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Regulatory Capture: Systematic and Institutionalized Corruption of Regulators under Neoliberal Regime

Nonbarking Dogs of Neoliberal State

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“Regulatory bodies, like the people who comprise them…mellow, and in old age…they become, with some exceptions, either an arm of the industry they are regulating or senile.”

John Kenneth Galbraith

Money! Backroom Deals! Secrecy! Political Power! Captured Government! Scandal! Suspicion! Major Money!

"Americans live in Russia, but they think they live in Sweden."

- Chrystia Freeland


Introduction

GS makes money by manipulating the system in a quasi-legal, morally corrupt manner. They challenge all the rules and use the Revolving Door between regulator and regulated to deliver legal bribes. Society needs better regulators and regulations to protect themselves from parasites like the GS Vampire Squid.

GS is one of the chief proponents of "Free Market" ideology. Free Market" is short for "Free to rip off the "Market" . The words "to rip off" are omitted when they sell the "Free Market" ideology and are reserved for the back rooms and jokes in private email. The rubes are too dim to get it or else think they are the scammers and not the scammed.

Comment at Economist's View
'Why the Fed Is So Wimpy'

Immanuel Wallerstein asked an interesting question: is the current iteration of global capitalism became so dysfunctional that it spells doom for the USA and it's role in the world as well as misery for American people? The current social system (aka " the current iteration of global capitalism') is called neoliberalism, or casino capitalism. It is both ideology and social practice. As Greenspan noted "an ideology is a conceptual framework with the way people deal with [social] reality." (in reply to REP. HENRY WAXMAN)

This second Gilded Age is characterized by rampant speculation and complete dominance of financial oligarchy over the rest of society  (Is There Capitalism After Cronyism The American Conservative) while the government regulators are intentionally (or "institutionally" -- "by design") asleep or looking the other way. In other words regulators are now completely captured by the big banks and are nothing more then stooges of financial oligarchy.  Often they are former staffers of big bands or supporting Wall Street law firms ("criminals with law degree"), or corrupt academicians on temporary assignment in the particular government body. We all remember  operation of  silencing of Brooksley Born in which prominent role was played by completely corrupt academician Lawrence Summers and Goldman Sacks' mole in the government -- Robert Rubin

Wallerstein and his colleagues tried to answer this question in the book Does Capitalism Have a Future? Thier line on thinking can be simplified to the following statement: When capital became unable of reaping large and fairly secure profits from manufacturing it like water tries to find other ways, and first of all criminal.  In other words it start criminalizing finance. From this point of view corruption of regulators is simply "the other way" of reaping large and fairly secure profits in new "permanent stagnation" condition of "Peak Capitalism", which entails less use of more expensive fossil fuels ("end of cheap oil"). Some economists even hypothesize that the US economy can expand only with oil prices below $60 per barrel.

From another point of view, as economist Joseph Schumpeter noted, capitalism is not a steady-state system. It is unstable system in which population constantly experience and then try to overcome one crisis after another. Joseph Schumpeter naively assumed that the net result is reimaging itself via so called “creative destruction".  But what we observe now it "uncreative destruction". In other words casino capitalism is devouring the host. We see that casino capitalism resort of non-creative, semi-criminal ways of maintaining the rate of profits. Actually this is what the US elite did with the country systematically since late 70th.

If we think about capitalism as a set of overlapping networks of power and influence at some point this destruction not only can be far less "creative" then Schumpeter expected. It can be outright criminal resembling the way organized crime operates (The City Of London Has Turned Britain Into A Civilized Mafia State).  For example, it can demonstrate itself in pre-planned, "on-purpose" destruction of the legal framework of the modern state via capture and corruption of regulators. In other words we see that human society can suffer from something like "social cancer", when social organism is destroyed in order for tumor sells to grow. And by tumor here I mean speculative finance and financial oligarchy.  Again this is a social system and as such it does not depend on particular people in power. As Prince Kropotkin observed about prison guards of Petropavlovsk jail in Sanct Petersburg "People are better then institutions". In a very deep way the ability to control speculation in the finance sector now became the central problem of any society that wants to survive in longer term. The idea that speculative behavior is entrepreneurial in nature and accelerates real economic growth is the fatal error of social judgment (Do Safer Banks Mean Less Economic Growth ) .  But as with cancer the key question is Can It Be Contained ?

While under casino capitalism all this "un-creative destruction" is done in order to preserve the level of profits which with end of cheap energy is impossible obtain via manufacturing. That does not exclude periods of "return of good times" when overinvestment in energy led to dramatic drop of oil prices: as soon as weaker players are eliminated the situation gradually returns to the "new normal". We observed two such periods since the neoliberalism became world dominant social system. One immediately after dissolution of the USSR and the second is the current period of low oil prices which started in late 2014.

If we think about capitalism as a set of overlapping networks of power and influence at some point this destruction can be far less "creative" then Schumpeter expected. For example it can demonstrate itself in pre-planned, "on-purpose" destruction of the legal framework of the modern state via capture and corruption of regulators. In other words we see that human society can suffer from something like "social cancel", when social organism is destroyed in order for tumor sells to grow. And by tumor seeks I mean speculative finance. In a very deep way the ability to control speculation in the finance sector now became the central problem of any society that wants to survive in longer term.

The idea that speculative behavior is entrepreneurial in nature and accelerates real economic growth is the fatal error of social judgment (Do Safer Banks Mean Less Economic Growth ) .

If we assume the big finance business model is somewhat similar to cancer, it is logical that they need to attack and immobilize the immune system in order to be able to grow fast. Corruption of regulators also can be viewed as a part of positive feedback loop created in the society by growth of financial sector. As such this is a systemic, institutional problem, not the problem of individual corrupt individuals. It is really an immanent, defining feature of neoliberalism as a social-economic system. In no way it is result of the action of few "bad apples". Much of is institutional and is related to the the structure of regulation of financial sector, which under neoliberalism is specifically designed to encourage capture.

As an immanent feature of neoliberal regimes it is also used as a universal "can opener" for more powerful neoliberal nations to get to the resources of weaker neoliberal nations, and, especially, countries governed by "resource nationalists". Accusations of widespread corruption are typical precursor to staging a neoliberal color revolution in such countries.

In a sense, the USA is probably most corrupt country in the world as neoliberal regime is strongest and the most mature in this country ( Why the Fed Is So Wimpy, by Justin Fox):

Regulatory capture — when regulators come to act mainly in the interest of the industries they regulate — is a phenomenon that economists, political scientists, and legal scholars have been writing about for decades. Bank regulators in particular have been depicted as captives for years, and have even taken to describing themselves as such.

The key feature of neoliberal regime is that large transnational corporation are the key political players which keep Congress and all regulatory agencies of short leash. Or, more correctly, government and top brass of internationals intermarry. The mixture of mechanisms used (revolving door, lobbyism, assigning cronies as heads of regulatory agency (Bush II favorite strategy)) can change with the time but the net result is always the same. As Senator Dick Durbin noted about the Congress Banks Frankly Own The Place. It's more correctly to say "transnationals own the country".

Started by Carter and continued by Reagan deregulation quickly exhausted its positive momentum of fighting excessive bureaucracy and government waste and become the way of stealth imposition of neoliberalism (also known as casino capitalism) on the society. Fundamentally, crony capitalism and corruption are two sides of the same neoliberal coin be it USA, or Russia, or Brazil.

Fundamentally, crony capitalism and corruption are two sides of the same neoliberal coin be it USA, or Russia, or Brazil.

The rampant deregulation implemented in the USA in 90th (dismantling Del Deal, immanent due to the growth of financial sector and its political influence) and "free market capitalism" (as if "free markets" ever existed; government always control the market via control of the currency; in turn large market players often control the government) is really side effect of a larger problem: systemic instability of financial sector. Old mechanisms of purging excessive size of financial sector via anti-Semitism and expulsion of Jews no longer work.

As soon as the political establishment became openly committed to laissez-faire, they essentially invite financial sector to hijack the political power in the society ("Quiet coup"). And financial sector tries to protect their political power by imposing a pretty draconian regime in the form of the National Security State, to exclude any chances of forming a meaningful opposition to their dominance. At this point mousetrap with cheese in form of "free market" propaganda is closed. After that banksters became completely immune from public scrutiny and prosecution, as 2008 events proved to the whole world. In a sense all three last US administrations (Clinton, Bush II and Obama) were/are essentially sock puppets of financial oligarchy.

Regulatory capture

The political appointees to federal regulators as the tool for blocking regulation was the key feature of Casino Capitalism, the variant of neoliberal regime established in the USA. And their actions are among of the most important contributions to the financial crisis. Due to this practice, the regulators were captured by the very businesses they were required to regulate. The chairperson of the Commodities Futures Trading Commission, for example, exempted important parts of Enron's business from regulation and, just weeks later, joined Enron' board. It has been the rule, not an exception, for retired regulators to get jobs as auditors of financial firms and become lobbyists. Incumbent regulators have difficulty in conducting effective supervision because of intensive lobbying from their former superiors.

This is not a new phenomenon . As Joy Key reminded us (Better a distant judge than a pliant regulator - FT.com, Nov 2, 2010):

In 1887, Congress passed an act to regulate the US railroad industry. The legislation originated in the demands of farmers and merchants for protection against the “robber barons”.

Despite this background, railroad interests supported the bill. Charles Adams, president of the Union Pacific Railroad, explained his reasoning to a sympathetic congressman, John D. Long. “What is desired,” he wrote, “is something having a good sound, but quite harmless, which will impress the popular mind with the idea that a great deal is being done, when, in reality, very little is intended to be done.”

On the whole, he got what he wanted. The Interstate Commerce Commission established by the act was chaired by a lawyer with experience of the railroad industry – acquired, naturally, by acting on behalf of his railroad clients. When, a decade later, the Supreme Court ruled that a rate-fixing agreement between railroads was illegal, the ICC was crestfallen: surely, the commission said, it should not be unlawful to confer, to achieve what the law enjoins – the setting of just and reasonable rates. Soon after, Congress approved legislation making it a criminal offence to offer rebates on tariffs the ICC had approved, and the commission thereafter operated as the manager of a railroad cartel.

One feature of regulatory capture is that the regulators of an industry start viewing it through the eyes of its principal actors, and to equate the public interest with the financial stability of these institutions. Sometimes such capture is clearly corrupt, as when regulators are directly or indirectly (via revolving door mechanism) are paid by the corporations they oversee. But the truth is that the largest contributors to congressional campaign funding are financial services industries, pharmaceuticals and energy. So they, by definition, have substantial political cloud in neoliberal state.

Sometimes the mechanism is more subtle and acts as "adverse selection" : new appointees are screened as for being "business-friendly", the prerequisite which also smells of corruption. Greenspan is a nice example of such political appointee; but Dugan, Cox (Our Corrupt Federal Regulator) and many others, who so far managed to escape jail, were equally destructive. Generally, bureaucratic institutions always try to preserve the problem to which they are the solution.

So efficiency of regulators is always less then desired. In other words there is no, and can never be in principle, an ideal regulator.

But institutions undermined by political appointees essentially became a turncoats and the part of the problem, not the part of the solution. In other words from regulators they became enablers of criminal behavior. As simple as that. All this was done under the smoke screen of neoliberalism, which starting from 70th became dominant ideology in the USA and elsewhere.

Simon Johnson, an MIT professor and former IMF chief economist has been a critic of the Bush/Obama bailout from the start, but his devastating essay in the May issue of the Atlantic, "The Quiet Coup," may be the clearest explanation of regulatory capture in the USA, the country that became just richer variant of a classic "banana republic":

Squeezing the oligarchs... is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or — here’s a classic Kremlin bailout technique — the assumption of private debt obligations by the government.

Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

Simon Johnson says:

So let's say that you have excessive regulation to start with, you bring that down to a sensible level, and then the guys making a ton of a money use that to undermine sensible regulation.

What he's describing is a "Peter Principle" of economics: in a classic cycle over-regulation is first reduced to meaningful regulation and then due to growth of influence (and profits) of financial oligarchy it inevitably reduced to a level of incompetence and at this point seize to effectively regulate the system. After spectacular crash excessive regulations are reinstalled and cycle starts again.
"Peter Principle" of economics: in a classic cycle over-regulation is first reduced to meaningful regulation and then due to growth of influence (and profits) of financial oligarchy it inevitably reduced to a level of incompetence and at this point seize to effectively regulate the system. After spectacular crash excessive regulations are reinstalled and the cycle starts again.

Here is relevant quote from Simon Johnson's paper:

The Bailout Proves the Banks Own the Politicians

The bailout proves the banks own the politicians. The only way we will ever get another Teddy Roosevelt would be to get a wealthy independent elected President who only wants one term and would use his elected mandate to push his agenda against the corporate power structure.

Here he forgot the possibility of repetition of the destiny of JFK. Also neoliberal ideology (like Marxism in the past in the USSR and its satellites) "infects" regulators making them organically unable to perform actions the contradicts it: in this case drastic anti-banks actions. This is a variant of Cognitive Regulatory Capture

It is interesting to note that the trend toward regulatory capture in the past was recognized by nobody else as Stalin, who instituted "purges" explicitly to prevent too complacent behaviour of government bureaucrats who with time forget about the goals of their institutions and are more and more driven by their own profit and privileges motives. While extremely cruel, this was pretty effective methods for keeping regulators in check.

Intellectual capture

An excellent definition of intellectual capture was given by Greenspan in 2009:

"Well, remember that what an ideology is a conceptual framework with the way people deal with reality. Everyone has one. You have to. To exist, you need an ideology. The question is whether it is accurate or not. "

That means that independence of regulators is not a panacea. They are influenced by dominant ideology like everybody else. So intellectual capture is prevalent even among the most nominally independent regulators, as to live in the society and be free of dominant ideology is very difficult or if want to be successful impossible. Under neoliberalism that gives rise to a very dangerous view: What’s good for Wall Street must be great for the real economy. For example independent central banks, will pursue neoliberal policies if top brass is captured by neoliberal ideology. The regulators may be independent at first, but if they share the ideology (and in this case this is a neoliberal ideology) they invariably fall under the spell —one way or another — of the people they are supposed to control.

Here is a pretty telling dialog reproduced in Democracy Now

So like Marxists pointed long ago "ideas became a material force, when they capture minds of people". That means that the virtues of independence become even more questionable once we factor in the politics. Will an independent regulator or central bank be less prone to political influence from powerful lobbies? That seems doubtful. In his famous article Simon Johnson tells a an interesting and pretty surprising at this time observation: the U.S. has been afflicted by a version of the crony capitalism that has been the scourge of so many emerging markets, except that Wall Street has bought its influence and power not by only and exclusively by bribery but more by financing and shaping the dominant ideology of our times -- neoliberalism (The Quiet Coup - Simon Johnson - The Atlantic, May 2009).

This process of ideological capture he called a Quiet coup. Here are some quotes from Dani Rodriks post (Dani Rodrik's weblog Simon Johnson's morality tale) which discusses the article and point out some questionable attribution of wisdom to IMF, which is an institution that is a key part of pushing neoliberalism to other countries:

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

The solution, to Simon, is equally clear. Finance needs to be cut down to size. What the U.S. needs is what the IMF would have told any country:

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.

... ... ...

The second problem the U.S. faces — the power of the oligarchy — is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

As with any story built around clear villains easy solutions, there is something in this account that is quite unsatisfying. For one thing, I think it puts the blame too narrowly on the bankers. Yes, there can be little doubt that banks badly misjudged the risks they were taking on. But they were aided in all this by the broader economics and policymaking community -- not because the latter thought the policies in question were good for bankers, but because they thought these would be good for the economy. Simon himself says as much. So why pick on the bankers? Surely the blame must be spread much more widely.

And I find it astonishing that Simon would present the IMF as the voice of wisdom on these matters--- the same IMF which until recently advocated capital-account liberalization for some of the poorest countries in the world and which was totally tone deaf when it came to the cost of fiscal stringency in countries going through similar upheavals (as during the Asian financial crisis).

Intellectual capture can also occur on the level below ideology. Every regulatory agency is dependent for information on the businesses it regulates. Many of the people who run regulated companies would be affronted by any suggestion that their activities do not serve the public good. But the truth is that few members of the public ever make contact with a regulatory agency; almost always, they need to deal with the professionals from industries they regulate. It does not requires a considerable effort of imagination to understand that any industry tried to use this leverage. So even the regulator with the best intentions comes to see issues eventually start to see the issue from the prism of the framework that was formulated by the corporate officers and professional he deals with on daily basis.. You need to have pretty abrasive or independent type of personality and considerable intellectual curiosity to discount this influence. And these are not the qualities often sought, or found, in regulators.

Lobbying as institutionalized corruption

The IMF’s latest working paper — A Fistful of Dollars: Lobbying and the Financial Crisis (Deniz Igan, Prachi Mishra, and Thierry Tressel IMF, December 2009) — shows how the powerful mechanism of lobbing created the alliance between Wall Street and Washington policymakers. In other words it convert social system into corporatism. Like military industrial complex, financial oligarchy understands pretty well that money spend on lobbing are money well spend: the most aggressive, the most reckless banks have the greatest return in bailout monies.

Lobbyists are an important mechanism for silencing and subverting federal regulators. Existence of revolving door is a perfect tool for keeping regulators at bay. See Frank Partnoy famous book Infectious Greed that explains how and why large scale financial malfeasance happens. And why it is hardly ever punished. Here is one quote:

"In July 2005, Public Citizen published a report entitled "The Journey from Congress to K Street": the report analyzed hundreds of lobbyist registration documents filed in compliance with the Lobbying Disclosure Act and the Foreign Agents Registration Act among other sources. It found that since 1998, 43 percent of the 198 members of Congress who left government to join private life have registered to lobby.

A similar report from the Center for Responsive Politics found 370 former members were in the "influence-peddling business", with 285 officially registered as federal lobbyists, and 85 others who were described as providing "strategic advice" or "public relations" to corporate clients."

Tremendous resources in their disposal permit lobbyists to win the assignment of red state democrats to the banking committee, so they can get contributions from bankers and serve as Trojan horses which can break any attempt to reform the system. The IMF had shown that money channeled to lobbyists by banks naturally impose on the society riskier lending with less supervision and regulation:

“Our analysis establishes that financial intermediaries’ lobbying activities on specific issues are significantly related to both their mortgage lending behavior and their ex-post performance. Controlling for unobserved lender and area characteristics as well as changes over time in the macroeconomic and local conditions, lenders that lobby more intensively (i) originate mortgages with higher loan-to-income ratios, (ii) securitize a faster growing proportion of loans originated; and (iii) have faster growing mortgage loan portfolios.”

Our analysis of ex-post performance comprises two pieces of evidence: (i) faster relative growth of mortgage loans by lobbying lenders is associated with higher ex-post default rates at the MSA level in 2008; and (ii) lobbying lenders experienced negative abnormal stock returns during the main events of the financial crisis in 2007 and 2008.”

The authors identify six key goals that bank achieved by spending huge sums of money for lobbying:
  1. Prevent any tightening of lending laws or new laws aimed to reduce the benefits of short-termist bonus generating strategies
  2. Allow systematic underestimation of default probabilities by overoptimistic bankers;
  3. Not only originate loans that carry more risk, but to convince legislators that such lending is prudent;
  4. To kill bills directed in tightening of lax lending standards
  5. To restrict entry by others preventing competition;
  6. To increase the probability of receiving preferential treatment in a crisis.
In other word lobbying by banks is a systemically dangerous activity that mimics methods used by organized crime (and as such falling under RICO statute) that puts the entire society at risk. Any meaningful actions are now impossible without weakening political influence of the financial industry (the capture of regulators). Unfortunately, for the same reason it is unlikely to occur . . .

Elimination of funding as the way to eliminate regulations

Deregulation has been a big problem in areas of the economy where the beneficiaries of changes in the law purchased the deregulatory changes from the people who controlled the federal government. And even if they can't kill regulation they have another tool in their disposal. Budgets is where regulations are neutered by politicians who did not stop the regulations. Kind of the second line of defense for financial oligarchy:

Rusty:

Logically, regulations benefit those that have a hand in creating them - politicians and lobbyists who represent entrenched business interests. Certainly politicians will try with at least lip service towards some equitable aim in the public interest, but they must work with the entrenched interests to achieve anything and to maintain power. So it makes sense that often regulations serve entrenched interests and thereby increase inequality.

ilsm -> Rusty...

I did some consulting work years ago in the transport industry (did an brief excursion from the military industry complex).

No DoT (FAA, Highways, pipelines, etc) regulation is allowed without support from the industry, thus we see new regulations discussed after each transport related disaster.

Once a regulation is "set", policies for enforcement are devised by the responsible agency, which leads to plans for enforcement, then budgets. Budgets is where regulations are neutered by politicians who did not stop the regulations (keep the gumint off the back of the perps).

See last Sunday's train derailment, or any pipeline explosion.

I worry more about what happens during my colonoscopy, I am much more familiar with neglect in the aerospace world.

Banks as the foundation of the corruption pyramid

Banking corruption is the foundation of all corruption pyramid. We are used to talking about corruption at various levels of government, as well as legislative and judicial branches. We also used to facts of corruption in military-industrial complex, including public procurement. However, in most cases, the foundation of this corruption pyramid are large banks, without which the implementation of most of illegal business activities would be impossible.

Here we are talking about the banking corruption -- the fact that banks and other financial institutions in the context of financial globalization and development of cashless payments have become a major part of the infrastructure of the shadow economy. And are extremely interested in participation in shady activities as those provide much better profit margins then legal activities. Without their mediation and help in money laundering including laundering of criminal assets would be not have the scale it now has. They are also the central player in organizing illegal export of capital abroad to offshore jurisdictions, which, in essence, is just another form of money laundering.

However, the media and the economic mainstream try to dismiss this systemic behaviour of major financial players, creating an image of respectable bankers and respectable businessmen. With few bad apples. In reality many banks have shadow economy as the major source of their income and are committing illegal transactions in the financial market necessary for support of both "gray" and "black" economy.

It is clear that large banks in those condition are especially interested in emasculation of regulators both directly via financing of political campaigns and then forcing the appointment of cronies as heads of regulatory agencies and indirectly, providing "revolving door" for personnel in regulatory agencies.

The Real Regulatory Revolving Door

Corruption can be more subtle. A politician who looks to a career after political office knows that big companies can offer lucrative consultancies and directorships, but representing the public interest does not. Everyone who works in a regulatory agency knows that if they are well regarded in the industry, they are eligible for jobs in the private sector which are far more rewarding than employment in a public agency. At this point serving in government office became just a jumpstart for a career in private industry. And you no longer need to bribe such people. They will be willing accomplices without bribing.

A reader on Naked Vapitalism blog, who has first hand knowledge of some of the major US financial regulators wrote (Sep 2, 2009 | nakedcapitalism.com) about the problem with systemic corruption of lawyers who are working in regulatory agencies. Incentives to switch sides are way too strong and legal prohibitions for such behaviour are absent:

A reader who has first hand knowledge of some of the major US financial regulators flagged a CounterPunch article by Pam Martens as the best discussion of the “revolving door” problem that he had ever seen.

The interesting thing about this article is that it highlights a problem that is not widely recognized and therefore has no safeguards against it. As our correspondent explains:

The most important aspect of this is that the “revolving door” problem is most acute, not with the actual regulated firms, but with the professional firms that provide services to regulated entities, especially law firms (it is also a serious issue with compliance consulting firms, although that is something of a separate issue.)

One reason for that is that the standards are different for lawyers than for financial professionals. Financial professionals are forbidden from joining any company they have recently examined; but lawyers are forbidden only from working on cases they have had contact with –- there are no specific prohibitions on working for law firms that have cases that they have had contact with, as long as they don’t work on those cases (as if that could ever be enforced.)

That means that lawyers like Linda Thomsen, who as head of Enforcement would have been familiar with every case of significance, could go directly to work for a securities law firm already handling cases which she would most certainly have been familiar with, without Ethics making so much as a peep. I don’t know how that can be seen as anything other than a serious conflict of interest.

I strongly disagree with the argument that SEC lawyers have incentives to drop cases to curry favor with future employers. On the contrary; they have every incentive to break big cases, which is the stuff that careers are made of. And it is the law firms, not the financial firms, that will most likely be their future employers.

Where they do have an incentive, however, is to quickly settle those cases; they get credit for making the case, but the penalties inflicted are not enough to cripple the big Wall Street firms that (through the law firms they hire) will be the ultimate source of income for the lawyers after they move into the private sector. If they were to do nothing, they would be seen as incompetent, and nobody would hire them; but if they do too much, they disrupt the revenue stream that ultimately feeds the securities law industry.

A key section of the Martens article, which is worth reading in its entirety:

The team that produced this report on one of the most long-running and convoluted frauds [Madoff] in the history of Wall Street included Inspector General H. David Kotz who came to the SEC-IG post in December 2007 after five years as Inspector General and Associate General Counsel for the Peace Corps. The Deputy Inspector General, Noelle Frangipane, also came to the SEC from the Peace Corps where she had served as Director of Policy and Public Information.

This lack of Wall Street cronyism by the top two in the Inspector General’s office might have been refreshing to some in Congress and compensated for their not knowing the difference between puts and calls and peaks and troughs and the intricacies of Mr. Madoff’s split-strike conversion strategy (he splits with your money while converting you to a pauper). But the background of the member of the team heading up the Inspector General’s Office of Investigations, J. David Fielder, should have rang serious alarm bells to Congressional investigators.

For the ten years leading up to July 2007, J. David Fielder worked for the SEC as a Senior Counsel in the Division of Enforcement. In February 1999, he moved to the Division of Investment Management, first as Senior Counsel on the Task Force for Adviser Regulation, then as Advisor to the Director. In November 2000, SEC Chairman, Arthur Levitt, appointed Fielder Counsel to the Chairman.

In July 2007, Mr. Fielder was invited to join the corporate law firm, Haynes and Boone LLP, as a partner. In other words, Mr. Fielder’s government issue rolodex filled with the names, home numbers and email addresses of his colleagues at the SEC along with the investigatory matters in his head is deemed fungible currency among corporate law firms and can be freely exchanged for partner status, instantaneously moving one from the lowly wages and attendant lifestyle of public servant to the rarefied bracket and luxuriant trappings of corporate law firm partner.

But what happened next is where things get interesting. In March 2009, just as the SEC Inspector General was hot in pursuit of Madoff aiders and abettors, Mr. Fielder gave up his lucrative partner status at Haynes and Boone to accept the lowly post of Assistant Inspector General of Investigations, working under a boss from the Peace Corps. In other words, he gave up big bucks for a demotion at the SEC.

What Mr. Fielder did might not raise alarm bells were it not happening on a regular basis throughout the corridors of Washington and Wall Street. To understand the implications, this maneuver deserves an appropriate name. A revolving door is assumed to mean one gets all the right connections as a public servant and cashes them in to the highest bidder in private industry. That concept doesn’t typically entertain the door revolving back to public servant status. On Wall Street, they call a maneuver like that a round trip: you buy 100 shares and eventually sell the same 100 shares. You end up back where you started: a round trip.

Just how many lawyer round trippers are involved in the Madoff investigation? Enough to raise a strong stench of circular corruption.

Ina Pickle September 2, 2009 at 7:05 am

The correspondent may be right about a revolving door, but he is wrong about the ethical rules governing lawyers. You cannot work against the former client, not just on any cases you had before, but on any new cases. The client owns your loyalty for the rest of your professional life. The client can waive some conflicts, but not others.

So: the rules on lawyers are actually much stricter than the person thinks. Yes, you can SOMETIMES work for a firm that has the other side of a case or deal, provided that you are “chinese walled.” But that is really not common (probably more common in transactional law than litigation). Few lawyers and law firms are willing to take the risk of an accusation – these are career ending events if you were to break the confidence and accidentally share something that hurt the former client. Also, clients get royally pissed that you affiliated with somebody who works against them. What the correspondent doesn’t seem to realize is that the stricter rules tend to make you even more bound to the client because you can tend to be stuck to one large client in fields where competitors tend to sue each other. So in some fields, like oil and gas, a firm might work for several majors. In a field like investment banking, not so much.

With deals, companies will have their preferred lawyers and not change much. Also, the more you move your business around, the more you can block firms from helping your enemies. I have sometimes suspected that firms went on campaigns to sew up potential opposing counsel.

This is a little simplistic, but the person seems to have an overly negative idea of the ethics rules under which lawyers operate. Law firms take conflicts checks VERY seriously, as do individual lawyers. If practices around Wall Street have changed, it is out of necessity. Several investment banks *used* to be a hundred years old: that is a lot of conflicts history. And you would still have to get the clients’ consent.

I honestly believe in regulatory capture. But what you ought to ask yourself, perhaps, is how one can take graduates from the same two or three colleges and business schools, and expect different thinking from them if they are plopped into different work environments? They are still socializing with the same bunch educated at the same two schools, still living with those people, working with those people – but one group is supposed to be policing the other. If you ask me, take a look at everybody who went to Harvard over the past 25 years, and there is the start of your revolving door. The “elites” in all fields across the East Coast already have a lot in common before they start work.

