24 Feb 2011

The tax haven in the heart of Britain

by Nicholas Shaxson

There is an institution with a murky history and remarkable powers that acts like a political and financial island within our island nation state. Welcome to the Square Mile and the City of London Corporation.

On 7 October 2002, an Anglican priest, William Campbell-Taylor, and an English-Jewish academic, Maurice Glasman, came to the law lords to challenge a parliamentary bill. It was the start of an episode that anyone worried about tax avoidance - or, for that matter, about the fate of the NHS, about economic inequality, about student loans, about capital flight from Africa, about global financial deregulation or about the political might of the financial sector - ought to know about. Yet there was little media interest.

The bill concerned the City of London Corporation, the local-government authority for the 1.2-square-mile slab of prime real estate in central London that is the City of London. The corporation is an ancient, semi-alien entity lodged inside the British nation state; a "prehistoric monster which had mysteriously survived into the modern world", as a 19th-century would-be City reformer put it. The words remain apt today. Few people care that London has a mayor and a lord mayor - but they should: the corporation is an offshore island inside Britain, a tax haven in its own right.

The term "tax haven" is a bit of a misnomer, because such places aren't just about tax. What they sell is escape: from the laws, rules and taxes of jurisdictions elsewhere, usually with secrecy as their prime offering. The notion of elsewhere (hence the term "offshore") is central. The Cayman Islands' tax and secrecy laws are not designed for the benefit of the 50,000-odd Caymanians, but help wealthy people and corporations, mostly in the US and Europe, get around the rules of their own democratic societies. The outcome is one set of rules for a rich elite and another for the rest of us.

The City's "elsewhere" status in Britain stems from a simple formula: over centuries, sovereigns and governments have sought City loans, and in exchange the City has extracted privileges and freedoms from rules and laws to which the rest of Britain must submit. The City does have a noble tradition of standing up for citizens' freedoms against despotic sovereigns, but this has morphed into freedom for money.

A few examples illustrate the carve-out. Whenever the Queen makes a state entry to the City, she meets a red cord raised by City police at Temple Bar, and then engages in a col­ourful ceremony involving the lord mayor, his sword, assorted aldermen and sheriffs, and a character called the Remembrancer. In this ceremony, the lord mayor recognises the Queen's authority, but the relationship is complex: as the corporation itself says: "The right of the City to run its own affairs was gradually won as concessions were gained from the Crown." The modern ceremony strikingly marks the political discontinuity at the City's borders.

The Remembrancer, whose position dates from the reign of Elizabeth I, is the City's official lobbyist in parliament, sitting opposite the Speaker, and is "charged with maintaining and enhancing the City's status and ensuring that its established rights are safeguarded". His office watches out for political dissent against the City and lobbies on financial matters. Then there is the City's Cash, "a private fund built up over the last eight centuries", which, among many other things, helps buy off dissent. Only part of it is visible: the Freedom of Information Act applies solely to its mundane functions as a local authority or police authority. Its assets are beyond proper democratic scrutiny.

The City Corporation is different from any other local authority. Here, hi-tech global finance melds into ancient rites and customs that underline its separateness and power with mystifying pomp. Among the City's 108 livery companies, or trade associations, you will find the WorshipfulCompanies of Loriners (concerned with stirrups and other harnesses for horses) and Fletchers (arrow-makers) as well as the Worshipful Company of Tax Advisers, among whose four prime aims is "to support the Lord Mayor and the City of London Corporation", and the Worshipful Company of International Bankers, whose heraldic "supporters" are the griffins, guardians of treasure.

The carve-outs that the City's grandees have created are astonishing. One of the biggest relates to the bill that came before the law lords on a chilly day in October 2002. Sitting in the Café Churchill on Parliament Street, Glasman used sugar sachets and teaspoons to reconstruct the scene for me. Apart from a couple of brave, independent-minded Labour MPs, notably John McDonnell, nobody supported Glasman and Campbell-Taylor to challenge the bill. Such is the fear that the corporation inspires in parliament.

Campbell-Taylor - a handsome and articulate Oxbridge-educated priest - probably felt more at home than Glasman in front of the assorted City scriveners, aldermen and barristers. Glasman has thick, tousled black hair, horn-rimmed glasses and an easy, slightly dishevelled charm. Born in 1961, a grandchild of eastern European refugees from the Holocaust, he was educated at a rough north London comprehensive but won an exhibition to read history at Cambridge. He bunked off lectures, took up the trumpet and joined a band, the Ashtrays, though the big break never came. "I had to do a reckoning with who I was," he told me. "I thought for a long time that it was women I was interested in. But I was having a lot of anxiety: I thought it was because I was with the wrong women. Eventually I realised it was political work and academic engagement that made me happy. I had made a simple category error."

He took on various academic posts and wrote a book called Unnecessary Suffering, about the Solidarity movement in Poland. In 1995, he took a job at Guildhall University, where he made friends with Campbell-Taylor, the chaplain. Campbell-Taylor first properly encountered the corporation through a campaign called Spitalfields Market Under Threat (Smut), confronting a property development on the fringes of the City. They were astonished to find that the corporation was a big shareholder in the development - a public authority acting as a private company, outside its jurisdiction. They resolved to find out more. Campbell-Taylor got himself elected as a City ward councillor, running on a campaign to save a school. Once inside, he discovered the matter that would take him to the law lords.

The slavery franchise

Over the centuries, reformers in Britain have tried, and failed, to have the corporation merged into a unified London authority. The political landscape heaved and shifted around it, but the City stood immune. As the Times noted in 1881, "The City Corporation is sacred although nothing else is."

For much of the 20th century, the Labour Party had a pledge in its manifesto to abolish the corporation. In 1917, Peter Mandelson's grandfather Herbert Morrison, a rising star in Labour ranks, put the party's antipathy plainly. "Is it not time London faced up to the pretentious buffoonery of the City of London Cor­poration and wipe it off the municipal map?" he asked. "The City is now a square mile of entrenched reaction, the home of the devilry of modern finance."

Clement Attlee took up the baton in 1937. "Over and over again we have seen that there is in this country another power than that which has its seat at Westminster," he said. "Those who control money can pursue a policy at home and abroad contrary to that which has been decided by the people." Freedom for money can lead to bondage for ordinary people. Labour never did abolish the corporation; instead, the Greater London Council was abolished in 1986 under Margaret Thatcher. In 1996, Tony Blair got Labour to replace its pledge to abolish the corporation with a promise merely to "reform" it. This was the suggestion before the law lords in 2002 - and it was an astonishing gift to the corporation.

Like any other local authority, the City of London is divided into wards. These elect candidates to serve on the Court of Common Council, the City's principal decision-making body. Unlike any other local authority, however, individual people are not the only voters: businesses can vote, too. Political parties are not involved - candidates stand alone as independents - and this makes organised challenge to City consensus all but impossible.

Before 2002, the 17,000 business votes (only business partnerships and sole traders could take part) already swamped the 6,000-odd residents. Blair's reforms proposed to expand the business vote to about 32,000 and to give a say, based on the size of their workforce in the Square Mile, to international banks and other big players. Voting would reflect the wishes not of the City's 300,000 workers, but of corporate managements. So Goldman Sachs and the People's Bank of China would get to vote in what is arguably Britain's most important local election.

The City called the reforms "radical change that is essential to keep a world-class financial centre". Glasman called it the "biggest retrograde step since Magna Carta". These workers did not have control of their own votes - the reform programme was comparable, he said, to the voting rights of chattel owners in the pre-war American South: the slavery franchise.

When the reforms came before the Lords, Tom Simmons, chief executive of the corporation, outlined the heft and the outlandish nature of this primeval quasi-British institution. "The corporation emerged from a 'missed time' and there is no direct evidence of it coming into existence," he said. "There is no charter that constituted the corporation as a corporate body." City people joke that it dates its "modern period" from 1067, the year when William the Conqueror "came friendly" to the City and let it keep its ancient rights as he subdued the rest of the country.

This "missed time" is significant, Glasman says, because it means the City's rights pre-date the construction of modern political Britain, and this has placed it outside parliament's normal legislative remit. The City evolved as an institution not so much subordinate to parliament, or the church, or the Crown, but adjacent to and intertwined with them in complex relationships. It is the carve-out again.

The offshore City

The corporation's part-escape from Britain is just one element of the offshore story. It is no coincidence that the capital of what was once the world's greatest empire - with the City as "governor of the imperial engine", as the historians P J Cain and A G Hopkins put it - has become the centre of a big part of the modern global offshore system.

As my book Treasure Islands describes in detail, the Bank of England, lodged in the heart of the City (but not, it has to be said, regulated by it), in effect encouraged tax havenry in British outposts of the Caribbean and elsewhere. By the 1980s, the City was at the centre of a great, secretive financial web cast across the globe, each of whose sections - the individual havens - trapped passing money and business from nearby jurisdictions and fed them up to the City: just as a spider catches insects. So, a complex cross-border merger involving a US multinational might, say, route a lot of the transaction through Caribbean havens, whose British firms will then send much of the heavy lifting work, and profits, up to the City.

The Crown dependencies of Jersey, Guern­sey and the Isle of Man, which focus heavily on European business, form the web's inner ring. In the second quarter of 2009, Jersey alone provided £135bn in bank deposits upstreamed to the City. Jersey Finance, the tax haven's promotional body, puts the relationship plainly: "Jersey is an extension of the City of London."

The next ring of the web contains the British overseas territories, such as the Cayman Islands and Bermuda. Like the Crown dependencies, they have governors appointed by the Queen and are controlled by Britain in myriad ways, but with enough distance to allow Britain to say "There is nothing we can do" when it suits.

The web's outer ring contains an assortment of havens, such as Mauritius in the Indian Ocean, Hong Kong and the Bahamas, which Britain does not control but which still feed billions in business to the City from around the world.

