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Mark Gongloff   |   August 15, 2013    3:52 PM ET

Hey, who says America is in decline? The U.S. is still more awesome than the rest of the world at making at least one thing. And that thing is income inequality.

A new paper by economists Facundo Alvaredo, Anthony B. Atkinson, Thomas Piketty, and Emmanuel Saez lays out just how much better at making inequality the U.S. is than everybody else and tries to explain how it got that way.

Since the 1970s, the top 1 percent of earners in the U.S. has roughly doubled its share of the total American income pie to nearly 20 percent from about 10 percent, according to the paper. This gain is easily the biggest among other developed countries, the researchers note. You can see this in the chart below, taken from the paper, which maps the income gains of the top 1 percent in several countries against the massive tax breaks most of them have gotten in the past several decades. (Story continues after chart.)

top 1 percent

The higher the dot, the more income inequality has grown in that country. See the red dot waaaay up in the left-hand corner, far away from everybody else? That is the United States, where the top earners have made more while getting their taxes slashed by over 40 percent.

This echoes an OECD study from earlier this year that found the U.S. had the highest income inequality in the developed world. It followed only Chile, Mexico and Turkey among all nations.

So how did America get so darn great at ratcheting open the chasm between the haves and have-nots? Thank the dynamic duo of Wall Street and Washington, which have been working so well together for the past few decades to make laws that favor banks. Turns out this Axis Of Making It Rain has also been making laws that favor the exorbitantly wealthy. Win-win. Unless you are poor, in which case: Sorry, be born to richer parents next time, maybe?

One thing you'll notice in this chart is that, typically, the bigger the tax cuts given to the 1 percent (the horizontal scale on the chart), the bigger the income inequality. This is consistent with other studies that have shown the tax code has a big effect on income distribution. That's one way Washington has boosted inequality: By slashing taxes on the rich, for freedom and growth and trickling down on the poor. Unfortunately, the paper points out, contrary to what you will hear from conservatives, lower tax rates on the wealthy offer no obvious benefits to growth, or to the poor.

One other thing you'll notice from the chart is that the United Kingdom has slashed taxes on the top 1 percent almost as aggressively the U.S. has, and yet the share of income going to the top 1 percent is not nearly as big. So there's something else going on here besides just tax breaks.

That something is Wall Street, more or less, as Matthew O'Brien of The Atlantic points out. The same politicians that have busily been slashing taxes on the wealthy have also been loosening fetters on banking, allowing the financial sector to swell to bloated size and mop up ever-more income while contributing ever-less back to the economy. Again, this is consistent with other studies that have attributed much of the rise in in inequality to the pay being sucked up by bankers and overpaid CEOs.

At the same time, U.S. lawmakers have also made it easier and more tax-friendly for the wealthy to pile up more capital gains on their investments. As O'Brien puts it, "The top 1 percent leveraged itself to the market, and haven't looked back."

One nifty benefit to having nine metric craptons of money is that you can use it to buy politicians to help you craft the laws you like, particularly those that will help you end up with 10 metric craptons of money. The poor and middle class, meanwhile, just get ever more discouraged about the political system and stop bothering to fight it, increasingly turning the whole process over to the wealthy and the politicians they own, according to a recent paper by Frederick Solt at Southern Illinois University. Sound familiar?

Mark Gongloff   |   August 15, 2013   11:06 AM ET

A consensus seems to be forming that U.S. consumers have cleaned up their balance sheets enough that they're ready to stuff themselves with debt all over again, ushering in a glorious economic boom. It's hard to see much evidence of that.

Oh, sure, consumers are starting to take on debt again. The New York Federal Reserve reported on Wednesday that auto loans rose by $20 billion in the second quarter, the biggest increase since 2006, and credit-card balances expanded by $8 billion. Student loan debt jumped another $8 billion, like it does, continuing to suck the life out of our economic future.

But are consumers ready to take on more debt? The Wall Street Journal seems to think so, splashing on its front page today a headline that reads "Confident Consumers Step Up Their Borrowing," with a lede reading: "After years of struggling to shed debt, Americans are finally gaining enough confidence in their finances to step up borrowing for autos, homes and other goods -- a shift that could boost the economic recovery."

Hooray, but for one problem: Households really haven't shed all that much debt. The New York Fed reported that households had $11.15 trillion in debt in the second quarter. That's down $78 billion from the first quarter, which is great. And yet debt is only about $1.5 trillion lower than it was at its peak in the third quarter of 2008 -- in the middle of a mammoth recession that was partly caused by, guess what, way too much household debt. (Story continues below the New York Fed's chart of mountainous debt levels.)

household debt

By comparison, consumer debt is still nearly $3 trillion higher than it was nine years ago, when the debt bubble was in its middle stages.

