Sunday, August 31, 2014

Wall Street has the most to lose from real democracy


The 1 percent’s long con: Jim Cramer, the Tea Party’s roots, and Wall Street’s demented, decades-long scheme

Wall Street has the most to lose from real democracy. Which is why they posture as rebels and not The Man


The 1 percent's long con: Jim Cramer, the Tea Party's roots, and Wall Street's demented, decades-long scheme
 Jim Cramer (Credit: AP/Mark Lennihan) 
Happy Labor Day. A few years ago, Eric Cantor used this holiday as one more occasion to celebrate business owners. To a lot of people, that sounded crazy. But in truth, it came straight out of the bull market ideology of the 1990s, a time when the nation came to believe that trading stocks was something that people in small towns did better than slicksters in New York, and when Wired magazine declared, in one of its many frenzied manifestoes, that “The rich, the former leisure class, are becoming the new overworked” and that “those who used to be considered the working class are becoming the new leisure class.” We were living in a “New Economy,” Americans said back then, and the most fundamental novelty of the age was an idea: that markets were the truest expression of the will of the people. Of course the Beardstown Ladies were better at investing than the Wall Street pros; they were closer to the humble populist essence of markets. Of course the Millionaire Next Door was an average Joe who never showed off; that’s the kind of person on whom markets smile. And of course bosses were the new labor movement, leading us in the march toward a luminous economic democracy. Ugh. I got so sick of the stuff that I wrote a whole book on it: "One Market Under God," which was published by Doubleday just as the whole thing came to a crashing end. Here is an excerpt. 
The Dow Jones Industrial Average crossed the 10,000 mark in March of 1999, a figure so incomprehensibly great that it was anyone’s guess what it signified. The leaders of American opinion reacted as though we had achieved some heroic national goal, as though, through some colossal feat of collective optimism, we had entered at long last into the promised land of riches for all. On television, the rounds of triumphal self-congratulation paused for a nasty rebuke to the very idea of financial authority brought to you by the online brokerage E*Trade, a company that had prospered as magnificently as anyone from the record-breaking run-up: “Your investments helped pay for this dream house,” declared a snide voice-over. “Unfortunately, it belongs to your broker.” And behold: There was the scoundrel himself, dressed in a fine suit and climbing out of a Rolls Royce with a haughty-looking woman on his arm. Go ahead and believe it, this sponsor cajoled: Wall Street is just as corrupt, as elitist, and as contemptuous toward its clients as you’ve always suspected. There should be no intermediaries between you and the national ATM machine in downtown Manhattan. You needed to plug yourself in directly to the source of the millions, invert the hierarchy of financial authority once and for all. “Now the power is in your hands.”
In the rival series of investment fairy tales broadcast by the Discover online brokerage (a curious corporate hybrid of Sears and J. P. Morgan) a cast of rude, dismissive executives, yawning and scowling, were getting well-deserved payback at the hands of an array of humble everymen. Again the tables of traditional workplace authority were rudely overturned by the miracle of online investing: The tow-truck drivers, hippies, grandmas, and bartenders to whom the hateful company men had condescended were revealed to be Midases in disguise who, with a little help from the Discover system, now owned their own countries, sailed yachts, hobnobbed with royalty, and performed corporate buyouts—all while clinging to their humble, unpretentious ways and appearances just for fun. And oh, how the man in the suit would squirm as his social order was turned upside down!