So, the corporation has two main claims to being a tax haven: first, as a semi-alien entity, floating partly free from Britain (just as the Cayman Islands are), and second, as the hub of a global network of tax havens sucking up offshore trillions from around the world and sending it, or the business of handling it, to London. These are possibly the biggest reasons for the City's wealth and power - yet how many Britons understand this?

“Don't tax or regulate us or we'll move to Switzerland," the bankers and hedgies cry; and all too often the politicians quail and cut taxes on the wealthy, deregulate finance further, and hand yet more freedoms to the City.

Nearly every multinational corporation has offshore subsidiaries (not counting those in Lon­don) - and the biggest users of offshore finance are banks. Financial Mail recently counted over 550 offshore subsidiaries just for Barclays, RBS and Lloyds - each of which far outstrips any other multinational. This isn't just about tax: banks go offshore to escape certain financial regulations, and can grow faster as a result. So, offshore is a big part of the Too Big To Fail story - another element strengthening the City's power through the grip these banks have on our elected leaders and boosting the breathtaking chutzpah of the Barclays chief executive, Bob Diamond, who told the UK Treasury select committee on 11 January that he didn't know how many offshore subsidiaries his bank had, and that the "period of remorse and apology" for banks should now end.

The corporation loves financial deregulation - globally. Deregulation is a bit like shaking (or, perhaps more accurately, removing a net from) a tree full of insects: the more you do it, the more business floats around, ready to be caught in the nearby web. As such, it is hardly surprising that the Lord Mayor of London is evan­gelical about it. In fact, his role is officially, as the City explains, to "expound the values of liberalisation" and provide "support for innovation, proportionate taxation and regulation". (On his 20-odd foreign trips a year, he makes clear that "proportionate" means "limited".) Not only that, but the Lord Mayor and colleagues promise to "take up cudgels on behalf of the City anywhere in the world on any subject which is of concern to the City".

Thus, the role of the City of London Corporation as a municipal authority is its least important attribute. This is a hugely resourced international offshore lobbying group pushing for international financial deregulation, tax-cutting and tax havenry around the world.

Divided capital

In the end, the bill on extending the corporate vote passed, carried on a Labour majority. Glasman's and Campbell-Taylor's challenge failed, although they won a small victory - that the process for choosing business electors be "open and clear". Campbell-Taylor now works in a small parish in north London; Glasman has risen from relative obscurity to become a leading thinker for the Labour Party - and was recently ennobled for this by Ed Miliband.

It is easy to be daunted by the City and the offshore system. Some reviewers of Treasure Islands were so disturbed by the scale of it - Peter Preston's defeatist review in the Guardian is a case in point - that they advocated, in effect, capitulation. Given that the financial services sector has just been exposed as having provided over half of the Conservative Party's funding last year, and that the Chancellor of the Exchequer, George Osborne, has just urged Britain to move from "retribution to recovery" over the banks, reform looks distant.

But the doubters are wrong. Yes, we still need a vision of how to confront the corporation and its offshore satellites. Few people in Britain can see the corporation, let alone understand its importance. However, widespread public education, a precursor to reform, can now begin. One of the biggest, most silent players behind so much offshore activity has been identified: a Teflon-like, medieval institution, wrapped around the neck of Britain and dedicated to keeping finance strong and free.

Already I see efforts around the world to constrain the offshore system that feeds the City. UK Uncut, the spontaneous protest movement opposing offshore tax avoidance by multinationals, has had an impact and now pledges to move against the banks. A big "One London" campaign to merge a divided capital into a single democratic entity may seem far off, but groups such as London Citizens are now thinking about the fairer division of London. The Tax Justice Network, and others, are helping build an intellectual edifice for understanding tax havens. Some of their goals - such as country-by-country reporting by multinationals - are already being partly met. The unions, too, and big NGOs, especially those working in international development, are engaging with the matter. An anti-haven mobilisation is under way in France; something similar may be starting in the US. The IMF, the Organisation for Economic Co-operation and Development, the EU and other agencies are now at least debating issues they ignored before. Around the world, legislators, regulators and ordinary people are starting to see the toxicity of Britain's role in protecting offshore business that drains billions out of developing countries each year.

The City of London Corporation - this heart cut out from the body of our vibrant, multicultural metropolis - is no longer so invisible. Now we must figure out what to do about it.

Nicholas Shaxson's book "Treasure Islands" is published by Bodley Head (£14.99)

The Second Enclosure Movement and the Construction of the Public Domain

Author(s) / Editor(s): Boyle, James

Summary of: The Second Enclosure Movement and the Construction of the Public Domain

The “second enclosure movement” attempts to put fences around the intellectual commons of ideas and facts in a manner analogous to the enclosure and transfer of property rights from the public to the private sphere during the first enclosure movement in England that fenced off common areas between the fifteenth and nineteenth centuries. A new way of thinking about the public domain, the intellectual commons, is needed to combat the negative impact of this trend.

Discipline: Law

Keywords: intellectual property, open source, property rights, public goods

Publication Reference:

Published in/by Law and Contemporary Problems, Vol. 66:33

Date: Winter/Spring 2003


•Limits on intellectual property rights are being eroded. Brandeis’ sense that intellectual property rights are the exception rather than the norm and that ideas and facts must always remain in the public domain is under attack. The commons of facts and ideas is being enclosed.

•The networked commons of the mind is different from the grassy commons of Old England, “enclosed” between the fifteenth and nineteenth centuries, in that it is generally “non-rival.” The threat of overuse of fields and fisheries is generally not a problem with informational and innovational commons. In fact, one may argue that increased innovation would occur from wider dissemination.

•The decreasing cost of copying intellectual property does not necessarily lead to reduced income for the creators of information: it also leads to lower costs of production, distribution, and advertising and increases the size of the potential market. “A large, leaky market may actually provide more revenue than a small one over which one’s control is much stronger.”

•“We rush to enclose ever-larger stretches of the commons of he mind without convincing economic evidence that it will help our processes of innovation and with very good reason to believe it will actually hurt them.”

•The dysfunctional side of property/monopoly can be seen as a restraint on innovation rather than a problem of price gouging.

•A new way of speaking about the intellectual commons and the public domain of intellectual works is necessary for its protection in a manner analogous to the creation of the concept of the “environment” as a rallying point to clarify and reshape perceptions of self-interest. Boyle points out that it was only after the creation of discourse around “an environment” was it possible for a coalition to be built around a reframed conception of common interest.

The “second enclosure movement” attempts to put fences around the intellectual commons of ideas and facts in a manner analogous to the enclosure and transfer of property rights from the public to the private sphere during the first enclosure movement in England that fenced off common areas between the fifteenth and nineteenth centuries. A new way of thinking about the public domain, the intellectual commons, is needed to combat the negative impact of this trend.

Limits on intellectual property rights are being eroded by specious arguments about the need to protect against piracy and to encourage innovation. Historically there was a sense that any grant of intellectual property rights, effectively a state granted monopoly, was to be strictly limited in term. In fact, the erosion of those historical limits through legislation and extensions of intellectual property protections like business method patents, the Digital Millennium Copyright Act, and patents on the human genome can be argued to decrease the possibilities for collaborative creation traditional in domains as varied as science, law, education, and music.

The first enclosure movement can be viewed as a “revolution of the rich against the poor”, it was justified by the incentives it offered for large-scale investment, for the control it offered over exploitation, and for the efficiency of exploitation of resources. It was said to “avoid the tragedies of overuse and underinvestment,” a conclusion that is subject to some debate.

The second enclosure movement is the similar much more recent application of intellectual property law to “the enclosure of the intangible commons of the mind”: things that were formerly thought of as either common property or uncommodifiable are being covered with new, or newly extended, property rights.

Advocates of the second enclosure argue that the extension of property rights is essential to create incentives to invention. Opponents point to the restrictions and bottlenecks on innovation and, in the case of the human genome, the claim that it is the “common heritage of humankind belonging to everyone.”


•Propertization is a vicious circle. Once something is made private it’s hard to take it back.

•To enclose the intellectual commons requires throwing away or restricting the characteristics of the Internet that made it so effective a force for innovation.

•The arguments for enclosure are analytically unsound and often based on the vested interests with financial abilities to sway lawmakers.

The notion of intellectual property has had critics through its history: Jefferson was concerned with the state creation of unbounded monopoly. He felt that intellectual property rights might be necessary, but should not be treated as natural rights and should be strictly limited in term.

The concept of public domain as applied to intellectual property is a relatively recent construct. Copyright is a system designed to feed the public domain providing temporary and narrowly limited rights. The public domain is “a commons that includes those aspects of copyrighted works which copyright does not protect.”

The Internet expanded rapidly because its core protocols, TCP/IP and HTML, are open.

A global network transforms the nature of creativity by introducing new ways of collaborating: examples include the free software and open-source software movement.

The free software and open-source software movements may serve as models for thinking about alternative ways of dealing with intellectual property which encourage collaborative innovation while offering creators the ability to distribute their inventions for financial gain. These movements stand squarely on intellectual property: they build on a living ecology of open code where the price for participation is a commitment to make incremental innovation part of the ecology.

Lessig defines a commons as “a resource that is free. Not necessarily zero cost, but if there is a cost, it is a neutrally imposed, or equally imposed cost.”

The General Public License (GPL) of the open-source software movement encourages continuing improvement by making source code for software and its modifications available for members of the community. Continuous, peer-monitored improvement is encouraged without violating individuals’ rights to distribute products for financial gain. Presumably the best solutions are adopted by the community.

Boyle proposes using the concept of “public domain” for intellectual property, a relatively recent term in legal discourse, as a rallying point for combating the erosion of the intellectual commons in much the manner that the concept of the “environment” was used to create a coalition of disparate self-interests.

23 Feb 2011

New Regimes Have Reason to Resent America

by William Pfaff

The political scholar Walter Russell Mead recently alluded to more than a half-century of American “world-order-building tasks,” a formulation that I think most Americans would accept as describing the international obligations Washington assumed in 1945-46, and the policy the United States has undertaken since 1941, when it entered the Second World War against Nazi Germany and the Japanese Empire.

