Sunday, March 16, 2014

Billionaires With Big Ideas Are Privatizing American Science: questions about the future of research for the public good.

Billionaires With Big Ideas Are Privatizing American Science

By WILLIAM J. BROAD MARCH 15, 2014 New York Times
Funding the Future

Last April, President Obama assembled some of the nation’s most august scientific dignitaries in the East Room of the White House. Joking that his grades in physics made him a dubious candidate for “scientist in chief,” he spoke of using technological innovation “to grow our economy” and unveiled “the next great American project”: a $100 million initiative to probe the mysteries of the human brain.

Along the way, he invoked the government’s leading role in a history of scientific glories, from putting a man on the moon to creating the Internet.The Brain initiative, as he described it, would be a continuation of that grand tradition, an ambitious rebuttal to deep cuts in federal financing for scientific research.

“We can’t afford to miss these opportunities while the rest of the world races ahead,” Mr. Obama said. “We have to seize them. I don’t want the next job-creating discoveries to happen in China or India or Germany. I want them to happen right here.”

Wendy Schmidt and her husband are advancing ocean studies.CreditBéatrice de Géa for The New York Times

Absent from his narrative, though, was the back story, one that underscores a profound change taking place in the way science is paid for and practiced in America. In fact, the government initiative grew out of richly financed private research: A decade before, Paul G. Allen, a co-founder of Microsoft, had set up a brain science institute in Seattle, to which he donated $500 million, and Fred Kavli, a technology and real estate billionaire, had then established brain institutes at Yale, Columbia and the University of California. Scientists from those philanthropies, in turn, had helped devise the Obama administration’s plan.

American science, long a source of national power and pride, is increasingly becoming a private enterprise.

In Washington, budget cuts have left the nation’s research complex reeling. Labs are closing. Scientists are being laid off. Projects are being put on the shelf, especially in the risky, freewheeling realm of basic research. Yet from Silicon Valley to Wall Street, science philanthropy is hot, as many of the richest Americans seek to reinvent themselves as patrons of social progress through science research.

The result is a new calculus of influence and priorities that the scientific community views with a mix of gratitude and trepidation.

“For better or worse,” said Steven A. Edwards, a policy analyst at the American Association for the Advancement of Science, “the practice of science in the 21st century is becoming shaped less by national priorities or by peer-review groups and more by the particular preferences of individuals with huge amounts of money.”

They have mounted a private war on disease, with new protocols that break down walls between academia and industry to turn basic discoveries into effective treatments. They have rekindled traditions of scientific exploration by financing hunts for dinosaur bones and giant sea creatures. They are even beginning to challenge Washington in the costly game of big science, with innovative ships, undersea craft and giant telescopes — as well as the first private mission to deep space.

The new philanthropists represent the breadth of American business, people like Michael R. Bloomberg, the former New York mayor (and founder of the media company that bears his name), James Simons (hedge funds) and David H. Koch (oil and chemicals), among hundreds of wealthy donors. Especially prominent, though, are some of the boldest-face names of the tech world, among them Bill Gates (Microsoft), Eric E. Schmidt (Google) and Lawrence J. Ellison (Oracle).

This is philanthropy in the age of the new economy — financed with its outsize riches, practiced according to its individualistic, entrepreneurial creed. The donors are impatient with the deliberate, and often politicized, pace of public science, they say, and willing to take risks that government cannot or simply will not consider.

Yet that personal setting of priorities is precisely what troubles some in the science establishment. Many of the patrons, they say, are ignoring basic research — the kind that investigates the riddles of nature and has produced centuries of breakthroughs, even whole industries — for a jumble of popular, feel-good fields like environmental studies and space exploration.

As the power of philanthropic science has grown, so has the pitch, and the edge, of the debate. Nature, a family of leading science journals, has published a number of wary editorials, one warning that while “we applaud and fully support the injection of more private money into science,” the financing could also “skew research” toward fields more trendy than central.

“Physics isn’t sexy,” William H. Press, a White House science adviser, said in an interview. “But everybody looks at the sky.”

Fundamentally at stake, the critics say, is the social contract that cultivates science for the common good. They worry that the philanthropic billions tend to enrich elite universities at the expense of poor ones, while undermining political support for federally sponsored research and its efforts to foster a greater diversity of opportunity — geographic, economic, racial — among the nation’s scientific investigators.

Historically, disease research has been particularly prone to unequal attention along racial and economic lines. A look at major initiatives suggests that the philanthropists’ war on disease risks widening that gap, as a number of the campaigns, driven by personal adversity, target illnesses that predominantly afflict white people — like cystic fibrosis, melanoma and ovarian cancer.

Public money still accounts for most of America’s best research, as well as its remarkable depth and diversity. What is unclear is how far or fast that balance is shifting, since no one, either in or out of government, has been comprehensively tracking the magnitude and impact of private science. In recognition of its rising profile, though, the National Science Foundation recently announced plans to begin surveying the philanthropic landscape.

There are the skeptics. Then there are the former skeptics, people like Martin A. Apple, a biochemist and former head of the Council of Scientific Society Presidents.

Initially, Dr. Apple said, he, too, saw the donors as superrich dabblers. Now he believes that they are helping accelerate the overall pace of science. What changed his mind, he said, was watching them persevere, year after year, in pursuit of highly ambitious goals.

“They target polio and go after it until it’s done — no one else can do that,” he said, referring to the global drive to eradicate the disease. “In effect, they have the power to lead where the market and the political will are insufficient.”

And their impact seems likely to grow, given continuing federal budget wars and their enormous wealth. Indeed, a New York Times analysis shows that the 40 or so richest science donors who have signed a pledge to give most of their fortunes to charity have assets surpassing a quarter-trillion dollars.

There are also signs of a growing awareness, among some philanthropists, that this influence brings a responsibility to address some of the criticisms leveled at them. Last year, a coalition of leading science foundations announced a campaign to double private spending on basic research over a decade — to $5 billion a year — as a counterweight to money rushing into health and other popular fields.

“Today, federal funding of basic research is on the decline,” the group said. “The best hope for near-term change lies with American philanthropy.”

A New Template

When Mr. Ellison, chief executive of the Oracle Corporation, heard a Nobel laureate biologist give a talk at Stanford about artificial intelligence, he was mesmerized. It was the early 1990s, and the idea of applying fast computers to genetic riddles was new. “I had never experienced anything like it,” Mr. Ellison recalled.

He invited the scientist, Joshua Lederberg of Rockefeller University, to visit him at his California estate. The visit went so well that Mr. Ellison handed the scientist a key to the house and asked him to think of it as his second home. Dr. Lederberg took him up on the offer, and over many dinners in what he would call “the most gorgeous setting in the world” — complete with Japanese teahouse, strolling gardens and ponds of ornamental fish — the men discussed many things, from Mr. Ellison’s early interest in molecular biology to the idea that great wealth can do great good.

In 1997, the friendship gave birth to the Ellison Medical Foundation. Hundreds of biologists have benefited from its patronage, and three have won Nobel Prizes. So far, Mr. Ellison, listed by Forbes magazine as the world’s fifth-richest man, has donated about half a billion dollars to science.

