Le Show; 2013-11-03

From deep inside your radio. This is a show and there is something that has been hanging in the air, not known to most people, but placed on the fast track by the Obama administration with a certain amount of alacrity, if I'm not being redundant, and if I am, I'll repeat myself. It's a set of free trade agreements, so-called, with Japan and with the European Union. There's been very little coverage of it in the mainstream media, so I thought it might be a fun idea to spend some time today with a person I know who has been writing about it with, again, as usual, deep knowledge. Eve Smith, the creator of the naked capitalism blog, who spent a couple of decades in the financial industry and is now doing penance for her sins by telling us what this stuff is all about. Eve, welcome back. Thanks so much, Harry.

So these are called free trade agreements, so we're supposed to think this is like another NAFTA, like that's supposed to be a good thing, but what you have been writing suggests that it may have even more insidious consequences than NAFTA has had, if not for jobs in this country for other things. For regulations, basically, I mean, in fact, you're correct that it's a real misnomer to call this a free trade agreement. The purpose of these two agreements, and so as you pointed out correctly, there are two separate ones that are believed to be highly parallel in structure, the European deal, and then the one that involves Japan is called the Trans-Pacific Partnership, but very little is known about them, despite the fact that they, if approved, would actually have quite dramatic and you might almost say cataclysmic consequences, and the only reason we know anything about them is that certain parts of them have been leaked. The U.S. trade representative is refusing to release anything even to congressmen.

They are only allowing congressmen themselves to read basically summary terms, and if you've ever worked on any contracts, summaries really don't tell you what the detailed terms are. I mean, the art, a lot of the art and the agreement lies in the exact language, but to give you an idea of what the implications are, the operating clause of the Trans-Pacific Partnership, and this is part of some of the leaked texts, not admittedly, they have changed, but this was in the first chapter. Each country shall ensure the conformity of its domestic laws, regulations, and administrative procedures with these agreements. So it is specifically to create an illegal structure that supersedes national law, and in the particular parts that it would that are of most disturbing, what it would do to environmental regulations, labor regulations, intellectual property, and the way that it works technically.

This is something that was in NAFTA, but becomes even more powerful under these deals, is there's a notion under NAFTA that investors basically have rights to if they suffer a profit opportunity. Now, under NAFTA, it's much more circumstride, but for instance, in Canada, the Quebec government has a prohibition to protect the St. Lawrence River Valley against tracking, and some of the fracking companies are trying to sue the Quebec government for $250 million because they are for going profit opportunities. So the whole construct is that if national regulations inhibit the ability of corporations to profit, they, as investors, can sue for the lost profit opportunity. They don't have to go through national governments to sue for the lost profit opportunity. Okay, let me unpack, I hate that term, but let me get into the weeds, another cliche on some of this stuff.

First of all, what you just finished saying seems to wipe away the whole concept of sovereign immunity. We have been told particularly in the context of the flooding of New Orleans by virtue of the incompetence of the United States Army Corps of Engineers in constructing a so-called hurricane protection system that you can't sue the federal government. So people who've had their homes and their businesses and perhaps their fathers and mothers washed away in a flood of man-made origin cannot sue the federal government for that misfeasence and malfeasence. But a corporation deprived of a profit opportunity can, is that what you're saying? That's correct. Actually, it has to do with regulations and rules at interferon. I'm not sure that incompetence by a specific body would qualify again because we don't have the text. We don't know it's in this deal. Okay. Secondly, what you are saying sounds like something that would, in days of your, have the right wing in the United States up on its hind legs and screaming about world government.

Where are they? That's a good question. It's amazing that they've kept it so much under wraps and the belief among a lot of people that I've been, the few people who are covering this, is that if the right understood the right would be everybody's upset as the little bit of the left that's been upset about this too, but the Obama administration has done a tremendous job of keeping this all under wraps. I mean, you, you know, at the very top of this show, you commented how very little has been written about it. And that's because of these extreme secrecy provisions that only little bits of the text have been leaked. Nobody really knows what's happening. Even the congressman who read the text have been told they can't talk about it in any meaningful way. I think the only ones who squawked about it a bit is Alan Grayson. And even then he said it took him six weeks of fighting with the trade representatives office to even get that they were basically stonewalling him on scheduling the time for him to read what they'd allow him to read. When did this whole process begin of introducing these treaties or agreements and the negotiating process?

Has this been going on for like the past year or two? It's been going on for about the last couple of years, although they're trying, and I don't think they're going to get it done, with a Trans-Pacific Partnership, it enlarged significantly earlier this year when Japan agreed to join. They now have 11 nations in the TPP and the Trans-Pacific Partnership is basically in everybody but China deal that they want in Asia. It's part, it's also got a geopolitical aim of isolating China. So it's sort of a two-for, but they've been underway for roughly two-year period. They are trying to wrap up the TPP by the end of this year, they had a meeting in Bali that Obama missed, and it was a really funny State Department briefing. I mean, and that's the other thing which is weird, they'll do these briefings and it's like an unnamed State Department official. I mean, it's a roomful of journalists and the fact that, you know, they won't officially publish who gave the talk is really kind of appalling. But that's standard Washington procedure, isn't it? That is standard, but that's not a standard Obama administration procedure. This was not this whole unnamed administration official, isn't a bad Obama invention.

