday, March 30, 2009

You Don't Get It, But Matt Taibbi Does! Good Luck America, How Are You?

Curse Alan Greenspan, Sanford (Sandy) Weill, Phil Gramm, Joe Cassano, Robert Rubin, James (Jimmy) Cayne, Christopher Cox, Angelo Mozilo, John Thain, Henry (Hank) Paulson, Richard (Dick) Fuld, and Kenneth (Ken) Lewis. If there is a Hell, may all of these scum burn there through eternity. To read a thumbnail capsule of each of these malefactors of great wealth, click on this link. Ifr this is a (fair & balanced) benediction for the Unites States of America, so be it.

[x Rolling Stone]
The Big Takeover
By Matt Taibbi

Tag Cloud of the following article

created at TagCrowd.com

It's over — we're officially, royally fucked. No empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline — a corporation that got rich insuring the concrete and steel of American industry in the country's heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire.

The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history — some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That's $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG's 2008 losses).

So it's time to admit it: We're fools, protagonists in a kind of gruesome comedy about the marriage of greed and stupidity. And the worst part about it is that we're still in denial — we still think this is some kind of unfortunate accident, not something that was created by the group of psychopaths on Wall Street whom we allowed to gang-rape the American Dream. When Geithner announced the new $30 billion bailout, the party line was that poor AIG was just a victim of a lot of shitty luck — bad year for business, you know, what with the financial crisis and all. Edward Liddy, the company's CEO, actually compared it to catching a cold: "The marketplace is a pretty crummy place to be right now," he said. "When the world catches pneumonia, we get it too." In a pathetic attempt at name-dropping, he even whined that AIG was being "consumed by the same issues that are driving house prices down and 401K statements down and Warren Buffet's investment portfolio down."

Liddy made AIG sound like an orphan begging in a soup line, hungry and sick from being left out in someone else's financial weather. He conveniently forgot to mention that AIG had spent more than a decade systematically scheming to evade U.S. and international regulators, or that one of the causes of its "pneumonia" was making colossal, world-sinking $500 billion bets with money it didn't have, in a toxic and completely unregulated derivatives market.

Nor did anyone mention that when AIG finally got up from its seat at the Wall Street casino, broke and busted in the afterdawn light, it owed money all over town — and that a huge chunk of your taxpayer dollars in this particular bailout scam will be going to pay off the other high rollers at its table. Or that this was a casino unique among all casinos, one where middle-class taxpayers cover the bets of billionaires.

People are pissed off about this financial crisis, and about this bailout, but they're not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d'état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.

The crisis was the coup de grâce: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve — "our partners in the government," as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.

The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.

I. PATIENT ZERO

The best way to understand the financial crisis is to understand the meltdown at AIG. AIG is what happens when short, bald managers of otherwise boring financial bureaucracies start seeing Brad Pitt in the mirror. This is a company that built a giant fortune across more than a century by betting on safety-conscious policyholders — people who wear seat belts and build houses on high ground — and then blew it all in a year or two by turning their entire balance sheet over to a guy who acted like making huge bets with other people's money would make his dick bigger.

That guy — the Patient Zero of the global economic meltdown — was one Joseph Cassano, the head of a tiny, 400-person unit within the company called AIG Financial Products, or AIGFP. Cassano, a pudgy, balding Brooklyn College grad with beady eyes and way too much forehead, cut his teeth in the Eighties working for Mike Milken, the granddaddy of modern Wall Street debt alchemists. Milken, who pioneered the creative use of junk bonds, relied on messianic genius and a whole array of insider schemes to evade detection while wreaking financial disaster. Cassano, by contrast, was just a greedy little turd with a knack for selective accounting who ran his scam right out in the open, thanks to Washington's deregulation of the Wall Street casino. "It's all about the regulatory environment," says a government source involved with the AIG bailout. "These guys look for holes in the system, for ways they can do trades without government interference. Whatever is unregulated, all the action is going to pile into that."

The mess Cassano created had its roots in an investment boom fueled in part by a relatively new type of financial instrument called a collateralized-debt obligation. A CDO is like a box full of diced-up assets. They can be anything: mortgages, corporate loans, aircraft loans, credit-card loans, even other CDOs. So as X mortgage holder pays his bill, and Y corporate debtor pays his bill, and Z credit-card debtor pays his bill, money flows into the box.

The key idea behind a CDO is that there will always be at least some money in the box, regardless of how dicey the individual assets inside it are. No matter how you look at a single unemployed ex-con trying to pay the note on a six-bedroom house, he looks like a bad investment. But dump his loan in a box with a smorgasbord of auto loans, credit-card debt, corporate bonds and other crap, and you can be reasonably sure that somebody is going to pay up. Say $100 is supposed to come into the box every month. Even in an apocalypse, when $90 in payments might default, you'll still get $10. What the inventors of the CDO did is divide up the box into groups of investors and put that $10 into its own level, or "tranche." They then convinced ratings agencies like Moody's and S&P to give that top tranche the highest AAA rating — meaning it has close to zero credit risk.

Suddenly, thanks to this financial seal of approval, banks had a way to turn their shittiest mortgages and other financial waste into investment-grade paper and sell them to institutional investors like pensions and insurance companies, which were forced by regulators to keep their portfolios as safe as possible. Because CDOs offered higher rates of return than truly safe products like Treasury bills, it was a win-win: Banks made a fortune selling CDOs, and big investors made much more holding them.

The problem was, none of this was based on reality. "The banks knew they were selling crap," says a London-based trader from one of the bailed-out companies. To get AAA ratings, the CDOs relied not on their actual underlying assets but on crazy mathematical formulas that the banks cooked up to make the investments look safer than they really were. "They had some back room somewhere where a bunch of Indian guys who'd been doing nothing but math for God knows how many years would come up with some kind of model saying that this or that combination of debtors would only default once every 10,000 years," says one young trader who sold CDOs for a major investment bank. "It was nuts."

Now that even the crappiest mortgages could be sold to conservative investors, the CDOs spurred a massive explosion of irresponsible and predatory lending. In fact, there was such a crush to underwrite CDOs that it became hard to find enough subprime mortgages — read: enough unemployed meth dealers willing to buy million-dollar homes for no money down — to fill them all. As banks and investors of all kinds took on more and more in CDOs and similar instruments, they needed some way to hedge their massive bets — some kind of insurance policy, in case the housing bubble burst and all that debt went south at the same time. This was particularly true for investment banks, many of which got stuck holding or "warehousing" CDOs when they wrote more than they could sell. And that's were Joe Cassano came in.

Known for his boldness and arrogance, Cassano took over as chief of AIGFP in 2001. He was the favorite of Maurice "Hank" Greenberg, the head of AIG, who admired the younger man's hard-driving ways, even if neither he nor his successors fully understood exactly what it was that Cassano did. According to a source familiar with AIG's internal operations, Cassano basically told senior management, "You know insurance, I know investments, so you do what you do, and I'll do what I do — leave me alone." Given a free hand within the company, Cassano set out from his offices in London to sell a lucrative form of "insurance" to all those investors holding lots of CDOs. His tool of choice was another new financial instrument known as a credit-default swap, or CDS.

The CDS was popularized by J.P. Morgan, in particular by a group of young, creative bankers who would later become known as the "Morgan Mafia," as many of them would go on to assume influential positions in the finance world. In 1994, in between booze and games of tennis at a resort in Boca Raton, Florida, the Morgan gang plotted a way to help boost the bank's returns. One of their goals was to find a way to lend more money, while working around regulations that required them to keep a set amount of cash in reserve to back those loans. What they came up with was an early version of the credit-default swap.