Victory in the Second World War was followed by the Cold War, its outcome in the 1980s taken complacently to be another American victory. History was pronounced to be over—another success for Washington. Completion of that American-built world order seemed just over the horizon. Then came the 9/11 Arab attacks on the U.S. Since then, it has been world disorder that we have faced.

There are many in Washington and elsewhere who believe that the democratic awakening of the Arab nations, which has been under way since December, will consolidate a predominantly democratic order for nearly all the major states, with the U.S. enjoying a respected leadership role. My own opinion is that nothing is less likely.

The American commitment of the last four decades (at least) has been to the reactionary and undemocratic order that has prevailed in the Middle East, and to the three wars and several small and misconceived “Greater Middle Eastern” interventions that sowed the disorder now undoing Middle Eastern and Mediterranean geopolitics.

Popular uprisings are the immediate cause of the present disorder, but Washington is clinging to the undemocratic remnants of the past while hoping for more democracy. This is true in Bahrain, where the U.S. Navy’s alliance has been with the Sunni monarchy of Bahrain, which is being held in place by the Sunni Saudi Arabian monarchy, both trembling with anxiety that the exploited Shiite majority in Bahrain, and minority in Saudi Arabia, may find effective support from Iran—America’s and the Sunni monarchies’ nuclear-nightmare state, itself a shaky despotism, but a Shiite one, and just as determined as the Saudi monarchy not to yield to democracy.

The Arab intellectual Khaled Hroub, writing in the London-published daily Al-Hayat, argues that the Arab dictators have profited from the Israeli-Palestinian conflict by making it a pretext for demanding discipline and conformity from their populations to stand firm against Israel. If democracy takes hold in the Arab states and Egypt, an increasingly authoritarian Israel that is seizing Palestinian territories and displacing the Jerusalem and West Bank Palestinian populations, will be increasingly isolated (if not worse)—and with it, the U.S.
The self-destructive alliance that the Obama administration (like the G.W. Bush administration before it) has forged with the reactionary and expansionist Likud party in Israel is a barrier to American friendship with Arab democracy.

Last week’s veto by the U.S. of an otherwise unanimous U.N. Security Council resolution condemning further illegal Israeli settlement-building on Palestinian land advances the moment when the Palestinians will take the issue to the General Assembly, which (not the Security Council) is the U.N. authority that voted to create Israel inside the territory of a partitioned Mandate Palestine. The assembly also guaranteed the well-being of the Palestinians whose land was appropriated. The Palestinians will now ask for recognition as an independent state and government, existing within the U.N.-defined frontiers, and that are under illegal military occupation. They will demand that the General Assembly require enforcement of partition on its original geographical terms (with mutually agreed modifications).

If Israel believes itself the victim of an international “de-legitimization” campaign today, wait until that happens! Its only friend will be a U.S., discredited by its abandonment of past Arab allies and rash past commitments, as well as by its frustration in Iraq and Afghanistan. The Israelis should note that even now the U.S. is not a true friend to Israel because its relationship is tainted by hypocrisy. Washington, too, has refused from the very start—and continues to refuse—to accept officially Israel’s violations of international law and its settlement of Palestinian territory. Its actions unofficially suggest otherwise, but they contradict America’s official commitments only because the right-wing Israeli lobby in the U.S. holds a gun to the back of Congress. Israel should take care.

The Obama administration itself launched its Middle Eastern policy in 2009 with a demand that Israeli settlements cease. It cravenly backed off that demand after it was contemptuously spurned, but Barack Obama’s successor will inherit the hypocrisy of past American policy choices in the Middle East and find himself the enemy of the governments that eventually will have replaced the unseated Tunisian, Egyptian, presumably Libyan (and other) despotisms of recent memory.

He and his electoral counselors may be more disposed than Obama to accept the unsavory but lucid advice of Machiavelli that I quoted in a recent column: “A prudent ruler [make that an American president] ought not to keep faith when by doing so would be against [his country’s] interest.” One should add that, above all, this is good advice when the candidate for betrayal is determined to commit national suicide, as is true of Israel under Likud rule.

Visit William Pfaff’s website for more on his latest book, “The Irony of Manifest Destiny: The Tragedy of America’s Foreign Policy” (Walker & Co., $25), at www.williampfaff.com.

© 2011 Tribune Media Services, Inc.

US economics: One big Ponzi scheme

While Bernie Madoff languishes in jail, bankers continue to profit as the poor lose their homes and hope.

by Danny Schechter
Wall Street traders represent the elite of the global financial world, but after the collapse of the economy those behind the world's depression still seem to be doing just fine [GALLO/GETTY]
Thank you, Bernie, for breaking your silence - even if you are still clinging to that cover-up mode you adopted since you took the entirety of the blame for your crimes.
What is clear is that ripping off the rich is punished far more severely than ripping off the poor. The lengthy sentence you were given spared countless other greedsters and goniffs from facing the music - what music there is.

In an interview - with a reporter from The New York Times who is writing a book to cash in on a man who has already cashed out - we learn, in the vaguest terms, that Mr M believes the banks he did his crooked business with "should have known" his figures did not figure. Keeping with the deceit that has served him well over the years, he names no names.

That said, how right he may be. There were many who should have known and done something about it. The Securities and Exchange Commission (SEC) and other regulators for one. Perhaps The New York Times for another. Remember, it was Madoff's confession to his sons that started him on his way to his new 12' x 12' home from home - in a federal correctional institute, where he may dream of his seized penthouse, homes and yachts - rather than any press expose.

For years, he went undetected by business journalists, who knew - or should have known - what he was up to. There are even questions about the speed with which he was sentenced, preventing him from being tried - a process which, through diligent cross-examination, would have brought us more information on the details of his dirty deals.

Do not believe all you read

Even The New York Times interview is being disputed, reports the New York Post: "The trustee representing thousands of Bernard Madoff's victims disputed a report that he personally grilled the Ponzi monster in prison."

"There has been no direct communication between them," said David Sheehan, the chief counsel for the court-appointed trustee, Irving Picard, after The New York Times reported that Picard and Madoff had met over the summer.

"The Times later changed a quote from Madoff and altered some text online that had implied Picard personally visited Bernie in the Butner, NC, lockup where he is serving a 150-year sentence. Picard did not dispute that his legal team met with Madoff."

Madoff is also still not coming clean about the web of alliances he had internationally, as well as in New York. We live in a global economy after all. We now know of Swiss and Austrian connections - but what about Israel, where this ingratiating handler was well known for his connections with Jewish philanthropists and institutions? So far, that story has yet to be told.

At the same time, the people investigating Madoff are making a small fortune. According to the Financial Times: "The army of lawyers and consultants helping to recover funds from Bernard Madoff's $19.6bn fraud stand to earn more than $1.3bn in fees, according to new figures that detail the cost of liquidating the huge Ponzi scheme."

The comments of readers to The Times appear to be more insightful than the paper’s own reports. Here is one from Texas: "I actually, sort of, feel sorry for this man. He was just doing what many investment firms were doing at the same time. He has been imprisoned as a scapegoat - yet many people since then - and to this day - are doing the same thing. Where are the indictments against the thousands of other people who did the same thing - and knowingly led this country into financial disaster?"

Banks close ranks

The best reporting on this subject is not in the mainstream press but in a music magazine, Rolling Stone, where Matt Taibbi investigates why the whole of Wall Street is not in jail: "Financial crooks brought down the world’s economy - but the feds are doing more to protect them than to prosecute them," he charges.

Madoff also believes the banks who serviced him did not want to know about his Ponzi scheme which, unfortunately, is probably true - and an attitude coming not just from the banks.

The Times report added: "He spoke with great intensity and fluency about his dealings with various banks and hedge funds, pointing to their 'willful blindness' and their failure to examine discrepancies between his regulatory filings and other information available to them.

"'They had to know,' Mr Madoff said. 'But the attitude was sort of: "If you’re doing something wrong, we don’t want to know."'"

Yves Smith of NakedCapitalism.com quips: "This sounds credible - but it also seems more than a tad self-serving."

Andrew Leonard asks in Salon: "Should we trust him? After all, if there is one thing we know about Bernie Madoff, it is that he is one hell of a liar. But as evidence emerges that bank executives were exchanging emails wondering about Madoff’s amazing investment record, the possibility that the banks were purposefully looking the other way is not inconceivable."

The truth is that many of us still do not really want to know - because, if we did, we would have to do something about it.

By their actions, both Democrats and Republicans clearly appear to prefer the most simplistic understandings - or misunderstandings.

The Financial Crisis Inquiry Commission (FCIC), like the 9/11 and Warren Commissions before it, avoided key issues. The FCIC inquiry did not call for a criminal indictment of wrongdoers. While informative, its report was ultimately a dud - telling us mostly what we knew, although there were some disclosures that our tepid press still missed.

Now the Republicans want to water down the regulations on derivatives in the Dodd-Frank financial 'reform' legislation, claiming they will lead to a loss of jobs. This is predictable: Every effort to defend big business is always couched in terms of helping the public.

The New York Times reported: "Representative Stephen Lynch, Democrat of Massachusetts, warned: 'You think regulation is costly? How about the $7trillion we just lost from not regulating the derivatives markets?'"

There was no response from his colleagues.

So who will do anything about it?

The political right prefers to change the subject, while the left does not seem to have the time or energy to make economic justice its principal concern - even as polls show the economy is the number one problem for most in the US.

Progressives should hang their heads in shame at the minimal amount of activism taking place against the banks and the escalating numbers of foreclosures. Homes and hope are being stolen from people for whom the term "depression" now has a personal, as well as economic, meaning.

The other day, economist Jeff Sachs - who has a lot of atoning to do for his own misguided, destructive economic advice to Russia after the fall of the Soviet Union - warned that little is being done about economic inequity and the growing ranks of the poor in the US. He asks if people who run things in the US want "another Egypt". He is a policy wonk, not an activist - and likely fears the idea.

