The spectacle of the Times endorsing three white guys was itself enough to draw attention, but capping it off by backing Goldman, a self-funding heir to the Levi Strauss fortune, has brought an unusual amount of attention to the paper’s endorsement process.

The extremely crowded race in a deep-blue district features a current member of Congress, a former member of Congress, two members of the State Assembly, and one City Council member. Goldman, a former counsel in the first impeachment trial of Donald Trump, has not held public office and has thus far given $4 million of his exorbitant personal wealth to his campaign. That type of self-funding has previously been a disqualification for a Times endorsement, but the paper of record made an exception for Goldman.

The paper also skipped the open primary for New York’s 3rd District and missed an easy chance to endorse a nonwhite man in New York’s 16th, which pits incumbent Rep. Jamaal Bowman against Westchester County Legislator Vedat Gashi and County Legislator Catherine Parker.

As important in the context of the Times endorsement, Goldman’s family enjoys ties to members of the Sulzberger family, which has owned and run the New York Times Co. for six generations. The paper’s current publisher and chair of its parent company is Arthur Gregg “A.G.” Sulzberger. One of the rival candidates, Rep. Mondaire Jones, alluded to that relationship in a joint press conference attacking Goldman on Monday alongside another candidate, Assembly Member Yuh-Line Niou. “Look, I have no idea whether the generations of close family relationship between the Sulzbergers and the Goldmans had any role at all to play in the endorsement,” Jones said.

The Times editorial board insisted that the decision was based on merit but also disclosed that the board answers to the publisher. A.G. Sulzberger did not recuse himself despite the ties between the Goldman and Sulzberger families and has in the past overruled editorial board preferences. Sulzberger, who lives in the 10th District, expressed an interest in the race internally, according to a political operative not working on behalf of any of the candidates who spoke directly with multiple members of the editorial board, as well as another person close to Sulzberger.

“[O]ur election endorsements are independent decisions that emerge through reporting and discussion by a board of experienced journalists, through individual interviews with candidates. This board reports directly to the opinion editor and, through her, to the publisher,” according to a statement from the Times, which added that Sulzberger and Goldman do not personally know each other. Asked if there were any contacts between Goldman and Sulzberger family members during the endorsement process, Goldman campaign spokesperson Simone Kanter said, “The answer to your question is ‘no.’” He also cited the Times’ statement.

Jones was featured so much in the text of the endorsement that without the headline it could have been seen as backing both men. The two experienced women of color in the race who are at or near the top of the polls, Niou and City Council Member Carlina Rivera, were not mentioned in the endorsement at all. New York Magazine’s Ross Barkan noted that the endorsement was part of a pattern of “the Times’ growing disdain for the progressive left.”

According to conversations with multiple members of the Jones camp, the campaign was under the strong impression that a majority of the editorial board members were in support of his campaign, though no final decision had been made. But the Jones camp also understood the influence of the Sulzberger family on the process, and in particular A.G. Sulzberger’s ability to tip the scales, as Jones alluded to in his comments. There was a broad awareness in Jonesworld that majority support from the board did not always translate to an endorsement, and when the endorsement went to Goldman, a belief that the family’s personal preference factored in.

Perhaps no other newspaper endorsement in the country matters as much as the Times’, particularly in the wealthier enclaves of New York City. It has the demonstrated capacity to move voters who are in its core audience. (The Times’ nod to Jones in 2020 helped him win his open primary in the district now pursued by Maloney.) Normally, the paper doesn’t get this opportunity, because seats come open so rarely. But a late change to redistricting in New York upended districts serving the affluent communities in Manhattan, giving the Times real power to shape certain races with its endorsement.

The ties between the Goldman and Sulzberger families include their mutual membership in elite Washington, D.C., circles. Shortly after announcing an abortive run for New York attorney general, Goldman banked a $1,000 check from Joseph Perpich, Cathy Sulzberger’s husband. It was the 81-year-old Perpich’s one and only contribution to a New York state political race.

Goldman’s mother, Susan Sachs Goldman, and Cathy Perpich (née Sulzberger), the sister of the previous New York Times publisher and aunt of its current one, both sat on the board of trustees of the elite Beltway private school Sidwell Friends, where all three Goldman children and all three Perpich (Sulzberger) children attended school. At Sidwell, Goldman was one year ahead of David Perpich, who sits on the board of directors of the New York Times Co. and is the publisher of Times products The Athletic and Wirecutter. Duke Magazine, the university’s alumni publication, profiled Perpich as the “NYT’s quiet strategist” in 2020.

As a 16-year-old student at Sidwell in 1993, “Danny” Goldman was quoted in the Times reacting to Chelsea Clinton’s entry into the private school. Days later, the Washington Post’s Howard Kurtz criticized the Times for running the story without disclosing Cathy Sulzberger’s presence on the Sidwell board.

“It’s not infrequent that the board might want somebody and the publisher wants someone else.”

Both the Times’ official statement and a tweet thread from the company’s PR feed are carefully worded. In the tweet thread, the paper states that there are “no members of the Sulzberger family who have anything to do with candidate endorsements other than our publisher,” who is, of course, a Sulzberger. The thread stresses that the endorsements are “independent decisions” but adds that the board reports to the publisher, A.G. Sulzberger, through the opinion editor.

Daniel Okrent, the former public editor of the Times, had no knowledge of the specific endorsement in question but explained that similar situations have happened before. “The publisher of the paper is the authority over the editorial page,” Okrent said. “It’s not infrequent that the board might want somebody and the publisher wants someone else.”

Okrent didn’t find this instance particularly worthy of condemnation; after all, the publisher is ultimately responsible for what goes out under the paper’s name. In this case, he wasn’t sure whether it merited disclosure within the endorsement. “I can see how [the editorial board] would think, ‘If we say he’s a family friend, that would weaken our determination that he’s the best person for the job,’” he noted.

The endorsement itself is unusually weak. It leads by saying that Goldman and Jones stand out from the mostly unnamed rest of the field. (Former Watergate-era Rep. Elizabeth Holtzman and Assembly Member Jo Anne Simon, along with Niou and Rivera, round out the top six candidates.) It highlights Goldman’s work on the Trump impeachment and says that “those who have worked with Mr. Goldman behind the scenes describe him as diligent and prepared and a person of integrity.” Longtime local reporter Errol Louis translated that to mean: “Queries within the alumni networks of Sidwell Friends, Yale, and Stanford Law, from which Goldman graduated, turned up good reports and no scandals.”

The endorsement celebrates Goldman “bring[ing] serious policy ideas to the race” but only mentions his support for a “ban on stock trading by members of Congress,” which has already been widely embraced by a majority of Democrats. The endorsement lauds Goldman for assisting with some research while in law school on the book “The New Jim Crow” but does not linger on Goldman’s immediate decision to become a prosecutor in the same criminal justice system the book had just lacerated.

Jones, by contrast, is described as a “prolific legislator” and a “bridge builder between the progressive wing of his party and its more moderate leadership.” The only mark against him is that he lacks experience working in the community he seeks to represent; Jones was elbowed out of his home district when Maloney, the chair of the Democratic Congressional Campaign Committee, moved to a more favorable seat. But of course Goldman similarly lacks that experience; the endorsement points out that “Goldman would need to use his first term to convince the large numbers of lower-income and middle-class Americans he would represent that he understands the issues facing those constituents.”

The Times editorial board is also known to harbor ill will in general toward candidates who self-fund their campaigns, a vestige of the anti-corruption piety that harkens to its mugwump roots. Goldman held off self-funding for much of the campaign, presumably fearful of losing the coveted endorsement. But on July 13, facing a cash shortfall, he dropped $1.24 million of his own money into his campaign coffers and another $750,000 a week later. Goldman later donated an additional $2 million of his own money.

Goldman won the prize without so much as a mention that he had broken the Times’ cardinal rule.

His opponents assumed that the move had cost him the endorsement. In the past, when the Times has endorsed a wealthy candidate funding their own campaign, it’s lashed itself for it in the process. “This page cares deeply about making elections fair and open, and if Mr. [Michael] Bloomberg’s administration had been anything less than distinguished, his insistence on undermining the campaign finance system would disqualify him from our support,” the Times wrote in the past. “As it is, with that one caveat in mind, we enthusiastically endorse Michael Bloomberg for mayor.”

“Mr. Bloomberg’s current campaign approach reveals more about America’s broken system than his likelihood of fixing it,” the Times observed in declining to endorse Bloomberg for president. “Rather than build support through his ideas and experience, Mr. Bloomberg has spent at least $217 million to date to circumvent the hard, uncomfortable work of actual campaigning.”

But Goldman won the prize without so much as a mention that he had broken the Times’ cardinal rule.

Goldman had already leapt to the top of an Emerson College poll even before the Times endorsement was released. Though he took only 22 percent of the vote in the poll, the unsettled field of candidates with similar ideologies could allow that small share to take the seat.

A similar progressive split vote led former Republican Jake Auchincloss to win a congressional seat in the Boston area in 2020. There were also rumors in that race that a close relationship between the Auchincloss family and the owners of the Boston Globe, John and Linda Henry, led to Auchincloss winning that paper’s endorsement.

The Times editorial board’s endorsement process has embarrassed the paper in the past. The 2020 Democratic presidential co-endorsement of Sens. Amy Klobuchar and Elizabeth Warren was roundly derided two and a half years ago.

On Wednesday night, the 10th District candidates debate at Medgar Evers College in Brooklyn. Goldman, Jones, Niou, Rivera, and Simon will be on the stage.

The post New York Times Faces Backlash Over Dan Goldman Endorsement Debacle appeared first on The Intercept.

But two actions on March 23 would swing investors from despair to relief, and reveal who really matters in America.

That morning, the Federal Reserve announced the deployment of additional “tools to support households, businesses, and the U.S. economy overall in this challenging time.” The measures included many actions taken during the 2008 financial crisis, with one new wrinkle: Direct purchases of corporate debt — the first nongovernment bond-buying in the Fed’s history — would now be allowed. Companies have swelled their borrowing in recent years, and experts have identified this as a source of serious economic risk. A sudden shock like the pandemic that wiped out revenues would not only cause bankruptcies, but also accelerate bond defaults, broadening stress throughout the financial system.

Backstopping corporate bond markets would support investors and capital owners. By the evening of March 23, investor confidence was lifted even further; reports announced progress on a record $2.2 trillion congressional rescue package, a large chunk of which would go to support the Fed’s interventions in corporate bond and other markets.

What would become known as the CARES Act became law on March 27, and the investor class has never looked back. While Americans struggle to file unemployment claims and extract stimulus checks from their banks, while small businesses face extinction amid a meager and under-baked federal grant program, the Fed has, at least temporarily, propped up every equity and credit market in America. And in a testament to its strength, it did so without spending a single cent.

The mere announcement of future spending heartened investors, who have relied on Fed support since the last financial crisis. This explains the shocking dissonance between collapsing economic conditions and the relative comfort on Wall Street. Between March 23 and April 30, the Dow Jones Industrial Average rocketed nearly 6,000 points, a jump of nearly 31 percent, creating over $7 trillion in capital wealth. The April gains were the biggest in one month since 1987.

The same month, 20.5 million Americans lost their jobs.

Similarly, the Fed’s promises to purchase corporate and municipal bonds and asset-backed securities and really anything else uplifted credit markets and made corporate borrowing cheaper, a tangible subsidy for large companies. March ended up setting a record for issuance of investment-grade corporate debt — the safest kind of corporate debt. Two hundred and sixty eight billion dollars traded hands that month, according to a Moody’s Analytics study, and April surpassed it, at $296 billion. Overall, $1 trillion in investment-grade bonds have been issued this year, nearly as much as all of 2019, along with tens of billions more in junk bonds from risky companies, which the Fed has also signaled that it would purchase.

Dozens of companies, from troubled aircraft maker Boeing to airline Delta, from Exxon Mobil to T-Mobile, have been tapping credit markets they might never have been able to access, at lower rates than previously offered. The American Prospect and The Intercept have identified at least 49 large companies that have issued corporate bonds since the Federal Reserve announced that it would purchase them. For some, the benefit of cheaper borrowing was worth hundreds of millions of dollars.

“It is meaningfully changing the way investors are evaluating the risks for a swath of companies,” said Kathryn Judge, a law professor at Columbia University and expert in financial markets and regulations. The Fed’s support disproportionately flows to large corporations with access to credit markets, Joyce pointed out. “Small and midsized businesses with much more need are more likely to struggle.”

Unlike in 2008, the large corporate entities in line for a bailout didn’t create the crisis in the first place. The Fed’s actions to save corporations from instant bankruptcy, simply by nodding in their direction, beats the alternative. The problem is that this same level of thunderous rescue hasn’t been extended beyond the biggest firms, which could lead to an economic landscape where they dominate society in the very near future. We have a system for central bankers to throw a life preserver to any large corporation, while everyone else must swim several miles to shore themselves.

Congress made the choice to empower the Fed, rather than figure out how to adequately support the rest of the economy and its citizens. And it gave the central bank wide discretion over the process, absolving members of Congress from blame but introducing the Fed’s bias toward large corporations and banks into who gets saved and who doesn’t.

In short, while activists nitpicked about which companies got small business grants worth $10 million, the real bailout, with trillions on the line rather than millions, was happening, quietly, at the Fed.

Investors are supposed to be risk-takers, who earn outsized returns because they put their money on the line. The Fed’s extraordinary support completely flips that, giving a safety net to those who don’t need it and making a mockery of the alleged virtues of free-market capitalism. If nothing the wealthy ventures can be lost, the only people who bear risks in our society are those who don’t have any money to begin with. That’s a recipe for soaring sales in pitchforks.

But what the Fed is doing may not even be sufficient to protect capital. The week of May 11 saw the biggest percentage drop in the stock market in nearly two months. As the Fed actually starts to actually outlay money, even it recognizes that not every crisis can necessarily be solved by lending gobs of money to General Electric. Not only is it socially unsustainable to protect just the rich from a crisis of this magnitude, it may not even work.

Among other measures, the CARES Act appropriated $454 billion to the Treasury Department’s Exchange Stabilization Fund to be used as an equity stake in a series of Fed “credit facilities.” You can think of this as similar to a big bank. The ESF stake represents the deposit base, which can absorb any losses from Fed lending. (In reality, the Fed is perfectly able to take losses through various accounting gimmicks, but it has chosen to limit itself in this fashion.) The Fed can then lever those deposits up 10 to 1, the same way a bank loans well above its deposits. That created a $4.5 trillion — trillion with a T — money cannon to back up the promises.

As soon as it became clear that a $4.5 trillion slush fund would be created, equity markets ballooned. The total value of the stock market cratered to 103 percent of GDP, about $21.8 trillion, on March 23. By April 30 it was back to 136.3 percent of GDP, or $28.9 trillion. By that metric, $7.1 trillion in stock market wealth has been created in that period.

Not only is it socially unsustainable to protect just the rich from a crisis of this magnitude, it may not even work.

It’s not like there were any other positive stories in the economy in late March and April, so we can attribute most of this uplift to the establishment of Fed facilities. “The Fed is the action, it’s the only real action,” Marcus Stanley, policy director with the coalition Americans for Financial Reform, told me. Almost all of that benefit goes to the wealthy: A 2017 report showed that about 10 percent of Americans own 84 percent of all stocks.

More critical was the rescue of the credit markets. By March 23, investors had spent a few weeks engaged in fire sales of corporate debt. Cash was fleeing to the safety of Treasury bonds. Reluctance to take on corporate debt triggered higher borrowing costs everywhere, and while bond-buying was still going on, many companies found themselves stuck. “There was like 10 or 15 days, there was no bond issue,” said V. Prem Watsa, CEO of Fairfax Financial Holdings, in a May 1 earnings call. “No one could do a bond issue. The AAA company couldn’t do a bond issue.”

The Fed’s announcement changed the picture. “It’s signaling, ‘We will not let the bond market go low,’” Stanley said. “’We’ll put a floor under the bond market in an aggressive and historically unprecedented way.’”

You can best see this through an array of exchange-traded funds, or ETFs: investment funds traded on stock exchanges made up of securities in a particular economic sector or asset class. There are dozens of ETFs linked to corporate debt, and their charts around this period all resemble a panoramic view of the Grand Canyon, hitting a low point on March 23, before shooting back up.

On March 23, the BlackRock iShares ETF of investment-grade corporate bonds went up 7.39 percent. The iShares AAA-rated corporate bond ETF: up 7.52 percent. Vanguard’s intermediate-term corporate bond ETF: up 5.43 percent. Pimco’s investment-grade corporate bond ETF: up 7.06 percent.

Even “high-yield” corporate bond ETFs, which hold debt in riskier companies imperiled by the crisis, have this same shape. The effect is often delayed until April 9, when the Fed announced that it would actually buy high-yield ETFs, in an indirect bid to reach so-called junk bonds that highly leveraged and risky corporations issue to investors. The iShares iBoxx high-yield ETF saw its biggest move upward that day since 2008. Other high-yield ETFs like Deutsche X-trackers and the S&P high-yield bond index show a similar spike. Junk bond issuance similarly spiked.

The Fed announcements included intentions to buy municipal bonds, as well as securities backed by student loans, auto loans, credit card debt, and commercial real estate loans; to make direct loans to large and midsized businesses; and to guarantee the entire trillion-dollar money market fund industry. It sent the message that essentially every credit market in existence would get some form of assistance. “They consider themselves a lender of last resort,” Peter Boockvar of Bleakley Advisory Group told CNBC. “They’re now the lender of all resorts.”

But the corporate bond rescue was particularly useful to companies sinking under the weight of the economic crash.

Carnival Cruise Lines is nobody’s idea of a sustainable business at the moment. Reeling from a Covid-19 outbreak on its Diamond Princess ship and shut down thereafter, in mid-March, Carnival was flirting with a consortium of hedge funds on a high-interest loan above 15 percent. These vulture funds, including Apollo Global Management and Elliott Management, specialize in distressed debt, squeezing governments and businesses with no alternatives. If Carnival couldn’t repay the loan, the hedge funds would be primed to take ownership.

But the March 23 announcement, signaling a Fed backstop to all comers, suddenly gave Carnival new options. Within days, it had secured $5.75 billion in loans, including a $4 billion bond issuance at 11.5 percent interest, and a $1.75 billion bond at an even smaller 5.75 percent rate that could be converted into Carnival stock. Because we know the alternative was a loan with 15 percent interest, we can calculate the value to Carnival. The difference in interest on the $4 billion loan is at least $140 million, and on the overall package, closer to $310 million.

Carnival also sold equity stakes of $500 million after March 23 (including 8 percent of the company to Saudi Arabia’s sovereign wealth fund), less than the $1.25 billion the vulture funds were seeking. That’s an implicit subsidy of $750 million. Keeping more of the company in shareholders’ hands gives them a subsidy as well. In addition, Carnival’s market capitalization grew by $3.5 billion from March 23 to the end of April. So one company with essentially no social or economic function currently benefited from billions in Fed-induced support.

Another good example is Boeing, the basket-case aircraft maker with a sketchy record of keeping planes in the sky. The firm “rejected” a federal bailout after issuing $25 billion in bonds. But that bond issuance was entirely made possible by the Fed’s implicit guarantee of corporate bond markets. Boeing’s Chief Financial Officer Greg Smith admitted on March 24, a day after the Fed announcement, that credit markets were “essentially closed.” A month later, it made the sixth-largest bond issuance in U.S. history that left investors clamoring for more; over 600 investors were willing to take up to $70 billion in Boeing debt at the auction.

So Boeing didn’t avoid a bailout; it got one through the side door from the Fed. And the company knows it: Smith thanked the Trump administration after securing the loan, “for the actions they have taken to support our economy and the credit markets.”

Boeing’s bond rescue had a secondary benefit. The CARES Act set aside $17 billion in a Treasury-led bailout for firms “critical to national security,” which everyone recognized as code for Boeing. That money would have come with significant strings attached, like equity stakes for the government. By the Fed reopening credit markets to Boeing, the company sidestepped that condition and kept its investors whole. “Without the Fed action, Boeing would be significantly owned by the U.S. taxpayer,” said Dennis Kelleher of the Wall Street watchdog Better Markets. That’s an implicit subsidy to Boeing and its shareholders.

The lack of conditions had a human cost. Aviation-related grants that the Treasury supplied came with a requirement to keep workers on the payroll for six months. Freed from any restrictions, Boeing almost immediately announced that it would cut 16,000 jobs. Similarly, General Electric, another company that spurned a direct bailout and floated $6 billion in bonds, cut 13,000 jobs in its aviation unit shortly thereafter.

Within weeks of the March 23 announcement, many large companies had wandered over to the corporate bond trough and taken a sip. Issuance of corporate bonds in April alone jumped to three times as much as the year before. The three largest weeks in the history of corporate debt offerings were two weeks in April and the first week of May.

Exxon Mobil took $9.5 billion. Nike was good for $6 billion, with $5 billion for Procter & Gamble and $6.5 billion for McDonald’s. Apple grabbed $8.5 billion. There was $11 billion for Disney and $6.5 billion for Coca-Cola. Silicon Valley stalwart Oracle trumped them all with a $20 billion debt offering. And Fairfax Financial Holdings, whose CEO, Watsa, was complaining that nobody could get a bond, secured $650 million at the end of April. “The bond market opened up,” Watsa told analysts on the earnings call. “Federal Reserve has been fantastic. The CARES Act has been huge.”

Bond recipients included companies battered by the coronavirus crisis. “April’s worst month for U.S. business activity in perhaps more than 85 years did not prevent high-yield bond issuance from topping its year earlier pace by 19 percent,” Moody’s noted. That included an $8 billion high-yield bond for Ford, the largest speculative bond sale in history.

“They consider themselves a lender of last resort. They’re now the lender of all resorts.”

Delta Airlines managed a $5 billion bond issue, despite few flights in the air; Southwest raised $6 billion. Norwegian Cruise Lines, in the same boat as Carnival, secured $2.2 billion. Six Flags Entertainment, shuttered due to lockdowns, got $725 million. MGM Resorts, a luxury series of hotels and casinos, took in $500 million. No AMC movie theater was open, but AMC floated $500 million in debt anyway. Despite housing few travelers, Airbnb took $1 billion.

Investors deemed just one major company too risky for bonds: United Airlines, which begged off a $2.25 billion bond deal on May 12 because investors wanted more protections attached to the loan and a higher interest rate than United sought. But despite the fact that banks and investors are in position to demand better terms, interest rates are correspondingly lower than what these companies would have been forced to agree to before the Fed’s intervention.

It was also significantly cheaper for companies to borrow money at the beginning of May than it was in late March. The corporate bond spread (the difference in interest-rate yield between the corporate bond and Treasury bonds) for BBB-rated firms, just above investment grade, soared throughout February and March and peaked on, you guessed it, March 23, at 4.88 percent. By May 1, it was down to 2.83 percent. The high-yield corporate bond spread looks the same, peaking at 10.87 percent on March 23 and settling at 7.7 percent on May 1. Those spreads have continued to drop. A lower spread equates to tangibly lower borrowing costs for large firms.

In all, The American Prospect and The Intercept found published reports of bond sales for 49 companies, a total of at least $190.3 billion. Some bond amounts were undisclosed, like for General Mills, CVS, and Kroger, so the number is likely higher. The interest savings on those bond issuances due to Fed intervention is hard to calculate, but using Credit Flow Research’s post-announcement bond issuance estimate of $575 billion, and the changes in spreads after March 23, it’s clearly tens of billions of dollars.

And, given that one part of the credit hierarchy gives the rest a boost, the market uplift to investors in the $10 trillion corporate debt market would be calculated in the hundreds of billions. Combined with ETF and stock market uplift, the trillions in relief absolutely dwarfs what regular Americans got to tide them over during the crisis.

This unprecedented rescue of corporate America, done without the outlay of a single U.S. dollar, was described by Fed Chair Jerome Powell in an April 29 news conference as not only necessary, but positive. “Many companies that would’ve had to come to the Fed have now been able to finance themselves privately … and that’s a good thing,” Powell explained. It is somewhat positive that distressed companies could turn to regular credit markets instead of bottom feeders like private equity vultures or Warren Buffett. And because of the existing connections to flood the financial system with money, bailouts are almost literally as simple as turning on a light switch.