LeeAnne September 2, 2009 at 7:17 am

So Felder has been rehired by the SEC after 2 years of orientation by the law firm Haynes and Boone LLP to become counter intelligence for the Madoff operation back at the SEC? Do we have an espionage thriller here?

A lawless industry fueled by political and regulatory capture would use more than just a few tools perfected by military and criminal organizations for covert activities.

I’m looking forward to an expose of the finance industry’s private investigation and para military organization hires with their personnel migration patterns.


DownSouth, September 2, 2009 at 7:43 am

Yves,

Reforming the polity at this point is more important than reforming the economy. If we attempt economic reform before political reform is accomplished, we’re just going to wind up with more disasters like the 2003 drug benefit for the elderly or the recent (and ongoing) bank bailout. What with Obama’s backroom deals with BigPharma that we already know about, plus heaven knows what else we don’t know about, the more astute observer can already see where healthcare reform is headed–huge benefits to powerful insiders, little benefit to the general good and huge cost to taxpayers.

I notice this post, along with a couple of other recent posts dealing with the Fourth Estate http://en.wikipedia.org/wiki/Fourth_Estate , deal more with political reform than with economic reform. I believe this is key, and I salute your efforts, as I am convinced that substantive economic reform is impossible without first achieving political reform.

The most radical creed of the American Revolution was that of the separation of Church and State. As Daniel Yankelovich put it, “the enemy was entrenched inherited privilege embodied in the church and in most branches of European royalty in collusion with each other.” Granted, the revolution was nominally against the British monarchy, but the Founding Fathers were acutely aware that the monarchy and the church were so inextricably interwoven as to be all but one and the same.

Today we face a similar problem, but instead of an unholy alliance between church and state, we have an equally pernicious alliance between major business corporations and state.

The first American revolution institutionalized the separation of church and state. I think we need a second American revolution that promulgates separation of big business and state.

You’ve already posted on a couple of the problem areas that require reform before the deathgrip that big business enjoys on the polity can be loosened. Let me repeat those and add a couple more (this is not meant to be a complete list):

• The Fourth Estate (the press, media)
• The Revolving Door
• Campaign Finance
• The Academe (and here I’m not just talking about the aberrant economics departments and their capture by business interests, but the equally perverse Nobel prize committee)

jake chase, September 2, 2009 at 1:05 pm

The truth about the SEC is not intuitive. One must have worked there as I did forty years ago (when, allegedly, it WAS enforcement minded) to understand that teh agency is a small army of bureaucrats who are simply biding their time either until retirement or escape to lucrative private practice. To the extent any enforcement takes place, it is directed against a fringle element of tin horn promoters, penny stock floggers, arrant confidence men whose pitches are so transparently idiotic that anyone falling for them really has only himself to blame. As for the top tier finaglers, they are strictly off limits. When a white shoe firm has a client with a problem, he calls the man at the top of the enforcement chain, who instructs the juniors accordingly.

Instead of this regulation tapdance, what we need to enforce honesty in business is integrity in the legal system. Unfortunately, we have defendant oriented federal judges who are universally hostile to shareholder interests, as well as state regulation which insulates management against liability in order to pile up franchise fees. Delaware is the leading culprit in this regard. The Congress could solve this problem by insisting upon federal charters for publicly traded corporations. They never will because the corporations will never permit it.

Back to the future

It looks like the USA is repeating all the mistake that were made in early XX century on a new level. During the 19th century, Washington was generally happy to do favors for Wall Street financiers. Railroad tycoons, who often used those railroads as vehicles of extravagant speculation, enjoyed subsidies, tax exemptions, loans, and a whole smorgasbord of financial fringe benefits supplied by pliable congressmen and senators (not to mention armadas of state and local officials).

But in 19th century when panic struck, the mighty, as well as the meek, went down with the ship. Washington felt no obligation to rush to the rescue. And there was blood on the floor.

By early in the 20th century, however, the savage anarchy of the financial marketplace had been at least partially domesticated under the reign of the greatest financier of them all, J P Morgan. Ever since the panic of 1907, the legend of Morgan's heroics in single-handedly stopping a meltdown that threatened to become worldwide, the iron discipline he imposed on more timorous bankers, has been told and re-told each time an analogous implosion looms. Back then, with Morgan performing his role as the nation's unofficial private central banker, president Teddy Roosevelt's administration continued to keep its distance from Wall Street, still unready to offer salvation to desperate financial oligarchs. Not normally sympathetic to Morgan and his crowd, Roosevelt did cheer from the sidelines as the uber-banker performed his rescue operation.

As it turned out, though, the days of Washington agnosticism about Wall Street were numbered. The economy had become too complex and delicate a mechanism and, in 1907, had come far too close to meltdown - even Morgan's efforts couldn't prevent several years of recession -- to leave financial matters entirely in the hands of the private sector. That's why Federal Reserve was established in 1913 under president Woodrow Wilson as a quasi-public authority meant to regulate the country's credit markets -- albeit one heavily influenced the country's principal bankers. That worked well enough until the Great Crash of 1929 and the Great Depression that followed and lasted until World War II.

President Franklin D Roosevelt's New Deal did, as a start, engage in some bail-out operations. The Reconstruction Finance Corporation, actually created by president Herbert Hoover, continued to rescue major railroads and other key businesses, while some of the New Deal's efforts to help homeowners also rewarded real estate interests. The main emphasis, however, switched to regulation. The Glass-Steagall Banking Act, the two laws of 1933 and 1934 regulating the stock exchange, the creation of the Securities and Exchange Commission, and other similar measures subjected the financial sector to fairly rigorous public supervision.

Actually, while Reagan administration get its due as as an initiator of the deregulatory binge, Clinton administration role in deregulation is often underestimated. For all practical purposes the OTC derivative dealers could be classified as RICO criminal enterprises since the early nineties. Frank Partnoy’s book, Infectious Greed provides an excellent summary up through 2002. Scot Griffin in his comment to “Wake Up, Gentlemen” ( The Baseline Scenario, Dec 15, 2009 noted:

The explanation for the perceived “flaw” is the recognition of the existence of regulatory capture. That is, the regulators were captured by the very businesses they were required to regulate. The regulators were puppets on a string dancing to the tune of the financial innovators. There was no separate regulatory innovation. It was lock-step by design.

Now, let’s assume there was no regulatory capture. What was the motivation for “regulatory innovation?” The answer is GDP growth.

There’s an argument that “It’s the economy, stupid!” the meme spawned by the first Clinton campaign, has had adverse consequences on the long term health of the economy by focusing government officials and regulators on an arbitrarily short cycle (e.g., 2 to 4 years) just as public corporations are. Again, extending the analogy (started above) of U.S. government as corporation, the voters are shareholders and they vote based on earnings growth. If you recognize that a lot of members of government have been involved in managing public corporations, it is easy to see how they can get caught up in this mentality.

Of course, one might argue correctly that this short-term focus existed long before Clinton.

Crisis of 2008 and disappearance of trust in Wall Street and government regulators

New Deal lasted for at least two political generations. When it was dismantles, the USA was on the sure path to step on the same rake again and again. And sure it stepped. Financial crisis of 2008 was a significant blow, that almost killed the American empire and set back the political influence of the USA almost to pre-WWII levels. The USA found itself almost in the USSR shoes when, like happened with communism in the USSR, the dominant ideology -- neoliberalism -- became a subject of nasty jokes.

In 2008 Wall Street, despite all the efforts of financial oligarchy, had been convicted in the court of public opinion of reckless, incompetent, self-interested, even felonious behavior with consequences so devastating for the rest of the country that government was licensed to make sure it didn't happen again.

In 2008 Wall Street, despite all the efforts of financial oligarchy, had been convicted in the court of public opinion of reckless, incompetent, self-interested, even felonious behavior with consequences so devastating for the rest of the country that government was licensed to make sure it didn't happen again.

Luckily for Wall Street, the financial oligarchy managed to replace Bush II with its Democratic copycat, right of the center senator Obama. Control of both Congress and presidency allowed them to avoid legal consequences of their actions.

But it is clear to everybody with IQ above 100 that the undoing of that New Deal regulatory regime, and its replacement, largely under Republican administrations (although Glass-Steagall was repealed on Bill Clinton's watch), with what some have called the "socialization of risk" has contributed in a major way to the mess we're in today.

Financial sector hypertrophy in the USA, while providing illusion of growth of GDP led to decimation of real economy, which has slipped into a coma as our resources and talents have gone into enriching the well-connected financiers. Jobless recoveries are natural side effect of this story. As Volker noted:

“I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy”.

In reality it was worse then Volker admitted. "Innovation" in the financial industry has had a negative effect on productivity because it sucks available investment money from socially productive, job creating sectors of the economy such as manufacturing. Another point is the intellectual capital “lost” to financial services. The outsize compensation has moved the best and the brightest to Wall Street, although you can argue whether they were really best and brightest based on the disastrous results of their activities. But the fact that physicians were leaving medicine for finance as well as physicists moving to hedge funds are undisputable.

Offloading of financial risk on taxpayers as a immanent feature on neoliberal regime in the USA

Neoliberal regime that was established in the USA in early 80th made the country legal framework (shredding New Deal regulations) and government behavior (corrupt administrations of Clinton and Bush II) extremely comfortable for financial oligarchy. Beginning with the massive bail-out of the savings and loan industry in the late 1980s, Washington committed itself, at least under conditions of acute crisis, to the policy of off-loading the risks taken by major financial institutions, no matter how irrationally speculative and wasteful, onto the backs of the American taxpaying public.

Beginning with the massive bail-out of the savings and loan industry in the late 1980s, Washington committed itself, at least under conditions of acute crisis, to off-loading the risks taken by major financial institutions, no matter how irrationally speculative and wasteful, onto the backs of the American taxpaying public.

Despite free market/anti-big-government rhetoric, real-life Washington has tacitly acknowledged the degree to which our national economy has become dependent on the financial sector (finance, insurance and real estate - or FIRE). And it will do whatever it takes to keep it afloat. The "socialization of risk" was accompanied by the "privatization of reward". This applies not only to particular institutions like Bear Stearns, or even to mortgage mega-firms like Fannie and Freddie, but to finance in general. When it seemed necessary, public monies were indeed funneled in the general direction of the banking/brokerage community to shore up the whole rickety structure. This allowed one burst bubble -- the dot-com debacle -- to be replaced by another, namely mortgage/collaterized-debt-obligation bubble. Blowing bubbles became substitute for real economy growth.

Backstopping the present bail-out is American taxpayer. Even while Washington was instituting the periodic "socialization" of bad debts, it was systematically abandoning the New Deal's commitment to regulation. That, of course, was in the very period when financial markets became more arcane due to introduction of computers.

It's time for a reversal of course. Stringent re-regulation of FIRE is not enough any more. Washington's mission may, at this late date, be an even more complex one than Roosevelt's faced when instituting New Deal. The government must figure out how to deploy its power to shift the flow of investment capital out of the minefields of speculative paper transactions back into productive channels. The attempt to ride the country of speculative activities of Wall Street, based on the role of dollar as the world reserve currency will fail. The country is just too big to be fed from this activities, and the other players will not be passive for long. Signs of activity in the direction of weakening of dollar role on international arena are visible both in Europe (despite its satellite status) and BRICS.

Instead of Conclusion: Not much hope


"I believe that the fraudulent nature of the GWOT (Global War on Terror) should be a key ingredient of any analysis of our political situation and it should be looked at as a part of the massive financial fraud of that period–the two are not separate. "

From comments, nakedcapitalism.com,
November 15, 2014 |

Current situation does not raise much hope. Looks like corruption of regulators will continue as a firmly established practice. As if it is a goal of the government to support it.

There is overwhelming evidence that those charged with regulating our financial system are simply in the bag of financial oligarchy, including our three most recent Presidents, nearly all Senators and Congressmen, as well as all prominent officials of the SEC, CFTC, Treasury Dept, Federal Reserve, and Agencies. All those revolving doors personalities. There appear to be individual exceptions (Ron Paul, Bernie Sanders), but they just confirm the rule.

Preserving regulatory capture seems to be one issue about which both parties are in complete agreement. Adopted after 2008 reforms are simply lipstick on the pig. The corruption is so deeply ingrained that no public official can be trusted to tell the truth about nation's real financial situation.

What will happen next? Nobody knows. But 401K investors had better understand this level of uncertainty, if not act on it, since now the safer an investment is advertized, the riskier it is likely turn to be. Recent bubble and then crash in TIPs is one telling example.

I think that due to systemic corruption of regulators stars are aligned against the US recovery, whatever it mean. As one commenter Econbrowser blog noted it might make sense to put money on the long term stagnation, Japanese style:

"The game is market manipulation to dilute the Hoi Polloi's credit holdings via interest rates below inflation. It is the same game as was played from the mid-1930's until the early 70's."


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[Mar 24, 2019] This aviation expert says Boeing made 'disastrously bad decision' on training for 737 MAX

Mar 18, 2019 | www.youtube.com

The recent Ethiopian Airlines crash led to the grounding of Boeing's 737 MAX planes across much of the globe. But as new details emerge about the cause of the model's second crash within five months, questions are being raised about how the plane's safety was approved in the first place. John Yang talks to Jeff Wise, a pilot and author of a book about MH370, the flight that vanished in 2014.


Kellie Hickman , 1 day ago

Hundreds of lives lost...because of nothing more than corporate greed and its enablers at the FAA.

Ray Quinn , 1 day ago

World to Boeing. Safety features are not optional! SMH😑

Zemli Drakona , 1 day ago

The warning light should be always on and should say "This plane sucks!"

die Macsmannschaft , 23 hours ago

No wonder Airbus become the new prince on the air! No wonder european produce luxurious goods, not the US!

LA's Totally Awesome , 1 day ago (edited)

So it was like driving a car while the "check engine" light is on X1000

K Me , 22 hours ago

Imagine buying a car with ABS, but the ABS failure light was an "optional extra".

CK Man , 1 day ago

$80,000 for a safety warning light! It should have been standard. How could they justify charging $80,000 for a warning light? It's like Ford charging $800 for Brake Fluid warning light, they would never have gotten away with that!

Africanknight88 , 19 hours ago

LAWSUIT and CRIMINAL CHARGES NEED TO BE FILED!!!! ....Now take that "optional".....my lord 😤🤬

Brandon E. Smith , 23 hours ago

It took only 346 lives to "improve" safety. 🙄 Boeing has always been a horrible, horrible company.

GNegasi , 1 day ago

How design or structural problems can be solved in a software update???

Jenny Kevin , 1 day ago

please don't hide the true, and don't the victim,

numbersix100 , 18 hours ago

I'll never fly on a 737 max, it's inherently unbalanced with its engines so far forward

Armando D'SOUZA , 20 hours ago

First make plane stable in flying mode when engines are producing force to move forward.

[Mar 24, 2019] Boeing 737 Max approval documents subpoenaed by fraud unit - YouTube

Mar 24, 2019 | www.youtube.com

Published on Mar 21, 2019

With the 737 Max still grounded after last week's deadly Ethiopian Airlines crash, the focus turns to Boeing. The company offered a warning system that -- for a price -- might have helped prevent the crashes. Kris Van Cleave reports.


Edmund Ming Yip Kwong , 2 days ago

This is so evil. Very disappointed at this multi-billion corporation

Arun K P , 2 days ago

I didn't know safety features were optional on planes 😂 wtf.

Suprianto , 2 days ago

$80 thousand for a warning light??? Unbelievable.... How much money can an indicator light cost? Software for detecting sensor malfunction should've been there in the first place.... For such a critical sensor, those safety systems should've been built into the systems in a $120 million dollar plane in the first place.

Ester F , 2 days ago (edited)

Why charge more for safety? It should be included by default. Then they kept saying it was safe for flight but excluded a crucial piece. It's all for profit... smh. 🧐 they are trying to deflect blame on the airline. Those planes should have never been sold in the first place.

Schmoo , 2 days ago

WOW! An add-on safety feature? Are you kidding me? That's just pure evil!

Rust belt McCLanahan Crawling , 2 days ago

Actually they should be charged with manslaughter for both plans ! Enough playing games with just a public court hearing then a fine ! Some Big People need to be held accountable by full law ! Jail time !

Crude Rude , 2 days ago (edited)

Wow.... just wow.... So they're releasing a flawed, unfinished product that requires glitchy software they have to patch and are also offering DLC?

Wenderz 26 , 1 day ago

That is like selling cars with no brakes, airbags, or seat belts, expecting the consumer to pay extra for necessary safety equipment . UNBELIEVABLE!

The Watchful Hunter , 2 days ago

I bet Boeing has been frantically shredding and wiping documents off hard drives for a week.

Mr. Sarcastic , 2 days ago (edited)

To bad all Airlines didn't buy the Super Deluxe "I really want to Live Package" from Boeing.

Hermes Trismegistus , 2 days ago

Once again, profit over safety! Those Boeing executives are money hungry demons! What a bunch of egotistical beasts!

Ryan Davis , 2 days ago

I would bet that the actual labor and materials are less than $2000. The engineering had already been completed as it is an option. Why then would safety be optional? Criminal greed, or a low value placed on human lives. Whomever is responsible has no moral or social compass and should be punished. Not with a fine but a lengthy prison term in Leavenworth.

Joseph Holland Pontes , 2 days ago

Oh no DLC is also optional to airplanes.

Dr Evil , 2 days ago

They should never have extra charge on safety features . Evil company

jaja smile , 2 days ago

80K just cost them billions ......

george movies , 1 day ago

Boeing and FAA, GUILTY! MASS KILLING . FIRST DEGREE MURDERERS.

David L , 1 day ago (edited)

I never thought capitalism was evil. Boeing: our planes were NOT safe to fly unless you pay extra.

Q & A , 2 days ago

That's one expensive bulb. 😳

105 Wonky , 1 day ago

You can have these 2 safety features which could potentially save lives, but your gonna have to pay 🤦‍♂️

Henry kirya , 1 day ago (edited)

if we can have recalls for cars, why cant we have the same for aircraft and force those chaps to install foolproof sensors in triplicate, complete with warning inidicators at no additional cost to the airlines!

[Mar 24, 2019] Ethiopian Airlines crash 'It seems amazing that Boeing have not provided the proper training' - YouTube

Notable quotes:
"... Profit before people. Computer says no! Failsafe failed. No manual over ride. Sorry folks. Say Your prayers. The problem maybe rebranded. Best case scenario. Impeccable flying from technical progress made. ..."
"... Totally unnecessary crash that was caused by cutting corners and greed. ..."
Mar 24, 2019 | www.youtube.com

leemsy lazy , 1 week ago

Imagines if Airbus was crashing in America like that.

Mulya hadi purnama , 1 week ago

Very Clearly, Unsafety... " Recall " and Grounded all Boeing Type 737 Max 8...Most Dangerous aircraft, almost 400 people's dead in 6 Months !!!

rocco decrescentis , 4 hours ago

No resignation! Like dumbbell n.45 used to say: You are fired!!

Robert Stephens , 1 day ago

When you see documentary of broken dreams. You'll be surprised as i was is that Boeing is using lithium batteries on these aircraft.

Zelalem Zemene , 1 week ago (edited)

Ethiopian Airlines is one of the best known safe reputation. Of course Indonesian Airlines is the best too. The crash was very similar after take off and dive into the ground. Boing is just protecting itself for its market.

Global Solutions , 6 days ago

Boeing needs to be sued for $2 billion for each victim of the Lion Air and Ethiopian Airlines plus $300 billion in punitive damages, and jail time for some executives ~ they knowingly put up unsafe planes. In its early days, the 737 also had several cashes.

QECHEW , 4 days ago (edited)

Obviously Boeing knew about the shortcomings of their design in earlier stages and instead of fixing their design they chose to use a software to fix it without informing the airlines or giving pilots adequate training in order to save costs.

GH1618 , 1 week ago

What is more surprising is that the angle-of-attack sensor system is not fail-safe.

Al Bundy , 6 days ago

Did the pilot's do the mandatory operating system Flash Player updates before takeoff?

Andy Roo , 16 hours ago

Profit before people. Computer says no! Failsafe failed. No manual over ride. Sorry folks. Say Your prayers. The problem maybe rebranded. Best case scenario. Impeccable flying from technical progress made.

Kamau Phillip , 1 week ago

The American pilots complained of the same issues with the same plane model but Boeing did nothing to correct the situation why????? ???

globalvillager700 , 3 days ago

Totally unnecessary crash that was caused by cutting corners and greed.

B M , 1 week ago

Prediction: Director of the FAA will resign!

Shinrin Yoku , 1 week ago

The MC-21300 is a much better plane anyway. Why do airlines not order it I wonder.

[Mar 24, 2019] Flying the Boeing 737 Max 8 A pilot's view from inside the cockpit - YouTube

Mar 24, 2019 | www.youtube.com

Probir Ghosh , 5 days ago

Its a shame that Boeing didn't tell this little piece of information to the rest of the world.

Ed Estrella , 5 days ago

You're telling me that lack of knowledge is what got over 300 people killed.... Beyond disturbing..

KimsonJohn , 5 days ago

Ipad course GTFOH! This is no cooking recipe. ..it's people's lives!

Weez naz , 5 days ago

56 minutes with an iPad lesson... Jesus Christ

sando wando , 1 day ago (edited)

PR stunt proudly paid by Boeing after being in bed with the WP. 😤

John S , 5 days ago

This piece of PR brought to you by Boeing!

Carl Johnson , 5 days ago

Nice ad after two crashes in less than six months

David Njabia , 5 days ago (edited)

Boeing must be lobbying really hard and it's a shame that a respectable entity like Washington Post is helping the narrative to shift the blame to pilots who are now dead. If it's a Boeing, I'll have second thoughts.

Tewoflos Telahun , 5 days ago

This video is brought to you by Boeing ! Please, Washington Post, be less biased next time.

lucius1976 , 5 days ago

1:39 MCAS = Mass Coffin Automation System

Jason L , 2 days ago

'commitment' OH PLEASE.....america was the last to ground their 737s.

Ab Xarbi , 15 hours ago

I tried to show this video to an Ethiopian, and he almost killed me.

MrXperx , 4 days ago

1. Boeing wanted a new plane with larger enginers but without spending money on a new fuselage. 2. Sold their planes to customers saying that Max type is same as the NG and that no cost is involved for retraining pilots. 3. Make the MCAS system so that the new and plane and old plane feel theoretically same to the pilot. 4. Not tell pilots about MCAS or hide critical details about the system. 5. 300+ people dead. I hope the Boeing management can sleep well knowing they have blood on their hands.

Stephen Courton , 5 days ago

Sounds like they created a dangerously unstable craft that requires a computer system to keep from stalling. Even if pilot turns off plane may have already got in situation hard to recover from manually especially near ground. Two planes found this out.

scrimmo , 21 hours ago

Time for Boeing and FAA officials to be locked up

ludovicoC , 2 days ago

To paraphrase Dr. Strangelove: "The whole point of the [MCAS] is lost IF YOU KEEP IT A SECRET! WHY DIDN'T YOU TELL THE [PILOTS], EH

[Mar 24, 2019] US Transport Department Looks Into Boeing 737 Max 8's Approval

Mar 20, 2019 | www.youtube.com

US Transport Department Looks Into Boeing 737 Max 8's Approval | al Jazeera English

https://www.youtube.com/watch?v=1ge8v5cIxm0

New investigations are starting into the certification of the Boeing 737 Max 8 after two fatal crashes in less than six months.


Damon Reynolds , 3 days ago

At the root of almost every problem today is 'cost cutting' for short term profits to satisfy roaming vulture capitalist greed. Why is the FAA 'under funded'? Why is it 'too expensive' to give pilots the sim time they need even after hundeds of people are dead??

Ardhi Adhary Arbain , 3 days ago

Ask manufacturer's engineers to check the plane for their own certification? That's crazy.

srinivas reddy , 3 days ago

I think boeing, FAA and US are working for each other I feel no surprise if they find no wrong doing

MVE , 3 days ago

profit over safety, that's what it is all about

DJ DA VINCI , 3 days ago

Did u know that when u turn off the MCAS it reset itself back on. Victims family should sue Boeing and the FAA till their last dime.

MegaTriumph1 , 3 days ago

Engines too far forward wings too swept back computer and pilot can't find center of balance and it piledrives into earth, its not a mystery. If I wanted to take a perfectly good 737 and turn it into an unflyable plane, well they did it.

Major Skies , 3 days ago

Just fix the auto pilot issue. Also, what in all of God's green earth? Pilots only learned about flying this new model with just textual information? No simulation? No wounder pilots of both airlines were confound by the conflicting warnings blaring at them in the cockpit.

GreenStorm01 , 3 days ago

First.

dinesh prabhu , 3 days ago

Ha ha ha there is no money for the faa, but the government had enough money to go on a bombing run around the world. So now who is responsible ? Boeing faa or other aviation authorities like the icao or others ? Who is going to be jailed for this mass murdering? Since they have accepted it so the faa chief should be put behind bars for lying about the inspection and the certificate !!!!!!

[Mar 24, 2019] FAA 'dropped ball' on Boeing 737 Max 8 - official - YouTube

FAA rep is a clown! It is not FAA fault and Boeing was under pressure. If one of your family was in one of those crashes, you would never shill for those corporate murders.
Mar 24, 2019 | www.youtube.com

Leon Eldarion , 5 days ago

He is a clown! It is not FAA fault and Boeing was under pressure. If one of your family was in one of those crashes, you would never shill for those corporate murders.

gtud65 cutting , 2 days ago

If BOEING company is from another country, then USA 🇺🇸 Boeing air plane ✈ crashed The Boeing company will be closed immediately

Sammy Woo , 2 days ago

Ex FAA employees have come out and say FAA doesn't have the expertise and have to rely on Boeing for aspects of the certifications, why? because dumb Americans buy politicians ever selling lower taxes. Hey dudes, u gotta spend money to hire good people duh! something gotta give. Cheap government, cheap results. U deserve what u paid for America.

Robert May , 13 hours ago

The MCAS system was not revealed to the first receivers of the Max 8's, nor was it in the Manuals. Boeing thought it would quietly do it's job in the background, but they were wrong. After the first accident from Lion Air, out of Indonesia, then all airliners were informed of this. The pilots in Ethiopia may or may not have been aware of this, and if they were they lacked insufficient training on how to deal with this problem. The MCAS system works to bring the nose of the plane down so it can fly at a level flight. MCAS get's it's information from AOA sensors that send info to the plane as to what angle the plane is flying at. Pilots have reported that the AOA sensors are faulty and sending "wrong information" and "activating" the MCAS system when it shouldn't have, causing the planes nose to point downward, and causing the plane to go into a nose dive, and this is what happened. Basically the MCAS was needed because Boeing redesigned the engines, that were bigger, and were mounted differently -- more forward and up on the wing, throwing off the center of gravity of the new 737 Max 8.The old 737 does not have this problem. AOA sensors, stands for Angle of Attack, to make sure air flow is right both over and under the wings, to make the plane aerodynamic. According to reports from pilots, you can "disengage" the MCAS SYSTEM, buy pulling back on the yoke, and this will do it. At the same time there are wheels by the throttle that you turn manually, to trim the planes stabilizer manually by yourself. This was done many times by well trained American pilots, who averted crashes with this jet. So, proper training and awareness could have saved a lot of lives. Let's not forget these MAX 8 jets have been flying for a couple years, with thousands of flights in North America and developed countries with "no" accidents, and pilots say the plane flies beautifully. They say it's a very smooth flying aircraft, and a pleasure to pilot. So, who's responsible for this -- well it's Boeing, for non disclosure of the MCAS system, and what to do, if it functions in error, and how to manually disengage the system. In my opinion, all pilots should know how to manually take a plane from takeoff, and land it smoothly with no automation, or computers to help them -- just like in the old days. Over the last 20 years, there have been so very few major aircraft go down. I'm all for automation, but I fully support proper pilot training should some of this automation fail -- like faulty sensors. It's completely crazy to rely on robots or Artificial Intelligence ( AI ) to fly planes, if you don't understand how the computers work, and how they fly the plane, and in the event of a failure of the computer, you can then shut it off, and have "no problem" , and take control of the aircraft yourself,- "manually" with a lot of confidence. I SHOULD ADD - this MCAS system and it's AOA sensors, should all be mandatory on a plane, and not be sold as extras, same as brakes on a car. You don't play around with peoples lives, to make a few extra dollars, selling "options." These features "must be standard equipment", on all these aircraft sold, PERIOD. This is why I'm "very against" self driving cars'. Can you imagine all the accidents that will happen from "faulty sensors." WOW , it will be a nightmare. Faulty sensors could be caused by snow, ice, extreme heat or cold. Are we getting so lazy that we need to have Artificial Intelligence driving our cars. No thanks for me, I'll drive my own car, and hope that people will rebel against this idea, and the makers of these cars, won't sell any of them, and thus, taking them off the market.This Boeing Max 8 should send a good example, of things to come if we allow driverless cars. Not for me, and I hope the general public will agree with this.

