How the 'plutonomists' bought governments

Citigroup is something special. With the largest financial services network in the world, it is a banking and finance behemoth, effectively the defining organisation of the global economy.

In 2008, a government aid package was needed to prevent the collapse of its global transactions services division, which transports more than $3 trillion around the world each day for most of the 500 biggest US-based corporations and over 80 national governments and 60 central banks around the world.

Now there is concern that Citigroup isn’t strong enough to survive a renewed recession, according to stress tests carried out by the US Federal Reserve. If Citigroup were allowed to unravel into bankruptcy, "100 governments around the world would be trying to figure out how to pay their employees", according to the Wall Street Journal.

In 2005 and 2006, Citigroup analysts studying income inequalities wrote three internal papers known as the Plutonomy Memos addressed to their wealthiest of customers. Citigroup has gone to great lengths to suppress publication of the memos, and a new analysis by author Edward Fullbrook shows that Citigroup had another, deeper motive for keeping them secret.

At the time, as Fullbrook concludes, the super-rich “plutonomists” recognised “the subversion of democratic process as the ultimate key to their success”. They spend vast amounts to influence the political process, ensuring that the masses continued to vote against their own interests.

Fullbrook’s table, “the revolving door between Goldman Sachs and the Obama administration”, lists 32 people in the US government who have been employed by the world’s most influential investment bank. Even before the crash, Citigroup could see the writing on the wall, as Fullbrook quotes:

Perhaps the most immediate challenge to Plutonomy comes from the political process. Ultimately, the rise in income and wealth inequality to some extent is an economic disenfranchisement of the masses to the benefit of the few. However in democracies this is rarely tolerated forever. One of the key forces helping plutonomists over the last 20 years has been the rise in the profit share – the flip side of the fall in the wage share in GDP. As plutonomists or capitalists tend to be long [on] the profit share, they have benefited from trends like globalization and the productivity revolution, disproportionately. However, labour has, relatively speaking, lost out. We see the biggest threat to plutonomy as coming from a rise in political demands to reduce income inequality, spread the wealth more evenly, and challenge forces such as globalization which have benefited profit and wealth growth.

As we complete this column, the crisis undermining the super-rich and their representatives in government claimed another victim. Greg Smith, a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa, has just resigned.

"I can honestly say that the environment now is as toxic and destructive as I have ever seen it,” he said on the way out. Apparently the company’s eyes-wide-open pursuit of profit has turned it against its customers. “To put the problem in the simplest terms,” Smith says, “the interests of the client continue to be sidelined in the way the firm operates and thinks about making money".

Smith says it’s a problem of leadership. “The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an axe murderer) you will be promoted into a position of influence.”

On March 24, we’ll be discussing how different kinds of democratic leadership can help get us beyond capitalism. You’re invited to attend.

Gerry Gold
Economics editor

Citigroup's 'assets' bonfire

When the world’s largest bank has to ask its chief executive and chairman to go because up to $11 billion of its assets are actually not worth the paper they are printed on, you know that the global financial crisis has entered deeper into the unknown. Citigroup, whose nominal assets – and nominal is the operative word here - are larger than the annual value of the British economy’s output, parted company with Chuck Prince on a Sunday night of all things. Citigroup’s losses announced relate to just one portion of the bank’s business – the sub-prime housing market. This is a bank which grew its assets – primarily its lending – by an astonishing 48% over the past 21 months. Now questions are being asked the real worth of all these “assets”.

Prince’s departure came hot on the heels of the resignation of Merrill Lynch’s Stan O’Neal, who was in charge of the investment bank as it ran up losses of $8 billion on mortgage-related debt. These gigantic losses stem from the banks’ involvement in what is euphemistically termed the sub-prime market in the United States where people with no income, no jobs and no assets – Ninjas – were encouraged to take out a mortgage on the basis of rising house prices.

Many of these mortgages were sold by unscrupulous and little regulated mortgage brokers, who received handsome commissions for selling expensive and unsuitable products. Then mortgage companies sold the debts on as securities packaged into “collateralised debt obligations” (CDOs). These were then traded around the world as if they totally-secure government bonds and ended up in the hands of Citigroup and Merill Lynch, as well as European banks in Germany, France and the UK (where Barclays is rumoured to be in difficulties).

The trouble is, the bottom has fallen out of the US sub-prime market. There have already been 1.7 million foreclosure proceedings in the US in the first eight months of 2007, and up to 2 million families are expected to lose their homes over the next two years, according to estimates by the US Congress's joint economic committee. In Cleveland, Ohio, an industrial city on the banks of Lake Erie, one in ten homes in the city is now vacant because of repossessions. The company making the most foreclosures in Cleveland is Deutsche Bank Trust.

While the German bank has loads of properties on its books that no one wants to buy, Citigroup and institutions around the world are left holding worthless CDOs – worthless because they can’t sell them on as the market for CDOs has seized up as part of the credit crunch. Or as Citigroup’s statement said, its securitised mortgage-backed debt obligations "are not subject to valuation based on observable market transactions". Overall, there are over $1 trillion worth of sub-prime mortgage-backed securities outstanding throughout the world.

Just in case you thought the global financial system was in melt-down, you can be reassured by the soothing words of Alistair Darling, the British chancellor. He appeared on radio just after dawn today to tell us that concerns should be kept "in perspective" because British banks had “very strong balance sheets”. Yet the failed Northern Rock bank has already used up £23 billion in government-backed loans – which the state will never get back. Darling added: "We have a strong economy, its momentum will carry us through." That’s alright then, except that the UK economy’s growth is largely founded on an unprecedented rise in house prices combined with easy credit. One million people are estimated to use their credit cards to pay their mortgages. This can’t go on, and Darling knows it. The crisis at Citigroup is the latest twist in the unravelling of financial system rooted in fantasy, whose collapse will take the productive economy down with it. On bonfire night in Britain, bankers are piling up assets for putting on the fire.

Paul Feldman
AWTW communications editor