Wednesday, December 22, 2010

Government Waste: 20 Of The Craziest Things That The U.S. Government Is Spending Money On

You are not going to believe some of the things that the U.S. government is spending money on. According to a shocking new report, U.S. taxpayer money is being spent to study World of Warcraft, to study how Americans find love on the Internet, and to study the behavior of male prostitutes in Vietnam. Not only that, but money from the federal government is also being used to renovate a pizzeria in Iowa and to help a library in Tennessee host video game parties. These are just some of the examples in a new report on government waste from Senator Tom Coburn entitled "Wastebook 2010". Even as tens of millions of American families find themselves suffering through the worst economic downturn in modern history, the U.S. government continues to spend money on some of the craziest and most frivolous things imaginable. Every single year articles are written and news stories are done about the horrific government waste that is taking place and yet every single year it just keeps getting worse. So just what in the world is going on here?

It almost seems as though Congress actually enjoys inventing new ways to waste U.S. taxpayer money. It seems nearly inconceivable that anyone could keep a straight face while trying to justify spending money on many of the things in the list below.

At a time when the U.S. national debt is closing in on 14 trillion dollars, government waste just seems more out of control than ever. The following are 20 of the craziest things that the U.S. government is spending money on....

#1 A total of $3 million has been granted to researchers at the University of California at Irvine so that they can play video games such as World of Warcraft. The goal of this "video game research" is reportedly to study how "emerging forms of communication, including multiplayer computer games and online virtual worlds such as World of Warcraft and Second Life can help organizations collaborate and compete more effectively in the global marketplace."

#2 The U.S. Department of Agriculture gave the University of New Hampshire $700,000 this year to study methane gas emissions from dairy cows.

#3 $615,000 was given to the University of California at Santa Cruz to digitize photos, T-shirts and concert tickets belonging to the Grateful Dead.

#4 A professor at Stanford University received $239,100 to study how Americans use the Internet to find love. So far one of the key findings of this "research" is that the Internet is a safer and more discreet way to find same-sex partners.

#5 The National Science Foundation spent $216,000 to study whether or not politicians "gain or lose support by taking ambiguous positions."

#6 The National Institutes of Health spent approximately $442,340 to study the behavior of male prostitutes in Vietnam.

#7 Approximately $1 million of U.S. taxpayer money was used to create poetry for the Little Rock, New Orleans, Milwaukee and Chicago zoos. The goal of the "poetry" is to help raise awareness on environmental issues.

#8 The U.S. Department of Veterans Affairs spent $175 million during 2010 to maintain hundreds of buildings that it does not even use. This includes a pink, octagonal monkey house in the city of Dayton, Ohio.

#9 $1.8 million of U.S. taxpayer dollars went for a "museum of neon signs" in Las Vegas, Nevada.

#10 $35 million was reportedly paid out by Medicare to 118 "phantom" medical clinics that never even existed. Apparently these "phantom" medical clinics were established by a network of criminal gangs as a way to defraud the U.S. government.

#11 The Conservation Commission of Monkton, Vermont got $150,000 from the federal government to construct a "critter crossing". Thanks to U.S. government money, the lives of "thousands" of migrating salamanders are now being saved.

#12 In California, one park received $440,000 in federal funds to perform "green energy upgrades" on a building that has not been used for a decade.

#13 $440,955 was spent this past year on an office for former Speaker of the House Dennis Hastert that he rarely even visits.

#14 One Tennessee library was given $5,000 in federal funds to host a series of video game parties.

#15 The U.S. Census Bureau spent $2.5 million on a television commercial during the Super Bowl that was so poorly produced that virtually nobody understood what is was trying to say.

#16 A professor at Dartmouth University received $137,530 to create a "recession-themed" video game entitled "Layoff".

#17 The National Science Foundation gave the Minnesota Zoo over $600,000 so that they could develop an online video game called "Wolfquest".

#18 A pizzeria in Iowa was given $60,000 to renovate the pizzeria's facade and give it a more "inviting feel".

#19 The U.S. Department of Agriculture gave one enterprising group of farmers $30,000 to develop a tourist-friendly database of farms that host guests for overnight "haycations". This one sounds like something that Dwight Schrute would have dreamed up.

#20 Almost unbelievably, the National Institutes of Health was given $800,000 in "stimulus funds" to study the impact of a "genital-washing program" on men in South Africa.

In light of all this, is it any wonder why the approval rating of Congress recently hit another new record low?

According to the most recent Gallup poll, only 13 percent of Americans approve of the job that Congress is doing.

Just think about that - only 13 percent!

Our politicians seem very confused about why there is so much anger in the country today. Well, there are certainly a lot of reasons for it, including the fact that the U.S. economy is on the verge of collapse, but it certainly doesn't help that our government is basically flushing our tax dollars down the toilet and spending them on some of the most wasteful things imaginable.

It would be bad enough if the federal government was swimming in money, but the truth is that all of this waste is being committed at a time when the U.S. government is nearing bankruptcy.

Over the last 30 years, the U.S. national debt has gotten 13 times larger. We have accumulated the largest debt in the history of the world and there is no end in sight.

In fact, we are rapidly running out of people to borrow money from. According to the Wall Street Journal, in order to repay maturing bonds and finance the exploding budget deficit, the U.S. government will have to borrow 4.2 trillion dollars in 2011.

Eventually the rest of the world is going to lose confidence in the ability of the U.S. government to repay all of this debt. Once confidence in U.S. Treasuries is totally gone, and there are already signs this is starting to happen, the game will be over and the U.S. financial system will collapse.

But the U.S. Congress just continues to act like it is "business as usual" and the wasteful spending just continues to get worse. Someday historians will look back and think that we must have been a nation full of idiots and morons.

For decades our politicians have been spending us into oblivion, yet we keep sending the vast majority of them back to Washington D.C. every time an election rolls around and the mainstream media keeps assuring us that our "respected leaders" know exactly what they are doing and that everything is going to be okay somehow.

It is almost as if some sort of collective insanity has overtaken most Americans. The path we are on inevitably leads to national bankruptcy and the destruction of our financial system, but only a small percentage of the population seems to care.

Well, in the end we will reap what we have sown. Unfortunately, the economic pain that is coming is going to be devastating for all of us - including those of us who are awake and are trying desperately to change things.

A Holiday Hate Road Trip

Sibel Edmonds Speaks Out on Whistleblower "Protections" (1/5)

Stanford Study Finds California Pension System Underfunded By $500 Billion »

Take a stab at who will eventually be paying for the shortfall.


An independent analysis of California’s three big pension funds has found a hidden shortfall of more than half a trillion dollars, several times the amount reported by the funds and more than six times the value of the state’s outstanding bonds.

The analysis was commissioned by Gov. Arnold Schwarzenegger, who has been pressing the State Legislature to focus on the rising cost of public pensions.

Graduate students at Stanford applied fair-value accounting principles to California’s pension funds, using a method recently devised by two economists working in Illinois, Joshua D. Rauh of Northwestern University and Robert Novy-Marx of the University of Chicago.

The Stanford group’s finding does not suggest that California has to come up with half a trillion dollars all at once; pensions are paid slowly over time. But the possibility that the state’s public pension funds are much deeper in the hole than reported could help explain why the required contributions to the funds have been rising every year, contributing to California’s annual budget drama.

The finding also raises vexing legal issues, because public debts in California are supposed to be approved by the voters. The voters have, in fact, duly authorized all of the state’s general obligation bonds, but the much larger pension debt is appearing out of nowhere.

The researchers offered six recommendations for closing the gap between what is owed to the state’s retirees and how much has been set aside, including less volatile investments and a revamped benefit structure.

Continue reading at the NYT...


« NJ Gov. Christie Tells Complaining Teacher: "Unlike The Fed, The State Of New Jersey Can't Print Money" (WATCH) »

Editor's Note - Reposting this story from earlier this year as part of several recent stories involving NJ Governor Chris Christie.


Video: Governor Christie explains economics to Rita Wilson -- May 26, 2010

Great clip. Runs 2 minutes. The teacher in question, Rita Wilson, makes $86,000 per year with 4 months of paid vacation.