You Tube , 2 days ago

Terrorists aren't needed to bring down airliners and frighten the public. Boeing and a failed Trump policy, that won't staff FAA department with a permanent and qualified leader, are managing the same thing through their fashionable neglect and arrogance.

Jackyboy335 , 3 days ago (edited)

The word Federal is part of this....right ? Profit is king...right ? "...we are a country of laws.."....right ?

Armando D'SOUZA , 3 days ago

Just look at the investigation of sinking and tilting Mellilium Tower in sanfransico. Building concrete Foundation and glasses are cracking and investigators are still studying what caused the two glass windows to crack. Similar investigation is going on how these two Boeing max crashed.

AJJ Against Jihadi Justin , 5 days ago

The FAA is in Boeings pocket book. Search... problems with Boeing 737 next generation with structural dangers reported on sbs datline australia

Vic Chavez , 5 days ago

Trump privatized the faa and this is what happens.

Wizkin Li , 5 days ago

No no no, this time it's all A320 neo 's fault

osidartaha2 , 4 days ago

Deadly strategie from Boeing for quick profits and market shares . Airliners are built to be operated for at least a couple of decades Boeing was providing worldwidely flying coffins made by mixing new technologies (leap engine ) with cheap and old technologies (1/2 century old airframe).A new well designed aircraft is stable, well-balanced without extra software's help.

barrych mak , 4 days ago

Check also the Boeing 767-300 nosedive crash on 23 Feb 2019 ! 3 Boeing nosedive crashes in 5 months !!!

I.P. Knightly , 3 days ago

Trump nominated his personal pilot to head up the FAA. After 2 years, they still have an "acting" director. Tim Boeing shows up at Mar-a-lago every weekend. What could possibly go wrong?

Peter Wexler , 1 day ago

I dissented this.

yin ng , 5 days ago

Same as to Ask Wall Street to regulate Wall Street and the Bankers to regulate themselves. Or ask the committed criminals to jail themselves.

Paradigm , 5 days ago

Byproduct of revolving doors.

Paul Forester , 3 days ago

This been a long time coming. Who cut the FAA? BOTH PARTIES DID! The system is gonna fall apart because too much damage has been done. Just keep paying people peanuts and have them try to do a skilled job. My cousin quit the airline industry because they don't want people to be able to pay for the education needed for these jobs. Like who program these systems.

roxar69 , 19 hours ago

So the merica is not really a saint..so now it not america dream but america dreaming..

Marcus Coyle , 5 days ago

Looks like I'll be getting that 🚲 sooner than later. I won't be traveling by plane for a few Give it time for all the smoke to clear and heads to roll😳

[Mar 23, 2019] Boeing Crapification 737 MAX Play-by-Play, Regulatory Capture, and When Will CEO Muilenburg Become the Sacrificial Victim by Lambert Strether

Notable quotes:
"... By Lambert Strether of Corrente . ..."
"... "It's a very, very serious investigation into basically, was there fraud by Boeing in the certification of the 737 MAX 8 ?" Arthur Rosenberg, an aviation attorney who is representing six families whose relatives died in the Ethiopian Airlines and Lion Air crashes, explained. ..."
"... Rosenberg expects the criminal probe to question whether Boeing fully disclosed to the FAA the engineering of the 737 Max 8's MCAS flight control system, called MCAS (Maneuvering Characteristics Augmentation System), during the plane's certification process. The flight control system was designed to prevent the plane from stalling. ..."
"... Unfortunately for Boeing and the passengers its crashed aircraft were carrying, the MCAS system was very poorly implemented. ..."
"... The single sensor was the result of regulatory capture, not to say gaming; see below. ..."
"... Black box data retrieved after the Lion Air crash indicates that a single faulty sensor -- a vane on the outside of the fuselage that measures the plane's "angle of attack," the angle between the airflow and the wing -- triggered MCAS multiple times during the deadly flight, initiating a tug of war as the system repeatedly pushed the nose of the plane down and the pilots wrestled with the controls to pull it back up, before the final crash. ..."
"... Regulatory Capture : Commercial aircraft need to be certified by the FAA before launch. The Washington Post labels today's process "self-certification": ..."
"... In practice, one Boeing engineer would conduct a test of a particular system on the Max 8, while another Boeing engineer would act as the FAA's representative , signing on behalf of the U.S. government that the technology complied with federal safety regulations, people familiar with the process said. ..."
"... (Note that a 10-year-old process would have begun in the Obama administration, so the regulatory process is bipartisan.) I understand that " safety culture " is real and strong, but imagine the same role-playing concept applied to finance: One bankers plays the banker, and the other banker plays Bill Black, and after a time they switch roles . Clearly a system that will work until it doesn't. More: ..."
"... The process was occurring during a period when the Transportation Department's Office of Inspector General was warning the FAA that its oversight of manufacturers' work was insufficient. ..."
"... The FAA, citing lack of funding and resources, has over the years delegated increasing authority to Boeing to take on more of the work of certifying the safety of its own airplanes. ..."
"... Alert readers will note the similarity to the Neoliberal Playbook , where government systems are sabotaged in order to privatize them, but in this case regulatory capture seems to have happened "by littles," rather than out of open, ideological conviction (as with the UKs's NHS, or our Post Office, our Veteran's Administration, etc.). ..."
"... Several FAA technical experts said in interviews that as certification proceeded, managers prodded them to speed the process. Development of the MAX was lagging nine months behind the rival Airbus A320neo. Time was of the essence for Boeing . ..."
"... In this atmosphere, the System Safety Analysis on MCAS, just one piece of the mountain of documents needed for certification, was delegated to Boeing . ..."
"... It should be clear at this point that the central claims of Muilenburg's letter are false. ..."
"... The self-certification debacle that allowed MCAS to be released happened on Muilenburg's watch and is already causing Boeing immense reputational damage, and a criminal case, not to mention the civil cases that are surely coming, will only increase that damage. Mr. Market, the Beltway, and even Trump, if his trade deals are affected, will all soon be bellowing for a sacrificial victim. Muilenburg should recognize the inevitable and gracefully resign. Given his letter, it looks unlikely that he will do the right thing. ..."
"... Beyond that ultimate problem is the ultimate regulatory problem: regulatory capture of the FAA by the airline companies. As a result, the FAA represents "its customers" the airplane makers, not the public users and customers. This is like the banks capturing the Fed, the Justice Dept. and Treasury to promote their own interests by claiming that "self-regulation" works. Self-regulation is the polite word for fraudulent self-indulgence. ..."
"... I would be surprised if the European Airbus competitors do not mount a campaign to block the 737-Max's from landing, and insisting that Boeing buy them back. This gives Airbus a few years to grab the market for these planes. ..."
"... This probably will throw Trump's China trade fight into turmoil, as China was the first country to ground the 737-Max's and is unlikely to permit their recovery without a "real" federal safety oversight program. Maybe Europe, China and other countries henceforth will each demand that their own public agencies certify the plane, so as to represent users and stakeholders, not only stockholders. ..."
"... The moral: Neoliberalism Kills. ..."
"... Rule #2 of Neoliberalism: Go die. ..."
"... > "Maybe Europe, China and other countries henceforth will each demand that their own public agencies certify the plane." ..."
"... As if the 737 MAX were the chlorinated chicken of aircraft. ..."
"... "This gives Airbus a few years to grab the market for these planes." ..."
"... Regulatory capture is rampant throughout the economy. Boeing self-certification being delegated by the FAA is not unlike the situation with electric transmission utilities. ..."
"... that is subject to both FERC and NERC regulation. ..."
"... In hindsight Boeing would have perhaps been better off to leave off the MCAS altogether and depend on pilot retraining to cover the altered handling. ..."
"... Reports I've read indicates that Boeing ignored even the clearly inadequate certification. "Documentation provided to the FAA claims that the MCAS system can only adjust the horizontal tail on the plane by 0.6 degrees out of a maximum of five-degrees of nose-down movement. But that limit was later increased to 2.5-degrees of nose-down movement. Boeing didn't communicate the change from 0.6-degrees to 2.5-degrees until after Lion Air." ..."
"... Boeing could also be liable for damages due to 737 groundings and due to delays in delivery of contracted planes. ..."
"... The analogy has been made between this the 737 MAX story and the Tylenol story. J&J got out in front of the problem and saved the product (and their company). Boeing's problem is of that order, and Muilenberg -- that letter! -- seems incapable of understanding that; insular, arrogant. One more reason to fire the dude toot sweet. If he comes out of his next review with a raise -- Everything Is Like CalPERS™ -- consider shorting Boeing ..."
"... Allowing this to happen seems the ultimate in short term thinking by Boeing. US manufacturers have always had an advantage over competitors because the FAA was held in such high regard worldwide that it was the de facto world safety regulatory body – every country followed its lead. But this chipping away of its authority has led to a near fatal loss of faith, and will no doubt lead to European and Asian regulatory authorities being strengthened. And no doubt commercial realities will mean they will look much more closely at US manufactured aircraft if there is some benefit to their own manufacturers. ..."
"... The Times thinks Boeing is too big to fail. Without a blockbuster Max, I don't see how Boeing maintains its current status in the industry. ..."
"... I also think they have been completely afflicted by the defense contractor mentality. ..."
"... Yes, the famous McDonnell-Douglas reverse takeover , where financial engineers inserted their sucking mandibles into an actual ..."
"... Note that Muilenberg came up through the defense side of the company not the commercial aircraft side. He may simply not have been equipped to understand FAA regulation at any deep level, hence the rot that finally surfaced. ..."
"... The tragedy is that corporate media in pursuit of profits will keep us up to date but will never mention the 6 or 8 minutes of terror for the 346 souls aboard the two flights. They will cover the criminal negligence trial if there are ever indictments. But, the news reports never will say that neoliberalism, deregulation, and privatization are the root causes of the deaths. ..."
"... Boeing also clearly did not know its customers . It should be engineering for the sort of pilots who are going to be hired by Lion Air, or any rapidly expanding airline in what we used to all the Third World. Hegemony, it seems, makes you insular and provincial. ..."
"... "The FAA, citing lack of funding and resource": I don't suppose I'll survive to see any arm of government not blame lack of funds for its boneheaded or corrupt incompetence. ..."
"... That's how I feel. The tech doc department at Boeing sounds like a horrible place to work; MBAs or their goons telling you all the time to do stuff you know is wrong. It's not surprising people were willing to talk to the Seattle Times; I bet there are more people. (Hey, Seattle Times! How about people testing the 737 MAX in simulators (assuming this is done)). ..."
"... Interestingly, and maybe relevant to the problem of confusion for the pilots, is that Boeing has had another automatic trim-modifier operating on its 737s for some time, the speed-trim system (STS): ..."
"... This system also modifies the stabilizer position during manual flight. Like MCAS, it was brought in to improve stability under certain flight conditions (the reasons for which are far beyond my knowledge). There is an indication that the pilots on the flight before the Lion Air crash misinterpreted MCAS actions for STS behavior. ..."
"... authority would revert to the pilot ..."
"... How many years ago did Wall Street take over the fortunes of the company? Why did they move their headquarters from their birthplace of Seattle to Chicago? Why did they start assembling planes in South Carolina and China? Was it to improve aviation safety? Or, to allow the profiteering parasites to feed off the carcass of the company? ..."
"... President Trump, here's a reelection tip: "Today I am declaring that all American registered aircraft flying in American airspace must be maintained in the U.S." ..."
"... Amazingly, Trump seems to have done OK on this. First, he didn't cave to Muilenberg's (insane, goofy, tone-deaf) request to keep the 737 flying; then he frames the issue as complexity (correct, IMNSHO), and then he manages to nominate a Delta CEO as head of the FAA . ..."
"... we're seeing signs that a crapification process has begun on the safety side in this industry. (It has been proceeding for years on the service/amenities side.) ..."
"... Considering the fact that all these 737s are grounded as no airline trust them to not kill a plane load of passengers and crew, this is a really big deal. Putting aside the technical and regulatory issues, the fact is that the rest of the world no longer trusts the US in modern aviation so what we have here is a trust issue which is an even bigger deal. ..."
"... Loss or at least wobbliness of imperial hegemony, like. It's not just the aircraft, it's US standards-setting bodies, methods, "safety culture," even -- dare we say it -- English as the language of aviation. French is no longer the language of diplomacy, after all, though it had a good run. ..."
"... Because markets. Neoliberalism puts everything up for sale. Including regulation. Oversimplifying absurdly: And so you end up with the profit-driven manufacturer buying the regulator, its produce killing people, and the manufacturer canceling its future profits. That's what the Bearded One would call a contradiction.* ..."
"... know your customer ..."
"... Like you, I am a retired software engineer, so I have followed an aviation blog discussion of this issue quite closely since it emerged as a probable software and system design failure. As the blog is open to all, its signal-to-noise ratio is pretty low, but it seems not too difficult for any technically-minded person to separate the wheat from the chaff. My current understanding, which I believe others here are in a position to correct, if necessary: ..."
"... this story is really fascinating and seems to be true a sign of the times. ..."
"... The Post's article on the FAA and Regulatory Capture is incomplete. The process for the FAA (and probably MANY government agencies) started under Reagan, did not revert to safety under Clinton (make government smaller and all that), and then accelerated under Bush II in 2005 (not a bi-partisan time). In particular, big changes to the FAA were made in 2005 that were executive in nature and did not require Congressional approval. CF: https://www.seattletimes.com/business/delegating-aircraft-safety-assessments-to-boeing-is-nothing-new-for-the-faa/ ..."
Mar 20, 2019 | www.nakedcapitalism.com

By Lambert Strether of Corrente .

At some point in the future, I'd like to do failure matrix for the pathways to misfortune ( example of such a matrix here ) that precipitated two deadly Boeing 737 MAX crashes on take-off in five months , but I don't feel that I have enough information yet. (I'm not unsympathathetic to the view that the wholesale 737 MAX grounding was premature on technical grounds , but then trade and even geopolitical factors enter in, given that Boeing is a "national champion.") We do not yet have results from the cockpit voice and flight data recorders of either aircraft, for example. But what we do know is sufficiently disturbing -- a criminal investigation into Boeing had already been initiated after the Lion Air crash, but before the Ethiopian Airlines crash -- that I think it's worthwhile doing a play-by-play on the causes of the crashes, so far as we can know them. About that criminal investigation :

According to the Wall Street Journal, a Washington D.C. grand jury issued a March 11 subpoena requesting emails, correspondence, and other messages from at least one person involved in the development of the aircraft.

"It's a very, very serious investigation into basically, was there fraud by Boeing in the certification of the 737 MAX 8 ?" Arthur Rosenberg, an aviation attorney who is representing six families whose relatives died in the Ethiopian Airlines and Lion Air crashes, explained.

"Nobody knows the answer to that yet," Rosenberg cautioned, adding that he had not yet seen the Justice Department's subpoena and therefore could not know its full scope.

Rosenberg expects the criminal probe to question whether Boeing fully disclosed to the FAA the engineering of the 737 Max 8's MCAS flight control system, called MCAS (Maneuvering Characteristics Augmentation System), during the plane's certification process. The flight control system was designed to prevent the plane from stalling.

Bloomberg comments :

A possible criminal investigation during an aircraft accident investigation is highly unusual . While airline accidents have at times raised criminal issues, such as after the 1996 crash of a ValuJet plane in the Florida Everglades, such cases are the exception.

Before we get to the play-by-play, one more piece of background: CEO Dennis Muilenburg's latest PR debacle, entitled " Letter from Boeing CEO Dennis Muilenburg to Airlines, Passengers and the Aviation Community ." The most salient material:

Safety is at the core of who we are at Boeing, and ensuring safe and reliable travel on our airplanes is an enduring value and our absolute commitment to everyone. This overarching focus on safety spans and binds together our entire global aerospace industry and communities. We're united with our airline customers, international regulators and government authorities in our efforts to support the most recent investigation, understand the facts of what happened and help prevent future tragedies. Based on facts from the Lion Air Flight 610 accident and emerging data as it becomes available from the Ethiopian Airlines Flight 302 accident, we're taking actions to fully ensure the safety of the 737 MAX. We also understand and regret the challenges for our customers and the flying public caused by the fleet's grounding.

Boeing has been in the business of aviation safety for more than 100 years, and we'll continue providing the best products, training and support to our global airline customers and pilots. This is an ongoing and relentless commitment to make safe airplanes even safer .

Soon we'll release a software update and related pilot training for the 737 MAX that will address concerns discovered in the aftermath of the Lion Air Flight 610 accident.

Fine words. Are they true? Can Boeing's "commitment to everyone to ensure " safe and reliable travel" really be said to be "absolute"? That's a high bar. Let's see!

I've taken the structure that follows from a tweetstorm by Trevor Sumner (apparently derived from a Facebook post by his brother-law, Dave Kammeyer ). However, I've added topic headings, changed others, and helpfully numbered them all, so you can correct, enhance, or rearrange topics easily in comments (or even suggest new topics). Let me also caveat that this is an enormous amount of material, and time presses, so this will not be as rich in links as I would normally like it to be. Also note that the level of abstraction for each topic varies significantly: From "The Biosphere" all the way to "Pilot Training." A proper failure matrix would sort that out.

* * *

(1) The Biosphere : The 737 MAX story beings with a customer requirement for increased fuel efficiency. This is, at bottom, a carbon issue (and hence a greenhouse gas issue , especially as the demand for air travel increases, especially in Asia). New biosphere-driven customer demands will continue to emerge as climate change increases and intensifies, and hence the continued 737 MAX-like debacles should be expected, all else being equal. From CAPA – Centre for Aviation :

The main expected impacts of climate change on aviation result from changes in temperature, precipitation (rain and snow), storm patterns, sea level and wind patterns. In addition, climate change is expected to lead to increased drought, impacts on the supply of water and energy, and changes in wildlife patterns and biodiversity. Consequences for aviation include reduced aircraft performance, changing demand patterns, potential damage to infrastructure, loss of capacity and schedule disruption.

All of these factors will affect aircraft design, manufacturing, maintenance, and use, stressing the system.

(2) Choice of Airframe : The Air Current describes the competitive environment that led Boeing to upgrade the 737 to the 737 MAX, instead of building a new plane:

Boeing wanted to replace the 737. The plan had even earned the endorsement of its now-retired chief executive. We're gonna do a new airplane," Jim McNerney said in February of that same year. "We're not done evaluating this whole situation yet, but our current bias is to not re-engine, is to move to an all-new airplane at the end of the decade." History went in a different direction. Airbus, riding its same decades-long incremental strategy and chipping away at Boeing's market supremacy, had made no secret of its plans to put new engines on the A320. But its own re-engineered jet somehow managed to take Boeing by surprise. Airbus and American forced Boeing's hand. It had to put new engines on the 737 to stay even with its rival .

Why? The earlier butchered launch of the 787:

Boeing justified the decision thusly: There were huge and excruciatingly painful near-term obstacles on its way to a new single-aisle airplane. In the summer of 2011, the 787 Dreamliner wasn't yet done after billions invested and years of delays. More than 800 airplanes later here in 2019, each 787 costs less to build than sell, but it's still running a $23 billion production cost deficit. .

The 737 Max was Boeing's ticket to holding the line on its position "both market and financial" in the near term. Abandoning the 737 would've meant walking away from its golden goose that helped finance the astronomical costs of the 787 and the development of the 777X.

So, we might think of Boeing as a runner who's tripped and fallen: The initial stumble, followed by loss of balance, was the 787; with the 737 MAX, Boeing hit the surface of the track.

(3) Aerodynamic Issues : The Air Current also describes the aerodynamic issues created by the decision to re-engine the 737:

Every airplane development is a series of compromises, but to deliver the 737 Max with its promised fuel efficiency, Boeing had to fit 12 gallons into a 10 gallon jug. Its bigger engines made for creative solutions as it found a way to mount the larger CFM International turbines under the notoriously low-slung jetliner. It lengthened the nose landing gear by eight inches, cleaned up the aerodynamics of the tail cone, added new winglets, fly-by-wire spoilers and big displays for the next generation of pilots. It pushed technology, as it had done time and time again with ever-increasing costs, to deliver a product that made its jets more-efficient and less-costly to fly.

In the case of the 737 Max, with its nose pointed high in the air, the larger engines "generating their own lift" nudged it even higher. The risk Boeing found through analysis and later flight testing was that under certain high-speed conditions both in wind-up turns and wings-level flight, that upward nudge created a greater risk of stalling. Its solution was MCAS , the Maneuvering Characteristics Augmentation System control law that would allow for both generations of 737 to behave the same way. MCAS would automatically trim the horizontal stabilizer to bring the nose down, activated with Angle of Attack data. It's now at the center of the Lion Air investigation and stalking the periphery of the Ethiopian crash.

(4) Systems Engineering : Amazingly, there is what in a less buttoned-down world that commercial aviation would be called a Boeing 737 fan site, which describes the MCAS system in more technical terms :

MCAS was introduced to counteract the pitch up effect of the LEAP-1B engines at high AoA [Angle of Attack]. The engines were both larger and relocated slightly up and forward from the previous NG CFM56-7 engines to accomodate their larger diameter. This new location and size of the nacelle causes it to produce lift at high AoA; as the nacelle is ahead of the CofG [Center of Gravity] this causes a pitch-up effect which could in turn further increase the AoA and send the aircraft closer towards the stall. MCAS was therefore introduced to give an automatic nose down stabilizer input during steep turns with elevated load factors (high AoA) and during flaps up flight at airspeeds approaching stall.

Unfortunately for Boeing and the passengers its crashed aircraft were carrying, the MCAS system was very poorly implemented. Reading between the lines (I've helpfully labeled the pain points):

Boeing have been working on a software modification to MCAS since the Lion Air accident. Unfortunately although originally due for release in January it has still not been released due to both engineering challenges and differences of opinion among some federal and company safety experts over how extensive the changes should be.

Apparently there have been discussions about potentially adding [A] enhanced pilot training and possibly mandatory [B] cockpit alerts to the package. There also has been consideration of more-sweeping design changes that would prevent [C] faulty signals from a single sensor from touching off the automated stall-prevention system.

[A] Pilot training was originally not considered necessary, because MCAS was supposed to give 737 MAX the same flight characteristics as earlier 737s; that's why pilots weren't told about it. (This also kept the price low.) [B] Such alerts exist now, as part of an optional package, which Lion did not buy. [C] The single sensor was the result of regulatory capture, not to say gaming; see below.

(The MCAS system is currently the system fingered as the cause of both the Lion Air and Ethiopian crashes; we won't know for sure until the forensics are complete. Here, however, is the scenario for an MCAS-induced crash :

Black box data retrieved after the Lion Air crash indicates that a single faulty sensor -- a vane on the outside of the fuselage that measures the plane's "angle of attack," the angle between the airflow and the wing -- triggered MCAS multiple times during the deadly flight, initiating a tug of war as the system repeatedly pushed the nose of the plane down and the pilots wrestled with the controls to pull it back up, before the final crash.

(5) Regulatory Capture : Commercial aircraft need to be certified by the FAA before launch. The Washington Post labels today's process "self-certification":

The FAA's publication of pilot training requirements for the Max 8 in the fall of 2017 was among the final steps in a multiyear approval process carried out under the agency's now 10-year-old policy of entrusting Boeing and other aviation manufacturers to certify that their own systems comply with U.S. air safety regulations.

In practice, one Boeing engineer would conduct a test of a particular system on the Max 8, while another Boeing engineer would act as the FAA's representative , signing on behalf of the U.S. government that the technology complied with federal safety regulations, people familiar with the process said.

(Note that a 10-year-old process would have begun in the Obama administration, so the regulatory process is bipartisan.) I understand that " safety culture " is real and strong, but imagine the same role-playing concept applied to finance: One bankers plays the banker, and the other banker plays Bill Black, and after a time they switch roles . Clearly a system that will work until it doesn't. More:

The process was occurring during a period when the Transportation Department's Office of Inspector General was warning the FAA that its oversight of manufacturers' work was insufficient.

Four years after self-certification began, fires aboard Boeing's 787 Dreamliner jets led to the grounding of the fleet and a wave of questions about whether self-certification had affected the FAA's oversight.

Why "self-certification"? Investigative reporting from the Seattle Times -- the article is worth reading in full -- explains:

The FAA, citing lack of funding and resources, has over the years delegated increasing authority to Boeing to take on more of the work of certifying the safety of its own airplanes.

Alert readers will note the similarity to the Neoliberal Playbook , where government systems are sabotaged in order to privatize them, but in this case regulatory capture seems to have happened "by littles," rather than out of open, ideological conviction (as with the UKs's NHS, or our Post Office, our Veteran's Administration, etc.).

(6) Transfer of Authority to Boeing : In the case of the 737 Max, regulatory capture was so great that certification authority was transferred to Boeing. In order to be certified, a "System Safety Analysis" for MCAS had to be performed. The Seattle Times :

The safety analysis:

Understated the power of the new flight control system, which was designed to swivel the horizontal tail to push the nose of the plane down to avert a stall. When the planes later entered service, MCAS was capable of moving the tail more than four times farther than was stated in the initial safety analysis document.

Failed to account for how the system could reset itself each time a pilot responded, thereby missing the potential impact of the system repeatedly pushing the airplane's nose downward. Assessed a failure of the system as one level below "catastrophic."

But even that "hazardous" danger level should have precluded activation of the system based on input from a single sensor -- and yet that's how it was designed.

So who certified MCAS? Boeing self-certified it. Once again The Seattle Times :

Several FAA technical experts said in interviews that as certification proceeded, managers prodded them to speed the process. Development of the MAX was lagging nine months behind the rival Airbus A320neo. Time was of the essence for Boeing .

"There wasn't a complete and proper review of the documents," the former engineer added. "Review was rushed to reach certain certification dates."

In this atmosphere, the System Safety Analysis on MCAS, just one piece of the mountain of documents needed for certification, was delegated to Boeing .

(I'm skipping a lengthy discussion of even more technical detail for MCAS, which includes discrepancies between what Boeing self-certified, and what the FAA thought that it had certified, along with the MCAS system acting like a ratchet, so it didn't reset itself, meaning that each time it kicked in, the nose was pitched down even lower. Yikes. Again, the article is worth reading in full; if you've ever done tech doc, you'll want to scream and run.)

(7) Political Economy : This tweet is especially interesting, because even I know that Muddy Waters Research is a famous short seller:

MuddyWatersResearch ‏ Verified account @ muddywatersre Mar 18

What's the result? Two $ BA planes have been grounded: 787 and Max. Last FAA grounding of a type of plane was 1979. In the case of the Max, FAA outsourced more than planned bc BA was 9 months behind Airbus 320neo 3/4 2 replies 4 retweets 19 likes

This is a great example of real short-termism by a corporate. It's clearly in $ BA LT interest to have robust cert system, but those chickens come home to roost years later, allowing mgmt to meet ST expectations. BTW, semi-annual reporting would do NOTHING to fix this mentality. 4

And here we are! There are a myriad of other details, but many of them will only prove out once the black boxes are examined and the forensics are complete.

* * *

It should be clear at this point that the central claims of Muilenburg's letter are false. I understand that commercial aviation is a business, but if that is so, then Muilenburg's claim that Boeing's commitment to safety is "absolute" cannot possibly be true; indeed, the choice to re-engine the 737 had nothing to do with safety. Self-certification makes Boeing "a judge in its own cause," and that clearly contradicts Muilenburg's absurd claim that "safety" -- as opposed to profit -- "is at the core of who we are."

The self-certification debacle that allowed MCAS to be released happened on Muilenburg's watch and is already causing Boeing immense reputational damage, and a criminal case, not to mention the civil cases that are surely coming, will only increase that damage. Mr. Market, the Beltway, and even Trump, if his trade deals are affected, will all soon be bellowing for a sacrificial victim. Muilenburg should recognize the inevitable and gracefully resign. Given his letter, it looks unlikely that he will do the right thing.


John A , , March 19, 2019 at 4:34 pm

Maybe they should have appointed aviation expert Nikki Haley to the Boeing board earlier.

Yikes , , March 19, 2019 at 4:35 pm

Sacrificial Victims were spread over land and sea in Kenya and Indonesia. Muilenburg and Obbie The Wan both are the criminals who profit.

dcrane , , March 19, 2019 at 4:36 pm

That should be "five months" not "five weeks" in the first sentence. Lion Air crashed on 29 October 2018.

Howard Beale IV , , March 19, 2019 at 4:39 pm

IIRC, one of the big constraints that was leveled was the need to keep the 737, regardless of version, into the same height relative to all other generations of the 737, whereas Airbus kept their height a lot higher than the 737.