It’s not that Mr. Ellison is the biggest or most visible of the philanthropists. (That distinction probably belongs to Bill Gates, who has donated roughly $10 billion for global public health.) But his work is very much a template for the new private science.

In the traditional world of government-sponsored research, at agencies like the National Science Foundation and the National Institutes of Health, panels of experts pore over grant applications to decide which ones get financed, weighing such factors as intellectual merit and social value. At times, groups of distinguished experts weigh in on how to advance whole fields, recommending, for instance, the construction of large instruments and laboratories costing billions of dollars.

By contrast, the new science philanthropy is personal, antibureaucratic, inspirational.

For Wendy Schmidt, the inspiration came in 2009, from a coral reef in the Grenadine islands of the Caribbean. It was her first scuba dive, and it opened her eyes to the riot of nature.

She talked it over with her husband, Eric, the executive chairman of Google, and the two decided that marine science needed more resources. (The government’s research fleet, 28 ships strong in 2000, has shrunk by about a third and faces further cuts.) So they set up the Schmidt Ocean Institute in Palo Alto, Calif., and poured in more than $100 million. The centerpiece is a ship nearly the length of a football field that, unlike most research vessels, has a sauna and a helicopter pad.

“We want to rapidly advance scientific research, to speed it up,” Mrs. Schmidt said in an interview.

The philanthropists’ projects are as diverse as the careers that built their fortunes. George P. Mitchell, considered the father of the drilling process for oil and gas known as fracking, has given about $360 million to fields like particle physics, sustainable development and astronomy — including $35 million for the Giant Magellan Telescope, now being built by a private consortium for installation atop a mountain in Chile.

The cosmos, Mr. Mitchell said in an interview before his death last year, “is too big not to have a good map.”

Eli Broad, who earned his money in housing and insurance, donated $700 million for a venture between Harvard and the Massachusetts Institute of Technology to explore the genetic basis of disease. Gordon Moore of Intel has spent $850 million on research in physics, biology, the environment and astronomy. The investor Ronald O. Perelman, among other donations, gave more than $30 million to study women’s cancers — money that led to Herceptin, a breakthrough drug for certain kinds of breast cancer. Nathan P. Myhrvold, a former chief technology officer at Microsoft, has spent heavily on uncovering fossil remains of Tyrannosaurus rex, and Ray Dalio, founder of Bridgewater Associates, a hedge fund, has lent his mega-yacht to hunts for the elusive giant squid.

The availability of so much well-financed ambition has created a new kind of dating game. In what is becoming a common narrative, researchers like to describe how they begged the federal science establishment for funds, were brushed aside and turned instead to the welcoming arms of philanthropists. To help scientists bond quickly with potential benefactors, a cottage industry has emerged, offering workshops, personal coaching, role-playing exercises and the production of video appeals.

Advancement Resources of Cedar Rapids, Iowa, did its first workshop in 2002 and has now conducted hundreds across the country, mostly to coach scientists and medical institutions in what it calls the art of donor development. “We help make their work accessible to people who do not have scientific backgrounds but do understand money,” said its founder, Joe K. Golding.

Medical institutions are even training their own scientists and doctors in the art of soliciting money from grateful — and wealthy — patients. And Nature ran a lengthy article giving tips on how to “sell science” and “woo philanthropists.” They included practicing an “elevator pitch” — a digest of research so compelling that it would seize a potential donor’s attention in the time between floors.

Practice in front of the mirror and “with anyone who will listen,” it advised. When the pitch is smooth enough, “aim high.”

Government Gloom

In November 2012, the White House issued a thick and portentous update on the health of the nation’s research complex. Produced by Mr. Obama’s Council of Advisors on Science and Technology, it warned of American declines, emphasized the rise of scientific rivals abroad and called for bold policy interventions.

“Without adequate support for such research,” the experts wrote in their cover letter, “the United States risks losing its leadership in invention and discovery.”

The financial outlook had fallen far and fast. Congress had long reached across party lines to support government research, for its economic and military rewards and because the distribution of billions of dollars plays well come election time. After rising steadily for decades, federal science financing hit a high point in 2009, in the early days of the Obama administration, as Congress, to stimulate the economy amid the global financial crisis, allocated about $40 billion for basic science.

That bipartisan consensus eroded with the Republican takeover of the House of Representatives in the 2010 midterm elections and the budget battles that followed. Spending on basic research has fallen by roughly a quarter, to $30 billion last year, one of the sharpest declines ever.

The cutbacks translate into layoffs: A group of scientific societies recently surveyed 3,700 scientists and technical managers and reported that 55 percent knew of colleagues who had lost jobs or expected to lose them soon.

In an interview, the director of the National Institutes of Health, Dr. Francis S. Collins, called 2013 one of his agency’s darkest years ever, with fewer grants awarded and with jobs and programs cut. In decades past, research financed by the institutes won more than 100 Nobel Prizes. The cutbacks, Dr. Collins said, were “profoundly discouraging.”

Largely unmentioned in the gloom is the rise of private science. The White House report mentioned philanthropy only in passing. “We didn’t do it justice,” said one of the authors, speaking on condition of anonymity because he was not authorized to discuss the report’s preparation.

Science policy has always been shot through with politics. Little surprise, then, that political sensitivities have been stoked by the injection of philanthropic money into this traditionally public sphere.

The official reticence about private science may reflect, in part, a fear that conservatives will try to use it to further a small-government agenda. Indeed, some of the donors themselves worry that too much focus on private giving could diminish public support for federal science.

“It’s always been a major worry,” said Robert W. Conn, president of the Kavli Foundation, which has committed nearly a quarter of a billion dollars to science and is part of the private effort to increase financing for basic research. “Philanthropy is no substitute for government funding. You can’t say that loud enough.”

Representative Lamar Smith would beg to disagree. Mr. Smith, a 14-term Republican from Texas, helped found the House Tea Party Caucus and, after the Tea Party ferment swept the Republicans to power in the House, became chairman of the Committee on Science, Space and Technology.

Last year, after a meteor exploded over Russia and injured more than 1,200 people, Mr. Smith declared that new sensors in space were “critical to our future.” Then he held a hearing to showcase a satellite-borne telescopemeant to scan the solar system for speeding rocks that could endanger the planet. Money for the venture comes from leaders of eBay, Google and Facebook, as well as anonymous private donors.

“We must better recognize what the private sector can do to aid our efforts to protect the world,” Mr. Smith said.

In decades past, that job would have belonged to NASA. But at the hearing, the project’s head, Edward T. Lu, a former astronaut and Google executive, testified that the spacecraft’s cost — $450 million — was about half what the government would have spent.

Committee members enthusiastically suggested that the private endeavor pointed the way toward a new era of lower federal spending.

“Congratulations!” said Representative Dana Rohrabacher, a California Republican. “I’m totally supportive.”

In the recent interview, Dr. Collins of the N.I.H. acknowledged that the philanthropists were “terrifically important” for filling gaps and taking advantage of new opportunities. The science, he emphasized, “has never been at a more exciting moment.”

Still, he and other experts are quick to add that the private surge is far too small to replace public financing.