From Cubachi

As if there is nothing more to love about New Jersey Governor Chris Christie, he held a townhall in Rutherford discussing his 33-bills “tool kit” that will bring a cap on property taxes and other taxes, as well as cutting spending and regulations to spur economic growth to the state.

One teacher in the town hall Rita Wilson, an English teacher from Kearny, complained about paying one-and-a-half percent of her paycheck to pay for her benefits. The woman is crying while other people either get another job or pay much more out of their checks for their health benefits.

Governor Christie did not want any of her complaining. He told her if she didn’t like the pay freeze and paying one-and-a-half percent of her check to pay for her benefits, she can leave her job.

“I’m not a rabble-rouser. I’m a simple English teacher,” whose students perform well, Wilson said. “I work really hard.”

Wilson said she used the babysitter example to make a point as Christie has pressured teachers to take a one-year wage freeze and contribute at least 1.5 percent of their salary toward health benefits. She and Christie then testily talked over each other for several questions and answers.

“You know what, you don’t have to do it,” Christie said.

“Teachers do it because they love it,” Wilson told him.

The governor said in a time of “economic crisis,” teachers and their main union — the powerful New Jersey Education Association — should be willing to take the freeze.


« Meredith Whitney: Secret State Bailouts Have Already Begun, And California Is The Main Beneficiary (Video) »

Bonus Video: Meredith Whitney discusses her report rating the finances of the 15 largest U.S. states -- Bloomberg TV

WSJ op-ed from Meredith Whitney published last month.

Bond subsidies and transfers have allowed states to avoid making tough decisions. It won't last. The threat posed by the state fiscal crisis in the U.S. is vastly underestimated and under-appreciated, because even today too few people understand how states have been managing their finances.

A clear example of this took place in Manhattan last week at the Economist magazine's Buttonwood Conference, where a panel role-played the federal government's response to a near default of the hypothetical state of New Jefferson. After various deliberations and simulated threats from the Chinese government, the panel reluctantly voted to grant New Jefferson an emergency bailout of $1.5 billion to cover the state's debt payment.

What this panel and so many other investors fail to appreciate is that state bailouts have already begun. Over 20% of California's debt issuance during 2009 and over 30% of its debt issuance in 2010 to date has been subsidized by the federal government in a program known as Build America Bonds. Under the program, the U.S. Treasury covers 35% of the interest paid by the bonds.

California is not alone: Over 30% of Illinois's debt and over 40% of Nevada's debt issued since 2009 has also been subsidized with these bonds. These states might have already reached some type of tipping point had the federal program not been in place.

Beyond debt subsidies, general federal government transfers to states now stand at the highest levels on record. Today, more than 28% of state funding comes from federal government transfers, the highest contribution on record.

These transfers have made states dependent on federal assistance. New York, for example, spent in excess of 250% of its tax receipts over the last decade. The largest 15 states by GDP spent on average over 220% of their tax receipts.

Continue reading...


Last month, Whitney put out a massive report on the worst 15 states.

The full rankings - Forbes

Worst states

1. California

2. New Jersey, Illinois, Ohio (tie)

3. Michigan

4. Georgia

5. New York

6. Florida

Best states

1. Texas

2. Virginia

3. Washington

4. North Carolina

Neutral states: Pennsylvania, Maryland, Massachusetts


More coverage:

Meredith Whitney Rates California Worst of 15 Biggest States - Bloomberg


Bonus video...

Video: Whitney with Maria Bartiromo

  • "It reminded me so much of the banks pre-crisis that we just kept working at it," she said. "We couldn't find anything that gave us a clear story, we couldn't find any information that was transparent. So we did it ourselves."


China extends help to tackle euro crisis

Beijing committed to take ‘concerted action’

The ultimate banking clearing house with zero oversight from the people still holds over $2 trillion on its balance sheet.

The Federal Reserve system (the Fed for short) is the US central banking system. The Fed was created in 1913 with the enactment of the Federal Reserve Act. In the beginning the Fed had limited powers and its mission was limited. According to the Fed its mission today is to conduct monetary policy, supervise and regulate banking institutions, and maintain stability in the financial system. If this is the mission of the Fed, it has radically failed and the American people should audit the Fed to see what went wrong. The problem with the Fed is that it is independent within the government since it does not need to seek legislation for actions. Yet the authority of the Federal Reserve is derived from the US Congress. Yet we have recently seen when a push to audit the Fed was issued in Congress a major backlash hit from the Fed and we have yet to conduct a full audit of the Federal Reserve. The Fed has conducted and put at risk the US currency to protect the banking interests of its member banks. The unstated mission of the Fed is to protect its banking allies even if it means destroying the economic structure of its host nation so long as wealth is stabilized in the new financial oligarchy.

Even as the Fed gloats that the economy is on a mends, we see that the Fed balance sheet hasn’t really shifted since the financial crisis hit:

fed balance sheet

Source: Wikipedia, chart

The Fed currently has over $2 trillion in “assets” on its balance sheets. We have documented that within this enormous amount of assets, there are questionable loans and items including shadow bailouts of the imploded commercial real estate market. The Fed has bailed out shopping malls in Oklahoma that have no adequate traffic to justify their existence all the way to luxury hotels. Do you think the American people consider this a solid way of managing the nation’s financial health?

Yet let us go back to one of the stated items listed on the Fed’s mission statement, that of financial stability. In the last decade the US financial markets have seen some of the worst financial volatility since the Great Depression. The Fed did not sit idly by as we now know with the released lending notes during the crisis. The Fed made $9 trillion in short-term loans to 18 of the largest financial institutions in the country. It also made loans to corporate entities like McDonalds for example. The Fed of course did not want this information to be released since it showed favoritism to the largest organizations in the country all the while lending tightened up to smaller businesses and organizations. Individuals certainly have felt the credit freeze and nowhere in the notes do we see the Fed making a solid effort to bolster lending to the American public. They were concerned about the biggest institutions and the rest were left hanging on a shingle.

During the banking crisis of the Great Depression many banks failed in a system setup under unit banking:

bank failures

Source: Mortgage News

Yet the big problem today is that we have a handful of banks holding over 50 percent of all total banking assets ($13 trillion and half with 19 banks out of 7,700+). So the raw count of bank failures is deceptive. We can have 100 bank failures costing $1 million each or have one giant failure like IndyMac costing $8 billion. The era of too big to fail is just as dangerous as one in which banks are isolated. In fact with the data released from the Fed we see the insidious problem of a system in which the worst performing banks with the most deceptive practices not only are bailed out but are given more capital to remain in business. All this does is solidifies their actions and makes them grow even bigger, the side effect of moral hazard. Think of JP Morgan taking over Washington Mutual and now they are going to charge customers $10 a month for what used to free checking for life. Think of Bank of America swallowing up Countrywide Financial. This is the kind of banking consolidation that the Fed has orchestrated since the crisis started with no accountability to Congress or the American people.

The Fed would like you to believe that they are using their own money but this is a lie. The Fed was instrumental in creating the housing bubble with their low Fed funds rate:

fed funds rate

Most Americans carry a large part of their net worth in real estate. So the fact that the Fed turned what used to be a stable asset into a highly volatile commodity that encouraged Wall Street banks to develop CDOs and other instruments of financial destruction was a method of siphoning off wealth from most Americans to their banking overlords. Again, the Fed is designed to maintain financial stability but the actions of the last few decades demonstrate that their mission should read:

“To aggregate as much wealth into the banking system while eliminating the American middle class by a slow systematic dilution of their currency and financial well being and standard of living.”

This is exactly what has happened in the last decade. The average American makes roughly $39,000 a year or less. 72 million Americans make $25,000 or less each year. Yet at the same time wealth at the top is getting more and more consolidated. So now we have a system where giant bank failures don’t happen but we have a slow destruction of wealth for the remainder of the American public. The Fed only cares about stability for its member banks. Ben Bernanke, the current Fed chief went on 60 Minutes claiming that Americans would be better off if they just got more educated. Oh really? So you mean with the current higher education bubble Americans should borrow more money from banks and the government so they can go into massive debt for a degree that may not help them land a job? We all know that the cost of college has far outpaced the cost of most items including healthcare costs. Yet the solution to our current crisis is to get into deeper debt and become slaves to banks yet again? Sounds like Alan Greenspan being a champion for adjustable rate mortgages.