In its simplest form, a CDS is just a bet on an outcome. Say Bank A writes a million-dollar mortgage to the Pope for a town house in the West Village. Bank A wants to hedge its mortgage risk in case the Pope can't make his monthly payments, so it buys CDS protection from Bank B, wherein it agrees to pay Bank B a premium of $1,000 a month for five years. In return, Bank B agrees to pay Bank A the full million-dollar value of the Pope's mortgage if he defaults. In theory, Bank A is covered if the Pope goes on a meth binge and loses his job.

When Morgan presented their plans for credit swaps to regulators in the late Nineties, they argued that if they bought CDS protection for enough of the investments in their portfolio, they had effectively moved the risk off their books. Therefore, they argued, they should be allowed to lend more, without keeping more cash in reserve. A whole host of regulators — from the Federal Reserve to the Office of the Comptroller of the Currency — accepted the argument, and Morgan was allowed to put more money on the street.

What Cassano did was to transform the credit swaps that Morgan popularized into the world's largest bet on the housing boom. In theory, at least, there's nothing wrong with buying a CDS to insure your investments. Investors paid a premium to AIGFP, and in return the company promised to pick up the tab if the mortgage-backed CDOs went bust. But as Cassano went on a selling spree, the deals he made differed from traditional insurance in several significant ways. First, the party selling CDS protection didn't have to post any money upfront. When a $100 corporate bond is sold, for example, someone has to show 100 actual dollars. But when you sell a $100 CDS guarantee, you don't have to show a dime. So Cassano could sell investment banks billions in guarantees without having any single asset to back it up.

Secondly, Cassano was selling so-called "naked" CDS deals. In a "naked" CDS, neither party actually holds the underlying loan. In other words, Bank B not only sells CDS protection to Bank A for its mortgage on the Pope — it turns around and sells protection to Bank C for the very same mortgage. This could go on ad nauseam: You could have Banks D through Z also betting on Bank A's mortgage. Unlike traditional insurance, Cassano was offering investors an opportunity to bet that someone else's house would burn down, or take out a term life policy on the guy with AIDS down the street. It was no different from gambling, the Wall Street version of a bunch of frat brothers betting on Jay Feely to make a field goal. Cassano was taking book for every bank that bet short on the housing market, but he didn't have the cash to pay off if the kick went wide.

In a span of only seven years, Cassano sold some $500 billion worth of CDS protection, with at least $64 billion of that tied to the subprime mortgage market. AIG didn't have even a fraction of that amount of cash on hand to cover its bets, but neither did it expect it would ever need any reserves. So long as defaults on the underlying securities remained a highly unlikely proposition, AIG was essentially collecting huge and steadily climbing premiums by selling insurance for the disaster it thought would never come.

Initially, at least, the revenues were enormous: AIGFP's returns went from $737 million in 1999 to $3.2 billion in 2005. Over the past seven years, the subsidiary's 400 employees were paid a total of $3.5 billion; Cassano himself pocketed at least $280 million in compensation. Everyone made their money — and then it all went to shit.

II. THE REGULATORS

Cassano's outrageous gamble wouldn't have been possible had he not had the good fortune to take over AIGFP just as Sen. Phil Gramm — a grinning, laissez-faire ideologue from Texas — had finished engineering the most dramatic deregulation of the financial industry since Emperor Hien Tsung invented paper money in 806 A.D. For years, Washington had kept a watchful eye on the nation's banks. Ever since the Great Depression, commercial banks — those that kept money on deposit for individuals and businesses — had not been allowed to double as investment banks, which raise money by issuing and selling securities. The Glass-Steagall Act, passed during the Depression, also prevented banks of any kind from getting into the insurance business.

But in the late Nineties, a few years before Cassano took over AIGFP, all that changed. The Democrats, tired of getting slaughtered in the fundraising arena by Republicans, decided to throw off their old reliance on unions and interest groups and become more "business-friendly." Wall Street responded by flooding Washington with money, buying allies in both parties. In the 10-year period beginning in 1998, financial companies spent $1.7 billion on federal campaign contributions and another $3.4 billion on lobbyists. They quickly got what they paid for. In 1999, Gramm co-sponsored a bill that repealed key aspects of the Glass-Steagall Act, smoothing the way for the creation of financial megafirms like Citigroup. The move did away with the built-in protections afforded by smaller banks. In the old days, a local banker knew the people whose loans were on his balance sheet: He wasn't going to give a million-dollar mortgage to a homeless meth addict, since he would have to keep that loan on his books. But a giant merged bank might write that loan and then sell it off to some fool in China, and who cared?

The very next year, Gramm compounded the problem by writing a sweeping new law called the Commodity Futures Modernization Act that made it impossible to regulate credit swaps as either gambling or securities. Commercial banks — which, thanks to Gramm, were now competing directly with investment banks for customers — were driven to buy credit swaps to loosen capital in search of higher yields. "By ruling that credit-default swaps were not gaming and not a security, the way was cleared for the growth of the market," said Eric Dinallo, head of the New York State Insurance Department.

The blanket exemption meant that Joe Cassano could now sell as many CDS contracts as he wanted, building up as huge a position as he wanted, without anyone in government saying a word. "You have to remember, investment banks aren't in the business of making huge directional bets," says the government source involved in the AIG bailout. When investment banks write CDS deals, they hedge them. But insurance companies don't have to hedge. And that's what AIG did. "They just bet massively long on the housing market," says the source. "Billions and billions."

In the biggest joke of all, Cassano's wheeling and dealing was regulated by the Office of Thrift Supervision, an agency that would prove to be defiantly uninterested in keeping watch over his operations. How a behemoth like AIG came to be regulated by the little-known and relatively small OTS is yet another triumph of the deregulatory instinct. Under another law passed in 1999, certain kinds of holding companies could choose the OTS as their regulator, provided they owned one or more thrifts (better known as savings-and-loans). Because the OTS was viewed as more compliant than the Fed or the Securities and Exchange Commission, companies rushed to reclassify themselves as thrifts. In 1999, AIG purchased a thrift in Delaware and managed to get approval for OTS regulation of its entire operation.

Making matters even more hilarious, AIGFP — a London-based subsidiary of an American insurance company — ought to have been regulated by one of Europe's more stringent regulators, like Britain's Financial Services Authority. But the OTS managed to convince the Europeans that it had the muscle to regulate these giant companies. By 2007, the EU had conferred legitimacy to OTS supervision of three mammoth firms — GE, AIG and Ameriprise.

That same year, as the subprime crisis was exploding, the Government Accountability Office criticized the OTS, noting a "disparity between the size of the agency and the diverse firms it oversees." Among other things, the GAO report noted that the entire OTS had only one insurance specialist on staff — and this despite the fact that it was the primary regulator for the world's largest insurer!

"There's this notion that the regulators couldn't do anything to stop AIG," says a government official who was present during the bailout. "That's bullshit. What you have to understand is that these regulators have ultimate power. They can send you a letter and say, 'You don't exist anymore,' and that's basically that. They don't even really need due process. The OTS could have said, 'We're going to pull your charter; we're going to pull your license; we're going to sue you.' And getting sued by your primary regulator is the kiss of death."

When AIG finally blew up, the OTS regulator ostensibly in charge of overseeing the insurance giant — a guy named C.K. Lee — basically admitted that he had blown it. His mistake, Lee said, was that he believed all those credit swaps in Cassano's portfolio were "fairly benign products." Why? Because the company told him so. "The judgment the company was making was that there was no big credit risk," he explained. (Lee now works as Midwest region director of the OTS; the agency declined to make him available for an interview.)