In the commercials for his online brokerage, Charles Schwab appeared in honest black and white, informing viewers in his down-home way how his online brokerage service worked, how it cut through the usual Wall Street song and dance, how you could now look up information from your own home. “It’s the final step in demystification,” he said. “This internet stuff is about freedom. You’re in control.” To illustrate the point other Schwab commercials paraded before viewers a cast of regular people (their names were given as “Howard,” “Rick,” and “Marion”) who shared, in what looked like documentary footage, their matter-of-fact relationship with the market—the ways they used Schwab-dot-com to follow prices, how they bought on the dips, how they now performed all sorts of once-arcane financial operations completely on their own. The stock market was about Rick and Marion, not Charlie Schwab.
In another of the great stock market parables of that golden year, the Ricks and Marions of the world were imagined in a far more insurgent light. Now the common people were shown smashing their way into the stock exchange, breaking down its pretentious doors, pouring through its marble corridors, smashing the glass in the visitors’ gallery windows and sending a rain of shards down on the money changers in the pit—all to an insurgent Worldbeat tune. As it turned out, this glimpse of the People Triumphant in revolution—surely one of the only times, in that century of red-hunting and labor-warring, that Americans had ever been asked by a broadcasting network to understand such imagery as a positive thing—was brought to you by Datek, still another online trading house. What the people were overthrowing was not capitalism itself but merely the senseless “wall” that the voice-over claimed always “stood between you and serious trading.”
Exactly! As the century spun to an end, more and more of the market’s biggest thinkers agreed that “revolution” was precisely what was going on here. Thus it occurred to the owners of Individual Investor magazine to send gangs of costumed guerrillas, dressed in berets and armbands, around Manhattan to pass out copies of an “Investment Manifesto” hailing the “inalienable right” of “every man and woman . . . to make money—and lots of it.”
Meanwhile, the National Association of Real Estate Investment Trusts ran ads in print and on TV in which a casually dressed father and his young son capered around the towering office blocks of a big city downtown. “Do we own all this, Dad?” queried the tot. “In a way we do,” answered his father. This land is their land—not because they have bought it outright, like Al, the country-owning tow-truck driver in the Discover spots, but in a more intangible, populist, Woody Guthrie sort of way: Because they have invested in REITs.
Not to be outdone by such heavy-handed deployment of 1930s-style imagery, J. P. Morgan, the very personification of Wall Street’s former power and arrogance, filled its ads with hyper-realistic black and white close-ups of its employees, many of them visibly non-white or non-male. Literally putting a face on the secretive WASP redoubt of financial legend, the ads reached to establish that Morgan brokers, like Schwab brokers, were people of profound humility. “I will take my clients seriously,” read one. “And myself, less so.” The ads even gave the names and e-mail addresses of the Morgan employees in question, a remarkable move for a firm whose principal had once been so uninterested in serving members of the general public that he boasted to Congress that he didn’t even put the company’s name on its outside door.
Faced with this surprisingly universal embrace of its original populist campaign against Wall Street, E*trade tried to push it even farther: The changes in American investing habits that had brought it such success were in fact nothing less than a social “revolution,” an uprising comparable to the civil rights and feminist movements. In its 1999 annual report, entitled “From One Revolution To the Next,” E*trade used photos of black passengers sitting in the back of a bus (“1964: They Said Equality Was Only For Some of Us”) and pre-emancipated white women sitting in the hilarious hairdryers of the 1960s (“1973: They Said Women Would Never Break Through the Glass Ceiling”) to establish E*Trade itself as the rightful inheritor of the spirit of “revolution.” The brokerage firm made it clear that the enemy to be overthrown on its sector of the front was social class: Next to a photo of a man in a suit and a row of columns, a page of text proclaimed, “They said there are ‘the haves’ and the ‘have-nots.’” But E*trade, that socialist of the stock exchange, was changing all that: “In the 21st century it’s about leveling the playing field and democratizing individual personal financial services.” The company’s CEO concluded this exercise in radicalism with this funky rallying cry: “Bodacious! The revolution continues.”
*
Whatever mysterious forces were propelling the market in that witheringly hot summer of 1999, the crafters of its public facade seemed to agree that what was really happening was the arrival, at long last, of economic democracy. While the world of finance had once been a stronghold of WASP privilege, an engine of elite enrichment, journalist and PR-man alike agreed that it had been transformed utterly, been opened to all. This bull market was the götterdammerung of the ruling class, the final victory of the common people over their former overlords. Sometimes this “democratization” was spoken of as a sort of social uprising, a final victory of the common people over the snobbish, old-guard culture of Wall Street. Sometimes it was said to be the market itself that had worked these great changes, that had humiliated the suits, that handed out whole islands to mechanics, that had permitted little old ladies to cavort with kings. And sometimes “democratization” was described as a demographic phenomenon, a reflection of the large percentage of the nation’s population that was now entrusting their savings to the market.
However they framed the idea, Wall Street had good reason to understand public participation as a form of democracy. As the symbol and the actual center of American capitalism, the financial industry has both the most to lose from a resurgence of anti-business sentiment and the most to gain from the ideological victory of market populism. For a hundred years the financial industry had been the chief villain in the imagination of populist reformers of all kinds; for sixty years now banks, brokers, and exchanges have labored at least partially under the regulations those earlier populists proposed. And Wall Street has never forgotten the melodrama of crash, arrogance, and New Deal anger that gave birth to those regulations. To this day Wall Street leaders see the possibility of a revived New Deal spirit around every corner; they fight not merely to keep the interfering liberals out of power, but to keep order in their own house, to ensure that the public relations cataclysm of 1929-32 is never repeated. This is why so much of the bull market culture of the Nineties reads like a long gloss on the experience of the 1930s, like a running battle with the memory of the Depression.
Take the stagnant-to-declining real wages of American workers, for example. A central principle of “New Economy” thought is that growth and productivity gains have been severed from wage increases and handed over instead to top management and shareholders. Since the redistributionist policies of “big government” are now as impermissible as union organizing, stocks of necessity have become the sole legitimate avenue for the redistribution of wealth. In other eras such an arrangement would have seemed an obvious earmark of a badly malfunctioning economic system, a system designed to funnel everything into the pockets of the already wealthy, since that’s who owns most of the stock. After all, workers can hardly be expected to buy shares if they can’t afford them.
But toss the idea of an ongoing financial “democratization” into the mix, and presto: Now the lopsided transformation of productivity gains into shareholder value is an earmark of fairness—because those shareholders are us! Sure, workers here and there are going down, but others, through the miracle of stocks, are on their way up.
Furthermore, ownership of stock among workers themselves, an ideologue might assert, more than made up for the decade’s stagnant wages. What capital took away with one hand, it was reasoned, it gave back with the other—and with interest.