If you look at many 737's over the years, some of the engine's nacelles were flat at the bottom to accommodate larger engine. Why? Boeing kept the height the same in order to maintain built-in stairs that, with virtually all airports having adjustable jetways, was basically redundant.

When you compare an A320xeo against a B737, you'll find that the Airbus rides higher when it comes to the jetways.

Michael Hudson , , March 19, 2019 at 4:42 pm

It seems to me that the Boeing 737-Max with the heavier, larger fuel-saving engines is so unbalanced (tilting over and then crashing if not "overridden" by a computer compensation) that it never should have been authorized in the first place.

When Boeing decided to add a much larger engine, it should have kept the airplane in balance by (1) shifting it forward or backward so that the weight did not tip the plane, and (2) created a larger landing-gear base so that the large engines wouldn't scrape the ground.

The problem was that Boeing tried to keep using the old chassis with the larger engines under the wings – rather than changing the wings, moving them forward or aft, and expanding the plane to permit a more appropriate landing gear.

The computer system has been blamed for not being a "smart enough" workaround to tell the plane not to plunge down when it already is quite close to the ground – with no perception of altitude, not to mention double-checking on the wind speed from both sensors.

Beyond that ultimate problem is the ultimate regulatory problem: regulatory capture of the FAA by the airline companies. As a result, the FAA represents "its customers" the airplane makers, not the public users and customers. This is like the banks capturing the Fed, the Justice Dept. and Treasury to promote their own interests by claiming that "self-regulation" works. Self-regulation is the polite word for fraudulent self-indulgence.

I would be surprised if the European Airbus competitors do not mount a campaign to block the 737-Max's from landing, and insisting that Boeing buy them back. This gives Airbus a few years to grab the market for these planes.

This probably will throw Trump's China trade fight into turmoil, as China was the first country to ground the 737-Max's and is unlikely to permit their recovery without a "real" federal safety oversight program. Maybe Europe, China and other countries henceforth will each demand that their own public agencies certify the plane, so as to represent users and stakeholders, not only stockholders.

The moral: Neoliberalism Kills.

Lambert Strether Post author , , March 19, 2019 at 5:13 pm

Rule #2 of Neoliberalism: Go die.

> "Maybe Europe, China and other countries henceforth will each demand that their own public agencies certify the plane."

As if the 737 MAX were the chlorinated chicken of aircraft.

* * *

I'm not sure about redesigning the wing and the landing gear. That might be tantamount to designing a new plane. (I do know that the landing gear is so low because the first 737s needed to accommodate airports without jetways, and so there may be other facets of the design that also depend on those original requirements that might have to be changed.)

Synoia , , March 19, 2019 at 7:45 pm

Correct – redesign the wing = new plane.

Cal2 , , March 19, 2019 at 7:45 pm

Rule #3 of Neoliberalism:

Their profits = Your cancer, which presents even more profit taking. I.e. Bayer makes the carcinogenic pesticides AND the chemotherapy drugs.

Carey , , March 20, 2019 at 10:19 am

Precisely this. Thank you.

John Zelnicker , , March 19, 2019 at 7:46 pm

@Michael Hudson
March 19, 2019 at 4:42 pm
-- -- -

"This gives Airbus a few years to grab the market for these planes."

That would be great for Mobile as the Airbus A320neo is assembled here.

Octopii , , March 20, 2019 at 7:38 am

And provides time for the A220 to ramp up in Mobile as well. Not a direct competitor for the 737 but a very good airplane developed by Bombardier.

Carey , , March 20, 2019 at 11:20 am

Also, the MC-21 is in final testing now; still using Western engines, for the moment. One to watch, maybe.

Which is worse - bankers or terrorists , , March 20, 2019 at 4:17 am

Engineering logs seem to indicate that larger landing gear cannot be added without re-engineering the plane.

115 kV , , March 20, 2019 at 8:15 am

Regulatory capture is rampant throughout the economy. Boeing self-certification being delegated by the FAA is not unlike the situation with electric transmission utilities.

After the 2003 northeast & Canada blackout, Congress passed the Energy Policy Act of 2005. It directed FERC to create an "electric reliability organization". Previously there were voluntary organizations set up after the 1966 blackout to establish operating standards in the industry. One of them was the North American Electric Reliability Council which morphed into the North American Electric Reliability Corporation (NERC) in 2006.

NERC is headquartered in Atlanta and employs hundreds of people. The standards setting generally takes place in NERC Committees and Subcommittees and sometimes from FERC itself. These are typically packed with industry people, with a patina of diversity that includes some governmental types and large industrial consumers. Let it suffice to say the electric transmission industry itself largely sets the rules how it operates.

Now consider the article in yesterday's NYT " How PG&E Ignored California Fire Risks in Favor of Profits ". The transmission circuit featured in the article (the Caribou-Palermo line) that caused the destruction of Paradise is a transmission line that is subject to both FERC and NERC regulation. As described in the article the circuit had many previous failures and was well beyond its design life.

However, both FERC and NERC have a laser focus on "market players" (think Enron or JP Morgan) and system operations (e.g., prevent collapses like the blackout of 2003). AFIK, neither FERC or NERC have prescriptive standards for routine maintenance or inspection and replacement (i.e., very expensive capital replacement that was not done on the Caribou-Palermo line), these are left to the discretion of the transmission owner. While substantive information about electric reliability is maintained by industry trade groups and submitted to FERC, what is available to the public is generally useless and subjected to scrubbing and polishing (often under the guise of Critical Energy Infrastructure Information).

We can see how self-policing work, can't we??? Rent-seeking market players can arbitrage markets, inflating prices consumers pay and make billions in profits, while California burns.

The neglectful rot in California is endemic in the industry as a whole.

A little bit of dignity , , March 19, 2019 at 4:47 pm

How about seppuku for the entire top management?

Robert Hahl , , March 20, 2019 at 7:14 am

If an airplane crashes in the forest, and no American were killed, did it make a sound?

Carolinian , , March 19, 2019 at 5:07 pm

That Seattle Times investigative story is indeed very good and a rare instance of newspaper writers troubling to carefully and cogently explain a technical issue.

In hindsight Boeing would have perhaps been better off to leave off the MCAS altogether and depend on pilot retraining to cover the altered handling.

One reason they may not have was that crash several years ago of a commuter plane in upstate NY where the plane started to stall and the confused pilot pulled up on the controls rather than making the airplane dive to regain speed. Still one has to believe that no automation is better than badly designed or malfunctioning automation.

allan , , March 19, 2019 at 5:31 pm

"depend on pilot retraining to cover the altered handling"

IANAP, but maybe the problem is that "nose up" situations can go south very quickly. For those with the stomach for it, there are videos on youtube of the 747 freighter that went nose up at Bagram a few years ago (perhaps due to loose cargo shifting backwards on takeoff). It was over very quickly.

ChrisPacific , , March 19, 2019 at 5:37 pm

Yes, I was impressed with it. Unfortunately the investigation precludes Boeing from responding as they did indicate they would have had something to say about it otherwise. But the analysis looks pretty cut and dried:

  1. Boeing underestimated the risk rating for the sensor, excluding the possibility of a catastrophic failure as occurred in the two incidents to date;
  2. Boeing also failed to implement the redundancy that would have been required even for their lower risk rating;
  3. Manual correction by the pilot as a possible risk mitigation was constrained by the fact that pilots weren't trained on the new system due to commercial factors.

Fixing any one of those three issues would have averted the disasters, although #3 is pretty precarious as you're relying on manual pilot actions to correct what is a clear systems defect at that point.

It sounds like #1 was partly because they failed to account for all the scenarios, like repeat activation raising the risk profile in certain circumstances. This is very easy to do and a robust review process is your best defense. So we could add the tight timelines and rushed process as a contributing factor for #1, and probably the others as well.

XXYY , , March 20, 2019 at 12:08 pm

People who work on accident investigation would probably agree on 2 things:

So while there is much to be profitably learned by investigating everything here, an effective "fix" may be surprisingly (or suspiciously) small in scope. There will be much clamoring for the whole plane to be resigned or scrapped, for better or worse.

anon in so cal , , March 19, 2019 at 6:28 pm

The Colgan crash, whose pilot, Renfrew, was chatting with the co-pilot below the allowed altitude? And who had apparently lied about his background, and had a pay-to-play pilot's license?

I think the Air France Airbus 447 also had a high-altitude stall (due to a faulty air speed sensor) and needed its nose pushed down, not up (which the copilots didn't realize).

Also, very informative article / OP, thanks for posting.

Synoia , , March 19, 2019 at 7:47 pm

MCAS was added to change the behavior of the plane from to tend to stall as speed increases. That is stall and crash, because such a high speed stall makes polit recovery very, very difficult.

In addition the MCAS driven amount of elevator change was initially 0.6 to 2.5, which indicates the 0.6 increment was found to be too low.

Carolinian , , March 19, 2019 at 8:07 pm

Well they are planning to keep it but

According to a detailed FAA briefing to legislators, Boeing will change the MCAS software to give the system input from both angle-of-attack sensors.

It will also limit how much MCAS can move the horizontal tail in response to an erroneous signal. And when activated, the system will kick in only for one cycle, rather than multiple times.

Boeing also plans to update pilot training requirements and flight crew manuals to include MCAS.

–Seattle Times

So apparently the greater elevator setting is not so necessary that they are not willing to reduce it. Also the max power setting would normally be on take off when the pilots are required to manually fly the plane.

Synoia , , March 20, 2019 at 12:12 pm

It is about speed, not power. I presume that MCAS was developed to solve a problem, nose up behaviour.

Carey , , March 20, 2019 at 10:28 am

Yes, that was an excellent Seattle times piece. Surprising to see that kind of truth-telling and, especially, *clarity* in an MSM piece these days. So what's the angle?

voislav , , March 19, 2019 at 5:48 pm

Reports I've read indicates that Boeing ignored even the clearly inadequate certification. "Documentation provided to the FAA claims that the MCAS system can only adjust the horizontal tail on the plane by 0.6 degrees out of a maximum of five-degrees of nose-down movement. But that limit was later increased to 2.5-degrees of nose-down movement. Boeing didn't communicate the change from 0.6-degrees to 2.5-degrees until after Lion Air."

Apparently this was done after simulations showed that 0.6 degrees was inadequate and the new 2.5 degree setting was not extensively tested before the planes were rolled out. IANAL, but this may be a serious problem for Boeing. Boeing could also be liable for damages due to 737 groundings and due to delays in delivery of contracted planes.

Big question is how 737 issues will affect 777X rollout, due at the end of the year. If 777X certification is called into question, this may cause further delays and put it at a further disadvantage against A350.

Lambert Strether Post author , , March 20, 2019 at 3:17 am

The 777 has been a great plane. Let's all pray the MBAs didn't fuck it up, too.

If I were Boeing, I'd have a team looking into the 777 certification process right now. And I'd set up a whistleblower line (so the Seattle Times doesn't get to the story first).

The analogy has been made between this the 737 MAX story and the Tylenol story. J&J got out in front of the problem and saved the product (and their company). Boeing's problem is of that order, and Muilenberg -- that letter! -- seems incapable of understanding that; insular, arrogant. One more reason to fire the dude toot sweet. If he comes out of his next review with a raise -- Everything Is Like CalPERS™ -- consider shorting Boeing

Chris , , March 20, 2019 at 1:35 pm

Thanks, Lambert, for post and comments. I don't know if this angle has been covered or explored: the relatively new way that Boeing now "manufactures" "tests" and "assembles" parts of its planes. I had dinner with new acquaintance, Boeing engineer for decades (I live near a plant in WA state). For the last few years, this engineer is stationed half year in Russia annually to oversee assembly there. In this newish, more profitable manufacturing system for Boeing, the parts come in from around the world with sketchy quality control, are then assembled by Russian workers this engineer (and other Boeing employees sent from States) supposedly oversees. But the engineer doesn't speak Russian and has too little access to translators .Needless to say, this engineer is planning an exit as soon as possible. Having grown up in WA state for 60 years with neighbors/friends who were Boeing engineers, assemblers, line workers, etc it makes me heart sick to see the current decimation of talent, rigor and wages with additional far-flung assembly factories (Russia with few translators?! who knew?). Might these manufacturing/assemblying "improvements" also be a contributing factor in these terrifying woes for Boeing?

PlutoniumKun , , March 19, 2019 at 5:57 pm

Thanks for this Lambert, fantastically informative and interesting post.

Self regulation only works when liability is transferred with it – over example, in construction whereby certification by the engineers or architects designing the building are also taking on liability in the event something goes wrong. It seems unlikely that this is the situation with Boeing.

Allowing this to happen seems the ultimate in short term thinking by Boeing. US manufacturers have always had an advantage over competitors because the FAA was held in such high regard worldwide that it was the de facto world safety regulatory body – every country followed its lead. But this chipping away of its authority has led to a near fatal loss of faith, and will no doubt lead to European and Asian regulatory authorities being strengthened. And no doubt commercial realities will mean they will look much more closely at US manufactured aircraft if there is some benefit to their own manufacturers.

Airbus will no doubt try to take advantage – just as Boeing (with some justification) tried to focus attention on the Air France Airbus loss which was attributed at least in part to excessive automation. China is pushing hard with its new Comac aircraft, but they seem to be poorly regarded worldwide (only Chinese airlines are buying). The Canadians have missed their chance with the Bombadier C-series.

JBird4049 , , March 19, 2019 at 6:07 pm

The more I read of this the more baffling it is. What was there stopping Boeing from just highlighting the changes and installing an easy manual override instead of this hidden change with effectively no way to permanently do so? Especially when in crisis mode? One could make a case of no extra training needed so long as the pilot knows about it and can easily turn it off.

Darius , , March 19, 2019 at 6:30 pm

I didn't see this before I posted my response. A more concise statement of my thoughts. This plus more robust redundant sensors. Penny wise and pound foolish.

The Times thinks Boeing is too big to fail. Without a blockbuster Max, I don't see how Boeing maintains its current status in the industry.

Synoia , , March 19, 2019 at 7:52 pm

One could make a case of no extra training needed so long as the pilot knows about it and can easily turn it off.

That's the expensive re-certification Boeing wanted to avoid.

Robert Hahl , , March 20, 2019 at 7:52 am

That would entail simulator training, that would entail modifying the simulators and the curriculum.

Darius , , March 19, 2019 at 6:22 pm

I am leaning towards thinking the kludgy design of the 727 Max could have been rolled out with no major problems if Boeing had been up front about design changes, made a robust and conservative MCAS, fully at the command of the pilot, and provided ample training for the new aircraft.

They still could have saved billions on the airframe. They would have had to acknowledge the significant modifications to the airlines with the attendant training and other costs and delays. They would have lost some sales. They still would have been far ahead of Airbus and light years ahead of where they are now.

I also think they have been completely afflicted by the defense contractor mentality.

Lambert Strether Post author , , March 20, 2019 at 3:08 am

> I also think they have been completely afflicted by the defense contractor mentality.

Yes, the famous McDonnell-Douglas reverse takeover , where financial engineers inserted their sucking mandibles into an actual engineering culture. The merger took place in 1997, 22 years ago, which is not so long, really. Note also that the finance guys drove the decision to outsource as much 787 manufacturing as possible , which creates headaches for real engineering, so the initial stumble with the 787 that led to the 737 fall is down to them, too.

Note that Muilenberg came up through the defense side of the company not the commercial aircraft side. He may simply not have been equipped to understand FAA regulation at any deep level, hence the rot that finally surfaced.

VietnamVet , , March 19, 2019 at 6:50 pm

The 737 Max crashes and Brexit are the chickens coming home to roost. NC is a treasure for your coverage of both.

Clearly upper management in Chicago only knows short term finance. Boeing stuck with old fashion hydraulic controls in the 737 but faced with an unacceptable flight characteristics of the larger more efficient engines added a fly-by-wire system to compensate for it.

The criminal charges are that besides being a faulty design (it relies on one fragile exposed sensor that if out of position keeps triggering dives until switched off) but Boeing hid it and self-certified that it was safe. Adding a discrepancy warning and position indicator for the two independent flight sensors to the cockpit video display is an extra cost feature.

Neither of the planes that crashed had the added safety display. All are cost saving measures. Finally, if a faulty sensor triggers dives, the pilot at the controls is busy with both hands on the yoke forcing the airplane to stay in the air with stall and proximity warnings are sounding. The second pilot also must realize what's going on, immediately turn off the electricity to the screw jack motor and manually turn the stabilizer trim wheel to neutral.

You can't learn this on an iPad. Both pilots should practice it together in a Flight Simulator. If the co-pilot was experienced, unlike the one in the Ethiopian crash; just maybe, they could have survived the repeated attempts by the airplane to dive into the ground on takeoff.

The tragedy is that corporate media in pursuit of profits will keep us up to date but will never mention the 6 or 8 minutes of terror for the 346 souls aboard the two flights. They will cover the criminal negligence trial if there are ever indictments. But, the news reports never will say that neoliberalism, deregulation, and privatization are the root causes of the deaths.

Lambert Strether Post author , , March 20, 2019 at 3:01 am

> if a faulty sensor triggers dives, the pilot at the controls is busy with both hands on the yoke forcing the airplane to stay in the air with stall and proximity warnings are sounding. The second pilot also must realize what's going on, immediately turn off the electricity to the screw jack motor and manually turn the stabilizer trim wheel to neutral. You can't learn this on an iPad. Both pilots should practice it together in a Flight Simulator. If the co-pilot was experienced, unlike the one in the Ethiopian crash; just maybe, they could have survived the repeated attempts by the airplane to dive into the ground on takeoff.

That's what I mean by horrid UI/UX. Might as well as both pilots to pat their heads and rub their tummies in synch. And since the two pilots have to both understand what's going on, we've multiplied the chances for failure.

Boeing also clearly did not know its customers . It should be engineering for the sort of pilots who are going to be hired by Lion Air, or any rapidly expanding airline in what we used to all the Third World. Hegemony, it seems, makes you insular and provincial.

EoH , , March 20, 2019 at 4:54 pm

Added cost, "mandatory" safety feature. Does not seem to square with the [soon to be former?] CEO's apology-industry written claim to be committed to absolute safety.

You can't make this stuff up.

dearieme , , March 19, 2019 at 7:03 pm

"The FAA, citing lack of funding and resource": I don't suppose I'll survive to see any arm of government not blame lack of funds for its boneheaded or corrupt incompetence.

But the bigger picture: suppose the FAA is to do its job properly. From where is it going to recruit its staff?

Smaller picture: it doesn't really matter whether the cocked-up MCAS killed all those people or not. Even if it's innocent of the charge, the account of its development and application is a horror story.

Bigger picture: what other horrors have been hidden by Boeing?

Lambert Strether Post author , , March 20, 2019 at 2:48 am

> the account of its development and application is a horror story.

That's how I feel. The tech doc department at Boeing sounds like a horrible place to work; MBAs or their goons telling you all the time to do stuff you know is wrong. It's not surprising people were willing to talk to the Seattle Times; I bet there are more people. (Hey, Seattle Times! How about people testing the 737 MAX in simulators (assuming this is done)).

Sounds like the MBAs in Chicago have been busy planting land mines everywhere. Somebody stepped on this one; there are others.

oaf , , March 19, 2019 at 7:05 pm

The unfortunate pilots were made test pilots; the unsuspecting passengers: Guinea pigs. Lab rats. And paid for the privilege. Some others may share this opinion. Change one little thing? Chaos Theory Rules. Same with weather/climate; folks. That rant is for later.

oafstradamus

dcrane , , March 19, 2019 at 7:08 pm

Boeing stuck with old fashion hydraulic controls in the 737 but faced with an unacceptable flight characteristics of the larger more efficient engines added a fly-by-wire system to compensate for it.

Interestingly, and maybe relevant to the problem of confusion for the pilots, is that Boeing has had another automatic trim-modifier operating on its 737s for some time, the speed-trim system (STS):

https://leehamnews.com/2019/02/01/bjorns-corner-pitch-stability-part-7/

This system also modifies the stabilizer position during manual flight. Like MCAS, it was brought in to improve stability under certain flight conditions (the reasons for which are far beyond my knowledge). There is an indication that the pilots on the flight before the Lion Air crash misinterpreted MCAS actions for STS behavior.

Synoia , , March 19, 2019 at 7:55 pm

Safety is at the core of who we are at Boeing

Yes, after money.

drumlin woodchuckles , , March 19, 2019 at 8:08 pm

At what point does "crapification" become insufficient to describe Boeing's product and process here? At what point do we have to speak of " ford-pintofication"?

barrisj , , March 19, 2019 at 8:15 pm

OK, I'm told to resubmit my crib re: "Boeing options" from the ZeroHedge "tweetstorm" by Trevot Sumner, and include a link got it:

Economic problem. Boeing sells an option package that includes an extra AoA vane, and an AoA disagree light, which lets pilots know that this problem was happening. Both 737MAXes that crashed were delivered without this option. No 737MAX with this option has ever crashed

https://mobile.twitter.com/trevorsumner/status/1106934369158078470

Ooops! "Options package"? Wait, a "package" that in the interim corrects a potentially catastrophic mfg. defect and airlines have to pay for it? Whoa, here's your late capitalism in play.

Lambert Strether Post author , , March 20, 2019 at 2:45 am

> Boeing sells an option package that includes an extra AoA vane, and an AoA disagree light

This is one of the details I could not get to (and we don't 100% know this is an issue until the forensics are done. Right now, we have narrative. Truly excellent narrative to be sure -- if only we thought of government the same way as pilots think of their aircraft! -- but narrative nonetheless).

Let me see if I have this right. Pilots, chime in!

"Authority" is one of the big words in this discussion; MCAS takes authority away from the pilot (and can do in such a drastic fashion as to crash the plane). Worse, the default case is that it can do so on the basis of a single sensor reading. In a design appropriate to the consequences for failure (i.e., a different design from that described in the "System Safety Analysis" that Boeing self-certified) MCAS would take readings from two sensors, and if they disagreed, authority would revert to the pilot . That's a general principle at Boeing, and so it's reasonable for pilots to assume that they retain authority of MCAS has not told them they don't have it any more.

Hence, the disagree light, which tells the pilots to take back authority because the sensors are confused. However, I think there are UI/UX issues with that, given that the 737 cockpit is extremely noisy and pilots have a lot to do on take-off. So a light might not be the answer. (The light also strikes me as a kludge; first, MCAS feels to me like a kludge, in that we're making the aircraft flyable only through software.* Fine for fighter jets, which can be inherently unstable, but perhaps not so fine for commercial aircraft? Then we have a second kludge, a light to tell us that the first kludge has kicked in. I dunno.)

NOTE * However, it's also true that automation affects flight characteristics all the time. So I'm not sure how savage to make this indictment.

rowlf , , March 20, 2019 at 6:00 am

The AOA indication is Service Bulletin 737-31-1650 (there may be others) and is on the both Pilot Flight Displays (PFDs). Pilots would likely abort a takeoff if they saw the indication come on before getting airborne.

California Bob , , March 19, 2019 at 8:20 pm

In hindsight, it appears Boeing should have made Mulally CEO. He appears to be competent.

Cal2 , , March 19, 2019 at 8:25 pm

"Boeing has been in the business of aviation safety for more than 100 years, "

How many years ago did Wall Street take over the fortunes of the company? Why did they move their headquarters from their birthplace of Seattle to Chicago? Why did they start assembling planes in South Carolina and China? Was it to improve aviation safety? Or, to allow the profiteering parasites to feed off the carcass of the company?

I want to fly on Boeing planes put together by well paid members of the Seattle Machinists Union, not low wage peons. Let's not even mention the maintenance of American aircraft in China and El Salvador.

https://www.bizjournals.com/chicago/news/2018/04/20/southwest-airlines-should-have-inspected-engines.html

President Trump, here's a reelection tip: "Today I am declaring that all American registered aircraft flying in American airspace must be maintained in the U.S."

Lambert Strether Post author , , March 20, 2019 at 2:32 am

> President Trump, here's a reelection tip:

> "Today I am declaring that all American registered aircraft flying in American airspace must be maintained in the U.S."

Amazingly, Trump seems to have done OK on this. First, he didn't cave to Muilenberg's (insane, goofy, tone-deaf) request to keep the 737 flying; then he frames the issue as complexity (correct, IMNSHO), and then he manages to nominate a Delta CEO as head of the FAA .

And your suggestion is very good one. I wonder if he could do that by executive order? And I wonder how many grey-beards would come off the golf courses to help out? I bet a lot.

oaf , , March 19, 2019 at 8:47 pm

The aircraft is NOT CRAP!!! However. It should have been flown A WHOLE LOT MORE before receiving certification.

*Real* test pilots should have their a–es on the line ; operating for a lot more hours at *the edge of the envelope*, as it is known. Stability should be by design; not software*patch*. Patch this!

What portion of its' MCAS system flight testing was in computer simulation? Like the so-called Doppler Radar; which *magically* predicts what the future will bring; while the experts pitch it as fact? And make life-or-death decisions on the theoretical data???
Rush to market; markets rule. We can die.

dcrane , , March 19, 2019 at 9:19 pm

The aircraft is NOT CRAP!!!

Agreed, but I think we're seeing signs that a crapification process has begun on the safety side in this industry. (It has been proceeding for years on the service/amenities side.)

Lambert Strether Post author , , March 20, 2019 at 2:25 am

> The aircraft is NOT CRAP!!!

Didn't say it was. The headline reads "Boeing Crapification," not "737 Crapification."

That said, the 737 clearly has issues, as Boeing itself knew, since if they'd had their druthers, they would have launched a new plane to replace it. See point #2.

> What portion of its' MCAS system flight testing was in computer simulation?

That is a very good question. If I understand the aerodynamics issues aright, MCAS would be most likely to kick in at takeoff, which raises a host of UI/UX issues because the pilots are very busy at that time. So was MCAS not tested in the simulators? If so, how on earth was a scenario that included sensor failure not included? It may be that there are more issues with Boeing's engineering process than the documentation issues raised by the Seattle Times, though those are bad enough.

Ron D , , March 20, 2019 at 4:18 pm

I say the 737-whatever is a flying Turd, and always has been. It has a bad wing design which means it has to fly nose up compared to other models( I always remember that when going to the restroom while going somewhere on one). And because of its poor design it has to takeoff and land at higher speeds. So when flying into someplace like Mexico City it can be quite a harrowing experience, and the smell of cooking brakes is relatively normal.

Boeing never should have let go of the 757. Now that was a good plane that was simply ahead of its time.

The Rev Kev , , March 19, 2019 at 8:53 pm

Considering the fact that all these 737s are grounded as no airline trust them to not kill a plane load of passengers and crew, this is a really big deal. Putting aside the technical and regulatory issues, the fact is that the rest of the world no longer trusts the US in modern aviation so what we have here is a trust issue which is an even bigger deal.

We now know that the FAA does not audit the work done for these aircraft but the airlines themselves do it. It cannot be just Boeing but the other aircraft manufacturers as well. Other countries are going to be asking some very hard questions before forking over their billions to a US aircraft manufacturer in future. Worse is when Ethiopia refused to hand over the black boxes to the US but gave them instead to a third party.

That was saying that based on how you treated the whole crash, we do not trust you to do the job right and not to change some of the results. It has been done before, ironically enough by France who the Ethiopians gave the black boxes to. And when you lose trust, it takes a very long time to gain it back again – if ever. But will the changes be made to do so? I would guess no.

notabanker , , March 19, 2019 at 9:44 pm

But if the discount foreign airlines had just trained their pilots and paid for the non-crashintothegroundat500mph upgrade, all of this could have been avoided.

The Rev Kev , , March 20, 2019 at 12:55 am

Do you think that there was an app for that?

Lambert Strether Post author , , March 20, 2019 at 2:23 am

> we have here is a trust issue which is an even bigger deal

Loss or at least wobbliness of imperial hegemony, like. It's not just the aircraft, it's US standards-setting bodies, methods, "safety culture," even -- dare we say it -- English as the language of aviation. French is no longer the language of diplomacy, after all, though it had a good run.

Because markets. Neoliberalism puts everything up for sale. Including regulation. Oversimplifying absurdly: And so you end up with the profit-driven manufacturer buying the regulator, its produce killing people, and the manufacturer canceling its future profits. That's what the Bearded One would call a contradiction.*

NOTE * There ought to be a way to reframe contradiction in terms of Net Present Value which would not be what we think it is, under that model.

Synoia , , March 19, 2019 at 10:05 pm

Thank you Lambert, this is very complete.

Can Boeing survive? Yes, as a much smaller company. What is upsetting to me, is that the Boeing management has sacrificed thousands of Jobs.

Lambert Strether Post author , , March 20, 2019 at 2:10 am

> Thank you Lambert, this is very complete.