But in any event, you know, he got up there and he just kept maintaining, we're going to get this done by the end of the year. And everybody in the room is saying this isn't happening because of XYZ. They just went down a list of, you know, parties to the deal that had significant problems that weren't going to be resolved by year ends. And on the European front, there may be, I mean, knock on wood, but there may be some interesting blowback from the Snowden revelations in that, you know, it's come out in the last week that the administration was tapping communications of 35 world leaders. And one of them was clearly Angela Merkel, who had her personal phone tap. She's got a secure, I guess, you know, some kind of secure phone. She uses her business, but she just had a regular Nokia, she used her personal communications. And the Germans are outraged. I mean, the Europeans take, you know, secrecy much more seriously than we do in general. And she grew up in East Germany, so she should know. Yes, she should know. And even though she hasn't said anything, a very senior deputy who's, who's slotted

to become her new number two, has basically said, I don't see how we can go forward with this deal. You know, we don't, you know, we don't regard America as a trust. I mean, it was, I'm exaggerating the language a little, but it was very close to that kind of statement. So, there's a, you know, it's at least very seriously delaying the EU deal, whether it's going to derail it is an open question. Let me, let me get to, back to the basics of this, both you and under your influence, I have suggested that free trade may be a misnomer in this deal. What are the impediments to trade between the United States and the European Union? When we hear free trade agreement, I think we imagine, oh, there's a bunch of tariffs that are going to come down, are there a lot of tariffs between the United States and the EU right now? No, there really aren't trade is substantially liberalized internationally. And in fact, ironically, a lot of the remaining restrictions, there's quote, restrictions because it's not really tariffs, it's subsidies.

The America's agricultural subsidies, that's what tanked the Doha round, which was going to be a global trade agreement, was a lot of emerging countries said, what do you mean? You know, we're agricultural exporters and we can't export our goods to the US because of the way you subsidize a whole bunch of different products. Particularly sugar, right? Particularly sugar, sugar's a really big one. So the, this deal basically, you know, even though it's got France in it, which has also has large agricultural subsidies, basically they sort of reconstituted this deal and are basically trying to sort of get this, get something through in sort of two pieces with a subset of, you know, rather have a global deal and said it's going to be two big international deals with most everybody who counts in them. Except for China. Except for China. And each country's got some specific objections, like the French have objected around their cultural subsidies. And you know, Joseph Stiglitz wrote a piece basically saying it's ridiculous. I mean, the French film, and just, you think, you know, French films running in American art houses are a threat to Hollywood.

And yet that's the kind of thing that they, that they want to prohibit in this deal. And there are also some pretty just, just inept provisions around intellectual property. The electronic freedom foundation came out last week and signed a letter against the deal. And one of the things they said was basically, aside from like they don't like it generally, they also basically said there are a lot of things that are basic to the operation of the internet, like being able to store temporary copies of things that this deal would make illegal and that would just create chaos. So it's not even, even on the things it's trying to do, it's not terribly well thought out. You know, there's another potential. I mean, again, I don't want to get hopeful because I think the real, the real key is, and you mentioned at the top when you were sort of making joke about fast track. In fact, the reason that the fast track language is actually important is that fast track is a specific authority that Congress can give to Obama to basically waive their right to look at a deal and approve it. And so they've asked for, but actually have not yet given fast track authority on this. So this is actually, there is an actual opportunity to intervene and, you know, tell your Congress

person that this deal is really terrible and they should not give fast track authority. But that really in reality would only happen if the terms of the deal were made public. Yeah. Exactly. So, yes, people don't know enough to be upset. It's very hard to get people upset about something that's being kept so secret. But everybody should really be extremely upset about this. Well, let's take as written, or take as read the easy jive that this is the most transparent administration in history, dot, dot, dot. But are there legitimate reasons while this is in the negotiating process for keeping the US desired language so secret? No, particularly since they're actually sharing it with something like 600 corporate representatives who are parties to this deal. But basically, the corporations that have an interest in this deal going forward get to see the language. Why doesn't the public get to see the language?

When you say their parties to the deal, are they, they're not, they're not formal, they're not formal signatories, but I'm saying that they're, there's some actual language they have. There's really peculiar. There's like a defined term of art they're using that's, that's close to that. And I don't think I can lay my hands on exactly that language, but it was, I was struck by how, or it was another one of these Oralianisms, you know, in terms of, in terms of these, you know, special 600 people who get to 600 or so people who get to see the language. Now, I'll, I'll ask you a dumb follow-up question, any labor unions among them? No. Why is that not surprising? Shouldn't are these basically mirror images of each other, these two agreements? They're, they're, they're believed to be again because there's going to be some negotiation. They probably won't be exactly parallel, but everybody's highly confident that it's in both agreements that they basically started from the same template in both deals. And the high concept is that the investors have rights. And if investors feel the nation-based regulation is interfered with their ability to profit,

that they can take it to this EU trade deal court or a Trans-Pacific Partnership court. And, you know, that that would, that they would be able to get awarded damages. Private parties can get governments, get damages. Okay. And who would appoint the members of these courts? Again, we don't know. We don't know. Oh, and you, another juicy bit, it was leaked in Japan. Not only is this deal, um, secret now, the, it was leaked in Japan that the signatories are required to keep the term secret for four years, which will basically insulate, you know, governments had voted it in from the wrath of the voters for a little while. You mentioned earlier, among the kinds of regulations or laws that corporations could challenge under this agreement, if it damaged their profit opportunities, were financial regulations. Would this mean that the, whatever value has been gained in a regulatory way via the