I don't know what the right level of household debt is. There may not even be a "right" level of household debt. But something tells me that when we are just barely below all-time peak debt levels that caused the worst recession/depression in 80 years, we might not yet have gotten rid of enough debt.

It does not help that consumers are still falling behind on their debts at a pace nearly three times faster than they did in the relatively quiet days of 2004.

As finance blogger Barry Ritholtz wrote yesterday, japing at some of the overly cheerful headlines about the New York Fed report, "Yay! We Suck Much Less Then We Used To!"

As if to confirm that consumers might not yet be ready to go on a spending splurge, Wal-Mart on Thursday reported quarterly revenue that fell short of expectations by nearly $2 billion, cut its forecast for the full year's profit and warned that the back-to-school shopping season was going to disappoint, too. Company executives used the phrase "challenging retail environment" or something like it ten times in their conference call. (H/T to Kim Bhasin.)

This matters a lot, because consumer spending makes up about two-thirds of all U.S. economic growth. Still-high debt levels and anemic wage growth -- the WSJ makes a big deal out of how incomes have grown 6 percent in four years, which is pitiful -- are keeping consumer demand weak. That keeps businesses from expanding and hiring and slows down the whole economy.

Household debt is still a big problem, but don't be confused: Government debt is not a problem. In fact, the government should be going deeper into debt now, while interest rates are still relatively low, to help generate demand while consumers continue to nurse themselves back to health.

Mark Gongloff   |   August 14, 2013    2:41 PM ET

One quarter of positive GDP does not a recovery make.

Europe's gross domestic product grew 0.3 percent in the second quarter from the quarter before, according to Eurostat, the European Union's official keeper of economic data. That's the first positive GDP reading for Europe since the third quarter of 2011, and it ends an 18-month recession that broke the eurozone record.

So, all's well that ends well, right? European crisis over? Austerity wins?

Not so much. Though Europe's economy is at least in slightly better shape than it was, say, a year ago, there are at least five specific reasons Europe is in just about as much trouble now as it was three months ago, when it was still considered in recession:

1. GDP is not the best way to measure an economy's health. GDP alone says nothing about the quality of growth, future productivity or the happiness and well-being of its citizens. It ignores hidden economic activity and income inequality. And on a more technical level, GDP is heavily affected by stuff like inventories and trade that tell you little about where the economy is going, Columbia Management interest-rate strategist Zach Pandl wrote in a recent research paper.

2. GDP is not even the best way to measure a recession. People have a weird habit of calling two or more quarters of negative GDP a recession. It's an oft-used rule of thumb, but it doesn't make much sense in real life, partly for some of the reasons listed above. That's why the National Bureau of Economic Research, the official arbiter of U.S. recessions, defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." Most everybody agrees that the U.S. was officially in a recession in 2001, even though we never had two straight quarters of negative GDP in that recession.

3. Not every country in Europe is out of recession. Second-quarter GDP was pulled higher by strong growth in some countries, including Germany, France and Portugal. But France and Portugal are still touch-and-go, and several other countries -- including Spain, Italy and the Netherlands -- are still in recession. All it would take is a credit crisis in one of those countries to spark another debt panic and slam economic growth once again.

4. Weather played a role. Second-quarter GDP was probably boosted by some construction projects that had been delayed due to bad weather in the first quarter, according to IHS Global Insight Chief European and UK Economist Howard Archer. In a research note, Archer said the GDP report "overstates the region’s economic health."

5. None of Europe's underlying problems have really been solved. Austerity is still the law of the land throughout much of the eurozone, particularly in countries that have gotten bailout money. That will keep a damper on growth going forward. The banking sector is still riddled with bad debts and hesitant to lend more, and unemployment is still at nosebleed levels, hampering consumer spending.

"While the second quarter expansion was modestly better than expected, the Eurozone still faces a tough job developing recovery momentum," Archer wrote.

Mark Gongloff   |   August 13, 2013    3:53 PM ET

Today we got a lesson in the power of Twitter, the power of Carl Icahn, or both.

A single tweet on Tuesday by the billionaire hedge-fund manager boosted the stock price of Apple, the biggest U.S. company by market capitalization, by 3 percent in a matter of minutes. At about 2:21 p.m. ET, Icahn tweeted:

While Icahn hasn't disclosed how much money he invested in the tech giant, the Wall Street Journal reported Tuesday evening that his stake in Apple is now worth over $1 billion.