Congress didn’t have to cede authority to the Fed and carp about it after the fact.

But to properly assess the virtues of the rescue, you have to set it in context. The unemployment rate is 14.7 percent and rising. Car lines for food banks stretch for miles. As Americans continue to struggle and lose ground, the nation’s investment elite have been thus far saved from any downside of the coronavirus crisis. Beneficiaries are largely confined to stockholders, bondholders, and corporate executives (who are often major stockholders). Workers are not only not protected, they’re paying for the rescue, with taxpayer money propping up the Fed actions.

“This is a massive wealth transfer to owners of financial assets,” said Lev Menand, a former Treasury official who now teaches at Columbia University. “The rules of the game are supposed to be that equities take the loss, high-yield debt holders take the loss.” Allowing them to instead bear no burden is a form of socialism for capitalists.

It would perhaps be more tolerable if anyone other than the rich shared in the gains of this corporate rescue. But the Fed’s bond-buying program, unlike the Paycheck Protection Program, has no requirements on companies to retain workers. The Fed changed the term sheets between March 23 and April 9, eliminating any such requirements. Apple’s recent debt issuance, which could later be purchased directly or indirectly by the Fed, explicitly states that it will be used for, among other things, “share buybacks and dividends” — forms of leaking money to investors rather than keeping workers on payroll.

In addition, the Fed has essentially outsourced its bond-buying and loan-making authority to big money managers and banks, heightening the need for connections with these giants to get relief. Smaller companies, who don’t have the revenue or technical know-how to issue bonds into public markets, will find it more difficult to get in line for relief. Meanwhile, lending to small businesses and individuals has slowed as banks pull back during the crisis; by one count, interest rates charged to small businesses are now double the rates for large firms. Running bailouts through the Fed necessarily enhances the survival of large financial players and big corporations; everyone else must fight for crumbs.

Treasury Secretary Steven Mnuchin responded to this charge of special benefits for large corporations at a Senate Banking Committee hearing on May 19, essentially calling the stealth bailout a good thing. “The announcement of the corporate bond facility without putting up $1 of taxpayer money unlocked the entire primary and secondary market for corporate bonds,” Mnuchin said. “Companies that I had expected would need to borrow from us were able to borrow $25 billion in the primary markets” — a reference to Boeing.

Congress didn’t have to cede authority to the Fed and carp about it after the fact. It could have decided the parameters of any economic rescue. But that would involve making actual governing decisions, which Congress would rather defer to others. You can argue that, in the absence of state functionality, the Fed had to step in. But we’re living with the unequal consequences of a central bank that can only solve problems for one set of powerful interests. And perversely, rescuing investors — rich people like members of Congress and the donors they listen to — makes it easier for Congress to keep ignoring the needs of everyone else.

Even the Fed understands this at some level. On May 13, Powell pleaded with Congress to pass stronger fiscal aid to prevent a multiyear economic malaise. “Deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy,” he said.

On May 12, the Fed finally kicked off its corporate bond-buying program, 50 days after the fateful March 23 announcement. It was confined to purchasing corporate bond ETFs of once investment-grade “fallen angel” companies that had gone to junk. Within two days, $305 billion had been purchased. But while the purchases sent corporate bonds up in value, by and large the promise of bond-buying had already produced the desired effect. The Fed completed the bailout before ever administering it.

“This is more like August 2007 than September 2009.”

Some market watchers see the runaway rally in capital markets as irrational. “People that manage large portfolios and assets spent 10 years in a bull market fed by Federal Reserve intervention,” said Menand. “Their frame of reference is that something goes wrong and the Fed comes in, that’s a market opportunity.” Menand believes that the Fed won’t be able to sustain such valuations amid mass bankruptcies and high unemployment.

With the hope of a V-shaped economic recovery now completely dead, at some point the markets will have to take notice, and the sugar high from the Fed aiming its money cannon will wear off. Stocks fell modestly in May, and Goldman Sachs analysts have predicted a 20 percent drop in the next three months. Noted hedge fund manager David Tepper called the stock market in the first half of May the second-most overvalued market in his career, rivaled only by the dot-com boom. And in raw numbers, the valuation increase has gone well beyond the amounts the Fed has promised.

That’s what you get when you send the Fed in to handle a problem in the real economy. The Fed is ill-suited as a crisis manager; it sees its job as mainly to boost liquidity and keep assets strong.

“You can get loans, but loans don’t replace income,” said Nathan Tankus, research director at the Modern Money Network. Menand likened the moment to August 2007, when the Fed provided enough liquidity to avert crisis for a while. Eventually, there was a reckoning when asset prices declined and losses hit the system. “This is more like August 2007 than September 2009,” he said. “The idea that we won’t have massive insolvency at big companies is crazy. And the Fed will not be there.”

The Fed-induced rush into corporate bonds, in other words, pools risk in an unstable asset, creating the type of financial crisis it seeks to stamp out. Companies with functionally no revenue path in the near future taking on mounds of additional debt could set the stage for a series of defaults, which rose in April. Zombie companies being kept alive by debt markets eventually run up against the fundamentals of operating amid an economic depression. And indebted companies stave off liquidation by firing workers, as Hertz did last month to avoid bankruptcy. It didn’t help; Hertz filed for Chapter 11 on May 22.

The very knowledge that the Fed will save investors from trouble is likely to accelerate risk throughout the market. “If you told a family you can get a credit card at 18 percent [interest], but in a downturn we will give you an opportunity to get a 3 percent card, that would incentivize them to spend a lot of money,” Bharat Ramamurti, one of the members of the Congressional Oversight Commission, told me.

The Fed itself has called out this possibility. Powell’s comments on May 13 were accompanied by a May 15 financial stability report, warning that the financial system had “amplified the shock” of the coronavirus crisis. It raised concerns about debt defaults as its actions persuaded investors to buy up more debt. It warned that asset prices had “room to fall,” when the announcement effect created more of that room. It worried of defaults among high-risk “leveraged loans,” when these are precisely the kind of loans it’s vowed to buy through purchases of high-yield ETFs.

Just how deeply does the Fed have its fingers in the dough of the economy? Recent job growth numbers reflect what you’d guess — that the most rapid job creation is happening at general merchandise stores like Walmart and Costco. Right behind them are “monetary authorities-central banks.”

The post How the Fed Bailed Out the Investor Class Without Spending a Cent appeared first on The Intercept.

Pelosi is hoping to move quickly to a floor vote to satisfy a major 2018 campaign pledge that Democrats would work to lower drug prices. Progressives led by Reps. Pramila Jayapal and Mark Pocan, who are pushing for changes to the legislation, are standing firm, arguing the bill is far too modest and would do little if enacted — which, given the makeup of the Republican-majority Senate, it won’t be.

On Saturday, Warren tweeted, “@PramilaJayapal is right. Drug prices are crushing American families. A bill to fix this shouldn’t work for only some drugs or some people—it should help everyone afford lifesaving treatments.” The next day, Sanders retweeted a plea by the Progressive Caucus to get its “key improvements to take on pharma greed” into the bill.

The bill, H.R. 3, the Elijah E. Cummings Lower Drug Costs Now Act, will not become law, whether Pelosi’s version passes or whether the stronger elements preferred by the Progressive Caucus are included. Senate Majority Leader Mitch McConnell will bury it with the other 400-odd pieces of legislation in his graveyard. But the importance of this House Democratic squabble goes well beyond a single bill. It will indicate whether the 98-member Progressive Caucus, which grew in size this year, is willing and able to fight for policies it believes in. How hard progressives push back against Pelosi will determine whether she will continue to ignore progressives as she pursues her policy framework, or whether she’ll have to respect and include them.

It’s not hyperbole to call the fight a potential bend point in the history of the Democratic Party, with stakes much higher than they appear. Pressure on House Democrats to approve the legislation is compounded by the naming of it after the late revered Cummings, who died of health complications in October. But in an irony that would surely not have been lost on Cummings himself, he had sponsored his own drug-pricing bill which was significantly stronger than the one his name is now attached to. Sanders co-authored the original Cummings bill.

The Rules Committee is expected to vote on the bill Tuesday afternoon, which would then allow it to move to the House floor for a vote. The Progressive Caucus has been surveying members the past several days, encouraging them to vote against the rule for the bill, which would block it from coming to the floor and send it back to the legislative drawing board. A source involved with the whip operation said that so far “the count is excellent,” expressing confidence that enough members of the caucus would stick together. (Before the House votes on a bill, it first votes to approve or reject the “rule” under which it would be considered. Taking down the rule is a way to block the underlying bill from a vote.)

There are 233 Democrats in the House of Representatives, and Pelosi needs 216 if everybody votes. (The vote threshold would typically be 218, but is lower because the seats of Cummings and former Rep. Katie Hill are empty, as are two GOP seats.) All Republicans are expected to vote against the bill, so if just 18 of the caucus’s 98 members vote down the rule, it would fail — and Pelosi would have to turn to progressives if she wanted to pass the bill. Rep. Alexandria Ocasio-Cortez, D-N.Y., will vote against the bill, according to her spokesperson Corbin Trent. “They stripped out everything that looked like progress,” said Trent.

The relative weakness of the bill coming to the House floor makes a mockery of the health care debate unfolding on the presidential campaign trail. While 2020 Democratic hopefuls debate a sweeping, comprehensive reform of the health care system, Democrats in the House are having trouble giving authority to the government to negotiate lower prices for more than a mere 25 drugs. The gap between the two debates could hardly be greater, even though Democrats in the House have a free hand policy-wise: After all, the bill has little chance of passing the Senate and becoming law, so it’s largely a messaging exercise.

All year long, the relationship between the Progressive Caucus and House leadership has simmered behind the scenes, emerging only in fitful moments, like in July when Pelosi resigned to passing a border supplemental spending bill that added few checks to the Trump administration’s cruel caging-of-children policies. The impeachment fight has mostly created unity among House Democrats, against a common enemy’s efforts to abuse the power of the presidency by leveraging foreign aid in order to damage a domestic political opponent. But lingering in the background all year has been the drug-pricing fight.

As the American Prospect documented last Friday, Pelosi and her staff, led by top health policy aide Wendell Primus, have frozen out progressives from deliberations over the Lower Drug Costs Now Act, exerting extreme control over the process. They bypassed legislation that Rep. Lloyd Doggett, D-Texas, wrote, which, thanks to progressive organizing, had the support of a majority of the caucus. Instead, Pelosi and Primus sought to find a compromise with the Trump White House, only to see Trump savage the bill on Twitter, indicating that it didn’t have his support. Despite that reversal, all the provisions weakened or watered down to gain Trump’s support remain in the bill, leaving open large gaps in who will benefit from the effects.

The tensions over the bill are rooted in a provision that will, for the first time, allow direct price negotiations between the government and major drug companies, creating an exemption to a noninterference clause banning such negotiations that was instituted in 2003. As written, however, the bill sets a floor of just 25 high-cost drugs that will be negotiated per year, rising to 35 in the tenth year of the bill’s enactment. The CPC and drug-affordability advocates believe this floor will operate as a ceiling, and that a higher minimum of negotiations ought to be mandated. Progressive caucus leaders would also rather see the noninterference clause stricken entirely, giving more flexibility to government officials to expand the scope of negotiations.

In addition, the uninsured will not see any benefits from the price negotiations and will be forced to pay whatever price drug companies can command. Nicole Smith-Holt, whose diabetic son died after he went off her insurance at age 26 and could no longer afford insulin, explained to the Prospect last week that “People like my son Alec wouldn’t have benefited. It wouldn’t have saved his life. And a lot of other lives would be at risk too.”

Perhaps the final straw for progressives came when Pelosi’s office decided to gut an amendment that Jayapal passed through the House Education and Labor Committee, which would expand proposed rebates for excessive price spikes to certain drugs under Medicare to also cover group health plans. Instead of having the secretary of labor conduct a feasibility study on the expansion and then affirmatively devise regulations to accomplish it, Pelosi’s office threw out everything but the study, which is frequently how Congress kills policy.

After being shut out of a high-priority legislative action — drug prices were one of the top issues in the 2018 midterms — and having the improvements they did get in whittled down to nothing, the Progressive Caucus decided to rebel. On Friday afternoon, they began whipping Progressive Caucus member offices on whether they would be willing to vote against the rule for the Lower Drug Costs Now Act. 

A Democratic source confirmed that “a substantial number of progressives” would vote against the rule if certain priorities — restoring the Jayapal amendment, increasing the minimum drugs negotiated, striking the noninterference clause, and making sure the uninsured benefit — were not included in the final text.

Pelosi’s team seemed unmoved by this threat, with an aide telling The Hill, “Representatives Pocan and Jayapal are gravely misreading the situation if they try to stand in the way of the overwhelming hunger for HR3 within the House Democratic Caucus and among progressive Members. … The Lower Drug Costs Now Act will pass next week.”

The aide also made the laughable suggestion that maintaining Jayapal’s amendment would force the Congressional Budget Office to reanalyze the bill, eating up too much time before the end of the year. Jayapal got her amendment through the Education and Labor Committee in October, meaning that there were two months to have CBO analyze the effects.

Pelosi appears to be banking on progressives’ past failures to follow through on their threats and defy leadership. But with Sanders and Warren siding with Jayapal and the CPC over the weekend, the progressive caucus may finally have the impetus to block the bill in its current form. The senators’ statements also mean that Pelosi now must contend not only with the left-wing elements of her caucus, but the two presidential candidates commanding a substantial chunk of the primary electorate. On the other hand, passing a messaging bill on drug pricing is a high priority for Democrats up for reelection in tight races, no matter the details, and progressive will be under intense pressure to go along on their behalf.

The Progressive Caucus has not taken a stand like this in some time, perhaps not since it pledged to oppose the Affordable Care Act if it didn’t include a “robust public option” in 2009 and 2010 — a pledge that was broken. Because Pelosi finds the bill’s passage to be an important marker of the House continuing to govern amid the impeachment inquiry, it has become a viable fight for progressives. A loss would be extremely embarrassing to Pelosi, and would signal that progressives do have the power to dictate terms on policy when they so desire — or at least can’t be utterly ignored. If the House manages to pass it without improvements, the opposite conclusion can be drawn. 

The post Bernie Sanders, Elizabeth Warren Team Up With House Progressives to Challenge Nancy Pelosi on Drug-Pricing Bill appeared first on The Intercept.

TransDigm wasn’t required by law to reimburse the Pentagon, and it didn’t cough up the dough at the behest of regulators. It returned the money after a damning report from the Defense Department’s inspector general, showing profit margins as high as 4,451 percent on sole-source spare parts. And it did so after a contentious House Oversight Committee hearing two weeks ago, where members of both parties — from freshmen progressives Alexandria Ocasio-Cortez and Rashida Tlaib to Freedom Caucus leaders Mark Meadows and Jim Jordan — demanded payback.

In other words, TransDigm paid $16.1 million because powerful people asked them to. “We saved more money today for the American people than our Committee’s entire budget for the year,” said House Oversight Committee Chair Elijah Cummings, D-Md., in a statement.

TransDigm paid $16.1 million because powerful people asked them to.

Rep. Ro Khanna, D-Calif., chaired that hearing. For him, it was the culmination of two years of work on TransDigm, which started when he was a freshman member of the minority party in the House. His successful fight to hold an egregious monopolist accountable for price-gouging reveals the kind of power members of Congress can wield, if they choose to wield it. At a time when much of Congress has gone out of its way to make itself irrelevant, fulminating about the corruption and obstruction of the Trump White House but unwilling to do much about it, it’s worth pausing to look at the type of investigation the legislative branch is capable of — and used to routinely perform, to great success.

“I have found being in Congress to be an extraordinary opportunity to impact our nation and world,” Khanna said in an interview with The Intercept last week. “You have to be willing to do your homework and be active in using the procedures we have.”

Just a couple months into Khanna’s first House term, he had coffee at a Capitol Hill-area Starbucks with Matt Stoller, author of the forthcoming book “Goliath” and a fellow at the Open Markets Institute, which at the time was housed at the New America Foundation. Stoller informed Khanna about some revelations that had been bubbling up among short seller Citron Research and the subscription-based investigative news site The Capitol Forum.

TransDigm, the subject of the reports, was more of a private equity conglomerate than a defense manufacturer. It used mergers to roll up exclusive rights to sole-source aircraft parts. TransDigm’s 2016 annual report stated, “about 80% of our sales come from products for which we believe we are the sole source provider.” Armed with that market power, critics claimed it jacked up prices, particularly for defense buyers, which made up about one-third of TransDigm’s sales.

A Capitol Forum analysis estimated some of these shifts using government data. Before being acquired by TransDigm, Whippany Actuation Systems sold a motor rotor for $654.46. Afterward, it was $5,474. Before acquisition, a Harco cable assembly was $1737.03; afterward, it was $7,863.60. The margins are exorbitant, but on fighter planes that can cost more than $100 million each, they didn’t raise much alarm inside the Defense Department.

With TransDigm having monopoly control over the spare parts, the Pentagon had no choice but to buy from them if they wanted their planes to stay in the sky. Sales personnel for TransDigm also allegedly structured contracts so they wouldn’t have to reveal cost information that would show the precise nature of the gouging, according to the reports.

TransDigm’s business model was lucrative, especially for its executives. In 2017, then-CEO Nicholas Howley took home $61 million in compensation, sixth-highest in the U.S. that year.

“Any time you raise questions about the corporate sector or a defense contractor, they will try to throw mud as a way to intimidate.”

Khanna got interested in the subject, and as a member of the House Armed Services Committee, he had oversight over defense procurement. So he did what he could as a member of Congress: He wrote a letter. Specifically, on March 21, 2017, he asked the inspector general of the Defense Department to investigate TransDigm. “Reports suggest that TransDigm Group has been operating as a hidden monopolist,” Khanna wrote. “Given that the Trump administration is proposing budget increases for the military, it is incumbent upon Congress to ensure that these increases provide for the common defense, rather than enrich a few individual financiers who stand to benefit at the expense of our troops and weapons systems.”

There was immediate backlash. A whisper campaign suggested that Khanna had a financial stake in seeing TransDigm’s stock falter. “Any time you raise questions about the corporate sector or a defense contractor, they will try to throw mud as a way to intimidate,” Khanna said. In addition, Wall Street analysts rode to TransDigm’s rescue, defending the stock as a “top pick” that was “the victim of its own success.” Several of these analysts worked for banks that handled TransDigm’s debt and had a stake in a successful outcome.

Khanna was undeterred, rallying support inside Congress for an investigation. Eventually, Sen. Elizabeth Warren, D-Mass., and Rep. Tim Ryan, D-Ohio, both of whom are running for president, joined the call for an audit of TransDigm’s purchasing. And in response, the inspector general decided to conduct a review.

The inspector general, in a report released this February, looked at a random sample of 47 parts TransDigm sold the government between January 2015 and January 2017. And sure enough, the study found that TransDigm earned an “excess profit” — defined as above a 15 percent margin — on 46 of the 47 parts. The margins ranged from 17 to 4,436 percent. The biggest markup came on a 3-inch “nonvehicular clutch disk” that cost $32 to make, which TransDigm sold for $1,443. The 46 parts, which totaled $26.2 million, produced an estimated $16.1 million windfall for the company.

Chart prepared by House Oversight Committee staff, based on data from Defense Department Inspector General Report, “Review of Spare Parts Purchased From TransDigm Group, Inc.,” Feb. 25, 2019.

Overall, the inspector general found that procurement officers had little chance of determining whether they were overpaying for TransDigm parts. Nearly all the contracts were below the $750,000 threshold that would trigger mandatory cost information disclosures. (That threshold was increased to $2 million late in 2017, as a way to “reduce administrative burdens” on private businesses.) And when officials asked TransDigm for the cost data, sales agents denied the request in 15 of 16 cases. The only time TransDigm released data was when the contract was above the threshold and submission was required, and that was the only contract where TransDigm earned a “reasonable” profit, according to the inspector general.

“It was very vindicating,” Khanna said. “The report convinced everyone about how terrible this is.”

Cummings, the House Oversight chair, wanted hearings on TransDigm, and Khanna also happened to be a member of that committee. Investigators for the committee spoke with former TransDigm employees, who gave more information about TransDigm’s deliberate deceptions. One former sales director said, “We were coached not to provide cost data,” and that working with the Defense Department was like “taking candy from a baby.”

This came to a head on May 15 at the Oversight Committee hearing, where former TransDigm CEO Howley (who remains the company’s executive chair) and current CEO Kevin Stein testified. Another witness, assistant secretary of defense for acquisition Kevin Fahey, condemned TransDigm’s “disgraceful business model, designed to exploit current statutes.” He also called TransDigm’s business practices “outrageous” and “sickening.”

“Are you going to pay back the taxpayers of this country, yes or no?”

One after another, members of Congress asked TransDigm to return the $16.1 million. “Are you going to pay back the taxpayers of this country, yes or no?” asked Rep. Jackie Speier, D-Calif. Stein responded: “No. We are still evaluating and we have not come to a conclusion.” Other members gave TransDigm advice: Pay back the overcharges. “You’ve got a bipartisan Congress saying you should pay back,” Khanna told the TransDigm executives. “We in Congress can almost agree on nothing. It’s remarkable that we agree on this.”

It took TransDigm a little over a week after the pummeling to write the check to the Defense Department. This was a departure from past practice; in 2006, TransDigm was also found to have gouged the Pentagon, that time for $5 million, and the company never paid that back.

Ultimately, this is a minor sacrifice for TransDigm, a company valued at $1.2 billion whose stock has soared 32 percent this year. The payback was only on a portion of TransDigm contracts; from 2012 to 2017, the Defense Department issued the company 4,942 contracts worth $471 million. So a more fulsome study could have found hundreds of millions of dollars in excess profits; TransDigm mostly got to keep all that.

Still, for a freshman congressman in the minority to initiate a process that ends in a voluntary refund to the government is unusual. And lawmakers in both parties, Khanna said, are discussing legislation that would close loopholes and require sole-source parts manufacturers to disclose cost data in every case, regardless of the size of the contract. They also want to figure out how to diversify parts suppliers to end sole-sourcing. “Not a single person in the committee defended TransDigm,” sad Khanna. “I had the surreal experience of having Grover Norquist’s brother, the comptroller of the Department of Defense, agree with my efforts. There’s great anger and outrage over TransDigm’s conduct.” Khanna added that he has heard anecdotally that overcharges in the defense parts sector are not limited to TransDigm; the Government Accountability Office is investigating monopolization in military contracting.

What Khanna’s crusade shows is that members of Congress do have the power to create change, even without passing legislation. In this case, just speaking up to ask for an investigation of TransDigm set things in motion. “That single act triggered an entire process that culminated in senior members of Congress holding a hearing to hold TransDigm accountable, and having legal changes to close loopholes in the process,” Khanna said. “My personal experience highlights the extraordinary authority Congress has if we exercise influence. There’s a reason that Congress was created in Article I of the Constitution.”

Correction: May 28, 2019, 2:19 p.m. ET
A previous version of this article misstated the title of Matt Stoller’s forthcoming book. 

The post How Rep. Ro Khanna Got a Price-Gouging Defense Contractor to Return $16.1 Million to the Pentagon appeared first on The Intercept.

His colleagues began to suspect the two things were related, a suspicion that was heightened when the committee passed his legislation on April 2 — followed the next day by the long-awaited request.

That bill, the Setting Every Community Up for Retirement Enhancement, or SECURE, Act, got a unanimous vote in the committee, and it’s expected to sail through on the House floor on Thursday and probably find its way to the president’s desk. But in important ways, the measure is a case study in everything wrong with policymaking in today’s Washington.

“One of my top priorities as Chairman of this committee is to help workers of all ages prepare for a financially secure retirement,” Neal said when the SECURE Act passed out of committee in April. “The SECURE Act goes a long way in addressing this problem by making it easier for Americans to save. Passage of this bill is a tremendous bipartisan accomplishment, and I hope to see the measure move through Congress and be signed into law in short order.”