Dodd-Frank law would go bye-bye? Almost certainly, yes, because you could basically, they could look and find some country that had more liberal regulations and argue that relative, you know, it, it's sure as a race to the bottom. Well, British Virgin Islands has less, that's regular. Well, they're not, they're not party to the deal. Okay. You could look to you, you could look to any country that's party to the deal and say, you know, for, so for instance, right now, one of the things that the banks are, you know, they played both ways. They'll say, oh, America, you can't possibly impose tougher regulations on derivatives. That's been one of the big fights because Gary Gensler at the Commodities Futures Trading Commission has been pushing under the derivative as authority he has to impose much tougher standards, not just on American companies, but on foreign companies that are doing business in the United States. There's basically the way it's written he can do that. And there's just been all kinds of howling about that. And the excuse has been, oh, they'll all go do it offshore, oh, they'll all go, you

know, oh, they'll go, go do it in London or some more permissive center. And that actually could be a basis for argument. And we want to do this with a US customer. We could root it through London, but that would cost us more or we couldn't do it readily in the US will now will make you pay. Another thing that the, this deal would prohibit is capital controls. And the thinking on capital controls is really change because capital controls are not black or white when people think of, you know, if you say capital controls, people think of, oh, you can't move any money in and out of the country at all, when in fact things like, for example, money laundering provisions, that's a capital control. The fact that you can't move $10,000 without reporting somewhere, that's a capital that's a loose form of capital control. We every time you fly into the United States, you have to fill out a form that says, are you or are you not bringing more than 10, monetary, monetary equivalent, exactly. So one thing that the IMF has changed its view and a lot of economists have changed their view is that they realize in the wake, we had a financial crisis in Asia in 1997. And what the Asian countries did after they had, they had hot money flood in, quick fast

moving international capital. And then it basically ran, you know, ran away and that left their economies in a mess. And the IMF came in and bailed them out. And the IMF bail outsized what we're seeing in Europe, or extremely draconian. And the Asian countries said never again. And they built up, they set their currencies really low so they could build up these great big foreign exchange war chests so that they would never need to go to the IMF again. Well, those have turned out to be very distorted for a whole bunch of reasons. And the IMF has said basically, gee, this isn't really such a good idea. And maybe it's actually better to allow countries to have some capital controls to make it harder for this hot money to run in and out. The IMF has now come around and said, we actually think this is, you know, certain types of controls are actually probably a good idea. And Malaysia is one country that actually did pretty well in this last crisis precisely because they had those kind of controls in place Chile is another. And so both of them are objecting to this deal rather vociferously.

And that's also going to be really funny if we have the IMF come in and do a, in fact, the IMF is now even considering those as part of their rescue programs implementing capital control. So then what happens if the IMF comes in and puts a program in as a condition of its rescue says, you know, we want you to restrict money going out. For example, you've got these countries that have become, you know, basically like Greece has become a tax haven. You know, what if somebody decided to go into country and it's got all this illicit foreign capital in there and they say, hey, let's quickly do over week, you know, they do things over weekends now. Let's do something fast over weekend and we'll like slam the gates down and keep this money that's not paying any taxes in the country and, you know, hit it with the 5% tax which is a fraction of what they should have been paying all along. I mean, that could easily be the term of the bailout and yet that will not be impossible under this deal. Let me ask you a more theoretical question. Once you accept the notion of global corporations and certainly as a part of that, once you

accept the idea, as we've seen in the case of Apple, that corporations who for tax purposes are stateless, domiciled nowhere in terms of a lot of their income. The income resides in no named jurisdiction. Once all that becomes normalized, does not the terms as we understand them of these agreements almost follow necessarily? I don't know. That I actually, particularly the case of Apple, know because they're a retail consumer product company and they have retail stores. If nothing else, you can hit them at the point of sale. You can always get people who sell end to consumer or end to business at the point of sale. So they can't get around that very readily and again, back to it's buying this free-traded geology.

Again, if we had any will, you could say if you don't pay taxes, we'll tear off your goods. There are a lot of ways if there was any will, either pay taxes somewhere or we won't let your goods in. The thing which is very disturbing about, because there's very similar to the free-market cityology, it's similar but different, free markets is kind of an inherent ideology because to have the conditions to get the benefits of a free market, you actually need a government to make sure nobody gets monopoly power and to make sure contracts are enforced, to make sure you don't even have oligopoly. So you basically can't have the bennies of the fantasy free market if you tear down all the regulations. Only with free trade, all the models are based on frictionless trade. They're based on no financing cost, no shipping cost, nothing happens at the border, no foreign exchange costs, all that stuff. Well you're never going to get there. And there was a very good paper in 1953, I think it was called, it's a Lipsy Landcaster theorem called The Theory of the Second Best and they actually used trade as their specific

example for this. And they said, basically the naive assumption that economists use, if you can't get to the idealized state, that the closer you get to it is better. And they basically said no, they said if you can't get to the idealized state, you actually have to evaluate your specific second best choices and they used an example where getting closer to free trade actually made things worse, for all the participant countries. So yet, yet everybody, but that's part of the propaganda that, oh, you can't interfere with quote-free trade that going in the other direction we bet, no, you actually have to look at the trade-offs. It's not a given that more liberal is better and less cerebral liberal is worse because you'll never get to perfect. Just in summary, the regulations and or laws, right, this would apply to laws as national laws as well as regulations that perhaps would be endangered by this. This would include environmental, labor, and financial laws and or regulations.