The N.I.H. budget alone runs to about $30 billion — half for basic research. At least for now, said Dr. Press, the board chairman of the American Association for the Advancement of Science, private giving is “still a drop in the bucket.”

Uncharted Billions

For all that, the government knows very little about how much philanthropic money is flowing into science, or how it is being spent.

Science analysts say that knowledge is vitally important: Without it, the government cannot get a comprehensive picture and strive for a smart balance in the nation’s overall science plans.

The issues are considered social as well as intellectual, and so, in their own grant-making decisions, federal agencies strive to ensure that their money does not flow just to established stars at elite institutions. They consider gender and race, income and geography.

Yet even as the federal government finely monitors its own investments in science research, philanthropy remains largely uncharted territory. (The government does carefully track science financed by private industry, but that research tends to produce such practical things as drugs, jets and gadgets, rather than fundamental insights into the mysteries of nature.)

“People assume we do it,” said John E. Jankowski, a senior analyst at the National Science Foundation, which not only finances research but also tracks science budgets. “But we don’t, because of resource constraints.”

The task is daunting. If government science is centralized, science philanthropy is determinedly not: It is an agglomeration of donors, from the wealthiest patrons to people who write modest checks to their favorite charities.

The National Academy of Sciences has repeatedly urged the government to step up its monitoring of the uncharted billions. And recently, Dr. Jankowski said, the National Science Foundation began developing a pilot survey, to be completed in about a year.

If budgets allow, he added, the agency plans to “ultimately fund” a comprehensive survey.

In the meantime, Fiona E. Murray, a professor of entrepreneurship at M.I.T., has taken a different tack, studying not the donors but the recipients — particularly the nation’s research universities.

To simplify the task, she looked at the 50 leading universities in science-research spending, places like Columbia and Stanford, Duke and Harvard, Michigan and Johns Hopkins.

What Dr. Murray found sheds light on the scope of the phenomenon, as well as questions about who benefits. Private donors now account for roughly 30 percent of the schools’ research money, she reported, adding that the rise of science philanthropy may simply help “rich fields, universities and individuals to get richer.”

The new patrons are responsible for one of the most striking trends on these campuses: the rise of privately financed institutes, the new temples of science philanthropy.

In Cambridge, Mass. — home to M.I.T. and Harvard — they include the $100 million Ragon Institute for immunology research, the $150 million Koch Institute for cancer studies, the $165 million Stanley Center for Psychiatric Research, the $250 million Wyss Institute for Biologically Inspired Engineering, the $350 million McGovern Institute for brain research, the $450 million Whitehead Institute for Biomedical Research and the $700 million Broad Institute for genome research.

“If I’m a rich person, I’m going to give to a leading institution — to Harvard or Princeton,” Dr. Murray said in an interview. That pattern, she added, “poses big issues” for the nation.

A Focus on Disease

If the map of the world of private science has yet to be drawn, one thing is clear: Much of the money is going into campaigns for a cure.

This private war on disease has resulted not only in significant advances in treatment, but also in what experts describe as a major breakthrough in how biomedical research is done. The method opens up blockages that have traditionally kept basic discoveries from being turned into effective treatments — especially for rare diseases that drug companies avoid for lack of potential profit.

“We think it’s potentially transformative,” said Maryann P. Feldman, a professor of public policy at the University of North Carolina at Chapel Hill who studies the approach.

The first success came with cystic fibrosis, which arises when a faulty gene clogs the lungs and pancreas with a sticky mucus. People with cystic fibrosis suffer from coughing, fatigue, poor digestion and slow growth, and die relatively young.

Around 2000, a surge of wealthy donors began making large contributions to the Cystic Fibrosis Foundation. Tom and Ginny Hughes of Greenwich, Conn., had two daughters with the disease, and gave millions of dollars. The family also posed in snapshots for the foundation’s “Milestones to a Cure” updates, and Mr. Hughes, a banker, helped the charity develop strategies to expand its fund-raising.

Year after year, the foundation held galas, hikes, runs and golf tournaments, eventually raising more than a quarter-billion dollars. With great skill, it used the money to establish partnerships across industry and academia, smashing through the walls that typically form around research teams.

By early 2012, the financial surge produced the first treatment for an underlying cause of cystic fibrosis. The drug counters a gene mutation that accounts for 4 percent of the cases in the United States — about 1,200 people. The medication thinned the deadly mucus, lessening symptoms and drastically improving quality of life.

The success begot a global rush to turn basic discoveries into treatments, a field now known as translational science. It also inspired rich donors to shower new money on disease research.

Many of their efforts are rooted deep in personal or family trauma. Sometimes, by sheer force of genetics and demographics, that impulse may risk widening historical racial inequalities in health care and disease research, disparities that decades of studies have shown to contribute to higher rates of disease and death among blacks, Hispanics and other minority groups.

A review of these campaigns finds that, as with cystic fibrosis — whichmainly strikes people of Northern European descent — a significant number are devoted to diseases that disproportionately affect white people.

Ovarian cancer strikes and kills white women more often than minority women. In 2012, after his sister-in-law died of the disease at age 44, Jonathan D. Gray, the head of global real estate at the Blackstone Group, the private equity firm, gave the University of Pennsylvania $25 million to set up a center to study female cancers.

Melanoma, the deadliest of skin cancers, also strikes and kills whites preferentially. Debra Black, wife of the financier Leon Black, survived a bad scare. Soon after, the couple teamed up with Michael R. Milken, the former junk-bond financier, whose charity FasterCures gives advice on how to accelerate research, to found the Melanoma Research Alliance. It quickly became the world’s largest private sponsor of melanoma research, awarding more than $50 million for work at Yale, Columbia and other universities.

Of course, the pervasiveness of most diseases means most philanthropists give comfort and medical relief across the lines of race and ethnicity. When Mr. Milken, for example, learned that he had prostate cancer, he set up a foundation to fight it. The charity has raised more than half a billion dollars, helping save not only him but also many black men, since they develop the disease more frequently than white men do.

So, too, the techniques of translational science, inspired by philanthropy, are now being applied in a federal effort against sickle cell anemia, a blood disorder that mainly strikes black people and has long been something of a research orphan.

Scientists first described sickle cell anemia in 1910 and uncovered its genetic basis in 1949. The discovery, by a team that included Linus Pauling, a Nobel laureate twice over, was central to the creation of the field of molecular medicine. Yet with little financing for sickle cell research, either public or private, no drug has been developed that targets the disease’s underlying cause, even though it has crippled and killed millions of people.

The government effort began with Dr. Collins, the N.I.H. director, who as a biologist had helped uncover the cystic fibrosis gene. As the new cystic fibrosis treatment emerged, he pressed the government to adopt the breakthrough translational method, federal budget cuts notwithstanding. Today, the N.I.H. translational science center has an annual budget of more than $600 million and seeks new drugs for rare diseases, which number in the thousands.

Some other noteworthy philanthropists who have shown a deep interest in science.

A candidate drug is undergoing clinical trials and looks promising. In December, the company working with N.I.H. on the research effortannounced that a single dose produced a “significant reduction” of pain for up to 24 hours.