In early March, after the latest bailout of AIG, Treasury Secretary Timothy Geithner took what seemed to be a thinly veiled shot at the OTS, calling AIG a "huge, complex global insurance company attached to a very complicated investment bank/hedge fund that was allowed to build up without any adult supervision." But even without that "adult supervision," AIG might have been OK had it not been for a complete lack of internal controls. For six months before its meltdown, according to insiders, the company had been searching for a full-time chief financial officer and a chief risk-assessment officer, but never got around to hiring either. That meant that the 18th-largest company in the world had no one checking to make sure its balance sheet was safe and no one keeping track of how much cash and assets the firm had on hand. The situation was so bad that when outside consultants were called in a few weeks before the bailout, senior executives were unable to answer even the most basic questions about their company — like, for instance, how much exposure the firm had to the residential-mortgage market.

III. THE CRASH

Ironically, when reality finally caught up to Cassano, it wasn't because the housing market crapped but because of AIG itself. Before 2005, the company's debt was rated triple-A, meaning he didn't need to post much cash to sell CDS protection: The solid creditworthiness of AIG's name was guarantee enough. But the company's crummy accounting practices eventually caused its credit rating to be downgraded, triggering clauses in the CDS contracts that forced Cassano to post substantially more collateral to back his deals.

By the fall of 2007, it was evident that AIGFP's portfolio had turned poisonous, but like every good Wall Street huckster, Cassano schemed to keep his insane, Earth-swallowing gamble hidden from public view. That August, balls bulging, he announced to investors on a conference call that "it is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions." As he spoke, his CDS portfolio was racking up $352 million in losses. When the growing credit crunch prompted senior AIG executives to re-examine its liabilities, a company accountant named Joseph St. Denis became "gravely concerned" about the CDS deals and their potential for mass destruction. Cassano responded by personally forcing the poor sap out of the firm, telling him he was "deliberately excluded" from the financial review for fear that he might "pollute the process."

The following February, when AIG posted $11.5 billion in annual losses, it announced the resignation of Cassano as head of AIGFP, saying an auditor had found a "material weakness" in the CDS portfolio. But amazingly, the company not only allowed Cassano to keep $34 million in bonuses, it kept him on as a consultant for $1 million a month. In fact, Cassano remained on the payroll and kept collecting his monthly million through the end of September 2008, even after taxpayers had been forced to hand AIG $85 billion to patch up his fuck-ups. When asked in October why the company still retained Cassano at his $1 million-a-month rate despite his role in the probable downfall of Western civilization, CEO Martin Sullivan told Congress with a straight face that AIG wanted to "retain the 20-year knowledge that Mr. Cassano had." (Cassano, who is apparently hiding out in his lavish town house near Harrods in London, could not be reached for comment.)

What sank AIG in the end was another credit downgrade. Cassano had written so many CDS deals that when the company was facing another downgrade to its credit rating last September, from AA to A, it needed to post billions in collateral — not only more cash than it had on its balance sheet but more cash than it could raise even if it sold off every single one of its liquid assets. Even so, management dithered for days, not believing the company was in serious trouble. AIG was a dried-up prune, sapped of any real value, and its top executives didn't even know it.

On the weekend of September 13th, AIG's senior leaders were summoned to the offices of the New York Federal Reserve. Regulators from Dinallo's insurance office were there, as was Geithner, then chief of the New York Fed. Treasury Secretary Hank Paulson, who spent most of the weekend preoccupied with the collapse of Lehman Brothers, came in and out. Also present, for reasons that would emerge later, was Lloyd Blankfein, CEO of Goldman Sachs. The only relevant government office that wasn't represented was the regulator that should have been there all along: the OTS.

"We sat down with Paulson, Geithner and Dinallo," says a person present at the negotiations. "I didn't see the OTS even once."

On September 14th, according to another person present, Treasury officials presented Blankfein and other bankers in attendance with an absurd proposal: "They basically asked them to spend a day and check to see if they could raise the money privately." The laughably short time span to complete the mammoth task made the answer a foregone conclusion. At the end of the day, the bankers came back and told the government officials, gee, we checked, but we can't raise that much. And the bailout was on.

A short time later, it came out that AIG was planning to pay some $90 million in deferred compensation to former executives, and to accelerate the payout of $277 million in bonuses to others — a move the company insisted was necessary to "retain key employees." When Congress balked, AIG canceled the $90 million in payments.

Then, in January 2009, the company did it again. After all those years letting Cassano run wild, and after already getting caught paying out insane bonuses while on the public till, AIG decided to pay out another $450 million in bonuses. And to whom? To the 400 or so employees in Cassano's old unit, AIGFP, which is due to go out of business shortly! Yes, that's right, an average of $1.1 million in taxpayer-backed money apiece, to the very people who spent the past decade or so punching a hole in the fabric of the universe!

"We, uh, needed to keep these highly expert people in their seats," AIG spokeswoman Christina Pretto says to me in early February.

"But didn't these 'highly expert people' basically destroy your company?" I ask.

Pretto protests, says this isn't fair. The employees at AIGFP have already taken pay cuts, she says. Not retaining them would dilute the value of the company even further, make it harder to wrap up the unit's operations in an orderly fashion.

The bonuses are a nice comic touch highlighting one of the more outrageous tangents of the bailout age, namely the fact that, even with the planet in flames, some members of the Wall Street class can't even get used to the tragedy of having to fly coach. "These people need their trips to Baja, their spa treatments, their hand jobs," says an official involved in the AIG bailout, a serious look on his face, apparently not even half-kidding. "They don't function well without them."

IV. THE POWER GRAB

So that's the first step in Wall Street's power grab: making up things like credit-default swaps and collateralized-debt obligations, financial products so complex and inscrutable that ordinary American dumb people — to say nothing of federal regulators and even the CEOs of major corporations like AIG — are too intimidated to even try to understand them. That, combined with wise political investments, enabled the nation's top bankers to effectively scrap any meaningful oversight of the financial industry. In 1997 and 1998, the years leading up to the passage of Phil Gramm's fateful act that gutted Glass-Steagall, the banking, brokerage and insurance industries spent $350 million on political contributions and lobbying. Gramm alone — then the chairman of the Senate Banking Committee — collected $2.6 million in only five years. The law passed 90-8 in the Senate, with the support of 38 Democrats, including some names that might surprise you: Joe Biden, John Kerry, Tom Daschle, Dick Durbin, even John Edwards.

The act helped create the too-big-to-fail financial behemoths like Citigroup, AIG and Bank of America — and in turn helped those companies slowly crush their smaller competitors, leaving the major Wall Street firms with even more money and power to lobby for further deregulatory measures. "We're moving to an oligopolistic situation," Kenneth Guenther, a top executive with the Independent Community Bankers of America, lamented after the Gramm measure was passed.

The situation worsened in 2004, in an extraordinary move toward deregulation that never even got to a vote. At the time, the European Union was threatening to more strictly regulate the foreign operations of America's big investment banks if the U.S. didn't strengthen its own oversight. So the top five investment banks got together on April 28th of that year and — with the helpful assistance of then-Goldman Sachs chief and future Treasury Secretary Hank Paulson — made a pitch to George Bush's SEC chief at the time, William Donaldson, himself a former investment banker. The banks generously volunteered to submit to new rules restricting them from engaging in excessively risky activity. In exchange, they asked to be released from any lending restrictions. The discussion about the new rules lasted just 55 minutes, and there was not a single representative of a major media outlet there to record the fateful decision.

Donaldson OK'd the proposal, and the new rules were enough to get the EU to drop its threat to regulate the five firms. The only catch was, neither Donaldson nor his successor, Christopher Cox, actually did any regulating of the banks. They named a commission of seven people to oversee the five companies, whose combined assets came to total more than $4 trillion. But in the last year and a half of Cox's tenure, the group had no director and did not complete a single inspection. Great deal for the banks, which originally complained about being regulated by both Europe and the SEC, and ended up being regulated by no one.