Many activists say they want to emulate the Egyptians, but who will organise anything as effective - even in a land that used to be known for people's movements - to raise hell? In Egypt, young people used the internet to organise and mobilise for change. In the US, the internet seems to function more as an escape valve, consuming hours of our time and giving us another way to talk to each other - and ventilate against the government. Social media here seems to be more for socialising.

The government supports internet freedom abroad - but restricts it and spies on it at home. Obama has already supported a law allowing him to shut it down here in a national emergency.

The passivity of the public is one result of the inundation by middle-of-the-road media and effective information deprivation.

As Noam Chomsky puts it: "The population in the United States is angry, frustrated and full of fear and irrational hatreds. And the folks not far from you on Wall Street are just doing fine. They're the ones who created the current crisis. They're the ones who were called upon to deal with it. They're coming out stronger and richer than ever. But everything's fine - as long as the population is passive."

That is our problem, Bernie. Even if the people want to know, it is not that easy to find out. Let us thank the media and our government for that.

News dissector Danny Schechter edits Mediachannel.org. His new film, Plunder: The Crime of Our Time, tells the story of the financial crisis as a criminal tale. He can be reached at: dissector@mediachannel.org

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera's editorial policy.

20 Feb 2011

Recognizing the Language of Tyranny

by Chris Hedges

Credits: AP

Empires communicate in two languages. One language is expressed in imperatives. It is the language of command and force. This militarized language disdains human life and celebrates hypermasculinity. It demands. It makes no attempt to justify the flagrant theft of natural resources and wealth or the use of indiscriminate violence. When families are gunned down at a checkpoint in Iraq they are referred to as having been “lit up.” So it goes. The other language of empire is softer. It employs the vocabulary of ideals and lofty goals and insists that the power of empire is noble and benevolent. The language of beneficence is used to speak to those outside the centers of death and pillage, those who have not yet been totally broken, those who still must be seduced to hand over power to predators. The road traveled to total disempowerment, however, ends at the same place. It is the language used to get there that is different.

This language of blind obedience and retribution is used by authority in our inner cities, from Detroit to Oakland, as well as our prison systems. It is a language Iraqis and Afghans know intimately. But to the members of our dwindling middle class—as well as those in the working class who have yet to confront our new political and economic configuration—the powerful use phrases like the consent of the governed and democracy that help lull us into complacency. The longer we believe in the fiction that we are included in the corporate power structure, the more easily corporations pillage the country without the threat of rebellion. Those who know the truth are crushed. Those who do not are lied to. Those who consume and perpetuate the lies—including the liberal institutions of the press, the church, education, culture, labor and the Democratic Party—abet our disempowerment. No system of total control, including corporate control, exhibits its extreme forms at the beginning. These forms expand as they fail to encounter resistance.

The tactic of speaking in two languages is as old as empire itself. The ancient Greeks and the Romans did it. So did the Spanish conquistadors, the Ottomans, the French and later the British. Those who inhabit exploited zones on the peripheries of empire see and hear the truth. But the cries of those who are exploited are ignored or demonized. The rage they express does not resonate with those trapped in self-delusion, those who continue to trust in the ultimate goodness of empire. This is the truth articulated in Joseph Conrad’s “Heart of Darkness” and E.M. Forster’s “A Passage to India.” These writers understood that empire is about violence and theft. And the longer the theft continues, the more brutal empire becomes. The tyranny empire imposes on others it finally imposes on itself. The predatory forces unleashed by empire consume the host. Look around you.

The narratives we hear are those fabricated for us by the state, Hollywood and the press. These narratives are taught in our schools, preached in our pulpits and celebrated in war documentaries such as “Restrepo.” These narratives humanize and ennoble the enforcers of empire. The government, the military, the police and our intelligence agents are lionized. These control groups, we are assured, are the guardians of our virtues and our protectors. They produce our heroes. And those who challenge this narrative—who denounce the lies—become the enemy.

Those who administer empire—elected officials, corporate managers, generals and the celebrity courtiers who disseminate the propaganda—become very wealthy. They make immense fortunes whether they deliver the nightly news, sit on the boards of corporations, or rise, lavished with corporate endorsements, within the vast industry of spectacle and entertainment. They all pay homage, even in moments defined as criticism, to the essential goodness of corporate power. They shut out all real debate. They ignore flagrant injustices and abuse. They peddle the illusions that keep us passive and amused. But as our society is reconfigured into an oligarchic system, with a permanent and vast underclass, along with a shrinking and unstable middle class, these illusions lose their power. The language of pleasant deception must be replaced with the overt language of force. It is hard to continue to live in a state of self-delusion once unemployment benefits run out, once the only job available comes without benefits or a living wage, once the future no longer conforms to the happy talk that saturates our airwaves. At this point rage becomes the engine of response, and whoever can channel that rage inherits power. The manipulation of that rage has become the newest task of the corporate propagandists, and the failure of the liberal class to defend core liberal values has left its members with nothing to contribute to the debate.

The Belgian King Leopold, promising to abolish slavery and usher the Congolese into the “modern” era, was permitted by his European allies to form the Congo Free State in 1885. It was touted as a humanitarian gesture, as was the Spanish conquest of the Americas, as was our own occupation of Iraq. Leopold organized a ruthless force of native and foreign overseers—not unlike our own mercenary armies—to loot the Congo of ivory and rubber. By the time the Belgian monarch was done, some 5 million to 8 million Congolese had been slaughtered. It was the largest act of genocide in the modern era until the Nazi Holocaust. Leopold, even in the midst of his rampage, was lionized in Europe for his virtue. He was loathed in the periphery—as we are in Iraq and Afghanistan—where the Congolese and others understood what he was about. But these voices, like the voices of those we oppress, were almost never heard.
The Nazis, for whom the Holocaust was as much a campaign of plunder as it was a campaign to rid Europe of Jews, had two methods for greeting arrivals at their four extermination camps. If the transports came from Western Europe, the savage Ukrainian and Lithuanian guards, with their whips, dogs and clubs, were kept out of sight. The wealthier European Jews were politely ushered into an elaborate ruse, including fake railway stations complete with flower beds, until once stripped naked they became incapable of resistance and could be herded in rows of five under whips into the gas chambers. The Nazis knew that those who had not been broken, those who possessed a belief in their own personal empowerment, would fight back. When the transports came from the east, where Jews had long lived in fear, tremendous poverty and terror, there was no need for such theatrics. Mothers, fathers, the elderly and children, accustomed to overt repression and the language of command and retribution, were brutally driven from the transports by sadistic guards. The object was to create mass hysteria. The fate of the two groups was the same. It was the tactic that differed.
All centralized power, once restraints and regulations are abolished, once it is no longer accountable to citizens, knows no limit to internal and external plunder. The corporate state, which has emasculated our government, is creating a new form of feudalism, a world of masters and serfs. It speaks to those who remain in a state of self-delusion in the comforting and familiar language of liberty, freedom, prosperity and electoral democracy. It speaks to the poor and the oppressed in the language of naked coercion. But, here too, all will end up in the same place.

Those trapped in the blighted inner cities that are our internal colonies or brutalized in our prison system, especially African-Americans, see what awaits us all. So do the inhabitants in southern West Virginia, where coal companies have turned hundreds of thousands of acres into uninhabitable and poisoned wastelands. Poverty, repression and despair in these peripheral parts of empire are as common as drug addiction and cancer. Iraqis, Afghans, Pakistanis and Palestinians can also tell us who we are. They know that once self-delusion no longer works it is the iron fist that speaks. The solitary and courageous voices that rise up from these internal and external colonies of devastation are silenced or discredited by the courtiers who serve corporate power. And even those who do hear these voices of dissent often cannot handle the truth. They prefer the Potemkin facade. They recoil at the “negativity.” Reality, especially when you grasp what corporations are doing in the name of profit to the planet’s ecosystem, is terrifying.

All tyrannies come endowed with their own peculiarities. This makes it hard to say one form of totalitarianism is like another. There are always enough differences to make us unsure that history is repeating itself. The corporate state does not have a Politburo. It does not dress its Homeland Security agents in jackboots. There is no raving dictator. American democracy—like the garishly painted train station at the Nazi extermination camp Treblinka—looks real even as the levers of power are in the hands of corporations. But there is one aspect the corporate state shares with despotic regimes and the collapsed empires that have plagued human history. It too communicates in two distinct languages, that is until it does not have to, at which point it will be too late.

Chris Hedges is a senior fellow at The Nation Institute and a weekly columnist for Truthdig. His latest book is “Death of the Liberal Class".

18 Feb 2011

The Submerged State

by David Sirota

The Great Paradox—that is what future generations will likely call this era, and rightly so. Our children’s children will look back and see that just a few years after the deregulatory agenda of anti-government ideologues resulted in a horrific recession, American politics somehow became even more dominated by anti-government zealotry than ever before.

Logic-wise, the situation seems to make about as much sense as the alcoholic drinking more to cure his addiction. Politics, though, is no longer even mildly related to logic. It’s all about perception. And with so many media outlets using scare and scandal to chase audience share, “government” is now presented in almost exclusively headline-grabbing—and therefore negative—terms. Think: wasteful bank bailouts, never-ending wars, outrageous sexual escapades and any other government-themed stories that entice you to read, listen, watch, click and loathe.

The dynamic, of course, has disconnected the “government” brand from what Cornell University professor Suzanne Mettler calls the “submerged state”—i.e., the government services that we like but that we don’t notice. We’re talking about noncontroversial stuff like picking up trash, putting out fires, paving roads and paying out earned benefits. When those functions are performed properly, they rarely receive recognition as government successes because, by definition, performing them properly means being fast, efficient and thus almost invisible.