This idea of stock prices compensating for lost or stagnant wages had long been a favorite ideological hobbyhorse of the corporate right, implying as it did that wealth was created not on the factory floor but on Wall Street and that workers only shared in it by the grace of their options-granting CEO. What was different in the 1990s was that, as the Nasdaq proceeded from triumph to triumph, economists and politicians of both parties came around to this curious notion, imagining that we had somehow wandered into a sort of free-market magic kingdom, where the ever-ascending Dow could be relied upon to solve just about any social problem. Now we could have it all: We could slash away at the welfare state, hobble the unions, downsize the workforce, and send the factories overseas—and no one got hurt!
Naturally the idea was first rolled out for public viewing in the aftermath of a serious public relations crisis for Wall Street. One fine day in January, 1996, AT&T announced it was cutting 40,000 white-collar jobs from its workforce; in response Wall Street turned cartwheels of joy, sending the company’s price north and personally enriching the company’s CEO by some $5 million. The connection of the two events was impossible to overlook, as was its meaning: What’s bad for workers is good for Wall Street. Within days the company was up to its neck in Old Economy-style vituperation from press and politicians alike. Then a golden voice rang through the din, promoting a simple and “purely capitalist” solution to “this heartless cycle”: “Let Them Eat Stocks,” proclaimed one James Cramer from the cover of The New Republic. “Just give the laid-off employees stock options,” advised Cramer, a hedge fund manager by trade who in his spare time dispensed investment advice on TV and in magazines, and “let them participate in the stock appreciation that their firings caused.” There was, of course, no question as to whether AT&T was in the right in what it had done: “the need to be competitive” justified all. It’s just that such brusque doings opened the door to cranks and naysayers who could potentially make things hot for Wall Street. Buttressing his argument with some neat numbers proving that, given enough options, the downsized could soon be—yes—millionaires, Cramer foresaw huge benefits to all in the form of bitterness abatement and government intervention avoidance. He also noted that no company then offered such a “stock option severance plan.” But the principle was the thing, and in principle one could not hold the stock market responsible; in principle the interests of all parties concerned could be fairly met without recourse to such market-hostile tools as government or unions.
And in ideology all one requires is principle. Thus it turned out to be a short walk indeed from Cramer’s modest proposal to a generalized belief in the possibility of real social redress through stocks. After all, since anyone can buy stocks, we had only ourselves to blame if we didn’t share in the joy. The argument was an extremely flexible one, capable of materializing in nearly any circumstance. In a November, 1999 think-piece addressing the problem of union workers angered by international trade agreements, a  New York Times writer found that they suffered from “confusion” since even as they protested, their 401(k)s were “spiking upward” due to “ever-freer trade.” To Lester Thurow, the answer to massive and growing inequality was not to do some kind of redistribution or reorganization but to “widen the skill base” so that anyone could “work for entrepreneurial companies” and thus have access to stock options. For lesser bull market rhapsodists the difference between “could” and “is” simply disappeared in the blissful haze. Egalitarian options were peeking out of every pocket. The cover of the July, 1999 issue of Money carried a photo of a long line of diverse, smiling workers—a familiar populist archetype—under the caption, “The employees of Actuate all get valuable stock options.” Inside, the magazine enthused about how options “are winding up in the shirt pockets of employees with blue collars, plaid collars and, increasingly, no collars at all.”
By decade’s end the myth of the wage/stock tradeoff was so widely accepted that its truest believers were able to present it as a historical principle, as our final pay-off for enduring all those years of deindustrialization and downsizing. In a January, 2000 Wall Street Journal feature story on how the good times were filtering down to the heartland folks of Akron, Ohio—a rust belt town that had been hit hard by the capital flight of the Seventies and Eighties—the soaring stock market was asserted to have gone “a long way in supplanting the insecurity of the 1980s, when the whole notion of employment for life was shattered, with something else: a sense of well-being.” Yes, their factories had closed—but just look at them now! The Journal found a blue-collar Akron resident who played golf! And an entrepreneur who drove a Mercedes! Who needed government when they options?
The actual effect of widespread use of stock options in lieu of wages, of course, was the opposite. Options did not bring about some sort of New Economy egalitarianism; they were in fact one of the greatest causes of the ever widening income gap. It was options that inflated the take home pay of CEOs to a staggering 419 times what their average line-worker made; it was options that unleashed the torrent of downsizing, outsourcing, and union busting. When options were given out to employees—a common enough practice in Silicon Valley by decade’s end—they often came in lieu of wages, thus permitting firms to conceal their payroll expenses. In any case, the growth of 401(k)s, even in the best of markets, could hardly be enough to compensate for declining wages, and it was small comfort indeed for those whose downsizing-induced problems came at age 25, or 35, or 45.
Options were a tool of wealth concentration, a bridge straight to the Nineteenth century.
And yet the fans of the bull market found it next to impossible to talk about options in this way. Only one interpretation, one explanatory framework seemed to be permissible when speaking of investing or finance—the onward march of democracy. Anything could be made to fit: The popularity of day trading, the growth of the mutual fund industry, the demise of Barings bank, the destruction of the Thai currency. The bubble being blown on Wall Street was an ideological one as much as it was anything else, with succeeding interpretations constantly heightening the rhetoric of populist glory. It was an “Investing Revolution!” It was all about “empowerment”!
And there were incredible prizes to be won as long as the bubble continued to swell, as long as the fiction of Wall Street as an alternative to democratic government became more and more plausible. Maybe the Glass-Steagall act could finally be repealed; maybe the SEC could finally be grounded; maybe antitrust could finally be halted. And, most enticingly of all, maybe Social Security could finally be “privatized” in accordance with the right-wing fantasy of long standing. True, it would be a staggering historical reversal for Democrats to consider such a scheme, but actually seeing it through would require an even more substantial change of image on Wall Street’s part. The financiers would have to convince the nation that they were worthy of the charge, that they were as public-minded and as considerate of the little fellow as Franklin Roosevelt himself had been. Although one mutual fund company actually attempted this directly—showing footage of FDR signing the Social Security Act in 1935 and proclaiming, “Today, we’re picking up where he left off”—most chose a warmer, vaguer route, showing us heroic tableaux of hardy midwesterners buying and holding amidst the Nebraska corn, of World War II vets day-trading from their suburban rec-rooms, of athletes talking like insiders, of church ladies phoning in their questions for the commentator on CNBC; of mom and pop posting their very own fire-breathing defenses of Microsoft on the boards at Raging Bull. This was a boom driven by democracy itself, a boom of infinite possibilities, a boom that could never end.
Excerpted with permission from “One Market Under God” (Doubleday Books).
Thomas Frank Thomas Frank is a Salon politics and culture columnist. His many books include "What's The Matter With Kansas," "Pity the Billionaire" and "One Market Under God." He is the founding editor of The Baffler magazine.