Once the capital requirements were gone, those top five banks went hog-wild, jumping ass-first into the then-raging housing bubble. One of those was Bear Stearns, which used its freedom to drown itself in bad mortgage loans. In the short period between the 2004 change and Bear's collapse, the firm's debt-to-equity ratio soared from 12-1 to an insane 33-1. Another culprit was Goldman Sachs, which also had the good fortune, around then, to see its CEO, a bald-headed Frankensteinian goon named Hank Paulson (who received an estimated $200 million tax deferral by joining the government), ascend to Treasury secretary.

Freed from all capital restraints, sitting pretty with its man running the Treasury, Goldman jumped into the housing craze just like everyone else on Wall Street. Although it famously scored an $11 billion coup in 2007 when one of its trading units smartly shorted the housing market, the move didn't tell the whole story. In truth, Goldman still had a huge exposure come that fateful summer of 2008 — to none other than Joe Cassano.

Goldman Sachs, it turns out, was Cassano's biggest customer, with $20 billion of exposure in Cassano's CDS book. Which might explain why Goldman chief Lloyd Blankfein was in the room with ex-Goldmanite Hank Paulson that weekend of September 13th, when the federal government was supposedly bailing out AIG.

When asked why Blankfein was there, one of the government officials who was in the meeting shrugs. "One might say that it's because Goldman had so much exposure to AIGFP's portfolio," he says. "You'll never prove that, but one might suppose."

Market analyst Eric Salzman is more blunt. "If AIG went down," he says, "there was a good chance Goldman would not be able to collect." The AIG bailout, in effect, was Goldman bailing out Goldman.

Eventually, Paulson went a step further, elevating another ex-Goldmanite named Edward Liddy to run AIG — a company whose bailout money would be coming, in part, from the newly created TARP program, administered by another Goldman banker named Neel Kashkari.

V. REPO MEN

There are plenty of people who have noticed, in recent years, that when they lost their homes to foreclosure or were forced into bankruptcy because of crippling credit-card debt, no one in the government was there to rescue them. But when Goldman Sachs — a company whose average employee still made more than $350,000 last year, even in the midst of a depression — was suddenly faced with the possibility of losing money on the unregulated insurance deals it bought for its insane housing bets, the government was there in an instant to patch the hole. That's the essence of the bailout: rich bankers bailing out rich bankers, using the taxpayers' credit card.

The people who have spent their lives cloistered in this Wall Street community aren't much for sharing information with the great unwashed. Because all of this shit is complicated, because most of us mortals don't know what the hell LIBOR is or how a REIT works or how to use the word "zero coupon bond" in a sentence without sounding stupid — well, then, the people who do speak this idiotic language cannot under any circumstances be bothered to explain it to us and instead spend a lot of time rolling their eyes and asking us to trust them.

That roll of the eyes is a key part of the psychology of Paulsonism. The state is now being asked not just to call off its regulators or give tax breaks or funnel a few contracts to connected companies; it is intervening directly in the economy, for the sole purpose of preserving the influence of the megafirms. In essence, Paulson used the bailout to transform the government into a giant bureaucracy of entitled assholedom, one that would socialize "toxic" risks but keep both the profits and the management of the bailed-out firms in private hands. Moreover, this whole process would be done in secret, away from the prying eyes of NASCAR dads, broke-ass liberals who read translations of French novels, subprime mortgage holders and other such financial losers.

Some aspects of the bailout were secretive to the point of absurdity. In fact, if you look closely at just a few lines in the Federal Reserve's weekly public disclosures, you can literally see the moment where a big chunk of your money disappeared for good. The H4 report (called "Factors Affecting Reserve Balances") summarizes the activities of the Fed each week. You can find it online, and it's pretty much the only thing the Fed ever tells the world about what it does. For the week ending February 18th, the number under the heading "Repurchase Agreements" on the table is zero. It's a significant number.

Why? In the pre-crisis days, the Fed used to manage the money supply by periodically buying and selling securities on the open market through so-called Repurchase Agreements, or Repos. The Fed would typically dump $25 billion or so in cash onto the market every week, buying up Treasury bills, U.S. securities and even mortgage-backed securities from institutions like Goldman Sachs and J.P. Morgan, who would then "repurchase" them in a short period of time, usually one to seven days. This was the Fed's primary mechanism for controlling interest rates: Buying up securities gives banks more money to lend, which makes interest rates go down. Selling the securities back to the banks reduces the money available for lending, which makes interest rates go up.

If you look at the weekly H4 reports going back to the summer of 2007, you start to notice something alarming. At the start of the credit crunch, around August of that year, you see the Fed buying a few more Repos than usual — $33 billion or so. By November, as private-bank reserves were dwindling to alarmingly low levels, the Fed started injecting even more cash than usual into the economy: $48 billion. By late December, the number was up to $58 billion; by the following March, around the time of the Bear Stearns rescue, the Repo number had jumped to $77 billion. In the week of May 1st, 2008, the number was $115 billion — "out of control now," according to one congressional aide. For the rest of 2008, the numbers remained similarly in the stratosphere, the Fed pumping as much as $125 billion of these short-term loans into the economy — until suddenly, at the start of this year, the number drops to nothing. Zero.

The reason the number has dropped to nothing is that the Fed had simply stopped using relatively transparent devices like repurchase agreements to pump its money into the hands of private companies. By early 2009, a whole series of new government operations had been invented to inject cash into the economy, most all of them completely secretive and with names you've never heard of. There is the Term Auction Facility, the Term Securities Lending Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility and a monster called the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (boasting the chat-room horror-show acronym ABCPMMMFLF). For good measure, there's also something called a Money Market Investor Funding Facility, plus three facilities called Maiden Lane I, II and III to aid bailout recipients like Bear Stearns and AIG.

While the rest of America, and most of Congress, have been bugging out about the $700 billion bailout program called TARP, all of these newly created organisms in the Federal Reserve zoo have quietly been pumping not billions but trillions of dollars into the hands of private companies (at least $3 trillion so far in loans, with as much as $5.7 trillion more in guarantees of private investments). Although this technically isn't taxpayer money, it still affects taxpayers directly, because the activities of the Fed impact the economy as a whole. And this new, secretive activity by the Fed completely eclipses the TARP program in terms of its influence on the economy.

No one knows who's getting that money or exactly how much of it is disappearing through these new holes in the hull of America's credit rating. Moreover, no one can really be sure if these new institutions are even temporary at all — or whether they are being set up as permanent, state-aided crutches to Wall Street, designed to systematically suck bad investments off the ledgers of irresponsible lenders.

"They're supposed to be temporary," says Paul-Martin Foss, an aide to Rep. Ron Paul. "But we keep getting notices every six months or so that they're being renewed. They just sort of quietly announce it."

None other than disgraced senator Ted Stevens was the poor sap who made the unpleasant discovery that if Congress didn't like the Fed handing trillions of dollars to banks without any oversight, Congress could apparently go fuck itself — or so said the law. When Stevens asked the GAO about what authority Congress has to monitor the Fed, he got back a letter citing an obscure statute that nobody had ever heard of before: the Accounting and Auditing Act of 1950. The relevant section, 31 USC 714(b), dictated that congressional audits of the Federal Reserve may not include "deliberations, decisions and actions on monetary policy matters." The exemption, as Foss notes, "basically includes everything." According to the law, in other words, the Fed simply cannot be audited by Congress. Or by anyone else, for that matter.