Icahn followed up with a tweet a few minutes later suggesting he would agitate for Apple to give more of its $147 billion cash pile to investors:

Almost immediately, Apple's stock, which was already about two percent higher on the day, jumped another 3 percent -- worth about $10 billion in market value. (Story continues after chart.)

apple stock

Author and investor Eric Jackson observed:

Obviously, the biggest winner here is Icahn, who got yet another boost to his ego. He has been on Twitter less than two weeks and is getting a quick lesson in the instant gratification it provides. Except instead of a few retweets and LOLs like the rest of us saps get, his tweets create $10 billion in paper wealth.

Apple shareholders are also happy with the stock's big jump. Apple itself may not be so thrilled, on the other hand, as it now is being pushed to give back cash more quickly than it wanted. That could involve, gasp, bringing some cash home from overseas.

The big losers here are Oracle CEO Larry Ellison, who earlier on Tuesday warned that Apple would "not be nearly so successful" without Steve Jobs, calling Jobs "irreplaceable." Ellison's declaration made nary a dent in the stock, in contrast with Icahn's.

The other big loser today is Icahn's bitter rival, hedge-fund manager William Ackman, who has lost an estimated $400 million in a war with Icahn and other hedge-fund managers over the weird-shake-marketing-thing Herbalife. Icahn claims he has made $500 million betting in favor of Herbalife, in direct conflict with Ackman, who calls the company a pyramid scheme.

Ackman has been in the news the past couple of days for a short-lived beef with J.C. Penney, and news that Herbalife is under investigation for a safety issue from a couple of years ago.

Icahn found a way to snatch the spotlight back for himself, in less than 140 characters.

UPDATE: 6:37 p.m. -- This story has been updated to include Carl Icahn's stake in Apple.

Mark Gongloff   |   August 13, 2013   12:27 PM ET

The IPO market is back in full swing. Believe it or not, that's bad news for the stock market.

So far this year, 126 companies have priced initial public offerings in the U.S., according to IPO tracker Renaissance Capital, up 40 percent from a year ago. Those companies have raised $27.1 billion, which puts the total IPO market on track to raise more than $43 billion this year, by my estimate. Adjusted for inflation, that would be the most money raised in the U.S. since 2007. (Story continues below chart.)

Why is this terrible news? Well, as MarketWatch columnist Mark Hulbert points out, peak moments of stock issuance are typically followed by bad stock-market returns.

"When companies are rushing to sell their shares, it often means that the overall stock market has become not just fairly valued, but actually overvalued," Hulbert writes.

As Hulbert points out, companies aren't selling you stock out of the goodness of their hearts, but to make their executives, employees and bankers rich. What better time to get rich than when you think your stock is probably overpriced? The last big IPO boom featured dumb money chasing quick riches on first-day stock pops, a game that was heavily rigged in favor of insiders.

Hulbert's own inflation-adjustment of the IPO data suggests the market is on pace for the biggest dollar amount of IPO issuance since 2000, just at the popping point of the dot-com bubble. Estimates like these are going to vary depending on what sort of method you use to adjust for inflation; suffice to say there are a lot of IPOs these days.

This is just the latest sign of a slow return to the days of dot-com stupid, including recently getting back to a stock price of nearly $1,000, a level not seen since the month right after that company's nutso IPO in 1999.

Meanwhile, the Financial Industry Regulatory Authority is reportedly looking into whispers that Wall Street analysts are back in the habit of kinda-sorta promising favorable stock ratings for companies that give their banks IPO business. This was ostensibly made illegal after the dot-com bust, but banks have found holes in the rules, which is their M.O.

It still seems soon to worry that things are too far out of hand. The $27.1 billion raised so far this year is actually down 11 percent from this time a year ago. The real IPO mania could come next year, if the widely anticipated Twitter IPO is not a gargantuan flop like Facebook's debut, which stunned the IPO market into temporary submission last year.

But however far away we are from bubbletown, it's hard to call stocks cheap. By one measure, the stock market is at its most expensive relative to corporate profits since the crisis, and far more expensive than its average over the past 100 years.

In another ominous sign, small investors -- a.k.a. the "dumb money" -- have finally started putting money into stock mutual funds after years of shunning the equity market in favor of bonds. Let's hope they're not too late.

Mark Gongloff   |   August 12, 2013    3:53 PM ET

As usual, it does not pay to be one of the little guys in banking.

U.S. authorities are reportedly hot on the trail of a couple of former JPMorgan Chase employees for their roles in the bank's "London Whale" trading debacle. Both men, Javier Martin-Artajo and Julien Grout, are reportedly in Europe and may be out of the reach of U.K. and U.S. authorities trying to find them, according to The New York Times.

The bankers were also very near the bottom of the JPMorgan Chase totem pole, as you can see from the organizational chart below, which dates to 2012. (Story continues after graphic.)