While the SECURE Act, a grab bag of measures that nearly passed in the last Congress, does have some decent features, it also includes one glaring provision that’s been on the insurance industry’s wish list for many years — and does not include the piece of progressive retirement security reform Neal has long said he’s championing.

“This bill is an open invitation to prey upon people who are exceedingly likely to lack meaningful access to a lawyer,” said Jeff Hauser of the Revolving Door Project at the Center for Economic and Policy Research. “The only types of bills [Senate Majority Leader Mitch] McConnell and Trump will sign are bills that enrich America’s worst companies, which is why the primary focus of House Democrats should be oversight rather than bipartisan predation of the non-rich.”

The SECURE Act, on the whole, is a fairly inoffensive law: That’s one reason it’s encountered next to no formal opposition. Some of the provisions are pretty good or, at least, not so bad. The bill would increase the age at which retirees must take money out of their retirement plans, from 70 ½ to 72. It would lift the age cap on contributing money into tax-free retirement accounts. It would let people withdraw money from retirement plans penalty-free in the event of a birth of a child or adoption.

There are also the usual special-interest giveaways: some paperwork reductions, lower government payments for cooperatives and charities (designed, oddly enough, as a handout for the Boy Scouts of America), and changes to the funding of retirement plans for the struggling newspaper industry.

But none of that is what appears to be driving the SECURE Act through Congress. You’d have to look at Section 204 to understand the rationale.

Section 204 gives a safe harbor to 401(k) plan sponsors who select so-called lifetime income products, another word for annuities, to appear among offerings to workers. This would mean that, if an employer picks an annuity provider and it goes out of business or rips off workers, they would not be able to sue the employer afterward. That could incentivize companies to find fly-by-night annuity providers that give good deals to the companies for business, making their money by ripping off the firm’s workers before filing for bankruptcy.

The lack of a safe harbor has been the primary hurdle to getting annuities into 401(k) offerings, said J. Mark Iwry, former senior adviser at the Treasury Department during the Obama years. “It’s the single most frequently mentioned obstacle by plan sponsors,” said Iwry, who is now a nonresident senior fellow at the Brookings Institution.

“This bill is an open invitation to prey upon people who are exceedingly likely to lack meaningful access to a lawyer.”

Annuities come in many flavors and types; in general, they provide a stream of monthly payments to retirees after they pay into them. Any financial institution can sell an annuity, but the primary sellers are life insurance companies. Some annuities, like fixed-income products, are relatively tame, though they often have high fees for the insurers. Others are variable-income products with opaque terms that confuse buyers into purchasing them and don’t pay off as promised.

The annuities industry is a $235 billion-a-year business, with brokers enjoying kickbacks like resort vacations and luxury watches, according to a 2015 report from Sen. Elizabeth Warren, D-Mass. Insurance companies have longed to tap the trillions of dollars sitting in 401(k) plans for annuities.

That would include some of Neal’s biggest donors, including Prudential, whose political action committee delivered $5,000 to Neal last quarter. Or the American Council of Life Insurers PAC, another $5,000 donor, whose members also sell annuities. Or Mass Mutual Life Insurance Company. Or New York Life. Or Liberty Mutual. Or TIAA. Or the Insured Retirement Institute, an industry PAC. Or the Association for Advanced Life Underwriting PAC, another trade group that immediately praised the SECURE Act’s committee passage. The Investment Company Institute, a trade group for mutual funds (that also benefit from the SECURE Act), is another Neal donor.

All in all, Neal picked up $30,000 last quarter in donations from companies and trade groups with a direct interest in the SECURE Act.

Iwry, the former Treasury official, explained that “for some years, going back to at least 2012 or 2013, the insurance industry has proposed a very similar safe harbor.” At that time, Phyllis Borzi, a top official with the Department of Labor, denied the industry a regulatory safe harbor as part of new rules on 401(k)-style plans, deeming it too weak. So the industry decided to focus attention on Congress instead. Borzi and Iwry have expressed their concerns about it publicly.

In theory, giving workers the option to get a lifetime stream of income after they retire is a good thing. That’s what a defined benefit pension looks like, after all. The problem Iwry has with the safe harbor as written in the SECURE Act is more technical.

Section 204 states that the safe harbor applies as long as the insurance company is licensed by a state for seven years; it does not assess whether the company is financially secure or highly rated by credit rating agencies. “As currently drafted, the legislative safe harbor would cover even insurers that are rated below investment grade and that barely meet the pass-fail standards of the state insurance departments,” Iwry said. The bill also makes explicit that there is no requirement for the plan sponsor to select the lowest cost contract when selecting an annuity provider.

Second, insurance companies falling under the safe harbor umbrella could provide any type of annuity, both the fixed-income variety and the more predatory variable-income or indexed type, which have drawn consumer protection concerns about high fees and nontransparent costs. While variable-income and indexed annuities are not covered by the safe harbor, they’re mentioned as a type of annuity an insurance company protected by the safe harbor can provide. This language is confusing and could give leeway for insurance companies to sell products that aren’t suitable for workers.

Some experts look to 403(b) plans, which are retirement accounts for certain public school employees and tax-exempt organizations. Those plans allow annuities and have been criticized for letting in predatory actors. “The 403(b) market provides a living, breathing illustration of what it looks like when annuities are included in retirement plans without adequate fiduciary protections, and it is a hellscape,” said Barbara Roper, director of investor protection for the Consumer Federation of America.

The language in Section 204 is even internally contradictory. The title reads “Fiduciary Safe Harbor for Lifetime Income Provider,” but just a few lines under that, a sub-title reads “Safe Harbor for Annuity Selection.” This lack of clarity over what’s actually being covered could be exploited in litigation to give a much larger exemption than intended. And the insurance industry has no problem with such possibilities. “This may just be the result of sloppy drafting — a conflict between the text and the subhead — but it is too important an issue to be left ambiguous,” said Roper.

Other parts of the SECURE Act play into the annuity providers’ hands. For example, the bill increases how much workers can have automatically deducted from their paycheck to go into a retirement account, from 10 to 15 percent. This is great for annuity providers, who can get more retirement money on the back end for their products. Another section entitles workers to a benefit statement that estimates the lifetime income they would get from the current funds in their retirement account. This is almost an advertisement for annuities, allowing workers to compare what’s in their accounts to the promises the industry can make.

The sticking point for Democrats when it came to the SECURE Act was not the potential it holds to facilitate the defrauding of would-be retirees but, rather, a strange provision that Rep. Kevin Brady, the former Republican chair of the committee, insisted on, according to people involved in the talks. Brady wanted to allow 529 accounts, which are set up for education savings, to be able to pay for home schooling. It’s a head-scratcher of an idea and opposed by teacher unions. Brady reluctantly allowed it to be stripped out of the final package, even though it passed through committee.

But that has been the only real controversy over the bill, which passed both the House Ways and Means Committee and the Senate Finance Committee unanimously. The House set up the vote to come on the same week as the Consumers First Act, a bill from the House Financial Services Committee that would roll back all of Mick Mulvaney’s degradations of the Consumer Financial Protection Bureau. This placement would suggest that the House is putting together a “consumer protection”-themed week. But while the Consumers First Act fits that bill, the SECURE Act is not structured that way, and its Section 204 could actually hurt consumers while giving a powerful industry what it’s wanted for a long time.

Meanwhile, what’s not in the bill is just as telling. While in the minority, for a decade Neal called for retirement security reform to be based around the concept of an “automatic IRA,” and he introduced a bill to that effect each cycle. Under the legislation, if an employer with at least 10 workers declined to sponsor a workplace retirement plan, the workers would be automatically enrolled into an auto-IRA. The simplicity of the approach is strongly opposed by the industry, which profits by heaping complexity and fees onto workers.

That Neal was setting this up while resisting attempts to be more aggressive on oversight against the Trump administration has angered some critics. “He’s been overt about wanting to get stuff done,” said the Revolving Door Project’s Hauser. “He’s been so obviously bad at oversight that I don’t think he’s burned any bridges at the White House.”

The SECURE Act’s breezy journey to passage reflects the role of industry in the nation’s legislative process. After Newt Gingrich’s revolutionaries took over the House in 1994, he set about dismantling the chamber’s intellectual infrastructure, slashing the budget for staff and dissolving collective research assets. The point was not to save taxpayer money but to effectively privatize the lawmaking process. With just a handful of underpaid staffers, members of Congress outsource the crafting of legislation to lobbyists and corporate attorneys.

That’s not the only corruption at work in this process. Outside groups in Washington have also formed to help lawmakers navigate complicated issues like financial security in retirement, but other than foundation or labor funding, there’s no real path for them to remain solvent without relying on industry support. Take a paper from February of this year on portable, nonemployer retirement benefits, a collaboration between the Aspen Institute Financial Security Program and Common Wealth, two third-party outfits dedicated to the issue of retirement security. “This paper is made possible through funding from The Prudential Foundation, although the authors retained full editorial control,” the paper discloses.

Yet of the four people thanked in the acknowledgments, one is Jamie Kalamarides, who is president of Prudential Group Insurance. The authors even admit that the paper “draws on the insights” of Kalamarides and the others mentioned: “While this paper draws on the insights of all of the contributors listed above, the findings, interpretations, and conclusions expressed here, as well as any errors or other shortcomings, are those of the authors alone.”

The SECURE Act is hardly the kind of package that would ensure true dignity to seniors in retirement; a bill from Rep. John Larson, D-Conn., would, however, by doing something simple: expanding Social Security. “This is not going to increase the economic security of older Americans,” said Alex Lawson of Social Security Works, a big supporter of the Larson bill, which advocates are trying to get to a floor vote. “And there’s some potential to harm people with complex products that Wall Street makes bank on.”

The post The House Has Found Bipartisan Agreement on Reform to Retirement Accounts. Be Afraid. appeared first on The Intercept.

Anzalone is the president of Anzalone Liszt, a prominent Democratic polling firm. He is joining Trade Works for America, an organization co-founded by Marc Short, who is now Vice President Mike Pence’s chief of staff. Funding for the group, which expects to spend $15 million to $20 million, comes from “the pharmaceutical industry, oil and gas, the automotive and agricultural sectors, and traditional GOP donors.”

Trade Works has bipartisan co-chairs: former Republican Governors Association Executive Director Phil Cox, and former North Dakota Sen. Heidi Heitkamp, a Democrat. Last year, when she was in office, Heitkamp declared NAFTA 2.0, which Trump has termed the United States-Mexico-Canada Agreement, “disappointing.” (Anzalone, as a pollster, isn’t required to register as a lobbyist if he doesn’t spend a significant amount of time talking directly to lawmakers or their staff.)

Unions share Heitkamp’s prior assessment. The AFL-CIO formally announced opposition to USMCA in its current form in March. “The NAFTA renegotiation requires strong labor rights provisions and strong enforcement provisions that as of today are not yet in the agreement,” their statement read. The agreement also locks in protections for certain pharmaceuticals, which progressives have loudly opposed.

Biden has sought to position himself as a union stalwart, kicking off his campaign at a Teamsters local and winning the endorsement of the International Association of Fire Fighters. But he also had his first fundraiser hosted by a union-busting lawyer, and this week he held another fundraiser in Los Angeles at the home of a board member of Kaiser Permanente, the hospital chain currently mired in a labor dispute with the National Union of Healthcare Workers. Health care workers picketed the Biden fundraiser on Wednesday. Now, his pollster has joined an organization dedicated to passing a trade agreement labor unions are against.

Biden has also set himself up almost entirely in opposition to Trump, while his pollster pushes to get Trump a win on trade policy, a signature issue for the president.

Owen E. Herrnstadt of the International Association of Machinists has laid out labor’s opposition to USMCA: There is no funding for enforcement or monitoring in the agreement. The labor standards are framed as “principles” rather than actual rights, and fields not involving trade or investment don’t have to abide by them. Also, workers cannot get employers who violate the agreement sanctioned on their own. It’s not even clear whether the murder of a trade union activist would qualify as a USMCA violation, since violations must occur “periodically and repeatedly.”

Mexico did pass amendments to its labor law, which unions had said must be completed before any agreement. The amendments give Mexican workers access to secret-ballot union elections for bargaining and contracts, and ban “protection unions” set up before anyone is hired. However, unions still believe it falls short.

Trade Works for America has been talking up the agreement on Capitol Hill, claiming that it will support 14 million jobs. As economist Dean Baker has noted, an analysis by the U.S. International Trade Commission estimated that USMCA would add 0.02 percent of gross domestic product to the economy per year, “an increment that would be essentially invisible.” And those increases are only secured through “greater certainty” for business investment, which makes no sense since there is already a trade agreement in place with Canada and Mexico and has been for a quarter-century.

The group has already spent nearly $700,000 on digital advertising and television, mostly targeting Democratic House members in swing districts.

Other politicians turned lobbyists working to pass USMCA include former holder of Rep. Alexandria Ocasio-Cortez’s seat Joe Crowley, former Republican Rep. Erik Paulsen, and former Obama administration Commerce Secretary Gary Locke.

A separate coalition working on the deal includes AT&T, John Deere, Kraft Heinz, the American Petroleum Institute, and the National Restaurant Association, with co-chair lobbyists who work for Cargill, Citigroup, Fiat Chrysler, and UPS.

A spokesperson for Biden did not immediately respond to a request for comment.

The post Joe Biden’s Union Schtick Is All Performance. His Pollster Just Signed Up to Lobby Against Labor for Trump’s NAFTA 2.0. appeared first on The Intercept.

The bill is called the Loan Shark Prevention Act, and it’s only two pages long. It includes language that would prevent lenders from adding fees to “evade” the interest rate cap and sets penalties for violators, including a forfeiture of all interest on the illegal loans.

According to Ocasio-Cortez’s office, the freshman representative plans to suggest postal banking as a public option for consumer lending, though that is not in the legislation. A postal lending option would in theory minimize the impact on access to credit from the rate cap. Sanders endorsed postal banking during his 2016 presidential campaign.

The interest rate cap, often referred to as a usury cap in a reference to the biblical term, has been a mainstay of Sanders’s left-wing agenda. He introduced similar legislation as far back as 2009, when Congress was debating the CARD Act, which added some more modest protections for credit card holders. While the 2009 bill specifically focused on credit cards, by 2016 Sanders had added all consumer loans to the plan.

“Today’s loan sharks wear expensive suits and work on Wall Street, where they make hundreds of millions of dollars in total compensation by charging sky-high fees and usurious interest rates,” Sanders and Ocasio-Cortez said in a statement accompanying the plan.

The federal rate cap would nullify a critical 1978 Supreme Court ruling in Marquette National Bank v. First of Omaha Service Corp. At the time, most states had some sort of usury cap in place, dating back to the National Bank Acts of 1863-64. The high interest rates of the late 1970s increased bank borrowing costs, but the caps protected consumers from enduring the same rates.

Amid much clamor from bank lobbyists and free marketeers, First National Bank of Omaha, as was customary at the time, mailed out unsolicited credit cards across the country. The terms on these complied with Nebraska’s higher interest rate cap but violated the laws of the states that First National mailed them into. The court had to answer: When a credit card offer is made, does the bank’s home-state interest rate or the borrower’s home-state interest rate apply? Arguing for First National was notorious conservative lawyer, and future failed Supreme Court nominee, Robert Bork.

The court unanimously chose the bank’s home state, and this revolutionized consumer lending. A handful of states lifted their usury caps entirely to entice banks to move their headquarters, most notably South Dakota and Delaware (in case you were wondering why your credit cards come out of those two states). Banks took the offer and could therefore export high interest rates anywhere in the country. Other states had usury laws on the books, but the Marquette decision made them irrelevant. (That’s also how Delaware’s Joe Biden became known as “the senator from MBNA,” and why Republicans regularly push to allow consumers to purchase health insurance “across state lines” — all of the insurers would set up shop in Delaware, or another low-regulation state, and sell junk plans from there, freed of state regulators elsewhere.)

The Sanders and Ocasio-Cortez proposal would allow the Federal Reserve Board to increase the rate cap for a period of 18 months but only if there are adverse circumstances threatening the “safety and soundness” of the financial system. Credit unions are exempt from this bill because a 1980 law already caps credit union interest rates to 15 percent. However, the National Credit Union Administration has used the “safety and soundness” provision since the cap was enacted; from a high of 21 percent in the 1980s, today it sits at 18 percent.

Current credit card interest rates range between 15 and 23 percent, and are higher for branded department store cards. Banks currently borrow from the Federal Reserve at a skinny 2.5 percent.

The real consumer savings from the Loan Shark Prevention Act would come from other short-term, small-dollar loans, which in an age of precarious finances at the low end have become commonplace. Payday loans carry annual percentage rates as high as 667 percent.

The Consumer Financial Protection Bureau recently gutted protections for payday lending customers that would have forced lenders to consider ability to repay before issuing the loan.

When Sanders made a similar proposal in 2016, bank trade publications warned that the plan would reduce access to credit for low-income families. No payday lender would offer a 15 percent rate for its services, at least not for anyone deemed a credit risk. The most aggressive consumer groups seeking changes to payday lending laws have asked for a 36 percent cap, as it exists in several states.

At a time when 40 percent of Americans don’t have $400 on hand for an emergency, demand for short-term loans would still exist. But if nobody will lend to such families at 15 percent, how will they cope? Will they go from loan sharks in three-piece suits to actual loan sharks?

The answer, to Ocasio-Cortez and Sanders, is postal banking, which several Democratic presidential candidates have endorsed. Letting the nation’s 31,000 post offices issue simple bank accounts and even short-term loans would solve numerous problems, particularly for the over one in four households who have little or no access to banking services, which lead them to use high-cost alternatives. Returning to a postal banking system, which as many as 4 million Americans enjoyed when it was in place from 1911 to 1967, could promote financial inclusion, save billions of dollars for vulnerable populations, and help modernize and stabilize the postal system — a nationalized entity written directly into the Constitution — in an era of electronic communication.

“We must make sure that giant Wall Street financial institutions are not the only way Americans can gain access to banking services,” the Sanders and Ocasio-Cortez statement reads. “Together, we are going to put predatory lenders out of business and provide affordable banking options to all Americans.”

The 2016 collective bargaining agreement between the U.S. Postal Service and the American Postal Workers Union included the rollout of postal banking pilot programs, but the Postal Service never enacted them. Those pilot programs would not have included short-term lending; that would likely require legislation.

The post Alexandria Ocasio-Cortez and Bernie Sanders Team Up on Bank Legislation appeared first on The Intercept.

Sanders is not alone among 2020 candidates in targeting big ag. Sen. Cory Booker’s strongest and most ambitious policy designs have been in the area of agriculture, and he introduced a moratorium and merger review bill last year. Sen. Elizabeth Warren’s farm policy includes reversing mergers she says should have never been approved, like the Bayer-Monsanto deal that consolidated the seed and pesticide industry. Even former Colorado Gov. John Hickenlooper has called modern antitrust enforcement a failure, supporting merger guidelines that encourage competition rather than the so-called consumer welfare standard.

With 30 percent of the Iowa economy tied up in agriculture, the concentration crisis seems like fertile ground for Democrats. The way of life of the independent family farmer is slowly slipping away, supplanted by mammoth agribusinesses: industrial-sized confinement lots, ruthless livestock companies and seed merchants, monoculture crops stretching for miles. These monopolists have grabbed a significant share of food profits; farmers used to earn 37 cents of every retail dollar, now down to only 15.

Any Democrat looking to improve life for everyday Iowans, then, could highlight preventing or reversing big ag consolidation as a way to salvage rural America. Anyone, that is, except for Tom Vilsack, former Iowa governor and former President Barack Obama’s agriculture secretary. Which makes sense, because he’s a mouthpiece for the corporate dairy industry.

Vilsack was heavily recruited to run for Senate against Republican Joni Ernst in 2020, but announced earlier this year that he would take a pass. Speaking on the “Iowa Starting Line” podcast last month, he warned Democratic candidates against talking about farm monopolies. “Well, there are a substantial number of people hired and employed by those businesses here in Iowa,” Vilsack said. “So you’re essentially saying to all of those folks, you might be out of a job. That’s not to me a winning message.”

If the conversation is about lost jobs, Vilsack has it backward: Farm consolidation causes job loss, from family farmers cashing out to Bayer cutting 12,000 jobs when it merged with Monsanto.

But his message will come as a relief to his industry employers.

Vilsack is president and CEO of the U.S. Dairy Export Council, joining just days after wrapping up as Obama’s agriculture secretary. The council’s members include the large corporate players who have made the dairy business a rolling disaster in America.

Prices for milk have plummeted since 2014, leading to the closure of around 4,600 dairy farms per year, a number that is expected to accelerate. The problem is a small set of monopoly purchasers. A single processor slowing purchases, as Grassland Dairy Products did in 2017, can lead to disaster. Some dairy companies have begun to include a list of suicide prevention hotlines in the envelope with farmers’ checks.

For the most part, only large factory farmers have remained viable; the average number of cows per dairy farm has doubled since 2004.

In the past, cooperatives would organize dairy farmers to protect their interests against consolidated buyers. But co-ops now include monopoly giants like Dairy Farmers of America, which “represents” 13,000 farmers producing 30 percent of the raw milk supply. As a hybrid producer and buyer, DFA can dictate terms to farmers in areas where there’s no alternative. They also own or partner with milk processors and marketers, meaning that they make more money when they keep prices to co-op members low.

DFA’s $14 billion in annual revenue rarely gets shared with its own members, unless forced. Last year, DFA paid out a $50 million class-action settlement to 9,000 farms for cornering the raw milk market and driving down prices in the Northeast, including Sanders’s state of Vermont. That followed a $140 million settlement in the Southeast in 2012.

Vilsack did disclose his affiliation at the top of the “Iowa Startling Line” interview, saying, “I work for dairy farmers and the dairy industry in the country as we try to export dairy products around the world.” But if farmers aren’t profiting from what they produce, expanded exports do little for them.

The U.S. Dairy Export Council is funded through direct grants from the U.S. Department of Agriculture’s Market Access Program, a marketing fund that gave the organization $4.7 million in public dollars last year, along with the dairy “checkoff” program, in which farmers kick in 7.5 cents for every 100 pounds of milk they sell for promotional campaigns. Checkoff programs have been savaged by farm reform groups and 2020 candidates like Warren, because the money often goes to lobbying activities for big ag.

In the last available disclosure form from the U.S Dairy Export Council’s corporate parent, from 2016, Vilsack’s predecessor in the organization, Thomas Suber, earned $753,620. “I’m surprisingly more busy now than I was when I was secretary,” Vilsack noted to “Iowa Starting Line.”

In the interview, Vilsack insisted that breaking up agricultural monopolies would do nothing for farmers “because a company of the broken-up companies will hold the patent to the seed. And as long as they hold the patent, they’re going to be able to license that technology to all those other smaller companies.” He suggested reducing patent protections on seeds from 20 years to five years.

This is a fine idea; Sanders actually endorsed it in his agricultural policy speech. But it skillfully avoids anything that would affect Vilsack’s job. Seeds are not the only input on farms, and crops are not the only items raised. In his answer about farm monopolies, dairy and livestock didn’t come up.

Furthermore, Vilsack completely contradicted himself moments later in the interview by saying, “It’s not so much the input costs that these guys are worried about, it’s their lack of market opportunity.” He endorsed creating local food markets (an odd thing for the head of an export council to say), where farmers can negotiate “directly as the producer with you the consumer.” This is precisely what isn’t done by Vilsack’s employers in the dairy industry, who force prices downward in anti-competitive ways.

Not all Iowa Democrats parrot Vilsack’s corporate-friendly line. Last year, former Iowa congressional candidate J.D. Scholten nearly defeated white nationalist Steve King in a right-wing district on a platform that rested heavily on going hard at Monsanto and other monopolistic banes of rural life.