Right. And the other thing is that strengthens intellectual property rights. So for instance, generic drug makers, I mean, that's one thing, one issue that in a lot of countries they don't like paying American companies, for example, I think it's India and Brazil has started basically making, and even in even Canada, we've got a lot of , you know, they get permission to make generics. This would make it easier, much easier for U.S. companies to go against generic makers internationally and kill people, basically, because because the, you know, many of these drugs, it costs almost nothing to make them. Yeah, India has taken on itself to manufacture generics without without the permission of the pharmaceutical company that has the patent. Is that right? Right. That's correct. And so that's what they're trying to change. Yeah. And in some countries, the patent rules are not as indulgent as in the U.S., for example, one thing that the pharmaceutical company is doing the U.S., and again, you'd have to

look nation by nation, but I would suspect a lot of other countries don't permit this, is one of the things in the U.S., you can extend the life of a patent by, and again, the labeling is our well, and it's called a new drug application, but for example, if you take an existing drug like a pick a dumb one, you know, well, but you're a trend. Well, butrin, it used to be that you had to take it. They had a version that you would have to take three times a day. Well, then they made a version you only need to take once a day. Well, that was actually a new drug application that permitted them to extend the life of the entire patent. They did that with Nexium too. Nexium. Nexium was the new purple pill because it replaced the old purple pill that, again, they filled with the molecules and made something just slightly different with the same effect and the same purpose and the same color, and it got a new drug application. Right. Exactly. So they can extend the life of patents with these NDAs, and I would doubt that all countries, there may be some countries that permit that kind of patent extension, but I would doubt

that all do, and I would doubt even that many do. So here we've got, on the one hand, from a regulatory standpoint, everything's getting weaker, and on intellectual property standpoint, they want to make everything more corporate friendly. And it's the worst of both, deliberately, the worst of both worlds. And would that also apply to copyright? I mean, there's been this sort of slow-motion movement in this country, thanks to the Disney company and others, to extend the length of copyright protection so that nobody can draw a mustache around Mickey for more and more years. That would be part of this. Yeah. And again, I would assume that would shake out similarly, but I don't know what they again because everything is secret, but again, one thing that the electronic Freedom Foundation talked about was the fact that even the Supreme Court in the U.S. had found that you buy something abroad, where they've got looser copyright risk, and so copying is permitted, right? We've got these, you know, like here, we've got, you know, for Microsoft, they only let you copy something three times, you know, they make you three copies if you're Microsoft disc.

You buy something overseas, and the rules are different, they're more permissive in terms of copies. If you were to take that Microsoft discs, you bought overseas in some country where the rules were more liberal, and you did more copies here, there was a series of lawsuits trying to say that that wasn't permitted here, and the claims were more so basically said that's ridiculous. They bought that, you know, they bought that overseas, the rules are different, it's okay. The EFS said this would be caught under the new rules, that that sort of copyright rule would be enforced. So the more stringent of the copyright rules? The more stringent standard would be, so I would assume, I would assume, so yes, I would assume, on the copyright life, you're probably correct, but again, I just don't know definitively because we don't know for sure, but that would be my assumption, my, that what you're saying is right. Wow. All right. Let's take a break and come back and talk about a more pleasant subject, JP Morgan Chase. This is Lesho with Eve Smith of nakedcapilism.com. But first, news of our friend, the Adam.

Sitting here and London with Addy, the Adam. Hello. I got good news for you, Addy. Good news for an Adam. You're pulling the Adam's leg. I am not. Deadline, Richland Washington, Hanford workers have completed the removal of radioactive waste from another of the site's single-walled storage tanks. Eleven tanks have been substantially, substantially emptied so far. That's good enough. The US Department of Energy says the waste was transferred to a newer double-walled tank that is, quote, considered less likely to leak. Not unlikely. Just less likely. Just good enough for me. Addy's line Lake Wiley, South Carolina, more than a hundred gallons of water with traces of our old friend, Tritium, and left Tritium.

It's a radioactive isotope of hydrogen, ladies and gentlemen, leaked during maintenance of the second nuclear unit of the Kataba nuclear station. The nuclear regulatory commission says there is the potential for Tritium to reach groundwater. The concentration is less than one-half the standard the EPA sets for Tritium and drinking water. So the event has been classified as a non-emergency. Of course, if it doubled, it would be more than the standards set by the EPA. But that, you say it. That couldn't happen. That couldn't happen. Large-scale Soviet nuclear tests dumping of spent fuel and two scuttled nuclear power submarines are a major source of pollution in the Arctic Ocean, according to a Russian Research Institute. What do they know? There are 17,000 containers and 19 vessels holding radioactive waste submerged in the KARA-C, as well as 14 nuclear reactors, according to a report passed by Russia to the Norwegian authorities in 2012, according to Ballona, an environmental group that acquired a copy of the document.

I have a side of Ballona, please. As the Arctic thaws under the influence of global warming, oceanic currents in the region could strengthen carrying the radioactive material to other continents, according to Alexander Shestakov, head of the Global Arctic Program at the World Wildlife Fund, the sinking of nuclear material and scuttling of ships used to be widespread practice. Those were the days. Those were the days. Japan's government was forced to admit that the radiation cleanup near FUK is way behind schedule. Tens of thousands of workers have been hired to scrape up the top layer of contaminated work. Former worker says it was a futile task. We decontaminated around a house, he said. But if it rained, more contaminated earth from outside that perimeter would just pour right in. He didn't want to be identified. Because he liked living. He loved living. Daveline-Kinkardine Ontario, Canada, Canadian Utility Giant Ontario Power Generation, says layers of rock, where it proposes a deep underground nuclear waste storage facility or solid, stable

and well suited for the job. Well, it's at the surface and less than a mile away, are the shores of Lake Huron. For the 24 million U.S. residents who get drinking water from the Great Lakes and those making their living from the $2.4 billion fishing industry and $13 billion tourism industry, it's a vital policy decision over which their elected representatives have no control because they're in the U.S. and the dump might be in Canada. It's just water. Oh, it's so much more than water. The May 5 release of about 80 gallons of slightly radioactive water from the Palisades nuclear power plant into Lake Michigan was unusual because it wasn't planned. But the incident brought it to focus what many southwest Michigan residents probably don't realize. The region's two nuclear plants, Palisades and the Cook plant, routinely discharge radioactive material into the air and into Lake Michigan.