Mettler’s upcoming book details exactly how the twin phenomena of sensationalism and submergence have conspired to sow mass cognitive dissonance. Citing findings from her nationwide survey, she shows that while most Americans conceptually support submerged-state pillars like federal education tax credits, student loans and mortgage interest subsidies, a majority of those benefits’ recipients nonetheless tell pollsters they “have not used a government social program.”

Certainly, some of that comes from the same ignoramuses who tell their congressional representatives to “keep your government hands off my Medicare.” And some of it represents the willful dishonesty of self-professed conservatives who are too embarrassed to admit they utilize the government programs they purport to detest. However, the data also suggest that because so many submerged-state policies are successful and inconspicuous, we have come to reflexively define “government” as only those spectacular failures that fill the evening news.

This selective psychological framing goes a long way toward explaining the Great Paradox—and Mettler’s study suggests that paradox will likely intensify in the age of Obama.
As her book shows, Americans become more supportive of government after using “visible social programs,” but they do not become more supportive of government after using submerged-state programs. Again, that’s because many don’t recognize they are interfacing with government—a problem exacerbated by a president who hasn’t reminded America of government’s worth.

Indeed, upon taking office, Barack Obama decided first to shun his explicitly pro-government campaign platform and then to mimic Ronald Reagan’s anti-government posture. Rather than champion those “visible social programs” like a public health care option or a new Works Progress Administration that might broadcast government’s intrinsic value, he merely pushed to expand the submerged state with initiatives like private health insurance subsidies and business tax cuts—and that was before Republicans took control of the House.

Today, the president has abandoned even those weak early efforts. Promoted with the Orwellian oxymoron “cut and invest,” his new austerity budget endorses a tax-slashing, government-demonizing competition between the White House and Congress. Instead of seizing a teachable moment and challenging the Great Paradox, he’s placing a big bet on it—a bet that shifts from meekly supporting the submerged state to submerging the state entirely.

Sure, his re-election campaign may benefit from that wager in 2012. But with our public sector so dangerously depleted, America will likely lose big for years to come.

David Sirota is a best-selling author whose upcoming book “Back to Our Future” will be released in March. He hosts the morning show on AM760 in Colorado. E-mail him at ds@davidsirota.com, follow him on Twitter @davidsirota or visit his website at www.davidsirota.com.


Will the Egyptian Revolution Also Devour Its Young?

By Barry Lando

Egypt in February 2011 is not Iran in January 1979, and those darkly predicting that Egypt’s revolution is fated to turn into another Islamic dictatorship are ignoring the many stark differences between the two situations. But as Egypt enters an unknown course, I am reminded of the fate of Sadegh Ghotbzadeh, once Iran’s foreign minister, ultimately destroyed by the man and movement he devoted his life to bring to power.

I first met him in October 1976 in Paris when I was a producer at “60 Minutes” teamed up with Mike Wallace. I was investigating the activities outside Iran of the shah’s feared secret police, the Savak. The most remarkable story came from Ghotbzadeh, then a 37-year-old Iranian dissident, active with one of the many exile groups in the French capital. A handsome, impeccably dressed Iranian, he spoke fluent English and French and had been working against the shah since his university days in the United States. He introduced us to a stocky 67-year-old Armenian by the name of Jules Khan Pira—his would-be assassin.

In heavily accented French, Khan Pira recounted how, under threat of a complex blackmail scheme by the Savak, he had been ordered to assassinate several opposition leaders. At the top of the list was Ghotbzadeh.

This led to one of the most unlikely interviews we had ever filmed: a large suite at the George V, a dapper Ghotbzadeh in dark blazer and tie, and sitting next to him, the shabbily dressed Khan Pira, the two revolvers that Khan Pira said he had received from a Savak agent sitting on a table between them.

Improbable as it seemed, Khan Pira’s tale checked out both in France and the U.S. But what is most revealing in retrospect is that nowhere in the “60 Minutes” report did we feel the need to mention specifically what Ghotbzadeh was up to in Paris. He was the major representative in Western Europe and America of an elderly, bearded, Iranian cleric, who was then exiled in Iraq and hardly known in the West, the Ayatollah Ruhollah Khomeini. At the time, in fact, Khomeini seemed to be a very discardable footnote to our story.

Over the next few months, however, Ghotbzadeh, with the fervor of the true believer, continued to provide me the latest printed petitions and protests from the Iranian opposition, condemning this or that brutal aspect of the shah’s regime and calling on a highly indifferent world to take action.
Most intriguing of all to me was the key role that Muslim clerics and their leaders such as Khomeini were playing in all of this, even from exile. There was an underground network among the theological centers of learning and the mosques across Iran. There were clandestine newspapers and an elaborate system of circulating Khomeini’s revolutionary speeches via audiocassettes throughout the country.

Very little of this had been noticed by the Western press, which was the major reason I was unable to persuade “60 Minutes” to do a report. Finally, in October 1978, with introductions arranged by Ghotbzadeh, I flew to Tehran and was plugged into the clandestine network of the Islamic movement. It was a curious mixture of professors and students of all ages, Muslim clerics from ragged villages in the countryside to the holy city of Qom, wealthy shopkeepers from Tehran’s sprawling Bazaar and middle-class professionals. Many of them, like Ghotbzadeh, had been educated in the U.S. or Western Europe.

I was impressed by their fervor, but also by the fact that, when pressed, none seemed to be able to define precisely what an Islamic revolution was all about. One evening I met with a group of about 10 young men and women in Tehran, many of them university students and teachers. After a lengthy discussion of the ongoing revolt, I suddenly asked what an Islamic government would actually look like. Well for one thing, said one young man in a dark turtleneck, “Women would have to cover their hair.” The women in the room seemed to agree.

“But what if a woman didn’t want to cover her hair?” I asked.

“Then her brother or her husband would take her aside and try to convince her,” said another man, with a soft smile.

“And what if she still didn’t want to?”

“We would keep trying to convince her,” said the man, still smiling.

“And, if after all that, she finally still refused?”

“That would be her right,” said one of the women.

“No,” said a man, “in that case, she would not be allowed to go out.”

“And if she still insisted?”

“We might have to put her in prison,” said the man in the turtleneck. His words seemed to surprise several in the room.

“For now such questions are secondary,” one of the teachers said. “The immediate work at hand is to bring down the shah. Defining the new government will come later through democratic elections.”

The revolution was now gaining momentum, with weekly marches and weekly martyrs. The shah seemed totally unable to deal with the situation. Back in Paris, Ghotbzadeh told me he was heading to Iraq to see Khomeini. “Look,” I said, “if I can get you a small film camera would you take pictures of him for us?” He was delighted with the idea, he said, since it would also give him a chance to get some film footage of Khomeini to circulate in Iran for his own purposes. Up till then, he had none.

But events were moving too fast. The French government, always attuned to the changing political winds, yielded to Ghotbzadeh’s entreaties and allowed Khomeini to go to Paris.
By December 1978, it was obvious that the shah was out. Ghotbzadeh was exultant as we entered a fine restaurant for lunch in Paris. He was immediately recognized by the maitre d’ and escorted to the best table. The now 39-year-old dissident, who for years had traveled about from one Western capital to another, staying in shabby hotels, attempting to interest reporters and politicians with his apparently forlorn cause, representing an Iranian cleric none had even heard of, was now appearing on everyone’s TV screen. He was one of the key spokesmen for the bearded ayatollah, whose image was now recognized around the world. They were on the brink of power. The shah’s rapid collapse had amazed everyone, including the opposition.

In a few days they would fly to Tehran, Ghotbzadeh told me with supreme confidence. Khomeini would be the new guard’s spiritual leader, but the real source of government, he assured me, would be Western-educated reformers like himself.

I raised the question of the world’s great revolutions and how they all seemed to follow the same dynamic—from the French to the American to the Russian. How they all seemed to arrive at some terror, how they devoured their young before they subsided and the political pendulum gradually swung back to center. “How will you avoid being devoured?” I asked Ghotbzadeh, only half in jest. “Don’t worry,” he said. “We know what we’re doing.”

That’s, of course, not the way it worked out. The revolution became increasingly chaotic, increasingly radicalized, as competing parties and factions struggled violently for power, particularly after the American hostages were taken. Ghotbzadeh maneuvered desperately, trying to stay on the political tightrope—head of Iranian TV, ultimately foreign minister.
He helped us get an exclusive interview with Khomeini after the hostages were taken. Nine months later, in December 1980, with the hostages still being held, we returned to Iran. War had broken out with Iraq after Saddam Hussein invaded, quietly encouraged by the United States.

We interviewed Iranian President Abolhassan Bani-Sadr, an economist turned president who was totally out of his element. The war had even further radicalized politics in Iran, and Bani-Sadr had become a virtual prisoner in his own presidential palace. The Imam Khomeini had thrown in his lot with the Islamic radicals. The Western-educated revolutionaries such as Bani-Sadr and Ghotbzadeh had been thrust to the side.

In a Kafkaesque interview, Bani-Sadr talked frankly of the mounting wave of torture and repression under what in theory was his own government. He condemned the road the revolution seemed to be taking. Shortly afterward he fled for his life to become an exile in Paris.

Ghotbzadeh chose a different fate. A few months before our visit he had been thrown in prison, charged with conspiring against the regime. It was only Khomeini’s personal intervention that saved him.

Ghotbzadeh was released, and ordered by the imam to go home, stay there and stop his plotting.

Our last evening in Tehran in December 1980, Wallace and I went over to Ghotbzadeh’s spacious residence. He greeted us with a wan smile. He was blunt in his criticism of Khomeini and the way in which the revolution had been perverted from the goals that Western-educated Iranians had hoped it would take. “The imam,” said Ghotbzadeh, “had promised us before the shah fell that, once the revolution had won, he would go back to the holy city of Qom and give us occasional spiritual guidance. But the real job of government would be left to us. But he misled us. Once he tasted power, he liked it. We were betrayed.”