Setting the Agenda

In the early 1980s, Leroy Hood, a biologist at the California Institute of Technology, proposed to make the first automated DNA sequencer, which he pitched to the National Institutes of Health as a way to rapidly identify the billions of hereditary units in every human cell. His grant proposals were rejected, so he turned to Sol Price, a warehouse-store magnate whose companies ultimately merged with Costco.

The breakthrough of the DNA sequencer led to the Human Genome Project — the federal effort that, at a cost of $3.8 billion, mapped all the heritable units — and, more recently, to the burgeoning field of personal genomics.

Science philanthropy, Dr. Hood said, “lets you push the frontiers.”

Over the years, the flood of private money has also inspired something of a reversal. In gene sequencing, in translational medicine, in the Obama administration’s Brain initiative and in other areas, the federal government, instead of setting the agenda, increasingly follows the private lead.

A decade ago, Anousheh Ansari, a Texas engineer who made a fortune in telecommunications, financed a $10 million prize competition for the first private craft that could send three people into space. Her success spawned a boom. Private donors now back dozens of science awards, and the government offers hundreds of its own, motivated, according to a White House study, “by the success of philanthropic and private sector prizes.”

Sometimes, private donors go to the government’s aid. When budget cuts threatened to shut down a giant particle accelerator on Long Island in 2006, Dr. Simons, the hedge-fund investor, who lives nearby, raised $13 million to bail it out. As a result, research teams were able to keep exploring subatomic aspects of the blast that brought the universe into existence.

If the rich donors are to be believed, their financing of scientific research in the years ahead will expand greatly in size and scope. A main reason is the Giving Pledge.

In 2010, Mr. Gates, along with his wife, Melinda, and the investor Warren E. Buffett, announced the campaign. So far, roughly a fifth of America’s nearly 500 billionaires have signed up, pledging to donate the majority of their fortunes to charity.

A Times analysis of the pledge letters made public shows that more than 40 percent of the signers plan to finance studies in science, health and the environment. With personal fortunes in excess of $250 billion, they are promising, at a minimum, to donate more than $125 billion. How much is destined for science is unclear, but several laid out objectives that are fairly extraordinary.

“We want to eradicate diabetes in our lifetime,” wrote Harold Hamm, a leading figure in the North Dakota oil rush, and his wife, Sue Ann.

Jon M. Huntsman, a Utah billionaire whose son Jon Jr. unsuccessfully sought the 2012 Republican presidential nomination, said his philanthropy would “make sure cancer is vanquished.”

Shortly before he died, Mr. Mitchell, the telescope man, spoke of his concern that American science was already losing its competitive edge. He cited the discovery of the Higgs boson, a subatomic particle seen as imparting mass to the universe. The finding was made at a particle accelerator in Europe after tight budgets shut down a rival machine near Chicago.

“We have no excuse” for losing the lead, Mr. Mitchell said. “We need to fix it.”

Sunday, March 9, 2014

The Vampire Squid Strikes Again: The Mega Banks' Most Devious Scam Yet

Banks are no longer just financing heavy industry. They are actually buying it up and inventing bigger, bolder and scarier scams than ever

by MATT TAIBBI

FEBRUARY 12, 2014

Call it the loophole that destroyed the world. It's 1999, the tail end of the Clinton years. While the rest of America obsesses over Monica Lewinsky, Columbine and Mark McGwire's biceps, Congress is feverishly crafting what could yet prove to be one of the most transformative laws in the history of our economy – a law that would make possible a broader concentration of financial and industrial power than we've seen in more than a century.
Matt Taibbi on the Great American Bubble Machine
But the crazy thing is, nobody at the time quite knew it. Most observers on the Hill thought the Financial Services Modernization Act of 1999 – also known as the Gramm-Leach-Bliley Act – was just the latest and boldest in a long line of deregulatory handouts to Wall Street that had begun in the Reagan years.
Wall Street had spent much of that era arguing that America's banks needed to become bigger and badder, in order to compete globally with the German and Japanese-style financial giants, which were supposedly about to swallow up all the world's banking business. So through legislative lackeys like red-faced Republican deregulatory enthusiast Phil Gramm, bank lobbyists were pushing a new law designed to wipe out 60-plus years of bedrock financial regulation. The key was repealing – or "modifying," as bill proponents put it – the famed Glass-Steagall Act separating bankers and brokers, which had been passed in 1933 to prevent conflicts of interest within the finance sector that had led to the Great Depression. Now, commercial banks would be allowed to merge with investment banks and insurance companies, creating financial megafirms potentially far more powerful than had ever existed in America.
All of this was big enough news in itself. But it would take half a generation – till now, basically – to understand the most explosive part of the bill, which additionally legalized new forms of monopoly, allowing banks to merge with heavy industry. A tiny provision in the bill also permitted commercial banks to delve into any activity that is "complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally."
Complementary to a financial activity. What the hell did that mean?
The Feds vs. Goldman
"From the perspective of the banks," says Saule Omarova, a law professor at the University of North Carolina, "pretty much everything is considered complementary to a financial activity."
Fifteen years later, in fact, it now looks like Wall Street and its lawyers took the term to be a synonym for ruthless campaigns of world domination. "Nobody knew the reach it would have into the real economy," says Ohio Sen. Sherrod Brown. Now a leading voice on the Hill against the hidden provisions, Brown actually voted for Gramm-Leach-Bliley as a congressman, along with all but 72 other House members. "I bet even some of the people who were the bill's advocates had no idea."
Today, banks like Morgan Stanley, JPMorgan Chase and Goldman Sachs own oil tankers, run airports and control huge quantities of coal, natural gas, heating oil, electric power and precious metals. They likewise can now be found exerting direct control over the supply of a whole galaxy of raw materials crucial to world industry and to society in general, including everything from food products to metals like zinc, copper, tin, nickel and, most infamously thanks to a recent high-profile scandal, aluminum. And they're doing it not just here but abroad as well: In Denmark, thousands took to the streets in protest in recent weeks, vampire-squid banners in hand, when news came out that Goldman Sachs was about to buy a 19 percent stake in Dong Energy, a national electric provider. The furor inspired mass resignations of ministers from the government's ruling coalition, as the Danish public wondered how an American investment bank could possibly hold so much influence over the state energy grid.
There are more eclectic interests, too. After 9/11, we found it worrisome when foreigners started to get into the business of running ports, but there's been little controversy as banks have done the same, or even started dabbling in other activities with national-security implications – Goldman Sachs, for instance, is apparently now in the uranium business, a piece of news that attracted few headlines.
Wall Street's War
But banks aren't just buying stuff, they're buying whole industrial processes. They're buying oil that's still in the ground, the tankers that move it across the sea, the refineries that turn it into fuel, and the pipelines that bring it to your home. Then, just for kicks, they're also betting on the timing and efficiency of these same industrial processes in the financial markets – buying and selling oil stocks on the stock exchange, oil futures on the futures market, swaps on the swaps market, etc.
Allowing one company to control the supply of crucial physical commodities, and also trade in the financial products that might be related to those markets, is an open invitation to commit mass manipulation. It's something akin to letting casino owners who take book on NFL games during the week also coach all the teams on Sundays.
The situation has opened a Pandora's box of horrifying new corruption possibilities, but it's been hard for the public to notice, since regulators have struggled to put even the slightest dent in Wall Street's older, more familiar scams. In just the past few years we've seen an explosion of scandals – from the multitrillion-dollar Libor saga (major international banks gaming world interest rates), to the more recent foreign-currency-exchange fiasco (many of the same banks suspected of rigging prices in the $5.3-trillion-a-day currency markets), to lesser scandals involving manipulation of interest-rate swaps, and gold and silver prices.
But those are purely financial schemes. In these new, even scarier kinds of manipulations, banks that own whole chains of physical business interests have been caught rigging prices in those industries. For instance, in just the past two years, fines in excess of $400 million have been levied against both JPMorgan Chase and Barclays for allegedly manipulating the delivery of electricity in several states, including California. In the case of Barclays, which is contesting the fine, regulators claim prices were manipulated to help the bank win financial bets it had made on those same energy markets.
And last summer, The New York Times described how Goldman Sachs was caught systematically delaying the delivery of metals out of a network of warehouses it owned in order to jack up rents and artificially boost prices.
You might not have been surprised that Goldman got caught scamming the world again, but it was certainly news to a lot of people that an investment bank with no industrial expertise, just five years removed from a federal bailout, stores and controls enough of America's aluminum supply to affect world prices.
How was all of this possible? And who signed off on it?
By exploiting loopholes in a dense, decade-and-a-half-old piece of financial legislation, Wall Street has effected a revolutionary change that American citizens never discussed, debated or prepared for, and certainly never explicitly permitted in any meaningful way: the wholesale merger of high finance with heavy industry. This blitzkrieg reorganization of our economy has left millions of Americans facing a smorgasbord of frightfully unexpected new problems. Do we even have a regulatory structure in place to look out for these new forms of manipulation? (Answer: We don't.) And given that the banking sector that came so close to ruining the world economy five years ago has now vastly expanded its footprint, who's in charge of preventing the next crash?
In this Brave New World, nobody knows. Moreover, whatever we've done, it's too late to have a referendum on it. Garrett Wotkyns, an Arizona-based class-action attorney who has spent more than a year investigating the banks' involvement in the metals markets and is suing Goldman and others over the aluminum case on behalf of two major manufacturers, puts it this way: "It's like that line in The Dark Knight Rises," he says. "'The storm isn't coming. The storm is already here.'"