In the nuclear industry, it's called effluence. Yes, even though it's not. The nuclear regulatory commission allows such releases as long as they are closely monitored and do not exceed federal radiation release standards set in place by the NRC. Plants need to discharge small amounts of radioactive materials to operate, says Jack Geisner, branch chief for the regional NRC office. John Cassidy is a senior health physicist for the NRC. He says radiological releases are an inevitable part of the nuclear power industry. They would like to recycle as much as possible of their radioactive water, but there's business needs. He says he didn't use the plural of the very point, very, very well educated atom you are. And deadline Plymouth Mass report found that pilgrim nuclear power station has been closed more times in 2013 than any of the dozens of other nuclear reactors in the United States. Operators shut down six times since January.

The plant spent 79 days in shutdown during those times. Energy, which owns and operates pilgrim, says it's spent 500 million to upgrade the plant since purchasing it. The NRC relicants pilgrim to operate another 20 years a little over a year ago. So it's aging, it's aging gracelessly. Thank you for feeding me there. Cheap, clean, cheap, and aging gracelessly are a friend of the atom. I guess I'm just looking so weird, so. Well ladies and gentlemen, it's not just people being interviewed on radio or television. We begin their answers weirdly and to my ear inappropriately with the word so as if they're concluding something instead of starting something, want to be starting something. It also includes representatives of the administration testifying at the first congressional hearing, certainly many to come, about the technical glitches, don't you know, of what's known

as Obamacare? QSSI had the EIDM piece on the front of it. Okay, Mr. Slavitt. So what I can tell you is that the EIDM tool is, in fact, capable now of handling all the demands that are being placed on it. If you don't accept there's a problem, it's hard to fix it. So sir, we do accept that there are challenges. Was this system overwhelmed by volume when healthcare.com went live? So let me explain what happened and where things stand today. I'm confused by that. No, I understand. So we're the face of, if you think about a house, we're the outside structure. You were responsible for the front door. So I think the front door is a bit of a term of art. Is that you, Mr. Slavitt? So we have access to the data which shows how many people are coming through the EIDM registration tool. The White House ever order, order your company for political reasons to mass the sticker shock

of Obamacare by disabling this anonymous shopper function. So let me answer two things. Did CGI system crash in a test with only a few hundred people in the days before October 1st? So there was an in test that occurred and the system did crash. Did you inform anybody at CMS or HHS that you needed more time because the system wasn't working? So once again, the portion that CGI was responsible for went through its unit test. You both just tested your parts. You didn't check the whole system, right? So CMS has independent contractor, QSSI, that test our system. And did you find any problems? So we found problems in the code. How much did your company receive to do all this? So the data services hub has been funded to just under $85 million. And we're continuing to show with Eve Smith of Negacapitalism.com.

Eve Banks have been in the news ever since, particularly the implosion of the economy in 2008. One bank that for a long time was walking around, almost advertising itself as, well, we're the guys who didn't get caught in all that stuff. We are the guys who run a big bank right. It was JP Morgan Chase. That's all changed in the last little while. And Jamie Diamond, the CEO and chairman of JP Morgan Chase, is suddenly not the almost literally golden boy he was perhaps a year or two ago. Well, I actually think this reassessment is long overdue. There's an expression in Japanese which translates roughly as to height competition among peanuts. And Jamie was sort of the winner of that. And the fact that he played it up to be anything better than that is really quite astonishing.

I mean, basically, and one of the, they're too missed that he's promoted very successfully. These aren't actually being reexamined, even in this reexamination of Jamie and JP Morgan, but nevertheless, one is this whole, we got through the crisis in better shape because we weren't involved as involved in the mortgage business because we were so smart. That isn't what I hear from, I know quite a few people who are in the mortgage business, mortgage securitization business. And they say, no, JP Morgan tried expanding just like everybody else. They just weren't very good at expanding their business. So that was why they went into the crisis with less. And the second myth that he's promoted very successfully is, oh, we didn't need a bailout because they didn't need the tarp. Well, the tarp was one of the latest bailouts of the many bailouts that happened. And one of the early ones that everyone forgets about happened when the money market funds were all bailed out. Now that happened right after the collapse of Lehman. Basically, Lehman went down on September 15, and I believe it was September 22.

I didn't recheck the dates before this chap, but it was certainly less than 10 days. After Lehman went under, Lehman had commercial paper and commercial paper is something that money market funds invested in. One fund, which had historically been very conservative, the reserve fund had had a lot of Lehman commercial paper and a run started on reserve. And apparently a run was starting on other money market funds. And that was when they put the guarantee, first they put the guarantee under the money market funds of 250,000 per account. And then because that was bigger than the guarantees they had in place for FDIC accounts, they had to throw the same guarantee under the FDIC account. So the part nobody talks about is who would have been particularly hurt if this hadn't happened? Well, money market funds, and this gets bit technical, but money market funds provide a lot of money to something called repo, which is a way that basically the very large dealer banks.