Ironically, not being sought for arrest is the London Whale himself, Bruno Iksil, aka "The London Whale" or "Voldemort," who has reportedly been cooperating with the authorities and may be more or less off the hook. And there's no word on why or how Macris is avoiding charges.

Iksil and other traders in the London office of JPMorgan's Chief Investment Office took massive gambles on credit derivatives last year and lost, costing the bank an estimated $6.2 billion.

To be sure, Martin-Artajo was more of a middle manager than a peon. But he had people above him with some responsibility for the London Whale trades, too. And Grout was at one of the lowest rungs of the bank.

Martin-Artajo and Grout allegedly lied about how much money the bank was losing on its credit derivatives trades, which makes this look like a run-of-the-mill case of rogue trading. Those do tend to involve low-level underlings losing a ton of money.

Unlike your typical case of rogue trading, however, the London Whale trade was set in motion by decisions made all the way at the top of the bank, including CEO Jamie Dimon. He reportedly pushed the staid Chief Investment Office, for which all of these traders toiled, to take more risks and make more money.

Chief Investment Officer Ina Drew, who reported to Dimon, relayed Dimon's instructions and then let her attention wander as the people below her went wild, according to a Senate report. Achilles Macris, who ran the London office at which these trades happened, designed and supervised the trading strategy that got out of control and cost the bank $6.2 billion.

All of these people, aside from Dimon, have left their jobs at the bank. Some of them have personally lost millions of dollars: Dimon took an $11.5 million pay cut this year, and Drew gave back two years' pay. The bank itself may soon settle civil charges in the case with an admission of some kind of wrongdoing. But none of these people are due for any frog-marching any time soon, various news reports suggest.

Perhaps none of them did anything for which they should be arrested, so no big deal. And it's not like they crashed the global economy or anything -- they just cost the biggest U.S. bank one quarter's worth of profits.

This news comes hot on the heels of the trial of Fabrice "Fabulous Fab" Tourre, the low-level Goldman Sachs cog who was found liable for crisis-era fraud, while the rest of the firm got off without having to admit or deny wrongdoing. And Fab is the only person who has been found liable for any crisis-era fraud so far. With each of these cases, it looks more like the government is happy to play tough with Wall Street minions, while the biggest players get away with fines and wrist slaps.

Mark Gongloff   |   August 12, 2013   12:26 PM ET

No wonder JPMorgan Chase is too big to fail: It's squeezing at least two very different banks inside one.

One bank is an (alleged!) serial troublemaker constantly being hassled by the authorities. The other is a can't-miss trading wizard beloved by investors.

You can see this just by looking at the calendar. During the second quarter of this year, JPMorgan caused headaches for its own public-relations department by making the pages of either the Wall Street Journal or the New York Times for unwelcome reasons on at least 27 different days, according to a review by The Huffington Post.

During that same quarter, the biggest U.S. bank suffered trading losses on zero different days, it said in a recent regulatory filing. That's right, zero days. (Story continues below perspectivizing chart.)

JPMorgan shareholders, as usual, chose to focus on the positive. The bank's stock rose nearly 12 percent during the quarter, while CEO and Chairman Jamie Dimon was able to keep all of his many titles, along with the keys to the Freewinds. (Story continues below chart of the quarter's highlights and lowlights.)

jpmorgan chart

In contrast, even Goldman Sachs, the great Vampire Squid, lost money on six different days in the quarter. Morgan Stanley remains the Jan Brady of Wall Street, losing money on 12 trading days. Goldman Sachs was once Marcia Brady, but now that honor belongs to JPMorgan, which has not had a day of trading losses in the past two quarters.

Meanwhile, the bad news just keeps on coming for JPMorgan, and at an even faster pace: We're not even halfway through the third quarter, and already the bank has made the WSJ for bad reasons on 18 separate days since the start of July.

These tales of woe include a settlement of charges that the bank manipulated electricity markets in California and the Midwest; the bank shedding its physical commodities-trading business under scrutiny by federal regulators; and new civil and criminal probes into its sale of mortgage-backed securities -- j =ust to name a few.

The very latest is that U.S. authorities would like to arrest a couple of former lower-level JPMorgan employees who allegedly tried to mask just how much money the bank was losing in its "London Whale" trades last year. Ironically, the bank seems to have at least learned one lesson from all of this bad news: How to stop losing money in trades.

Mark Gongloff   |   August 9, 2013    1:52 PM ET

Maybe there's not a new tech bubble, but at least one tech stock is back to its tech-bubble glory days. shares jumped to more than $980 on Friday, on the verge of making the online travel company the first stock ever in the Standard & Poor's 500-stock index to be worth $1000.

That alone is kind of an amazing statistic, considering how many different companies have been in the S&P 500 since it began in 1957. Especially since one of those companies is Google. Also, Apple.