Friday, August 29, 2014

Rolling Stone’s Tax Scam Story: The Biggest Tax Scam Ever


Some of America’s top corporations are parking profits overseas and ducking hundreds of billions in taxes. And how’s Congress responding? It’s rewarding them for ripping us off

In July, the American pharmaceutical giant AbbVie, maker of the world’s top-selling drug – the arthritis treatment Humira – reached a blockbuster deal to acquire European rival Shire, best known for the attention-deficit medication Adderall. The merger was cheered by Wall Street, not for what the deal will do to advance pharmaceutical science, but because it will empower the bigger firm, AbbVie, to renounce its U.S. citizenship.
Tea Party The Nonexistent Case for Never Raising Taxes
At $55 billion, the AbbVie deal is the largest in a cavalcade of corporate “inversions.” A loophole in American tax law permits companies with just 20 percent foreign ownership to reincorporate abroad, which means that if a big U.S. firm acquires a smaller company located in a tax haven, it can then “invert” – that is, become a subsidiary of its foreign-based affiliate – and kiss a huge share of its IRS obligations goodbye.
AbbVie shareholders will continue to control 75 percent of the company, which will still be managed by executives outside Chicago. But the merged company will now file its tax returns on the island of Jersey – a speck of land in the English Channel, where Shire is incorporated. AbbVie, which racked up more than $10 billion in Humira sales last year, will slash its effective corporate tax rate from 22 percent to 13. The cost to the U.S. Treasury? Possibly as much as $1.3 billion by the year 2020.
Companies striking deals to become technically foreign can be found in all corners of American business, from California computer-equipment manufacturer Applied Materials to Minnesota medical-device giant Medtronic to North Carolina­based banana behemoth Chiquita. Little is changing in the core business of these firms. They will just pay less in taxes – and to a foreign government, often Ireland or the Netherlands.
These tax turncoats have drawn the ire of President Obama. “I don’t care if it’s legal,” he declared this summer. “It’s wrong.” These inverted companies, he said, “don’t want to give up . . . all the advantages of operating in the United States. They just don’t want to pay for it.”
With Congress gridlocked, Obama is vowing to tackle the problem on his own – as he has done to advance his agenda on LGBT equality and immigration reform. In August, he threatened “quick” executive action to “at least discourage” inversion schemes. But pressed for specifics, the president conceded the White House has no silver bullet. In fact, Treasury Secretary Jacob Lew had declared only weeks earlier, “We do not believe we have the authority to address this inversion question through administrative action. If we did, we would be doing more.”
Over the next decade, corporate inversions could cost the U.S. Treasury nearly $20 billion – revenues that could other­wise pay for Head Start programs, to rebuild roads and bridges, or just bring down the deficit. The wave of inversions is threatening “to hollow out the U.S. corporate income tax base,” Lew warned in a July letter to the chief tax writers in the House and Senate. But inversions are just the tip of the iceberg. The crisis of corporate tax avoidance is far more pervasive – and destructive – than either Obama or Lew is letting on. At a moment when Congress appears impossibly divided, a strong, bipartisan consensus has, in fact, emerged in Washington: The world’s richest corporations will get away with fleecing hundreds of billions of tax dollars from the rest of us.
In public, Democratic politicians blast corporate tax dodgers. But the party’s most viable comprehensive “reform” proposals would reward the crooked accounting of U.S.-based multinationals. Republican­backed legislation – no surprise – would only make the crisis worse. Why? “It’s not rocket science; it’s money and politics,” says Jared Bernstein, former top economic adviser to Vice President Joe Biden. “Concentrated wealth is buying the policy agenda it likes, and blocking one it doesn’t.”
Last year the IRS finally collected more in tax receipts than it did before the crash in 2007. But dig a little deeper into the numbers and it is clear we haven’t returned to normal: Corporations paid nearly $100 billion less in federal income taxes last year than before the Great Recession – down nearly 40 percent as a share of GDP. In fact, corporate profits and corporate tax collections are now trending in opposite directions. Profits were up $93 billion last year – to a high of $2.1 trillion, according to the Commerce Department. Yet corporate tax payments actually fell last year by more than $15 billion.
How is this possible?
It goes way beyond inversion. The top names in American business – from Apple to Xerox – have joined in the greatest tax dodge in world history. Using clever accounting games, these corporations have siphoned majestic sums out of the country and into tax-haven shell companies – where the money is untouchable by the IRS.
The numbers are staggering. More than $2 trillion in U.S.-based multinational profits currently sit in offshore accounts, representing, by credible estimates, in excess of $500 billion in unpaid taxes. If that money were deposited in federal coffers tomorrow, it would wipe out the deficit for 2014. And every year that Congress dithers on a crackdown, America is forfeiting an approximate $90 billion in revenue.
the great american bubble machine
The details of corporate tax avoidance can be dizzyingly complex. But the broad strokes are simple. For more than a century, American corporations have been required to pay taxes on their global income. There’s no double taxation problem; companies receive credit for taxes paid over to other governments. The logic of our system is straightforward: U.S. corporate citizens enjoy benefits that aren’t cabined inside our borders. The U.S. Navy secures shipping lanes needed to transport goods from Chinese factories to ports around the world. The American legal system protects corporate patents and other intellectual property worldwide. U.S. taxpayers fund the R&D that makes many of these corporations profitable in the first place.
There is one odd hitch in our system of global taxation. The corporate tax bill – nominally 35 percent – is not due in America until the foreign profits come home. In the jargon of the corporate world, the taxes are “deferred” until the profits are “repatriated.” Until then, the offshore cash can be invested and grow U.S.-tax-free, not unlike your 401(k).
“The deferral tax break really highlights how broken our tax code is,” says Ron Wyden, the Oregon Democrat who chairs the Senate Finance Committee. “When you park a big chunk of cash overseas, you get a huge tax break for it.”
In reality, much of the untaxed income is actually earned in the United States before elaborate accounting schemes siphon it overseas. The racket is simplest for tech and pharmaceutical companies, whose value is tied to intellectual property. According to David Cay Johnston, author of Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich – and Cheat Everybody Else, Pfizer provides a prime example. When the company was developing Viagra, it transferred the economic rights to its intellectual property abroad, ultimately to a shell company in Liechtenstein – an infamous European tax haven. On each sale of the drug here, the European subsidiary charged the U.S. parent company a steep royalty – payment of which moved the profit from high-tax America to low- to zero-tax Liechtenstein.
Adding insult to injury, this self-dealing creates a phantom business expense in the United States. “They get a tax deduction in America while they pile up the money in another country, tax-free,” says Johnston.
Contrary to what the term “offshore” might suggest, these untaxed profits are not stranded. “There’s this false notion that these funds are locked in a strongbox somewhere,” says Edward Kleinbard, a former chief of staff for Congress’ Joint Committee on Taxation. In reality, these untaxed foreign profits are often banked, by the offshore subsidiaries themselves, in Manhattan – where they’re used to invest in stocks and U.S. Treasury bonds. “The money,” says Kleinbard, “is already back in the U.S. economy.”
Worse, equally convoluted accounting sleights of hand can be used to make the untaxed income – or at least its financial power – available to fund daily corporate operations in the U.S., or just enrich shareholders. The ratings agency Standard & Poor’s recently coined a term to describe this practice: “synthetic cash repatriation.”
Take Apple, which wanted to reward investors last year with a $60 billion stock buyback that would boost the company’s share price. Apple did not have enough cash in its American accounts to complete the deal. And the company couldn’t legally tap its “offshore” billions (reportedly banked in Manhattan) without paying U.S. taxes.
To sidestep the law, Apple borrowed the cash, using the largest corporate bond offering in history to raise $17 billion in the States. Thanks to the massive piles of offshored cash and securities on its books – presently more than $137 billion – Apple’s net cost of borrowing was minuscule, about 1.57 percent. Apple liked this trick so much it repeated it – raising another $12 billion in April this year. Shareholders got their reward. Only Uncle Sam was cut out of the deal.
The crisis in multinational corporate tax avoidance is growing exponentially. According to an analysis by Audit Analytics, the indefinitely reinvested foreign earnings of the firms in the Russell 1000 Index surged from $1.1 trillion in 2008 to more than $2.1 trillion in 2013. That latter figure is greater than the GDP of Russia.
The analysis reveals that the biggest names in corporate America are boycotting the U.S. tax system, en masse. Top offenders include giants from high-tech (Microsoft, $76 billion); Big Pharma (Pfizer, $69 billion); Big Oil (Exxon­Mobil, $47 billion); investment banks (Goldman Sachs, $22 billion); Big Tobacco (Philip Morris, $20 billion); discount retailers (Wal-Mart, $19 billion); fast-food chains (McDonald’s, $16 billion) – even heavy machinery (Caterpillar, $17 billion). General Electric has $110 billion stashed offshore, and enjoys an effective tax rate of four percent – 31 points lower than its statutory obligation to the IRS.
“The things these companies are doing, 20 years ago would almost certainly have been illegal,” says Bob McIntyre, president of Citizens for Tax Justice. “But now you’ve got so many big, powerful corporations doing it that it’s the norm.” Systematic avoidance helps explain why corporate income taxes – one-third of federal revenue in the 1950s – have now dropped below 10 percent of Treasury receipts today.
Many in corporate America justify this rampant tax dodging by arguing that the 35 percent corporate tax rate in the U.S. is too high. In reality, our system offers big corporations so many other tax favors that the effective tax multinationals pay on their U.S. profits is often lower than what the same companies pay in other developed nations. “The constant corporate whining that they’re overtaxed in the United States,” McIntyre says, “is bullshit.”
America confronted – and largely dealt with – the issue of international tax loopholes once before. A half-century ago, the Kennedy administration understood that American corporations were using accounting gimmicks to shift untaxed profits overseas. “Deferral has served as a shelter for tax escape through the unjustifiable use of tax havens,” President Kennedy said in 1961. Congress eventually agreed on new laws that drew a sharp line between “active” income – earned from selling real-world goods and services – and “passive” income, the easily manipulated paper profits generated from financial transactions. The former would still qualify for the deferral tax break; the latter would be taxed immediately.