And in places like all the investment banks, most many of which are now gone, like Merrill Lynch, Bear Stearns before it was acquired by JP Morgan, but Goldman Sachs, and all the international big international banks of big dealing operations too. So this would also be the trading operations of Citibank, the trading operations of all the big foreign banks, like society, general, and they all have big operations in the US too, not just internationally. Deutsche Bank, there's basically, now all the banks that are called Scythes in that group of Scythes, struct systemically the important financial institutions, there's not like a special list of banks that are Scythes, but in any event, so they all have these big dealing platforms where they're trading foreign exchange and they're trading securities. The way you finance a inventory of securities, that we stocks and bonds, and you also finance your derivative exposures is using something called repo where you take your, let's say you've got a security and you take and you bring it to somebody else and say, I'm going to basically

do a pawn shop operation. I'm going to give you my security and you'll give me cash, but then I'm obligated to rebuy your security back in a very, the security back in a very short period of time. And it sounds all convoluted, but basically it's a financing mechanism. So if Goldman wants to do a repo with, let's say, one deal with Morgan Stanley, it wouldn't do it directly with Morgan Stanley. The Federal Reserve encouraged there be hubs for this and the biggest is JP Morgan. And there's another one bank of New York Mellon, but JP Morgan is far and away the biggest. Well, who provides most of the biggest source of cash for repo are the money market funds? And who would have been in a ton of trouble if repo seized up JP Morgan? So the one of the first bailouts was actually a bailout of JP Morgan. And the second one, which was, which effectively bailed out JP Morgan, even though they claim it didn't bail them out directly, which it didn't bail them out directly, was when the AIG credit default swaps positions were paid out a hundred cents on the dollar because

if those hadn't been paid out, it's likely that Morgan Stanley and possibly also, probably also Goldman would have been very seriously damaged and would have gone underhead, you know, without either that rescue or some other rescue. And again, if they had gone under JP Morgan, would have been next in line. The idea that JP Morgan wasn't somehow bailed out and all these bailouts is nonsense. But the point is the securities firms, the securities firms side had all been sufficiently bailed out by the tarp that, you know, some of the tarp did go to help Morgan Stanley and Goldman, and basically the big beneficiaries of the tarp, Morgan Stanley Goldman, even the Goldman denies it up and down also because Warren Buffett wouldn't have come in if basically he didn't get the inside skinny that tarp was coming. And city and B of A, city and B of A desperately needed it. So diamond's position is, oh, because we were forced to take the tarp, we weren't, didn't need to be bailed out.

The tarp was the last. And they, they benefited from all these early ones that nobody thinks about. So let's look at them where they stand now. There is pending this supposedly $13 billion settlement with the so-called settlement with the Justice Department. Settlement of civil liability, is that right? Civil liability and there's a fine in there. So that's one of the things which makes this difficult to talk about is because the media is all presented as settlement singular when it's really settlement plural. And that's another reason they, the media reporting on this has been appallingly bad. Well, let's back up and talk about the settlement piece versus the fine's pit part. The settlement part, all of this is for investors. Remember, the homeowners we dealt with in 2012. That was the global settlement with the 50 attorneys generally. That was the global settlement. Right. And interestingly, here we have JP Morgan paying more in the settlement for investors than they paid in the settlement for homeowners. Those you, the administration's priorities, doesn't do it a bit in any event.

One big chunk of this is the investor liabilities, all basically what they call put back liability. So it's the fact that the investors were promised stake and instead they were given a lot of hamburger and some of that hamburger was green. You know, they, they are the mortgages in the security. These mortgages and the securitizations, right? And they were promised and they had, and this was in the contracts. This wasn't like, oh, you know, we fantasized it would be some quality. There were very specific, there are multiple contractual provisions that they had to meet very specific quality standards. And if they were only permitted to have a certain percentage that fell below those quality standards. And the ones that fell below had to have other redeeming characteristics, basically they had to have higher yield. You know, if they were going to be, you know, less, they had to be a lot juicier in terms of the interest rate. So it, and across the different JP Morgan entities, it's, they've been 2000, forward 2007, they sold roughly 650 billion of mortgage securitizations of which 100 to 200, they believed

to have 100 to, somewhere between 100 to 200 billion of liability that's being extinguished in this settlement. And remember, then this settlement that's supposedly, you know, and this, that they keep totting this 13 billion number, well, first, we take off the two to three billion that's fine. That's a different category. And then we take off the fact that four billion of this is going to be homeowner, various forms of homeowner relief, which we know from the last settlement for homeowners is basically worth garbage that the bank typically doesn't pay it itself. It does things like short sales, which don't come out of its hide and don't really help in vet, you know, it comes out of the investors hide. And so it's not like JP Morgan is necessarily going to be paying much or any of that four billion piece. So you're basically talking, you know, roughly, you know, depending on how big the fine component is, because again, we don't have quite all the moving parts disclosed here. And basically we're really talking $7 billion ish on 100 to 200 billion of liability.

That's a screaming deal. I JP Morgan is laughing its way to the bank on this one because for those kind of suits, generally speaking, when they go to court, the damage has been much higher. If they're laughing all the way to the bank, they're heading home. This is the settlement that was engineered when Jamie Diamond was invited or invited himself to have invited himself to have a face-to-face discussion with the attorney general of the United States. Now, I guess we all could get that, right? Yeah, no, a lot of professors have been very unhappy with that. That just doesn't, that's they are having trouble finding a precedent for that. And what appears to have precipitated that little talk, and again, this is somehow disappeared. This is another part of the, like, what's, where's the reporting on this, was that it was a Reuter story. There was a Reuter story on Monday that prosecutors in California, basically the Sacramento Office of the DOJ, was going to find out what was going to happen.