VI. WINNERS AND LOSERS

Stevens isn't the only person in Congress to be given the finger by the Fed. In January, when Rep. Alan Grayson of Florida asked Federal Reserve vice chairman Donald Kohn where all the money went — only $1.2 trillion had vanished by then — Kohn gave Grayson a classic eye roll, saying he would be "very hesitant" to name names because it might discourage banks from taking the money.

"Has that ever happened?" Grayson asked. "Have people ever said, 'We will not take your $100 billion because people will find out about it?'"

"Well, we said we would not publish the names of the borrowers, so we have no test of that," Kohn answered, visibly annoyed with Grayson's meddling.

Grayson pressed on, demanding to know on what terms the Fed was lending the money. Presumably it was buying assets and making loans, but no one knew how it was pricing those assets — in other words, no one knew what kind of deal it was striking on behalf of taxpayers. So when Grayson asked if the purchased assets were "marked to market" — a methodology that assigns a concrete value to assets, based on the market rate on the day they are traded — Kohn answered, mysteriously, "The ones that have market values are marked to market." The implication was that the Fed was purchasing derivatives like credit swaps or other instruments that were basically impossible to value objectively — paying real money for God knows what.

"Well, how much of them don't have market values?" asked Grayson. "How much of them are worthless?"

"None are worthless," Kohn snapped.

"Then why don't you mark them to market?" Grayson demanded.

"Well," Kohn sighed, "we are marking the ones to market that have market values."

In essence, the Fed was telling Congress to lay off and let the experts handle things. "It's like buying a car in a used-car lot without opening the hood, and saying, 'I think it's fine,'" says Dan Fuss, an analyst with the investment firm Loomis Sayles. "The salesman says, 'Don't worry about it. Trust me.' It'll probably get us out of the lot, but how much farther? None of us knows."

When one considers the comparatively extensive system of congressional checks and balances that goes into the spending of every dollar in the budget via the normal appropriations process, what's happening in the Fed amounts to something truly revolutionary — a kind of shadow government with a budget many times the size of the normal federal outlay, administered dictatorially by one man, Fed chairman Ben Bernanke. "We spend hours and hours and hours arguing over $10 million amendments on the floor of the Senate, but there has been no discussion about who has been receiving this $3 trillion," says Sen. Bernie Sanders. "It is beyond comprehension."

Count Sanders among those who don't buy the argument that Wall Street firms shouldn't have to face being outed as recipients of public funds, that making this information public might cause investors to panic and dump their holdings in these firms. "I guess if we made that public, they'd go on strike or something," he muses.

And the Fed isn't the only arm of the bailout that has closed ranks. The Treasury, too, has maintained incredible secrecy surrounding its implementation even of the TARP program, which was mandated by Congress. To this date, no one knows exactly what criteria the Treasury Department used to determine which banks received bailout funds and which didn't — particularly the first $350 billion given out under Bush appointee Hank Paulson.

The situation with the first TARP payments grew so absurd that when the Congressional Oversight Panel, charged with monitoring the bailout money, sent a query to Paulson asking how he decided whom to give money to, Treasury responded — and this isn't a joke — by directing the panel to a copy of the TARP application form on its website. Elizabeth Warren, the chair of the Congressional Oversight Panel, was struck nearly speechless by the response.

"Do you believe that?" she says incredulously. "That's not what we had in mind."

Another member of Congress, who asked not to be named, offers his own theory about the TARP process. "I think basically if you knew Hank Paulson, you got the money," he says.

This cozy arrangement created yet another opportunity for big banks to devour market share at the expense of smaller regional lenders. While all the bigwigs at Citi and Goldman and Bank of America who had Paulson on speed-dial got bailed out right away — remember that TARP was originally passed because money had to be lent right now, that day, that minute, to stave off emergency — many small banks are still waiting for help. Five months into the TARP program, some not only haven't received any funds, they haven't even gotten a call back about their applications.

"There's definitely a feeling among community bankers that no one up there cares much if they make it or not," says Tanya Wheeless, president of the Arizona Bankers Association.

Which, of course, is exactly the opposite of what should be happening, since small, regional banks are far less guilty of the kinds of predatory lending that sank the economy. "They're not giving out subprime loans or easy credit," says Wheeless. "At the community level, it's much more bread-and-butter banking."

Nonetheless, the lion's share of the bailout money has gone to the larger, so-called "systemically important" banks. "It's like Treasury is picking winners and losers," says one state banking official who asked not to be identified.

This itself is a hugely important political development. In essence, the bailout accelerated the decline of regional community lenders by boosting the political power of their giant national competitors.

Which, when you think about it, is insane: What had brought us to the brink of collapse in the first place was this relentless instinct for building ever-larger megacompanies, passing deregulatory measures to gradually feed all the little fish in the sea to an ever-shrinking pool of Bigger Fish. To fix this problem, the government should have slowly liquidated these monster, too-big-to-fail firms and broken them down to smaller, more manageable companies. Instead, federal regulators closed ranks and used an almost completely secret bailout process to double down on the same faulty, merger-happy thinking that got us here in the first place, creating a constellation of megafirms under government control that are even bigger, more unwieldy and more crammed to the gills with systemic risk.

In essence, Paulson and his cronies turned the federal government into one gigantic, half-opaque holding company, one whose balance sheet includes the world's most appallingly large and risky hedge fund, a controlling stake in a dying insurance giant, huge investments in a group of teetering megabanks, and shares here and there in various auto-finance companies, student loans, and other failing businesses. Like AIG, this new federal holding company is a firm that has no mechanism for auditing itself and is run by leaders who have very little grasp of the daily operations of its disparate subsidiary operations.

In other words, it's AIG's rip-roaringly shitty business model writ almost inconceivably massive — to echo Geithner, a huge, complex global company attached to a very complicated investment bank/hedge fund that's been allowed to build up without adult supervision. How much of what kinds of crap is actually on our balance sheet, and what did we pay for it? When exactly will the rent come due, when will the money run out? Does anyone know what the hell is going on? And on the linear spectrum of capitalism to socialism, where exactly are we now? Is there a dictionary word that even describes what we are now? It would be funny, if it weren't such a nightmare.

VII. YOU DON'T GET IT

The real question from here is whether the Obama administration is going to move to bring the financial system back to a place where sanity is restored and the general public can have a say in things or whether the new financial bureaucracy will remain obscure, secretive and hopelessly complex. It might not bode well that Geithner, Obama's Treasury secretary, is one of the architects of the Paulson bailouts; as chief of the New York Fed, he helped orchestrate the Goldman-friendly AIG bailout and the secretive Maiden Lane facilities used to funnel funds to the dying company. Neither did it look good when Geithner — himself a protégé of notorious Goldman alum John Thain, the Merrill Lynch chief who paid out billions in bonuses after the state spent billions bailing out his firm — picked a former Goldman lobbyist named Mark Patterson to be his top aide.

In fact, most of Geithner's early moves reek strongly of Paulsonism. He has continually talked about partnering with private investors to create a so-called "bad bank" that would systemically relieve private lenders of bad assets — the kind of massive, opaque, quasi-private bureaucratic nightmare that Paulson specialized in. Geithner even refloated a Paulson proposal to use TALF, one of the Fed's new facilities, to essentially lend cheap money to hedge funds to invest in troubled banks while practically guaranteeing them enormous profits.

God knows exactly what this does for the taxpayer, but hedge-fund managers sure love the idea. "This is exactly what the financial system needs," said Andrew Feldstein, CEO of Blue Mountain Capital and one of the Morgan Mafia. Strangely, there aren't many people who don't run hedge funds who have expressed anything like that kind of enthusiasm for Geithner's ideas.

As complex as all the finances are, the politics aren't hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.