To this day, the provenance of the "complementary activities" loophole that set much of this mess in motion remains something of a mystery. We know from congressional records that a vice chairman of JPMorgan, Michael Patterson, was one of the first to push the idea in House testimony in February 1999 and that, later that year, an early version of the bill put forward in the Senate by Phil Gramm also contained the provision.
But even one of the final bill's eventual authors, Republican congressman Jim Leach, can't remember exactly whose idea adding the "complementary activities" line was. "I know of no legislative history of the provision," he says. "It probably came from the Senate side."
Moreover, Leach was shocked to hear that regulators had pointed to this section of a bill bearing his name as the legal authority allowing banks to gain control over physical-commodities markets. "That's news to me," says the mortified ex-congressman, now a law professor at the University of Iowa. "I assume no one at the time would have thought it would apply to commodities brokering of a nature that has recently been reported."
One thing that is clear in the public record is that nobody was talking, at least publicly, about banks someday owning oil tankers or controlling the supply of industrial metals.
The JPMorgan witness, Michael Patterson, told the House Financial Services Committee at the 1999 hearing that his idea of "complementary activities" was, say, a credit-card company putting out a restaurant guide. "One example is American Express, which publishes magazines," he testified. "Travel + Leisure magazine is complementary to the travel business. Food & Wine promotes dining out . . . which might lead to greater use of the American Express card."
"That's how insignificant this was supposed to be," says Omarova. "They were talking about being allowed to put out magazines."
Even apart from the "complementary" provision, Gramm quietly added another time bomb to the law, a grandfather clause, which said that any company that became a bank holding company after the passage of Gramm-Leach-Bliley in 1999 could engage in (or control shares of a company engaged in) commodities trading – but only if it was already doing so before a seemingly arbitrary date in September 1997.
This meant that if you were a bank holding company at the time the law was passed and you wanted to get into the commodities business, you were out of luck, because the federal law prohibited banks from being involved in physical commodities or any other forms of heavy industry. But if you were already a commodities dealer in 1997 and then somehow became a bank holding company, you could get into whatever you pleased.
This was nuts. It was a little like passing a law that ordered you to leave the Army if you were gay in November 1999 – but if you were a heterosexual soldier as of September 1997 and then somehow became gay after 1999, you could stay in the Army.
To this day, nobody is exactly clear on what the grandfather clause means. If a company traded in tin before 1997 and then became a bank holding company in 2015, would it have to stick with tin? Or did the fact that it traded tin in 1997 mean the company could buy oil tankers and pipelines in 2020?
In 2012, the Federal Reserve Bank of New York – the most powerful branch of the Fed, the primary regulator of bank holding companies and the final authority on these things – put out a paper saying it had no clue about the exact meaning of the provision. "The legal scope of the exemption," a trio of New York Fed officials wrote in July that year, "is widely seen as ambiguous." Just a few weeks ago, the Fed's director of banking supervision, Michael Gibson, told the Senate, "I'm not a lawyer," and that it's "under review."
It almost didn't matter. For nearly a decade, this obscure provision of Gramm-Leach-Bliley effectively applied to nobody. Then, in the third week of September 2008, while the economy was imploding after the collapses of Lehman and AIG, two of America's biggest investment banks, Goldman Sachs and Morgan Stanley, found themselves in desperate need of emergency financing. So late on a Sunday night, on September 21st, to be exact, the two banks announced they had applied to the Federal Reserve to become bank holding companies, which would give them lifesaving access to emergency cash from the Fed's discount window.
The Fed granted the requests overnight. The move saved the bacon of both firms, and it had one additional benefit: It made Goldman and Morgan Stanley, which both had significant commodity-trading operations prior to 1997, the first and last two companies to qualify for the grandfather exemption of the Gramm-Leach-Bliley Act. "Kind of convenient, isn't it?" says one congressional aide. "It's almost like the law was written specifically for them."
The irony was incredible. After fucking up so badly that the government had to give them federal bank charters and bottomless wells of free cash to save their necks, the feds gave Goldman Sachs and Morgan Stanley hall passes to become cross-species monopolistic powers with almost limitless reach into any sectors of the economy.
And they weren't the only accidental beneficiaries of the crisis. JPMorgan Chase acquired the commodity-trading operations of Bear Stearns in early 2008, after the Fed pledged billions in guarantees to help Chase rescue the doomed investment bank. Within the next two years, Chase also acquired the commodities operations of another failing bank, the newly nationalized Royal Bank of Scotland, which included Henry Bath, a U.K.-based company that owns a large network of warehouses throughout Europe.
As a result, entering 2010, these three companies were newly empowered to go out and start doubling down on investments in physical industry. Through a fortuitous circumstance, the cost of financing for bank holding companies had also dropped like a stone by the end of 2009, as the Fed slashed interest rates almost to zero in a desperate attempt to stimulate the economy out of its post-crash doldrums.
The sudden turning on of this huge faucet of free money seems to have been a factor in an ensuing commodities shopping spree undertaken by all three firms. Morgan Stanley, for instance, claimed to have just $2.5 billion in commodity assets in March 2009. By September 2011, those holdings had nearly quadrupled, to $10.3 billion.
Goldman and Chase – along with Glencore and Trafigura, a pair of giant Swiss-based conglomerates that were offshoots of a firm founded by notorious deceased commodities trader and known market manipulator Marc Rich – all made notably coincidental purchases of metals-warehousing companies in 2010.
The presence of these Marc Rich entities is particularly noteworthy. According to famed Forbes reporter Paul Klebnikov, who was assassinated in 2004 after years of reports on Russian corruption, Rich made a fortune in the early Nineties striking crooked deals with the Soviet bosses who controlled the U.S.S.R.'s supplies of raw materials – in particular commodities like zinc and aluminum. These deals helped create a fledgling class of profiteers among the bosses of the crumbling Soviet empire, a class that would go on years later to help push Russia out of its communist past into its kleptocratic present.
"He'd strike a deal with the local party boss, or the director of a state-owned company," Klebnikov said back in 2001. "He'd say, 'OK, you will sell me the [commodity] at five to 10 percent of the world-market price . . . and in return, I will deposit some of the profit I make by reselling it 10 times higher on the world market, and put the kickback in a Swiss bank account.'"
Rich made these reported deals while in exile from the United States, which he fled in 1983 after the U.S. government charged him with tax evasion, wire fraud, racketeering and trading with the enemy after being caught trading with rogue states like Iran, among other things. The state filed enough counts to put him away for life, and he remained a fugitive until January 2001, when a little-known Clinton administration Justice Department official named Eric Holder recommended Rich be pardoned. A report by the House Committee on Government Reform later concluded that Holder had not provided a credible explanation for supporting Rich's pardon and that he must have had "other motivations" that he didn't share with Congress. Among other things, the committee speculated that Holder had designs on the attorney general's office in a potential Al Gore administration.
In any case, in 2010, a decade after the Rich pardon, Holder was attorney general, but under Barack Obama, and two Rich-created firms, along with two banks that have been major donors to the Democratic Party, all made moves to buy up metals warehouses. In near simultaneous fashion, Goldman, Chase, Glencore and Trafigura bought companies that control warehouses all over the world for the LME, or London Metals Exchange. The LME is a privately owned exchange for world metals trading. It's the world's primary hub for determining metals prices and also for trading metals-based futures, options, swaps and other instruments.
"If they were just interested in collecting rent for metals storage, they'd have bought all kinds of warehouses," says Manal Mehta, the founder of Sunesis Capital, a hedge fund that has done extensive research on the banks' forays into the commodities markets. "But they seemed to focus on these official LME facilities."