It was obvious Ghotbzadeh was ignoring Khomeini’s stern warning to stop conspiring. Several people were there, some of them mullahs, others with the bearing of military officers. They talked softly in small groups. Occasionally one came over to speak in Farsi with Ghotbzadeh. Yet Ghotbzadeh was still optimistic about the future, he said as we left. It was after midnight. The others remained.

Ghotbzadeh was rearrested a few months later and charged with attempting to overthrow the Islamic government in order to establish a secular republic. Though at his trial he denied the accusation, he was also charged with planning to assassinate the Imam Khomeini, the man he helped bring to power.

On Sept. 21, 1982, at Tehran’s infamous Evin Prison, Ghotbzadeh was placed before a wall and executed, shot through the neck.

How the Democrats Killed Roosevelt’s Dream of the Affordable Home

By Robert Scheer
Editor’s note: The following excerpt from Robert Scheer’s book “The Great American Stickup” details the perversion of Fannie Mae and Freddie Mac.

Chapter 7: Poverty Pimps

"It’s the same the whole world over
It’s the poor what gets the blame
It’s the rich what gets the pleasure
Ain’t it all a bloomin’ shame?"

That chorus of the nineteenth-century Cockney ditty “She Was Poor But She Was Honest,” detailing the travails of a poor lass whose life is ruined by the deflowering advances of a rich man, best captures the mainstream Republican response to the banking meltdown. Their defense has been to blame “bleeding-heart” liberals concerned for the poor for a debacle that occurred unmistakably on their watch, and in response to their antiregulatory ideology, but for which they shuddered to take responsibility.

The effort to shift blame from Wall Street moguls to the poor who took loans they could not afford, while illogical given the frenzy with which those loans were marketed, is also understandable as an act of political desperation. Blame those being swindled rather than the swindlers has been the mantra of America’s right wing bereft of any other explanation for the debacle that will allow them to continue their ways.

The Wall Street meltdown left conservative politicians and their ancillary pundits in the lurch looking for a culprit, any culprit—except the folks who run Wall Street, that powerful emblem and engine of American capitalism. Instead, they settled on an alternate bogeyman: government efforts to end discrimination in the mortgage markets and broaden home ownership to low-and moderate-income families.

The problem with the economy, they argued, was not greed or incompetence in the executive suites, but a misguided pressure to lend money to irresponsible poor and nonwhite people. Government influence on the mortgage markets, the logic went, had distorted the markets and created an unstable base of bad loans that, like a foundation made of sand, had sent the global economy sliding off a cliff at the first hard rain.

When the Bush administration was forced in the fall of 2008 to bail out the “government sponsored enterprises” or GSEs, as the mortgage buying companies of Fannie Mae and Freddie Mac are referred to, grateful conservatives finally had what appeared to be a convenient government villain. Working backwards from the GSEs’ founding mandate to support the market for middle- and low-income buyers by buying up mortgages from lenders and then repackaging them as securities, longtime critics were only too excited to blame do-gooder liberalism as the fly in the ointment of capitalism. Specifically, House Financial Services Committee chair Barney Frank was singled out as having pressured the GSEs to make loans to unqualified poor people—especially minorities—who then defaulted and caused the economic downturn.

“Taxpayers are now on the hook for as much as $200 billion to rescue Fannie Mae and Freddie Mac, and if you want to know why, look no further than the rapid response to this bailout from House baron Barney Frank,” wrote the Wall Street Journal in a September 9, 2008, editorial. “Mr. Frank wants you to pick up the tab for its failures, while he still vows to block a reform that might prevent the same disaster from happening again.”

The editorial is worth quoting at length because it summarizes a perspective broadly held and argued by conservatives. It correctly criticizes Frank for statements he made in 2004, when Fannie Mae revealed a “multibillion-dollar financial ‘misstatement.’ ” Frank had said that he felt that despite this, the mortgage lender was not a danger to taxpayers. “I think Wall Street will get over it,” Frank had said. The Journal mocked this response—”Yes they’re certainly ‘over it’now that Uncle Sam is guaranteeing their Fannie paper, and even Fannie’s subordinated debt.” The newspaper then ridiculed Frank for his criticism of conservative economic policies, saying that what really blocked reform was Frank’s insistence that “any reform be watered down and not include any reduction in their MBS [mortgage backed security] holdings.”

Some liberal pundits, most notably the New York Times’ Paul Krugman, attempted to play down the role of Freddie and Fannie, arguing, incorrectly, that they only made proper “conforming” loans. But that was false, for the definition of conforming is whatever Freddie and Fannie approved of, and those turned out to be as disastrously irresponsible as any.

The free-market conservatives are right in criticizing those GSEs, for they were highly culpable, and the grand swindle could not have taken place without them. But they are wrong in describing the GSEs led by Fannie Mae and Freddie Mac as do-gooder public entities; in reality they are privately owned, profit-driven companies that richly reward their executives for stock market success. That is the source of much confusion in this debate; the top executives of the GSEs were compensated as handsomely, and often more so, than any other corporate executives, but because of their original government sponsorship, they made for convenient targets for the wrath of free-market ideologues.

The man who understood that best was a whistleblower in the mold of Brooksley Born. Like her, Armando Falcon Jr. was appointed by the president to regulate entities led by people who had the political clout to prevent any meaningful regulation. Falcon was director of the Office of Federal Housing Enterprise Oversight (OFHEO), the underfunded and government agency assigned to monitor the federal housing behemoths.

Thus there was considerable irony when, a year and half after the crash he had warned against, Falcon found himself on April 9, 2010, before the bipartisan Financial Crisis Inquiry Commission, which included Brooksley Born, unraveling his part of this tale of woe. His testimony was a devastating indictment of the culture of corruption that was as bipartisan in origin as was the makeup of the commission now seeking answers. He had attempted to regulate agencies dominated by leaders drawn from Democratic ranks during a Republican administration, but as with Born earlier, he was done in by both sides.

Yet while Falcon had come to be supported by conservatives who never did have much love for the hybrid GSEs he was attempting to regulate, he was clear that the cause was not the pathetic ambitions of the ordinary folks attempting to buy homes they couldn’t properly afford. Rather, it was the greed of the powerful. Falcon cut through the false dichotomy that cast blame for the banking debacle either on the huge totally private financial moguls or their government-sponsored rivals but not both. He said they were, in terms of motivation and impact, one and the same.

Conservatives make much of the affordable housing goals of the GSEs, endorsed by George W. Bush as well as Bill Clinton, as the cause of the irresponsible lending that occurred these past decades. But Falcon in his testimony shot that one down. Asked by the commission to testify on the impact of those goals on the GSE issue, Falcon responded: “Your letter also asked me about the impact of affordable housing goals on the enterprises’ financial problems. In my opinion, the goals were not the cause of the enterprises’ demise. The firms would not engage in any activity, goal fulfilling or otherwise, unless there was a profit to be made. Fannie and Freddie invested in subprime and Alt A mortgages in order to increase profits and regain market share. Any impact on meeting affordable housing goals was a byproduct of the activity.”

Nevertheless, it remains true that the GSEs were the major purchasers and packagers of securities based on mortgages, and they acted with the implicit guarantee that the bonds they sold were backed by the federal government. When the meltdown occurred, that guarantee went from implicit to explicit, and the federal government moved in and backed all of those toxic obligations. It also fueled the conservative attack that two key executives of Fannie Mae, the larger of the two agencies, were also influential players within the earlier Clinton administration and had led the fight to prevent any meaningful regulation of those mortgage-based securities. What the conservatives insist on ignoring is that while Fannie and Freddie were originally government sponsored to make moderate-priced housing more accessible, they had long since shed any of the trappings or restraints of a government agency.

Over the decades since 1938, when Fannie Mae, the first of the GSEs, was created, they had in effect gone from being public to private enterprises, with the companies’ and their top executives’ fortunes dependent on stock market valuation of their publicly traded shares.

In that spirit, the top officials of the two agencies were rewarded not in the manner of heads of huge government agencies but rather at easily thirty times the highest pay of any such executive, including the president himself. But they did still require the acquiescence of Congress, which retained the power to pull their federal charters through legislation. Preventing that outcome, or indeed any serious regulation of the GSEs, became the major object of their lavishly funded lobbying operation. Not surprisingly then, the top executives tended to be drawn from the ranks of political operatives rather than from more traditional financial backgrounds. It is also true, as conservatives are wont to point out, that the two men who most shaped the actions of Fannie Mae, the bigger of the two agencies, were drawn from the Democratic side. But they couldn’t have done this damage to the housing market alone and instead functioned like, and indeed were in close partnership with, the other moguls in the mortgage business.

The tale of their alliance with leaders of a runaway mortgage industry, particularly the industry-dominant figure of Countrywide’s Angelo Mozilo, who also cofounded subprime sinkhole IndyMac Bank, which failed as well, is central to the debacle that ensued. But to mention the guys on the quasi-government–sponsored side and not their key partners in the fully privatized mortgage business is to deny reality.

In fact, it is the dance of the private with the public that is the norm in what we naïvely refer to as our “free enterprise system”—be it agribusiness, the defense industry, telecommunications, or, as in this case, the financial sector. All of these industries operate in an environment of government rules that their lobbyists get to help write, and all succeed through an ability to negotiate the regulatory environment that results from those laws.

At this dance, Countrywide’s Mozilo was a virtuoso, but he had two key partners every bit as skilled as he was on the GSE side of things. For the past two decades, one of the two main leaders of the government-sponsored agencies was James A. Johnson, who started political life working for Minnesota Democratic senator and later vice president Walter Mondale and parlayed that into a job running Fannie Mae that paid him more than $6 million a year.

The Washington Post in a fawning tribute to Johnson on March 27, 1998, shortly before he retired from Fannie Mae, referred to him as “one of the most powerful men in the United States.” The Post’s reporter added: “As chairman of three preeminent institutions in the nation’s capital—the government-sponsored home mortgage behemoth known as Fannie Mae, the peerless think tank known as the Brookings Institution, and the mammoth performing arts emporium known as the Kennedy Center—he has positioned himself to exert enormous influence over the country’s economic, intellectual and cultural lives. And while he’s at it, he’s getting seriously rich.”