The Kennedy-era reforms kept corporate tax avoidance substantially in check through both Democratic and Republican administrations. Even Reagan cracked down on multinational tax dodgers with the tax reform of 1986. But changes in recent years – including one in 1997 and another in 2006 – have, according to a recent Senate investigation, “nearly completely undercut” the ability of the Treasury to tax the paperwork profits of multinationals. The original sin was committed by the Clinton Treasury – then led by Robert Rubin, later a top executive at Citigroup and a major player in the subprime mortgage crisis. In 1997, Treasury changed regulations to permit corporations to decide for themselves which subsidiaries were relevant for tax purposes, simply by ticking off a box on a tax form. But these changes, intended to simplify the tax code, also opened a colossal loophole.
By telling the IRS to treat certain offshore subsidiaries as “disregarded entities” – a.k.a. “tax nothings” – corporate accountants could divert and mask passive income, making it untaxable abroad. “I don’t think they realized how much check-the-box would lubricate international tax avoidance,” says Kleinbard.
Corporate accountants were gleeful. Tax watchdogs were horrified. “The stupid Clinton Treasury,” McIntyre says bitterly. “They were warned about this before they put out the regulations. Then they discovered that all the people who were telling them they were idiots were right.”
For a brief moment, Treasury sought to reverse course. But lobbyists from firms including Monsanto, Morgan Stanley, IBM and Philip Morris locked arms to defend their de facto tax cut. The Clinton Treasury backed down. Soon, some administration officials took a spin through the revolving door – raising troubling questions about the relationship between corporate America and its regulators. William Morris, who became the Clinton Treasury’s associate international tax counsel around the time the regulations were enacted, jumped to GE, where today he orchestrates the firm’s global tax policy.
The great corporate tax dodge exploded under the presidency of George W. Bush. By 2004, American multinationals had siphoned hundreds of billions of dollars offshore. Far from cracking down, the Republican Congress rewarded corporate tax dodgers with a “repatriation tax holiday.” Multinationals were invited to bring home their overseas earnings – to be taxed at a measly 5.25 percent.
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This tax giveaway was part of Bush’s American Jobs Creation Act and sold to the public as a way to provide a shot in the arm to the U.S. economy. More than $300 billion came home – nearly 80 percent of it from locations the U.S. government considers tax havens. But the tax holiday didn’t spur investment, growth or jobs. In fact, the top 15 participants, after bringing home a collective $150 billion, proceeded to slash 20,000 jobs. The act did little more than make rich investors even richer. A huge proportion of each repatriated dollar – between 60 and 92 cents – wound up in the hands of shareholders.
The Bush tax holiday also “dangled in front of every CFO in America the expectation that there would be another tax holiday, and another after that,” says Kleinbard. Eager to reassure corporate America that pipelining profits offshore was now kosher, Congress enacted little­debated legislation in 2006 that codified tax exclusions enabled by the decade-old check-the-box rules. The accounting boondoggle was now doubly entrenched – in law and regulation. The impact was stark: In 2006, corporations held roughly $600 billion offshore. That sum would soon double, then triple.
In his first campaign for president, Barack Obama called for “ending tax breaks for companies that ship jobs overseas” – shorthand for repealing tax deferrals on offshored corporate profits. But upon taking office in 2009, Obama lowered his sights, proposing more modest reforms, including elimination of check-the-box and a limit on tax deductions linked to offshore profits. Despite preserving deferral, these reforms were still projected to raise $210 billion over a decade. And Obama continued to talk tough. In May of that year, he denounced our “broken tax system, written by well­connected lobbyists,” and promised to “restore fairness and balance to our tax code.”
But even these proposals ran into a corporate buzz saw. Around 200 multi­nationals, including top backers of Democrats, had joined forces in a campaign spearheaded by the Business Roundtable and the U.S. Chamber of Commerce. Ken Kies, a top lobbyist for companies including GE and Microsoft, told reporters, “This is going to be the biggest fight for the corporate community in the next two years.”
The corporate blitz worked. The new president, who’d won more votes than Ronald Reagan, backed down. “We were doing the Recovery Act, health care reform and financial reform,” says Bernstein, Biden’s former economic adviser. “Adding a massive fight with multinational corporations just wouldn’t have been smart.” Far from ending the abuses of corporate tax avoidance, the Obama administration has since become complicit. The president has twice signed legislation reauthorizing the Bush law that effectively codifies check-the-box. The provision is among a package of “tax extenders” – including loopholes favored by both parties – that Congress habitually tacks on to other, must-pass legislation. These corporate giveaways were last rubber-stamped in the 2013 bill that pulled America back from the “fiscal cliff.”
Without meaningful resistance from Congress, corporations are pressing forward with abusive tax schemes. Two recent Senate investigations offer a window into the dark arts of corporate America’s tax avoidance.
Apple’s tax strategies in particular have come under the microscope. On a recent earnings call, the Silicon Valley giant announced it has parked $137.7 billion offshore. In its own SEC filings, Apple has revealed it would have to pay nearly 33 percent in U.S. tax – some $45 billion – to repatriate those offshored earnings. That would be more than enough to fund NASA for the next two years.
According to Senate investigators, Apple makes use of “ghost companies,” incorporated in Ireland as “a conduit for shifting billions of dollars in income from the U.S.” From 2009 to 2012, Apple booked $30 billion in income to a subsidiary called Apple Operations International, an entity with no official employees. But thanks to overlapping loopholes in Irish and American tax law, AOI has not been forced to declare itself a tax resident of either country. As a result, for the past five years, it filed no returns, and its profits weren’t taxed by any government. “Apple sought the Holy Grail of tax avoidance,” said Sen. Carl Levin, D-Mich., chairman of the Permanent Subcommittee on Investigations. Apple, for its part, insists that its accounting practices are legitimate. “We pay all the taxes we owe,” said CEO Tim Cook, testifying before Congress in May 2013.
While tech firms and Big Pharma have long made use of accounting tricks to offshore profits, big industrial concerns have not, historically, been able to play games to the same degree. That’s no longer true. Starting about 15 years ago, heavy-equipment manufacturer Caterpillar paid accounting firm PricewaterhouseCoopers $55 million to create a scheme to “migrate profits” from the U.S. to Switzerland.
With no change to its core business, Caterpillar began booking earnings from its U.S.-managed parts business in Geneva – after first negotiating a deal with Swiss authorities to tax those earnings at four to six percent. From 2000 to 2012, Caterpillar shifted more than $8 billion in taxable income to Europe, deferring $2.4 billion in U.S. taxes. “In the fantasy­land that is international tax law,” Levin said, “tax lawyers waved a magic wand to make millions of dollars in U.S. taxes disappear.”
The real problem with multinational corporate tax avoidance is not that the firms are breaking the law. It’s that the law itself is broken. “Most of what they’re doing is completely legal,” says a top Senate tax staffer. “The problem is with the system that allows them to do it.”
Democratic Senate Finance Chairman Ron Wyden has long sought to overhaul the corporate tax system. Wyden talks like a progressive champion, likening the current tax code to “a rotten carcass that the special interests feast on.” He has introduced legislation that would eliminate deferral for all international corporate profits, which would be a huge victory for taxpayers. According to a Joint Committee on Taxation estimate, forcing companies to pay taxes on their profits as they’re earned would raise around $600 billion over 10 years.
If only Wyden had stopped there. In an attempt to draw support from tax-phobic GOP lawmakers, Wyden would actually give away all that revenue – plus $200 billion more over the first decade, according to the Tax Policy Center – by slashing the U.S. corporate tax rate to just 24 percent. Wyden insists that this low rate would both keep high-skill, high-wage jobs at home and deter companies from “manipulating the tax code to set up shop overseas.”
“The morons in Congress are either unbelievably disingenuous,” H. David Rosenbloom, who directs the international tax program at NYU’s law school, says, “or too stupid to understand this.” There’s no way the U.S. can set its tax rates low enough to compete with tax-haven nations like Ireland, he says, and still run a global superpower.
Wyden has also called for a repeat of the 2004 tax holiday – allowing offshored cash to come at the discounted rate of just 5.25 percent. On $2.1 trillion in offshored earnings, that could give these companies close to a half-trillion-dollar tax break. Wyden calls the corporate giveaway “a sensible transition.”
The best that can be said of Wyden’s approach is that by ending deferral and making schemes to offshore U.S. profits moot, it would stop the bleeding. In contrast, the top Republican proposal, developed by House Ways and Means Chairman Dave Camp, would rip open new arteries. Like Wyden, Camp would also slash the overall corporate tax rate – to 25 percent. In lieu of a tax holiday, he would impose a “transition tax” on offshore profits, from 8.75 percent to as low as 3.5 percent. Camp’s legislation “solves” the problem of deferred offshore profits by largely surrendering the United States’ right to tax corporate earnings booked abroad – making our international tax system “even more of a mess than it is now,” writes McIntyre.
This is the reality of our political system in 2014: In what should be a titanic battle between multinational corporate power and federal power, our elected representatives are hardly putting up a fight. Obama has been a sharp critic of corporate tax avoidance. Yet the offshore corporate earnings stash has nearly doubled on his watch. Senate Majority Leader Harry Reid has unleashed blistering attacks on corporations like Walgreens that have threatened to renounce their U.S. citizenship for tax purposes. And he has said he’s “ready to roll” on a vote for a (sure-to-fail) Democratic bill that seeks a two-year moratorium on inversions. Yet Reid has also been shopping a stand-alone tax-holiday proposal, rewarding multinational tax avoiders with a 9.5 percent rate. Reid’s partner in this effort? Kentucky Republican Rand Paul – who’s been courting right-wing billionaire David Koch. “Rand’s got good ideas,” Koch told The Wichita Eagle in July.
The American people want change: Two-thirds of Americans believe large corporations should be paying higher taxes, and 80 percent believe corporate loopholes should be closed. But Washington isn’t listening. The kid-glove treatment of corporate tax offenders by both parties is exhibit A in America’s shift from a functioning democracy to a nascent oligarchy. It aligns with a recent study conducted by Princeton and Northwestern that concluded “organized groups representing business interests have substantial independent impacts” on federal decision making, while the interests of average Americans “appear to have only a minuscule, statistically nonsignificant impact.”
“Corporate tax breaks are beloved by those who take advantage of them,” says Bernstein. “You’re not going to change that without realigning a lot of politics.” Until that day comes, we’ll be living with the tax policy that multinational corporations have bought and paid for. Which means that you and I are stuck with the bills.