The JPMorgan deal seemed to be in direct violation of an order sent to the bank by the Fed in 2005, which declared the bank was not authorized to "own, operate, or invest in facilities for the extraction, transportation, storage, or distribution of commodities." The way the Fed later explained this to the Senate was that the purchase of Henry Bath was OK because it considered the acquisition of this commodities company kosher within the context of a larger sale that the Fed was cool with – "If the bulk of the acquisition is a permissible activity, they're allowed to include a small amount of impermissible activities."
What's more, according to LME regulations, no warehouse company can also own metal or make trades on the exchange. While they may have been following the letter of the law, they were certainly violating the spirit: Goldman preposterously seems to have engaged in all three activities simultaneously, changing a hat every time it wanted to switch roles. It conducted its metal trades through its commodities subsidiary J. Aron, and then put Metro, its warehouse company, in charge of the storage, and according to industry experts, Goldman most likely owned some metal, though the company has remained vague on the subject.
If you're wondering why the LME would permit a seemingly blatant violation of its own rules, a good place to start would be to look at who owned the LME at the time. Although it eventually sold itself to a Hong Kong company in 2012, in 2010 the LME was owned by a consortium of banks and financial companies. The two largest shareholders? Goldman and JPMorgan Chase.
Humorously, another was Koch Metals (2.32 percent), a commodities concern that's part of the Koch brothers' empire. The Kochs have been caught up in their own commodity-manipulation schemes, including an episode in 2008, in which they rented out huge tankers and used them to store excess oil offshore essentially as floating warehouses, taking cheap oil out of available supply and thereby helping to drive up energy prices. Additionally, some banks have been accused of similar oil-hoarding schemes.
The motive for the Kochs, or anyone else, to hoard a commodity like oil can be almost beautiful in its simplicity. Basically, a bank or a trading company wants to buy commodities cheap in the present and sell them for a premium as futures. This trade, sometimes called "arbitraging the contango," works best if the cost of storing your oil or metals or whatever you're dealing with is negligible – you make more money off the futures trade if you don't have to pay rent while you wait to deliver.
So when financial firms suddenly start buying oil tankers or warehouses, they could be doing so to make bets pay off, as part of a speculative strategy – which is why the banks' sudden acquisitions of metals-storage companies in 2010 is so noteworthy.
These were not minor projects. The firms put high-ranking executives in charge of these operations. Goldman's acquisition of Metro was the project of Isabelle Ealet, the bank's then-global commodities chief. (In a curious coincidence commented upon by several sources for this story, many of Goldman's most senior officials, including CEO Lloyd Blankfein and president Gary Cohn, started their careers in Goldman's commodities division.)
Meanwhile, Chase's own head of commodities operations, Blythe Masters – an even more famed Wall Street figure, sometimes described as the inventor of the credit default swap – admitted that her company's warehouse interests weren't just a casual thing. "Just being able to trade financial commodities is a serious limitation because financial commodities represent only a tiny fraction of the reality of the real commodity exposure picture," she said in 2010.
Loosely translated, Masters was saying that there was a limited amount of money to be made simply trading commodities in the traditional legal manner. The solution? "We need to be active in the underlying physical commodity markets," she said, "in order to understand and make prices."
We need to make prices. The head of Chase's commodities division actually said this, out loud, and it speaks to both the general unlikelihood of God's existence and the consistently low level of competence of America's regulators that she was not immediately zapped between the eyebrows with a thunderbolt upon doing so. Instead, the government sat by and watched as a curious phenomenon developed at all of these new bank-owned warehouses, in the aluminum markets in particular.
As detailed by New York Times reporter David Kocieniewski last July, Goldman had bought into these warehouses and soon began pointlessly shuttling stocks of aluminum from one warehouse to another. It was a "merry-go-round of metal," as one former forklift operator called it, a scheme of delays apparently designed to drive up prices of the metal used to make the stuff we all buy – like beer cans, flashlights and car parts.
When Goldman bought Metro in February 2010, the average delivery time for an aluminum order was six weeks. Under Goldman ownership, Metro's delivery times soon ballooned by a factor of 10, to an average of 16 months, leading in part to the explosive growth of a surcharge called the Midwest premium, which represented not the cost of aluminum itself but the cost of its storage and delivery, a thing easily manipulated when you control the supply. So despite the fact that the overall LME price of aluminum fell during this time, the Midwest premium conspicuously surged in the other direction. In 2008, it represented about three percent of the LME price of aluminum. By 2013, it was a whopping 15 percent of the benchmark (it has since spiked to 25 percent).
"In layman's terms, they were artificially jacking up the shipping and handling costs," says Mehta.
The intentional warehouse delays were just one part of the anti-capitalist game the banks were playing. As an incentive to get metal under their control, they actually paid the industrial producers of aluminum extra cash to store the metal in their warehouses, fees reportedly as much as $230 a metric ton.