The most galling thing about this financial crisis is that so many Wall Street types think they actually deserve not only their huge bonuses and lavish lifestyles but the awesome political power their own mistakes have left them in possession of. When challenged, they talk about how hard they work, the 90-hour weeks, the stress, the failed marriages, the hemorrhoids and gallstones they all get before they hit 40.

"But wait a minute," you say to them. "No one ever asked you to stay up all night eight days a week trying to get filthy rich shorting what's left of the American auto industry or selling $600 billion in toxic, irredeemable mortgages to ex-strippers on work release and Taco Bell clerks. Actually, come to think of it, why are we even giving taxpayer money to you people? Why are we not throwing your ass in jail instead?"

But before you even finish saying that, they're rolling their eyes, because You Don't Get It. These people were never about anything except turning money into money, in order to get more money; valueswise they're on par with crack addicts, or obsessive sexual deviants who burgle homes to steal panties. Yet these are the people in whose hands our entire political future now rests.

Good luck with that, America. And enjoy tax season. ♥

[As Rolling Stone’s chief political reporter, Matt Taibbi's predecessors include the likes of Hunter S. Thompson and P.J. O'Rourke. Taibbi has written Spanking the Donkey: On the Campaign Trail with the Democrats (2005); Smells Like Dead Elephants: Dispatches from a Rotting Empire (2007): and The Great Derangement: A Terrifying True Story of War, Politics & Religion at the Twilight of the American Empire (2008). Taibbi graduated from Bard College in 1991.]

Copyright © 2009 Rolling Stone

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Copyright © 2009 Sapper's (Fair & Balanced) Rants & Raves

Sunday, March 29, 2009

WTF Is This Blogger Doing On Facebook?

This blogger learned at his maternal grandmother's knee — (and other low joints) — that "Fools' names and fools' faces are often found in public places." As if this blog wasn't public enough, an innocent(?) reply to an invitation to a political gathering in the late fall of '08 resulted in a signup on Facebook. So, what's next for this Facebook naif? As the Clash sing, "Should I stay or should I go?" If this is a (fair & balanced) existential question, so be it.

[x NY Fishwrap]
Is Facebook Growing Up Too Fast?
By Brad Stone

Tag Cloud of the following article

created at TagCrowd.com

When Facebook signed up its 100 millionth member last August, its employees spread out in two parks in Palo Alto, Calif., for a huge barbecue. Sometime this week, this five-year-old start-up, born in a dorm room at Harvard, expects to register its 200 millionth user.

That staggering growth rate — doubling in size in just eight months — suggests Facebook is rapidly becoming the Web’s dominant social ecosystem and an essential personal and business networking tool in much of the wired world.

Yet Facebook executives say they aren’t planning to observe their latest milestone in any significant way. It is, perhaps, a poor time to celebrate. The company that has given users new ways to connect and speak truth to power now often finds itself as the target of that formidable grass-roots firepower — most recently over controversial changes it made to users’ home pages.

As Facebook expands, it’s also struggling to match the momentum of hot new start-ups like Twitter, the micro-blogging service, while managing the expectations of young, tech-savvy early adopters, attracting mainstream moms and dads, and justifying its hype-carbonated valuation.

By any measure, Facebook’s growth is a great accomplishment. The crew of Mark Zuckerberg, the company’s 24-year-old co-founder and chief executive, is signing up nearly a million new members a day, and now more than 70 percent of the service’s members live overseas, in countries like Italy, the Czech Republic and Indonesia. Facebook’s ranks in those countries swelled last year after the company offered its site in their languages.

All of this mojo puts Facebook on a par with other groundbreaking — and wildly popular — Internet services like free e-mail, Google, the online calling network Skype and e-commerce sites like eBay. But Facebook promises to change how we communicate even more fundamentally, in part by digitally mapping and linking peripatetic people across space and time, allowing them to publicly share myriad and often very personal elements of their lives.

Unlike search engines, which ably track prominent Internet presences, Facebook reconnects regular folks with old friends and strengthens their bonds with new pals — even if the glue is nothing more than embarrassing old pictures or memories of their second-grade teacher.

Facebook can also help rebuild families. Karen Haber, a mother of two living outside Tel Aviv, logs onto Facebook each night after she puts the children to bed. She searches for her family’s various surnames, looking for relatives from the once-vast Bachenheimer clan of northern Germany, which fractured during the Holocaust and then dispersed around the globe.

Among the three dozen or so connections she has made on Facebook over the last year are a fifth cousin who is a clinical social worker in Woodstock, N.Y.; a fourth cousin running an eyeglasses store in Zurich; and another fifth cousin, living in Hong Kong selling diamonds. Now she shares memories, photographs and updates with them.

“I was never into genealogy and now suddenly I have this tool that helps me find the descendants of people that my grandparents knew, people who share the same truth I do,” Ms. Haber says. “I’m using Facebook and trying to unite this family.”

Facebook has also become a vehicle for broad-based activism — like the people who organized on the site last year and mobilized 12 million people to march in protests around the globe against practices of the FARC rebels in Colombia.

Discussing Facebook’s connective tissue, Mr. Zuckerberg recalls the story of Claus Drachmann, a schoolteacher in northern Denmark who became a Facebook friend of Anders Fogh Rasmussen, Denmark’s prime minister. Mr. Drachmann subsequently invited Mr. Rasmussen to speak to his class of special-needs children; the prime minister obliged last fall.

Mr. Zuckerberg says the story illustrates Facebook’s power to cut through arbitrary social barriers. “This represents a generational shift in technology,” he says. “To me, what is interesting was that it was possible for a regular person to reach the prime minister and that that interaction happened.”

As Facebook has matured, so has Mr. Zuckerberg. He has recently traded his disheveled, unassuming image for an ever-present tie and making visits to media outfits like “The Oprah Winfrey Show.” And he says Facebook’s most important metrics are not its membership but the percentage of the wired world that uses the site and the amount of information — photographs, news articles and status updates — zipping across its servers.

Facebook’s mission, he says, is to be used by everyone in the world to share information seamlessly. “Two hundred million in a world of six billion is tiny,” he says. “It’s a cool milestone. It’s great that we reached that, especially in such a short amount of time. But there is so much more to do.”

AS Facebook stampedes along, it still has to get out of its own way to soothe the injured feelings of users like Liz Rabban.

Ms. Rabban, 40, a real estate agent and the mother of two from Livingston, N.J., joined the site in November 2007, quickly amassing 250 friends and spending hours on the site each day.

But these days, she spends less time on the site and posts caustic comments about Facebook’s new design, which turns a majority of every user’s home page into a long “stream” of recent, often trivial, Twitter-like updates from friends.

“The changes just feel very juvenile,” Ms. Rabban says. “It’s just not addressing the needs of my generation and my peers. In my circle, everyone is pretty devastated about it.”

Ms. Rabban is not alone. More than two and a half million dissenters have joined a group on Facebook’s own site called “Millions Against Facebook’s New Layout and Terms of Service.” Others are lambasting the changes in their own status updates, which are now, ironically, distributed much more visibly to all of their Facebook friends.

The changes, Facebook executives say, are intended to make the act of sharing — not just information about themselves but what people are doing now — easier, faster and more urgent. Chris Cox, 26, Facebook’s director of products and a confidant of Mr. Zuckerberg, envisions users announcing where they are going to lunch as they leave their computers so friends can see the updates and join them.

“That is the kind of thing that is not meaningful when it is announced 40 minutes later,” he says.

The simmering conflict over the design change speaks to the challenges of pleasing 200 million users, many of whom feel pride of ownership because they helped to build the site with free labor and very personal contributions.

“They have a strange problem,” says S. Shyam Sundar, co-director of the Media Effects Research Laboratory at Pennsylvania State University, of Facebook’s quandary. “This is a technology that has inherently generated community, and it has gotten to the point where members of that community feel not only vested but empowered to challenge the company.”