A far less flattering portrait a year earlier by Matthew Cooper in Slate, titled “A Medici with Your Money,” pointed out, “he is not a philanthropist with his own money. The fount of Johnson’s generosity is Fannie Mae’s foundation, funded out of its profits.” The Slate article had it right, noting the connection between the vast public outreach of Johnson’s operation and his goal of retaining government backing for an enormous engine of profit from which he benefitted mightily: “What makes Fannie Mae special is that it is essentially the taxpayers’ money that Johnson is giving away. Fannie Mae enjoys a massive government subsidy, and its charitable contributions are part of a vital corporate strategy to keep it that way.”

Johnson’s expansive public relations strategy was maintained, indeed expanded, by the man who would replace him, his deputy Franklin Delano Raines. Prior to working for Johnson, Raines had been highly compensated as a Wall Street financial executive. At Fannie Mae he was earning $2.25 million when Clinton appointed him to be director of the Office of Management and Budget at an annual salary of $148,400. The president quipped that Raines would be joining “other successful people who came into this Administration to help save the middle class and when they leave they will be part of it.”

Not quite. After Raines left two years later in 1998 and replaced Johnson as the chair of Fannie Mae, he would be paid $36 million in compensation for his last three years of service, which extended well into the Bush years, before being forced out in 2004 amid an accounting scandal. He left with a $25 million pension, an $8.7 million deferred compensation plan, another $5.5 million in stock options, and a guaranteed income of $1.4 million. which would be paid to him and his wife until both died. Is that what Bill Clinton considers middle class?

A year before the scandal broke and four years before Fannie Mae was revealed as a disaster case—and taken over by the federal government even as its stock shares tumbled 90 percent—Raines was much celebrated as a typical elitist progressive “doing well by doing good.” Raised in a working-class family with a janitor father who built a home with his bare hands and struggled to keep a roof over his family’s head, Raines’s story made for great profile copy on NPR and in such national publications as the New York Times and Ebony magazine. More important, it gave Fannie Mae credibility in saying its huge expansion in alternative lending—boldly labeled the “American Dream Initiative”—was for progressive ends: helping the poor and minorities become homeowners.

Yet when the banking meltdown predictably occurred, based on years of high-risk lending and Wall Street gambling, those were the two groups hardest hit, with most who had signed up for the program losing everything. At no point in the glowing profiles of the “first African American Fortune 500 CEO” did any of those journalists use the words “predatory lending” or, at a minimum, query Raines as to the efficacy, let alone morality, of his huge compensation being tied to backing high-risk loans that should never have been made.

A significant percentage of those loans were made by Countrywide, whose chair and founder, Angelo Mozilo, had a particularly cozy relationship to Fannie Mae under both Johnson and Raines. Indeed, too cozy we would come to find out, when it was later revealed both men had received low-interest mortgage loans from Countrywide on various houses they owned around the country. They received this favorable treatment as part of the “Friends of Angelo” program, to which it was referred internally at Countrywide. Because of all this, there is no doubt both Raines and Johnson deserve the opprobrium heaped on them by conservatives. They are indeed “poverty pimps,” who, in the imagery of the 1960s are like the hustlers in poorer communities who rip off well-intentioned poverty programs and thus do a deep disservice to those they gave lip service to caring about.
Where the conservatives went wrong, however, is in describing this exploitation as the result of pressure from what they claim are bleeding-heart liberals in the Clinton administration and afterwards, with Frank acting as ringleader from his powerful perch in the House finance committee. The assumption they make is that Fannie and Freddie got into trouble because of pressure to support loans to people who shouldn’t have been given loans, and therefore had stopped acting as responsible loan guarantors of last resort. That is exactly wrong; the problem is quite opposite. The GSEs simply acted all too much like any other financial conglomerate lining the pockets of their top executives—trading short-term gain for long-term instability.

The key to Fannie Mae’s explosive growth in the backing of suspect mortgages in the 1990s rested in the decision of its chair, Johnson, to team up with Countrywide’s Mozilo in a computerized scheme to make suspect mortgages seem credible by changing the ways that creditworthiness was evaluated. The scheme, and that was what it unmistakably was, revolved around something called the “CLUES system,” a computer program Countrywide had developed that crunches data on the creditworthiness of potential homebuyers to bypass the evaluation of loan officers as to the creditworthiness of potential mortgage customers.

As Gretchen Morgenson would describe it in a August 26, 2007, New York Times article, as Countrywide was slithering into oblivion: “Countrywide’s entire operation, from its computer system to its incentive pay structure and financing arrangements, is intended to wring maximum profits out of the mortgage lending boom no matter what it costs borrowers, according to interviews with former employees and brokers who worked in different units of the company and internal documents they provided.”

Just how unsavory an operation Countrywide, the nation’s top mortgage lender, had run was laid out in that article as well as congressional and SEC investigations, as Countrywide came to be absorbed by Bank of America in a shotgun marriage arranged by the U.S. government in an attempt to save both. Johnson, who was chosen by Barack Obama to head the committee vetting his vice presidential choices, had to resign that post after the Wall Street Journal revealed his “sweetheart” loans of more than $5 million from Countrywide as a “Friend of Angelo.” Scant attention was paid, however, to the role of Mozilo in leading Fannie Mae into its downfall.

The connection between Mozilo and Johnson was as tight as it gets in their world. In 1996, as the subprime scandal was forming, Johnson named Mozilo to be chair of Fannie Mae’s National Advisory Council. The purpose of that body, as announced in the Fannie Mae press release, was “to advise the corporation on issues affecting the housing and mortgage finance industry and the expansion of home ownership opportunities.” And opportunities there were, as Mozilo pointed the way for Fannie Mae, providing it with an edge over its smaller and more cautious rival, Freddy Mac. A retrospective analysis by knowledgeable National Mortgage News executive editor Paul Muolo in May 2009 put the history of that connection clearly:

It was no secret in the industry that Freddie Mac officials (pre being taken over by the government) were unhappy that Countrywide sold most of its residential loans to Fannie Mae. And that was by design, really. In the early 1990s, under the direction of then Fannie CEO/chairman Jim Johnson, Countrywide’s founder and CEO Angelo Mozilo was actively courted and wined and dined (so to speak) by the GSE. The reason was simple: Mozilo’s Countrywide was the largest residential lender in the nation. The more loans it funded—the more loans it could (in theory) sell to Fannie (as opposed to Freddie)

For years the running joke in the industry was that Countrywide was really a subsidiary of Fannie Mae.

On July 9, 1999, Countrywide issued a press release that laid out just how cozy the relationship had become. Entitled “Countrywide Announces Strategic Agreement with Fannie Mae,” the press release began with the following: “Countrywide the nation’s largest independent residential mortgage lender and servicer, announced today that it has entered into a new strategic agreement with Fannie Mae that unites their unique and complimentary strengths to expand markets, reduce the costs of homeownership, and to lead the mortgage industry to higher levels of productivity, efficiency and innovation.”

And profit, which of course was at the heart of this “strategic agreement” between the very-much-for-profit private lender and the very-much-for-profit but government-sponsored Fannie Mae. The difference is that when the scam exploded, the federal government stepped in directly, using hundred of billions of taxpayer dollars to take over Fannie Mae, but also indirectly by providing funding for Bank of America’s takeover of Countrywide.

The key to the strategic agreement was in Fannie Mae’s endorsing Countrywide’s computer rating scheme that bypassed traditional credit checks by experienced loan officers that for the previous lengthy history of the nation’s housing industry had kept the mortgage industry solvent. As the Countrywide press release crowed: “The strategic agreement also addresses loan products and processes. The objective is to expand markets to accommodate more customers and streamline loan processing in order to reduce the up-front cost of homeownership. This entails increased acceptance of Countrywide’s proprietary CLUES underwriting technology, greater use of short form appraisals, expansion of streamlined home products, flow sales for expanded criteria loans, and guideline waivers.”

With those words, the mortgage lender and the government-sponsored agency sealed their deal with the devil; the wraps of reasonable restraint, due diligence of asset appraisal, verifiable credit checking, and all of the other bylaws of prudent banking were lifted, and the gold rush was on. Nor did the principals care much about the obvious risk in which they were engaging, since they assumed it would be passed on long before the consequences of such irresponsible behavior were felt. That was because of the wonders of securitization of debt to be sold in that unregulated commodities market, which seventeen months later the Commodity Futures Modernization Act signed by Clinton would guarantee to remain unregulated.

The press release marked this enormous shift in the marketing of mortgages, quoting Mozilo: “This new strategic agreement between Fannie Mae and Countrywide is an unprecedented milestone in mortgage banking history.” Key to the new era of the housing Ponzi scheme was the reduction of capital required to back up the unsavory mortgages as the Countrywide press release clearly stated: “The strategic agreement contemplates efforts by Fannie Mae and Countrywide to work together to create capital structures that reduce the intensive capital demands of mortgage banking. The Alternative Servicing Compensation mortgage-backed securities (ASC MBS) product developed by Fannie Mae and recently issued by Countrywide is an initial effort to provide this flexibility.”
Three months later, on October 7, 1999, American Banker reported that the newly liberated Countrywide was off to the subprime races: “Countrywide’s monthly report underscored a shift in strategy throughout the mortgage industry. Now that the refinancing boom has ended, lenders are making more loans to people who previously might not have qualified for a mortgage.” The article went on to mention the concern of Salomon Smith Barney analyst Thomas O’Donnell over “Fannie Mae’s official entrance into the sector last week, when it launched a program aimed at providing lower-cost mortgages for people with slightly impaired credit, would spur interest in serving the sector and provide liquidity to help lending increase their subprime business.”