Both Goldman and Glencore reportedly offered such incentives, which not only allowed the companies to collect more rent (Goldman was charging a daily rate of 48 cents a metric ton) but also served to discourage industrial producers like Alcoa or the Russian industrial giant Rusal (which has Glencore CEO Ivan Glasenberg on its board of directors) from selling directly to manufacturers.
The result of all this was a bottlenecking of aluminum supplies. A crucial industrial material that was plentiful and even in oversupply was now stuck in the speculative merry-go-round of the bank finance trade.
Every time you bought a can of soda in 2011 and 2012, you paid a little tax thanks to firms like Goldman. Mehta, whose fund has a financial stake in the issue, insists there's an irony here that should infuriate everyone. "Banks used taxpayer-backed subsidies," he says, "to drive up prices for the very same taxpayers that bailed them out in the first place."
Dave Smith, Coca-Cola's strategic procurement manager, told reporters as early as the summer of 2011 that "the situation has been organized to artificially drive up premiums." Nick Madden, the chief procurement officer of Novelis, a leading can-maker, said at roughly the same time that the delays in Detroit were adding $20 to $40 a metric ton to the price of aluminum.
Coca-Cola was the first to file a complaint against Goldman over the warehouse issue, doing so in mid-2011, and many people in and around the industry weren't surprised that it was the world's biggest and most powerful corporate consumer of aluminum that came forward first. Other manufacturers, many believe, kept their mouths shut out of fear the banks would punish them. "It's very likely that commercial companies deliberately avoided an open confrontation with Goldman because it was a Wall Street powerhouse with which they had – or hoped to establish – important credit and financial-advisory relationships," says Omarova. One government official who has investigated the issue for Congress said even some of the country's largest aluminum users have been reluctant to come forward. "When some of these huge transnationals don't want to talk about it, it makes you wonder," the aide noted.
SStill, a few days after the Times published its aluminum-storage exposé in late July 2013, Sen. Brown held hearings to investigate the causes of the alleged manipulation. (One executive, Tim Weiner of MillerCoors, would testify that global aluminum costs for manufacturers had been inflated by $3 billion in just the past year.) After those hearings, and after word leaked out that regulatory agencies had launched investigations, Goldman curtly announced new plans to reduce the delivery times of its aluminum stocks. The bank has consistently maintained that its interest in the warehouse company Metro is not "strategic," that it only bought the firm "as an investment," and will sell it within 10 years. JPMorgan Chase and other banks announced that it might be getting out of the physical commodities business altogether. The LME, meanwhile, had already come up with plans to force its member warehouses to increase their output of aluminum.
A few weeks later, on August 9th, 2013, a company called CME Group – one of the world's leading derivatives dealers – announced that it would henceforth be selling a new kind of aluminum swap futures contract. The new instrument, the firm said, would be "the first Exchange product that enables the aluminum Midwest premium to be managed."
What this signaled was that before that moment, no one in the financial sector wanted to get within a hundred miles of selling price insurance against the Midwest premium, because it was so obviously corrupt. But then the Times let the cat out of the bag, and next thing you knew, now that everyone was watching, a major derivatives purveyor suddenly felt confident enough to sell a hedging insurance against the Midwest premium, given that it was now presumed, once again, to be free from manipulation and subject to market forces.
"That should tell you a lot about how completely people in the business understood that the metals market was broken," says Wotkyns.
One other bizarre footnote to the aluminum scandal: According to the Bank Holding Company Act of 1956, any company that becomes a bank holding company must divest itself of certain commercial holdings it may own within two years. To that two-year grace period, the Fed may add up to three additional years. This was done for both Goldman and Morgan Stanley. The aluminum scandal broke, coincidentally, just a few months before Goldman's five-year grace period was scheduled to end. There was some expectation that the Fed might order the banks to divest some of their commercial holdings.
But there was a catch. "Congress in its infinite wisdom left an ambiguity," says Omarova. Although the Bank Holding Company Act mandated that the companies had to be compliant at the end of the review period, it didn't actually specify what the Fed had to do if they weren't. When Goldman's review period passed, "the Fed took the position that nothing had to happen," says Omarova. "So nothing happened."
The aluminum delays were not just an isolated incident of banks scheming to boost rent revenue. Recently, evidence has surfaced that the same kinds of behavior may be going on across the LME. In order for a parcel of metal to be traded on the LME, it has to be what's called "on warrant." If you are the owner of a metal that you no longer want to be traded, you can "cancel the warrant" – essentially taking it out of the system. It's still in the warehouse, but in a kind of administrative limbo.
When the world LME supply of a metal features high percentages of canceled stock, that typically means someone is moving metals around a lot even after they've been put into storage – perhaps in a Goldman-style "merry-go-round," perhaps for some other reason, but historically it has not been something seen often in functioning, healthy metals markets.
In January 2009, before the American too-big-to-fail banks and the shady Swiss commodities giants bought into all of these warehouses, less than one percent of the total global supply of LME aluminum was "canceled warrant." Today, with world supplies of aluminum about double what they were then, 45.2 percent of the total stock is classified as canceled. In Detroit, where Goldman is supposedly cleaning things up, the percentage is even crazier: 76.9 percent of the aluminum stock has canceled warrants.
You can see hints of the phenomenon in other LME metals. Five years ago, just 1.3 percent of the LME's copper stocks had canceled warrants. Today, 59 percent of it does. In January 2009, just 2.3 percent of zinc stocks were canceled; it's at 32 percent today. Zinc incidentally has something else in common with aluminum – a shipping-and-handling-like premium, called the U.S. zinc premium in the United States, which has skyrocketed in recent years, increasing by 400 percent between the summer of 2012 and the summer of 2013, when the price plateaued just as the aluminum scandal broke.
Then there's nickel. Thirty-seven percent of the global stock is now classified as canceled. Five years ago, 0.5 percent was. One industry insider, who is very familiar with and utilizes the nickel market, says that despite the fact that there is a massive global oversupply of the metal, prices are being artificially propped up as much as 20 to 30 percent.
He blames the banks' speculative weigh stations, saying that nickel producers, despite low global demand, are cheerfully selling their stocks to bank-run warehouses, which are paying above-market prices to put raw materials into the merry-go-round. "They are happy to sell to the banks and to the warehouse supply, while they pray for demand to pick up," the insider said.