Naked Capitalism on the Fraud of Bank Regulation


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Gillian Tett’s Astonishing Defense of Bank Misconduct

Posted on August 29, 2014 by

I don’t know what became of the Gillian Tett who provided prescient coverage of the financial markets, and in particular the importance and danger of CDOs, from 2005 through 2008. But since she was promoted to assistant editor, the present incarnation of Gillian Tett bears perilous little resemblance to her pre-crisis version. Tett has increasingly used her hard-won brand equity to defend noxious causes, like austerity and special pleadings of the banking elite.
Today’s column, “Regulatory revenge risks scaring investors away,” is a vivid example of Tett’s professional devolution.
The twofer in the headline represents the article fairly well. First, it take the position that chronically captured bank regulators, when they show an uncharacteristic bit of spine, are motivated by emotion, namely spite, and thus are being unduly punitive. Second, those meanie regulators are scaring off investors. It goes without saying that that is a bad outcome, since we need to keep our bloated, predatory banking system just the way it is. More costly capital would interfere with its institutionalized looting.
In other words, the construction of the article is to depict banks as victims and the punishments as excessive. Huh? The banks engaged in repeated, institutionalized, large scale frauds. If they had complied with regulations and their own contracts, they would not be in trouble. But Tett would have us believe the regulators are behaving vindictively. In fact, the banks engaged in bad conduct. To the extent that the regulators are at fault, it is for imposing way too little in the way of punishment, way too late.
As anyone who has been following this beat, including Tett, surely knows is that adequate penalties for large bank misdeeds would wipe them out. For instance, as many, including your humble blogger, pointed out in 2010 and 2011 that bank liability for the failure to transfer mortgages in the contractually-stipulated manner to securitazation trusts alone was a huge multiple of bank equity. So not surprisingly, as it became clear that mortgage securitization agreements were rigid (meaning the usual legal remedy of writing waivers wouldn’t fix these problems) and more and more cases were grinding their way through court, the Administration woke up and pushed through the second bank bailout otherwise known as the National Mortgage Settlement (which included 49 state attorney general settlements) of 2012.
Similarly, Andrew Haldane, then the executive director of financial stability for the Bank of England, pointed out that banks couldn’t begin to pay for the damage they did. In a widely-cited 2010 paper, Haldane compared the banking industry to the auto industry, in that they both produced pollutants: for cars, exhaust fumes; for bank, systemic risk. Remember that economic theory treats cost like pollution that are imposed on innocent bystanders to commercial activity as an “externality”. The remedy is to find a way to make the polluter and his customer bear the true costs of their transactions. From Haldane’s quick and dirty calculation of the real cost of the crisis (emphasis ours):
….these losses are multiples of the static costs, lying anywhere between one and five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. “Economical” might be a better description.
It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite.
Contrast Haldane’s estimate of what an adequate levy would amount to with how Tett’s article depicts vastly smaller amounts as an outrage:
A couple of years ago Roger McCormick, a law professor at London School of Economics and Political Science, assembled a team of researchers to track the penalties being imposed on the 10 largest western banks, to see how finance was evolving after the 2008 crisis.
He initially thought this might be a minor, one-off project. He was wrong. Last month his project team published its second report on post-crisis penalties, which showed that by late 2013 the top 10 banks had paid an astonishing £100bn in fines since 2008, for misbehaviour such as money laundering, rate-rigging, sanctions-busting and mis-selling subprime mortgages and bonds during the credit bubble. Bank of America headed this league of shame: it had paid £39bn by the end of 2013 for its transgressions.
When the 2014 data are compiled, the total penalties will probably have risen towards £200bn. Just last week Bank of America announced yet another settlement with regulators over the subprime scandals, worth $16.9bn. JPMorgan and Citi respectively have recently settled with different US government bodies for mortgage transgressions to the tune of $13bn and $7bn.
Yves here. Keep in mind that these settlement figures are inflated, since they use the headline value, and fail to back out the non-cash portions (which are generally worth little, or in some cases are rewarding banks for costs imposed on third parties) as well as tax breaks.
In an amusing bit of synchronicity, earlier this week Georgetown Law professor Adam Levitin also looked at mortgage settlements alone and came up with figures similar to the ones that have McCormick running to the banks’ defense. But Levitin deems the totals to be paltry:
There’s actually been quite a lot of settlements covering a fair amount of money. (Not all of it is real money, of course, but the notionals add up).
By my counting, there have been some $94.6 billion in settlements announced or proposed to date dealing with mortgages and MBS….In other words, what I’m trying to cover are settlements for fraud and breach of contract against investors/insurers of MBS and buyers of mortgages.
Settlements aren’t the same as litigation wins, and I don’t know the strength of the parties’ positions in detail in many of these cases, but $94.6 billion strikes me as rather low for a total settlement figure.
And that is the issue that Tett tries to finesse. The comparison that she and McCormick make on behalf of the banks is presumably relative to their ability to pay, when the proper benchmark is whether the punishment is adequate given the harm done.
In fact, despite McCormick’s and the banks’ cavilling, investors understand fully that these supposedly tough settlements continue to be screaming bargains. When virtually every recent settlement has been announced, the bank in question’s stock price has risen, including the supposedly big and nasty $16.6 billion latest Bank of America settlement (which par for the course was only $9 billion in real money). The Charlotte bank’s stock traded up 4% after that deal was made public. So if investors are pleased with these pacts, what’s the beef?
The complaint, in so many words, is that these sanctions are capricious. Tett again:

The numbers are getting bigger and bigger,” observes Prof McCormick, who has been so startled by this trend that last month he decided to turn his penalty-tracking pilot project into a full-blown, independent centre. A former leading European regulator says: “What is happening now is astonishing. If you had asked regulators a few years ago to predict how big the post-crisis penalties might be, our predictions would have been wrong – by digits.”
Now the article does list some abuses, such as the Libor scandal, that were exposed after the crisis. That goes double for chain of title abuses, which suddenly exploded into media and therefore regulators’ attention in the fall of 2010. That means the reason that the penalties have kept clocking up is that, in the absence of having performed large scale systematic investigations in the wake of the crisis, regulators are dealing with abuses that came to their attention after the “rescue the banks at all costs” phase. Those violations are just too visible for the officialdom to give the banks a free pass, particularly since the public is correctly resentful that no one suffered much if at all for crisis-related abuses.
So the banks’ unhappiness seems to result from the fact that having been bailed twice by the authorities (once in the crisis proper, a second time via the “get of out jail almost free” of the Federal/state mortgage settlements of 2012), the financiers thought they were home free. They are now offended that they are being made to ante up for some crisis misconduct as well as additional misdeeds. Yet Tett tries to depict the regulators as still dealing with rabbit of 2008 bad deeds that are still moving through the banking anaconda, when a look at JP Morgan’s rap sheet shows a panoply of violations, only some of which relate to the crisis (as in resulting from pre-crisis mortgage lending or related mortgage backed securities and CDOs):
Bank Secrecy Act violations;
Money laundering for drug cartels;
Violations of sanction orders against Cuba, Iran, Sudan, and former Liberian strongman Charles Taylor;
Violations related to the Vatican Bank scandal (get on this, Pope Francis!);
Violations of the Commodities Exchange Act;
Failure to segregate customer funds (including one CFTC case where the bank failed to segregate $725 million of its own money from a $9.6 billion account) in the US and UK;
Knowingly executing fictitious trades where the customer, with full knowledge of the bank, was on both sides of the deal;
Various SEC enforcement actions for misrepresentations of CDOs and mortgage-backed securities;
The AG settlement on foreclosure fraud;
The OCC settlement on foreclosure fraud;
Violations of the Servicemembers Civil Relief Act;
Illegal flood insurance commissions;
Fraudulent sale of unregistered securities;
Auto-finance ripoffs;
Illegal increases of overdraft penalties;
Violations of federal ERISA laws as well as those of the state of New York;
Municipal bond market manipulations and acts of bid-rigging, including violations of the Sherman Anti-Trust Act;
Filing of unverified affidavits for credit card debt collections (“as a result of internal control failures that sound eerily similar to the industry’s mortgage servicing failures and foreclosure abuses”);
Energy market manipulation that triggered FERC lawsuits;
“Artificial market making” at Japanese affiliates;
Shifting trading losses on a currency trade to a customer account;
Fraudulent sales of derivatives to the city of Milan, Italy;
Obstruction of justice (including refusing the release of documents in the Bernie Madoff case as well as the case of Peregrine Financial).
Finally, let’s dispatch the worry about those poor banks having to pay more to get capital from investors. If this actually happened to be true, it would be an extremely desirable outcome, for it would help shrink an oversize, overpaid sector.
However, the Fed and FDIC earlier this month, in an embarrassing about face, admitted that the “living wills” that banks submitted were a joke, meaning that the major banks can’t be resolved if they start to founder. We’ve said for years that the orderly liquidation authority envisioned by Dodd Frank is unworkable. And we weren’t alone in saying that; the Bank of International Settlements and the Institute for International Finance agreed.
The implication, which investors understand full well, is that “too big to fail” is far from solved, and taxpayers are still on the hook for any megabank blowups. As Boston College professor Ed Kane pointed out in Congressional testimony last month, and Simon Johnson wrote in Project Syndicate earlier this week, that means that systemically important banks continue to receive substantial subsidies.
Yet Tett would have you believe that banks are suffering because investors see them as bearing too much litigation/regulatory risk. If that were true, Bank of America, the most exposed bank, would have cleaned up its servicing years ago.
It’s clear that banks and investors regard the risk of getting caught as not that great, and correctly recognize the damage even when they are fined as a mere cost of doing business. It is a no brainer that their TBTF status assures that no punishment will ever be allowed to rise to the level that would seriously threaten theses institutions. Everyone, including Tett, understands that this is all kabuki, even if the process is a bit untidy. So all of this investor complaining is merely an effort to get regulators to fatten their returns a bit.
Bank defenders like Tett would have you believe that the regulators have been inconsistent and unfair. In fact, if they have been unfair to anyone, it is to the silent equity partners of banks, meaning taxpayers. Banks are so heavily subsidized that they cannot properly be regarded as private firms and should be regulated as utilities. Fines for serious abuses that leave banks able to continue operating in their current form are simply another gesture to appease the public. Yet Tett would have you believe that a manageable problem for banks is a bigger cause for concern than the festering problem of too big to fail banks and only intermittently serious regulators.