At the beginning of the Obama administration, Vilsack’s Department of Agriculture and the Justice Department convened five public workshops around the country to discuss agricultural and antitrust enforcement. This was seen as a prelude to real action to help farmers. It led nowhere. Enforcers declined to take action. “The Obama Justice Department looked at this and decided we would have a very difficult time getting through the process,” Vilsack said to “Iowa Starting Line.” Critics argue that the administration was simply intimidated by pushback from the industry.

For his part, Vilsack failed to finalize new rules in the initial two years that would have banned big ag retaliation against farmers and given them stronger legal tools to prevent abuse. When Republicans took over Congress in 2011, they bottled up these rules for years. Vilsack only completed them in the administration’s final days, and even then in weakened form. Because they hadn’t taken effect yet, the Trump administration swiftly nullified the rules.

Krysta Harden, Vilsack’s top deputy at the Department of Agriculture, last month also joined up with the dairy industry, running global environmental strategy at Dairy Management Inc., the parent company of the U.S. Dairy Export Council, which Vilsack runs.

Pulling rank on the 2020 field, Vilsack claimed that the fervor over agricultural monopolies stems from “folks in think tanks in urban centers who have had very little experience, if any, with rural places.” Most 2020 candidates haven’t taken Vilsack’s advice, including the junior senator from the dairy state of Vermont.
“I come from a state where agriculture is very important,” Sanders told HuffPost last month. “Literally every week another farmer is going out of business … so the answer is vigorous antitrust legislation, break them up.”

The post Obama’s Agriculture Secretary, Now Working for the Dairy Industry, Urges 2020 Democrats to Be Nice to the Dairy Industry appeared first on The Intercept.

The lead lobbyist for SunTrust Bank is a former Shelby chief counsel. The head of the Federal Deposit Insurance Corporation, which will not only decide whether to approve the merger, but will also serve as the combined bank’s primary federal regulator, is another former Shelby chief counsel. And the White House official responsible for vetting financial regulator nominees, who has yet to move through two Democratic vacancies on the FDIC who may have concerns about the merger, is a third former Shelby chief counsel.

“The Shelby mafia is representative of how the Republican establishment expertly cultivates and deploys likeminded people throughout the government and the broader political ecosystem,” said Jeff Hauser, director of the Revolving Door Project at the Center for Economic and Policy Research. No similar system exists on the left and certainly not out of an individual senator’s office.

Snagging a staff position with Shelby sets up young conservatives on both sides of the political lobbying complex. Republican administrations want you for their executive branch, to ensure expert advancement of anti-regulatory policy. Banks want you for your network of contacts, which you can tap at virtually every federal agency critical to a financial institution. And you can always slide between one and the other, gaining contacts and prestige along the way and raising the fees you can command.

But the Shelby mafia’s role in the SunTrust-BB&T merger is even a step beyond.

As The Intercept has reported, the SunTrust-BB&T merger, which would create the nation’s sixth-largest commercial bank, was helped along by the bipartisan bank deregulation bill passed last year. Regulators took the opportunity from that law to not only reduce regulatory standards for banks with under $250 billion of assets (which includes SunTrust and BB&T separately), but also for banks up to $700 billion (which would include the merged company, which would carry roughly $442 billion). The Federal Reserve used Section 401 of the legislation to reassess rules on banks and grant relief from certain capital and liquidity requirements, as well as less frequent stress testing, in which the bank must show how it would fare under adverse economic conditions.

Assisting in that process from the outside was SunTrust’s head lobbyist, Mark Oesterle. For many years, Oesterle has been advocating for treating SunTrust differently than its larger counterparts. “We are not Wall Street banks, but we face the same regulatory regime as a Wall Street bank,” Oesterle said in 2012, in a story about how large regional banks were opening up lobbying operations, “and staffing them with seasoned Washington hands.”

Oesterle is one such Washington hand. He started his career as a legislative aide to Shelby and then joined the Senate Banking Committee in 2001, when Shelby was ranking member and later chair. After serving as deputy staff director and then chief counsel for a decade, Oesterle left the committee in early 2011 to join lobbying group Reed Smith. It was a good time to spin out to K Street; the Dodd-Frank financial reform had just been written, and banks were eager to put their stamp on the rule-making process. After working for a number of financial institutions at Reed Smith, Oesterle became SunTrust’s main lobbyist in Washington in 2012.

As a big-bank lobbyist, Oesterle can draw upon his ties to Shelby. “The so-called Shelby mafia not only works in sync across government to undermine regulation meant to keep us safe from rapacious banks,” Hauser noted, “but they make fellow Shelby alumni working in the swamp rich as well.”

Mark Calabria, a senior staffer on the banking committee at the same time as Oesterle, was recently confirmed as head of the Federal Housing Finance Agency, which oversees mortgage giants Fannie Mae and Freddie Mac. William Duhnke, a former staff director and general counsel for the banking panel, has since January 2018 been the chair of the Public Company Accounting Oversight Board, which monitors financial auditing. Hester Peirce and Elad Roisman, two of the three Republican commissioners on the Securities and Exchange Commission, are former Shelby staffers; like Oesterle, Roisman was chief counsel. Roisman replaced Michael Piwowar on the SEC, and he was formerly chief economist for Shelby’s banking committee. He now serves as executive director of the Milken Institute.

But with SunTrust’s merger with BB&T, Oesterle will rely on two Shelby mafia members in particular. Jelena McWilliams was chief counsel and deputy staff director to Shelby on the banking committee in 2012 and 2013. She spun out to become chief legal officer at Fifth Third Bancorp, another large regional bank, and was confirmed as chair of the FDIC in June of last year.

The FDIC plays a dual role in the SunTrust-BB&T merger. Under the Bank Merger Act of 1960, the FDIC must approve any deals that would create a state bank without a national charter. That’s the intention of this deal, putting the FDIC in the driver’s seat. In addition, as Sen. Sherrod Brown, D-Ohio, wrote in a letter to McWilliams on Tuesday, the merger “would also result in the largest bank the FDIC has ever supervised as the primary federal regulator.” That means that the chief lobbyist for this potential mega-bank and the chair of its primary regulator both come out of the Shelby orbit.

Sue Mallino, a spokesperson for SunTrust, said that “Mark has not connected with chair McWilliams on the merger.” She added that there will be many opportunities for public comment throughout the process and that “we’re confident the BB&T-SunTrust combination of two purpose-driven companies will be positive for consumers and communities.”

In the letter, Brown asked for the FDIC to decide this merger at the board level, rather than under delegated authority by career staff. He stressed the importance of that decision. Financial institutions of smaller sizes than this merged entity, like Washington Mutual and Countrywide, were significant drivers of the 2008 financial crisis. In addition, SunTrust and BB&T have overlapping bank operations in 80 markets and 740 branches within a two-mile radius; subsequently, they could dominate several areas of the country. Branch closures would further create job loss in those areas.

A board-level review would put the FDIC’s five members on the record on whether the merger would affect competition and systemic risk. However, those five slots are not currently filled. McWilliams and two outside members — Office of the Comptroller of the Currency head Joseph Otting and Consumer Financial Protection Bureau Director Kathy Kraninger — are the only ones seated. The two positions intended for Democrats, the vice chair and the internal director, have been vacant for many months.

Democrats recommended Martin Gruenberg, the former FDIC chair, and Graham Steele, a former Brown staffer, for those positions many months ago. But they have not been formally nominated by President Donald Trump. The official responsible for financial regulatory personnel in the White House is named Andrew Olmem. He was deputy staff director and chief counsel to Shelby on the Senate Banking Committee from 2005 to 2013.

There’s an insidious nature to the role of the ex-Shelby officials in this matter. Democratic regulators asking too many questions about this big-bank merger could prove damaging. So Olmem has been slow-walking the Democratic FDIC recommendations. That helps McWilliams, who as FDIC chair has no formal opposition confirmed at the agency, and it helps Oesterle, greasing the wheels for the merger of his bank. And all of this goes back to Shelby.

“Their fingerprints are all over SunTrust-BB&T merger,” said David Segal, co-founder of progressive organization Demand Progress. “The Republicans — especially Shelby and his acolytes — are efficient and ruthless.”

The Intercept asked the FDIC if McWilliams sought formal ethics guidance to clear her for involvement in the merger, given the connections to Shelby’s office. The FDIC said they would not provide a comment. Shelby’s office did not return a request for comment.

In a separate letter, Brown called on Trump to nominate a full slate for the FDIC board, citing in particular the need for a complete panel to analyze the SunTrust-BB&T merger. “In an environment where there is bipartisan concern over banking industry consolidation and its effects on community banks, the costs and benefits of this merger call for careful scrutiny, and the full attention of a complete FDIC board,” Brown wrote. He had previously joined colleagues in urging Trump to nominate the FDIC members, but not in the context of the SunTrust merger.

Regulators will hold public meetings on the merger in Charlotte, North Carolina, on April 25 and in Atlanta on May 3. Both are areas where BB&T and SunTrust are already prominent. SunTrust Park is the home of the Atlanta Braves; BB&T Ballpark houses the minor league Charlotte Knights. Both are “stadium banks,” not big enough to be global names, but big enough to have a stadium named after them.

Bank mergers have accelerated during Trump’s presidency, with faster approval times. But regulators have never been much of a barrier. Since 2006, the Fed has rejected zero of 3,819 applications. In February, Sen. Elizabeth Warren, D-Mass., called the merger approval process at the regulators “a rubber stamp.” The Shelby mafia serves as an assist to that process.

Among liberals who focus on executive branch personnel, there’s almost a grudging respect for the pipeline that Shelby’s office has arranged for conservative staff. “It is worth asking why Democrats have not been able to groom, cultivate, and deploy talented young people to work in the public interest on the same scale as Shelby and McConnell’s Republicans,” Hauser said. Liberals have been fuming at Senate Minority Leader Chuck Schumer for a series of missteps in getting minority members onto independent commissions.

Moreover, the type of executive branch appointees Democrats elevate are qualitatively different, said Segal. “Democrats’ first instinct is to seek to appease their dual masters — a corporatist funding class and a populist base of voters — by identifying appointees who offend neither and are destined to accomplish little.”

A recent headline attests to this: “Purdue’s Sackler family wants global opioids settlement: Sackler lawyer Mary Jo White.”

The Sacklers are responsible for hundreds of thousands of opioid deaths in America. White, a political independent, was Barack Obama’s choice for SEC commissioner. After that stint, she returned to Debevoise & Plimpton, the law firm for numerous corporations she formerly regulated.

“You don’t want to mess with Mary Jo,” Obama said when he nominated her.

Correction: April 24, 2019

This story previously misidentified one of the nominees Democrats are recommending for the FDIC as Thomas Curry. It is Martin Gruenberg.

The post The “Shelby Mafia” Is Muscling Through a Major New Bank Merger appeared first on The Intercept.

Stat News first reported Aronson’s role in drug-pricing talks, which The Intercept was able to confirm. Aronson was previously a health policy adviser to Rahm Emanuel when he served in the House of Representatives.

“Our office meets with a wide variety of people, and Aronson is not involved in drafting Democrats’ prescription drug legislation,” said Pelosi spokesperson Henry Connelly.

While it’s in the short-term interest of insurance payers and providers to lower the cost of prescription drugs, the marriage of convenience could have its limits. Democrats from former President Barack Obama to 2020 hopeful Bernie Sanders have expressed support for interventions in the private insurance industry, from public insurance options to a Medicare for All system that abolishes insurers entirely. The House’s most powerful Democrat teaming up with insurers on drug prices may make it harder to consider more aggressive changes down the road.

Already, the House has taken the side of pharmacy benefit managers in a dispute with the Trump administration over drug company rebates. One of Aronson’s clients is the Pharmaceutical Care Management Association, the leading trade group for pharmacy benefit managers.

The situation reveals a familiar dynamic in Washington, where political parties don’t debate each other on policy as much as they mediate fights between corporate interests. Almost everything on drug pricing coming out of the Trump administration, whose Health and Human Services Secretary Alex Azar was the president of drug company Eli Lilly, attacks pharmacy benefit managers and hospitals to the benefit of drug companies; almost everything coming out of the speaker’s office attacks drug companies to the benefit of pharmacy benefit managers and hospitals.

Aronson, the health industry lobbyist, worked at the Centers for Medicare and Medicaid Services and as policy director for the White House Office of Health Reform under Obama, where Emanuel served as chief of staff in 2009 and 2010.

The situation reveals a familiar dynamic in Washington, where political parties don’t debate each other on policy as much as they mediate fights between corporate interests.

In 2015, Aronson shifted to K Street, working for the powerful firm Mehlman Castagnetti Rosen & Thomas, where she is “uniquely equipped to help health clients achieve policy and political objectives,” according to the company’s website. Aronson is also the executive director of the Campaign for Sustainable Drug Pricing, or CSRxP, which describes itself as “a broad-based coalition of leaders — physicians, nurses, hospitals, consumers, health plans, PBMs, pharmacists, and businesses — promoting bipartisan, market-based solutions to lower drug prices in America.”

Members of the CSRxP are mostly large corporations and trade groups, including the American Hospital Association, America’s Health Insurance Plans, the American College of Physicians, and the Pharmaceutical Care Management Association. Hospital groups Ascension and Kaiser Permanente, insurance companies Anthem and Blue Cross Blue Shield, and pharmacy benefit managers CVS Health and Prime Therapeutics are also part of the coalition.

In a statement, CSRxP spokesperson Jon Conradi said, “Ms. Aronson and the CSRxP team have, and will continue to, work with Members of Congress on both sides of the aisle to advance policies that hold Big Pharma accountable for their egregious pricing practices that are fleecing American consumers.”

As The Intercept has reported, Primus has been developing a policy since February, through which Medicare and drugmakers would submit prices for certain high-priced drugs, and a third-party arbitrator would select one of the two prices, or choose a third based on their own research.

Aronson is part of a team of policy experts developing the legislation. Others include Harvard professor Richard Frank, an Obama administration veteran who co-authored a Health Affairs study introducing the arbitration concept in 2008, and Johns Hopkins professor Gerard Anderson. These three have discussed the matter with Trump administration officials. Primus has expressed a desire to find a drug-pricing solution that President Donald Trump would sign.

Sources indicate that Frank Pallone, D-N.J., chair of the House Energy and Commerce Committee, would likely carry the arbitration bill.

House progressives have criticized the concept, because it hands over pricing decisions to an unaccountable and opaque third party. Many have gotten behind legislation from Rep. Lloyd Doggett, D-Texas, to require Medicare to negotiate directly with pharmaceutical companies, and if firms refused to reduce prices of a drug, to authorize compulsory licensing of that drug to generic manufacturers. That bill has 122 co-sponsors, and Sen. Elizabeth Warren, D-Mass., has been pushing a related idea around direct public manufacturing of generic drugs. Pharmaceutical lobbyists appear to be more comfortable with arbitration.

A third solution has emerged from the Center for American Progress’s health policy adviser Topher Spiro, who attended one meeting with Primus and other experts before the election but then broke with the group. He is working with House Ways and Means Committee Chair Richard Neal, D-Mass., on a bill that would negotiate directly with drug companies, enforced with an excess profit tax on any price increase beyond the current rate of medical inflation. “This would be much broader than the Doggett bill,” said a CAP spokesperson, saying that it would apply to all payers of drugs used by Medicare. “We’ve had productive discussions with the groups, Rep. Neal’s office, Rep. Doggett’s office, and Speaker Pelosi’s office in an attempt to find a bold, comprehensive solution that can lower drug prices for all Americans,” the CAP spokesperson added.

Connelly, Pelosi’s spokesperson, responded to questions about the drug-pricing negotiations by saying, “We’re continuing to incorporate feedback and ideas from members and stakeholders about how we can develop the toughest possible bill.”

House Democrats and outside groups have sparred over the disparate options, behind the scenes and in public, which has led to fears that nothing will emerge on what was seen as the most promising avenue for bipartisan legislation in this Congress.

Drug company CEOs testified before the House Energy and Commerce Committee on April 10, and while lobbyists were pleased that there was no gotcha moment to point to like the infamous tobacco industry hearings in the 1990s, lobbyists were concerned that the CEOs were so compliant that members of Congress gained leverage over negotiations. There’s also an exploitable split between U.S.-owned drugmakers, who oppose any regulation on drug prices, and European-owned firms, who are more comfortable with it.

The intra-Democratic debate could frustrate any resolution.

But while the environment is fertile for some solution, the intra-Democratic debate could frustrate any resolution. Policymakers see a narrow window to get something done before the 2020 elections take over. With several Democratic candidates eager to back legislation lowering drug prices, there’s concern that Trump won’t sign something his potential challengers want, and on the other side, Democrats may not want to give Trump a victory to kick off his re-election campaign.

Meanwhile, the role of the corporate coalition Aronson heads in the negotiations may be coloring Pelosi and Primus’s positions on other health-related policies. For example, House Democratic leadership has publicly rejected a proposed Health and Human Services rule to eliminate the legal kickbacks that pharmacy benefit managers get from negotiating rebates with drug companies.

Primus and Pelosi have said that removing rebates would not bring list prices for prescription drugs down an equivalent amount, and they’ve cited estimates from the Center on Medicare and Medicaid Services’s Office of the Actuary suggesting higher consumer prices and government costs from the rebate rule. An HHS study from the data analysis firm Milliman found a far broader possible range of outcomes, from $135 billion in costs to consumers and government to $188 billion in savings.

“A plan that merely trusts Pharma to lower its prices hasn’t worked before, and it won’t work now,” said Connelly.

Of course, resisting the administration’s moves on rebates mirrors the position of the pharmacy benefit managers, one of Aronson’s key clients. Supporters of the HHS rule believe that ending rebates will change the business model for pharmacy benefit managers and control the misaligned incentives that lead to high list prices. Connelly noted that, in the context of drug price reform, “PBMs are going to have to step up too.”

The three leading pharmacy benefit managers that control the lion’s share of the market — CVS, Express Scripts, and OptumRx — have all merged or are merging with insurance companies (CVS with Aetna, Express Scripts with Cigna, and OptumRx with UnitedHealth). So siding with PBMs is effectively equivalent to siding with insurance companies, which are obviously the main obstacle (along with hospitals) to any expansion of Medicare or public insurance option in health markets.

Primus has also repeatedly downplayed support among the House leadership for a Medicare for All-style single-payer program, including in a presentation to insurance executives from Blue Cross Blue Shield. That company is also a member of Aronson’s Campaign for Sustainable Drug Pricing. Primus told the insurance executives, as the The Intercept previously reported, that Democratic leadership in the House would not be backing Medicare for All, but wanted help from insurance companies taking on pharmaceutical prices.

The Partnership for America’s Health Care Future has been running attack ads against Democratic single-payer supporters. That group has many coalition members in common with the Campaign for Sustainable Drug Pricing, including the American Hospital Association, America’s Health Insurance Plans, Ascension, Blue Cross Blue Shield, and the Federation of American Hospitals.

The Affordable Care Act also had the backing of stakeholder industries, and while it expanded coverage for millions of Americans, it was always seen as an incremental and not comprehensive fix to a broken system, as evidenced by Democrats running on improving health care in the 2018 midterms. Former Iowa Sen. Tom Harkin referred to it as a “starter home.” With a hospital and insurance company lobbyist working closely with the speaker’s office, it’s difficult to see how that starter home will be allowed to build an addition.

The post Nancy Pelosi’s Drug-Pricing Talks With the Trump Administration Are About Mediating Fights Between Corporate Interests appeared first on The Intercept.

Not only did this deprive taxpayers an offset to costs associated with refunding loans, but it also extended the life of the for-profit colleges, allowing them to enroll more students into a doomed enterprise that wasted time, money, and effort, and delivered them nothing of value.

That mirrors a persistent theme of DeVos’s leadership. Though the Obama administration initially dithered while for-profit colleges preyed on students, eventually it did crack down on the sector. Not so under DeVos.

Her top assistant Robert Eitel, previously a vice president at for-profit networks Bridgepoint and Career Education Corp, led the effort to block a rule making it easier for students to file for debt relief on loans when colleges defraud them. Head of student enforcement Julian Schmoke was a former dean at for-profit college DeVry, and during his tenure, a special team at the agency investigating for-profit abuses was disbanded. The agency has delayed tens of thousands of debt relief claims, and last October, it eliminated the “gainful employment” rule that would have forced for-profits to prove that students received decent-paying jobs after graduation. DeVos also reinstated a college accreditor that was terminated under the Obama administration for lax oversight of for-profits, despite her own career staffers determining that the accreditor was deficient.

Now, DeVos’s reluctance to seek insurance against for-profit college failures effectively kept a predatory group of schools on life support. “It’s indicative of the coziness between politicals at the Education Department and the for-profit industry,” said Clare McCann, a former senior policy adviser to the Education Department under President Barack Obama, now with the New America Foundation.

At issue are letters of credit, documents provided by an institution’s lenders that guarantee payment. Under current federal regulations, all schools that participate in student aid programs must undergo a financial audit. Through a complicated calculation of a college’s solvency, each school gets a financial responsibility score. Those with a failing grade must provide the Education Department with a letter of credit.

This acts as an insurance policy for the government. When a school closes, students can apply for a discharge to cancel their loans, depriving the Education Department, which issues the loans, of expected revenue. The letter of credit covers some of those losses.

The Education Department’s rules are fairly weak. Failing schools can either post a letter of credit equal to 50 percent of the total federal financial aid paid out in the last calendar year, or secure provisional certification through a letter of credit worth at least 10 percent of that figure. Not surprisingly, schools opt for the latter. Provisional status takes away some due process rights, making it easier for the Education Department to close failing schools — “It’s like being on probation,” said McCann — but it keeps student aid flowing at a drastically reduced cost.

It’s not entirely clear how much these letters of credit cost colleges, but Aaron Ament, president of the National Student Legal Defense Network, believes that it’s substantial. “Typically, [a bank] requires the institution to post 100 percent collateral,” Ament said.

The vast majority of schools at risk of closure belong to for-profit college networks. Over the past decade, more than 700 individual for-profit college campuses have shut down, compared to around 100 private nonprofit or public colleges. That adds up to nearly 40 percent of all for-profits in America vanishing since 2010, including closures of Corinthian Colleges and ITT Tech, two of the biggest networks. For-profit colleges soared amid the pain of the recession, but imploded amid persistent complaints of deceptive enrollments, gouging of students, and worthless diplomas.

Several remaining for-profits are teetering. The Education Department has discretion to require a letter of credit whenever they determine a risk to the taxpayer, like during a change in ownership and control of the institution, which happens often as for-profits sell their stakes to keep the lights on.

According to the most recent information, in the final year of the Obama administration, the Education Department held $937 million in letters of credit. But there is no up-to-date record of which colleges have supplied one. That’s the subject of a lawsuit involving the Freedom of Information Act, which the National Student Legal Defense Network filed in U.S. district court in Washington last summer.

Initially, the Education Department said it would take two years to track down all the letters of credit, and committed only to an ongoing two-year lag for all updates. The National Student Legal Defense Network subsequently asked for the status of five for-profit college networks known to be in financial risk. In November, the Education Department disclosed that it did not hold a letter of credit on any of the five.

For-profit networks without a letter of credit include: InfiLaw, a collection of law schools that have been closing, with the last surviving one converting to nonprofit status; Career Education Corporation, which has been forced by state regulators to forgive $500 million in student debt after accusations that it misled students about low job placement rates; and Bridgepoint, which is facing numerous investigations over similar deceptions.

Without a letter of credit, these schools need not guarantee hundreds of millions of dollars to the Education Department, allowing them to limp along, enrolling students in programs more likely to saddle them with massive debt than kickstart a career. “You’re talking about thousands of people’s lives we know are going to be ruined, and for what?” said Seth Frotman, the former student loan ombudsman for the Consumer Financial Protection Bureau who now runs the Student Borrower Protection Center.

The cases of Education Corporation of America and the Dream Center are the most egregious. Both networks are now closed, and the Education Department allowed prior letters of credit to expire, leaving no money to offset large losses from canceled loans.