This leads to the next potentially disastrous aspect of this story: What happens if the Fed suddenly raises interest rates, and the banks, their access to free money cut off, can no longer afford to sit on piles of metal for 16 months at a time?
"Look at nickel," says Eric Salzman, a financial analyst who has done research on metals manipulation for several law firms. "You could see the price drop 20 to 30 percent in no time. It'd be a classic bursting of a bubble."
But the potential for wide-scale manipulation and/or new financial disasters is only part of the nightmare that this new merger of banking and industry has created. The other, perhaps even darker problem involves the new existential dangers both to the environment and to the stability of the financial system. Long before Goldman and Chase started buying up metals warehouses, for instance, Morgan Stanley had already bought up a substantial empire of physical businesses – electricity plants in a number of states, a firm that trades in heating oil, jet fuels, fertilizers, asphalt, chemicals, pipelines and a global operator of oil tankers.
How long before one of these fully loaded monster ships capsizes, and Morgan Stanley becomes the next BP, not only killing a gazillion birds and sea mammals off some unlucky country's shores but also taking the financial system down with them, as lawsuits plunge the company into bankruptcy with Lehman-style repercussions? Morgan Stanley's CEO, James Gorman, even admitted how risky his firm's new acquisitions were last year, when he reportedly told staff that a hypothetical oil spill was "a risk we just can't take."
The regulators are almost worse. Remember the 2008 collapse happened when government bodies like the Fed, the Office of the Comptroller of the Currency and the Office of Thrift Supervision – whose entire expertise supposedly revolves around monitoring the safety and soundness of financial companies – somehow missed that half of Wall Street was functionally bankrupt.
Now that many of those financial companies have been bailed out, those same regulators who couldn't or wouldn't smell smoke in a raging fire last time around are suddenly in charge of deciding if companies like Morgan Stanley are taking out enough insurance on their oil tankers, or if banks like Goldman Sachs are properly handling their uranium deposits.
"The Fed isn't the most enthusiastic regulator in the best of times," says Brown. "And now we're asking them to take this on?"
Banks in America were never meant to own industries. This principle has been part of our culture practically from the beginning of our history. The original restrictions on banks getting involved with commerce were rooted in the classically American fear of overweening government power – citizens in the early 1800s were concerned about the potential for monopolistic abuses posed by state-sponsored banks.
Later, however, Americans also found themselves forced to beat back a movement of private monopolies, in particular the great railroad and energy cartels built by robber barons of the Rockefeller type who, by the late 1800s, were on the precipice of swallowing markets whole and dictating to the public the prices of everything from products to labor. It took a long period of upheaval and prolonged fights over new laws like the Sherman and Clayton anti-trust acts before those monopolies were reined in.
Banks, however, were never really regulated under those laws. Only the Great Depression and years of brutal legislative trench warfare finally brought them to heel under the same kinds of anti-trust concepts that stopped the robber barons, through acts like Glass-Steagall and the Bank Holding Company Act of 1956. Then, with a few throwaway lines in a 1999 law that nobody ever heard of until now, that whole struggle went up in smoke, and here we are, in Hobbes' jungle, waiting for the next fully legal catastrophe to unfold.
When does the fun part start?

This story is from the February 27th, 2014 issue of Rolling Stone.

http://www.rollingstone.com/politics/news/the-vampire-squid-strikes-again-the-mega-banks-most-devious-scam-yet-20140212

Wednesday, March 5, 2014

Why Netflix Is About to Raise Prices

[ Predictions about Netflix have an overall negative score on accuracy...still, it is fun to speculate. No one, for instance, ever thinks of an advertising vs. higher price model. Viewer could choose which. With the demos Netflix has, even a 30 second non-skippable and fairly non-annoying commercial at the beginning of each movie/episode would bring in tons of cash. Cable Networks? The skippability of commercials is way out of the bag and uncontrollable. They don't raise prices but their programming continues to slide. ]

Why Netflix Is About to Raise Prices

By David Eller | Motley Fool
March 3, 2014

Netflix's (NASDAQ: NFLX ) content costs are increasing on seemingly every front: acquisition, creation, and distribution. Even though the battle is heating up with Amazon.com(NASDAQ: AMZN ) and Netflix would like to keep its prices low, you have to wonder if Netflix can keep the cost of a subscription at its current level. The cost of a streaming package is only $7.99, that's almost half the price of a movie ticket in New York City . Can prices remain this low going forward in the face of deals like the one with Comcast (NASDAQ: CMCSA ) ?

On Jan. 22, Netflix filed a letter to shareholders with the SEC that highlighted the company's "evaluation of plan tiering." This is the warning shot that price increases will be coming. To the company's credit, it went further to say that "If we do make pricing changes for new members, existing members would get generous grandfathering of their existing plans and prices" so there would be no near-term impact on your pocket.

This language is vague, but if the company pairs pricing with its costs then it could lead to quality/stream matrix where you may pay $7.99 per month for one stream of SD video, your neighbor pays $9.99 per month for one stream of HD video and your cousin with three kids pays $14.99 per month for three streams of HD video. The company experimented with different price tiers for multiple streams, but with the Comcast news and other carriers likely following then it may be raising the price for HD vs. SD as well.

The "Net Neutrality" sugar high
The deal with Comcast is the first volley in the Net Neutrality war. Sellside analysts can say that the Comcast deal is good for consumers until they are blue in the face, but the reality is that your bill is going up over the long term. The fact that this may not contribute to it over the next 12 months is simply a sugar high.

Netflix has been battling for years over whether it would need to pay more to pipe its content over Comcast's last mile. The recent DC District court decision that the FCC overstepped its legal authority in preventing broadband providers from throttling Netflix traffic seemed to be the last nail in the coffin. Verizon had already been accused of slowing down traffic for both Amazon and Netflix, but Comcast is trying to push through a massive merger and would like to avoid the bad press that a battle with Netflix would create.

More cable deals are likely to follow, possibly at worse metricsIt's true that nobody knows the increase in the payment size that Netflix will have to cough up for this deal. There has been speculation that the payment that had been going to Cogent will now be going to Comcast but there is no basis for that guess. What we do know is that Netflix has its back to the wall as half of its $3 billion in content liabilities are coming due in the next 12 months, so it will do anything it can to reduce or stabilize costs. This cost stream is likely to increase as well as it strikes deals with other broadband providers who can blame the ISP access point for slow traffic and strong arm a payment from Netflix.

Actors don't take IOUs
The recent $400 million debt offering is supposedly for general corporate purposes "including capital expenditures, investments, working capital and potential acquisitions" which probably means content creation costs. It also came in correlation with Netflix confirming season 3 of "House of Cards." Considering the success of this brand, the production price tag is likely increasing.

Even the state of Maryland is reaching into Netflix's pockets
Now that the company has confirmed a script for season 3 of its hit show, Governor Martin O'Mally of Maryland is rethinking the tax holiday offered to the company for filming in Baltimore. The state will probably come to the table by June which would allow for a February 2015 debut but this action shows how dependent Netflix is on the good will of third parties.

A price hike would likely take place sooner than later. The last time the company raised prices on existing customers, it sparked a backlash that resulting in Reed Hastings apologizing in September. When the summer rolls around and people are more apt to be spending time outside, it is simply easier to decide to unplug for a few months.