The Fed has given horrible advice over and over. It wouldn’t be such a problem if they were a pundit on a radio show. But this is our central bank! This is the institution that made $9 trillion in short-term loans and fought Congress to keep it hidden from the American people. This is the institution that has over $2 trillion in “assets” and doesn’t want to say what it is because the American people will find out that junk mortgages on failed real estate deals will show up. The Fed has failed on its explicit mission and it is time to fully audit the Fed.

« The tunnel people of Las Vegas: How 1,000 live in flooded labyrinth under Sin City's shimmering strip »

But I thought Bernanke and Geithner had already fixed the economy...


Deep beneath Vegas’s glittering lights lies a sinister labyrinth inhabited by poisonous spiders and a man nicknamed The Troll who wields an iron bar.

But astonishingly, the 200 miles of flood tunnels are also home to 1,000 people who eke out a living in the strip’s dark underbelly.

Some, like Steven and his girlfriend Kathryn, have furnished their home with considerable care - their 400sq ft 'bungalow' boasts a double bed, a wardrobe and even a bookshelf.

They have been there for five years, fashioning a shower out of a water cooler, hanging paintings on the walls and collating a library from abandoned books.

Their possessions, however, are carefully placed in plastic crates to stop them getting soaked by the noxious water pooling on the floor.

'Our bed came from a skip oustide an apartment complex,' Steven explains. 'It's mainly stuff people dump that we pick up. One man's junk is another man's gold.

‘We get the stuff late at night so people don't see us because it's kind of embarrassing.’

Read the story and see more photos at the Daily Mail...


Check out this brand new slideshow...


$2 Trillion Dollars In Debt Threatens 100 US Cities

Look around your town. How do the streets look? Not good, right? Lots of pot holes and cracks and stuff? Well, it’ll probably end up getting worse. According to economists, 100 US cities are threatened by bankruptcy, thanks to $2 TRILLION dollars in debt.

“Next to housing this is the single most important issue in the US and certainly the biggest threat to the US economy,” said economist Meredith Whitney on CBS’s 60 Minutes. ”There’s not a doubt on my mind that you will see a spate of municipal bond defaults. You can see fifty to a hundred sizable defaults – more. This will amount to hundreds of billions of dollars’ worth of defaults.”

Here’s where it gets dangerous. What happens is that problems roll uphill, not downhill. In the real world, the poop rolls downward, but in the government world, problems creep uphill. Bankrupt cities turn to states, who then go bankrupt. Bankrupt states turn to the federal government, leeching even more money in support from federal funds. Where does the country go to borrow money? Well, China, of course.

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Foreclosures on People Who Never Missed a Payment

« 60 Minutes EXTRA: State Budget Ponzi Schemes In New York & New Jersey - Web Exclusive Video »

Three 1-minute clips that were not shown on Sunday's broadcast, focusing on the twin fiscal nightmares of New York and New Jersey and their addiction to budgetary irresponsibility and ponzi-financing as seen through the eyes of NJ Governor Chris Christie and NY Lt. Governor Richard Ravitch.

First up is New York...

Video - 60 Minutes Overtime - Richard Ravitch, New York's Lieutenant Governor

All 3 clips run approximately 1 minute.


Now it's New Jersey's turn...

Video - 60 Minutes Overtime - Chris Christie

How did it get so bad in New Jersey?


Video - 60 Minutes Overtime - Chris Christie

Can New Jersey be fixed?


Sunday's complete broadcast...

Take the time to watch this one if you haven't already; it was definitely one of the best 60 Minutes segments in recent memory.

Federal Reserve Bank Orders Oklahoma Bank to Remove All Symbols of Christian Faith. Now Who is Next?

What right does a privately owned bank. Not a government agency have the jurisdiction to tell another privet owned bank to remove all vestiges of Christianity from this bank. That is what has happened in Perkins Oklahoma. They were ordered to remove anything that said Merry Christmas and Bible verse of the day.Employees could not wear any crosses or pins resembling the Christian faith.
Now I say who is next? Under the new banking reform law that passed congress and signed into law this year.Is this part of the new Financial dictatorship of the Federal Reserve telling the country who is the boss?Who are the winners and losers in this new economy? Will they tell me who has a mortgage I can not have home bible studies and have to take down any crosses in my Home since they hold the bank note. If I run a business selling lamps.I have a cross and a painting of Jesus preaching in the sermon on the mount.Will I have to remove the expression of my faith from my place of business by the order of this new economic dictator called the Federal Reserve Bank?This Central Bank which congress turned over its constitutional authority to.
These Bankers have thrown people out of there homes,they have looted our nation and they robbed the dignity of the common person. Now they want to take away the faith of many people.There religious freedom they cling to. They want to rob the people of any hope. Today they go after a bank. Tomorrow what privet business will they attack next? Telling them they can not have any form of Christianity. We must stop them here. If we allow them to tell banks what to do.Who will they go after next?

« CHART - Sovereign Debt Madness - $10.2 Trillion in Global Borrowing Expected In 2011 »

(WSJ) - $10.2 trillion is the amount of money advanced-nation governments will need to borrow in 2011. As the debts of advanced countries rise to levels not seen since the aftermath of World War II, it’s hard to know how much is too much. But it’s easy to see that the risk of serious financial trouble is growing.

Next year, fifteen major developed-country governments, including the U.S., Japan, the U.K., Spain and Greece, will have to raise some $10.2 trillion to repay maturing bonds and finance their budget deficits, according to estimates from the International Monetary Fund. That’s up 7% from this year, and equals 27% of their combined annual economic output.

Aside from Japan, which has a huge debt hangover from decades of anemic growth, the U.S. is the most extreme case. Next year, the U.S. government will have to find $4.2 trillion. That’s 27.8% of its annual economic output, up from 26.5% this year. By comparison, crisis-addled Greece needs $69 billion, or 23.8% of its annual GDP.

So far, with the notable exception of Greece, major advanced nations haven’t had too much trouble raising the money they need. Japan’s domestic investors have consistently bought its government bonds despite their low yield. Foreign investors have been snapping up U.S. Treasury bonds, which remain the world’s premier safe-haven investment.

Continue reading...



Now watch the greatest global debt satire of all time...

Video: Clarke & Dawe on the INSANITY of European debt guarantees

Watch this one for a laugh...


« 'How To Forge A Client's Signature' And Other Lessons From Inside The Ameriquest Sub-Prime Sweatshop »


Excerpt from the book The Monster, by Michael W. Hudson.

Bait and Switch

A few weeks after he started working at Ameriquest Mortgage, Mark Glover looked up from his cubicle and saw a coworker do something odd. The guy stood at his desk on the twenty-third floor of downtown Los Angeles's Union Bank Building. He placed two sheets of paper against the window. Then he used the light streaming through the window to trace something from one piece of paper to another. Somebody's signature.

Glover was new to the mortgage business. He was twenty-nine and hadn't held a steady job in years. But he wasn't stupid. He knew about financial sleight of hand—at that time, he had a check-fraud charge hanging over his head in the L.A. courthouse a few blocks away. Watching his coworker, Glover's first thought was: How can I get away with that? As a loan officer at Ameriquest, Glover worked on commission. He knew the only way to earn the six-figure income Ameriquest had promised him was to come up with tricks for pushing deals through the mortgage-financing pipeline that began with Ameriquest and extended through Wall Street's most respected investment houses.

Glover and the other twentysomethings who filled the sales force at the downtown L.A. branch worked the phones hour after hour, calling strangers and trying to talk them into refinancing their homes with high-priced "subprime" mortgages. It was 2003, subprime was on the rise, and Ameriquest was leading the way. The company's owner, Roland Arnall, had in many ways been the founding father of subprime, the business of lending money to home owners with modest incomes or blemished credit histories. He had pioneered this risky segment of the mortgage market amid the wreckage of the savings and loan disaster and helped transform his company's headquarters, Orange County, California, into the capital of the subprime industry. Now, with the housing market booming and Wall Street clamoring to invest in subprime, Ameriquest was growing with startling velocity.