I wish it were as complete as it should be! There are a ton of horrid details about sensors, the UI/UX for the MCAS system, 737 cockpit design, decisions by the marketing department, and training and maintenance for Asian airlines that I just couldn't get to. (Although most of those presume that the forensics have already been done.) But I felt that dollying back for the big picture was important to. Point #1 is important, in that all the factors that drove the 737 decision making are not only still in place, they're intensifying, so we had better adjust our systems (assuming Boeing remains a going concern -- defenestrating Muilenberg would be an excellent way to show we accept the seriousness of customer and international concern).

Bill Smith , , March 19, 2019 at 10:56 pm

Bloomberg is reporting that : "The Indonesia safety committee report said the plane had had multiple failures on previous flights and hadn't been properly repaired."

And the day before when the same plane had the problem that killed everyone the next day: "The so-called dead-head pilot on the earlier flight from Bali to Jakarta told the crew to cut power to the motor driving the nose down, according to the people familiar, part of a checklist that all pilots are required to memorize."

Lambert Strether Post author , , March 20, 2019 at 2:14 am

There's an enormous expansion of air travel in Asia. The lower end -- not flag -- carriers like Lion Air and also Air Asia are in that business to be cheap ; they're driven by expansion and known to be run by cowboys.

That said, know your customer . I would translate this into an opportunity for Boeing to sell these airlines a service package for training their ground operations. But it seems that cutting costs is the only thing the MBAs in Chicago understand. Pilots, pipe up!

Bill Smith , , March 20, 2019 at 7:13 am

Pilot training and requirements are in the hands of the country, not Boeing. If the story that the copilot of the Ethiopian Airlines plane had only 200 hours of experience that is astounding.

In the US that requirement is 1500 hours. In addition most US airlines would require more than that. And then they slot 'beginning' pilots for flights in good (better) weather as high minimums pilot.

Bill Smith , , March 20, 2019 at 7:17 am

"sell these airlines a service package" That won't help an airline that is in the business to be cheap. The Indonesia airplane was repeatedly reported for problems in prior days/flights that was never fixed.

Basil Pesto , , March 20, 2019 at 2:42 am

indeed I was just about to mention this same story. The link is here: https://www.bloomberg.com/news/articles/2019-03-19/how-an-extra-man-in-cockpit-saved-a-737-max-that-later-crashed?utm_campaign=news&utm_medium=bd&utm_source=applenews

and this quote makes an interesting follow-on to the thread yesterday with 737 Pilot (which Lambert linked to in the first paragraph here):

"The combination of factors required to bring down a plane in these circumstances suggests other issues may also have occurred in the Ethiopia crash, said Jeffrey Guzzetti, who also directed accident investigations at FAA and is now a consultant.

"It's simply implausible that this MCAS deficiency by itself can down a modern jetliner with a trained crew," Guzzetti said."

Setting aside Mr Guzzetti's background (dismissing his claim here as tendentious right off the bat would strike me as uncharitable), and without wishing to exculpate anyone, it does lend some credence to the idea that Ethiopia Airlines may have some contributory negligence here, staffing the flight with such an inexperienced first officer.

JBird4049 , , March 20, 2019 at 12:25 pm

Setting aside Mr Guzzetti's background (dismissing his claim here as tendentious right off the bat would strike me as uncharitable), and without wishing to exculpate anyone, it does lend some credence to the idea that Ethiopia Airlines may have some contributory negligence here, staffing the flight with such an inexperienced first officer.

One can often point to inexperience, incompetence, stupidity, incompetence or just bad luck when some disaster happens, but Boeing counted on perfect performance from flight crews to successfully work with a workaround needed for other workarounds that needed perfect performance to not catastrophically fail. I know enough about complexity that you cannot depend on perfection because something will always fail.

BillC , , March 20, 2019 at 7:25 am

Your excellent summary lacks some MCAS details that are not widely reported by the general-audience press.

Like you, I am a retired software engineer, so I have followed an aviation blog discussion of this issue quite closely since it emerged as a probable software and system design failure. As the blog is open to all, its signal-to-noise ratio is pretty low, but it seems not too difficult for any technically-minded person to separate the wheat from the chaff. My current understanding, which I believe others here are in a position to correct, if necessary:

A. The requirement for MCAS apparently emerged very late in the MAX's development, when it became clear that the upper cowling around the larger engines, being moved up and forward with respect to earlier 737 versions, adds nose-up force as the angle of attack (AoA) approaches the upper limits of the MAX's operating envelope because at such angles, the cowling itself generates lift beyond that of the wing.

B. As perceived by a pilot flying manually (not on autopilot), this added nose-up force makes it easier to pull back on the control column ("stick"), increasing the AoA further. This is like a car running off the asphalt onto a muddy shoulder: the steering wheel wants to turn the wrong way (toward the ditch) rather than the right way (back on the road).

C. An FAA regulation prohibits certification of an aircraft that presents the pilot with changing stick forces near stall that nudge the pilot toward the wrong reaction, 14 CFR 25.203(a) , IIRC (unfortunately, I can't find the original blog citation).

D. MCAS was put in place to satisfy this certification requirement -- not to automagically correct stalls without pilot action.

E. Other means of meeting this requirement exist, ranging from an airframe redesign that avoids the extra nose-up effect of the larger repositioned engines down to a "stick pusher" that increases the force a pilot would need to pull the stick back further in this situation.

F. Any of the other options would negate one or both of the MAX's chief selling points: little cost or schedule impact to Boeing (in a rush to meet the Airbus 320 NEO challenge) and to its customers ("No new flight crew training necessary, because to the pilot, the MAX feels just like its 737 predecessors.") That is, all the other options introduce new hardware to a completed design and the more fundamental changes could require new type certification.

G. The easiest fix was pure software: at high indicated AoA, under manual control, and with flaps up, automatically rotate the horizontal stabilizer a little bit nose-down, which increases the pressure needed to pull the stick back (nose-up). No need to tell the pilot about this in training or real time, since it's just to make MAX feel like any other 737.

H. The design presented for certification described a single small rotation. Testing showed this was insufficient to provide the tactile feedback necessary for certification in all cases, so the software fix was obvious: if the trigger conditions still hold after a 5 sec. pause, do it again.

I. Apparently nobody asked at that point, "What if the AoA indication is stuck high?" We're under schedule and cost pressure, so who wants to complexify things by (1) adding additional sanity-checking to the aircraft's AoA computations or (2) limiting how many times we add a little bit of nose-down.

J. When these details combine with a consistently erroneous AoA reading, MCAS can -- if not repeatedly countermanded or disabled and manually reversed -- eventually rotate the horizontal stabilizer to its maximum nose-down position, where it was found in both recent incidents, IIRC.

Even if the pilots figure out that's what's happening amid a cacophony of seemingly contradictory instrument readings and warnings (stick-shaker, trim wheel clacking, alarm chimes, and synthesized voices), the pilots still have to (1) cut power to the electrical trim systems and (2) restore the required trim, which may then require as many as 50 manual turns of a trim wheel. If you're near the ground, time is short

A minority of commenting pilots assert that any competently trained cockpit crew should be able to identify MCAS misbehavior quickly and power off automatic trim per the same checklist that was prescribed for "runaway automatic trim" on every 737 variant, MAX included. Most seem to agree that with aircraft control difficulties, multiple alarms, and disagreement among the pilot's and first officer's airspeed and AoA readings almost from the moment of takeoff (not yet officially confirmed), an MCAS-commanded runaway trim event may feel very different from the runaway trim flavors for which pilots have had simulator training, making problem identification difficult even given knowledge of the earlier Lion Air incident.

I imagine most software developers and engineers have seen cost/schedule pressures lead to short cuts. If their life was at stake, I doubt that many would think self-certification that such a project complies with all relevant safety requirements is a good idea.

ShamanicFallout , , March 20, 2019 at 12:59 pm

Thank you for that. And just 'wow'. I don't really know anything about aircraft/flying but this story is really fascinating and seems to be true a sign of the times. I guess we'll know what the current 'temperature' is out there when the fallout (civil liability, criminal liability, plane orders cancelled/ returned, etc) manifests. If Boeing skates, we'll know we've got a long way to go.

Cheryl from Maryland , , March 20, 2019 at 8:15 am

The Post's article on the FAA and Regulatory Capture is incomplete. The process for the FAA (and probably MANY government agencies) started under Reagan, did not revert to safety under Clinton (make government smaller and all that), and then accelerated under Bush II in 2005 (not a bi-partisan time). In particular, big changes to the FAA were made in 2005 that were executive in nature and did not require Congressional approval. CF: https://www.seattletimes.com/business/delegating-aircraft-safety-assessments-to-boeing-is-nothing-new-for-the-faa/

drfrank , , March 20, 2019 at 9:22 am

Yes, but. Part of what we are seeing in this case is a rush to judgement based on less than full evidence and analysis, and so prejudices and ideological positions (which I share actually) are plainly to be seen (and perhaps worth analyzing). "Crapification," says the headline.

Yet, I cannot say that I disagree with BA's business decisions as such in a highly competitive environment as regards the tradeoffs in the development of the MAX and there is a certain absurdity in the idea that Boeing would knowingly take a high reputational risk, in an industry where failure is front page news (contrast banking or pharma failures).

I have no reason to believe that an FAA fully in charge of all aspects of certification would have prevented these crashes, as banking and drug regulators have not kept us safe either. What seems worthy of note is that neither the airlines that buy the product nor the foreign aviation regulators nor pilots' associations do their own testing and certification, in an area where more redundancy would be good. Nor is there any kind of private third party watchdog testing, like a Moody's or S&P, evaluating potentially toxic products and services for a price.

Finally, I suppose we have to ask ourselves why the price of the stock is holding up fairly well even as the news flow on these tragedies is helping the short sellers. Lest we forget that Boeing is the 5th largest defense contractor in the US.

oaf , , March 20, 2019 at 10:01 am

Is engine throttle automated in the flight regime where these accidents occurred? Or are the pilots controlling power? Is the lag in thrust response interacting with the MCAS in an unanticipated way? Aerodynamic lift of nacelles is mentioned several times; there is another lift factor relating to the thrust angle; which is not necessarily aligned with the fuselage axis in flight. Departure procedures often require speed limits and altitude changes; so it is likely multiple power demand levels get set through takeoff and climb until cruise altitude is reached. Does Autopilot/Flight Director integrate with MCAS; or are they independent systems? Even without touching flight controls; power changes affect pitch forces. I am wondering if consequences of manual power changes on an otherwise automated departure were adequately investigated in the certification of the MCAS. Please excuse my ignorance of these details.

oaf , , March 20, 2019 at 11:18 am

Regulatory elements that have been getting attention include the use of *standard* weights for passengers; IIRC, 170 lbs for US (and possibly ICAO) passengers comes to mind . Many aircraft accidents have an element of disregard for proper weight distribution, either accidental, or negligent. For instance: Tail-heavy bad! Intentional loading outside of subsequently approved C.G. and/or max weight limits is a common, if not ubiquitous part of determining certification limits.There is a safety factor in the certificated limits; but banking on this; using estimates; is proven risky or disastrous when actual weights, and distribution thereof, is uncertain. Cargo with false weight values could also occur. One might find incentive to claim lower weights than actual to save on freight charges. How many 170 lb passengers do you know? I am not familiar with scales being used to check aircraft weight and balance before takeoff; only calculations; based on formulas and charts.
Scales ARE USED during certain maintenance procedures; for airworthiness certificates; and following certain modifications.

Jack , , March 20, 2019 at 11:50 am

Here is an interesting article by a professional pilot blogger Patrick Smith. He calls the 737, "the Frankenplane", and traces its history all the way back to the 707 in 1959. According to Smith, "We wonder if the 737 MAX even needed to exist in the first place. Somewhere deep down, maybe the heart of this whole fiasco is Boeing's determination to keep the 737 line going, variant after variant, seemingly forever. I'm not saying this is the reason for what happened in Indonesia or Ethiopia, but the whole 737 program just seems misguided and unnecessary. Instead of starting from scratch with a new airframe, they took what was essentially conceived as a regional jet in the mid-1960s, and have pushed and pushed and pushed the thing -- bigger and bigger engines, fancier avionics and more seats -- into roles it was never intended for. The "Frankenplane," I call it.
See the article here .
As a pilot myslef, I feel the airlines have a lot to answer for as well. Their constant "dumbing down" of pilots, which comes from making pilots work long hours for low pay, results in pilots not being the best of the best. And training is a cost to airlines. Training doesn't result in revenue. Better to have the pilots actually flying, hence Boeing selling this new version of the 737 as not requiring further training. But, training and practice is everything in flying. Flying a plane is actually a relatively easy skill to acquire. Most people can learn to fly a trainer in 5 hours or so. Most people solo (fly the plane without an instructor) with only 10-20 hours of instruction. It takes a lot longer to learn how to drive a car for most people (45 hours is the average). So it really isn't that difficult .until something goes WRONG. That is when the training kicks in. An often quoted flying truism, is that flying is "99% boredom and 1% stark terror". What happened with these two crashes is that you had some inexperienced pilots who were not fully trained on the systems (a lot of that blame goes to Boeing). When things start going wrong, information overload can easily occur if you have not been properly trained, even with two pilots.

Carey , , March 20, 2019 at 1:44 pm

Maybe this is the link mentioned above:

http://www.askthepilot.com/ethiopian-737max-crash/

allan , , March 20, 2019 at 11:57 am

"you had some inexperienced pilots"

The captain, Yared Getachew, had more than 8,000 hours of flying under his belt.
(It is true that the first officer only had 200.)

You have to wonder how the average US commercial pilot would have done under the circumstances.

(Reply to Jack at 11:50 am)

EoH , , March 20, 2019 at 3:15 pm

Thanks for that correction. We can expect a deluge of blame-the-other-guy PR from the aircraft manufacturer and certification agencies. Billions are on the line for Boeing if a cascade of judgments it made materially contributed to these crashes. The usual strategic corporate bankruptcy might follow. I presume Boeing is considered much TBTF by the USG.

JerryDenim , , March 20, 2019 at 12:19 pm

Great job summarizing and connecting dots Lambert. I might add one more bullet point though. Items #5 and #6 were aided, abetted and perhaps somewhat necessitated by 'ye ole NeoLiberal playbook' you spoke of, but more specifically, the current regulatory FAA/Boeing milieu is attributable to years of budget cuts and strategically applied austerity. The old Grover Norquist, ' not destroyed, but small and weak enough to be drowned in a shallow bath' saw. Exact same thing we've witnessed with other formally effective regulators like the EPA, the SEC or the IRS.

I remember having a conversation with an FAA maintenance inspector, an old timer, about ten years ago. He looked to be upwards of seventy, and he told me he was eight years beyond eligibility for a full retirement. He informed me that a few years back he was supervising a team of ten people that was now down to two. Their positions had been cut outright or eliminated after they resigned or transferred when the remaining positions were made miserable by the increased workload and bureaucratic headaches. The inspector said he had not retired yet because he knew he would not be replaced and he felt the work was important. I asked him if his department was atypical and he said it was not. Same thing, across the board, with the exception of the executive level desk jobs in DC and Oklahoma City. Readers can draw their own conclusions but when it comes to funding Federal regulators, I believe you should never attribute anything to incompetence that you could attribute to malice.

No doubt Neo-Liberal ideologues in high places pushing the corrosive "customer/client" model of regulating along with the requisite deference and obsequious to industry played a large role as well.

"Chickens coming home to roost" Indeed.

EoH , , March 20, 2019 at 2:44 pm

I understand the published materials to boil down to this possible scenario:

To remain competitive and profitable, Boeing needed to improve the fuel efficiency and flight characteristics of a mainstay medium-haul aircraft. Instead of designing a new aircraft, it modified an existing airframe. Among other changes, it added more powerful engines, new lift and control surfaces, and enhanced computerized controls.

The modified Max aircraft **did not** fly like the earlier version. That meant Boeing would have to disclose information about those changes. It would need to train pilots in them, in how to integrate new protocols into existing ones, and in what to do if the enhanced computer controls malfunctioned, requiring the pilot to regain manual control.

These steps could have increased cost and time to market, might have involved new certifications, and might have reduced sales. Boeing appears to have relied on enhanced computer flight controls to avoid them.

The newly enhanced computerized controls meant that the computer would do more of the actual flying – the part that was different from the pre-Max version – and the pilot less. It gave the pilot the virtual – but not real – experience of flying the older aircraft, obviating the need, in Boeing's judgment, for additional disclosures and training. That worked except when it didn't. (See, driverless car development.)

One possible failure mode derives from the Max's reliance on a single sensor to detect its angle of attack, the aircraft's nose-up or nose-down deviation from level flight. Reliance on a single sensor would make it harder to detect and correct a fault. (Boeing's version of commitment to "absolute" safety.)

In these two crashes, the sensor may have given a faulty reading, indicating that the aircraft's nose was higher than it should have been for that stage of flight, an attitude that risked a stall. The programmed response was to drop the nose and increase power. A normal reaction to a real stall, this response can become catastrophic when unexpected or when the pilot cannot correct it.

In both crashes, it appears that the pilot did attempt to correct the computer's error. Doing so, however, reset the automated control, leading the computer to reread the faulty sensor to mean "stall." It again dropped the nose and increased speed. The pilot recorrected the error in what would become a deadly loop, a tug of war that ended in a powered dive into the ground.

Seal , , March 20, 2019 at 3:52 pm

This is like #Immelt at #GE

VietnamVet , , March 20, 2019 at 4:17 pm

What is interesting is what comes next. The FAA was drowned in the bath tub along with the EPA, FDA, SEC, etc. It doesn't have the money or staff to recertify the 737 Max. An incompetent Administration that is interested only in extracting resources is in charge. It is clear that Boeing hid the changes to save money and time. Adding a warning indicator that the flight sensors are not in the correct position to the pilot's display, including it in the preflight checklist, plus flight training would have prevented the Indonesian crash. But these changes would have raised questions on the adequacy of the new flight critical system and may have delayed certification overseas. It is easy to overlook problems if your paycheck is at risk. The Boeing managers who pushed this through deserve jail time for manslaughter.

Canada said it will recertify the 737 Max before it flies in their airspace. China won't recertify the Max until the Trump Trade War is over. Also, a delay boosts their replacement airliner. If Chicago and DC paper this over like the 2008 Great Recession; the final nails will have been hammered into the coffin of the hegemon. Trust is gone

[Mar 23, 2019] The Other Recent Deadly Boeing Crash No One Is Talking About - Slashdot

Mar 23, 2019 | tech.slashdot.org

The Other Recent Deadly Boeing Crash No One Is Talking About (nymag.com) 65 Posted by EditorDavid on Saturday March 23, 2019 @01:34PM from the searching-for-answers dept. New York magazine's Intelligencer remembers last month's crash of a Boeing 767 carrying cargo for Amazon and the U.S. Postal Service -- and shares a new theory that its cause wasn't a suicidal pilot or an autopilot malfunction:

In online pilot discussion forums, a third idea has been gaining adherents: that the pilots succumbed to a phenomenon called somatogravic illusion, in which lateral acceleration due to engine thrust creates the sensation that one is tipping backward in one's seat .

The effect is particularly strong when a plane is lightly loaded, as it would be at the end of a long flight when the fuel tanks are mostly empty, and in conditions of poor visibility, as Atlas Air 3591 was as it worked its way through bands of bad weather. The idea is that perhaps one of the pilots accidentally or in response to wind shear set the engines to full power, and then believed that the plane had become dangerously nose-high and so pushed forward on the controls.

This would cause a low-g sensation that might have been so disorienting that by the time the plane came barreling out of the bottom of the clouds there wasn't enough time to pull out of the dive.

It has been speculated that this might have been the cause of another bizarre and officially unsolved accident from three years ago: Flydubai Flight 981, which crashed 2016 in Rostov-on-Don, Russia....

While it's still too early to draw any kind of conclusions about Atlas Air 3591, the possibility exists that a firm conclusion will never be drawn -- and if it is, the cause could turn out not to be a design flaw or software malfunction that can be rectified, but a basic shortcoming in human perception and psychology that cannot be fixed as long as humans are entrusted with the control of airplanes.


BobC ( 101861 ) , Saturday March 23, 2019 @02:26PM ( #58321314 )

Re:Flying by Instruments? ( Score: 5 , Informative)

Yes, commercial pilots are taught to "fly their instruments". General aviation pilots may enjoy more "seat-of-the-pants" flying, but even they are taught to trust instruments over human perceptions, which are easily fooled, as even simple demos will show.

I used to work for an aircraft instrument maker, and our user interfaces, everything the pilot interacts with, got more care and attention than the rest of the instrument. Of course we had to display nothing but totally accurate data, and do so promptly, but we also had to do so in ways that were obvious and clear, so the pilot can take in the most important information with a quick glance.

The pilot's standard "scan" is perhaps the most-trained skill. To look at everything on the instrument panels and outside the windows often enough to not miss anything, yet slow enough to take in all vital information.

When things get hectic, the pilot still does this scan, interrupting it as needed to deal with situations, but still doing it. Because, as the saying goes, "trouble often comes in threes": Stopping everything to handle an initial situation may mask what's really going on, and lead to a cascade of failures.

With ever more data being aimed at the pilot, there is a distinct risk of information overload, especially when tired, or during tense but otherwise normal situations, such as take-off, landing, or flying through turbulence. This overload often encourages the pilot to rely more on signals from the body, which need less conscious processing, rather than focus on all that data.

Here, again, is where commercial pilots receive extra training, but perhaps not often enough. This is one of the factors that keep commercial pilot mandatory retirement ages so low: The risk of overload increases with age, even when all other factors match those of a younger person.

Plus, staying in peak training for decades is fatiguing, and relatively few can do so "naturally". Which is one of the reasons we're running out of commercial aircraft pilots.

It may seem counter-intuitive, but this overload risk is often handled by adding more automation, more automatic systems to "help" the pilot. So much so that actually manually "driving" a commercial aircraft, with hands on the controls, is an increasingly rare part of a normal flight.

Our instruments also tried to take pilot fatigue into account, saving our brightest and loudest alarms only for the most desperate situations, to punch-through that overload to help ensure prompt and correct reactions.

One product I worked on was a TAWS (Terrain Awareness and Warning System) instrument, which basically stayed quiet unless there was a risk of the pilot flying into the ground, to help prevent "CFIT" accidents (Controlled Flight Into the Ground). It has special modes for take-off and landing, though our instrument was designed to actually *avoid* making the pilot depend on it's display: Useful for information as part of the scan, but not to be used to navigate the aircraft. Our main function was to provide visual and audible alerts only when needed.

I believe 100% of US commercial aircraft (and perhaps now even biz-jets) are required to have TAWS on-board and active. Any TAWS-equipped plane approaching the ground outside of an approved approach path for a know airport will give the pilot "Terrain ahead. Pull up! Pull up!" alerts until the hazard no longer exists.

Unfortunately, if a stall is also immanent, the pilot will simultaneously receive an alert to push the nose down. And increase power. And other things as well. An overload of alerts, which a skilled and calm pilot will respond to with the most correct action. But which can overload a stressed or tired pilot, or one with the beginnings of a cold or flu.

The thing is, every alert can be silenced, to reduce the confusion and distractions. But an overloaded pilot can forget even this simple aid to keeping full awareness and control.

This is a big part of why pilots are so often blamed for crashes: Because, for whatever reason, they failed to take the appropriate action demanded by the situation.

As a former aircraft instrument developer, I was always well aware of my instruments' contribution to the pilot's mental load. Our teams agonized over tiny changes to font selection and sizes and colors and contrast. And how many button presses were needed to accomplish a function. And how easy it was to switch modes or silence an alert. Which is why we had a massive alpha test system that got even the earliest versions of our instruments in front of pilots with experimental aircraft and ratings. (Experimental aircraft and the pilots who fly them are rare and precious things to instrument developers, even when we owned and operated our own corporate test aircraft.)

Fortunately, our efforts paid off, and pilots (and the FAA) loved our instruments. Some of our design innovations were adopted into instrument regulations by the FAA, so all manufacturers had to build to our standard. But always hovering over our success was the fear of news of the crash of a plane flying our instruments. And the fear that information overload from our instruments would be shown to be a contributing factor.

Which is why part of our required reading was any and all reports (mainly NTSB and NASA) that even mention pilot overload. Even a decade after leaving that industry, I still read these reports.

rnturn ( 11092 ) , Saturday March 23, 2019 @01:55PM ( #58321174 )
Oh... Are we back to t"pilot error" excuses again? ( Score: 2 )
``...the cause could turn out not to be a design flaw or software malfunction that can be rectified, but a basic shortcoming in human perception and psychology that cannot be fixed as long as humans are entrusted with the control of airplanes.''

On the other hand, we have two recent examples of what can happen when a flight computer is given control of the plane and it is unable to avoid doing something stupid like -- as the old euphemism goes -- `make inadvertent contact with the terrain'.

Until we know more about how this was supposed work and exactly why it didn't , I think I'll trust the human with his hands on the controls more than the flight computer.

(Thankfully, the occasions for my needing to fly are few and far between.)

Futurepower(R) ( 558542 ) writes: < MJennings.USA@NOT_any_of_THISgmail.com > on Saturday March 23, 2019 @01:39PM ( #58321082 ) Homepage
Design errors in the 737 MAX-guidance system ( Score: 2 )

Everything I've been able to learn has indicated that there are major design errors in the guidance system of the Boeing 737 MAX-8

ebonum ( 830686 ) , Saturday March 23, 2019 @02:02PM ( #58321206 )
Artificial horizon? ( Score: 3 )

If you look at it and you are headed down (and you have good airspeed), you don't need to keep trying to nose down - regardless of what your senses are telling you.

What about looking at how the altimeter is changing?

The artificial horizon gives you a lot of information when your sense of direction is playing tricks on you (in the clouds and feeling like you are going up,down, rolling, etc.)

[Mar 21, 2019] The Lives the Free Market Took

Mar 21, 2019 | jacobinmag.com

BY
BRANKO MARCETIC

The people who died in last Sunday's plane crash were not just killed by Boeing. Their deaths stemmed from an ideology that puts business interests above human life.


... ... ...

Boeing is not just a lobbying juggernaut that donates prodigiously to politicians all over the country; it's also a company in which numerous members of Congress are personally invested, and it cultivates mutually beneficial financial relationships with top officials . Meanwhile, as William McGee of Consumer Reports told Amy Goodman , these issues are rooted in the FAA's lax, business-friendly oversight of the very industry it's meant to regulate, a case of regulatory capture that stretches back long before this administration.

Whatever the black box from the Ethiopian Airlines flight reveals, the lives put at risk by lax regulations are not apolitical tragedies; they are caused by an administration that time and again has shown itself to be callous and indifferent to the lives of the people it claims to fight for, whether Puerto Ricans left to fend for themselves in the wake of natural disaster, or federal workers used as bargaining chips in a game of political brinkmanship.

But more than that, they are victims of an ideology that tells us the greatest insult to human life is not the death and misery that comes from unchecked greed, but efforts to democratically control it through public institutions. The real problems aren't unsafe products, pollution, dangerous chemicals, and the like, we're told, but "red tape" and the taxes used to fund the bodies regulating them. Meanwhile, activists like Nader have long been painted as " wacky " extremists in the pursuit of some quixotic ideological crusade simply for trying to do things like prevent people from dying in cars without seat belts .

When social-democratic policies are enacted, wealthy people take less home after taxes, and businesses are inconvenienced by regulations meant to secure the common good. But when neoliberal policies are put in place, people and their families go hungry, they lose their homes, they get injured on the job, they get sick, and, sometimes, they die. The public should be enraged by the actions of governments like Trump's and Trudeau's; but we should also be angry at a political narrative that tells us trying to stop such tragedies is "ideological" instead of common sense. We owe it to the crash victims to create no more of them.


[Mar 21, 2019] The Boeing 737 Max 8- a Case Study in Uncreative Destruction

Mar 21, 2019 | www.counterpunch.org

On May 12, 2010, the New York Times ran an article by economics editor Catherine Rampell titled "The New Poor: In Job Market Shift, Some Workers Are Left Behind"that focused on the largely middle-aged unemployed who will probably never work again. For example, 52 year old administrative assistant Cynthia Norton has been working part-time at Walmart while sending resumes everywhere but nobody gets back to her. She is part of a much bigger picture:

Ms. Norton is one of 1.7 million Americans who were employed in clerical and administrative positions when the recession began, but were no longer working in that occupation by the end of last year. There have also been outsize job losses in other occupation categories that seem unlikely to be revived during the economic recovery. The number of printing machine operators, for example, was nearly halved from the fourth quarter of 2007 to the fourth quarter of 2009. The number of people employed as travel agents fell by 40 percent.

But Ms. Rampell finds the silver lining in this dark cloud:

This "creative destruction" in the job market can benefit the economy.

Pruning relatively less-efficient employees like clerks and travel agents, whose work can be done more cheaply by computers or workers abroad, makes American businesses more efficient. Year over year, productivity growth was at its highest level in over 50 years last quarter, pushing corporate profits to record highs and helping the economy grow.