Those tensions boiled up previously, when Facebook announced the intrusive Beacon advertising system in 2007, and again when Facebook introduced new service terms earlier this year, which appeared to give the company broad commercial control over the content people uploaded to the site.

Facebook responded to protests over the second move by promising users a vote in how the site would be governed.

But while Facebook is willing to give users a voice, it doesn’t necessarily want to listen.

Users are widely opposed to terms that grant Facebook the right to license, copy and disseminate members’ content worldwide. But Facebook says it has to ignore those objections to protect itself against lawsuits from users who might blame the company if they later regret having shared some piece of information with their friends. (Other Web sites have similar stipulations.)

While Facebook addressed the feedback on its unpopular design changes last week — partly by saying it would give users more control over the stream of updates that appear on their pages — it also said members’ pages would soon become even busier and more dynamic, updating automatically instead of requiring users to refresh their browsers to see new posts.

That’s a change that may irk users like Ms. Rabban, who don’t like how busy their pages have become. Facebook executives counter that it will help users share more information, and that they will eventually come to appreciate it, just as they have with previous changes that were initially jarring.

“It’s not a democracy,” Mr. Cox says of his company’s relationship with users. “We are here to build an Internet medium for communicating and we think we have enough perspective to do that and be caretakers of that vision.”

People, of course, sometimes like to keep secrets and maintain separate social realms — or at least a modicum of their privacy. But Facebook at almost 200 million members is a force that reinvents and tears at such boundaries. Teachers are yoked together with students, parents with their children, employers with their employees.

Uniting disparate groups on a single Internet service runs counter to 50 years of research by sociologists into what is known as “homophily” — the tendency of individuals to associate only with like-minded people of similar age and ethnicity.

Facebook’s huge growth is creating inevitable collisions as the whole notion of “friend” takes on a highly elastic meaning. When the Philadelphia Eagles allowed the star safety Brian Dawkins to leave for the Denver Broncos earlier this month, Dan Leone, a gate chief at Lincoln Financial Field, the Eagles’ stadium, expressed his disappointment by referring to the situation with an obscenity on his Facebook status update.

Mr. Leone’s boss, who was his Facebook friend, forwarded the update to an Eagles guest services manager, who fired him. The team has since refused to reconsider the matter, despite Mr. Leone’s deep remorse and his star turn on countless radio talk shows across the country to discuss the situation.

“If you know your boss is online, or anyone close to your boss is online, don’t be making comments that can be detrimental to your employment,” Mr. Leone advises.

Facebook is trying to teach members to use privacy settings to manage their network so they can speak discreetly only to certain friends, like co-workers or family members, as opposed to other “friends” like bosses or professional colleagues. But most Facebook users haven’t taken advantage of the privacy settings; the company estimates that only 20 percent of its members use them.

Other problems are trickier, especially among true friends and family members. How, for example, can Facebook remain a place for teenagers to share what they did on Saturday night when it is also the place where their parents are swapping investment tips with old friends?

In the six weeks since Rich Hall, a 52-year-old theater manager in Mount Carroll, Ill., joined Facebook, he has reconnected with more than 400 friends and acquaintances, including former high school friends, his auto mechanic and former buddies from his days as a stock car driver.

In the course of his new half-hour-a-day Facebook habit, Mr. Hall also “friended” the 60 high school students he is directing in a school play, so he could coordinate rehearsal times. That led some of them to deny his request because, as he says they told him, their parents “found it creepy.” Along the way, Mr. Hall also found photographs of his 19-year-old son on the site, drinking beer at a Friday night bonfire.

“He denied it and said he wasn’t there,” Mr. Hall says. “I said, ‘Let’s go to this page together and look at these photos.’ Of course he did it. There are no secrets anymore.”

Dwindling secrets, and prying eyes, are at the heart of the Facebook conundrum. While offering an efficient and far-reaching way for people to bond, the site has also eroded sometimes natural barriers.

“People usually spend a lot of time trying to be separate — parents and children are a good example,” says Danah Boyd, a social scientist who has studied social networks and now works in the research department of Microsoft, which has invested in Facebook. “You are already seeing young people sitting there thinking, ‘Why am I hanging out with my mother who is reminiscing with her high school mates?’ You are seeing some reticence with young people that wasn’t there two years ago.”

For their part, Facebook executives say they are less interested in being cool than in being a useful place where anyone can go to share elements of their lives.

“The people who started the company weren’t cool. I’m not cool,” Mr. Cox says. “If you look at the people who work here, it’s much more nerdy and curious than cool.

“Cool only lasts for so long, but being useful is something that applies to everyone.”

Mr. Zuckerberg hopes that being ubiquitous and useful translates to the bottom line.

Though Facebook is privately held and doesn’t publicly disclose its earnings, various press and analysts’ estimates of its 2008 revenues span from $250 million to $400 million. That range may not be enough to cover the company’s escalating expenses, and it hardly justifies some of the atmospheric valuations that have been placed on the start-up, including the $15 billion that Microsoft assigned to the company when it invested in it in 2007.

Facebook’s financial challenges aren’t unique. Popular free e-mail services like Hotmail from Microsoft and Gmail from Google have little in the way of profits to show for their vast audiences, aside from a few text ads that people rarely click on. Instant messaging networks like Microsoft Messenger and AIM from American Online are similarly popular but have never been hyperprofitable, for the simple reason that people do not want intrusive ads inserted into personal conversations.

Facebook’s approach is to invite advertisers to join in the conversation. New “engagement” ads ask users to become fans of products and companies — sometimes with the promise of discounts. If a person gives in, that commercial allegiance is then broadcast to all of the person’s friends on the site.

A new kind of engagement ad, now being tested, will invite people to vote — “what’s your favorite color M&M?” for example — and brands will pay every time a Facebook member participates.

“We are trying to provide the antidote for the consumer rebellion against interruptive advertising,” says Sheryl Sandberg, Facebook’s chief operating officer and Mr. Zuckerberg’s business consigliere.

Ms. Sandberg, who ran Google’s highly successful advertising initiatives before leaving the search giant to join Facebook, said her company’s revenue was growing despite a brutal downturn that is hurting other kinds of online advertising. She also puts one rumor to rest, saying the company is not considering charging members for any aspect of its service.

“We’re pretty pleased with the overall trajectory,” she says. “Our conversations with big advertisers have broadened in scope and we also have more people asking about how they can work with us.”

Facebook recently introduced advertising tools to let companies focus on users based on the language they use on the site and their geographic location. So, for example, an advertiser can now tailor a message to the Latino community in Los Angeles or French speakers in Montreal.

Despite the gloom permeating much of the advertising world, and the formidable challenges facing the site, some advertisers say they glimpse the future in Facebook’s brand of interactive advertising.

“Our clients all want to see if they can make this work,” says Al Cadena, the interactive account director at Threshold Interactive in Los Angeles, which represents companies like Nestlé, Honda and Sony. “Advertising used to be a one-way communication from advertiser to consumer, but now people want to have a dialogue. And Facebook is becoming the default way to do that, not only in the States but really for the whole world.”

Internet evangelists say that when a technology diffuses into society, as Facebook appears to be doing, it has achieved “critical mass.” The sheer presence of all their friends, family and colleagues on Facebook creates potent ties between users and the site — ties that are hard to break even when people want to break them.

Many who have tried to free themselves of their daily Facebook habit and leave the site, like Kerry Docherty, a student at Pepperdine University’s law school, speak of a powerful gravitational pull and an undercurrent of peer pressure that eventually brings them back.