Up and down the line, from loan officers to regional managers and vice presidents, Ameriquest's employees scrambled at the end of each month to push through as many loans as possible, to pad their monthly production numbers, boost their commissions, and meet Roland Arnall's expectations. Arnall was a man "obsessed with loan volume," former aides recalled, a mortgage entrepreneur who believed "volume solved all problems." Whenever an underling suggested a goal for loan production over a particular time span, Arnall's favorite reply was: "We can do twice that." Close to midnight Pacific time on the last business day of each month, the phone would ring at Arnall's home in Los Angeles's exclusive Holmby Hills neighborhood, a $30 million estate that once had been home to Sonny and Cher.On the other end of the telephone line, a vice president in Orange County would report the month's production numbers for his lending empire. Even as the totals grew to $3 billion or $6 billion or $7 billion a month—figures never before imagined in the subprime business—Arnall wasn't satisfied. He wanted more. "He would just try to make you stretch beyond what you thought possible," one former Ameriquest executive recalled. "Whatever you did, no matter how good you did, it wasn't good enough."

Inside Glover's branch, loan officers kept up with the demand to produce by guzzling Red Bull energy drinks, a favorite caffeine pick-me-up for hardworking salesmen throughout the mortgage industry. Government investigators would later joke that they could gauge how dirty a home-loan location was by the number of empty Red Bull cans in the Dumpster out back. Some of the crew in the L.A. branch, Glover said, also relied on cocaine to keep themselves going, snorting lines in washrooms and, on occasion, in their cubicles.

The wayward behavior didn't stop with drugs. Glover learned that his colleague's art work wasn't a matter of saving a borrower the hassle of coming in to supply a missed signature. The guy was forging borrowers' signatures on government-required disclosure forms, the ones that were supposed to help consumers understand how much cash they'd be getting out of the loan and how much they'd be paying in interest and fees. Ameriquest's deals were so overpriced and loaded with nasty surprises that getting customers to sign often required an elaborate web of psychological ploys, outright lies, and falsified papers. "Every closing that we had really was a bait and switch," a loan officer who worked for Ameriquest in Tampa, Florida, recalled. " 'Cause you could never get them to the table if you were honest." At companywide gatherings, Ameriquest's managers and sales reps loosened up with free alcohol and swapped tips for fooling borrowers and cooking up phony paperwork. What if a customer insisted he wanted a fixed-rate loan, but you could make more money by selling him an adjustable-rate one? No problem. Many Ameriquest salespeople learned to position a few fixed-rate loan documents at the top of the stack of paperwork to be signed by the borrower. They buried the real documents—the ones indicating the loan had an adjustable rate that would rocket upward in two or three years—near the bottom of the pile. Then, after the borrower had flipped from signature line to signature line, scribbling his consent across the entire stack, and gone home, it was easy enough to peel the fixed-rate documents off the top and throw them in the trash.

At the downtown L.A. branch, some of Glover's coworkers had a flair for creative documentation. They used scissors, tape, Wite-Out, and a photocopier to fabricate W-2s, the tax forms that indicate how much a wage earner makes each year. It was easy: Paste the name of a low-earning borrower onto a W-2 belonging to a higher-earning borrower and, like magic, a bad loan prospect suddenly looked much better. Workers in the branch equipped the office's break room with all the tools they needed to manufacture and manipulate official documents. They dubbed it the "Art Department."

At first, Glover thought the branch might be a rogue office struggling to keep up with the goals set by Ameriquest's headquarters. He discovered that wasn't the case when he transferred to the company's Santa Monica branch. A few of his new colleagues invited him on a field trip to Staples, where everyone chipped in their own money to buy a state-of-the-art scanner-printer, a trusty piece of equipment that would allow them to do a better job of creating phony paperwork and trapping American home owners in a cycle of crushing debt.

Carolyn Pittman was an easy target. She'd dropped out of high school to go to work, and had never learned to read or write very well. She worked for decades as a nursing assistant. Her husband, Charlie, was a longshoreman.In 1993 she and Charlie borrowed $58,850 to buy a one-story, concrete block house on Irex Street in a working-class neighborhood of Atlantic Beach, a community of thirteen thousand near Jacksonville, Florida. Their mortgage was government-insured by the Federal Housing Administration, so they got a good deal on the loan. They paid about $500 a month on the FHA loan, including the money to cover their home insurance and property taxes.

Even after Charlie died in 1998, Pittman kept up with her house payments. But things were tough for her. Financial matters weren't something she knew much about. Charlie had always handled what little money they had. Her health wasn't good either. She had a heart attack in 2001, and was back and forth to hospitals with congestive heart failure and kidney problems.

Like many older black women who owned their homes but had modest incomes, Pittman was deluged almost every day, by mail and by phone, with sales pitches offering money to fix up her house or pay off her bills. A few months after her heart attack, a salesman from Ameriquest Mortgage's Coral Springs office caught her on the phone and assured her he could ease her worries. He said Ameriquest would help her out by lowering her interest rate and her monthly payments.

She signed the papers in August 2001. Only later did she discover that the loan wasn't what she'd been promised. Her interest rate jumped from a fixed 8.43 percent on the FHA loan to a variable rate that started at nearly 11 percent and could climb much higher. The loan was also packed with more than $7,000 in up-front fees, roughly 10 percent of the loan amount.

Pittman's mortgage payment climbed to $644 a month. Even worse, the new mortgage didn't include an escrow for real-estate taxes and insurance. Most mortgage agreements require home owners to pay a bit extra—often about $100 to $300 a month—which is set aside in an escrow account to cover these expenses. But many subprime lenders obscured the true costs of their loans by excluding the escrow from their deals, which made the monthly payments appear lower. Many borrowers didn't learn they had been tricked until they got a big bill for unpaid taxes or insurance a year down the road.

That was just the start of Pittman's mortgage problems. Her new mortgage was a matter of public record, and by taking out a loan from Ameriquest, she'd signaled to other subprime lenders that she was vulnerable—that she was financially unsophisticated and was struggling to pay an unaffordable loan. In 2003, she heard from one of Ameriquest's competitors, Long Beach Mortgage Company.

Pittman had no idea that Long Beach and Ameriquest shared the same corporate DNA. Roland Arnall's first subprime lender had been Long Beach Savings and Loan, a company he had morphed into Long Beach Mortgage. He had sold off most of Long Beach Mortgage in 1997, but hung on to a portion of the company that he rechristened Ameriquest. Though Long Beach and Ameriquest were no longer connected, both were still staffed with employees who had learned the business under Arnall.

A salesman from Long Beach Mortgage, Pittman said, told her that he could help her solve the problems created by her Ameriquest loan. Once again, she signed the papers. The new loan from Long Beach cost her thousands in up-front fees and boosted her mortgage payments to $672 a month.

Ameriquest reclaimed her as a customer less than a year later. A salesman from Ameriquest's Jacksonville branch got her on the phone in the spring of 2004. He promised, once again, that refinancing would lower her interest rate and her monthly payments. Pittman wasn't sure what to do. She knew she'd been burned before, but she desperately wanted to find a way to pay off the Long Beach loan and regain her financial bearings. She was still pondering whether to take the loan when two Ameriquest representatives appeared at the house on Irex Street. They brought a stack of documents with them. They told her, she later recalled, that it was preliminary paperwork, simply to get the process started. She could make up her mind later. The men said, "sign here," "sign here," "sign here," as they flipped through the stack. Pittman didn't understand these were final loan papers and her signatures were binding her to Ameriquest. "They just said sign some papers and we'll help you," she recalled.

To push the deal through and make it look better to investors on Wall Street, consumer attorneys later alleged, someone at Ameriquest falsified Pittman's income on the mortgage application. At best, she had an income of $1,600 a month—roughly $1,000 from Social Security and, when he could afford to pay, another $600 a month in rent from her son. Ameriquest's paperwork claimed she brought in more than twice that much—$3,700 a month.

The new deal left her with a house payment of $1,069 a month—nearly all of her monthly income and twice what she'd been paying on the FHA loan before Ameriquest and Long Beach hustled her through the series of refinancings. She was shocked when she realized she was required to pay more than $1,000 a month on her mortgage. "That broke my heart," she said.