ECA’s letter of credit expired at the end of March 2017; Ament’s team estimates that it would have been worth at least $27 million. The company managed over 70 campuses with roughly 19,000 students, but to many, their imminent demise was easy to spot. “We saw the writing on the wall for the school [last May] when it tried to change accreditation agencies and got a 50-page letter saying, ‘You are terrible,’” said Ben Miller, another former Obama-era Education Department policy adviser, now at the Center for American Progress. “It was obvious there would be problems, but the Education Department waited.”

ECA closed 26 campuses in a restructuring last September, but the Education Department didn’t ask for a letter of credit until the following month. Furthermore, it gave ECA until March 2019 to post it. The company didn’t make it that long, abruptly closing all campuses last December after its original accreditor dropped them. Students were not given time to transfer their credits to another school, a process known as a teach-out.

“When it collapsed, the Education Department had nothing,” said Ament.

The other case was even more of a head-scratcher. The Dream Center, a Christian charity with no experience in higher education, associated with a Los Angeles mega-church, acquired the failing for-profit Education Management Corporation in 2017. The 102 campuses included Argosy University, South University, and Art Institute locations.

At the time, the Dream Center only had $35 million in the bank, according to its Internal Revenue Service disclosure. “They had less money than EDMC turned in profit in a given year,” said Miller. Outside investors fronted nearly $200 million to finance EDMC’s operations, but any significant loss would put the Dream Center in financial peril.

Despite this, the Education Department did not require a new letter of credit as a condition of the Dream Center acquisition. The Education Department has historically been more concerned with finding a buyer when colleges go south than holding to account those that placed them into financial ruin.

In a similar situation in 2016, the Obama administration’s Education Department obtained a 25 percent letter of credit from Apollo Education Group when it took over the University of Phoenix. But the three older letters of credit held over from EDMC only totaled 10 percent, and the Education Department let the $104 million in guarantees expire in May 2018. In addition, no requirements for improving student outcomes were placed on the deal, unlike the University of Phoenix case.

The Education Department did convert part of one letter of credit into a cash escrow account, but then released $10 million of it back to the Dream Center to be used for salaries, retention bonuses, and payments to transferring students. “Releasing the money back to the institution seems particularly unorthodox and problematic,“ said McCann.

Dream Center’s first-year loss came to $38 million, more than it had in the bank at the end of 2017. Amid imminent evictions from its properties, Dream Center shut down 30 campuses last December. In January, a federal judge placed the Dream Center’s institutions in receivership, hoping to stave off closure. The following month, the Education Department learned that Dream Center took roughly $13 million intended for student financial aid refunds and used it to pay operating expenses, including payroll and bonuses.

In response, the Education Department cut off student loan payments, and a week later, most Dream Center campuses shut down; some were spun off to a nonprofit foundation backed by a private equity firm. Without a current letter of credit, there was nothing to offset canceled loans.

“With Dream Center, they were scraping the bottom of the barrel so much, they stole money intended for students,” said McCann. “Not requiring a letter of credit extends the life of these toxic assets.” That means more students chewed up and spit out by a system concerned more with profits than education or career placement.

DeVos’s special pleading for for-profit colleges has not forestalled their demise; the business model itself is flawed. But it has helped executives escape the carnage relatively intact. The pending reauthorization of the Higher Education Act gives Congress an opportunity to weigh in on the Education Department’s record with for-profit colleges. But the Trump administration’s blueprint for the reauthorization would further relax rules on for-profits.

Ament’s organization, the National Student Legal Defense Network, continues to pursue its FOIA case with the Education Department. It’s also representing students who attended Dream Center colleges.

Some experts believe that even if DeVos’s agency used letters of credit in a standard fashion, it would be insufficient. “Letters of credit come in as a consequence tool when things go bad,” said Miller. “It should be, once you get a lot of money from the government, we should have insurance just because.”

The Education Department has not yet responded to a request for comment.

The post Betsy DeVos Quietly Making It Easier for Dying For-Profit Schools to Rip Off a Few More Students on the Way Out appeared first on The Intercept.

Wendell was a reference to Wendell Primus, a top policy aide to House Speaker Nancy Pelosi, who, inside the halls of Congress, needs no surname clarification. Pocan gave voice to simmering frustrations about Primus’s meddling in internal House policy debates. On the Hill, there’s a name given to people like Primus, unelected lifers who use their years of service and clout to influence the party’s direction: He’s a member/staffer. And members don’t like it when a staffer — even a member/staffer — starts setting the boundaries of their ambitions.

Primus serves as Pelosi’s sharp elbows, particularly on health policy. He is working directly with the Trump White House on watered-down drug-pricing legislation that differs from a bill favored by House liberals. And as The Intercept has reported, Primus reassured insurance executives last December, shortly after the Democratic takeover of the House, that party leadership would not favor a Medicare for All plan.

He also lashed out at Medicare for All on tape, at a little-noticed health care conference in Irvine, California, in February, homing in on regional differences in provider reimbursement rates as a signature obstacle. “The regional issues about transfers of money that were involved are enormous here and for that reason, I don’t think it’s going to happen,” he said, adding that senior Democrats all agreed with him on this. Primus even cited a right-wing study about the costs of single payer, neglecting to mention that the same study found that it would reduce overall health expenditures.

Pelosi has defended Primus publicly, touting him in the Washington Post as “probably the most progressive staff person on Capitol Hill.” Pelosi’s office wouldn’t make Primus available for interview, but in an email, spokesperson Henry Connelly said that “Wendell is the architect of some of the most sweeping and impactful progress in extending health coverage and lowering Americans’ health costs that has been signed into law in the past 50 years.”

But one line from the slide deck Primus presented to insurers reveals the disconnect between what “progressive” means to the old guard in Congress and what it means to a new generation.

Among other criticisms, Primus explained to insurers that “stakeholders are against” single payer, therefore leadership is too. This rationale for policy opposition — stakeholders are against virtually anything that would damage their interests, regardless of whether it benefits the public — represents Primus’s worldview in one phrase. You could call him the last of the loser liberals, desperate to maintain the last few scraps of the welfare state rather than forward anything more bold. The mindset views younger progressives as people to protect leadership from, and anti-government conservatives as people to bargain with. They strive not to make the world a better place, but to make it less bad than Republicans want.

Rep. Mark DeSaulnier of California has clashed with Primus, and said that he is a symptom of a broader cultural problem in Washington. “There are mostly good people in staff, but there are some people who start to think they have to protect democracy from elected officials,” DeSaulnier said. “If you even bring up something that’s hard to do or aspirational, staff are like, Oh, you can’t do that here — which is a self-fulfilling prophecy.”

Primus was once seen as the face of the principled left, fighting the ravages of Clintonism from the inside. In 1996, he resigned as deputy assistant secretary of the Department of Health and Human Services, in a public protest against President Bill Clinton’s decision to sign the welfare reform bill. At HHS, Primus produced a study showing that welfare reform would increase child poverty (a prediction that hasn’t really come true because of other policy supports for children, although overall poverty is indeed up). “To remain would be to disown all the analysis my office has produced regarding the impact of the bill,” he wrote in his resignation letter.

The resignation was an important act of defiance from the left flank of the party and should be commended. But by 2001, when studies showed two-parent families increasing, particularly among low-income African Americans, Primus told the New York Times, “’In many ways welfare reform is working better than I thought it would. … The sky isn’t falling anymore. Whatever we have been doing over the last five years, we ought to keep going.” Of course, those numbers were mainly due to a stock-fueled economic boom in the late 1990s, and when that reversed during the Great Recession, a lack of welfare benefits utterly failed the poor.

Connelly responded to this quote by saying, “You shouldn’t cherry-pick a single comment from a man who had the courage to actually resign over welfare reform.” But he didn’t answer the question of whether Primus still thinks that welfare reform worked better than expected.

The fight over welfare reform is illustrative in another way: Primus, like many liberals of his generation, was mostly engaging in the same work he does today — defending America’s meager safety net from a right-wing assault. Prior to working in the Clinton administration, he spent several years on the House Ways and Means Committee as chief economist and staff director for the Human Resources subcommittee. He penned his own welfare legislation, which was a bit kinder to the poor. In the 1980s, he helped draft the Gramm-Rudman-Hollings Balanced Budget Act, softening the most harmful implications of its automatic spending cuts. The impetus was the same: Protect the safety net.

There’s an entire cottage industry on the center-left dedicated to this purpose, with which Primus has long been associated. After leaving the Clinton administration, he joined the Center on Budget and Policy Priorities, which focuses on welfare state programs. Its tentative approach is embedded in its very name; while today’s progressives are arguing for Medicare for All and a full-blown economic restructuring around a Green New Deal, yesterday’s were weighing different budget and policy priorities, defending some while sacrificing others in an endless retreat. Primus has also written for the Brookings Institution, another similarly aligned organization that was once the beating heart of liberal policymaking, but is absent from today’s more ambitious debates.

Progressive economist Dean Baker recalled a meeting he took with Primus in 2000. At the time, there was a huge budget surplus, and Baker had just released a book calling for no cuts to Social Security. Primus asked him to soften his resistance if the cuts would pay for other important programs. Baker recalled that Primus said, “‘I’m worried about the budget in 2015, how are we going to pay for food stamps in 2015?’ And he was dead serious. Maybe I’m an optimist, but aren’t there other things to worry about [in 2000]?”

Primus and those who think like him have a well-established mindset and a narrow viewpoint on policy debates, one beaten into them by the Reagan years. They want to preserve benefits for the poor and needy, without too many painful cutbacks. They are deficit hawks who want to use resources they consider scarce to barely cover what we have today. They generally seek to protect the handful of programs that managed to survive the conservative revolution, because they believe that’s all government can do.

Without question, these organizations play an important defensive role on the left and can provide a countervailing force to the Clintonite center and the far right. They’re not inherently bad people, they’re simply creatures of their time, as we all are.

For instance, Primus joined Pelosi’s office and was a key conduit between the CBPP/Brookings axis and Capitol Hill. During the debate over the Affordable Care Act, Primus clashed so much with White House chief of staff Rahm Emanuel that the two “couldn’t be in the same room together,” according to the Washington Post. Emanuel wanted to scale back the ACA, but Primus won that battle.

“They do great work between the 40-yard lines,” said Baker. “Whenever something might be cut in Congress, they do the best stuff on why it’s bad. It’s good and useful stuff, but it’s never going to change the ballgame.”

Others who have clashed with Primus think his worldview is ultimately self-defeating. “If you followed their advice, all the programs they’re interested in saving would be cut, they would all be worse off today than right now,” said Alex Lawson of Social Security Works.

We are now in a different era than even a few short years ago. Progressives, responding to decades of stagnant wages, sinking economic mobility, and soaring income and wealth inequality have proposed structural changes across the board. This goes well beyond the “pity-charity liberalism” that grants some minor alms for society’s losers, rather than broad agency or power for the working class.

“It’s a problem throughout the caucus,” said one House aide, who sought anonymity to speak candidly. “These people who are thought of as liberal lions have not updated themselves to the politics of the moment.” Instead of fighting the Rahm Emanuels of the world, that puts Primus in opposition to the vanguard of the left. And that has created significant tension.

It doesn’t help that Primus’s portfolio primarily includes health policy, the area that won House Democrats the 2018 midterms, and where the left has constructed a defined imperative to take on the insurance and pharmaceutical industries. Primus has been the proxy for Pelosi’s fight to control the narrative on health care.

Pelosi has made clear that she follows Primus’s lead on these issues. “On health policy, ‘what does Wendell think’ is what we say all the time about this issue,” the speaker said at a 2013 town hall. “He’s very much empowered by the speaker,” said the House staffer. “The speaker is running a thing where he gets the first draft on these policies.”

The controversy between Primus and liberal lawmakers in this Congress started with his undermining Medicare for All. Pelosi has promised hearings on a Medicare for All bill during this congressional session, which is farther than any similar effort has gone. But she’s been ambivalent in public about the concept. Behind the scenes, Primus has attempted to knife it. Pelosi, said Washington Rep. Pramila Jayapal, “has made it clear that [Medicare for All] isn’t necessarily the fix that she at this moment believes in, but she is respectful of me in leading this effort, and I would expect her staff to at least follow that.”

In the slide presentation to insurers, Primus said that party leaders weren’t interested in Medicare for All and wanted to work with the Trump administration on drug-price legislation instead. Improving the Affordable Care Act would be the “most cost-effective path to universal coverage,” according to Primus’s slides. House Democrats recently proposed a package of legislation to do just that, by expanding exchange subsidies and instituting a national reinsurance program.

Primus described single payer with phrases like “implementation challenges,” “monies needed for other priorities,” and “creates winners and losers,” along with the warning that stakeholders are against it. Last week, Politico reported on a second Primus meeting, this time with health policy researchers, where he called Medicare for All an “unhelpful distraction” and solicited research to “discredit the idea, or at least amplify its risks.” Pelosi’s office denied that Primus was requesting hit pieces. “Wendell absolutely did not ask for any kind of one-sided analysis of Medicare For All, and anyone who says otherwise wasn’t actually listening,” said Connelly.

But at the health care conference in Irvine, Primus approvingly cited the Charles Blahous study for the Mercatus Center at George Mason University, a hit piece that produced an allegedly staggering cost for Medicare for All. “There are experts on the right and the left, Chuck Blahous, the Urban Institute, that have said all of that [costs] about $32 trillion,” Primus said.

Blahous’s own calculations reveal that Medicare for All would save Americans $2 trillion relative to what they would spend on health care under the current system, while covering 30 million more people. Despite that, right-wing media and campaign ads have consistently parroted the headline $32 trillion figure, without context. It’s jarring to see the alleged “most progressive staff person on Capitol Hill” do the same.

Primus seemed to recognize the minefield he was walking into in Irvine, saying about Medicare for All, “I get myself into trouble every time I say something about this.”

The Progressive Caucus demanded answers from Primus on his Medicare for All maneuvering last week, even going through the slide presentation piece by piece. Primus insisted that his remarks were distorted. But members didn’t seem to take that as a sufficient answer. “It’s really inappropriate for staff representing the speaker’s office to be undercutting members of our caucus,” said Jayapal after the meeting. “This does not help us at all and was frankly insulting to those elected to represent our constituents.”

Added DeSaulnier, “I didn’t hear an apology from him.”

On drug prices, Primus has been far more aggressive, taking the lead in dictating policy. He is known in the Capitol as a principled foe of drug industry greed. In his briefing for insurers, Primus mentioned a handful of modest but worthwhile ideas, like lifting roadblocks to generic medication production, stopping schemes that lengthen patent protections, and ending “pay for delay,” in which a drug company pays a generic manufacturer to not produce a generic version of an expensive drug. Two of these passed the House Energy and Commerce Committee last Wednesday.

But since Congress’s swearing-in, Primus has become obsessed with finding a drug proposal the Trump administration will support. In February, he backed an idea to use third-party arbitration to set the price of certain prescription drugs. This neglected the fact that, for a year, House Democrats were coalescing around a bill from Rep. Lloyd Doggett, D-Texas, to require Medicare to negotiate with pharmaceutical companies over price, and if they refused, to authorize compulsory licensing of that drug to generic manufacturers.

Doggett has 122 co-sponsors for his bill, yet Primus short-circuited it. “Pharma peeled off members from his bill,” said Lawson. “Wendell’s discussion gave those who dropped the ability to say, ‘It’s not because of my funders, but because of the same concerns that Wendell has.’”

Primus initially signaled support for Doggett, but shifted to arbitration around the same time Patients for Affordable Drugs, a group funded by former hedge fund manager John Arnold, started to favor the concept. “Arnold has spent enormous money on ads, both for and against members,” Lawson said. “Maybe he’s thinking this is the way to keep them on his side.”

The arbitration concept grew out of a 2008 study in Health Affairs from a former Obama administration official and a director at health insurer Aetna. The government and the drugmaker would submit prices, and a third-party arbitrator would select one or choose a third price based on their own research.

Primus’s version would only cover a select set of high-cost drugs, and critics fear that the arbiter would be unaccountable and the process opaque. Initial reports suggested that the arbitration would be voluntary and nonbinding, though Connelly suggested that those reports were false. “We’re continuing to incorporate feedback and ideas from members and stakeholders about how we can develop the toughest possible bill,” he said. Still, it’s unclear whether drug manufacturers would be forced to accept the arbitrated price.

We do know that pharmaceutical lobbyists appear to be more comfortable with the arbitration concept, which “comes from a fundamental misunderstanding of the debate,” said Peter Maybarduk, director of Public Citizen’s Access to Medicines Program. “It’s not a good strategy to be reasonable to the pharmaceutical lobby. You have to be bold and go after them with a fight that’s big enough that the public is engaged and mobilized in support.”

Primus has progressed to formal talks with the Trump administration, as well as Senate Finance Committee Chair Chuck Grassley, R-Iowa. As part of what’s been called a “reassurance tour” with groups inside and outside of the Capitol, Primus told Progressive Caucus members that he was not negotiating with the White House, but instead trying to find something all House Democrats could support. Doggett has said that any potential compromise must “be on something that really makes a difference in the lives of people on health care and not agreement for agreement’s sake.”

It’s hard to square Primus’s insistence that he’s not negotiating with the White House with what he said at the Irvine health care conference: “I think we will cut a deal with the administration. And I think that if we do it right in the House, that will give it enough push to get it done in the Senate.”

He added, “I think it’s going to take some time to educate members about all of this.”

Primus has also tried to derail an idea from the Trump administration some consider useful. He wants to delay an HHS rule to eliminate the legal kickbacks that pharmacy benefit managers get from negotiating rebates with drug companies. Supporters believe ending rebates will change the business model for pharmacy benefit managers and control the misaligned incentives that lead to high list prices. (The higher the list price, the higher the rebate, the story goes, and if rebates are effectively banned, PBMs would have to earn their fees from insurers by pushing list prices down.)

At the Irvine health care conference, Primus cited estimates from the Center on Medicare and Medicaid Services’ Office of the Actuary suggesting higher consumer prices and government costs from the rebate rule. “If you take away those rebates, prescription drug prices might go down a little bit, but they’re not going to come down nearly enough to offset the loss of the rebates,” Primus said. “The administration has no authority right now to force the manufacturers to lower list prices.” The speaker has said something similar.

Nobody thinks banning rebates will cure all ills in the pharmaceutical supply chain. But Primus’s complaint that the government might have to pay more fits with his longstanding concern over federal deficits.

Another slide in Primus’s insurance presentation, titled “Not Preparing for Boomer Retirement,” explained how deficits could strain health budgets as the population ages. This has been a consistent Primus concern. “We didn’t use the decade just before the baby boom generation retired to get ready,” Primus said in a 2010 roundtable on Social Security preserved on C-SPAN. “That is really one of the greatest failures of the Bush administration.” (I could think of others.)

In that roundtable, Primus advised lawmakers to “learn the lesson” of 1983, when Ronald Reagan and Tip O’Neill got together to make Social Security more solvent by, among other things, gradually raising the retirement age for full benefits.

President Barack Obama did try to reduce the cost of living adjustment in Social Security, a net benefit cut. Primus, according to several outside groups, warned them against going hard against the Obama plan, and asked them to slow-walk any calls for expanding the program. It was a replay of the conversation Dean Baker had with Primus a decade earlier. But the groups didn’t listen, rallied against Obama’s benefit cut and for Social Security expansion, and won. Two hundred House Democrats endorsed a Social Security expansion bill this year.

This rare loss for Primus didn’t alter his viewpoints on fearing deficits and debt. Lawson said that Primus was the driving force behind Pelosi including a controversial “pay-go” provision into House rules, requiring all new spending to be offset with either budget cuts or tax increases. And his top priority for the prescription drug plan, according to his remarks at the Irvine health care conference, is that it saves money for the government, which can then be plowed into other programs.

When Pete Peterson, a billionaire who spent hundreds of millions of dollars to push Washington policymakers toward austerity, died in 2018, Pelosi delivered a floor speech that praised him effusively, as if he’d dedicated his life to eradicating child malnutrition or curing cancer, rather than pouring millions into pushing for major cuts to Social Security and Medicare. “Pete was a clarion voice for fiscal responsibility, and a strong moral conscience in Washington,” Pelosi said in her House floor eulogy of Peterson, who, by 2012, had already spent half a billion dollars targeting Social Security, Medicare, and other spending programs.

If Primus didn’t write that speech, he surely supported it. “He was 100 percent the main guy behind pay-go,” Lawson said. “He thinks the thing you do as a lefty is that you reduce the deficit.”

Jayapal acknowledged Primus’s long tenure in Washington, but suggested that it wasn’t necessarily something to celebrate. “This is somebody who has been a staff for a very long time. We don’t have the health care system we need, do we?” she said. “Maybe it’s time to try something new.”

While progressives have been more willing to attack Primus as a member/staffer interfering with their priorities, they haven’t extended that critique to the woman empowering him: Pelosi. “The speaker respects members. This is separate from her,” DeSaulnier said. Jayapal added, “She has always been respectful of members.” But without a go-sign from the speaker, Primus wouldn’t have any weight to throw around. While the House Democratic caucus has unified in opposition to Trump, there are key splits on core values and ideals. It’s a bit easier to blame the split on a staffer, but the root cause has yet to be resolved.

The post Wendell Primus, the Most Powerful Staffer in Congress, Represents a Generational Divide on the Left appeared first on The Intercept.

Whether such policy boldness means anything in a brand-obsessed political landscape will be determined when ballots are cast. But it is undeniably driving a policy discussion that the next Democratic presidential nominee, no matter who it is, will likely take up. In that context, the debate over Warren’s plan is critical, as it prefigures the trajectory of each and every challenge to corporate dominance.

First, many critiques will come from those with a direct stake in the outcome — in this case, Big Tech-funded individuals or organizations, which are so ubiquitous as to create an echo chamber. Second, the critiques will highlight the “radical” nature of the changes, setting them at odds with American history, even though Warren’s central proposal — to structurally separate business lines in an effort to eliminate anti-competitive conduct and foster competition — has a century-old pedigree. And third, we’ll be assured that the cure is worse than the disease, that Warren’s ideas would destroy everything from online shopping to the smartphone, a perspective that relies on deliberate misinterpretation.

This roadmap for discrediting policy solutions that confront power should be easy enough to spot by now, and will be employed long into the future. So it’s worth breaking down how it works.

The Manufacturing of Dissent

“The issue is not the size and current market dominance of these [tech] companies,” wrote the American Enterprise Institute’s Michael Strain for Bloomberg, in response to the Warren plan. “If anything, politicians should be celebrating these companies as crown jewels of the U.S. economy.”

Strain’s employer, AEI, is funded in part by Google, according to the company’s transparency page. This is not noted in Strain’s Bloomberg op-ed. But AEI and its writers have done several critical pieces about Warren’s proposal, as well a California privacy regulation that also imposes stricter rules on Big Tech. All of these opinion articles indirectly benefit one of AEI’s donors.

The episode points to a significant trend of writers and scholars opining on the Warren plan while conflicted by the overwhelming amounts of Big Tech cash that have infested Washington. Google’s list of organizations to whom it has donated is massive, and combined with Facebook and Amazon’s dominance of Washington, it’s hard to find anyone with a critical eye toward Big Tech regulation who doesn’t have something to disclose.

Rich Lowry of National Review unleashed a pack of industry talking points to explain how Big Tech “helps create a strong American society.” National Review takes Google money. Here’s a similar sentiment dragging the Warren plan on the pages of National Review, from a senior fellow at the Competitive Enterprise Institute, which also takes Google money. The American Action Forum seems to dislike the Warren plan; the group, well, takes Google money.

Geoffrey Manne and Alec Stapp condemn Warren for “wanting to turn the Internet into a sewer.” Manne’s organization, the International Center for Law and Economics, has taken a boatload of Google money; as of 2015, he had contributed to at least eight white papers commissioned or funded by Google that endorsed Google’s policy positions, in addition to being a frequent pro-Google commentator in news articles and congressional testimony. Stapp, before hooking up with Manne at ICLE, worked at the Mercatus Center at George Mason University, another recipient of Google funds. A former Manne co-author, Joshua Wright, worked at George Mason University and has been periodically on and off the Google payroll in between government work.