The term "creative destruction" might ring a bell. It was coined by Werner Sombart in his 1913 book "War and Capitalism". When he was young, Sombart considered himself a Marxist. His notion of creative destruction was obviously drawn from Karl Marx, who, according to some, saw capitalism in terms of the business cycle. With busts following booms, like night follows day, a new round of capital accumulation can begin. This interpretation is particularly associated with Volume Two of Capital that examines this process in great detail. Looking at this material, some Marxists like Eduard Bernstein drew the conclusion that capitalism is an infinitely self-sustaining system.

By 1913, Sombart had dumped the Marxist commitment to social revolution but still retained the idea that there was a basis in Karl Marx for upholding the need for "creative destruction", a view buttressed by an overly positive interpretation of this passage in the Communist Manifesto:

The bourgeoisie cannot exist without constantly revolutionizing the instruments of production, and thereby the relations of production, and with them the whole relations of society. Conservation of the old modes of production in unaltered form, was, on the contrary, the first condition of existence for all earlier industrial classes. Constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones.

By the 1930s, Sombart had adapted himself fairly well to the Nazi system although he was not gung-ho like Martin Heidegger or Carl Schmitt. The wiki on Sombart notes:

In 1934 he published Deutscher Sozialismus where he claimed a "new spirit" was beginning to "rule mankind". The age of capitalism and proletarian socialism was over and with "German socialism" (National-Socialism) taking over.

But despite this, he remained critical. In 1938 he wrote an anthropology text that found fault with the Nazi system and many of his Jewish students remained fond of him.

I suspect, however, that Rampell is familiar with Joseph Schumpeter's use of the term rather than Sombart since Schumpeter was an economist, her chosen discipline. In 1942, he wrote a book titled Capitalism, Socialism and Democracy that, like Sombart, retained much of Karl Marx's methodology but without the political imperative to destroy the system that utilized "creative destruction". He wrote:

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation–if I may use that biological term–that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in. . . .

The wiki on Schumpeter claims that this theory is wedded to Nikolai Kondratiev's "long wave" hypothesis that rests on the idea that there are 50 year cycles in which capitalism grows, decays and enters a crisis until a new round of capital accumulation opens up. Not only was the idea attractive to Schumpeter, it was a key part of Ernest Mandel's economic theories. Unlike Schumpeter, Mandel was on the lookout for social agencies that could break the cycle and put development on a new footing, one based on human need rather than private profit.

Returning to Rampell's article, there is one dimension entirely missing. She assumes that "creative destruction" will operate once again in order to foster a new upswing in the capitalist business cycle. But how exactly will that manifest itself? All the signs point to a general decline in business activity unless there is some kind of technological breakthrough equivalent to the computer revolution that fueled growth for decades. Does anybody believe that "green manufacturing" will play the same role? I don't myself.

One thing does occur to me. Sombart's book was written in 1913, one year before WWI and was even titled eerily enough "War and Capitalism". One wonders if the Great War would be seen as part and parcel of "creative destruction". War, after all, does have a knack for clearing the playing field with even more finality than layoffs. Schumpeter wrote his in 1942, one year into WWII. My guess is that he did not theorize war as the ultimate (and necessary?) instrument of creative destruction but history will record that WWII did introduce a whole rafter of new technology, including aluminum, radar, nuclear power, etc., while bombing old modes of production into oblivion. What a great opportunity it was for capitalism to rebuild Japan, especially after firebombing and atomic bombs did their lovely work.

In my view, there's something disgusting about this "creative destruction" business especially when it is articulated by a young, pro-capitalist Princeton graduate like Catherine Rampell who wrote for Slate, the Village Voice and other such b-list publications before crawling her way up into an editorial job at the NYT. She clearly has learned how to cater her reporting to the ideological needs of the newspaper of record, growing more and more reactionary as the crisis of capitalism deepens.

[Mar 21, 2019] Neoliberalism at 30,000 Feet

Mar 21, 2019 | jacobinmag.com

hen United Airlines flight 1462 made an unexpected landing in Chicago last month, it was not due to mechanical issues, weather conditions, or flight logistics, but a battle over legroom in the aisles. As one passenger tried to recline her seat and another used a $20 device called a Knee Defender to prevent the occupant ahead of him from leaning back, the battle over personal space descended into a scuffle. The pilot opted to make an additional stop to remove the unruly passengers.

Flight 1462 hasn't been alone. Not just the random dispute of irate travelers, similar flights have been diverted because of the airlines' frenzied drive to wring as much money out of customers as possible. Airlines are increasingly cramming more passengers onto each flight, termed "densification," and regularly overbooking flights. Any aspect of a flight that was once provided free of charge -- from a checked bag to a complementary drink to using a credit card to pay for a ticket -- can now be charged à la carte.

So relentless has this nickel and diming been that when news reports claimed the discount airline Ryan Air was about to start charging for in-flight bathroom use, many people took them seriously. But the story wasn't true -- it was all a ploy for free press from a company unwilling to pay for advertising, help disabled passengers, or provide ice for drinks.

Such frugality is only one of the problems wrought by airline deregulation. If the greatest benefit of deregulation has been that more people can afford to fly, it has come at the cost of increased tumult within the industry and reduced pay for workers.

Before the airlines were deregulated under President Jimmy Carter, the Civil Aeronautics Bureau (CAB) maintained flight pricing structures, airport gate access, and flight paths. There were rules that stipulated which airlines could compete in which market and what prices they could charge. Loosening restrictions meant abandoning the CAB and its pricing structures, and allowing an unmediated flow of competition.

With fewer restrictions, upstart fly-by-night airlines could compete against major airlines like American/US Airways, United, Delta, Alaskan, and Hawaiian Airways. Such competition, conservative and liberal advocates claimed, would bring down flight costs, providing more savings and convenience to the customer.

But allowing this level of competition also unleashed chaos. While the discount airlines would win over passengers for a time by offering flights half as expensive, the major airlines would respond by slashing their prices in an attempt to drive the upstarts out of business.

By drastically reducing ticket costs, the major airlines would take on an unsustainable amount of debt that, combined with the loss of business to the new entrants, would lead to layoffs or bankruptcy. Pension funds were then raided and labor contracts voided to pay for the price wars. With each airline company collapse, thousands of employees were laid off, decimating union membership.

To compete, the legacy airlines also drove down the salaries of their pilots, and cut benefits and vacation time. Besides a reduction in compensation, a two-tiered pay system has been set up with decent pay for incumbent pilots and markedly low wages for new entrants. Starting salaries for pilots are now as low as $15,000 a year, even as CEO pay rises inexorably. Remarking on a career in which he had seen his pay cut in half and his pension eliminated, captain Sully Sullenberger told the BBC in 2009 that he did not know "a single professional pilot who wants his or her children to follow in their footsteps."

While unions were still strong in the industry, they were constantly embroiled in bitter labor disputes. Between the voided contracts and the hemorrhaging membership caused by regular bankruptcy, they were left fighting to maintain wage standards in an unnecessarily competitive industry.

The only way discount airlines could offer such low prices was by paying their workers less, using less experienced pilots and sometimes non-unionized labor, offering fewer frills, and running spartan operations that only serviced a handful of routes with a single type of jet liner (thus simplifying pilot and mechanic training). Instead of a single union representing employees across the industry -- typified by the Air Line Pilots Association (ALPA), which represented a majority of pilots -- some discount airlines maintained relationships with offshoot unions with smaller membership rolls and less leverage.

The discount airlines also depended on secondary, class-B airports that charged less in landing fees. But those discounts eventually disappeared when the secondary airports no longer needed to cut their fees to attract business.

To maintain their dominance over the market, the major airlines shifted from a direct city-to-city flight standard to the hub-and-spoke system of today. The hub-and-spoke setup allowed large centralized airports like Dallas-Ft. Worth and Atlanta to be ruled by a single company that determines which flights can use which terminals and at what cost.

While the hub-and-spoke system has some benefits, it's largely inefficient, dependent as it is on multi-stage connecting flights. Combined with the need to cut costs, it would also cause longer airport delays as planes were left waiting on the tarmac to make sure all passengers from connecting flights made it aboard. A single delay in a connecting flight could throw passengers' itineraries askew, leaving them stuck in a random airport overnight.

The major airlines used other tricks to keep out nascent airlines. They paid off travel agents and travel reservation sites to give preference to their particular airline. They introduced frequent flier miles to maintain brand allegiance.

Upstart discount airlines like Southwest were able to survive the vicious price wars by leaning on quality of service and direct flights, but most did not. The list of companies that were liquidated, temporarily or permanently, as a result is impressively long considering what it takes to start an airline: America West, PanAm, TransWorld, Western, Piedmont, Frontier, Northwest, National, Texas International, People Express, ValuJet, Air Florida, Eastern, Braniff, Skytrain, Pacific Southwest, Western Pacific, and many more.

Once bankrupt, the major airlines then bought the upstarts, creating an effective oligopoly. So much for competition.

Already on a spending spree during the heady years of the 1990s dot-com boom, buying up failed companies only saddled major airlines with more debt. While most people assume that the airlines had to be bailed out in 2001 because of the decrease in traffic after the September 11 attacks, it was also because the airlines were insolvent from previous financial problems, largely as a result of the price wars.

The actions of the major airlines may seem ruthless, but they were largely protecting their position in a deregulated industry that allowed the discount airlines to undercut labor standards just to offer cheaper prices to customers. They were defending themselves from disruption.

Considering the skill, education, and investment needed to maintain a safe and reliable airline, it is not exactly a business that needs to be disrupted. Running an airline is labor intensive, and it only turns a profit at random intervals. There's little money to be skimmed off.

With profit margins so thin, tickets on a half-empty flight have to cost twice as much as a fully booked one. Which is why, for a time, smaller cities that weren't necessarily travel hubs bore the brunt of deregulation. Routes that weren't fully booked experienced skyrocketing flight costs, which, for small-town travelers, was a huge disincentive to fly.

The bilking of transportation costs to and from smaller cities after a run of chaotic competition is eerily similar to what happened during the railway mania of the 1800s. Investors rushed to build rail lines everywhere and anywhere while money was flush. But once cash became tight, the rail industry used their monopoly power to charge exorbitant prices for anybody trying to ship in and out of smaller towns like Cincinnati. Such predatory pricing is what led to transportation regulation in the first place.

Since the 2001 airline bailout, things have calmed down a bit. It no longer costs $600 to fly from New York to Pittsburgh. Fewer discount airlines are entering the market, and the handful that are still in operation work with the major airlines on various routes (e.g. "flight provided by Frontier"). The price wars have settled to a quiet struggle played out on online travel registration websites like Kayak.com and Hipmunk.com, which have wholly replaced the job of travel agents.

But for airlines, the lower revenue from cheaper tickets has to be made up somewhere, and convenience may be the easiest element to remove. Airlines are pushing petty indignities on passengers and flight attendants by way of a million miscellaneous charges. Half the time, the discounts saved by cheaper tickets from deregulation are recouped in add-on fees. Eventually airlines may just offer extra-saver flights devoid of the most basic accommodations and simply force passengers who can't afford first-class seats to be stacked in the cargo hold like cord wood.

So what's the alternative? The airline industry is close to being a natural monopoly, there's little reason to foster competition. Indeed, the industry would benefit from nationalization or a well-regulated public option. At the very least, more regulation is necessary.

Without subsidization and some rules about flight costs, there is little incentive for the airline industry to provide affordable flights to locations that aren't fully booked. The irony is that we already subsidize airline travel. It just occurs through bailouts and bankruptcies after each airline has fought tooth and nail for market dominance. Public funds wind up paying for a wasteful, inefficient system characterized by irrational, destructive competition.

Through regulation or more aggressive means, it's quite possible to ensure good wages and working conditions and safe, affordable, reliable service -- all without blackout dates, three layovers, or all-out battles for legroom.

[Mar 21, 2019] With Personal Connection to Crash, Ralph Nader Takes on Boeing - WSJ

Mar 21, 2019 | www.wsj.com

He has long been a vocal critic of the Federal Aviation Administration, saying the agency lacks the resources and willpower to aggressively police airlines and manufacturers.

Mr. Nader said Boeing may be exposed to civil and possibly criminal liability. After the first fatal crash in October -- a Lion Air flight that crashed into the Java Sea minutes after takeoff -- company officials "were put on notice about the problem" with an automated stall-prevention system that can misfire and override pilot commands by repeatedly pushing down an aircraft's nose, he said.

The Justice and Transportation Departments are scrutinizing Boeing's dealings with the FAA over safety certifications, people familiar with the matter have said.

... ... ...

Mr. Nader has expressed his concerns to lawmakers and former regulators, and called for congressional hearings. Before the U.S. grounded the planes last week, he championed the idea of a sweeping boycott of all versions of 737 MAX aircraft. He also has stressed the importance of having Mr. Muilenburg, Boeing's CEO, testify on Capitol Hill about safety issues with the fleet.

Criticizing Boeing's original design of the automated flight-control feature, dubbed MCAS, Mr. Nader said it reflected a misguided view driven by engineering overconfidence and called it "the arrogance of the algorithms."

[Mar 21, 2019] Ralph Nader's Grandniece Died in Ethiopian Plane Crash; Now He Is Urging Boycott of Boeing Jet Democracy Now!

Mar 21, 2019 | www.democracynow.org

... ... ...

RALPH NADER : Boeing is used to getting its way with the patsy FAA . And this time, however, it's in really hot water. If it continues to dig its heels in, it's going to expose itself and its executives to potential criminal prosecution, because they are now on notice, with two crashes -- Indonesia and Ethiopia. There's probably a lot more to come out in terms of the technical dissent, in the, what was called, "heated discussions" about the plane software between the FAA , the pilots' union, Boeing. And you can't suppress technical dissent forever. And Senators Markey and Blumenthal are calling for the release of all the relevant information. And while that happens, the planes must be grounded. You see, they're on notice now. This is the future of passenger business for Boeing. They've got orders for over 3,000 planes from all over the world. They've produced and delivered about 350. Southwest is the leading owner and operator of these planes. It's digging its heels in, and so is American Airlines, I believe, and Air Canada. And Boeing is not going to get away with this, because this is not some old DC-9 about to be phased out. This is their future strategic plan. And they better own up. 2013, they grounded the 787 because of battery fires, and they had about 50 or 60 of those planes. So, there's plenty of precedent.

And the most important thing that people can do is: Do not fly this plane, the 737 MAX 8 and 9. Ask the airline, when you book the flight, whether it's that plane. The airline should not dare charge you for reservation changes. And I'm calling for a boycott of that plane. If several hundred thousand air passengers boycott that plane and there are more and more empty seats, that will do more to bring Boeing around than the patsy FAA and a rather serene Congress, which, by the way, gets all kinds of freebies from the airlines that ordinary people don't get. We've sent a survey last year, twice, to every member of Congress, asking them to disclose all these freebies. We didn't get one answer. And that helps account for, over the years, the total reluctance of members of Congress even to do such things as deal with seat size, restroom space and other conveniences, never mind just the safety of the aircraft. So, this is important for consumers. Just don't fly 737 MAX 8 or 9. Make sure that you're informed about it. And for up-to-date information, you can go to FlyersRights.org . That's run by Paul Hudson, who lost his daughter in the Pan Am 103, 30 years ago, and has been a stalwart member of the FAA Advisory Committee. And that's where you get up-to-date information, FlyersRights.org .

JUAN GONZÁLEZ: Well, we're also joined by William McGee, who's the aviation adviser for Consumer Reports . Could you give us your perspective on what's happened here? And also, could you expand on what Ralph Nader was talking about, about the use of artificial intelligence in these new planes?

WILLIAM McGEE: Sure, absolutely, Juan. You know, there are so many unanswered questions here, but many of them are focused on the time period between the first crash in late October with Lion Air and the crash on Sunday with Ethiopian. Again, for perspective here, as Ralph noted, we're not talking about old aircraft. This is an airplane that's only been in service since 2017. This is the Boeing 737 MAX 8, a recent derivative of the 737. Now, in that time period, the aircraft that crashed in October was 2 months old; the one that crashed on Sunday was 4 months old. This is really unprecedented in all the years that I've been in this industry. We don't see brand-new airplanes crash on takeoff like this under similar circumstances.

... ... ...

WILLIAM McGEE: Absolutely. And, you know, this goes back many years. Ralph mentioned that the FAA is known throughout the industry, even among some of its own employees and to airline employees, as the "tombstone agency." And that phrase comes from the fact that the FAA has shown time and time again that it is reluctant to act unless there's a tragedy and, unfortunately, unless there are fatalities. Now, we have seen this as recently as last year, when, you may recall, over Philadelphia, a Southwest 737 had a major engine malfunction that punctured a hole in the fuselage and killed a woman who was nearly sucked out of the aircraft. Well, what wasn't as well reported was that two years prior, that same engine type and that same airline, Southwest, same aircraft type, 737, also had an uncontained engine failure. But in 2016, there were no injuries, and there were no fatalities. Instead of the FAA stepping in and saying, "We need to, you know, have all of these engine blades inspected on this engine type, on all the carriers that are operating it," the FAA asked the industry, "What would you like to do? How long would you like to take to look at this?" And the industry dragged its heels, not surprisingly, and said, "We need more time." Two years later, in 2018, there was a fatality. And then, two days after that, last April 2018, two days after that woman was killed, the FAA issued what's called an AD, an airworthiness directive. That's what should have been issued in 2016, where that death wouldn't have happened. So, we have seen this time and again.

And you mentioned Attention All Passengers , my book. Much of the book, about a third of it, is devoted to the issue of the FAA oversight of airline maintenance. We could easily talk about it for two or three more days. But the bottom line is that the entire model of how the airline industry works in the United States has been changed dramatically in the last 15 years or so. All airlines in the United States -- without question, all of them -- in 2019, outsource some or most or just about all of their maintenance, what they call heavy maintenance. Much of it is done outside of the United States -- El Salvador, Mexico, Brazil, China, Singapore. Again, we're talking about U.S. airlines. And although the FAA , on paper, says there is one standard for maintenance of U.S. airlines, the reality is there isn't. There are waivers given all the time, so that when work is done outside the United States, there are waivers so that there are no security background checks, there are no alcohol and drug screening programs put in place. And, in fact, many -- in some cases, most -- of the technicians cannot even be called mechanics, because they're not licensed. They're not licensed as they're required to be in the U.S. So, basically, you have two sets of rules. You have one that's for in-house airline employees and another for the outsourced facilities. And this all leads back to the FAA . I have sat in a room with FAA senior officials and asked them about this, and they say that they don't think it's a problem. It is a problem.

JUAN GONZÁLEZ: And what impact --

WILLIAM McGEE: I've spoken to --

JUAN GONZÁLEZ: What impact have the mergers, of the constant mergers of airlines, had, so we basically have a handful of U.S. airlines now, on all of this?

WILLIAM McGEE: Oh, no question. We have an oligopoly now. And, you know, even just going back as far as 2001, you know, there were four or five major carriers that we don't have anymore: America West, Continental, US Airways, TWA . You know, so what we have now is effectively an oligopoly. And this is unprecedented in the history of the aviation industry here in the United States. And so, you know, even when -- Ralph was talking about boycotts, and, you know, it's an excellent idea. But it's more challenging now than it would have been a few years ago. You know, there might have been more pressure on Southwest and American 10 or 15 years ago, when consumers had more choices. Now it's getting harder and harder for consumers to express their displeasure. We saw this after the Dr. Dao incident, where that passenger was dragged off United. In the long term, it didn't really affect United's bookings. It would have in another time, but so many people are locked in, particularly outside New York, Washington, Los Angeles. They're locked in, where they don't have a lot of choice on carriers.

AMY GOODMAN : Ralph Nader, I wanted to get your response both to this news that they were working on a fix -- they know there's a software glitch, that somehow, when on automatic pilot, when the plane is taking off, it takes this precipitous dive, and the way to deal with it is to take it off automatic and put it on manual. Now, AP has been doing a deep dive into the database of pilots complaining over and over again about this problem and saying they have to quickly switch to manual to prevent the plane from nosediving into the ground. And this latest news from The Wall Street Journal that while they're talking about this glitch being fixed in the next five weeks or so, that five weeks were lost in January because of the government shutdown.

RALPH NADER : Well, that's what Paul Hudson wrote in his press release at Flyers Rights. The focus has got to be on inaccurate or nonexisting information in Boeing's training manuals and inadequate flight training requirements. They sold this plane on the basis, among other things, of having larger engines. It's supposed to be 10 percent more fuel-efficient. But they sold it on the grounds that "You don't have to really train your pilots, airlines. This is really just a small modification of the reliable 737 that's all over the world." The question really comes down to cost cutting. They tantalize the airlines by saying, "This isn't really a new plane. It's very easy to fly, if you can fly a 737." And that turned out to be quite false...

... ... ...

[Mar 21, 2019] Pentagon to probe if Shanahan used office to help Boeing

Mar 21, 2019 | finance.yahoo.com

The Pentagon's inspector general has formally opened an investigation into a watchdog group's allegations that acting Defense Secretary Patrick Shanahan has used his office to promote his former employer, Boeing Co.

Citizens for Responsibility and Ethics in Washington filed an ethics complaint with the Pentagon's inspector general a week ago, alleging that Shanahan has appeared to make statements promoting Boeing and disparaging competitors, such as Lockheed Martin.

Shanahan, who was traveling with President Donald Trump to Ohio on Wednesday, spent more than 30 years at Boeing, leading programs for commercial planes and missile defense systems. He has been serving as acting Pentagon chief since the beginning of the year, after James Mattis stepped down.

The probe comes as Boeing struggles to deal with a public firestorm over two deadly crashes of the Boeing 737 Max 8 jetliner within the last five months. And it focuses attention on whether Trump will nominate Shanahan as his formal pick for defense chief, rather than letting him languish as an acting leader of a major federal agency.

Dwrena Allen, spokeswoman for the inspector general, said Shanahan has been informed of the investigation. And, in a statement, Pentagon spokesman Tom Crosson said Shanahan welcomes the review.

"Acting Secretary Shanahan has at all times remained committed to upholding his ethics agreement filed with the DoD," said Crosson. "This agreement ensures any matters pertaining to Boeing are handled by appropriate officials within the Pentagon to eliminate any perceived or actual conflict of interest issue(s) with Boeing."

During a Senate hearing last week, Shanahan was asked by U.S. Sen. Richard Blumenthal, D-Conn., about the 737 Max issue. Shanahan said he had not spoken to anyone in the administration about it and had not been briefed on it. Asked whether he favored an investigation into the matter, Shanahan said it was for regulators to investigate.

On Wednesday, Blumenthal said that scrutiny of Shanahan's Boeing ties is necessary. "In fact, it's overdue. Boeing is a behemoth 800-pound gorilla -- raising possible questions of undue influence at DOD, FAA and elsewhere," said Blumenthal.

Shanahan signed an ethics agreement in June 2017, when he was being nominated for the job of deputy defense secretary, a job he held during Mattis' tenure. It outlined the steps he would take to avoid "any actual or apparent conflict of interest," and said he would not participate in any matter involving Boeing.

The CREW ethics complaint, based to a large part on published reports, including one by Politico in January, said Shanahan has made comments praising Boeing in meetings about government contracts, raising concerns about "whether Shanahan, intentionally or not, is putting his finger on the scale when it comes to Pentagon priorities."

One example raised by the complaint is the Pentagon's decision to request funding for Boeing 15EX fighter jets in the 2020 proposed budget. The Pentagon is requesting about $1 billion to buy eight of the aircraft.

Shanahan, 56, joined Boeing in 1986, rose through its ranks and is credited with rescuing a troubled Dreamliner 787 program. He also led the company's missile defense and military helicopter programs.

Trump has seemed attracted to Shanahan partially for his work on one of the president's pet projects -- creating a Space Force. He also has publicly lauded Shanahan's former employer, Boeing, builder of many of the military's most prominent aircraft, including the Apache and Chinook helicopters, the C-17 cargo plane and the B-52 bomber, as well as the iconic presidential aircraft, Air Force One.

This is only the third time in history that the Pentagon has been led by an acting chief, and Shanahan has served in that capacity for longer than any of the others.

Presidents typically take pains to ensure the Pentagon is being run by a Senate-confirmed official, given the grave responsibilities that include sending young Americans into battle, ensuring the military is ready for extreme emergencies like nuclear war and managing overseas alliances that are central to U.S. security.


3 hours ago Why did Trump appoint a former Boeing executive and industry lobbyist to the the Secretary of Defense to replace General Mattis? What in Shananhan's background makes him qualified to lead our nation's military forces? 3 hours ago WITHOUT A DOUBT HE DID., ALSO INVESTIGATE NIKKI HALEY'S APPOINTED ON BOEING'S BOARD TO REPLACE SHANAHAN. FOLLOW THE HOEING KICKBACKS(MONEY), TO DONALD TRUMP'S FAMILY. 3 hours ago Shanahan probably helped Boeing on the promise of a later payback just like Ms. Nikki Haley did while Gov of SC where Boeing built a new plant on her watch. She helped big time to keep the Unions out of the new Boeing plant and now Boeing is going to put her on their board of directors. Nothing like a bit of an obvious payoff. 2 hours ago Reminds me of the Bush Jr days in the White House. During the Gulf War (#2) Vice President #$%$ Cheney awarded oil company Halliburton (Cheney was CEO before accepting the VP job) to deliver meals for the troops. The contract was ?No Bid.? Why was an oil company delivering food to troops with a no bid contract? After Cheney?s Job was over being VP he went back to being CEO at Halliburton and moved Halliburton?s headquarters to Dubai. What an American! 2 hours ago Now we understand why Boeing & the FAA hesitated to ground those planes for few days despite many countries who did grounded those plane which is a precedent for a country to ground & NOT wait for the manufacturer. ONLY after Canada grounded those planes Boeing & the FAA & that's because Canada IS a the #1 flight partner of the US ! 4 hours ago Years ago there was a Boeing procurement scandal and Trump does love the swamp he claims to hate.

[Mar 20, 2019] Reuters natch, are trying to pretend it's somehow the pilot's or airline's fault, but the their own reporters show it ain't

Mar 20, 2019 | www.moonofalabama.org

FFS , Mar 20, 2019 2:26:33 PM | link

OT: Reuters natch, are trying to pretend it's somehow the pilot's or airline's fault, but the their own reporters show it ain't

https://uk.reuters.com/article/uk-indonesia-crash-exclusive-idUKKCN1R10F7

[Mar 20, 2019] Was the 737 Max problem just bad software by Stephen Bryen

Mar 18, 2019 | www.asiatimes.com

he crash of the Ethiopian Max-8 Flight 409 on March 10, 2019, resulted in the grounding of all the Boeing 737 Max series aircraft – even the last hold-out, the United States, belatedly grounded them when President Trump acted and overruled the Federal Aviation Administration (FAA) that opposed any halt to flights.

In the United States, the FAA certifies aircraft as airworthy, puts out bulletins and advisories on problems and fixes and often is the "go to" agency for many aviation flight authorities around the world.

The 737 Max series is a new version of the venerable 737, equipped with new engines and other modifications that have impacted the aircraft's performance in good ways and bad.

Almost every expert today puts the blame for both flight disasters on faulty software that took over running the plane's flight control system. Many have pointed to Boeing's alleged lack of transparency in telling pilots what to do if the software malfunctioned. In addition, there had been at least eight pilot-reported flight control incidents prior to the first Lion Air crash.

Experienced pilots

Three of the pilots on the two doomed planes each had more than 8,000 hours flying experience – quite a lot – and the pilots of the Ethiopian airlines had additional information on the plane's flight characteristics and what to do in an emergency.

While we are still awaiting a final report on last year's Lion Air crash, we do have a quite informative initial report, although it lacks hard findings. In the Ethiopian case, we only have flight track information from ground radar and some incomplete reporting on what the pilots were saying to ground control. More will become available as the flight recorders are analyzed.

Yet despite this, we can understand some of what happened and clearly it is more than a single software glitch. This may help explain why Boeing did not meet its proposed deadline of January for installing updated software. Now in March Boeing says the replacement software will be available in April. But even if it is, there are more issues involving both hardware and software.

The software which so far has received virtually all the attention is called MCAS, for Maneuvering Characteristics Augmentation System. MCAS was added to the Max-8 series because new, heavier and larger engines replaced the old engines and as a result, the updated Max planes had a strong tendency to pitch nose up.

The new engine, CFM Leap-1B, was selected by Boeing because it was much more fuel efficient than the older models, one of the big reasons customers want the 737 Max.

The new engines forced re-engineering of parts of the 737.

Fitting the new engines meant moving them forward and lengthening the front landing gear to keep the engines from scraping on the ground. In turn, this changed the plane's center of gravity and also altered the air flow on the wings.

MCAS was a band-aid to fix the pitch up problem caused by the relocated and heavier new engines. MCAS is designed to push the nose down and prevent the aircraft from going into a stall. MCAS was intended to deal only with a specific flight risk.