Crime Scene – New Orleans: An Act of Big Oil.


By Greg Palast
Tuesday, 26 August 2014


[Lower Ninth Ward, New Orleans]  Nine years ago this week, New Orleans drowned.  Don’t you dare blame Mother Nature.  Miss Katrina killed no one in this town.  But it was a homicide, with nearly 2,000 dead victims.  If not Katrina, who done it?  Read on.

The Palast Investigative Fund is making our half-hour investigative report available as a free download – Big Easy to Big Empty: The Untold Story of the Drowning of New Orleans, produced for Democracy Now.  In the course of the filming, Palast was charged with violation of anti-terror laws on a complaint from Exxon Corporation. Charges were dropped, and our digging continued.

Who is to blame for the crushing avalanche of water that buried this city?

It wasn’t an Act of God.  It was an Act of Chevron.  An Act of Exxon. An Act of Big Oil.

Take a look at these numbers dug out of Louisiana state records:
Conoco 3.3 million acres
Exxon Mobil 2.1 million acres
Chevron 2.7 million acres
Shell 1.3 million acres
These are the total acres of wetlands removed by just four oil companies over the past couple decadesIf you’re not a farmer, I’ll translate this into urban-speak:  that’s 14,688 square miles drowned into the Gulf of Mexico.

Here’s what happened.  New Orleans used be to a long, swampy way from the Gulf of Mexico.  Hurricanes and storm surges had to to cross a protective mangrove forest nearly a hundred miles thick.

But then, a century ago, Standard Oil, Exxon’s prior alias, began dragging drilling rigs, channeling pipelines, barge paths and tanker routes through what was once soft delta prairie grass.  Most of those beautiful bayous you see on postcards are just scars, the cuts and wounds of drilling the prairie, once America’s cattle-raising center.  The bayous, filling with ‘gators and shrimp, widened out and sank the coastline.  Each year, oil operations drag the Gulf four miles closer to New Orleans.

Just one channel dug for Exxon’s pleasure, the Mississippi River-Gulf Outlet ("MR-GO") was dubbed the Hurricane Highway by experts—long before Katrina—that invited the storm right up to—and over—the city’s gates, the levees.

Without Big Oil's tree and prairie holocaust, "Katrina would have been a storm of no note," Professor Ivor van Heerden told me.  Van Heerden, once Deputy Director of the Hurricane Center at Louisiana State University, is one of the planet’s the leading experts on storm dynamics.

If they’d only left just 10% of the protective collar. They didn’t.

Van Heerden was giving me a tour of the battle zone in the oil war.  It was New Orleans’ Lower Ninth Ward, which once held the largest concentration of African-American owned homes in America.  Now it holds the largest contrition of African-American owned rubble.

We stood in front of a house, now years after Katrina, with an "X" spray-painted on the outside and "1 DEAD DOG," "1 CAT," the number 2 and "9/6" partly covered by a foreclosure notice.

The professor translated:  "9/6" meant rescuers couldn’t get to the house for eight days, so the "2"—the couple that lived there––must have paddled around with their pets until the rising waters pushed them against the ceiling and they suffocated, their gas-bloated corpses floating for a week.

In July 2005, Van Heerden told Channel 4 television of Britain that, "In a month, this city could be underwater." In one month, it was.  Van Heerden had sounded the alarm for at least two years, even speaking to George Bush’s White House about an emergency condition:  with the Gulf closing in, the levees were 18 inches short.  But the Army Corps of Engineers was busy with other rivers, the Tigris and Euphrates.

So, when those levees began to fail, the White House, hoping to avoid Federal responsibility, did not tell Louisiana's Governor Kathleen Blanco that the levees were breaking up.  That Monday night, August 29, with the storm by-passing New Orleans, the Governor had stopped the city’s evacuation.  Van Heerden was with the governor at the State Emergency Center.  He said, "By midnight on Monday the White House knew. But none of us knew."

So, the drownings began in earnest.

Van Heerden was supposed to keep that secret.  He didn't.  He told me, on camera––knowing the floodwater of official slime would break over him. He was told to stay silent, to bury the truth. But he told me more.  A lot more.  
"I wasn't going to listen to those sort of threats, to let them shut me down."
Well, they did shut him down. After he went public about the unending life-and-death threat of continued oil drilling and channelling, LSU closed down its entire Hurricane Center (can you imagine?) and fired Professor van Heerden and fellow experts. This was just after the University received a $300,000 check from Chevron.  The check was passed by a front group called "America’s Wetlands"—which lobbies for more drilling in the wetlands.

In place of Van Heerden and independent experts, LSU’s new "Wetlands Center" has professors picked by a board of petroleum industry hacks.

In 2003, Americans protested, "No Blood for Oil" in Iraq.  It’s about time we said, "No Blood for Oil"—in Louisiana.

The Real Reason Sugar Has No Place in Cornbread


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And it should always be made in a cast iron skillet. [Photographs: Vicky Wasik]
I'm about to touch the third rail of Southern food. Well, actually, one of the third rails of Southern food, for when it comes to defining how certain beloved dishes should or should not be made, Southerners can get downright touchy. But, sometimes a truth is so self-evident that you can't present an impartial case for both sides. So I'm just going to say it: sugar has no business in cornbread.
Neither, for that matter, does wheat flour. One might make something quite tasty with well-sweetened wheat flour mixed with cornmeal, but be honest with yourself and call it a dessert. Cornbread is something else.
Now for a less personal perspective.
Much of the sugar/no sugar debate comes down to how one's grandmother made cornbread (and my grandmother didn't let a speck of sugar enter her batter). There are plenty of otherwise perfectly normal Southerners (my wife, for instance) whose grandmothers put sugar in cornbread. And there's a good explanation for why they did it. It all comes down to the nature of modern cornmeal.

Daily Bread

20140820-cornbread-vicky-wasik-3.jpgBut, first, a word on cornbread and Southerness. A lot of corn is grown in places like Iowa and Illinois, and Americans in all parts of the country have long made breads, cakes, and muffins from cornmeal. But for some reason, cornbread itself is still associated primarily with the South.
"The North thinks it knows how to make cornbread, but this is gross superstition," Mark Twain wrote in his autobiography. When the Southern Foodways Alliance needed a title for their series of books collecting the best Southern food writing, they chose Cornbread Nation.
Cornbread's enduring role in Southern cookery comes from its ubiquity—it was the primary bread eaten in the region from the colonial days until well into the 20th century. Though farmers in the Northeast and Midwest cultivated thriving crops of wheat and rye, corn remained the staple grain of the south, as European wheat withered and died of rust in the region's heat and humidity.
For all but the wealthiest Southerners, the daily bread was cornbread.
For all but the wealthiest Southerners, the daily bread was cornbread. "In the interior of the country," a New York Times correspondent observed in an 1853 article about Texas, "cornbread forms the staple article of diet—anything composed of wheat flour being about as scarce as ice-cream in Sahara." Biscuits made from wheat flour are very closely associated with the South, but for most Southerners they were rare treats reserved for special occasions like Sunday dinner.