For Ameriquest, the fact that Pittman couldn't afford the payments was of little consequence. Her loan was quickly pooled, with more than fifteen thousand other Ameriquest loans from around the country, into a $2.4 billion "mortgage-backed securities" deal known as Ameriquest Mortgage Securities, Inc. Mortgage Pass-Through Certificates 2004-R7. The deal had been put together by a trio of the world's largest investment banks: UBS, JPMorgan, and Citigroup. These banks oversaw the accounting wizardry that transformed Pittman's mortgage and thousands of other subprime loans into investments sought after by some of the world's biggest investors. Slices of 2004-R7 got snapped up by giants such as the insurer MassMutual and Legg Mason, a mutual fund manager with clients in more than seventy-five countries. Also among the buyers was the investment bank Morgan Stanley, which purchased some of the securities and placed them in its Limited Duration Investment Fund, mixing them with investments in General Mills, FedEx, JC Penney, Harley-Davidson, and other household names.

It was the new way of Wall Street. The loan on Carolyn Pittman's one-story house in Atlantic Beach was now part of the great global mortgage machine. It helped swell the portfolios of big-time speculators and middle-class investors looking to build a nest egg for retirement. And, in doing so, it helped fuel the mortgage empire that in 2004 produced $1.3 billion in profits for Roland Arnall.

In the first years of the twenty-first century, Ameriquest Mortgage unleashed an army of salespeople on America. They numbered in the thousands. They were young, hungry, and relentless in their drive to sell loans and earn big commissions. One Ameriquest manager summed things up in an e-mail to his sales force: "We are all here to make as much fucking money as possible. Bottom line. Nothing else matters." Home owners like Carolyn Pittman were caught up in Ameriquest's push to become the nation's biggest subprime lender.

The pressure to produce an ever-growing volume of loans came from the top. Executives at Ameriquest's home office in Orange County leaned on the regional and area managers; the regional and area managers leaned on the branch managers. And the branch managers leaned on the salesmen who worked the phones and hunted for borrowers willing to sign on to Ameriquest loans. Men usually ran things, and a frat-house mentality ruled, with plenty of partying and testosterone-fueled swagger. "It was like college, but with lots of money and power," Travis Paules, a former Ameriquest executive, said. Paules liked to hire strippers to reward his sales reps for working well after midnight to get loan deals processed during the end-of-the-month rush. At Ameriquest branches around the nation, loan officers worked ten- and twelve-hour days punctuated by "Power Hours"—do-or-die telemarketing sessions aimed at sniffing out borrowers and separating the real salesmen from the washouts. At the branch where Mark Bomchill worked in suburban Minneapolis, management expected Bomchill and other loan officers to make one hundred to two hundred sales calls a day. One manager, Bomchill said, prowled the aisles between desks like "a little Hitler," hounding salesmen to make more calls and sell more loans and bragging he hired and fired people so fast that one peon would be cleaning out his desk as his replacement came through the door.As with Mark Glover in Los Angeles, experience in the mortgage business wasn't a prerequisite for getting hired. Former employees said the company preferred to hire younger, inexperienced workers because it was easier to train them to do things the Ameriquest way. A former loan officer who worked for Ameriquest in Michigan described the company's business model this way: "People entrusting their entire home and everything they've worked for in their life to people who have just walked in off the street and don't know anything about mortgages and are trying to do anything they can to take advantage of them."

Ameriquest was not alone. Other companies, eager to get a piece of the market for high-profit loans, copied its methods, setting up shop in Orange County and helping to transform the county into the Silicon Valley of subprime lending. With big investors willing to pay top dollar for assets backed by this new breed of mortgages, the push to make more and more loans reached a frenzy among the county's subprime loan shops. "The atmosphere was like this giant cocaine party you see on TV," said Sylvia Vega-Sutfin, who worked as an account executive at BNC Mortgage, a fast-growing operation headquartered in Orange County just down the Costa Mesa Freeway from Ameriquest's headquarters. "It was like this giant rush of urgency." One manager told Vega-Sutfin and her coworkers that there was no turning back; he had no choice but to push for mind-blowing production numbers. "I have to close thirty loans a month," he said, "because that's what my family's lifestyle demands."

Michelle Seymour, one of Vega-Sutfin's colleagues, spotted her first suspect loan days after she began working as a mortgage underwriter at BNC's Sacramento branch in early 2005. The documents in the file indicated the borrower was making a six-figure salary coordinating dances at a Mexican restaurant. All the numbers on the borrower's W-2 tax form ended in zeros—an unlikely happenstance—and the Social Security and tax bite didn't match the borrower's income. When Seymour complained to a manager, she said, he was blasé, telling her, "It takes a lot to have a loan declined."

BNC was no fly-by-night operation. It was owned by one of Wall Street's most storied investment banks, Lehman Brothers. The bank had made a big bet on housing and mortgages, styling itself as a player in commercial real estate and, especially, subprime lending. "In the mortgage business, we used to say, 'All roads lead to Lehman,' " one industry veteran recalled.Lehman had bought a stake in BNC in 2000 and had taken full ownership in 2004, figuring it could earn even more money in the subprime business by cutting out the middleman. Wall Street bankers and investors flocked to the loans produced by BNC, Ameriquest, and other subprime operators; the steep fees and interest rates extracted from borrowers allowed the bankers to charge fat commissions for packaging the securities and provided generous yields for investors who purchased them. Up-front fees on subprime loans totaled thousands of dollars. Interest rates often started out deceptively low—perhaps at 7 or 8 percent—but they almost always adjusted upward, rising to 10 percent, 12 percent, and beyond. When their rates spiked, borrowers' monthly payments increased, too, often climbing by hundreds of dollars. Borrowers who tried to escape overpriced loans by refinancing into another mortgage usually found themselves paying thousands of dollars more in backend fees—"prepayment penalties" that punished them for paying off their loans early. Millions of these loans—tied to modest homes in places like Atlantic Beach, Florida; Saginaw, Michigan; and East San Jose, California—helped generate great fortunes for financiers and investors. They also helped lay America's economy low and sparked a worldwide financial crisis.

The subprime market did not cause the U.S. and global financial meltdowns by itself. Other varieties of home loans and a host of arcane financial innovations—such as collateralized debt obligations and credit default swaps—also came into play. Nevertheless, subprime played a central role in the debacle. It served as an early proving ground for financial engineers who sold investors and regulators alike on the idea that it was possible, through accounting alchemy, to turn risky assets into "Triple-A-rated" securities that were nearly as safe as government bonds. In turn, financial wizards making bets with CDOs and credit default swaps used subprime mortgages as the raw material for their speculations. Subprime, as one market watcher said, was "the leading edge of a financial hurricane."

This book tells the story of the rise and fall of subprime by chronicling the rise and fall of two corporate empires: Ameriquest and Lehman Brothers. It is a story about the melding of two financial cultures separated by a continent: Orange County and Wall Street.

Ameriquest and its strongest competitors in subprime had their roots in Orange County, a sunny land of beauty and wealth that has a history as a breeding ground for white-collar crime: boiler rooms, S&L frauds, real-estate swindles. That history made it an ideal setting for launching the subprime industry, which grew in large measure thanks to bait-and-switch salesmanship and garden-variety deception. By the height of the nation's mortgage boom, Orange County was home to four of the nation's six biggest subprime lenders. Together, these four lenders—Ameriquest, Option One, Fremont Investment & Loan, and New Century—accounted for nearly a third of the subprime market. Other subprime shops, too, sprung up throughout the county, many of them started by former employees of Ameriquest and its corporate forebears, Long Beach Savings and Long Beach Mortgage.

Lehman Brothers was, of course, one of the most important institutions on Wall Street, a firm with a rich history dating to before the Civil War. Under its pugnacious CEO, Richard Fuld, Lehman helped bankroll many of the nation's shadiest subprime lenders, including Ameriquest. "Lehman never saw a subprime lender they didn't like," one consumer lawyer who fought the industry's abuses said.Lehman and other Wall Street powers provided the financial backing and sheen of respectability that transformed subprime from a tiny corner of the mortgage market into an economic behemoth capable of triggering the worst economic crisis since the Great Depression.