The problems

Here are some of the problems one finds when reviewing the Preliminary Air Accident Investigation Report on the Lion Air crash.

1. MCAS operates by receiving information from a special sensor that measures the flying angle of the plane and takes over the flight controls if the angle is too great – meaning the aircraft could stall. A stall happens when a plane has too low an airspeed and not enough lift and the plane will literally fall out of the air.

There are two sensors that measure the angle of attack or nose-up condition of the Boeing 737 Max, one that provides data to the pilot and another that provides data to the copilot. The sensors are known as Angle of Attack Sensors, or AoA.

In the Lion Air aircraft, the pilot's AoA sensor had been found to be faulty on an earlier flight as reported by the pilot. That AoA sensor was replaced and tested by aircraft maintenance before the fatal flight.

The pilot gets no console or other warnings that his AoA sensor might be faulty. The pilot can ask his copilot what reading he is getting and see if there is a difference. That is exactly what happened on the Lion Air flight.

It would appear that the MCAS software is driven by information from the pilot's sensor. If the sensor itself is not at fault, there could still be wiring and connection problems that could feed bad information to MCAS. These conditions cannot be determined in flight.

If it is true that MCAS relies on information from only one sensor, that could be a design error. Modern aircraft are famous for built-in flight system redundancy, but apparently not in the case of MCAS. In addition, the pilot cannot manually change the MCAS choice of sensor.

2. No one has yet explained why the pilot's stick shaker was running on from the start of the flight and never stopped. The stick shaker is a motor with an unbalanced flywheel that is attached to the pilot's control stick, and another is attached to the co-pilot's stick. The stick shaker is supposed to warn the pilot of a potential stall. But why was it on nearly the whole time? And why was the co-pilot's stick shaker not on?

3. The pilots are supposed to be able to shut down MCAS, which only operates when the aircraft is manually operated, by switching the electronic trim control to off. The trim control is what MCAS uses to change the nose pitch of the 737 Max. But in the Lion Air case, we know the pilots turned off the electronic trim control. But MCAS kept adjusting the trim nose down, against the pilots' wishes. Or possibly something else was driving the trim control nose down, such as a shorted circuit or bad wiring.

4. The pilots also tried turning the aircraft's autopilot on, according to the report. MCAS is only supposed to work when the autopilot is off, that is only when the plane is operated under manual pilot control. The autopilot should have disabled MCAS but apparently it did not – in fact, the Lion Air autopilot would not turn on. There is no explanation for this. Was the autopilot locked out by MCAS? Or was there some other software or hardware foul up?

5. Pilots also had a very difficult time handling the aircraft stick, meaning that the flight control stick required a great deal of force to operate, especially when the pilots were, repeatedly, trying to recover the plane that was headed nose down, gaining speed and losing altitude. Stick force "feel" in 737s is artificial and is controlled by a couple of pitot tube sensors at the rear of the aircraft above the horizontal stabilizer.

There have been repeated problems on older 737s with the planes forward and rear pitot tubes, due partly to icing conditions and to pitot tube heater problems which are supposed to remove ice. Some pitot tubes have failed because of fouling. Pitot tubes detect aircraft speed and they do this by comparing the force of incoming air on the pitot tubes to what are called static ports located elsewhere on the plane. Accidents have been attributed to faulty or fouled pitot tubes.

It is not clear how the flight speed information from the pitot tubes is integrated into the MCAS if it is. But speed information is fed into the flight computer and if it is faulty it could create ambiguities in the MCAS and the flight computer.

6. Would better pilot training have helped pilots avoid disaster? Boeing has been criticized for not initially providing information about MCAS to Max pilots, and only later issuing a bulletin on how to deal with some MCAS anomalies. Boeing also apparently did not offer any additional pilot training, leaving pilots to find their way through a morass of complex problems made worse by possible hardware and software faults.

As it is, it appears the Lion Air pilots acted in the best way they could but were unable to overcome the instability of the aircraft as it headed nose down to disintegrate in the ocean. We don't yet know how the Ethiopian Airline pilots performed, but they had the advantage of advisories from Boeing and the FAA. Still, the same final result.

What is clear is that there is more than one single cause for the two aircraft crashes. And we know that other planes experienced control problems but recovered. These disasters suggest there was a complex of problems that caused the two disasters.

Boeing's engineers need to assess the entire flight control system, the electronics and mechanics, before a satisfactory solution is at hand.

[Mar 19, 2019] Trump Forced to Ban Boeing Poor Quality of American Planes to Affect Russian Airlines the Least! - YouTube

350 planes were grounded.
Notable quotes:
"... The United States held out to the last. Trump personally requested to ground the flagship aircraft of the American company only late evening yesterday, when Canada joined the interdiction. ..."
Mar 16, 2019 | www.youtube.com

Subscribe to Vesti News https://www.youtube.com/channel/UCa8M...

Today, Russia, following Europe and America, banned the flights of Boeing 737 MAX. Dozens of countries have stopped using this aircraft after the Sunday crash in Ethiopia.

The United States held out to the last. Trump personally requested to ground the flagship aircraft of the American company only late evening yesterday, when Canada joined the interdiction.


Putin The Great , 2 days ago (edited)

737 is out of date considering the modern bigger fuel efficient engines don't fit it.They're just applying band aid to fix it's short coming. Airbus A320 has no problems with these new engines as it sits higher.

orderoutofchaos621 , 2 days ago

Sukhoi superjet 100 and MC 21 should be prioritised by Russian airlines.

Richie Blackmore. , 3 days ago

40 countries banned these aircraft from their airspace..... Comparable to the vicious, aggressive, malign, thoughtless, selfish and self aggrandising SANCTIONS the US regime and its vassals slap on innocent countries in attempts to impoverish or/and change their governments!!!!!!!!!

But this is self inflicted!!!!!! I hope the US regime can see the irony in this!!!!

0pTicaL823 , 2 days ago

Boeing should thank China for being the first to ground it's entire fleet, if one of the 96 planes that China operated, god forbid, had gone down, Boeing is done, 3-strikes you're out

statinskill , 2 days ago (edited)

Something is wrong with these planes and it is a good thing that they're being grounded world-wide until the problem is fixed. It is prudent both from the side of Rosaviatsiya and the FAA to not permit these planes to fly in the meanwhile to prevent further potential tragedies. However this is no reason to simply write off the huge fleet of Boeing 737 MAX planes in service world-wide. Right now engineers at Boeing are working on the problem and then those planes will be retrofitted asap. Personally I have no particular concerns flying in a Boeing 737 MAX once the problem is fixed.

[Mar 18, 2019] Boeing (BA) Secures $250M Deal to Support LRSO Cruise Missile

Mar 18, 2019 | finance.yahoo.com

Zacks Equity Research , Zacks March 18, 2019

The Boeing Company BA recently won a $250 million contract to offer weapon system integration for the Long Range Stand-Off (LRSO) Cruise Missile. Work related to the deal is scheduled to be completed by Dec 31, 2024.

The contract was awarded by the Air Force Nuclear Weapons Center, Eglin Air Force Base, Florida. Per the terms of the deal, this aerospace giant will provide aircraft and missile carriage equipment development and modification, engineering, testing, software development, training, facilities and support necessary to fully integrate the LRSO Cruise Missile on the B-52H bomber platform.

Attributes of LRSO

The LRSO is a nuclear-armed air-launched cruise missile, under development. It is set to replace the current AGM-86 air launched cruise missile (ALCM). LRSO, might be up to about 50% longer than Joint Air-to-Surface Standoff Missile-Extended Range (JASSM-ER) and still be suitable for internal carriage by the B-2 and B-52.

Our View

AGM-86 ALCM has been serving the U.S. Air Force quite efficiently. However, with increasingly sophisticated air defense systems developed by America's nemeses, especially Russia, demand for a new stealth nuclear-armed cruise missile capable of either destroying these defenses or penetrating them has been increasing consistently. In this scenario, the LRSO comes as the most credible stealthy and low-yield option available to the United States (according to Strategic Studies Quarterly Report).

Boeing's B-52, which has been the U.S. Air Force's one of the most preferred bombers, is completely dependent on long-range cruise missiles and cannot continue in the nuclear mission beyond 2030 without LRSO. As B-52 is expected to play a primary role in the U.S. nuclear mission for at least next decade and ALCM is already well beyond its originally planned end of life, we may expect more contracts similar to the latest one to usher in from the Pentagon in the coming days. This, in turn, should prove conducive to Boeing.

Price Performance

In a year's time, shares of Boeing have gained about 16.5% against the industry's 2.2% decline.

[Mar 18, 2019] The Boeing debacle is the latest example of regulatory capture by D. Saint Germain

Mar 15, 2019 | medium.com

How the Boeing 737 Max grounding and the Genoa bridge collapse show us that allowing companies to self-certify the safety of their products can be deadly

On Wednesday the United States joined 42 other countries in grounding Boeing's 737 Max 8 jets, days after a crash in Ethiopia of a 737 Max 8 jet left 157 people dead. The United States was a holdout, taking days longer to ground the planes than most of Europe. Our Federal Aviation Administration (FAA) said, in those days between, that they weren't grounding the planes because " the agency's own reviews of the aircraft show no 'systematic performance issues.' "

There were some conflicting accounts of exactly how the US came to ground the 737 Max 8. A statement from Boeing on Wednesday read that "Boeing has determined  --  out of an abundance of caution and in order to reassure the flying public of the aircraft's safety  --  to recommend to the FAA the temporary suspension of operations of the entire global fleet of 371 737 MAX aircraft."

In other words, Boeing claimed it was their idea / recommendation that the FAA ground the aircraft. Meanwhile, Donald Trump declared that he grounded the aircraft by executive order, forcing the FAA's hand.

Which begs the question  --  why did it take a presidential decree and/or the company itself to get the FAA, the main agency responsible for overseeing airplane transit in the United States, to ground potentially dangerous aircraft?

As James Hall, the former National Transportation Safety Board chairman, explained in the Times , in 2005 the FAA turned its safety certification responsibilities over to the manufacturers themselves (if manufacturers met some requirements). In plain speak, this means that Boeing got to decide if Boeing's airplanes were safe enough to fly  --  with no additional third-party checks.

The FAA said the purpose of this change was to save the aviation industry roughly $25 billion between 2006 to 2015.

Given this, it makes you wonder if the statement on Tuesday by Acting FAA Administrator Daniel K. Elwell  --  that the agency had conducted its own review  --  was factual, or if the agency had simply reviewed the safety review that Boeing had conducted on itself. It also clarifies why Boeing came to recommend to the FAA that their planes be grounded, rather than the FAA taking any decisive action on their own.

The term for this maze, where a government safety agency allows an industry to regulate itself so the industry can save some money , and where the industry itself has to be the one to recommend to government that their product shouldn't be in operation pending investigation, is regulatory capture .

From Wikipedia : "Regulatory capture is a form of government failure which occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating."

The issue, in short, is that it is rarely in a business' self-interest to ensure the absolute safety of their products. Safety testing takes time, money, and if inspections reveal problems that need fixing, more money. Corporations are profit maximizers and pursue whatever method they need to minimize cost (including minimizing fixing flaws in their products) and maximize profit.

Without the threat of outside inspection or serious repercussions, there are few incentives to fix potential problems. Insurance covers accidents, and most mega-corporations have funds set aside in their operating budgets to pay the (generally small, relative to their operating budgets) fines governments may impose if and when a problem is discovered.

This is why it is unlikely that industry will ever sufficiently regulate itself on safety issues. Remember Edward Norton's job in "Fight Club"? "The car crashes and burns with everyone trapped inside. Now, should we initiate a recall? Take the number of vehicles in the field, A. Multiply it by the probable rate of failure, B. Multiply the result by the average out-of-court settlement, C. A x B x C equals X. If X is less than the cost of a recall, we don't do one."

The United States isn't alone in turning over self-certification of its transportation and infrastructure to industry. The Genoa Bridge Collapse in Italy last year, in which 43 people died, is another case.

The Morandi Bridge is a privately-owned toll bridge, publicly built but later sold off to Autostrade, a company majority owned by the Benetton clothing family. As a private infrastructure company, Autostrade has a profit maximization goal of keeping bridge maintenance costs low and toll profits high. Thanks to further privatization efforts of the Italian government, the safety and inspection of bridges is also conducted by private companies. In the case of the Morandi Bridge, the inspection company responsible for safety checks and certification of the bridge was owned by Autostrade's parent company, leaving the company that owns the bridge to self-certify its safety. The result, as the world saw, was a bridge that collapsed.

As Texas engineer Linwood Howell said in the Times, "the engineers inspecting the bridge would have their own professional liabilities to worry about, including the profits of the company that was paying them," i.e. a clear conflict of interest between maintaining basic safety and ensuring their own jobs.

Meanwhile, as Italian law professor Giuliano Fonderico noted , "the government behaved more like its first priority was cooperating with Autostrade, rather than regulating it."

These current examples of regulatory capture are the latest in a series of examples from recent times; others have pointed to regulatory capture in the Federal Reserve during the economic crisis , and the Mineral Management Service during the BP Oil Spill , to name two. Unfortunately it is only when a tragedy occurs that the public expresses concern.

George Stigler, who received the Nobel Peace Prize in Economics in part for his work around regulatory capture in 1982, believed that it was likely that industry would come to dictate the regulatory issues within their industries because of personal connections, a greater understanding of issues facing industry than the general public, but mostly, a public ignorance around what their regulators are up to.

Perhaps it is time for people to pay a little more attention to what our regulators, who we pay to protect us from bridge collapses and plane crashes, are up to. There are some people with big ideas on fixes for regulatory capture, but public demand will also need to exist for real reform efforts to take place.

[Mar 16, 2019] Boeing 737 Crashes Raise Tough Questions on Aircraft Automation - Bloomberg

Mar 16, 2019 | www.bloomberg.com

Tom Enders just couldn't resist the swipe at the competition. It was June 2011, and the chief executive officer of Airbus SE was on a stage at the Paris air show after the planemaker won in a matter of days an unprecedented 600 orders for its upgraded A320neo airliner, while Boeing Co. stood on the sidelines.

"If our colleagues in Seattle still maintain we're only catching up with their 737, I must ask myself what these guys are smoking," Enders blurted out, to the general amusement of the audience, while Boeing representatives at the back of the room looked on.

Boeing had wavered on its decision whether to follow Airbus's lead and re-engine the 737 or go with an all-new aircraft. Customers were willing to wait for "something more revolutionary," as Jim Albaugh, at the time Boeing's head of commercial aircraft, said then.

But the European manufacturer's blow-out success with the A320neo, essentially a re-engined version of its popular narrow-body family, would soon force Boeing's hand.

As the A320neo became the fastest-selling plane in civil aviation history as Airbus picked off loyal Boeing customers like American Airlines Group Inc. , the U.S. company ditched the pursuit of an all-new jet and responded in July 2011 with its own redesign, the 737 Max.

"The program was launched in a panic," said Sash Tusa, an analyst at Agency Partners , an equity research firm in London. "What frightened Boeing most of all was losing their biggest and most important customer. American Airlines was the catalyst."

It turned out that Chicago-based Boeing wasn't too late to the party in the end: While the Max didn't quite replicate the neo's order book, it did become the company's fastest seller as airlines scrambled to cut their fuel bills with new engines that promised savings of 20 percent or more. All told, the Max raked in about 5,000 orders, keeping the playing field fairly level in the global duopoly between Airbus and Boeing.

Close Scrutiny

Now the 737 Max is grounded globally, after two almost factory-fresh jets crashed in rapid succession. As a result, the repercussions of Boeing's response to Airbus's incursion are under the microscope. Getting particular scrutiny are the use of more powerful, fuel-saving engines and automated tools to help pilots control the aircraft.

After the grounding, Boeing said that it "continues to have full confidence in the safety of the 737 Max, and that it was supporting the decision to idle the jets "out of an abundance of caution." The company declined to comment beyond its public statements.

In late October, a plane operated by Lion Air went down minutes after taking off in Jakarta, killing all 189 people on board. Then on March 10, another 737 Max crashed, this time in Ethiopia en route to Kenya. Again, none of the 157 people on board survived the impact.

There are other similarities that alarmed airlines and regulators and stirred public opinion, leading to the grounding of the 737 Max fleet of more than 350 planes. According to the Federal Aviation Administration , "the track of the Ethiopian Airlines flight was very close and behaved very similar to the Lion Air flight."

How Boeing Safety Feature Became a Suspect in Crashes: QuickTake

After decades of steadily declining aircraft accidents, the question of how two identical new planes could simply fall out of the sky minutes after takeoff has led to intense scrutiny of the 737 Max's systems. Adding to the chorus in the wake of the crash was President Donald Trump, who lamented the complexities of modern aviation, suggesting that people in the cockpit needed to be more like nuclear physicists than pilots to command a jet packed with automated systems.

"Airplanes are becoming far too complex to fly. Pilots are no longer needed, but rather computer scientists from MIT," the president said in the first of a pair of tweets on March 12, darkly warning that "complexity creates danger."

Analog Machine

Automation plays a limited role in the 737 Max. That's because the aircraft still has essential analog design and layout features dating back to the 1960s, when it was conceived. It's a far older concept than the A320, which came to market at the end of the 1980s and boasted innovations like fly-by-wire controls, which manipulate surfaces such as flaps and horizontal tail stabilizers with electrical impulses and transducers rather than heavier hydraulic links.

Upgrading the 737 to create the Max came with its own set of issues. For example, the 737 sits considerably lower to the ground, so fitting the bigger new engines under the wings was a structural challenge (even with the squished underbelly of the engine casing). In response, Boeing raised the front landing gear by a few inches, but this and the size of the engines can change the plane's center of gravity and its lift in certain maneuvers.

Boeing's technical wizardry for the 138- to 230-seat Max was a piece of software known as the Maneuvering Characteristics Augmentation System, or MCAS. It intervenes automatically when a single sensor indicates the aircraft may be approaching a stall. Some pilots complained, though, that training on the new system wasn't sufficient and properly documented.

"The benefits of automation are great, but it requires a different level of discipline and training,'' said Thomas Anthony, director of the Aviation Safety and Security Program at the University of Southern California. Pilots must make a conscious effort to monitor the plane's behavior. And reliance on automation means they will take back control only in the worst situations, he said.

Errant Sensor

With the Lion Air crash, data from the recovered flight recorders points to a battle in the cockpit between the software and the pilots who struggled in vain to keep control. The data showed that an errant sensor signaled the plane was in danger of stalling and prompted the MCAS to compensate by repeatedly initiating a dive. The pilots counteracted by flipping a switch several times to raise the nose manually, which temporarily disabled MCAS. The cycle repeated itself more than two dozen times before the plane entered its final deadly dive, according to the flight data.

With the flight and cockpit voice recorders of the Ethiopian plane now in France for analysis, the interaction between the MCAS system and the pilots will again be under close scrutiny, probably rekindling the broader debate about who or what is in control of the cockpit.

That man-versus-machine conundrum has been central to civil aviation for years. Automation has without doubt made commercial flying much safer, as planemakers added systems to help pilots set engine thrust, navigate with greater precision and even override human error in the cockpit.

For example, automation on modern aircraft keeps pilots within a so-called flight envelope to avoid erratic maneuvers that might destabilize the aircraft. Analyses of flight data show that planes have more stable landings in stormy, low-visibility conditions when automation is in charge than on clear days when they land by sight.

Sully's Miracle Landing

The most daring descent in recent memory, Chesley "Sully" Sullenberger's landing of US Airways Flight 1549 in the Hudson River in early 2009, is Exhibit A of how an interconnected cockpit worked hand-in-hand with an experienced pilot. Automatic pitch trim and rudder coordination assisted manual inputs and kept the Airbus A320 steady on its smooth glide into the icy water. The drama showed that automation can play a crucial support function, provided a pilot is fully trained and the aircraft properly maintained.

"Some people are saying modern aircraft such as the 737 Max are too complex," said Dave Wallsworth, a British Airways captain on the Airbus A380 double-decker. "I disagree. The A380 is a far more complex aircraft and we fly it very safely every day. Pilots are capable of understanding aircraft systems so long as the manuals contain the information we need."

Airbus traditionally has pushed the envelope on automation and a more modern cockpit layout, with larger screens and steering by joystick rather than a central yoke, turning pilots into something akin to systems operators. Boeing's philosophy, on the other hand, has been to leave more authority in the hands of pilots, though newer designs also include some computerized limits. Like Airbus planes, the latest aircraft from Seattle -- where Boeing makes most of its jetliners -- are equipped with sophisticated autopilots, fly-by-wire controls or systems to set speed during landings.

"The big automation steps came in the 1980s with the entry into service of the A320 and the whole fly-by-wire ethos," said John Strickland, an independent aviation analyst. "I don't think automation per se is a problem, we see it in wide-scale use in the industry, and as long as it is designed to work hand-in-hand with pilots and pilots understand how to use it, it shouldn't be an issue."

Erratic Movements

But the counter-argument is that increasingly complex systems have led computers to take over, and that many pilots may have forgotten how to manually command a jet -- particularly in a moment of crisis. That criticism was leveled at Airbus, for example, after the mid-Atlantic crash of Air France Flight 447 in 2009 that killed all 228 people on board. Analysis of the flight recorders showed the crew was confused by stall warnings and unreliable speed readings, leading to erratic maneuvers that ended in catastrophe.

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"I grew up on steam gauges and analog, and the modern generation on digital and automation," said Jon Weaks, president of the Southwest Airlines Pilots Association and a Boeing 737 captain for the Dallas-based airline. "No matter what you grew up on, you have to fly the plane. If the automation is doing something you don't want it to do or that you don't understand, you have to disconnect it and fly the plane."

A 2013 report by the FAA found more than 60 percent of 26 accidents over a decade involved pilots making errors after automated systems abruptly shut down or behaved in unexpected ways. And the 2016 inspector general's report at the FAA noted that as the use of automation increases, "pilots have fewer opportunities to use manual flying skills."

"As a result, the opportunities air carrier pilots have during live operations to maintain proficiency in manual flight are limited and are likely to diminish," the report found.

The grounding of the 737 Max fleet has left Boeing in crisis. The company couldn't get through with its message that the plane was safe to fly, as the group of regulators and airlines idling the jet kept expanding. The 737 program is Boeing's cash cow, accounting for a third of its profit, and Boeing's stock dropped sharply in the days after the disaster.

Get in Line

The Max gave Boeing a relatively cheap path back into the narrow-body game that it was at risk of losing to the Airbus neo. At the time, Boeing had to make a quick decision, as it was still burdened financially by the 787 Dreamliner wide-body that was over budget and behind schedule.

Both manufacturers have said they won't come out with an all-new single-aisle model until well into the next decade, preferring to wait for further technological advancements before committing to massive spending. The success of both the neo and the Max bought the companies that extra time, with orders books stretching years into the future.

Half a century after it was launched almost as an afterthought, the 737 program has become the lifeblood of Boeing that helps finance the rest of the corporation -- the biggest U.S. exporter. It's the one aircraft that Boeing cannot afford to give up.

"The Max was the right decision for the time," said Richard Aboulafia, an aviation analyst with the consultancy Teal Group . "Yes, there may be an issue with MCAS needing a software patch. Yes, there may need to be some additional training. But these are not issues that cause people to change to the other guys' jet. The other guys have a waiting line, and when you get to the back of that line, you burn more fuel."

-- With assistance by Alan Levin, Benjamin D Katz, Margaret Newkirk, Michael Sasso, and Mary Schlangenstein

[Mar 14, 2019] Boeing 737 Max an artificial intelligence event by James Thompson

Mar 14, 2019 | www.unz.com

Conventional wisdom is that it is too early to speculate why in the past six months two Boeing 737 Max 8 planes have gone down shortly after take off, so if all that follows is wrong you will know it very quickly. Last night I predicted that the first withdrawals of the plane would happen within two days, and this morning China withdrew it. So far, so good. (Indonesia followed a few hours ago).

Why should I stick my neck out with further predictions? First, because we must speculate the moment something goes wrong. It is natural, right and proper to note errors and try to correct them.(The authorities are always against "wild" speculation, and I would be in agreement with that if they had an a prior definition of wildness). Second, because putting forward hypotheses may help others test them (if they are not already doing so). Third, because if the hypotheses turn out to be wrong, it will indicate an error in reasoning, and will be an example worth studying in psychology, so often dourly drawn to human fallibility. Charmingly, an error in my reasoning might even illuminate an error that a pilot might make, if poorly trained, sleep-deprived and inattentive.

I think the problem is that the Boeing anti-stall patch MCAS is poorly configured for pilot use: it is not intuitive, and opaque in its consequences.

By the way of full disclosure, I have held my opinion since the first Lion Air crash in October, and ran it past a test pilot who, while not responsible for a single word here, did not argue against it. He suggested that MCAS characteristics should have been in a special directive and drawn to the attention of pilots.

I am normally a fan of Boeing. I have flown Boeing more than any other plane, and that might make me loyal to the brand. Even more powerfully, I thought they were correct to carry on with the joystick yoke, and that AirBus was wrong to drop it, simply because the position of the joystick is something visible to pilot and co-pilot, whereas the Airbus side stick does not show you at a glance how high the nose of the plane is pointing.

http://www.unz.com/jthompson/fear-of-flying-and-safety-of-gruyere/

Pilots are bright people, but they must never be set a badly configured test item with tight time limits and potentially fatal outcomes.

The Air France 447 crash had several ingredients, but one was that the pilots of the Airbus A330-203 took too long to work out they were in a stall. In fact, that realization only hit them very shortly before they hit the ocean. Whatever the limitations of the crew (sleep deprived captain, uncertain co-pilot) they were blinded by a frozen Pitot air speed indicator, and an inability to set the right angle of attack for their airspeed.

For the industry, the first step was to fit better air speed indicators which were less likely to ice up. However, it was clear that better stall warning and protection was required.

Boeing had a problem with fitting larger and heavier engines to their tried and trusted 737 configuration, meaning that the engines had to be higher on the wing and a little forwards, and that made the 737 Max have different performance characteristics, which in turn led to the need for an anti-stall patch to be put into the control systems.

It is said that generals always fight the last war. Safety officials correct the last problem, as they must. However, sometimes a safety system has unintended consequences.

The key of the matter is that pilots fly normal 737s every day, and have internalized a mental model of how that plane operates. Pilots probably actually read manuals, and safety directives, and practice for rare events. However, I bet that what they know best is how a plane actually operates most of the time. (I am adjusting to a new car, same manufacturer and model as the last one, but the 9 years of habit are still often stronger than the manual-led actions required by the new configuration). When they fly a 737 Max there is a bit of software in the system which detects stall conditions and corrects them automatically. The pilots should know that, they should adjust to that, they should know that they must switch off that system if it seems to be getting in the way, but all that may be steps too far, when something so important is so opaque.

What is interesting is that in emergencies people rely on their most validated mental models: residents fleeing a burning building tend to go out their usual exits, not even the nearest or safest exit. Pilots are used to pulling the nose up and pushing it down, to adding power and to easing back on it, and when a system takes over some of those decisions, they need to know about it.

After Lion Air I believed that pilots had been warned about the system, but had not paid sufficient attention to its admittedly complicated characteristics, but now it is claimed that the system was not in the training manual anyway. It was deemed a safety system that pilots did not need to know about.

This farrago has an unintended consequence, in that it may be a warning about artificial intelligence. Boeing may have rated the correction factor as too simple to merit human attention, something required mainly to correct a small difference in pitch characteristics unlikely to be encountered in most commercial flying, which is kept as smooth as possible for passenger comfort.

It would be terrible if an apparently small change in automated safety systems designed to avoid a stall turned out have given us a rogue plane, killing us to make us safe.


Anatoly Karlin , says: Website March 11, 2019 at 2:36 pm GMT

Pilots are used to pulling the nose up and pushing it down, to adding power and to easing back on it, and when a system takes over some of those decisions, they need to know about it.

I have read that Boeing kept MCAS out of the limelight as otherwise the 737 MAX would need to be certified as a new plane and airlines would need to do $$$ pilot retraining, making their product less competitive.

James Thompson , says: Website March 11, 2019 at 3:09 pm GMT
@Anatoly Karlin Interesting. It is certainly hard to understand why MCAS was shrouded in secrecy, when it was potentially lethal.
Captain 737 , says: March 11, 2019 at 7:38 pm GMT
Interesting response from a "by-stander", who compares a sophisticated aircraft with a new model car !!!

As an experienced captain on 737s (not the MAX) I say, let the investigation begin; and let us not have by-standers giving their penny worth. A normal 737 . is there also an abnormal 747 or 777 or 787, or a 737 ??

Pilots carry the can . but, are the most respected profession in the world. What ever happened, let the investigation decide the outcome, and not the "un-trained" (is there such a term !!!!).