After the banking meltdown, the SEC would file a civil suit against Mozilo’s and Countrywide’s many violations, but Johnson and Raines avoided such accountability for the crash. Johnson, the media pointed out, is the man who started Fannie Mae on its mortgage derivatives spree during the 1990s, after he had served as a managing director for corporate finance at Lehman Brothers, and who, after retiring from Fannie Mae, went on to be a director of Goldman Sachs. It is true that Johnson had begun as an aide to Democratic senator and later presidential aspirant Walter Mondale and throughout his private and public career drew identified with liberal rhetoric while personally enriching himself with hundreds of millions of dollars in stock options, salary, retirement packages, and other compensation.

His protégé and successor at Fannie Mae would provide an even more egregious example of a liberal veneer covering a rapacious capitalist greed. If you were to pick a spokesman for the American dream, it must have occurred to his backers in the Clinton administration that Franklin Delano Raines was a pretty damn good one. Saddled by his father with a rather heavyweight name—sharing those fulsome first five syllables with the renowned president—the African American Raines’s rise through Harvard and into high posts in successive Democratic administrations was stunning in a nation far more race-and class-bound than it likes to imagine.

After earning big bucks on Wall Street while his party was in the political wilderness during the Reagan era, Raines built a reputation as a skilled negotiator and clear-headed advisor while working in the Clinton White House as head of the large Office of Management and Budget. But it was when he again passed through the revolving door of the federal government to return to Fannie Mae to become the director of the nation’s largest buyer of home mortgages that he fully realized his potential as an icon, a mustachioed Horatio Alger stereotype proving the famed American elevator could still raise one to the top in a single lifetime.

The New York Times’ Richard Stevenson wrote on May 17, 1998, that Raines saw his father take five years building a home with his own hands. “To have such an emotional connection to a home may serve Mr. Raines well as he leaves his post this week as White House budget chief to take over Fannie Mae, the curious and huge Washington corporation whose government-mandated mission is to encourage homeownership, especially among low-and moderate-income working people.”

Fannie Mae and its smaller, parallel organizations such as Freddie Mac are often described the way the Times does here, because they were spawned by the government and have implicit advantages—on taxes and interest rates—and implied backing from the federal government. However, although they were originally chartered by it during the Depression, Fannie Mae and siblings have not been part of the government since 1968. When they profit, as they did enormously before the recession, the dividends go to shareholders and the bonuses to executives. In no sense are they independent government agencies like the Social Security Administration, depending on a form of taxation to be redistributed as a social safety net. And while they have a vague legacy and “mission” to broaden the base of home ownership in the United States—and pay lip service to this on their periodic presentations on Capitol Hill—their prime agenda is to produce profit.

Certainly, Raines, all heartwarming stories aside, was a corporate CEO, not a director of a social service agency—and he certainly wasn’t compensated like one, being paid, for example, the second highest compensation package in the mortgage business in 2001: $4 million in salary and an estimated $10 million in stock options. (The CEO of Freddie Mac was third, with numbers as nearly as staggering. Figures are from National Mortgage News, May 6, 2002.)

And like most modern CEOs, Raines was far more focused on short-term gain than on long-term goals. Thus, although his six-year reign at Fannie Mae was successful in generating huge profits, it also saw systemic accounting troubles—some called it fraud—that would force Raines to return some of his huge pay package, as well as a conveniently shortsighted view of the housing market as bubble-proof.

“We don’t think that there is a housing bubble in the country,” he told Black Enterprise magazine for an extensive profile in the May 2003 issue. Crediting low-interest rates, he added, incorrectly, “People’s incomes are higher so they can afford more housing and, obviously, the owners of the house [will] try to raise the price when they’re selling it.”

In fact, as was clear even then, real income for the vast majority of Americans—and especially those served by Raines’s “American Dream Initiative” program—had been barely rising throughout the Clinton bubble. What everybody and their sister knew was that, in fact, folks who would have never qualified for loans based on income were for some reason being sought after by lenders, and that those folks who did own were leveraging their reassessed assets to buy second, third, or fourth places to “flip” in the red-hot market.

With credit so loose and the market booming, Raines and Fannie were sitting pretty. From Black Enterprise:
Franklin D. Raines has a lot to smile about. In mid-January, the Federal Mortgage Loan Association, better known as Fannie Mae, accomplished something that’s rather uncommon these days—increased profits. Operating net income for fiscal 2002 rose 19.1% to $6.4 billion, or $6.31 on $10.6 billion in net interest income. And while Wall Street remains jittery after a slew of corporate scandals, economic uncertainty, and whispers of housing bubbles, Fannie Mae’s 54-year-old chief executive is at the helm of a financial products and services giant that posted its 16th consecutive year of double-digit earnings growth.

Sure, Raines wasn’t above exploiting Fannie’s high-minded charter to brush back critics, like the Wall Street Journal, who have long been nearly obsessive in pointing out that the GSEs enjoyed unfair advantages because of their historic government ties. From the Wall Street Journal: “The point all of this makes, and the point we’ve been trying to make all along, is that Fan and Fred don’t function like other companies. The two biggest mortgage holders in the country are allowed to pile up debt, implicitly guaranteed by taxpayers, without being held to even the minimum of corporate governance standards that every other publicly traded company has to observe. Sooner or later this is asking for trouble.”

That “trouble” was detailed by the New York Times’ Gretchen Morgenson in her September 5, 2009, story commemorating the one-year anniversary of the $200 billion in bailout funds “to keep Fannie in the black.” Morgenson reported on efforts of Florida Democratic congressman Alan Grayson to expose the malpractices of Fannie Mae’s Raines and other executives. Grayson was livid that in addition to the government having to take over the mortgage giant, taxpayers then had to foot the legal bills for Raines ($2.43 million) and two other Fannie Mae execs (another $3.87 million) for just ten months ending in July 2009, with the tab continuing to rise. The legal expenses were generated from shareholder lawsuits.

The reporter reminded readers, “With all the turmoil of the financial crisis, you may have forgotten about the book-cooking that went on at Fannie Mae. Government inquiries found that between 1998 and 2004, senior executives at Fannie manipulated its results to hit earnings targets and general $115 million in bonus compensation. Fannie had to restate results by $6.3 billion.”

In other words, the books were “cooked” so Raines and his pals—chief financial officer J. Timothy Howard and former controller Leanne Spencer—could earn bonuses based on the successes suggested by those phony figures. The government sought through litigation to collect from the three $100 million in fines and $115 million in restitution for the unearned bonuses—$84.6 million from Raines alone—but settled for $31.4 million from the three. As part of the settlement, Raines, Howard, and Spencer did not have to admit wrongdoing.

None of this sat very well with Congressman Grayson, who told Morgenson: “I cannot see the justification of people who led these organizations into insolvency getting a free ride. It goes right to the heart of what people find most disturbing in this situation—the absolute lack of justice.” He asked, “When did Uncle Sam become Uncle Sap?” and seemed to be speaking for all taxpayers when he lamented: “It is wrong in a very deep sense. The essence of our society is that people who do good things are rewarded and people who do bad things are punished. Where is the punishment for Raines, Howard and Spencer? There is none.”

Back in 2003, while bad things were certainly happening at Fannie Mae on his watch, Raines was showing a talent for obfuscation. As he assured Black Enterprise reporter Aisha Jefferson, “The Wall Street Journal finds problems where no other paper seems to find problems. They don’t believe in intervening in the market to help housing and homeownership. And so, I think this is an effort to make the case that Fannie Mae shouldn’t exist.”

Unfortunately, this was just a smokescreen. Fannie Mae actually was receiving pressure not from liberal politicians to become more heavily involved in riskier mortgages but from—what else?—the profit motive. With giants like Citi moving heavily into mortgage-based securities—a sector pioneered by Fannie itself—and increasingly betting on riskier and riskier loans, the GSEs were actually playing catch-up. And when they decided to push their chips deep into the hottest, yet most unpredictable, Alt-A and subprime mortgages, it was not at the behest of the Barney Franks of this world but rather in pursuit of Wall Street profits.

That sorry reality, brought home by the spectacular crash of 2008, was clearly outlined in testimony that Armando Falcon offered two years after the government fully took control of Fannie and Freddie. In his testimony before the bipartisan Financial Crisis Inquiry Commission, which Congress had created to analyze the causes of the banking meltdown, the former chief regulator of the housing agencies did not mince words.

Falcon corrected the errors of Democrats and Republicans in assigning responsibility. The problem, he stated, with the so-called government-sponsored but essentially private institutions that the conservatives are so happy to vilify and that liberals feel the need to defend is that they represented the worst of both worlds. Although originally chartered by the government, they had morphed into super for-profit monstrosities run by executives whose huge bonuses depended on the price of the company stock. As Falcon put it in his testimony: “Ultimately the companies were not unwitting victims of an economic down cycle or flawed products and services of theirs. Their failure was deeply rooted in a culture of arrogance and greed.”

In short, they behaved like the other financial conglomerates, but the government-sponsored housing enterprises were protected by powerful members of Congress and what turned out to be a strong guarantee that the taxpayers would cover their bad paper.

They do deserve considerable blame for the banking disaster that ensued, and while it is hardly the whole story, it gave the free-market conservatives a convenient target. But it also presents them with a contradiction that they refuse to confront. The housing enterprises failed not because they were do-gooder pubic entities but because they weren’t. Their top executives were driven by the same desire for outlandish profit that their counterparts at AIG and Citigroup had. As Falcon put it, referring to then Fannie Mae’s CEO Franklin Raines: “While all of this political power satisfied the egos of Fannie and Freddie executives, it ultimately served one primary purpose: the speedy accumulation of personal wealth by any means.

In the case of CEO Franklin Raines, he collected over $90 million in total compensation from 1998 to 2003. Of that amount, $52 million was directly tied to achieving earnings-per-share goals. However, the earnings goal turned out to be unachievable without breaking rules and hiding risks.”

It only adds insult to injury to blame the unfettered greed of folks like Raines, and his congressional allies who were lavishly attended to by those agencies, on a concern for the low-income homebuyers who were their main victims.