Manne and Stapp’s piece got the pile-on treatment on Twitter from representatives of the Google-funded Cato Institute and Niskanen Center; Stapp previously worked at Niskanen. Several venture capitalists who currently rely on Big Tech for exit strategies for their companies also gave the thumbs-up to the piece.

The Computer and Communications Industry Association, a trade group that includes Amazon, Facebook, and Google among its members, uses a subsidiary named Springboard to hurl critiques at regulatory tech policies. In addition to the aforementioned articles from AEI and National Review, Springboard points to the opinions of a partner at Andreessen Horowitz, an early investor in Facebook, and the CCIA’s own vice president for Law an Policy — which amounts to CCIA linking to itself as outside confirmation of its beliefs.

These linkages are virtually endless and show an incestuous network of academics, think-tankers, advocacy organizations, and trade groups, all of which happen to agree on every issue important to Big Tech. The money supports extending the prominence and megaphone of these organizations, and with nearly unlimited pocketbooks, it creates the impression of a tsunami of support for the industry.

A “Radical” Idea That’s Been Around for Over a Century

The core of Warren’s plan, which for now is just a proposal on Medium rather than legislation, involves what is known as “structural separation.” Companies with over $25 billion in annual global revenue that operate platforms — connectors between people, people and advertisers, or people and merchants — would not be allowed to both own the platform and also participate as a seller on that platform. The classic example would be Amazon’s marketplace, where Amazon also operates its own line of Amazon Basics, competing with its third-party sellers. Google’s ad exchange also competes on Google with ad tech companies, and would need to be spun off. The same would go for Google’s local search, which routinely deprioritizes recommendation sites like Yelp.

The idea is that these entities get preferential treatment from the platform they own, giving Basics, Google ad tech, and Google Search an unfair advantage and extending the platform’s dominance. Only the biggest companies would have to structurally separate; smaller platforms would still have to meet a standard of fair, reasonable, and nondiscriminatory treatment for participants on the platform and its users.

This forced divestiture of tech platforms’ other business lines has been described as radical. Manne and Stapp claim it will turn the internet into your sewer service — mainly because Warren uses the word “utility” to describe regulated platforms.

Jeff Bezos didn’t come up with the idea of owning a marketplace and using it to sell your own stuff at an unfair advantage against rivals. Reading Railroad, for example, became the largest company in the world by owning the rails that carried anthracite coal, as well as the coal mines along the route. Rival coal producers that wanted to use the lines got less favorable rates, fell behind, and got swallowed up by Reading Railroad.

Congress put a stop to it in 1906 by adopting the Hepburn Act, which prevented the railroads from carrying products that they owned. This forced the Reading Railroad to divest the P&R Coal and Iron Company, the subsidiary that owned the coal mines. Warren is merely following a long history of structural separation that began when Teddy Roosevelt was president.

Theater owners were not allowed to also produce and distribute films after the Supreme Court’s Paramount decision in 1948. Television networks were prevented from owning the programming they ran in prime time, under the Financial Interest and Syndication, or “fin-syn,” rules imposed by the Federal Communications Commission in 1970. In telecom, AT&T was heavily circumscribed and restricted to common-carrier telephone service, banning the company from capitalizing on innovations from Bell Labs and forcing compulsory licensing of those patents in 1956, which created the modern electronics industry. Banks were structurally separated between investment and deposit-taking commercial lines after the Glass-Steagall reforms. Rep. David Cicilline, D-R.I., the chair of the House Judiciary’s antitrust subcommittee, has analogized a structural separation in tech as a Glass-Steagall type of rule.

These structural separations have widespread goals: diversity, financial stability, decentralization of power, and innovation. “We owe the internet to structural separation,” said Harold Feld, a senior vice president with Public Knowledge, referring to the Carterfone decisions, where the FCC allowed people to connect their own devices, like a modem, to the telephone network. “Clearly this has a long and successful history in telecom.”

Some of these restrictions, like those on banks or television stations, have been dismantled. And there are cases of companies selling products in a store while also owning the store: Kirkland products at Costco are ubiquitous, for example. But as Lina Khan, scholar and staffer for Cicilline’s antitrust subcommittee, has pointed out, the key question is whether the platform, be it brick and mortar or digital, is creating a bottleneck by privileging its own products over rivals. And there’s a lot of evidence that Amazon in particular does just that, reacting to high-selling products by creating a generic version, and down-ranking the competitor in its search. Because half of all e-commerce is sold on Amazon, competitors have few alternatives but to sell in what feels like a rigged marketplace.

India has already instituted a Warren-like rule to prevent e-commerce platforms from selling their own products on the platform. “We should go back and understand the wisdom of that kind of separation,” said Peter Carstensen, a professor emeritus at the University of Wisconsin Law School. “We would never want the interstate highway system to be owned by Walmart. It simplifies the market functions if you separate them out.”

Another benefit to structural separation is the relative ease of regulation. Instead of well-paid economists fighting it out over what constitutes anti-competitive conduct or restraint of trade, large companies simply can’t compete with rivals on their own platform, because of the threat of market power.

The Warren plan sets a rather arbitrary number of $25 billion in annual revenue as the dividing line for that power, a kind of substitute for the technocratic determination. This has angered critics: Andy Kessler at the Wall Street Journal denied that antitrust law has anything to do with bigness.

The idea that John Sherman, author of the Sherman Antitrust Act, was not concerned with bigness would come as news to Sherman, who once said, “If we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of any of the necessaries of life.” Warren’s campaign sees the $25 billion figure as a clean way to assist regulators with pinpointing market dominance. “It has the benefit of a clear rule,” said one senior campaign adviser, who was not authorized to speak on the record. “We should presume if a company with over $25 billion in revenue is operating a marketplace, it has power and leverage.”

While agnostic on the specific dividing number, Feld gave Warren’s team credit “for trying to come up with something that makes sense.” Others are not as thrilled about it. But their arguments often misconstrue the Warren plan.

Assuming the Worst

Ben Thompson, a former Apple and Microsoft analyst who writes about the business of technology, had one of the sharpest critiques of the Warren proposal, and it starts with denying Warren’s claim on the history of technology. Warren has credited the Microsoft trial for creating space for the modern tech giants to emerge, something Thompson mocks. “Bing was not even launched until 2009, eight years after the Microsoft case was settled. MSN Search, its predecessor, did launch in 1998, but with licensed search results from Inktomi and AltaVista; Microsoft didn’t launch its own web crawler until 2005.”

This view neglects the politics of the U.S. trial against Microsoft, which put a dominant company under pressure and wary of extending that dominance into the then-emerging web services arena. As Gary Reback, who represented Netscape against Microsoft in the 1990s, has often said, including to me in a 2017 interview, “The trial is the remedy.” By exposing Microsoft’s machinations to the nation, it made the company gun-shy to choke off competition, Reback argues.

“The only way to get to Google was the Microsoft browser,” he said. “Microsoft could have put up a big red sign saying this site is unsafe. It could have killed Google in the cradle, but didn’t. The reason why, and this is from Microsoft people, is they had this public trial. It wasn’t worth it as a company.”

Feld concurred that Microsoft’s behavior changed after the public spotlight of the trial, and the kind of aggressive actions to shut down competitors largely stopped. You can apply this to IBM’s antitrust issues in the 1970s and ’80s opening space for Apple, and AOL’s forced interoperability of Instant Messenger in 2001 giving room to social media. “Big companies are sensitive to this stuff; after they’ve been burned, they do generally play it safe,” Feld said, noting that big cable hasn’t had such a spotlight and they managed to crush TiVo swiftly and completely. So while Thompson focuses on specific Microsoft business decisions, he ignores the political context.

Thompson also warns that applying the structural separation standard to Apple, as Warren confirmed in an interview at South by Southwest, would lead to smartphones shipped without any applications. “Was Apple breaking the law when they shipped the first iPhone with only first-party apps?” Thompson asks. “At what point did delivering an acceptable consumer experience out-of-the-box cross the line into abusing a dominant position? This argument may make sense in theory but it makes zero sense in reality.”

This argument also has zero bearing on what Warren’s talking about. Whether Apple is unfairly tying or bundling its own apps onto its phones at purchase is a question for existing antitrust laws — it was the question in the Microsoft case, in fact. “The ordinary rules apply in that case,” said the senior Warren adviser. “The key thing we’re talking about is the marketplace.”

Contrary to what critics have claimed, Apple would not have to divest from the App Store completely under Warren’s plan, nor would the security benefits of Apple managing what goes onto its phone wither away. Apple would merely be disallowed from selling its own apps next to competing ones. This would hardly destroy Apple, largely a phone and hardware manufacturer and not primarily an app-maker. It would allow competition on the platform.

Apple does have a legitimate antitrust problem with the App Store, as Thompson acknowledges. Spotify has complained to the European Union that Apple takes a 30 percent cut from all revenues from its iPhone app, while preventing it from emailing users directly or allowing upgrades. This indirectly benefits Apple Music, Spotify says. Apple has accused Spotify of using “misleading rhetoric” in its complaint.

Spotify wants changes to Apple’s conduct on the App Store — which is not only fair game for traditional antitrust that can identify anti-competitive impositions of market power, but is also part of Warren’s plan, which mandates fair and nondiscriminatory treatment to marketplace participants. And it shows how Warren is highlighting a consumer welfare issue: If Spotify has to absorb a 30 percent transfer of revenues to Apple for use of its iPhone customers, it likely has to raise prices, and it cannot offer services like upgrades directly.

Thompson and others run through all sorts of reasons why Warren’s proposal would degrade the consumer tech experience. This isn’t warranted from a proposal that simply says platform monopolies shouldn’t suck up all the benefits of every adjacent money stream related to the platform. The idea that a Google shorn of its advertising platform would revert to a nonfunctional “10 blue links” website, instead of a model where it can charge for supplier access but not control it entirely, is simply fearmongering.

The argument also suffers from a lack of imagination. Is Apple Music really the best the world can do? With a fair market, let’s see what innovation is possible.

The upshot of these familiar points of attack is a kind of denialism, where the plain facts — a set of entrenched companies swallowing competition and profits — get pushed to the side. Any effort to deal with this reality is termed the flip side of Trumpism, as the outlet owned by Amazon CEO Jeff Bezos put it recently.

What Warren’s plan does is target the denialism. The vast majority of internet traffic flows through Amazon, Google, Facebook, or sites they control. The five biggest firms have acquired 436 companies in the past decade, nearly all without antitrust review. (Warren’s plan, incidentally, would unwind several of these mergers.) The remaining holdouts, like Yelp, find themselves in the “kill zone,” attacked by Big Tech to the point of irrelevance. Facebook has a subsidiary app that hunts for rivals gaining market share, so it can either purchase or crush them. The impact on competition, innovation, entrepreneurship, wages, and inequality is real.

There are certainly reasonable concerns to express about a short presidential campaign proposal, without legislative language, intended to start a discussion about the power and influence of one industry. What’s unreasonable is outsourcing opinions on the matter to self-interested parties, distorting history, or leaping to unverifiable conclusions about the horrors of a post-regulatory world.

Warren’s plan is the first to actually propose regulation that’s specific to the tech sector. “This is why it’s great to kickstart the debate,” said Feld. “You couldn’t write the piece of legislation tomorrow; real homework has to be done. But these are really the right lines of the debate.”

The post How to Think About Breaking Up Big Tech appeared first on The Intercept.

In a remarkably candid editorial, five partners with the D.C. law firm Debevoise & Plimpton have confidently predicted that the SEC will refrain from imposing financial penalties on corporations for securities violations “for the remainder of the current presidential term.” This benefits the large trading and securities interests that employ Debevoise for legal defense work. The editorial amounts to Debevoise informing their clients that the coast is clear.

The reason for the expected decrease in enforcement has to do with a fatal delay by Schumer to name a minority commissioner and the Trump administration’s unprecedented exploitation of this mistake.

The SEC is currently operating with four commissioners, three of whom were appointed by Republicans. Like many independent commissions, two of the SEC’s five commissioners must not be members of the party in the White House. But Kara Stein, a Democratic commissioner, ended her tenure January 2, and that seat remains vacant. Allison Lee, the former Stein aide preferred by Senate Democrats as her replacement, has yet to be formally nominated, though her name was recommended several months ago. Bloomberg reported March 20 that Lee will be announced “in the coming weeks,” though they also reported that last August.

The Debevoise partners, whose clients include numerous big bank and securities firms, explain that this imbalance will come as good news for companies looking to break securities laws. “Because it is likely that this four-person commission will remain in place for the remainder of the current presidential term, we may soon see fewer corporate penalties in financial reporting cases and, if recent votes are indicative, potentially more broadly,” they write in an analysis for Law360, a trade publication for the legal community.

“It’s absolutely astonishing,” said David Segal of Demand Progress, which has closely tracked personnel moves under the Trump administration. “Trump’s violation of the longstanding norm that minority-party commissioners will secure nominations and fair confirmation processes is so severe that white-collar defense firms are now advising clients that laws likely won’t be enforced against them for the rest of his term.”

It would be highly unusual for a president to hold vacant a commission seat intended for the opposing party for two years. But critics like Segal place some of the blame on Schumer for failing to submit Lee’s name for consideration when there was an open Republican seat on the SEC last summer. Typically, commission slots like this move in pairs, giving Democrats and Republicans a reason to vote for the nominee from the other party.

When the Republican nominee, former chief counsel for the Senate Banking Committee Elad Roisman, sailed through the Senate to confirmation in September, it effectively orphaned Lee, giving the Trump administration incentive to slow-walk her nomination, and giving Senate Majority Leader Mitch McConnell incentive in the future to prevent her from getting a floor vote. This freezes out one of the SEC’s seats, giving Republicans an indefinite 3-1 advantage.

None of this should have come as a surprise. In June 2018, three months before Roisman was confirmed, The Intercept reported: “Stein has been a lame duck for months without any action from Schumer. If Roisman gets confirmed first without pairing a replacement for Stein, the agency could be down a Democrat for who knows how long.”

The one-member shortage actually makes a difference, the Debevoise partners explain. Republican hard-liners like Roisman and his fellow commissioner Hester Peirce have deemed financial penalties for securities issuers illegitimate, even in cases in which corporations materially benefited from the misconduct. Democrats have generally held that securities violations of any kind be should be deterred through the civil penalties the SEC can impose (criminal charges go through the Justice Department).

Jay Clayton, the SEC chair and technically a political independent, sided with Democrats on a handful of enforcement cases while Stein still served on the commission. For example, Tesla was hit with a $20 million fine over CEO Elon Musk’s “going private” tweets. In another recent case, Walgreens paid $34.5 million for issuing misleading financial reports to investors. The vote in favor of that penalty was 3-2, with Roisman and Peirce dissenting. Without Stein’s presence, the fine would not have been approved, and there are several other examples of this.

Now that Stein has left, the two hard-line Republicans can effectively block any penalties on securities violators.

The conservative rationale against financial penalties has a kernel of wisdom: Shareholders effectively bear the cost of these penalties, and enforcement should be targeted at the responsible individuals instead. “Corporations are all too willing to pay large civil penalties in exchange for no or lighter sanctions for individuals,” Peirce said in an October 2018 speech. “It is usually not right for shareholders to pay for the bad actions of corporate executives.”

While individual accountability is certainly important, the SEC has few mechanisms to impose that, other than banning individuals from securities markets. The Justice Department deals with criminal prosecutions; the SEC can only refer cases to them. Rejecting financial penalties takes away the SEC’s main enforcement tool.

And Peirce has not lived up to her statements in this regard. In August 2018, for example, she voted against penalizing David T. Laurance, the founder of a company that promoted a fraudulent initial coin offering, even while approving penalties against the company. Laurance was banned from the securities industry for life. More recently, Peirce voted against penalizing Kenneth Grace, a fraudulent investment adviser, from being barred from the securities industry.

The SEC’s penalties for 2018 were down 47 percent from the previous year, according to the Debevoise partners, and that followed another drop in 2017. The four-member commission could decrease such fines even further. “It is quite possible that we will see a further decrease in the amount of penalties levied by the SEC,” the partners write, adding that enforcement staff may choose to avoid financial reporting cases altogether, because of the lack of expected monetary fines. The partners also predict more “no-penalty cease-and-desist orders,” in which the SEC tells a securities violator simply to not do it again.

That Debevoise partners would openly state this, given their client base, is rather amazing. One of the firm’s main areas of expertise is white-collar and regulatory defense, and the five co-authors routinely represent clients before the SEC. The editorial amounts to lawyers tacitly giving the high sign to corporate clients that they are in little danger of regulatory problems for their actions in the securities markets.

Four of the five partners who wrote the editorial previously worked at the SEC on enforcement matters. The list includes Andrew Ceresney, the SEC’s former director of enforcement under Mary Jo White, who has also decamped to Debevoise. At the firm, Ceresney has represented several hedge funds and financial institutions, including JPMorgan Chase. Kara Brockmeyer, another co-author, previously served as chief of the SEC Enforcement Division’s Foreign Corrupt Practices Act unit. Robert Kaplan and Julie Riewe also worked in the Division of Enforcement.

Segal, of Demand Progress, believes that Schumer and Senate Democrats should use their tools in the Senate minority to force action to fill the Democratic seat on the SEC. “They must use every tool at their disposal to push back against this,” he said, singling out the Senate Democratic caucus members currently running for president: Kamala Harris, Elizabeth Warren, Bernie Sanders, Amy Klobuchar, Cory Booker, and Kirsten Gillibrand.

“If we can’t trust them to wield their power in the Senate to ensure that public interest-minded appointees get to serve in the executive branch,” Segal said, “how can we trust that they will do so as president?”

The post Chuck Schumer Neglected to Name a Democratic Commissioner for the SEC. Now It’s Open Season for Wall Street, Bank Lawyers Crow appeared first on The Intercept.

They had called Chung in to inform her of an imminent bankruptcy filing, Gymboree’s second in two years, which would accompany the liquidation of two of the company’s three brands, including Crazy 8, which caters to lower-income parents. Chung was ready for that; the closure of Crazy 8 was announced in December, and the bankruptcy was long rumored. But then Schickedanz dropped the bomb.

“She said, ‘We had to make some other decisions and you’ve been impacted,’” Chung explains. “‘We had to terminate the severance plan.’”

The severance plan, according to Chung and two of her close friends, was a key reason why she decided to move to Gymboree from Old Navy five years earlier. The retail sector’s volatility has boiled over recently, with rapid-fire bankruptcies and store closures emptying malls across the country, much of it driven by private-equity firms busting out otherwise profitable companies. But Chung, a single parent caring for an elderly father, came to Gymboree because she knew she’d be due a year’s worth of salary if the company ever went belly-up.

Instead, on the same day as the bankruptcy filing, Gymboree’s board triggered Article VII of the severance plan, a self-destruct button that enabled the company to terminate the plan “at any time in any respect” via a majority vote from the board of directors. As a result, none of the roughly 400 staff members at Gymboree headquarters in San Francisco would receive severance, to say nothing of the nearly 10,000 clerks at 800 Gymboree and Crazy 8 locations, who would now be managing going-out-of-business sales without the promise of assistance in the aftermath.

Kahng told Chung that there just wasn’t enough cash available to pay severance. But Chung said she had information, which she would later share with the U.S. bankruptcy trustee overseeing the case, that at least a few executives would leave Gymboree with golden parachutes.

A few weeks earlier, she had learned about a confidential deal between the board and eight members of Gymboree’s executive leadership team. According to Chung, those executives received paper checks with a “retention bonus” equal in value to their severance payouts. The board, which includes representatives from hedge funds and private equity firms, told the executives to deposit the checks immediately. Bankruptcy experts often call this type of payment a “disguised severance.”

Chung heard this firsthand from one of the bonus recipients. Chung had an equivalent title to most of the members who she was told received the bonuses, but she was left out. She would later tell the bankruptcy trustee in a letter that she watched as four of those bonus recipients jetted off to the Sundance Film Festival, just days after Gymboree declared bankruptcy.

In the meeting, Chung had asked, “What about the retention bonuses the others have, including you?” referring to Schickedanz, a member of the executive leadership team. Kahng would only reply, “That is not an appropriate question and I will not comment on it.”

Chung said she had replied, “The answer is what’s not appropriate.”

Gymboree, founded in 1976, is on its way to history. Children’s Place, a rival retailer, paid $76 million for the rights to the Gymboree and Crazy 8 brands, and the Gap is purchasing Gymboree’s 139-store luxury chain, Janie and Jack. But the disguised severance maneuver Chung has alleged reveals how in corporate America, the winners at the top can win even in failure. And nobody else is safe — certainly not the line-level workers, but not even vice presidents like Mera Chung.

The Intercept has reviewed documents confirming the termination of the severance plan on the day of the bankruptcy. Chung made her allegations about the disguised severance to friends, attorneys, and bankruptcy officials in the weeks after Gymboree’s filing, according to interviews and documents. And Julie Thompson, a vice president of product integrity and compliance for Gymboree, also said in a separate interview that bonus payouts were made to the executive leadership team.

Moreover, Chung alleged to the trustee that Gymboree underreported the extent of the retention bonus payments in a filing with the bankruptcy court. In that filing, Gymboree acknowledges “discretionary bonus payments of $270,000 to two employees,” but Chung asserts that eight executives received bonuses totaling an estimated $2.1 million.

Gymboree, its executives, and board members have failed to respond to numerous requests for comment through email, phone, and LinkedIn. Calls to the company’s media relations department have gone directly to voicemail. Three calls to personal cellphones of members of Gymboree’s executive leadership team were answered, but the individuals refused to comment.

The situation at Gymboree echoes other recent retail bankruptcies in which executives got a king’s ransom while everyone else got a firm handshake. Toys “R” Us and Sears were approved for millions in executive bonuses, a fact that has enraged advocates for line-level workers. “These are the same handful of people who couldn’t run our company successfully, and they’re being rewarded while everyone’s severance is taken away?” asked Lily Wang, deputy director for Organization United for Respect’s Rise Up Retail campaign.

You can make a case for retention bonuses for top executives in some bankruptcies. They are usually justified as a way to keep the leadership from decamping to other jobs as soon as the bankruptcy is filed. “The rationale is by giving good people retention bonuses so they will stay, the company will have much greater likelihood of reorganizing and getting back on its feet,” said Brett Weiss, a bankruptcy attorney in Maryland.

But in this case, Gymboree was knowingly liquidating most of its business before the bankruptcy was ever filed, making retention bonuses less urgent. “This was a liquidation chapter 11, the executives are not going to be in these positions a year from now,” Weiss said. “Maybe they said, ‘How can we get more money out without having the trustee claw it back? What’s the greatest number of people we can do this for without raising red flags? How about the executive leadership team?’” Gymboree’s lawyers in the bankruptcy case did not respond to a request for comment.

Moreover, while some executives do need to be in place to wind down operations, the alleged bonuses were not uniformly given to executives who had that role. For example, the VP of marketing allegedly got a bonus, even though marketing operations effectively ceased. Meanwhile, Thompson’s job involved regulatory compliance, which any retailer still selling products (even in a going-out-of-business sale) needs to maintain. Yet she was denied a bonus and fired without severance.

The situation has left Chung devastated. “Me and this other woman were the altar sacrifices for the others to get paid,” she says. “People have to understand how vulnerable they are.”

Chung was recruited to Gymboree five years ago by her former boss at Old Navy, where she was the vice president of kids and baby clothing design. She was told that she would have the run of an entire brand, the low-price Crazy 8. “It was their only brand that was relevant,” Chung says. She took the job.

At the time, Gymboree was under the control of Bain Capital, Mitt Romney’s old private-equity firm. The private-equity business model involves engaging in buyouts with borrowed money and putting that mountain of debt on the company it purchases, all the while extracting profits from the company through management fees. Few companies, particularly in the high-risk retail sector, can deal with such a debt burden — it makes it difficult to invest in stores, personnel, or better products.

Chung says this showed in how Gymboree ran the business. “Instead of investing in creative talent, they promoted design and merchandising from within,” she says. “Merchandisers became complacent with wanting product they knew would sell from the year before. There were years upon years of awful clothes with poodles and trucks on them.” She also complains that Crazy 8 had no marketing budget, and her work to break with standard fare was practically hidden.