A long list of mortgage entrepreneurs and Wall Street bankers cultivated the tactics that fueled subprime's growth and its collapse, and a succession of politicians and regulators looked the other way as abuses flourished and the nation lurched toward disaster: Angelo Mozilo and Countrywide Financial; Bear Stearns, Washington Mutual, Wells Fargo; Alan Greenspan and the Federal Reserve; and many more. Still, no Wall Street firm did more than Lehman to create the subprime monster. And no figure or institution did more to bring subprime's abuses to life across the nation than Roland Arnall and Ameriquest.

Among his employees, subprime's founding father was feared and admired. He was a figure of rumor and speculation, a mysterious billionaire with a rags-to-riches backstory, a hardscrabble street vendor who reinvented himself as a big-time real-estate developer, a corporate titan, a friend to many of the nation's most powerful elected leaders. He was a man driven, according to some who knew him, by a desire to conquer and dominate. "Roland could be the biggest bastard in the world and the most charming guy in the world," said one executive who worked for Arnall in subprime's early days. "And it could be minutes apart."He displayed his charm to people who had the power to help him or hurt him. He cultivated friendships with politicians as well as civil rights advocates and antipoverty crusaders who might be hostile to the unconventional loans his companies sold in minority and working-class neighborhoods. Many people who knew him saw him as a visionary, a humanitarian, a friend to the needy. "Roland was one of the most generous people I have ever met," a former business partner said.He also left behind, as another former associate put it, "a trail of bodies"—a succession of employees, friends, relatives, and business partners who said he had betrayed them. In summing up his own split with Arnall, his best friend and longtime business partner said, "I was screwed."Another former colleague, a man who helped Arnall give birth to the modern subprime mortgage industry, said: "Deep down inside he was a good man. But he had an evil side. When he pulled that out, it was bad. He could be extremely cruel." When they parted ways, he said, Arnall hadn't paid him all the money he was owed. But, he noted, Arnall hadn't cheated him as badly as he could have. "He fucked me. But within reason."

Roland Arnall built a company that became a household name, but shunned the limelight for himself. The business partner who said Arnall had "screwed" him recalled that Arnall fancied himself a puppet master who manipulated great wealth and controlled a network of confederates to perform his bidding. Another former business associate, an underling who admired him, explained that Arnall worked to ingratiate himself to fair-lending activists for a simple reason: "You can take that straight out of The Godfather: 'Keep your enemies close.' "

Michael W. Hudson is a staff writer at the Center for Public Integrity, a non-profit journalism organization. He previously worked as a reporter for the Wall Street Journal and as an investigator for the Center for Responsible Lending. The winner of a George Polk Award, Hudson has also written for Forbes, The Big Money, the New York Times, the Los Angeles Times and Mother Jones. He edited the award-winning book Merchants of Misery and appeared in the documentary film Maxed Out. He lives in Brooklyn, New York.

The above is excerpted from THE MONSTER: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America--and Spawned a Global Crisis by Michael W. Hudson, just published by Times Books, an imprint of Henry Holt and Company, LLC. Copyright (c) 2010 by Michael W. Hudson. All rights reserved.


More see walking on mortgage as a viable plan

'Strategic default' losing stigma as homes go deeper underwater

More Americans than ever are showing a willingness to walk away from their underwater homes, according to a recent survey. Chris Kelly is a perfect example of someone who never thought she would send the bank “jingle mail” — mailing the keys back. But she did.

Until last year Kelly, a 46-year-old administrative assistant, was living in a 3,000-square-foot home she owned with her ex-husband in the Seattle suburbs.

The duo had put the three-bedroom, three-and-a-half bath home on the market before finalizing their divorce in the spring of 2009 but had no luck luring move-up buyers to the $600,000 home even after price markdowns.

Kelly wound up living there solo, struggling to make the mortgage payments. But as she kept writing checks, and worrying, she became aware that she’d have to make a hard choice: Leave the house while she still had decent savings, or pay until she’d emptied out all her accounts and then enter foreclosure.

In the latter scenario, she’d have to look for a lease with no money left for a deposit. Either way, she’d lose the home, whose value had dropped underwater -- below what the couple owed on it.

“It was a pretty clear decision,” says Kelly, who now lives in Austin, Texas. “I knew I had to walk away. The longer I stayed there, the worse my credit would be and the harder time I’d have finding a rental.”

So a year ago she walked way, joining the growing number of Americans willing to turn their backs on homes they can neither sell nor afford to keep. The real estate industry calls this "strategic default," referring to people who choose to walk away even when they can technically afford to continue paying their mortgage.

Nearly half, 48 percent, of homeowners with a mortgage said they would consider walking away from their home if they owed more on it than it was worth, according to a Harris Interactive survey released this month. The survey was conducted in November for real estate listings site Trulia and foreclosure research firm RealtyTrac.

Just six months ago, a similar survey indicated that only 41 percent of consumers would consider walking if they were underwater on their mortgages.

“It’s a phenomenon we haven’t seen before in the housing market,” said Rick Sharga, senior vice president of RealtyTrac. “The mindset of why people purchase a home has changed over the past decade.”

In the early 2000s, as home prices rose sharply and steadily, many buyers saw their home as an investment. But in the wake of the housing bust, it's clear that a home has become far more of a “utility” — a form of shelter — than an investment.

Over the next year, hundreds of thousands of homeowners will face the question of whether to walk away as their mortgage payments spike.

Sharga said that $300 billion worth of adjustable rate mortgages are expected to reset upward over the next 12 to 15 months, adding on average $1,000 to monthly mortgage payments on homes that already are worth 30 percent to 50 percent less than their original sale price.

Roughly 23.2 percent of all single-family homeowners who have a mortgage are underwater on their property, according to third-quarter data from Zillow. (Zillow estimates that 40 percent of single-family homes are owned, with the rest mortgaged.)

Major banks, including Bank of America and Wells Fargo, are preparing to work with these owners through modification programs that may include principal reduction or temporary interest-only loan payments until markets improve and refinancing is possible, Sharga says.

But clearly, many homeowners may have motivation to walk. They’ll see their mortgage payments spike at a time when their home value is underwater the deepest.

American homeowners lost $1.7 trillion in home value during 2010, a far higher loss of equity than the $1 trillion lost during 2009, according to Zillow data released earlier this month. Zillow also reported on a blog that less than one-fourth of the 129 metro areas it tracks showed home value gains in 2010.

Story: Have down payment, but stuck in appraisal hell

In addition, the impacts to credit from a foreclosure are typically less damaging than those from a bankruptcy, which hits more lines of credit and loans than just the home loan. According to Barry Paperno, consumer operations manager at, the consumer site for Minneapolis-based credit scoring company Fair Isaac Corp., a personal bankruptcy can shave 130 to 240 points off a person’s credit score, while a foreclosure typically reduces a score by 85 to 160 points. (FICO scores range from 350 to 850, with higher scores better.)

“It’s serious, and it certainly complicate future purchases,” Paperno says. “Compared to a bankruptcy, though, the score impact can be surprisingly different.”

The latest Harris survey also revealed some interesting gender differences in attitudes about strategic default: Men were nearly 50 percent more likely than women to consider walking away from an underwater loan, with 57 percent indicating willingness, vs. 40 percent of women.

Story: Where home prices are falling dangerously

Pete Flint, CEO of Trulia, said that this may indicate men take a more investment-minded approach to homeownership and evaluate when to walk as a financial decision, while women may view their property as a home and have a harder time with the concept of leaving it even under fiscal duress.

Kelly embodies both approaches. She says she was torn about the decision, but couldn’t let sentiment overtake what, ultimately, was a move toward self-preservation.

“I never thought that this was something that would happen,” she says. “I loved that house.”

Jane Hodges ( is a writer in Seattle.

Investigators: Widlak's Death Most Likely A Suicide

Ruling Ends 2-Month Investigation Into Banker's Death

Macomb County investigators announce that the death of 62-year-old David Widlak of Grosse Pointe Farms was most likely a suicide.Widlak was last was seen Sept. 19 at the Mount Clemens-based Community Central Bank Corp.Widlak was reported missing the following Monday morning after a maintenance man said he saw Widlak's vehicle in the parking lot and his office was in disarray.Duck hunters found Widlak's body in Harrison Township, northeast of Detroit.