“People gave me a hard time for leaving Facebook,” says Ms. Docherty, who quit at the end of 2007 but then rejoined six months later. “Everyone has a love-hate relationship with it. They wanted me to be wasting my time on it just like they were wasting their time on it.” ♥

[x Valleywag Blog]
Brad Stone, the baddest tech reporter that ever was born
By Owen Thomas

News flash: Brad Stone still at large, still smokin' hot. Fake Brad Stone is doing a passable job of celebrating the career of the ruggedly handsome New York Times reporter who outed Fake Steve Jobs. Passable. I mean, I like the idea of supplanting the Pulitzer Prize with a new "Stoney" award. But Fake Brad could do so much more. He could, for example, burst into song. With apologies to George Thorogood — and, while I'm at it, to Brad Stone, Fake Brad Stone, and my readers — Valleywag presents a rock-and-roll celebration of our favorite Timesman. Here are the lyrics to "Brad to the Stone":

On the day I was hired, the Timesmen all gathered 'round
Those hacks all gazed in envy at the ex-Newsweek reporter they'd found
Then Bill Keller spoke up, and he said leave this one alone
He could tell right away, that I was Brad to the Stone
Brad to the Stone
Brad to the Stone
B-B-B-B-Brad to the Stone
B-B-B-B-Brad
B-B-B-B-Brad
Brad to the Stone

I broke a thousand stories, before I wrote about you
I'll break a thousand more baby, before I am through
I'm gonna break your cover, Fake Stevie, in your PJs all alone
I'm here to tell ya bloggers, that I'm Brad to the Stone
Brad to the Stone
B-B-B-Brad
B-B-B-Brad
B-B-B-Brad
Brad to the Stone

I make a rich CEO beg not to cover his shady deal
I'll make the Gray Lady blush, and make other tech reporters squeal
I wanna be your ink-stained wretch, yours and yours alone
I'm here to tell ya bloggers, that I'm Brad to the Stone
B-B-B-B-Brad
B-B-B-B-Brad
B-B-B-B-Brad
Brad to the Stone]
Copyright © 2009 The New York Times Company

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Copyright © 2009 Sapper's (Fair & Balanced) Rants & Raves

The Eyes Have It

Maureen (The Cobra — thanks to the fratboy nicknaming shtik of The Dubster) Dowd takes on the issue of eye-color. Brown is good, blue is bad. The (brown-eyed) Cobra grew up in a blue-eyed family. Long before she wrote this Op-Ed piece on eye-color, The Cobra worried about "privileged blue-eyed WASPs” like The Dubster and The Dickster and their fitness for office. If this is a (fair & balanced) polygenic concern, so be it.

[x NY fishwrap]
Blue Eyed Greed?
By Maureen Dowd

Tag Cloud of the following article

created at TagCrowd.com

As international lunacy goes, it was hard to beat the pope saying that condoms spread AIDS.

But Brazil’s president, known simply as Lula, gave it his best shot.

At a press conference Thursday in Brasilia with Prime Minister Gordon Brown of Britain — who has a talent for getting himself into dicey spots — Lula started off coughing from some cheese bread he’d wolfed down. Then he suddenly turned accusatory.

“This crisis was caused by the irrational behavior of white people with blue eyes, who before the crisis appeared to know everything and now demonstrate that they know nothing,” charged the brown-eyed, bearded socialist president.

As the brown-eyed Brown grew a whiter shade of pale, Lula hammered the obvious point that the poor of the world were suffering in the global crash because of the misdeeds of the rich.

“I do not know any black or indigenous bankers,” said Lula.

He also told CNN he would press this theme at the G-20 meeting in London this week. He says his past as a poor, hungry, unemployed lathe operator gives him special insight.

“I lived in houses that were flooded by water,” he said, adding, “Sometimes, I had to fight over space with rats and cockroaches, and waste would come in when it flooded.”

The “Lula lulu” by the “Brazil nut,” as The New York Post dubbed it, became big news just as President Obama met at the White House with Vikram Pandit and a cadre of white-bread bankers who have taken the bailout — some of whom, like Jamie Dimon, have distinctly blue eyes.

And it is true, of course, that the upper-crust, underwhelming Anglo-Saxon leaders who allowed America’s financial markets to morph into louche casinos, George W. Bush and Dick Cheney, were very, very white men with blue eyes.

As the Who sang: “No one knows what it’s like to be the bad man, to be the sad man behind blue eyes. No one knows what it’s like to be hated, to be fated to telling only lies.”

Every time Cheney looks into the camera with those ice-blue eyes and says President Obama is making us less safe, it sounds as if he’s secretly hoping we do get attacked just to prove his point that Obama is weak, even if he has to go up in smoke, too.

(When I double-checked the color of Cheney’s eyes, his daughter Liz Cheney jokingly e-mailed back, “Sorry, but that information is classified.”)

Before President Obama, whose brown eyes are opaque when you look into them, presidents have been more known for blue eyes. The ones with brown eyes, Richard Nixon and L.B.J., came a cropper.

Throughout history, whether it’s images of Jesus that don’t look Middle Eastern or Barbies who don’t look ethnic, blue eyes and white skin have often been painted as the ideal.

The cerulean-eyed Paul Newman once wryly predicted his epitaph: “Here lies Paul Newman, who died a failure because his eyes turned brown.”

Surveys show that people with blue eyes are considered more intelligent, attractive and sociable.

A 2007 University of Louisville study concluded that people with blue eyes were better planners and strategic thinkers — superior at things like golf, cross-country running and preparing for exams — while people with brown eyes had better reflexes, making them good at hockey and football.

Lula’s rant underscored an ancient rivalry.

When I was little, growing up in a house that prominently displayed a blue-eyed Jesus and a blue-eyed J.F.K., I felt my brown eyes were far less attractive than my brothers’ blue ones.

I obsessed on it so much, cutting out a picture of a beautiful brown-eyed model and keeping it in my scrapbook, that my mother finally reassured me:

“You look at blue eyes. You look into brown eyes.”

Later, of course, there would be the thrill of Van Morrison serenading a “Brown-Eyed Girl.”

Before Barack Obama, when I interviewed the brown-eyed sons of immigrants who were thinking of running for president, Mario Cuomo and Colin Powell, they seemed torn about taking the big plunge, given how far they had come in relation to their dads.

I asked Governor Cuomo if he was leaving the field to “the privileged blue-eyed WASPs” like Bush senior and Dan Quayle who felt entitled and never worried about their worthiness.

Barack Obama and his family have already had a profound effect on the culture in terms of what is beautiful and marketable. Black faces are popping up in all kinds of ads now — wearing straw boaters and other prepster outfits in Ralph Lauren ads.

With Michelle urging students to aim for A’s and the president promising to make school “cool,” brown eyes may finally — and rightfully — overtake blue as the windows of winners. ♥

[Maureen Dowd received the Pulitzer Prize for commentary in 1999, with the Pulitzer committee particularly citing her columns on the impeachment of Bill Clinton after his affair with Monica Lewinsky. Dowd joined The New York Times as a reporter in 1983, after writing for Time magazine and the now-defunct Washington Star. At The Times, Dowd was nominated for a 1992 Pulitzer Prize for national reporting, then became a columnist for the paper's editorial page in 1995. Dowd's first book was a collection of columns entitled Bushworld: Enter at Your Own Risk (2004). Her second book followed in 2005: Are Men Necessary?: When Sexes Collide. Dowd earned a bachelor's degree from DC's Catholic University in 1973.]

Copyright © 2009 The New York Times Company

Get the Google Reader at no cost from Google. Click on this link to go on a tour of the Google Reader. If you read a lot of blogs, load Reader with your regular sites, then check them all on one page. The Reader's share function lets you publicize your favorite posts.

Copyright © 2009 Sapper's (Fair & Balanced) Rants & Raves