By 2017, Gymboree couldn’t hold out any longer and went into bankruptcy. The business was put in control of its largest creditors, who were private equity and investment firms. The seven-member board included then-CEO of Gymboree, Daniel Griesemer; Ron Beegle, CEO of investment consultant Carriage House Capital Advisers; Matt Perkal, a partner at hedge fund Brigade Capital Management; Brian Hickey from mutual fund firm OppenheimerFunds; and Eric Sondag, a partner at private-equity firm Searchlight Capital, who was made board chair. Other members of the board were not disclosed, and since Gymboree is not a public company, they have no requirement to do so. Apollo Global Management, Marblegate, Nomura Securities, and Tricadia Capital Management also had a share of the company.

Though Gymboree emerged from bankruptcy in decent financial shape, Thompson described the new board as uninterested. “There was zero involvement in what was going on day to day,” she says. “They just let the CEO do whatever he wanted.”

Griesemer decided to invest in a complete redesign of Gymboree’s clothing line. It was a high-cost gamble off the bankruptcy, and it failed; when the new clothes hit stores last summer, parents called them “complete garbage.” Says Thompson: “I started paying attention to sales, and I was like, ‘Oh my god, this is so bad.’ It was negative 20 to 30 percent [compared to the previous year] every single day.”

By November, Griesemer was fired, and Kahng, the new CEO, came in. She had started her career as a food scientist at Kraft and was an independent member of the board prior to being named CEO, according to her LinkedIn page.

“She thought they were going to try to rehab the brand, that this was her career-defining moment,” Chung says. She described one meeting in which Kahng pronounced that Gymboree needed to be a “disruptor” like Apple. “She said, ‘What does every parent experience?’” Chung recalls. “‘Every parent in the world feeds their child strained carrots. When my children were babies, there were carrot stains on everything. We could do something so simple, an orange bib.’ She was 100 percent serious. I barely got through the meeting.”

The disruption didn’t take. By early December, the company announced that it would shutter all Crazy 8 stores after the holidays and significantly reduce the Gymboree footprint. Chung says that in the month after the announcement, Kahng never formally addressed Crazy 8 employees, leaving them confused about their roles. If the brand was closing, there was no need to design or purchase product for the next season. “My team of 20 said, what do we do?” Chung recalls. “They said keep showing up until further notice. They didn’t want to let us go because then they would have to pay severance.”

The Gymboree management severance plan was not a package negotiated individually. It was an employee benefits plan, established under the auspices of the Employee Retirement Income Security Act. This has become popular, particularly with large companies, says Jim Keenley, an ERISA attorney in Berkeley, California. The statute provides protections to workers if they aren’t given what’s promised in the severance plan. It offers no protection, however, if the plan is terminated.

“It’s an illusory contract,” says Keenley. “It’s very common for severance plans to have language in them that say, here’s your severance but we can take it away at any time for any reason.” No advance warning is needed for termination, under current law. While retirement benefits under ERISA are better protected, severance plans are considered a welfare benefit, and the funds do not vest.

So employees have no recourse if a termination occurs. And most of them don’t read the fine print allowing companies like Gymboree to pull that trigger. “I didn’t have anyone look at it,” says Thompson. “I was naïve.”

Both Thompson and Chung were told after the 2017 bankruptcy that the severance plan remained active. And both sought further assurances after it was clear that Gymboree would slide into bankruptcy again. Chung says she had asked three colleagues — the general counsel, the VP of human resources, and the general manager of her brand, Crazy 8 — whether her severance would be honored. None gave a straight answer. But Thompson said that when she approached the general counsel, Kimberly MacMillan, in early January, MacMillan reassured her, “Don’t worry, we will file it as a first-day motion.”

In bankruptcy-speak, MacMillan was saying that the severance plan would be one of the payouts that Gymboree would seek to get approved when it filed. Pending court approval, all employees eligible for the severance plan would be compensated. The severance plan was approved in the 2017 bankruptcy, so Thompson trusted MacMillan that the same would happen the second time around. “I had good working relationship with [MacMillan],” Thompson says. “She fucking lied to my face.”

MacMillan, in a short phone call with The Intercept, said that “we [Gymboree employees] follow a strict no-comment policy” with the media, and hung up.

Around the same time, Chris Lu, general manager of Crazy 8, was commuting home with Chung. “She would always disclose things to me, she would blab them to me,” Chung says. In her letter to the trustee, Chung writes that Lu told her that members of the executive leadership team were “paid their severance,” after demanding assurances from the board of directors. The board arranged for a “retention bonus contract” in the amount of the severance pay. “She said I couldn’t tell anyone about it,” Chung recalls. “I said, ‘Why did you tell me that if I cannot say anything?’”

In a brief phone conversation with The Intercept, Lu would only say, “I can’t talk to you. … I’m going to hang up now.”

According to Chung’s trustee letter, members of the executive leadership team who may have received retention bonuses included Lu, MacMillan, Schickedanz, Chief Financial Officer Jon Kimmons, VP of Information Technology David Sondergeld, VP of Logistics Dana Todorovic, VP of Sourcing Patricia Lesser, and VP of Marketing Parnell Eagle. Those in the “next level down” like Chung were left out, even though she had the same VP title as several of the recipients. Chung and Thompson were not formally part of the executive leadership team.

Thompson had also heard about the not-so-secret retention bonuses. “Nobody officially told me, but I heard rumors,” she says. She talked it over with Chung just before the bankruptcy. But when Thompson asked MacMillan about the executive leadership team meeting with the board, MacMillan told her that she couldn’t comment on it.

Both Thompson and Chung were told about the severance termination on the same evening. That day, everyone in the office figured out who was being let go, because human resources had cleared out the layoff victims’ time-off balance from the payroll processing system. “Everyone compared notes, mine’s not cleared out, mine is,” Thompson says. “Everyone zeroed out is going to get let go. Mine was zeroed out at end of Wednesday.”

Thompson was told by phone that she would be terminated without severance. Kahng, who as CEO was also a member of the board, told her that “it wasn’t our decision. Goldman Sachs is running the show now, we couldn’t do anything about it.”

Goldman Sachs was the lead creditor on Gymboree’s remaining loans, which it used for cash flow. The investment bank was the first in line to get paid from the bankruptcy. “It’s like when you get on an airplane — Goldman was group 1,” says Chung.

The next day, staff was packed into a tiny conference room. Chung decided to wear a vintage Sex Pistols T-shirt to the meeting with the words “No Future” scrawled on the front. Schickedanz, the human resources chief, read a prepared statement through tears. Everyone had to turn in their ID badges, laptops, and corporate credit cards, and vacate the building by the end of the day. Employees would get their last paycheck and paid time off, and that was it.

Schickedanz, in a phone call with The Intercept, said, “Oh, I thought you were someone else calling. … I’m going to jump off [the phone],” and hung up.

One employee, Katherine Pocrass, filed a class-action lawsuit against Gymboree, alleging that the company did not provide 60 days’ advance notice of the mass firing, as required under the Worker Adjustment and Retraining Notification Act. Attorneys for that case did not respond to a request for comment.

The WARN Act case is ongoing, and Chung would be eligible to be a member in the class-action, which could yield up to 60 days of back pay. But her severance was for a year.

Chung says she met with 17 different attorneys seeking legal recourse for her full severance. Each of them said that while Gymboree’s actions were unconscionable, they were technically legal; the severance plan entitled the company to terminate at any time. Eugene Pak, a business litigator in the Bay Area, said that the situation struck him as “unethical.” Added Keenley, the ERISA attorney: “I think Mera felt that it was unfair. … I’ve been looking for ways to find that it was not lawful, but I have not found them.”

Ron Tyler, a friend of Chung’s and a law professor at Stanford, provided her with several legal contacts. “I think her devastation comes from the fact that she, after very carefully and persistently creating this extremely successful career, to have it end so dramatically and intentionally by her company,” Tyler says. “And she saw the writing on the wall. Had it not been for that [severance] agreement, she would have left before.”

Pictures from Lu’s Facebook account, since removed, place her in Park City, Utah, at the time of the film festival. One check-in still on Facebook places her there as well.

“It’s like a B-grade Netflix movie,” Chung says. “If they were so needed for retention, why were they able to go to Sundance?”

Chung began to write letters to members of the board of directors through LinkedIn. “In your decision to Terminate my Severance Plan on the same day you filed for Chapter 11, you have succeeding in destroying my career, and the financial security it took me over 30 years to build,” she wrote. “I ask you to search your conscience and let me know how you sleep at night.”

According to Chung, she received vague assurances from Kahng and board member Beegle. Both later blocked Chung as a contact on LinkedIn, so she can no longer access these responses.

A week later, Lu texted Chung: “Shaz [Kahng] asked me to tell you to ‘hold tight & not do anything rash.’”

“What this letter does NOT explain is why the company’s ‘cash position’ was different approximately 3 weeks prior to Jan 16, when the ELT (executive leadership team) received the now widely known ‘confidential’ retention bonus,” Chung replied. Schickedanz did not respond.

Shelly Walsh, general manager of Janie and Jack, the viable brand that Gymboree was attempting to sell, was not present at the executive leadership team meeting where bonuses were allegedly distributed. She negotiated a subsequent agreement for a $400,000 bonus to remain with the company through the sale, which Gymboree had to get bankruptcy court to approve.

In February, the U.S. bankruptcy trustee for the eastern district of Virginia, where Gymboree’s bankruptcy was filed, objected to a motion to approve an additional $2.2 million in incentive and retention bonuses to 52 key employees. This included the $400,000 to Walsh.

“These employees comprise less than 0.5 % of Debtors’ total workforce of over 10,000 employees, many of whom – the true rank-and-file and hourly employees – are literally working themselves out of jobs in connection with the Debtors’ going out of business sales,” wrote the U.S. trustee, a neutral governmental party that operates in the interest of the process. The filing also notes: “In the 90-days prior to the Petition Date, the Debtors and their non-Debtor affiliates made discretionary bonus payments to two other employees who are also participants under the Employee Programs in the aggregate amount of approximately $270,000.00.”

This appears to refer to the retention bonuses to the executive leadership team, which Gymboree was required to disclose to the bankruptcy court because they occurred 90 days before the filing. But both Chung and Thompson doubt the figures. On March 11, Kahng resigned as CEO. She did not return a request for comment through LinkedIn.

In her letter to the bankruptcy trustee, Chung estimated that the $270,000 represented the average annual salary of each of the eight executive leadership team members who received the disguised severance. That would put the total at $2.1 million.

Chung received a response from the U.S. trustee’s office, asking if her email could be shared with the unsecured creditor’s committee, which can seek clawbacks of the bonuses if they were found to be paid out and undisclosed. Chung agreed. A Justice Department spokesperson told The Intercept that the U.S. trustee does not comment on internal communications or deliberations regarding pending cases.

In addition to clawbacks, other sanctions could include “anything from jail time to a stern speaking-to and anything in between,” said Weiss, the bankruptcy attorney. “It could be perfectly innocent or it could be criminal.” So far, a prison sentence seems unlikely. Despite the U.S. trustee’s filing, bankruptcy court Judge Keith Phillips approved Gymboree’s additional bonus payouts, with some minor modifications. The biggest change was that a pre-petition retention payment of $52,500 for one undisclosed employee was cut in half.

Weiss expressed some surprise that the payments were approved over the U.S. trustee’s objections. But “judges don’t typically dig into monthly operating reports in large corporate entities,” he says. And even the trustee is resource-constrained. “They have some forensic accounting experience, but they’re not forensic accountants. They don’t have the staff and expertise to go after fraud at that [high] level.”

Creditors can afford to investigate secret payouts, but the time and expense of proving a case over a few million dollars may not be worth it to them. In addition, the 2005 bankruptcy bill includes some restrictions on bonus and severance payments to senior officers and managers, but it’s up to judges to make the determinations on which bonuses are reasonable to retain executives and which are excessive. “The 2005 amendments are garbage,” says Weiss. “It doesn’t surprise me in the least that they were not written in a way that makes it easy to prevent this sort of stuff.”

The upshot of this is that top executives have a relatively free hand to extract cash from a dying company — a particular problem in retail, where Payless Shoes and numerous others have closed shop. And that comes at the expense of both creditors and their fellow employees, even people high up in the organization like Mera Chung.

“The Goldman Sachses of the world are going to do whatever they want,” Chung says. While the firing didn’t leave her destitute, the combination of an uncertain future in retail and the need to care for her father makes things far more treacherous than it would have been with the severance. She worries about fellow creative directors, who are unaccustomed to legalese, not knowing the risks of losing their safety net if the business goes under. And she wants people to know what was done to her.

Referring to her colleagues and board members, she tells me, “You are going to have to answer to scrutiny for being a scumbag. I’m not going to walk away until your face is on a fucking billboard.”

The post “She Lied to My Face”: Inside the Hectic Last Days of Gymboree’s Retail Bankruptcy appeared first on The Intercept.

Tucker Warren, who has been running communications for Schultz’s independent, not-yet-presidential campaign since January, is also a partner with Hamilton Place Strategies, a public relations firm for numerous corporate clients, including several big banks. Founded by Tony Fratto, a former press aide to George W. Bush, Hamilton Place has for years cranked out arguments favoring financial deregulation and opposing the breakup of the nation’s largest financial firms.

Schultz has spent the early part of his presidential exploration avoiding specifics and defining himself as a “centrist independent,” midway between progressives like Bernie Sanders and Elizabeth Warren and reactionaries like Donald Trump. He has said that he would not sign any legislation unless it has bipartisan support, and that his cabinet would include Democrats and Republicans. He has highlighted the budget deficit and “limiting the power of lobbyists and special interests in Washington.”

That goal appears to be at odds with Schultz’s staffing decisions, given that Warren’s employer works for a multitude of special interest groups.

Warren told The Intercept in an email that he is on leave from Hamilton Place and “focused full-time on Howard Schultz.” On Hamilton Place’s website, Warren is still listed as a partner, and his LinkedIn page states that both jobs are current.

Hamilton Place Strategies did not return a request for comment. Currently, Warren is the only member of the PR shop who is employed by Schultz.

“My work for Howard Schultz has no bearing on HPS or the counsel it provides to clients,” Warren said to The Intercept. However, given the breadth of his corporate clients, the potential for a conflict of interest is strong. Warren’s Hamilton Place bio indicates that he “oversees client accounts pertaining to domestic and international finance, trade, insurance, healthcare, education, manufacturing, transportation, and technology,” which describes nearly all major domestic policy that a president would need to administer.

Warren would not commit to recusing himself from working on these issues as part of the Schultz campaign. “I will absolutely and without hesitation engage on issues – the list you provided is basically the entire U.S. economy – where my career has given me understanding that can inform our team’s thinking,” he wrote.

He joined Hamilton Place in 2011 and was made a partner in 2014. Previously, he was the communications director for the Financial Crisis Inquiry Commission, which studied the 2008 banking industry crash. Before that, at the PR firm Edelman, he worked with corporate clients like JPMorgan Chase and AstraZeneca. Warren has largely worked behind the scenes at Hamilton Place, but the firm’s positioning on key issues of financial regulation offers a window into the work he did.

Hamilton Place is most widely known for going to bat for Wall Street. Major trade associations and big banks are some of the firm’s largest clients. Fratto, who was a Treasury Department spokesperson under George W. Bush, frequently pops up in financial regulation-related stories, scoffing at the need for new rules on the big banks. In 2016, Fratto was one of the biggest opponents of the 21st century Glass-Steagall Act, which would have imposed a firewall separating investment banks that engage in trading activity from commercial banks that take deposits.

Fratto also has been one of the most consistent backers of the Export-Import Bank, which facilitates cheap loans for foreign deals with U.S. multinationals. Hamilton Place created “Exporters for Ex-Im,” an ad hoc group of companies seeking to turn the cheap lending spigot back on.

In 2013, Hamilton Place released a report called “Banking on our Future: The Value of Big Banks in a Global Economy,” which argued that capping the size of U.S. banks would reduce American influence and competitiveness, while not making the global financial system any safer. “The truth is that the U.S. needs both large multinational banks and small community banks in order to service the needs of the U.S. and global economies,” the report reads. The report also claimed that U.S. banks aren’t that big compared to European counterparts, though that margin disappears when using comparative international accounting standards.

A more recent report in July 2017 pronounced big banks “safe and sound.” Notably, Hamilton Place didn’t reverse this pronouncement amid the significant bank deregulation put in place by the Trump administration.

In short, Hamilton Place is a full-service support staff for Wall Street banks, parroting their arguments at every turn for years. And now one of their partners is doing communication for a possible presidential candidate.

The post Howard Schultz Hired a Corporate Mouthpiece for His “Centrist” Presidential Campaign appeared first on The Intercept.

There isn’t a particular individual to single out and blame for the party’s failure, and that’s not what this story is doing. Kamala Harris’s role in the affair was no more or less tragic than anyone else’s. But now that she’s running for president, Harris is not only eliding responsibility for her part in the failure, but claiming it as an outright success. That claim doesn’t withstand a moment’s scrutiny.

“We went after the five biggest banks in the United States. We won $20 billion together,” Harris said in her initial campaign address in Oakland, California. She has highlighted the settlement for years as an example of her record of taking on powerful interests.

Harris is referring to the national mortgage settlement, a massive deal made with Bank of America, Wells Fargo, JPMorgan Chase, Citigroup, and Ally Bank (formerly known as GMAC) in 2012, when she served as California attorney general. And that settlement is best understood as a second bank bailout, protecting legally exposed mortgage fraudsters while doing little to prevent evictions. In fact, more families lost their homes as a result of transactions facilitated by the national mortgage settlement than those who got a sustainable loan modification to save them.

Equating a toothless settlement with a sufficient penalty for criminal fraud sets a meager baseline for what constitutes punishment, virtually ensuring subsequent crimes. If we will ever dismantle a system that delivers one set of laws for the powerful and another for everybody else, we must be honest about the glaring inadequacies of the past. Harris often uses the phrase “let’s speak that truth” as a throat-clearer in speeches. Well, let’s speak some truth about the national mortgage settlement.

Let’s first understand what the settlement was about. During the run-up of the housing bubble, banks acquired thousands of subprime mortgages and turned them into securities. They created trusts as repositories of the mortgages, with bonds flowing out to investors around the world. All of this produced explosive demand for new mortgages, hooking millions more with subprime debt and inflating the bubble that later popped.

Governed mostly under New York state law, the trusts had to receive the mortgages before a stipulated closing date, with no grace period after the fact. But banks simply didn’t execute the transfers, breaking the chain of ownership on virtually all securitized mortgages in the housing bubble years. As a result, mortgage-backed securities were backed by nothing.

When the collapse of the bubble ushered in a flood of mortgage defaults, the trust administrators lacked the legal authority to foreclose. In an industrial-scale cleanup, law firms, mortgage servicing companies, and third-party subcontractors fabricated, forged, and backdated documents to paper over the failed securitizations.

This cover-up was not infallible, and the subsequent chaos — foreclosures on homes with no mortgage, foreclosures on people who never missed a payment, and multiple companies seeking foreclosure on the same property — revealed the fracturing of a property records system that had served America well since the 1630s. Mortgage companies were also caught piling on illegal fees, pushing customers into foreclosure, and lying to borrowers seeking loan modifications. Eventually, this mountain of false evidence and fraud burst into public view. By the fall of 2010, the leading mortgage companies in America stopped foreclosing on people, because they couldn’t do it anymore legally.

The stakes couldn’t have been higher. Trillions of dollars in securitized mortgages were apparently corrupted; title insurance companies were refusing to insure them until the mess was resolved. Following the law on these loans would have wiped out most of the major banks in the United States. Law enforcers had the leverage necessary to end the foreclosure crisis by allocating losses from the crash equitably, while punishing those responsible to prevent routinized fraud and abuse from ever happening again.

These options were not just wild fantasies. Then-Federal Deposit Insurance Corp Chair Sheila Bair wrote up a proposal at the time to take down all delinquent mortgages to current value and have homeowners and banks share in the upside when prices recovered. Experienced prosecutors like Bill Black, who helped put nearly a thousand bank executives in prison after the savings and loan scandal, were devising methods to hold financial crisis actors accountable. A collection of housing advocates, expert analysts, foreclosure victims, and defense attorneys were demanding such meaningful resolutions and pleading with Harris and other law enforcement officials to join them.

But in that crucial moment, nobody bothered to investigate the breadth of the fraud and how many were affected, instead moving directly to negotiating what facsimile of a penalty would be tolerable to the banks. A 50-state foreclosure fraud task force was formed to be the vehicle to clean all this up and get the system humming again.

Harris wasn’t in office when negotiations commenced in the fall of 2010, and while she nominally joined the task force executive committee after her election as California attorney general, for her first several months in office she kept relatively quiet on the matter. She was not the first attorney general to break from the investigation; New York’s Eric Schneiderman and five other Democrats got there first, and Schneiderman largely led the resistance.

A coalition called Californians for a Fair Settlement formed (with Schneiderman’s help) to separate Harris from the negotiations. They jammed office phone lines with constituent calls, and eventually got Gavin Newsom, at the time Harris’s biggest potential rival in state politics, to sign a letter opposing the emerging deal. (Newsom has since endorsed Harris’s presidential candidacy; the two share campaign consultants.) A month of persistent grassroots pressure and challenges to her political advancement led to Harris’s dramatic break with the talks, after a day spent with bankers trying to salvage them.

When Harris departed in September 2011, the deal being discussed by the task force with five banks was for around $20 billion; the final deal, which she returned to in February 2012, totaled $25 billion. The Obama White House, which wanted to take action against banks in an election year, put extreme pressure on the dissident attorneys general and got them to roll over for a relative pittance. And even this headline number wildly overstates the penalty for the banks and the benefit for homeowners.

The national mortgage settlement only included $5 billion in actual hard dollars: $3.5 billion to the states, and another $1.5 billion in “sorry you illegally lost your home” checks for foreclosure victims. The checks totaled $1,480 each, barely a month’s rent in California. As for the state relief, Harris and her fellow negotiators never mandated that the money go toward helping homeowners. So, like many others, California Gov. Jerry Brown purloined most of the state’s $410 million share to fill holes in the budget. Years later, private litigants sued the state for robbing the settlement fund and won, but the state has yet to return the money, years after it could have done much good.

When Harris talks about how she “won $20 billion” for the state, she isn’t referring to those hard-dollar provisions. She means the consumer relief portion of the settlement, which were credits given to banks for assisting struggling homeowners with their mortgages. The credits were lower than the raw dollar figure, but Harris always highlights the higher number. In addition, banks could modify loans they serviced on behalf of investors, who took the actual hit. This means that banks paid much of their fine with other people’s money.

Of the $20 billion Harris touts, nearly half of it, $9.5 billion, came in the form of short sales, in which homeowners sell their properties for below the mortgage balance without having to make up the difference. That can be helpful to someone’s credit score, but it results in losing the home, the exact opposite intention of the settlement. And because California is a “non-recourse” state, lenders are prevented from seeking mortgage balances from borrowers after a home sale anyway.

In 2013, Harris’s predecessor, Sen. Barbara Boxer, got a ruling from the Internal Revenue Service that short sale forgiveness in California represented no material value to borrowers. In other words, this supposed “gift” for homeowners from Harris’s settlement totaled $0.00.

Another $4.7 billion of relief in California involved forgiveness of second mortgages like home equity lines of credit, which were deeply delinquent and “essentially dead,” according to mortgage experts. That forgiveness did not prevent lenders from pursuing foreclosure on the same families over their primary mortgages. And banks were getting credit toward their total for something they’d have had to do anyway: writing off debt that would never be collected.

So over 70 percent of Harris’s $20 billion settlement either removed people from their homes or canceled unrecoverable debt. A little less than 33,000 California families actually got principal reductions on their primary mortgages, the most sustainable type of relief.