The other amazing thing about this feat is that it nearly completes a wild round-trip for the stock that began right after its IPO in March 1999.

The stock finished trading on its first day at $497.26. In just a month, it soared to $974, adjusted for splits and dividends.

And then it crashed like the end of a six-day meth bender, plunging below $7 a share by December 2000.

But Priceline is BACK, BABY! (Story continues below chart of BACK-ness.)

priceline stock chart

So I am raising our Tech Bubble Death Watch Threat Level to 2, on a scale of 1 to 5, meaning the outlook for a new tech bubble that destroys all of our money is "guarded."

It is also worth pointing out that not only are the tech stocks getting a little expensive, but also maybe all of the stocks: Steven Russolillo, the Wall Street Journal MoneyBeat blogger (my old job), points out that the average price in the S&P 500 recently rose to $70.04, the highest on record.

JPMorgan Investors Aren't Too Worried About New Probes

Mark Gongloff   |   August 8, 2013   11:03 AM ET

If it's Thursday, it must mean that JPMorgan Chase is in some kind of trouble again. This has become such a common thing that JPMorgan investors hardly bother to care any more.

The eleventy-billionth piece of bad news for the biggest U.S. bank came on Wednesday evening, when it revealed that it was the subject of criminal and civil Justice Department probes into allegations that it had defrauded investors in mortgage-backed securities. In other words, business as usual. Bank of America and other big banks have either already been sued or are under investigation on similar charges.

JPMorgan, meanwhile, is being poked and prodded by eight or so different federal regulators for alleged misdeeds ranging from mortgage shenanigans to interest-rate manipulation.

The latest addition to this long list of troubles did appear to gently rattle JPMorgan's stock price, which was down less than one percent Thursday afternoon, on a day when the broader stock market was slightly higher.

But overall, as you can see from the chart below, courtesy of Yahoo Finance, as the bank's regulatory woes have mounted, its stock price has climbed, too, which helps explain why CEO Jamie Dimon's job was recently declared safer than ever. (Story continues after chart.)

jpm chart

That's not to say it's been a perfectly smooth ride. As you can see from the chart, the bank's "London Whale" trading losses last year did briefly cause the stock to fall off the table. The episode hit the bank's reputation, leading to the spectacle of Dimon and other bank executives having to testify before Congress. But it did not hurt the stock for long -- the bank's share price is up about 77 percent from its bottom in June 2012.

Investors had themselves another little shudder earlier this year, as the New York Times and others all took a moment to point and yell, "Can you BELIEVE all of the trouble this bank is in?"

"JPMorgan's...recent history of significant regulatory failures demonstrate that shareholders are continuing to be called upon to pay for the firm's inability to ensure an acceptable control environment," Graham Fisher bank analyst Joshua Rosner wrote in a widely read research note entitled "JPMorgan Chase: Out of Control."

JPMorgan shareholders seemed momentarily concerned about this, sending the stock down more than 8 percent in a couple of weeks. But the stock has bounced back, climbing recently toward all-time highs not seen since the dot-com bubble.

One reason for the stock's resilience is that none of these woes have really affected the bank's profits, which came close to setting a record in the second quarter. Rosner estimated that JPMorgan has suffered $16 billion in legal costs since 2009. But the bank has earned $71 billion in profit during that time.

JPMorgan on Wednesday raised its estimate for future legal costs to $6.8 billion, up an extra $800 million, to account for the new probes. But it could pay off that entire bill with just the second quarter's $6.5 billion in profits.

Actual criminal charges against the bank could raise bigger risks. But for now investors are betting such charges are not going to happen. Given the Justice Department's track record, that seems like a safe bet.

What, Is The SEC Just Giving Up?

Mark Gongloff   |   August 7, 2013   12:33 PM ET

After managing to pin the entire financial crisis on one Goldman Sachs vice president, the Securities and Exchange Commission is apparently close to declaring victory and going home.

The Wall Street Journal reports that the SEC has decided to take no action against the hedge fund Magnetar Capital, which allegedly helped build toxic securities that Merrill Lynch sold to unsuspecting investors before the financial crisis. What's more, the SEC is "quietly winding down some of [its] highest-profile investigations related to the crisis," the WSJ writes, citing "people familiar with the situation." The article is consistent with earlier reports that the SEC had few crisis-era cases left in the pipeline.

This likely means the SEC is unlikely to extract much more from Wall Street than the $2.73 billion in penalties and restitution it has already gotten in crisis cases, a figure that pales in comparison to the $14 trillion in damage the financial crisis is estimated to have caused. (Story continues below a graphic that will help put this into context.)