Regulators close banks in Ga., Fla., Ark., Minn.

WASHINGTON (AP) -- Regulators on Friday shuttered three small banks in Georgia and one each in Florida, Arkansas and Minnesota, raising to 157 the number of U.S. banks brought down this year by the struggling economy and soured loans.

The Federal Deposit Insurance Corp. took over the three Georgia banks: Appalachian Community Bank of McCaysville, with $68.2 million in assets; Chestatee State Bank, based in Dawsonville, with $244.4 million in assets; and Atlanta-based United Americas Bank, with $242.3 million in assets.

The FDIC also seized Bank of Miami, based in Coral Gables, Fla., with $448.2 million in assets; First Southern Bank of Batesville, Ark., with $191.8 million in assets; and Community National Bank of Lino Lakes, Minn., with $31.6 million in assets.

Florida has been the hardest hit state for bank failures, and Georgia also has registered many shutdowns. Bank of Miami was the 29th bank to fail in Florida this year, while the failures of the three Georgia banks brought the number in that state to 21 in 2010. Other states that have seen large numbers of bank failures are California and Illinois, amid an avalanche of bad loans, especially for commercial real estate.

Peoples Bank of East Tennessee, based in Madisonville, Tenn., agreed to assume $67.5 million of the assets and most of the deposits of Appalachian Community Bank. Bank of the Ozarks, based in Little Rock, Ark., is assuming all the assets and deposits of Chestatee State Bank. State Bank and Trust Co., based in Macon, Ga., is acquiring the assets and deposits of United Americas Bank.

Boca Raton, Fla.-based 1st United Bank is assuming $442.3 million of the assets and all the deposits of Bank of Miami. Southern Bank, based in Poplar Bluff, Mo., is taking $152.8 million of the assets and all the deposits of First Southern Bank. Farmers & Merchants Savings Bank of Manchester, Iowa, is assuming the assets and deposits of Community National Bank.

In addition, the FDIC and Peoples Bank of East Tennessee agreed to share losses on $46.4 million of Appalachian Community Bank's loans and other assets. The FDIC and Bank of the Ozarks are sharing losses on $195.3 million of Chestatee State Bank's assets. The agency and State Bank and Trust Co. are sharing losses on $195.8 million of United Americas Bank's assets.

The FDIC and 1st United Bank agreed to share losses on $313.5 million of Bank of Miami's assets.

The failure of Appalachian Community Bank is expected to cost the deposit insurance fund $26 million. The failure of Chestatee State Bank is expected to cost the fund $75.3 million; that of United Americas Bank, $75.8 million; that of Bank of Miami, $64 million; First Southern Bank, $22.8 million; and Community National Bank, $3.7 million.

The 157 closures nationwide so far this year tops the 140 shuttered in all of 2009 and is the most in a year since the savings-and-loan crisis two decades ago.

The 2009 failures cost the insurance fund about $36 billion; the failures so far this year have cost around $21 billion, less because the banks failing in 2010 have on average been smaller. Twenty-five banks failed in 2008, the year the financial crisis struck with force; only three succumbed in 2007.

The growing bank failures have sapped billions of dollars out of the deposit insurance fund. It fell into the red last year, and its deficit stood at $8 billion as of Sept. 30.

The number of banks on the FDIC's confidential "problem" list jumped to 860 in the third quarter from 829 three months earlier. The 860 troubled banks is the highest number since 1993, during the savings-and-loan crisis.

The FDIC expects the cost of resolving failed banks to total around $52 billion from 2010 through 2014.

Depositors' money -- insured up to $250,000 per account -- is not at risk, with the FDIC backed by the government. That insurance cap was made permanent in the financial overhaul law enacted in July.

US corporations move to create a part-time, contingent workforce

Big employers in the US are increasingly using part-time and temporary workers to hold down labor costs, according to the latest figures from the Labor Department. In a trend that has been accelerated over the last two years, corporations are moving to phase out full time positions and create a workforce earning far lower wages and fewer, if any, benefits that can be hired and fired at will.

In November there were a total of 9.2 million “involuntarily part-time” workers in the US. After adding an average of 28,000 new jobs over the previous few months, temporary help services created 39,500 jobs in November, more than any other sector of the economy. Temporary agency jobs accounted for 80 percent of the 50,000 jobs added by private employers last month.

Since the beginning of the year, employers have added a net 307,000 temporary workers, more than a quarter (26.2 percent) of the 1.17 million private sector jobs added in total, according to a December 19 article in the New York Times. In the comparable period after the recession of the early 1990s, only 10.9 percent of the private sector jobs added were temporary, and after the downturn earlier this decade, just 7.1 percent were temporary.

“It hints at a structural change,” Allen L. Sinai, chief global economist at the consulting firm Decision Economics told the Times. Temporary workers “are becoming an ever more important part of what is going on.”

In a recent interview with the job search web site, Melanie Holmes, vice president of staffing agency Manpower, said, “The nature of work is changing. Because of technology, we’re able to work anywhere, at any time, and not just from home or from Starbucks, but from India. That’s changed the way some employers look for employees. They recognize they’re always going to want to have a contingent workforce and to staff up or down to meet their needs.”

Temporary agencies have seen an increase across every sector of the economy, with some reporting a 17 to 20 percent increase in new customers in education, nonprofits, healthcare, manufacturing and financial services. A survey by Staffing Industry Analysts, a Mountain View, California research firm, reported that 68 percent of all temporary workers would rather have permanent employment.

The shift to low-paid and part-time workers is part of a fundamental change in class relations in the US. America’s corporate and financial elite has used the economic crisis—created by their own making—to strip workers of long-standing income and job protections and drastically increase productivity and exploitation. As a result, US corporations are making record profits and are sitting on huge financial reserves. Rather than hiring they are using the cash hoards to pay out bigger executive bonuses, boost share values through stock buybacks and to prepare a new wave of mergers and acquisitions.

Corporate America has received the full support of the Obama administration, which, while handing over trillions in bailouts and tax cuts for the rich, has refused to provide any relief to victims of the economic crisis. The president has repeatedly insisted that only the private sector, not the government, is responsible for creating jobs, even as corporations carry out a hiring boycott and 27 million people remain jobless or underemployed.

According to the Economic Policy Institute, the ratio of job seekers for every available full-time job is 7.1-to-1. With November’s official jobless rate hitting 9.8 percent, unemployment has not dipped below 9 percent for 19 straight months, tying the recession of the early 1980s for the longest stretch on record. Economists expect the jobless rate to remain above 9 percent through all of 2011, if not beyond.

Exploiting the desperate conditions facing workers, US corporations are limiting themselves to hiring part-timers to cut labor costs and introduce “flexibility.” The Times writes, “Corporate executives, stung by the depth of the recent downturn, are looking to make it easier to hire and fire workers. And with the cost of health and retirement benefits running high, many companies are looking to reduce that burden. In some cases, companies wrongly classify regular employees as temporary or contract workers in order to save on benefit costs and taxes.”

Increasingly, manufacturing companies, including auto and auto parts makers are relying on temporary workers they can rapidly dispense with if sales decline. With the assistance of the United Auto Workers, the auto industry has increased the use of temporary workers, along with lower-paid new hires earning half the wages of traditional workers.

This is part of an international trend, as corporations and government institute labor “reforms” to strip workers of job protections. According to the International Labor Organization, temporary employment levels grew in absolute terms in all of the industrialized countries over the last decade, led by Japan, which saw the addition of 990,000 temporary workers. There were also large increases in the United Kingdom (+603,000), the United States (+520,000), Germany (+434,000) and France (+279,000).

As the global economic crisis hit, the biggest temporary job losses were recorded in the manufacturing sector of developed countries, most noticeably in the car industry. In Germany, for example, auto companies eliminated the positions of between 100,000 and 150,000 temporary agency workers in the four to six months after October 2008.

With the unemployment rate for college graduates at 5.1 percent—the highest since records began being kept in 1970—many young people have found no prospects other than temporary work. Since leaving school in 2009, Jeff, a college graduate in Chicago, has only had temporary assignments although he has put in over 100 applications for a full time position.