Sadly, California made out better than the rest of the country. Nationwide, while the settlement’s architects promised 1 million principal reductions, only 83,000 received them. Set against the millions of foreclosures in this period, to call it a drop in the bucket is generous. And praising Harris for making the best of a shameful deal is faint praise indeed.

Harris has noted a tension between exacting adequate punishment for mortgage crimes and delivering speedy relief to homeowners. But nearly 16 months elapsed between the initiation of the 50-state “investigation” and the settlement, and none of that time was actually spent investigating. The actual relief for homeowners was totally inadequate.

For the banks, the settlement was cause for celebration. Despite being caught red-handed in a litany of abuses, they paid off their penalty by either using other people’s money or performing routine functions. The actual impact made barely a dent in their profits. And they got a broad release from prosecution, putting their intense legal exposure behind them.

Needless to say, no bank executive went to jail for these crimes. In exchange for agreeing to the settlement, Schneiderman got to co-chair an overhyped federal-state task force that would allegedly serve as the real vehicle for criminal accountability. (Harris also wanted the gig, but Schneiderman out-maneuvered her for the position.) The task force wound up being a repository for existing cases, issuing no criminal subpoenas and merely securing more weak settlements.

Harris initiated a “mortgage strike force” to prosecute individuals, but it only brought a handful of cases, and the ones her campaign touts as triumphs were against penny-ante “foreclosure rescue” scams, not the bankers who maneuvered homeowners into foreclosure in the first place. Harris passed up the opportunity to charge OneWest Bank, then chaired by current Treasury Secretary Steven Mnuchin, with what her own investigators called “widespread misconduct” in state foreclosure cases.

Overall, the national mortgage settlement was a blight on this country, a tragic missed opportunity to rebalance the unfair burden thrown on homeowners for a financial crisis they did not cause. The architects of the settlement should be embarrassed by the very mention of it. If this is what we hold up as justice, then we have none.

Surely Harris must have better things in her record to talk about. She authored the California Homeowners Bill of Rights, which gave borrowers more protections against foreclosure, although attorneys have questioned its spotty enforcement (one major mortgage company had never even heard of the Homeowners Bill of Rights, years after its passage). And she did hire an aggressive settlement monitor, Katie Porter, who got personally involved in cases and delivered better outcomes for homeowners; Porter is now a first-term member of Congress.

But Harris is specifically praising herself for the national mortgage settlement, and that’s just appalling. Letting the biggest banks in America get away with the largest consumer fraud in American history is nothing to celebrate. It’s more deserving of an apology, for abandoning vulnerable Americans in their hour of need and damaging the noble cause of equal justice under law.

The post Kamala Harris Celebrates Her Role in the Mortgage Crisis Settlement. The Reality Is Quite Different. appeared first on The Intercept.

Pentagon procurement officials responded to the report by vowing to seek $16.1 million in voluntary refunds from TransDigm, the approximate amount of excess profits on $26.3 million in contracts. TransDigm has yet to respond.

The report offers powerful evidence about TransDigm’s much-maligned pricing practices, which gained scrutiny nearly two years ago in a series of short-seller reports and news items targeting the company as the “Martin Shkreli of defense contracting.” More of a private equity conglomerate than a defense contractor, TransDigm uses mergers and acquisitions to corner the market on sole-source aircraft parts sought by the military; thereafter, critics attest that the company jacks up the price. About a third of TransDigm’s sales in 2017 were in the defense sector, according to the inspector general report.

Three Democrats — Reps. Ro Khanna of California, Tim Ryan of Ohio, and Sen. Elizabeth Warren of Massachusetts — requested the audit to see whether TransDigm was reaping excess profits in procurement.

Wednesday’s report shows that, well, yes, it was.

The inspector general reviewed 47 of the 113 contracts TransDigm made with the Defense Department between January 2015 and January 2017. “We determined that TransDigm earned excess profit on 46 of 47 parts,” the report states. One part yielded what the inspector general considered a “reasonable” profit of 11 percent. The other 46 ranged in margins from 17 to 4,451 percent.

Military procurement can be a mind-numbingly complex subject, but in general, procurement officers are supposed to analyze whether they’re paying a fair and reasonable price. This is often done through competitive bidding, but the overwhelming majority of TransDigm’s parts were sole-source, meaning that the company has an effective monopoly. Even in cases with a competitive bidding process, TransDigm was in many cases the sole manufacturer: The “competitive” suppliers all bought their parts from TransDigm before selling to the government.

TransDigm has also been accused by Khanna of creating the illusion of multiple distributors for a product, hiding the fact that the distributors are all owned by TransDigm. The inspector general did not fully address that charge, “because it was referred to the Defense Criminal Investigative Service for action deemed appropriate.”

Absent competitive bidding, procurement officers can ask the contractor for cost data so that they can apply a reasonable markup. From 2015-17, contractors were required to submit certified cost data in cases where the contract is over $750,000. But all TransDigm contracts except two came in below that threshold, evading the requirement.

This will only get worse. Congress increased the threshold to $2 million in 2017. The change was pitched as a way to “reduce administrative burdens” on private businesses.

For contracts below the threshold, procurement officers can request cost data. But contractors like TransDigm can simply decline the request. It did so in 15 of 16 cases; the only request honored was for a large contract, for which submitting the cost data was mandatory. That case, where the procurement officer received cost data, was the only one where TransDigm earned a “reasonable” profit, according to the inspector general.

Other TransDigm moves kept procurement officers in the dark, the report said. The company claimed that 32 of the 47 contracts studied were for items available in the commercial marketplace. Contracts for commercial items are exempt from cost data disclosure. But the inspector general determined that only four of the 32 items that TransDigm claimed were commercial actually were.

Procurement officers can also check against historical prices to test for price gouging. But just one inflated price snuck into a previous contract would increase the entire baseline. In 37 cases where officers checked historical prices of TransDigm parts, 34 of them were considered inflated, the inspector general wrote.

Overall, officers mostly had no way of determining whether they were overpaying for TransDigm parts. They did, however, urgently need the spare parts to keep aircraft in the sky and keep up with mission readiness. So they bought from TransDigm, giving the company the estimated $16.1 million windfall.

TransDigm is a relatively small Pentagon supplier within the $144.6 billion procurement budget. Penny-ante price gouging in spare parts, where the costs are relatively small on an individual basis and can get obscured in the total budget, fly under the radar. But if the practices are standard across the contracting space, the military may be squandering tens of billions of dollars.

“The audit’s findings clearly show that egregiously excessive profit was the norm on virtually all of TransDigm’s contracts and parts,” said the three Democratic members of Congress in a statement. The lawmakers have also requested a report from the Government Accountability Office on monopolistic practices in the spare parts market, “to see if there are more TransDigms out there.” That report is expected this summer.

TransDigm has made no comment on the inspector general report. The company’s stock, which had increased nearly 25 percent in the past month, dropped slightly on Tuesday, when news of the report broke, and fell again on Wednesday.

On a recent earnings call, TransDigm Executive Chair Nicholas Howley did obliquely reference the controversy, insisting that “there has been no allegation of any wrongdoing or illegality,” and that the Defense Department would be requesting “about $16 million” in voluntary refunds. Howley did not say whether TransDigm would pay the refund, only that it was “not a financial obligation of the company.”

In addition to recommending the refund, the inspector general wrote that the Defense Department should ensure that procurement officers get cost data when they request it, to help prevent the military from being gouged by suppliers. The report also called for better reporting when contractors deny requests for cost data, and additional studies to prevent unreasonable pricing.

The Pentagon agreed with all the recommendations. But in a letter attached to the report, a former director of defense pricing and Obama administration holdover, Shay Assad, wrote, “We need to look to other ways to address and combat the unconscionable greed exhibited by companies like TransDigm. The traditional recommendations of increased reporting and oversight, increased training, and revising departmental policies help but they do not get at the root of the problem. We will need legislative change to address price gouging and war profiteering.”

Assad, a former Raytheon executive, has been called “the most hated man in the Pentagon” for his aggressive scrutiny into what defense contractors charge the government. Only in Washington can you become “hated” for trying to save taxpayers from being cheated.

Fortunately for TransDigm and others like it, Assad has been reassigned. It remains to be seen whether Trump’s Defense Department appointees will ramp up scrutiny of procurement. Considering that the acting defense secretary was a longtime executive at major defense contractor Boeing, it would be an understatement to call this unlikely.

The post It Might Be Time for a “War Dogs” Sequel appeared first on The Intercept.

A leading anti-corruption group is crying foul, pointing to a revolving-door practice in which agency officials often show up on the opposite side of the negotiating table, where they press their former colleagues to get mergers approved.

Two recent cases involve mergers in the office supply and dialysis industries, and on Monday, Jeff Hauser of the Revolving Door Project at the Center for Economic and Policy Research filed a public comment exposing that dynamic.

Hauser’s comment pertains to the proposed merger between Staples and Essendant, the nation’s largest office equipment wholesaler and one of only two major companies in that space. If the merger is approved, Staples, the main retail giant in the industry, would be in a position to potentially control price points for its retail competitors.

On a party-line vote, the FTC agreed to this unholy alliance, reaching a settlement that puts alleged “firewalls” in place to separate information about Essendant’s retail clients from those making Staples pricing decisions. Staples presumably wouldn’t need access to that information to simply make Essendant’s prices higher (or its own prices lower) to drive market share away from rivals, among numerous other options. The settlement agreement provisionally agreed to by the FTC is subject to public comment and then a final approval.

In his letter, Hauser floats a hypothesis for why the FTC gave the go-ahead: The legal counsel for Staples’s parent company was, until 2012, the leader of the FTC division that negotiated the settlement, where he worked with some of the agency lawyers now dealing with the Staples case.

The lead counsel for Sycamore Partners, the private equity firm that owns Staples, is Matthew J. Reilly of the white-shoe D.C. law firm Kirkland & Ellis. As his bio indicates, Reilly “served for five years as the head of the FTC’s Mergers IV division.” The Mergers IV Division of the FTC’s Bureau of Competition happens to be the section that handled the Staples-Essendant case.

“The potential for Reilly’s prior relationships with members of the Mergers IV division to have helped secure the deal’s approval irreparably undermines public confidence in this merger’s merits.”

Two of the career FTC attorneys involved in the Staples case — Maria DiMoscato and Kevin Hahm — previously worked on cases in which Reilly was a lead attorney. Hauser speculated that, as head of the division, Reilly had promotion or bonus authority over these more junior attorneys. “The potential for Reilly’s prior relationships with members of the Mergers IV division to have helped secure the deal’s approval irreparably undermines public confidence in this merger’s merits,” Hauser wrote in his comment letter to the FTC.

Due to this conflict of interest, the Revolving Door Project wants the FTC to withdraw its approval for the Staples-Essendant merger. The Washington-based watchdog group also wants new rules prohibiting a former attorney from representing clients in a merger inquiry before a division in which the attorney once held a leadership role.

This would renew public trust in the agency as “serving the public interest, rather than the interests of the regulated,” Hauser writes. But it would really screw up Kirkland & Ellis’s marketing of Reilly as a bulldozer prying open the doors of the FTC.

“Matt is frequently relied upon to obtain regulatory clearance for many of the toughest, high profile deals,” according to his law firm bio. The National Law Journal gave Reilly the honor of one of America’s top outside counsels, specifically “for his success in obtaining US merger clearances,” Kirkland & Ellis notes. He has experience in this field, too, having represented Office Depot when it was approved to purchase OfficeMax in 2013.

In other words, Reilly’s past service at the FTC is precisely how he makes his money working for corporate clients. He needs to shuttle between the government and the private sector to build the relationships necessary to serve his clients’ goals of concentrating corporate power.

Through a spokesperson, Sycamore Partners declined to comment. Reilly did not respond to a request for comment, and neither did the FTC.

The FTC is taking public comment on the proposed settlement for the Staples-Essendant merger until Wednesday, February 27. The commission will then make a final decision on the merger within a couple months.

Hundreds of comments have been filed opposing the merger, which is unusually large for an FTC comment period. Grassroots groups like Demand Progress have been organizing opposition to the merger, with an emphasis on preventing another private equity retail disaster, in which Staples builds unsustainable debt as it grows through acquisition.

A similar revolving-door situation can be seen in another approved vertical merger, between dialysis giant Fresenius and NxStage Medical, makers of an in-home dialysis machine. Fresenius is one of two leading dialysis companies, and critics charge that the deal could prohibit competitors from making more patient-friendly devices and potentially limit uptake of in-home use.

In this case, NxStage Medical went beyond merely hiring the head of the specific division of the FTC’s Bureau of Competition analyzing the merger: It hired Deborah Feinstein, the former head of the entire bureau.

Feinstein’s case exemplifies just how fluid the door between the private and public spheres is. She has shuttled between the Bureau of Competition and top antitrust law firm Arnold & Porter Kaye Scholer three times in the past 30 years. At the FTC, she was notorious for waving through mergers in pharmaceuticals and other industries; in a 2013 speech, Feinstein openly argued in favor of settlements that allow companies to merge as “a remedy that is as good as or better than what could be achieved from litigation.”

Now back at Arnold & Porter, Feinstein represents companies in the same settlement negotiations that she championed while at the FTC.

Feinstein did not respond to a request for comment.

This corrosive back-and-forth between positions of power at the antitrust agencies and firms that represent clients before those agencies is widespread. Joseph Simons, the current chair of the FTC, worked on corporate mergers at the law office of Paul, Weiss, Rifkind, Wharton & Garrison. Christine Wilson, a Republican commissioner, worked at Kirkland & Ellis, Matthew Reilly’s firm, representing clients like Northwest Airlines in its merger with Delta, and later as Delta’s in-house counsel.

“This is not Nigerian corruption where suitcases of cash are handed over or money is transferred to Swiss Banks,” writes Jonathan Tepper, co-author of “The Myth of Capitalism.” “The revolving door creates a culture of ideological capture and what Nassim Nicholas Taleb calls the ‘retrospective bribe.’ It encourages poachers turned gamekeepers turned poachers to look after their clients’ interests in the long term.”

The antitrust group of Arnold & Porter, Feinstein’s firm, has a particular pipeline into government service. Lawyers from the group have moved on to positions like FTC chair, general counsel, and director of the Bureau of Competition, as well as head of the Justice Department’s Antitrust Division. Former Antitrust Division chief William Baer had two stints at the FTC in between his tenure at Arnold & Porter. Former chair of the FTC Robert Pitofsky also went back-and-forth between the agency and Arnold & Porter.

The true irony is that one of the co-founders of Arnold & Porter was Thurman Arnold, the head of the Antitrust Division under President Franklin D. Roosevelt and perhaps the most aggressive antitrust enforcer in history. He might not be thrilled about what’s being done in his name.

The post Watchdog Group Slams FTC for Revolving-Door Practices Ahead of Pending Staples Merger appeared first on The Intercept.

After the Senate Environment and Public Works Committee advanced Wheeler’s nomination for permanent EPA chief on a party-line vote, a group of five senators issued a veiled threat to the nominee: Promise to rewrite regulations on renewable fuels that are more favorable to oil refineries, or forget about being confirmed.

It’s a fight without a decent resolution for any human being needing to breathe clean air or inhabit a sustainable planet. The prodigious amount of energy used in producing corn-based biofuels is not much cleaner than the energy from burning oil-heavy gasoline. The fight is more over who will get to earn more money in the final, dying days of dirty energy dominance. It’s also a preview of the kind of battles that the advocates of a Green New Deal will have as they take on entrenched incumbent industries who have been spending heavily, for years, to generate government favors they are loathe to see disappear.

The regulation at issue is called the renewable fuel standard, or RFS, which requires all gasoline sold in America to contain a minimum volume of renewable sources — which are dominated by corn-based ethanol. Big Ag wants the standard to be higher; Big Oil wants to be free from the corn burden.

The oil-backed senators are mimicking a tactic used previously by their colleagues representing corn-producing states, who successfully made a similar threat to a lower-level EPA official in 2017, in exchange for guarantees that refiners would be required to blend more ethanol into gasoline.

The biggest player of all in this debate is Trump confidant and corporate raider Carl Icahn, who remains under investigation for using his role as a White House deregulatory czar to try to tip the scales in favor of oil refiners, which would have benefited a refinery he owns to the tune of $200 million per year.

The behind-the-scenes fight is symptomatic of a growing trend in an increasingly corporate-controlled government. In the Second Gilded Age, senators have become little more than traffic cops, mediating the grievances of competing sets of business giants. And Wheeler, himself a former lobbyist for all sorts of energy companies, has gotten caught in the middle of the latest showdown.

The situation is made stranger by the fact that the hostage-takers — the oil-state senators seeking guarantees from Wheeler — have been winning under the Trump administration. Refiners have seen compliance costs for biofuel blending drop fourfold since 2017 and have benefited from a significant ramp-up in discretionary waivers from the EPA, including for Icahn’s refinery.

“These senators, and Icahn, are saying that right now, what you’re doing is fine, but we need a long-term solution to rid us of this obligation,” said Tyson Slocum, director of Public Citizen’s Energy Program and an adviser to the Commodity Futures Trading Commission. “What’s very interesting here is the continuing fight within the core Republican base, between Big Ag and Big Oil.”

One of the more arcane elements of the current rule is that oil refiners are responsible for making sure the rule is followed — not the gasoline wholesalers (or “blenders”). In regulatory-speak, this is known as the “point of obligation.”

If a refiner does not blend enough ethanol, they can purchase renewable fuel credits, known as renewable identification numbers, or RINs, from those who have over-blended, to comply with their obligation. It’s sort of a cap-and-trade system for biofuels, ensuring that the required amount is blended into the nation’s fuel supply.

Each side wants something from the RFS. Corn producers want the EPA to mandate higher levels of biofuel blending. In a midterm visit to Iowa, President Donald Trump approved a year-round “E15” ethanol mandate, requiring 15 percent of the product to be placed into gasoline. Under current law, ethanol blends are reduced in the summer, over concerns that E15 produces more smog (which corn producers, of course, contest). That regulation has yet to be finalized, and corn producers have lobbied heavily to complete the task.

Refinery interests simply want somebody else to do the blending, freeing them from either having to undergo the costly process of blending themselves, or purchase RINs to satisfy the regulation. If the point of obligation were shifted from refiners to gasoline wholesalers, it could save some refiners a fortune — particularly CVR Energy, the refinery company of which Icahn is the majority owner. CVR does not have the infrastructure to blend ethanol, and in 2016 it spent $205.9 million on RINs.

When Icahn received the formal title of White House special adviser on regulatory reform, in 2017 —without having to divest from any of his stocks — he got right to work. The Trump administration started floating that it would change the point of obligation. And an ethanol lobbying group suddenly struck a deal with Icahn: It would support a change in the point of obligation, in exchange for year-round E15. It even wrote the executive order with the policy update.

Amusingly, the Renewable Fuels Association, which reached the deal with Icahn, includes the renewable division of Valero Energy, the oil giant which, like Icahn, owns refineries that cannot blend ethanol.

This all eventually blew up in Icahn’s face. Senate Democrats demanded an investigation into whether Icahn violated conflict of interest laws. Under criticism, Icahn resigned from his White House adviser position in August 2017. By November, the U.S. attorney in the Southern District of New York had subpoenaed Icahn for “information pertaining to … Mr. Icahn’s activities relating to the Renewable Fuels Standard and Mr. Icahn’s role as an advisor to the President.”

This would all be terrible for Icahn if he hadn’t profited handsomely from his meddling. The trading price for RINs has dropped from 90 cents after Trump’s election in November 2016 to 20.5 cents today. One reason for that is that the EPA has been rapidly handing out “financial hardship waivers” to refiners to exempt them from the point of obligation requirements, including to Icahn’s CVR Energy in April 2018.

We don’t know precisely how many waivers the EPA has granted, because the agency initially kept that information secret. But Reuters has reported that 29 refineries across the country received them in 2018, including such financially strapped companies as Exxon Mobil. That’s up from just seven waivers in 2015, and it translates into sharply lower demand for RINs, causing the price to drop. (Icahn was also shorting the market for RINs, profiting off the plummeting prices.)

The hardship waivers have led to reduced ethanol blending overall — 2.25 billion fewer gallons annually, according to one report. The EPA says its hands are tied by court rulings to give hardship waivers to “small refiners” who cannot afford blending or RINs. Corn producers are not buying it, arguing that such actions throw the biofuels market into chaos. “There’s no good reason multibillion-dollar oil refining giants should be able to skirt the law,” Sen. Chuck Grassley, R-Iowa, told Reuters in December.

These developments, however, have made it a good time to be a refiner, though it’s a temporary solution, Slocum said. “[Refiners] accurately understand that these low RIN prices are not a given going forward.”

With Wheeler seeking confirmation as permanent EPA director, both Big Oil and King Corn saw a point of leverage. Wheeler’s confirmation hearing was suffused with talk of this relatively minor renewable fuels issue.

Corn-state senators, like Mike Rounds, R-S.D., demanded clarity on finalizing the year-round E15 rule — Wheeler committed to finalizing the rule by summer — while hitting the EPA on hardship waivers. “I don’t think the intent of Congress was that [hardship waiver granting] reduces the total amount of ethanol that is actually being marketed,” Rounds said. Republican Sens. Joni Ernst of Iowa and Kevin Cramer of North Dakota also pushed Wheeler on ethanol.

Meanwhile, oil-state senators pushed back. “Corn is not the only stakeholder in this program,” bellowed Sen. James Inhofe, R-Okla., despairing of real-world costs borne by refiners. “There is growing concern the administration is only listening to one side of the argument and that those arguments are not based on actual real-world conditions.”

The near-term issue is that the EPA must regularly reset how many gallons of biofuels the market is required to produce, based on market conditions. Wheeler said in his testimony that the agency would propose a reset sometime in February.

After the hearing, the oil lobby escalated the fight. Five Republican senators — Texas’s Ted Cruz, Louisiana’s Bill Cassidy and John Kennedy, Pennsylvania’s Pat Toomey, and Utah’s Mike Lee (Utah has a couple major refineries within its borders) — wrote a letter to Wheeler on February 11. “As we continue to evaluate your nomination to be Administrator,” the Senators wrote, “it is important that we have a better understanding of your views and approach to administering the RFS (renewable fuel standard). … [W]ithout an adequate proposal to meaningfully lower the regulatory burden of Renewable Identification Numbers (RINs), we will have serious concerns with your nomination.”

There was no need to read between the lines. The oil-state senators want Wheeler to lower that reset to reduce costs on refiners, or they will vote no on his confirmation. They also want him to continue issuing hardship waivers to refiners, without reallocating the waived amounts to nonexempted refiners. And they asked for an unspecified “reform” of the RIN market to prevent manipulation (which represented some rare interest from Republicans in market manipulation of any kind).

While Icahn was not formally involved with the letter, and while he has not traditionally been a donor to the Republicans on the letter (except for one small donation to Toomey in 2010), Slocum speculated that he had some involvement. “Just because we’re not seeing Icahn’s name, that doesn’t mean he’s sitting on the sidelines,” Slocum said. “He’s too big a player on this issue.”

The fact that Republican senators would threaten the confirmation of Wheeler, one of the most fossil fuel-friendly EPA administrators ever to hold the job, boggles the mind. Especially because, as acting administrator, Wheeler has continued to hand out hardship waivers like candy. But because Democrats are expected to be almost entirely opposed to Wheeler’s confirmation, the votes of these five senators could absolutely block his appointment.

That said, a coalition of corn-state senators could also be in a position to block Wheeler. In fact, in 2017, Ernst blocked the confirmation of Bill Wehrum, who runs the EPA office that deals with the biofuel mandate, until the Trump administration backed down on changing the point of obligation.

“You have two very powerful core Republican corporate constituencies going to battle with each other,” said Slocum. “And a full-time professional lobbyist who’s represented corporate interests is the key influencer who will play some role in brokering a compromise.” That compromise is difficult to see, as any relief for refiners will likely be reflected in lower demand for corn-based ethanol.

But this is Washington’s role these days: picking and choosing which industry to gift and which to burden.

The post Big Corn and Big Oil Are Warring Over Trump’s Nomination of Andrew Wheeler appeared first on The Intercept.