This news follows less than a week after the SEC won its first "major" victory in a crisis-era trial, when a civil jury found former Goldman banker Fabrice "Fabulous Fab" Tourre liable for six charges of fraud. Tourre was accused of selling toxic securities to investors without telling them that hedge-fund manager John Paulson had guided the construction of those securities so that he could bet against them and make billions. Tourre is so far the only individual who has successfully been taken to trial, civil or criminal, for actions leading to the crisis. He may also be the last.

The SEC long ago decided that Paulson, Magnetar and other hedge funds didn't commit fraud just because they bet against mortgage securities. The hedge funds didn't sell toxic securities to investors, after all. But the Tourre verdict suggests that fraud did actually occur somewhere between the creation of those securities, their sale to investors, and their collapse, which nearly brought down the financial system.

Unfortunately, those other episodes of fraud may never have their day in court, if the SEC is really winding down its probes. The agency is certainly running out of time: The five-year statute of limitations is about to expire for many of these cases, although in some cases banks have signed "tolling agreements" that extend the deadline.

To be fair, it's not as if the SEC has just been Googling porn all day, like it used to. It has brought several actions in crisis-related cases in recent years.

But those cases have resulted mainly in settlements in which banks neither admit nor deny wrongdoing. That group includes Tourre's old employer, Goldman Sachs and curiously does not include Deutsche Bank, which also worked with Paulson to build toxic securities, and which once employed the SEC chief of enforcement, Robert Khuzami.

The Justice Department and other government agencies have done some of the SEC's lifting, filing civil lawsuits against major banks, although some of them repeat the same allegations and have not gained much traction. The financial fraud section of the Justice Department's "Accomplishments" website, last updated in October 2012, lists only one major action involving the financial crisis, its October 2012 civil lawsuit claiming Bank of America tried to defraud Fannie Mae and Freddie Mac by selling them bad mortgages. Earlier this week, the Justice Department sued BofA again, this time over bad "jumbo" mortgages. But the Justice Department has quietly dialed back its allegations in the earlier lawsuit, The New York Times pointed out.

Federal cases involving mortgage bonds sold before the crisis have targeted JPMorgan Chase, Credit Suisse and others. But we may be nearing the end of those cases, too.

And there haven't been, and likely will never be, any criminal charges arising from the crisis. This is not the SEC's fault, as it only has the power to bring civil charges. The Tourre trial suggests the agency, under the new leadership of former federal prosecutor Mary Jo White, has finally grown a little bolder in targeting individuals -- but it increasingly looks like Tourre's scapegoated scalp will be the last.

Private Equity Firms Are Back To Their Pre-Crisis Shenanigans

Mark Gongloff   |   August 6, 2013    1:20 PM ET

It has been almost five long years since the collapse of Lehman Brothers, and you know what that means: It's about time we had ourselves another financial crisis, already.

Fortunately, Wall Street is working on the problem. The Wall Street Journal's Ryan Dezember and Matt Wirz report that private-equity firms are back to engaging in some pre-crisis shenanigans: Namely, loading companies up with debt to pay themselves a huge dividend.

"So far this year, $47.4 billion of new loans and bonds have been sold by companies to pay dividends to the private-equity firms that own them, according to data provider S&P Capital IQ LCD," Dezember and Wirz write. "That is 62 percent more than the same period last year, which wound up being the biggest year on record, with $64.2 billion sold to fund private-equity payouts."

Believe it or not, these numbers are way, way bigger than before the crisis, when private equity firms would borrow, at most, $30 billion a year for what are known as "dividend recaps." This is the fancy term for buying an already struggling company and saddling that company with even more debt and using the proceeds to write yourself a ginormous check. Capitalism, ladies and gentlemen!

This foolishness has utterly no use to society, aside from maybe enriching the pension funds and endowments that are invested in the private equity firm. Otherwise, the bulk of it goes to making already stupidly wealthy people even more stupidly wealthy.

This sort of thing was standard practice before the financial crisis, when the credit flowed like oxygen, but shut down abruptly when the crisis made all the credit disappear. Now the credit is back, and in fact it is flowing even more freely than before the crisis -- unless, that is, you are a "person" trying to buy a house or something, in which case, tough luck, try being richer next time.

But if you are a private-equity firm, then investors just can't wait to lend you money. One private-equity executive remarked earlier this year that "credit markets to me seem like the go-go years of 2006 and 2007."

And private-equity firms have been only too happy to oblige by piling on more debt.

Investors are so hot to lend money to private equity firms, in fact, that they'll close their eyes and ignore all kinds of warnings about how risky these loans can be. For example, the WSJ points out the comeback of a kind of debt known as the "pay in kind toggle," which basically lets the company occasionally get away with not paying its debts every now and then, like when the meth cook gets spoiled and they're a little short on cash. Sounds risky, and it is, but investors are willing to lend money on these ridiculous terms at ridiculously low interest rates, according to the WSJ. Because that has never ended badly before, right?