While a suit, and as soon as Tuesday, and it might include criminal charges. And that's apparently what got Jamie running to talk to Eric Holder. That they had had set on the talks that, before that they had broken off, but the threat of the criminal charges is what brought Diamond to the table. And the last reporting I saw, which was a good week ago, was that Holder had said he couldn't really include the criminal charges in the deal. So I'm not sure where this all stands. I mean, because Holder, you know, that was a week ago, and who knows what really happened, right? I mean, a week is any tragedy and negotiated time. But, you know, Holder was, was at least at one moment acting like he wasn't going to include this. So I have no idea where this stands, but the point was that a criminal charge for, in the past, they've only made these criminal charges against subsidiaries. Because a criminal charge against the bank as a whole would mean that certain parties literally would have to stop doing business with them. And so it's considered to be like a huge threat to the institution, to lock, to lodge criminal charges against the institution.

And it was Eric Holder who said a couple years ago, right, that he had to consider the impact upon the rest of the economy of filing criminal charges against any of these large two, two bigger fail banks. Right. Then on the last weekend, we read that JP Morgan has reached a settlement with the FHFA. Now, that's part, that's part of why the reporting on this has been so terrible. That's actually part of this 13 billion. How is it? And they've acted like this. They've acted like this is all the DOJ's settlement when, in fact, the FHFA basically, and here this is the funny part, the administration was saying such terrible things about Ed Demarco, the head of the Federal Housing Finance Authority, because he refused to modify, to do principal modifications, which, you know, he had an economic theory, and I don't agree with his economic theory, but, you know, everybody, everybody who knows Ed Demarco says he's a dedicated public servant. So, even if he has, you know, a bad idea, he's come by it legitimately, not by, you know, being somebody's crony. But he's been very tireless about filing these suits, again, of these put back suits.

So the biggest chunk of that, we were promised stake, but we got rotten hamburger, is the FHFA part, and then the other big piece of that is that different states also filed suits, like, and again, so like 500 million of, sort of, what's left over is, for example, New York's piece, New York has 500 million of liability that they're, maybe no, I think it's 500 million of damages that they're getting out of this. So, they're different states, so they're different state actions that are being wrapped into this too. But as I say, there are lots of moving parts, and the disclosure by the administration is very poor, because I think they don't want people looking at all the moving parts, and they'd see how much is the states, and how much is the FHFA, which, how can they are cold or take any credit for this? I mean, they can't. And then- They just basically got in front of, they got in front of a mob and are calling it a parade. And then there's the little piece, which came out in the last couple of days, as we're speaking, that some considerable amount of this money that supposedly JP Morgan will

be forking over to some part of the federal government or to some states is tax deductible. Right. That's- and that, apparently, is accurate. They're not permitted to tax deduct, a payment made to the federal government, so the fine portion, which is the two to three billion, they won't be tax deductible. But this is back to the F, the FANIAN Freddie are still technically private. They still have shareholders. Right. And anything related to FANIAN Freddie is going to be tax deductible. And I haven't seen a very good description on the tax issues, but given the way that people have- the media has been riding the bottom line up, I would assume that all these state, anything related to payments to the states, are deduct- deductible from the federal tax is the same way that if you personally have a state tax payment, you can deduct it from the federal. So that basically what I have read is that they'll be able to get four billion in tax savings, that it will take the cost of the deal down from 13 billion to about nine billion.

And in all this, Jamie Dimon stands accused legally of nothing, right? Nothing. Nothing. Now, I will say in fairness, but only in fairness. One of the reasons, but with gets to another misleading part of what the media has been talking about, of all this liability, probably only about a third of it comes from things that were done on Jamie Dimon's watch, of the selling stake but getting hamburger part. JP Morgan bought two institutions, Bear Stearns, and Washington Mutual during the crisis, and those were both big subprime issuers. So they sold a lot of bad stuff to investors. And in fairness, his supporters would say he did that at the urging of the Treasury Department. Urging is probably fair word, but people have said stronger things like he was Rob Beatner arm twisted.

And in fact, I got to tell you, in investor land, the line is, if the government is selling, I want to be on the other side of that trade. The government is considered to be a stupid salesman and a stupid negotiator. And there was no, they didn't invite anybody else to the table, but Jamie. So there was no competition on the other side of the table for this deal to give you an idea when when JP Morgan bought Washington Mutual, that bank had $40 billion of equity. JP Morgan paid $1.9 billion. They reserved for losses of, I think it was $36.1 billion. So basically, they already anticipated, they already built into the price that they were going to have to pay $36 billion down the road. That meant they booked $2 billion in profit, they made it, they bought it. And they were expecting to make $2.5 billion a year on top of that. And on last quarter, they reduced the lost reserve by $715 billion. So basically, it means they made even more money than they thought they did.