Early Cornbread

The simplest type of cornbread was corn pone, which was made from a basic batter of cornmeal stirred with water and a little salt. It was typically cooked in a greased iron skillet or Dutch oven placed directly on hot coals. An iron lid was put on top and covered with a layer of embers, too, so the bread was heated from both bottom and top and baked within the pan.
Over time, the basic pone recipe was enhanced to become cornbread. Cooks first added buttermilk and a little baking soda to help it rise. Later, eggs and baking powder made their way into many recipes. But there are two ingredients you almost never see in any recipes before the 20th century: wheat flour and sugar.
In 1892, a Times correspondent, after enumerating the many types of corn-based breads eaten in Virginia, noted, "It will be observed that in none of them is sugar used. There are cornmeal puddings served with sweet sauces, but no Southern cook would risk the spoiling of her cornbreads by sweetening them."
In 1937, the Times reported that "cornbread in Kentucky is made with white, coarsely ground cornmeal. Never, never are sugar and wheat flour used in cornbread. Water-ground cornmeal and water-ground whole wheat flour have still a market in Kentucky and are still used with delight."

Changing the Recipe

So why were cooks so unanimous on the subject of sugar and wheat flour up through the 1930s and so divided on it today? That mention of Kentucky's lingering market for "water-ground" meal provides an important clue, for a huge shift occurred in the cornmeal market in the early part of the 20th century, one that changed the very nature of cornmeal and forced cooks to alter their cornbread recipes.
There's no better source to turn to to understand these changes than Glenn Roberts of Anson Mills in Columbia, South Carolina. In the 1990s, Roberts embarked on a single-minded mission to help rediscover and revive the rich variety of grains that were all but lost amid the industrialization of agriculture and food production. He's cultivated a network of farmers to grow heirloom corn, rice, and other grains, and he launched Anson Mills to mill them in traditional ways and distribute them to restaurant chefs and home cooks.
During the 19th century, Roberts says, toll milling was the way most farm families got the meal for their cornbread. Farmers took their own corn to the local mill and had it ground into enough cornmeal for their families, leaving behind some behind as a toll to pay the miller. "With toll milling, it was three bags in, three bags out," Roberts explains. "A person could walk or mule in with three bags, take three bags home, and still get chores done."
The mills were typically water-powered and used large millstones to grind the corn. Starting around 1900, however, new "roller mills" using cylindrical steel rollers began to be introduced in the South. Large milling companies set up roller operations in the towns and cities and began taking business away from the smaller toll mills out in the countryside. "The bottom line is they went off stone milling because the economies didn't make sense," Roberts says, "which is why stone milling collapsed after the Depression."
Unlike stone mills, steel roller mills eliminate much of the corn kernel, including the germ; doing so makes the corn shelf stable but also robs it of much flavor and nutrition. The friction of steel rolling generates a lot of heat, too, which further erodes corn's natural flavor. Perhaps the most significant difference, though, is the size of the resulting meal.
"If you're toll milling," Roberts says, "you're using one screen. It's just like a backdoor screen. If you put the grits onto that screen and shake it, coarse cornmeal is going to fall through. The diverse particle size in that cornmeal is stunning when compared to a [steel] roller mill."
When cornmeal's texture changed, cooks had to adjust their recipes. "There's a certain minimum particle size required to react with chemical leaven," Roberts says. "If you are using [meal from a roller mill] you're not going to get nearly the lift. You get a crumbly texture, and you need to augment the bread with wheat flour, or you're getting cake."
The change from stone to steel milling is likely what prompted cooks to start putting sugar in their cornbread, too. In the old days, Southerners typically ground their meal from varieties known as dent corn, so called because there's a dent in the top of each kernel. The corn was hard and dry when it was milled, since it had been "field ripened" by being left in the field and allowed to dry completely.
High-volume steel millers started using corn harvested unripe and dried with forced air, which had less sweetness and corny flavor than its field-ripened counterpart. "You put sugar in the cornmeal because you are not working with brix corn," Roberts says, using the trade term for sugar content. "There's no reason to add sugar if you have good corn."

Today's Cornmeal


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By the end of the Depression, old fashioned stone-ground cornmeal and grits had all but disappeared from the South, replaced by paper bags of finely-ground corn powder. The new cornmeal tended to be yellow, while the meal used for cornbread in much of the coastal South traditionally had been white. (There is a whole complex set of issues associated with the color of cornmeal that will have to wait for a later time.)
Cooks who paid attention knew there was a difference. "A very different product from the yellow cornmeal of the North is this white water-ground meal of the South," wrote Dorothy Robinson in the Richmond Times Dispatch in 1952. "The two are not interchangeable in recipes. Most standard cookbooks, with the exception of a comparative few devoted to Southern cooking, have concerned themselves with yellow cornmeal recipes as if they did not know any other kind! They do not even distinguish between the two. They simply say, naively, 'a cup of cornmeal' when listing ingredients in a recipe."
But even those who knew the difference had trouble finding the old stone-ground stuff. In 1950, a desperate Mrs. Francine J. Parr of Houma, Louisiana, posted a notice in the Times-Picayune with the headline "Who's Got Coarse Grits?" and explained, "the only grits we can get is very fine and no better than mush. In short, I'm advertising for some grocer or other individual selling coarse grits to drop me a line."

Making Proper Cornbread


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Cornbread is just one of many traditional Southern foods that are difficult to experience today in their original form for the simple reason that today's ingredients just aren't the same. Buttermilk, rice, benne seeds, watermelons, and even the whole hogs put on barbecue pits: each has changed in fundamental ways over the course of the 20th century.
But, thanks to historically-minded millers like Glenn Roberts and others, it's getting a little bit easier to find real stone-ground cornmeal again. Some are even using heirloom varieties of dent corn to return the old flavor and sweetness to cornmeal and to grits, too.
The key to making good, authentic Southern cornbread is to use the right tools and ingredients. That means cooking it in a black cast iron skillet preheated in the oven so it's smoking hot when the batter hits the pan, causing the edges of the bread to brown. That batter should be made with the best buttermilk possible (real buttermilk if you can find it, which isn't easy).
And you shouldn't use a grain of wheat flour or sugar. If you start with an old fashioned stone-ground meal like the Anson Mills' Antebellum Coarse White Cornmeal, you'll have no need for such adulterations.


this gentleman got it just right...follow this recipe!!
I very much enjoyed this article and I am so glad to see someone tell the real story about cornbread and get it right. Like most southerners I agree whole heatedly that you should never put sugar in corn bread.
My dad and granddad have raised white dent corn for as long as I can remember, (i'm 51 my dad is 76). I use to go with them when they would take a sack of shelled corn to the miller to have it ground into corn meal. After the last old miller died in the area where I grew up, (southwest Virginia), my dad located and purchased a small stone mill and with the help of my granddad they brought it home and set it up. My dad is still raising his own white dent corn and grinding his own corn meal which he generously shares with me and many other folks in the community. I can tell you, it is nothing like the so called corn meal that you buy from the store. for the last 2 years he has raised a variety called Boone County White. Dad remembers raising it when he was growing up. The corn grows 15 feet tall and the ears of corn are can be as larges as 14 inches long and grow about 8 feet high on the stalk. I had never seen anything like it until 2 years ago when he raised the first patch of it. Truly "Corn as high as an elephants eye ...". I have seen a number of people requesting a recipe, so here it is and like most good things it is very simple.
If you like the bread about an inch to inch and a half thick us a #5 cast iron skillet, if you like it thinner then use a #7 or #8 cast iron skillet.
(The cast iron skillet needs to be well seasoned or the bread will stick)
Preheat you oven to 475. when the oven is hot put about a teaspoon or two of bacon grease in the skillet and slide it in the over on the top rack to heat up. While the skillet is heating, take a medium size mixing bowl and blend together:
1 1/2 cups of corn meal
1 tsp of salt
1 to 1 1/2 tsp of baking powder
1/4 tsp of baking soda
Add enough whole buttermilk to the dry ingredients to make a thick paste. If you like the cornbread kind of wet and heavy add a little extra buttermilk if you like it dry then use a little less.
When the skillet is good and hot, (the bacon grease will be starting to smoke), remove the skillet from the oven and pour in the batter and return it to the top rack of the oven. When the top is golden brown it is ready, about 15 to 20 minutes.