“Since I graduated I’ve worked four different temp jobs, including for the US Census. The first was for 20 hours a week for a utility company; it was a six-month assignment but it paid so low that I had to take another temporary job in the catering industry. Now I’m working for an online retailer, which said they planned to put me on full time.

“You’re nothing but a commodity, always on call. The temp agency will call you the night before or even a few hours before your assignment—but you never get guaranteed hours. At one job for a catering service, they expected you to invest hundreds of dollars for your own clothes, including a tuxedo, shoes and ties. You get no transportation even if the assignment is 40 miles away. A friend of mine had to travel back and forth for over an hour but they only gave her four hours. She got $10 an hour, but the temp agency was paid $19.50 an hour for her services.”

“There are very limited opportunities to work in the field you studied in,” Jeff added. “The only way to get a full time job is to start temporary. I’ve worked in catering and warehouse work and I’ve never heard of a temporary job with benefits. A quarter of the new hires are temps. That is a fundamental change. The companies feel that in a depressed labor market they can get the skills they need from the pool of unemployed workers without paying competitive wages or benefits. It’s all part of the reduction in living standards for the working class.”

Paul Craig Roberts: Reaganomics

The Intel Hub
By Paul Craig Roberts

I admire Robert Reich, because he has a social conscience. However, if I were writing about the current Republican/Obama tax cut, I would not help the Republicans put Ronald Reagan’s name on it. Outside of progressive circles, which reflexively blame Reagan, the 40th president is still popular, because the 1980s were the last of the good times. Who prefers 21st century America to the Reagan 1980s?

In his recent article “Reaganomics Redux” in Reader Supported News (17 December), Reich writes that “Ronald Reagan came to Washington intent on reducing taxes on the wealthy and shrinking every aspect of government except defense.” As Reagan’s first Assistant Secretary of the Treasury for Economic Policy, often labeled both in praise and derision “the father of Reaganomics,” I would like to offer a different perspective.

Reagan came to Washington to put an end to stagflation and the cold war. Keynesian demand management had the wrong policy mix. Easy money pumped up aggregate demand, but high tax rates reduced the response of supply to demand. Consequently, prices rose. The problem was reflected in worsening “Phillips curve” tradeoffs between inflation and employment. As time passed, higher rates of unemployment were required to bring down inflation, and higher rates of inflation were required to boost employment.

Washington was concerned, including Democrats in Congress, because stagflation threatened every category in the budget.

The supply-side policy, which some label Reaganomics, reversed the policy mix. Monetary policy was tightened to lower aggregate demand, and marginal tax rates were reduced in order to boost the response of supply.

The policy worked. The economy ceased to experience worsening tradeoffs between inflation and unemployment. I described the policy change in my book, The Supply-Side Revolution, published after exacting peer review by Harvard University Press in 1984.

The Reagan tax rate reduction was modeled on the John F. Kennedy tax rate reduction, which was strongly supported by Reich’s Keynesian colleagues in Kennedy’s time. Both the Kennedy and Reagan tax rate reductions cut marginal tax rates (the rate of tax on additional income) proportionally across the board. Everyone got roughly the same percentage cut in tax rates.

Both the Kennedy and Reagan tax rate reductions raised distributional issues. As the higher incomes are taxed at higher rates, those with higher incomes pay far larger dollar amounts. Thus, when rates are reduced, those with higher incomes get more dollars back. But proportionally both tax rate reductions were equal for everyone. Progressives have focused on who got the most dollars back without acknowledging that lower income people were suffering the most from stagflation.

The Reagan tax rate reductions on earned income were proposed as 30% across the board phased in over three years. If memory serves, when enacted, they were a bit less. Using the 30% figure, the top tax rate on wages and salaries was reduced from 50%–the tax rate on a 19th century American slave–to 35%–a higher tax rate than that imposed on medieval serfs.

In 1980 the top tax rate on investment income (“unearned income”) was 70%. It was not Reagan, but the Michigan Democrat William M. Brodhead who put the amendment on the Reagan tax rate reduction bill to reduce immediately the top tax rate on investment income from 70% to 50%.

Reagan had rejected the Treasury’s proposal to reduce the tax rate on investment income. At 4:27 p.m.on February 13, 1981, the Dow Jones wire service reported: “The White House said President Reagan had rejected the Treasury proposal to reduce the maximum tax on unearned income.”

Supply-side economics did not originate with Reagan. Supply-side economics grew out of the policy process in the US Congress. During the 1970s, I was a member of the congressional staff, both House and Senate and personal staffs and committee staffs. My best Republican allies were Jack Kemp and Marjorie Holt in the House and Orrin Hatch in the Senate. My Democratic allies were far more powerful–Russell Long, chairman of the Senate Finance Committee, Lloyd Bentsen, chairman of the Joint Economic Committee, and Sam Nunn on the Senate Armed Services Committee.

Everyone forgets, but House Speaker Tip O’Neill, a Democrat, had an alternative tax cut bill to Reagan’s. O’Neill’s bill cut personal income tax rates by 15%, but had expensing–one year write-offs for business investments–in contrast to Reagan’s accelerated depreciation for business investment. My effort to have the Reagan administration compromise with Tip O’Neill in order to gain expensing was blocked by White House chief of staff Jim Baker.

There were more supporters among Democrats in Congress for the supply-side solution to stagflation than there were on Wall Street. Indeed, Wall Street was the greatest problem that the Treasury team faced. Wall Street believed that the Reagan tax rate reductions would cause the double-digit inflation from stagflation to go even higher and destroy the values of their stock and bond portfolios. Wall Street’s two prestige economists, known as Dr. Gloom and Dr. Doom, along with Dow Jones’ Barrons, regularly beat me up in print as a “Keynesian inflationist.”

The reason for Reagan’s military buildup was to bring the Soviets, with their broken economy, to the negotiating table to end the cold war. That was Reagan’s second great achievement. The military/security complex was opposed to ending the cold war because of the implied cut in the vast military budget. It was Reagan’s chief-of-staff Don Regan who got the deal done during Reagan’s second term.

It was later administrations that reneged on the deal Reagan struck with Gorbachev and created a new war against “Muslim terrorists” and courted former Soviet republics as members of NATO.

I did not support the Bush tax cuts, because they have nothing to do with the economy’s problems since the collapse of the Soviet empire two decades ago. Reich does not acknowledge the devastating impact on American incomes and employment of the offshoring of middle class jobs in manufacturing and professional services. The Soviet collapse caused socialist India and communist China to decide to get on the winning side of “the end of history.” Consequently, for the first time US corporations had access to the massive supplies of Indian and Chinese labor. The large excess supplies of labor in those countries meant that US corporations could hire workers at wages far below their productivity. Thus the savings from replacing American workers with Chinese and Indians translated into higher stock prices, higher shareholder earnings, and large bonuses for managements, thus worsening the income distribution.

It is the before-tax incomes of corporate CEOs that have exploded from 30 times the average wage to 300 times. Annual Wall Street bonuses from extreme debt leverage now exceed the lifetime earnings of workers. To blame the worsening income distribution on tax rate reductions is to ignore the facts.

Jobs offshoring has resulted in both manufacturing jobs and professional service jobs, such as software engineering and IT, being sent to India and China with a corresponding decline in US employment, income and consumer demand.

Reagan’s supply-side economic policy has nothing whatsoever to do with the post-1991 offshoring of American manufacturing jobs and tradable professional services.

None of us in the Reagan administration had any inkling that the Bill Clinton and George W. Bush regimes would deregulate the financial sector and unleash greed and debt leverage to levels that the world has never before experienced.

No one in the Reagan administration realized that the demise of the Soviet Empire would result in an American Empire whose annual trillion dollar military budgets would be financed by cutting Social Security, Medicare, and income support programs for the poor.

None of us in the Reagan administration, with the exception of the neoconservatives whom Reagan fired, would have supported the policies of the George W. Bush administration or the Clinton administration, which launched a war against Serbia on false premises just as Bush did against Afghanistan and Iraq,

Reagan was not perfect–especially Ed Meese’s war on drugs and the neocon’s plots–but the Reagan administration had no intention of establishing American hegemony over the world. Empire is a neoconservative goal, not a conservative one.

Supply-side economics is a necessary modification to Keynesian demand management, not a conspiracy to enrich the rich.