And now he's crying that some of the $36 billion, I mean, again, this is all crocodile tears. He's, you know, what they're paying is just part of that $36 billion. He expected to lose. And the final piece of the JP Morgan puzzle is I understand it is the lung whale debacle. Now, that's the one where Jamie really should be in someone's crosshairs. With this, the part we don't know with the mortgage part is to what extent that, that K, that criminal case in Sacramento could actually ultimately be pinned on Jamie. We just don't know that because that hasn't been disclosed. So there could be something that implicates Jamie, but it's uncertain out of that part. However, London whale, no question, absolutely no question. The reason being that, and it's a bit convoluted to explain, but there the chief investment office is, and every bank has an entity like that. It's basically to manage the cash of their treasury department because all these banks have enormous amounts of money going in and out, and they have to keep it all sort of

liquid, but they still, you know, some of it, they need to have immediately available. Some of it might be two to three days, some of it might be a week or a month. So they give them a lot of flexibility on how they account for that because they don't want the accounting to interfere with the bank needing to sell stuff in case they need to sell something because something unexpected happened. They get very liberal accounting for that particular kind of unit, and basically, now this is not the criminal part, but basically, it's very clear they abused the accounting. I mean, when you compare what they were doing in the JP Morgan CIO to what other banks do, they were taking way more risks. They were running it basically like a proprietary trading unit rather than just treasury liquidity unit. On top of that, and this is a part we get to diamond, is it wasn't just they've been trying to make it sound like, oh, this, you know, the London whale was a rogue trader. They always try to make these guys on that like road traders. Well, that's really not the case.

First, diamond was very involved in all the trading and all the trading strategies. Second, what has come out over time with all the revelations is that they had wildly deficient risk controls in that unit, wildly deficient to them. Some of them are more complicated to explain, but I'll give you a simple one. One of the things you have to do in these units is mark the value of positions because for instance, this unit had a very complicated, illiquid, derivative trade on. So what is this worth? They have to market every day. That's just one of their requirements. Well, and normally what happens in an institution is the trader does the mark and somebody reviews it. The risk control for the price unit and the risk control for that unit or in that unit, that's unheard of. That's like basically you're taking a test and getting to score it yourself and that's the basis for your grade.

And the worst is that the JP Morgan people act like this was normal. I mean, this was clearly so deeply established in the institution that nobody had worked anywhere or at least they were acting like they hadn't worked anywhere else and didn't understand how wildly irregular that was. So and there are other things where they were that bad. But the whole point was that there's really clear evidence they had severely deficient risk controls. Okay. That's part one. Part two is that Diamond lied like a rug through this whole thing. He got up and made multiple statements to investors while this was being exposed that were just totally untrue. They actually basically had to restate the first quarter earnings, which is really, really bad. Oh, and then the other thing they did was that the reg, because this actually came out in the financial times and some other places, you know, some of the people got news of this London, London, well reported first was the financial times in Bloomberg and, you know, JP Morgan first denied it, then said it wasn't so bad and then they finally had to fess up, right? Well, during this period, their main regulator for this particular unit, the office of the control of the currency, clears their throat and says, I am like, what's going on here?

And during this period, they've made up these, dogate my homework excuses and weren't submitting reports. They had, it was a two week period when they just refused to submit reports to the OCC. And this is just, this is just egregiously bad. And then again, it came out in the Senate hearings, they had Senate hearings later, how wildly, badly JP Morgan had behaved to its regulator while this was all going on. Now the reason that this is, this is very serious isn't just that it's bad behavior, which is really bad behavior, but that this is, these are Sarbanes Oxley violations. Sarbanes Oxley was implemented after Anne Ron and the biggest point of Sarbanes Oxley was to end the, I'm the CEO and I know nothing excuse. And so the things, the, the, the teeth in Sarbanes Oxley, which unfortunately aren't, you know, then never use the baby teeth, right? Or that the, the CEO and at least the chief financial officer, and sometimes it's, other officers signed to, but at a minimum, the CEO and the CFO are required to do so things.

They require to certify the accuracy of the financial statements. They have to sign them, they have to sign certifications and they also have to certify the adequacy of internal controls. And for a bank, that includes, it's a risk control. There's absolutely no way that JP Morgan had adequate risk controls. And this unit was the biggest risk you, in terms of like they have risk, and they have, you know, things they used to determine how much the risk exposures are. This was the biggest single risk unit in the bank. There is no way that you can't claim that this investing operation was not material to JP Morgan. And Sarbanes Oxley provides for both civil and criminal penalties and the language is parallel. You could start a civil suit. And if you found enough dirt, you could flip it to criminal. I don't know why. This isn't happening. The only, the only people under prosecution for the London Whale trade are some of the traders, three of the traders, right?

Right. There is a remote possibility. I would say remote because they have indicted one of the fairly, they're actually extra dining him from Spain. Now, now this will be the proof of whether a holder is really serious about anything. Normally what a prosecutor does is try to get somebody to turn somebody higher up in the line. They flip him. They flip him. So if they were to flip him and go after the head of that unit, who, her name was Ena Drew, she resigned. I don't know how that path doesn't lead to diamond. So, but if they just go after him, it's clear they just want a scalp. And it's the usual approach. So, just wanting a scalp to say they prosecuted somebody, not really going to get at the root of the behavior. Well, if you've done your usual masterful job of elucidating the almost, inelucidatable for us here for the past little while, and I frankly would love to continue this conversation, but I got to go have a personal meeting with Attorney General Eric Holder about a couple

of legal matters. Once again, the website is nakedcapitalism.com, shining light into the corners of the financial world, doing it, I guess, because you have to, right? Because nobody else will. Yes. Thanks so much. Thank you. And our thanks to Andrew Boyle at 5A Studio in London and Jamie Mathler at Argos Studios in New York for Engineering Help with today's broadcast. This show comes to you from Century of Progress Productions and Originates Through the Facilities Flagship Station of the Change Is Easy Radio Network.