To be fair, this sort of behavior was not the cause of the last financial crisis (although it was not an innocent bystander). And it will probably not start a new financial crisis tomorrow or anything. A lot of this is predicated on the Federal Reserve keeping interest rates at rock-bottom, forcing investors into ever-riskier investments in their desperate thirst for yield. The Fed can pop this bubble any time it likes, and may have tried to do that a little bit recently by talking about "tapering" its program to buy $85 billion in super-safe bonds every month.

But this is just the latest in a string of signs that memories of the crisis are starting to fade on Wall Street. Credit-rating agencies are starting to ease up on their standards a bit in order to win new business, as they did with toxic mortgage junk ahead of the crisis. Banks are also loosening their standards for lending money to already-indebted companies, a practice that got the attention of the Federal Reserve earlier this year.

Wall Street has even tried to revive the market for synthetic collateralized debt obligations, the "monstruosities!!!" as Fabrice "Fabulous Fab" Tourre described them, that really were at the heart of the last crisis.

Fortunately, memories aren't that short on Wall Street, and investors have roundly rejected synthetic CDOs so far. Just give it some more time.

Larry Summers Defended Enron

Mark Gongloff   |   August 5, 2013    1:38 PM ET

Here's something else to add to the long list of reasons Larry Summers would make a terrible Federal Reserve chairman: He reportedly told California to suck it up when it complained that Enron was manipulating its power market.

According to Kurt Eichenwald's 2005 book about the Enron scandal, "Conspiracy of Fools," then-California Gov. Gray Davis (D) reached out in late 2000 to Summers, who was then the Treasury secretary under President Clinton, for help with the state's little problem of power outages and skyrocketing electricity prices. Davis suspected, rightly, that Enron was toying with the state's electricity supply for fun and profit.

Summers, though, scoffed at Davis's suspicions, according to Eichenwald. The book details how together with then-Fed Chairman Alan Greenspan, Summers geniusplained to Davis that over-regulation was the real problem and that Davis risked scaring away Enron and other power suppliers if he raised a big fuss. In fact, maybe the real problem was that California's energy prices were too low, because of onerous price caps, Summers reckoned, according to Eichenwald.

When energy prices kept on soaring, Davis complained again, prompting a video conference call that included Summers and Greenspan and, incredibly, George W. Bush's favorite executive, Enron CEO Kenneth "Kenny Boy" Lay. On that call, Summers declared that Lay was doing a "pretty good job" of supplying energy to California, Eichenwald writes. The book says Summers again suggested that the state's energy prices were actually too low, and that maybe if the state was so in love with low energy prices, what it needed to do was relax environmental regulations to let more power plants get built in a hurry.

Let's stop for a minute here to soak in all the wrong in these exchanges. According to Eichenwald, Summers' knee-jerk reaction to word that Enron was manipulating markets was to personally defend Enron and Ken Lay -- and call not only for deregulation of power markets, but also to relax environmental protections while we're at it.

Fortunately, Davis ignored these helpful suggestions, because before very long it was revealed that Enron had indeed been manipulating California's energy market, all of the time, with schemes dubbed "Death Star" and "Fat Boy," while its energy traders joked about the unkind things they had been doing to "Grandma Millie."

The film director Alex Gibney wrote in The Daily Beast about Summers' Enron connection back in November 2008, when President Obama was considering making Summers the Treasury Secretary again (h/t economist J.W. Mason). Gibney suggested that Summers would have to answer questions about what on earth he was thinking at the time.

For better or worse, Obama made another Robert Rubin disciple, Timothy Geithner, Treasury secretary instead. He made Summers a top economic adviser, a role in which he stifled arguments for a large-enough fiscal stimulus package in early 2009. So Summers didn't have to answer those Enron questions then.

But he should surely have to answer questions about Enron this time around, if Obama decides to tap him to run the Fed. Because this is not just ancient history: According to recent regulatory settlements by JPMorgan Chase and Barclays, power markets in California and elsewhere are still vulnerable to manipulation, including by some of the banks that Larry Summers will be charged with regulating.

The Enron response is just another example of the de-regulatory fervor Summers has shown throughout his career, helping loosen bank fetters and keep derivatives unregulated in the 1990s. Unlike some of his peers, including Greenspan, he has not repudiated those views, perhaps in part because he is on the payroll of the banks.

Summers' supporters -- a group that consists mainly of Obama and Summers' buddies -- claim that he is much more interested in bank regulation than his rival for the Fed job, Vice Chairman Janet Yellen. But so far, he has shown nothing but the wrong kind of interest.

Oh, No...

Mark Gongloff   |   August 2, 2013    4:04 PM ET

So, this happened:

Because when you stand accused of being beholden to an old-boy network of Robert Rubinites, the first person you naturally turn to for help is Timothy Geithner.

This raises some interesting questions:

Is President Obama now just trolling the Huffington Post, of which he is reportedly a big fan, out of boredom?

Will we very soon have a "Dick Cheney helps George Bush pick the Vice President" type situation on our hands? (h/t Justin Perras for this nightmare scenario)

Will Tim Geithner have a moment of epiphany and realize it would be totally wrong of him to recommend his old mentor/hijacking buddy Larry Summers for the job?

And finally: Seriously? Why is Tim Geithner in this discussion?

Larry Summers Is Also Lousy At Crisis Management

Mark Gongloff   |   August 2, 2013    1:14 PM ET

In answer to the question, "Why on earth should Larry Summers be chairman of the Federal Reserve?" his supporters usually allege that he is great in a crisis. Whether you believe that depends on your definition of "great."

In fact, there is plenty of evidence that Larry Summers is actually kind of terrible in a crisis.

It is true that Summers has been present for more than the normal person's share of crises. But Dean Baker, of the Center For Economic And Policy Research, a liberal think tank, suggests that Summers is mainly being graded for attendance, rather than performance.

"While it is true that he took a leadership role in dealing with far more crises than Janet Yellen, the other leading contender for the job, it is hard to believe that his record in this area would be a plus if he was being graded by the outcomes," Baker writes.

Summers's track record dates all the way back to the Mexican peso crisis of 1994. Then, Summers was just an undersecretary of the Treasury, below then-Treasury Secretary Robert Rubin. Summers helped bang out a $20 billion bailout deal for Mexico that "protected big investors in Mexico's debt, like Goldman Sachs," writes Baker. Goldman Sachs was, naturally, Rubin's former employer, which raised a lot of eyebrows at the time. What has gotten less attention, Baker asserts, is that Mexico's economy has struggled since the bailout, posting the worst growth of any Latin American country in the two decades since (though he doesn't offer any data to back that up that assertion).

Update: Baker sent me a link to IMF data which do show, once you crunch the numbers, that Mexico's GDP per capita has lagged that of Argentina, Chile, Brazil and Peru since 1994.

The next crisis hit in 1997, when Summers was deputy Treasury secretary. A whole bunch of Asian countries got into trouble, and Summers and the International Monetary Fund pushed draconian bailout terms on them, which crushed their currencies. That in turn led to a surge in Asian exports to the U.S., widening the U.S. trade deficit with the rest of the world. Developing countries also started hoarding more-expensive U.S. dollars, leading to a glut of global savings that helped keep global interest rates low and may have contributed to the dot-com stock and housing bubbles, Baker figures. So, also maybe not such a great success.

Then came the Russian debt crisis of 1998, in which Russia mostly ignored Summers's counsel and came out looking pretty good, Baker says. Summers warned the Russian economy would collapse if it didn't take his advice. Instead, after a brief downturn, it came out of the crisis as one of the world's strongest emerging markets.

To me, Baker's framing of the 1990s crises is debatable. I can see how Summers's defenders might find it unfair to blame the whole global savings glut of the 2000s on the bailout terms of the East Asian crisis. Similarly, blaming two decades of weak Mexican growth on the 1994 bailout seems like another stretch.

But there should be little disagreement about Summers's performance in the biggest financial crisis of our time, and his contribution to it. Neither put him in very good light.

Summers was out of government by the time of the 2001 recession, but his work in the Clinton administration to deregulate the banking sector and fight the regulation of derivatives had already planted the seeds of the next crisis. Unlike Alan Greenspan and some other Clinton-era deregulators, Summers has shown no remorse about his role in creating the crisis. In fact, he has defended the idea of super-sized banks even since. Of course, some of those super-sized banks have paid him very well.

As a top economic adviser to President Obama in 2009, Summers displayed his crisis-fighting acumen by arguing against a large-enough stimulus package, contributing to the sluggish recovery that continues to this day. And he utterly failed to see the crisis coming in the first place, shouting down another economist who suggested in 2005 that one was on the way.

Summers' supporters suggest that his chief rival for the Fed post, Janet Yellen, the current Fed vice chair, lacks "the gravitas to manage a financial crisis," which is likely code for "she is a woman." Because in fact, Yellen has spent the past several years helping the Fed manage the biggest financial crisis in generations. And she has done so with far more prescience than Summers, being one of the few Fed policymakers to see trouble brewing as early as 2005, when Summers was still bullying other economists for similar warnings.

So, yes, sure, Summers has had a lot of crisis experience. But what good has it done us?