If one takes a look at the (released to date) information about the Lion Air crash – "unreliable airspeeds" (the airspeed indicator is providing erroneous information during a critical phase of flight (like climb out after take-off)) could have been the cause of that aircraft crash – not AI.

A simple explanation – the airspeed indicator is "unreliable", as one moment the indication is under-speed, then overspeed, followed by under-speed, and so it goes; like a yoyo going up and down; the indicated speed is erroneous and the pilots cannot rely on what is presented on the airspeed indicator. Pilots, according to the Boeing Training Manual, are trained to handle unreliable airspeeds – the key is to fly the plane based solely on pitch attitude and thrust (there are memory items for unreliable airspeed occurrences, along with the reference items in aircraft's Quick Reference Handbook – the QRH (Boeing term) is the pilots "bible" for any issues and problems when the aircraft is in the air !! ).

The point of the above paragraph is to enlighten the 'un-trained' as to not speculate too soon with ideas and a "hypothesis" of what may have happened, until the knowledgeable ones – the aircraft manufacturer (probably being the most knowledgable), the country's aviation authority, the engine manufacturer, and (dear I say) the FAA (the Yanks just cannot help themselves delving into other countries' affairs; when for 9/11 not one minutes was spent by anyone (FAA, Boeing, no one) investigating the so-called crashes of four aircraft – on one day, within one and a half hours of each other, and in the most protected airspace in the world (got the hint !!) – I have digressed, though for reason .. have completed their investigations.

I can assure you that no pilot wants to crash a plane we (pilots) all want to live to 100, and beyond.

Humans make mistakes, but technology needs humans to correct technology's mistakes. Boeing build reliable and trustworthy aircraft; pilots undertake their duties in a safe and controlled manner (according to training and aircraft manufacturer stipulated standards); but errors happen – and the investigator is there to establish what happened, so that these do not happen again. Unfortunately, it is just possible that the cause of the first MAX accident is the same as the second. But, let the knowledgable ones determine that fact – and let me, and us, not speculate.

AI in the MAX hhmmmmm – let Boeing release that information, before we start speculating again (on AI – is an auto pilot AI; the B737 I fly has two auto pilots; is that double AI ??).

To the rest of the travelling public – airline travel remains, and has been, the safest form of transport for decades. I am confident that the status quo will remain.

Time will reveal the answers to these two accidents, when the time is right – when the investigators (for both) have concluded their deliberations.

My guess is, the majority of people will have forgotten these two MAX events (but, for those who have lost loved ones), as some other crisis/event will have occurred in their lives and/or in the world.

Dieter Kief , says: March 11, 2019 at 7:38 pm GMT
@Anatoly Karlin

737 MAX would need to be certified as a new plane and airlines would need to do $$$ pilot retraining, making their product less competitive.

Short sighted businessmen – Nothing lasts for long

Joni Mitchell – – – Chinese Cafè on Wild Things Run Fast

The Anti-Gnostic , says: Website March 11, 2019 at 7:45 pm GMT
I think the problem is that the Boeing anti-stall patch MCAS is poorly configured for pilot use: it is not intuitive, and opaque in its consequences.

I think that's the case with a lot of current technology. Human factors and tactileness don't seem to get much weight in current engineering.

Simply Simon , says: March 12, 2019 at 12:26 am GMT
@Captain 737 I respect your analysis especially coming from a seasoned 737 captain. I have over 5,000 flying hours in single and twin-engine, conventional and jet, all military. I have not flown since 1974 so the advances in auto-pilot technology are beyond my comprehension. My question to you is simple–I think. If the aircraft took off in VFR conditions I assume the pilots knew the pitch attitude all during the takeoff phase. Is there no way to manually overpower the auto-pilot once the pilots knew the pitch attitude was dangerously high or low?
kauchai , says: March 12, 2019 at 2:37 am GMT
If this is a made in china airplane, the empire would mobilize the whole world to ground the entire fleet. The diatribes, lies, cruel sick jokes, lawsuits, etc, etc, would fly to the heavens.

But NO, this is an empire plane. Designed, built and (tested?) in the heart of the empire. And despite the fact that more than 300 people had died, IT IS STILL SAFE to fly!

LOL! LOL!

Anonymous [414] Disclaimer , says: March 12, 2019 at 3:41 am GMT
Quite a short and to-the-point article, although the link to "artificial intelligence" is tenuous at best.

What is sold as Artificial Intelligence nowadays is massive statistical processing in a black box (aka as "Neural Network Processing"), it's not intelligent. The most surprising fact is that it works so well.

Neural Networks won't be in high-assurance software soon. No-one knows what they really do once configured (although there are efforts underway to attack that problem ). They are impossible to really test or design to specification. Will someone underwrite that a system incorporating them does work? Hardly. You may find them in consumer electronics, research, "self driving cars" that never really self-drive without surprises and possibly bleeding edge military gear looking for customers or meant to explode messily anyway.

But not in cockpits. (At least I hope).

Check out this slideshow about the ACAS-X Next Generation Collision Airborne Collision Avoidance System. It has no neural network in sight, in fact if I understand correctly it doesn't even have complex decision software in-cockpit: it's all decision tables precomputed from a high-level, understandable description (aka. code, apparently in Julia) to assure safe outcome in a fully testable and simulatable approach.

In this accident, we may have a problem with the system, as opposed to with the software. While the software may work correctly and to specification (and completely unintelligently) the system composed of software + human + physical machinery will interact in interesting, unforeseen, untested ways, leading to disaster. In fact the (unintelligent software + human) part may disturbingly behave like those Neural Networks that are being sold as AI.

Anonymous [414] Disclaimer , says: March 12, 2019 at 4:16 am GMT
A disquieting item on your morning cereal box:

https://www.stripes.com/news/us/boeing-cited-by-pentagon-over-quality-concerns-going-back-years-1.522343

https://www.stripes.com/news/air-force/air-force-won-t-accept-any-more-boeing-tankers-until-manufacturing-process-is-cleaned-up-1.571108

Anonymous [427] Disclaimer , says: March 12, 2019 at 4:46 am GMT
@Anatoly Karlin I'm guessing that it would require a change in the TCDS and possibly a different type rating, which would be anathema for sales.

I'm a little airplane person, not a big airplane person (and the 737 is a Big Airplane even in its smallest configuration) but I know there have been several instances where aircraft had changes that required that pilots of the type have a whole different type rating, even though the changes seemed minor. I'm guessing airlines are training averse and don't want to take crews off revenue service beyond what is statutorily required. The margins in airline flying are apparently much leaner now than in the glory days.

I never approved of allowing fly by wire in commercial airliners, I never even really liked the idea of FADEC engine control (supervisory DEC was fine) because a classical advantage of gas turbines (and diesels) was that they could run in an absolutely electrically dead environment once lit. Indeed, the J-58 (JT11-D in P&W parlance) had no electrical system to speak of beyond the instrumentation: it started by mechanical shaft drive and ignited by triethyl borane chemical injection. The Sled could make it home on needle-ball and alcohol compass, and at least once it did. Total electrical failure in any FBW aircraft means losing the airplane. Is the slight gain in efficiency worth it? I'm told the cables, pulleys, fairleads and turnbuckles add 200 pounds to a medium size airliner, the FBW stuff weighs 80 or so.

The jet transports we studied in A&P school had a pitot head and static port on either side of the flight deck and the captain and F/O had inputs from different ones, though IIRC the altimeter and airspeed were electrically driven from sensors at the pitot head or inboard of it. I have a 727 drum-pointer (why are three pointer altimeters even legal anymore??) altimeter and it has no aneroids, just a couple of PCBs full of TTL logic and op amps and a DB style connector on the back. Do crews not cross check airspeed and altitude or is there no indicator to flag them when the two show something different?

Also, not being a jet pilot myself, my understanding is that anyone with T-38 experience is forever after thinking in terms of AOA and not airspeed per se, because that airplane has to be flown by AOA in the pattern, and classically a lot of airline pilots had flown Talons. Is there no AOA indicator in the 737? Flying in the pattern/ILS would make airspeed pretty dependent on aircraft weight, and on a transport that can change a lot with fuel burn, do they precisely calculate current weight from a totalizer and notate speeds needed? (I presume airliners don't vary weight other than fuel burn, not being customarily in the business of throwing stuff out of the airplane, although they used to fly jumpers out of a chartered 727 at the parachute meet in Quincy)

dearieme , says: March 12, 2019 at 12:00 pm GMT
@Captain 737 Why are you pretending to be a pilot, and a pompous one at that?
dearieme , says: March 12, 2019 at 12:06 pm GMT
Many problems in the world arise because many computing people reckon themselves very clever when they are merely rather clever. And often they combine what cleverness they have with a blindness about humans and their ways. I shouldn't be at all surprised if programmers at Boeing decided that they always knew better than pilots and doomed the planes accordingly.

I saw recently an expression that made me grin: "midwits". It describes rather well many IT types of my acquaintance.

dearieme , says: March 12, 2019 at 12:51 pm GMT
Another human cost of midwittery:

https://www.dailymail.co.uk/news/article-6797193/More-500-village-postmasters-wrongly-hounded-stealing-millions-system.html

Fabian Forge , says: March 12, 2019 at 4:55 pm GMT
@fish And that's the problem, as Mr. Kief also points out. The individuals at the decision making level (let's call them "executives") don't or can't think that far ahead, at least when the corporation they run is concerneed.

It really is a time-preference problem.

Fabian Forge , says: March 12, 2019 at 5:06 pm GMT
@dearieme One corollary is that the Midwits take such joy in their cleverness that they assume their wit has value in and of itself. This is most evident when they design clever solutions to invented problems. Billions of dollars of venture capital have been set on fire in that way, when technical and financial midwittery combine.
Dieter Kief , says: March 12, 2019 at 10:55 pm GMT
@Andrei Martyanov It's almost nitpicking. But – James Thompson says it above: The MCAS in this Boing model 737 MAX 8 is used to cover up a basic construction flaw. This has undoubtedly worked for quite some time – but it came with a risk. And this risk might turn out to have caused numerous deaths. In this case, if it will turn out, that the MACS system didn't do what it was supposed to do and thus caused numerous deaths – will this then be looked upon as a problem of the application of artificial intelligence? Yes, but not only . It was a combination of a poorly built (constructed) airliner and software, which might not have been able to compensate for this flawed construction under all conditions.

It's cheaper to compensate via software – and this might (might) turn out to be a rather irresponsible way to save money. But as I said: Even in this case, the technical problem would have to be looked upon as twofold: Poor construction plus insufficient software compensation. I'd even tend to say, that poor construction would then be the main (=basic) fault. With the zeitgeisty (and cheap!) software-"solution" for this poor construction a close second.

Eagle Eye , says: March 12, 2019 at 11:25 pm GMT
@Captain 737 Curiously, this is "Captain 737″'s first and only comment here.

It's almost as if Boeing hired a high-priced PR firm whose offerings include pseudonymous online "messaging" to "shape opposition perceptions" etc. Note the over-obvious handle. (Just like globalist shills like to pretend to be regular blue-collar guys in small fly-over towns.)

By their words shalt ye know them.

PREDICTION: In 3-4 years, we will "discover" a long paper trail of engineers warning early on about the risk of hastily kludging a half-assed anti-stall patch MCAS onto a system that had undergone years of testing and refinement WITHOUT the patch.

Only somebody PAID not to see the problem could fail to perceive that this means that as so altered, the ENTIRE SYSTEM goes back to being technically immature.

Anonymous [427] Disclaimer , says: March 13, 2019 at 12:00 am GMT
@Dieter Kief What "basic construction flaw" are we discussing here? The 737 airframe is pretty well established and has a good record-there have been incidents but most have been well dealt with.
Dieter Kief , says: March 13, 2019 at 12:39 am GMT
@Anonymous I've read today, that in the aviation world there is a consensus, that what James Thompson says in his article is right:
"Boeing had a problem with fitting larger and heavier engines to their tried and trusted 737 configuration, meaning that the engines had to be higher on the wing and a little forwards, and that made the 737 Max have different performance characteristics, which in turn led to the need for an anti-stall patch to be put into the control systems."

– A German engineer wrote in a comment in the Berlin daily Die weLT, this construction flaw makes the 737 MAX 8 something like a flying traktor . He concluded, that Boing proved, that you can make a tractor fly, alright. But proper engineering would have looked otherwise – and would for sure had come at a higher cost.
(The different performance charactersitics mentioned by James Thompson is an extraordinarily nice way to express, that the 737 MAX 8 is a tad more likely to stall, just because of the very design-changes, the bigger turbines made necessary. And this is a rather nasty thing to say about an airplane, that a new design made it more likely to stall! ).

Sparkon , says: March 13, 2019 at 1:54 am GMT
@Anonymous

What "basic construction flaw" are we discussing here? The 737 airframe is pretty well established and has a good record.

I 'm not so sure about the good record, and I too suspect the underlying problem is the 737 itself – the entire 737 airframe and avionics.

Worst crash record

LET 410 – 20
Ilyushin 72 – 17
Antonov AN-1 – 17
Twin Otter – 18
CASA 212 – 11
DC-9/MD80 – 10
B737-100 / 700 – 10
Antonov 28 – 8
Antonov 32- 7
Tupolev 154- 7

[a/o 2013 – my bold]

https://www.telegraph.co.uk/travel/news/Least-safe-aircraft-models-revealed/

The 737 family is the best selling commercial airliner series in history with more than 10,000 units produced. However, this airplane in its various configurations has had many crashes since it first entered service in 1968.

[Mar 14, 2019] Regulatory Capture: The Banks and the System That They Have Corrupted

Mar 14, 2019 | jessescrossroadscafe.blogspot.com


"But the impotence one feels today -- an impotence we should never consider permanent -- does not excuse one from remaining true to oneself, nor does it excuse capitulation to the enemy, what ever mask he may wear. Not the one facing us across the frontier or the battle lines, which is not so much our enemy as our brothers' enemy, but the one that calls itself our protector and makes us its slaves. The worst betrayal will always be to subordinate ourselves to this Apparatus, and to trample underfoot, in its service, all human values in ourselves and in others."

Simone Weil

"And in some ways, it creates this false illusion that there are people out there looking out for the interest of taxpayers, the checks and balances that are built into the system are operational, when in fact they're not. And what you're going to see and what we are seeing is it'll be a breakdown of those governmental institutions. And you'll see governments that continue to have policies that feed the interests of -- and I don't want to get clichéd, but the one percent or the .1 percent -- to the detriment of everyone else...

If TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car... I think it's inevitable. I mean, I don't think how you can look at all the incentives that were in place going up to 2008 and see that in many ways they've only gotten worse and come to any other conclusion."

Neil Barofsky

"Written by Carmen Segarra, the petite lawyer turned bank examiner turned whistleblower turned one-woman swat team, the 340-page tome takes the reader along on her gut-wrenching workdays for an entire seven months inside one of the most powerful and corrupted watchdogs of the powerful and corrupted players on Wall Street – the Federal Reserve Bank of New York.

The days were literally gut-wrenching. Segarra reports that after months of being alternately gas-lighted and bullied at the New York Fed to whip her into the ranks of the corrupted, she had to go to a gastroenterologist and learned her stomach lining was gone.

She soldiered through her painful stomach ailments and secretly tape-recorded 46 hours of conversations between New York Fed officials and Goldman Sachs. After being fired for refusing to soften her examination opinion on Goldman Sachs, Segarra released the tapes to ProPublica and the radio program This American Life and the story went viral from there...

In a nutshell, the whoring works like this. There are huge financial incentives to go along, get along, and keep your mouth shut about fraud. The financial incentives encompass both the salary, pension and benefits at the New York Fed as well as the high-paying job waiting for you at a Wall Street bank or Wall Street law firm if you show you are a team player .

If the Democratic leadership of the House Financial Services Committee is smart, it will reopen the Senate's aborted inquiry into the New York Fed's labyrinthine conflicts of interest in supervising Wall Street and make removing that supervisory role a core component of the Democrat's 2020 platform. Senator Bernie Sanders' platform can certainly be expected to continue the accurate battle cry that 'the business model of Wall Street is fraud.'"

Pam Martens, Wall Street on Parade

[Mar 13, 2019] Boeing, The FAA, And Why Two 737 MAX Planes Crashed

Notable quotes:
"... To implement a security relevant automatism that depends on only one sensor is extremely bad design. To have a flight control automatism engaged even when the pilot flies manually is also a bad choice. But the real criminality was that Boeing hid the feature. ..."
"... The Ethiopian Airlines plane that crashed went down in a similar flight profile as the Indonesian plane. It is highly likely that MCAS is the cause of both incidents. While the pilots of the Ethiopian plane were aware of the MCAS system they might have had too little time to turn it off. The flight recorders have been recovered and will tell the full story. ..."
"... The FAA certifies all new planes and their documentation. I was for some time marginally involved in Airbus certification issues. It is an extremely detailed process that has to be followed by the letter. Hundreds of people are full time engaged for years to certify a modern jet. Every tiny screw and even the smallest design details of the hardware and software have to be documented and certified. ..."
"... How or why did the FAA agree to accept the 737 MAX with the badly designed MCAS? How could the FAA allow that MCAS was left out of the documentation? What steps were taken after the Indonesian flight crashed into the sea? ..."
"... That the marketing department has more say than the engineers who design and test the hardware and the software in passenger jets tells us a great deal about the Potemkin-style workplace culture that prevails in Boeing and similar large US corporations. The surface sheen is more important than the substance. The marketing brochures and manuals are no different from mainstream news media in the level of BS they spew. ..."
"... The Indonesian pilots did not have the time to figure out and realise that something else was controlling the plane's flight, much less deactivate what is effectively a second autopiloting system. ..."
"... B is right. This is a criminal act of deception and fraud thats cost hundreds their lives. Boeing executives responsible should be prosecuted and then jailed. ..."
"... while all the technical discussion around how to fly a plane is truly interesting, what's really at issue here is corporate and institutional betrayal of trust. ..."
"... The corporate aspect is Boeing, obviously. The institutional aspect is FAA, which used to lead the world in trust when it came to life and death matters. ..."
"... But now, in what Bloomberg, even while trying to support FAA, has no choice but to report as a "stunning rebuff" to FAA's integrity, countries around the world are grounding this flawed plane. Germany, among others, has closed its airspace to the 737. ..."
"... "Should anyone be flying 737MAXes before the black box data has been evaluated?" ..."
"... Before, the civilian airliners were falling out of the sky because of an immature technology, that is because of the learning curve. Now that the technology involved is fully mature the airliners are falling out of the sky for profit taking. ..."
"... Is it really so hard to connect the secrecy about MCAS and why it was needed in the first place? The lawyers will have a ball of the decade with this: the defendant created a secret software solution to turn a Lego airplane into a real airplane, made the software dependent on a single sensor, and made it difficult to switch the software off. ..."
"... I cannot believe that Boeing shares dropped only 7.5%, this is a statement of how untouchable Boeing is and how protected it will be by the Corrupt. ..."
Mar 13, 2019 | www.moonofalabama.org

Boeing, The FAA, And Why Two 737 MAX Planes Crashed psychohistorian , Mar 12, 2019 4:55:32 PM | link

On Sunday an Ethiopian Airlines flight crashed, killing all on board. Five month earlier an Indonesian Lion Air jet crashed near Jakarta. All crew and passengers died. Both airplanes were Boeing 737-8 MAX. Both incidents happened shortly after take off.

Boeing 737 MAX aircraft are now grounded about everywhere except in the United States. That this move follows only now is sad. After the first crash it was already obvious that the plane is not safe to fly.

The Boeing 737 and the Airbus 320 types are single aisle planes with some 150 seats. Both are bread and butter planes sold by the hundreds with a good profit. In 2010 Airbus decided to offer its A-320 with a New Engine Option (NEO) which uses less fuel. To counter the Airbus move Boeing had to follow up. The 737 would also get new engines for a more efficient flight and longer range. The new engines on the 737 MAX are bigger and needed to be placed a bit different than on the older version. That again changed the flight characteristics of the plane by giving it a nose up attitude.

The new flight characteristic of the 737 MAX would have require a retraining of the pilots. But Boeing's marketing people had told their customers all along that the 737 MAX would not require extensive new training. Instead of expensive simulator training for the new type experienced 737 pilots would only have to read some documentation about the changes between the old and the new versions.

To make that viable Boeing's engineers had to use a little trick. They added a 'maneuver characteristics augmentation system' (MCAS) that pitches the nose of the plane down if a sensor detects a too high angle of attack (AoA) that might lead to a stall. That made the flight characteristic of the new 737 version similar to the old one.

But the engineers screwed up.

The 737 MAX has two flight control computers. Each is connected to only one of the two angle of attack sensors. During a flight only one of two computer runs the MCAS control. If it detects a too high angle of attack it trims the horizontal stabilizer down for some 10 seconds. It then waits for 5 seconds and reads the sensor again. If the sensor continues to show a too high angle of attack it again trims the stabilizer to pitch the plane's nose done.

MCSA is independent of the autopilot. It is even active in manual flight. There is a procedure to deactivate it but it takes some time.

One of the angle of attack sensors on the Indonesian flight was faulty. Unfortunately it was the one connected to the computer that ran the MCAS on that flight. Shortly after take off the sensor signaled a too high angle of attack even as the plane was flying in a normal climb. The MCAS engaged and put the planes nose down. The pilots reacted by disabling the autopilot and pulling the control stick back. The MCAS engaged again pitching the plane further down. The pilots again pulled the stick. This happened some 12 times in a row before the plane crashed into the sea.

To implement a security relevant automatism that depends on only one sensor is extremely bad design. To have a flight control automatism engaged even when the pilot flies manually is also a bad choice. But the real criminality was that Boeing hid the feature.

Neither the airlines that bought the planes nor the pilots who flew it were told about MCAS. They did not know that it exists. They were not aware of an automatic system that controlled the stabilizer even when the autopilot was off. They had no idea how it could be deactivated.

Nine days after the Indonesian Lion Air Flight 610 ended in a deadly crash, the Federal Aviation Administration (FAA) issued an Emergency Airworthiness Directive.


bigger

The 737 MAX pilots were aghast. The APA pilot union sent a letter to its members:

"This is the first description you, as 737 pilots, have seen. It is not in the AA 737 Flight Manual Part 2, nor is there a description in the Boeing FCOM (flight crew operations manual)," says the letter from the pilots' union safety committee. "Awareness is the key with all safety issues."

The Ethiopian Airlines plane that crashed went down in a similar flight profile as the Indonesian plane. It is highly likely that MCAS is the cause of both incidents. While the pilots of the Ethiopian plane were aware of the MCAS system they might have had too little time to turn it off. The flight recorders have been recovered and will tell the full story.

Boeing has sold nearly 5,000 of the 737 MAX. So far some 380 have been delivered. Most of these are now grounded. Some family members of people who died on the Indonesian flight are suing Boeing. Others will follow. But Boeing is not the only one who is at fault.

The FAA certifies all new planes and their documentation. I was for some time marginally involved in Airbus certification issues. It is an extremely detailed process that has to be followed by the letter. Hundreds of people are full time engaged for years to certify a modern jet. Every tiny screw and even the smallest design details of the hardware and software have to be documented and certified.

How or why did the FAA agree to accept the 737 MAX with the badly designed MCAS? How could the FAA allow that MCAS was left out of the documentation? What steps were taken after the Indonesian flight crashed into the sea?

Up to now the FAA was a highly regarded certification agency. Other countries followed its judgment and accepted the certifications the FAA issued. That most of the world now grounded the 737 MAX while it still flies in the States is a sign that this view is changing. The FAA's certifications of Boeing airplanes are now in doubt.

Today Boeing's share price dropped some 7.5%. I doubt that it is enough to reflect the liability issues at hand. Every airline that now had to ground its planes will ask for compensation. More than 330 people died and their families deserve redress. Orders for 737 MAX will be canceled as passengers will avoid that type.

Boeing will fix the MCAS problem by using more sensors or by otherwise changing the procedures. But the bigger issue for the U.S. aircraft industry might be the damage done to the FAA's reputation. If the FAA is internationally seen as a lobbying agency for the U.S. airline industry it will no longer be trusted and the industry will suffer from it. It will have to run future certification processes through a jungle of foreign agencies.

Congress should take up the FAA issue and ask why it failed.

Posted by b on March 12, 2019 at 04:39 PM | Permalink

Comments next page " @ b who wrote
"
But the engineers screwed up.
"

I call BS on this pointing of fingers at the wrong folk

Engineers get paid to build things that accountants influence. The West is a world in which the accountants have more sway than engineers.

It is all about the money b and to lead folks in some other direction is not like what I think of you.

The elite that own global private finance and everything else killed those people in the planes because they set the standards that the accountants follow and then force the engineers to operate within

The profit narrative is bad for humanity.


bj , Mar 12, 2019 4:57:15 PM | link

A whistleblower at Boeing would have been nice.
bevin , Mar 12, 2019 5:00:23 PM | link
"Congress should take up the FAA issue and ask why it failed."
If there had been any chance of that happening, the planes would probably still be flying and dead passengers alive.
This, if you are right and I suspect that you are, is symptomatic of an empire dying of corruption. It is no accident that both the new secretary of defence and the neo-con cult itself were born of Boeing. A fact memorialised in the UK where the Blairites rally in the Henry Jackson society.
Lochearn , Mar 12, 2019 5:00:42 PM | link
Last night I wrote on a previous thread:
Over the space of a few months 2 almost new Boeing 737 MAX aircraft have crashed. Rather than going to the expense of designing an entirely new fuselage and normal length landing gear for its larger and much more powerful 737 MAX engines Boeing stuck with the now ancient 737 fuselage design that sits only 17 inches from the ground – necessitating changes to the positioning of the engines on the wing, which together with the vast increase in power, created aerodynamic instability in the design that Boeing tried to correct with software, while not alerting pilots to the changes.
Through the 1980s and early 1990s Boeing executives had largely resisted pressure from Wall Street to cut staff numbers, move plant to non-union states and outsource. The 777 was the last real Boeing, though significant outsourcing did take place – but under the strict control and guidance of Boeing engineers. After the "reverse" takeover of MacDonnell Douglas in 1997 the MDD neoliberal culture swamped Boeing and its HQ was moved from the firm's home near Seattle to Chicago so executives could hobnob with speculators. Wall Street had taken down another giant.
David Park , Mar 12, 2019 5:01:36 PM | link
The story I have most interest in, at the moment, is the state of the power blackout in Venezuela and whether this was a cyber attack by the United States. If it was, it is, in my opinion, a weapon of mass destruction and a very major war crime. The story seems to be fading from the news so I'm hoping b. will be able to gather more information about it.

But I find every story by b, worthwhile!

Ghost Ship , Mar 12, 2019 5:04:07 PM | link
I don't know if this is true by my sister who was an engineer working on military jets said that she'd heard that because of various design requirements, the 737-MAX was inherently unstable but stability was provided by the fly-by-wire system. In military jets, this feature provides greater maneuverability and survivability but has no place on civilian aircraft as the outcome of a system failure would be catastrophic with the pilots being unable to do anything about it. Anyone heard anything similar?
james , Mar 12, 2019 5:09:31 PM | link
b - thanks for addressing this.. subservient canada is also flying them still..) canada is going the same way as the usa-faa - into a ditch long term... it is really sad for the people who have died and for the fact that as @1 psychohistorian notes - the decisions are being put in the hands of the wrong people...
Barbara Ann , Mar 12, 2019 5:11:56 PM | link
Excellent piece b.
karlof1 , Mar 12, 2019 5:13:53 PM | link
Gotta agree with psychohistorian @1, that the engineers aren't totally responsible. Deregulation pukes at FAA, bean counters at Boeing and their managers who approved it all are morally culpable. Airline executives aren't immune either, although many will likely plead ignorance.
mourning dove , Mar 12, 2019 5:17:18 PM | link
If the US were a sane country, a Congressional investigation would follow, but it's not, and Congress is going to be more concerned with Boeing's bottom line than in public safety or the integrity of the FAA. That's probably why the planes haven't been grounded in the US. Congress is much more likely to impede investigation and accountability.
dave , Mar 12, 2019 5:17:28 PM | link

the dreamliner is the plane of the future barack hussein obarmie


The Boeing Broken Dreams Al Jazeera Investigations

https://www.youtube.com/watch?v=rvkEpstd9os

karlof1 , Mar 12, 2019 5:19:49 PM | link
David Park @5--

You'll want to read this !

Steven , Mar 12, 2019 5:26:50 PM | link
You omit important facts: the pilots know by heart how to quickly cut off electronic control of the stabilizers and fly manually. The pilots on the preceding lion air flight had had the same problem, and immediately solved it. The defective sensor should have been immediately replaced, and would have in the United States. On the next flight, the pilots (the copilot being quite unexperienced) spent 10 minutes not doing what they were trained to do in an emergency where the stabilizers are out of control: disable them.

When some flight crews get it right, but others don't, it's not a design flaw but a problem with the flight crews.

I can't agree with your conclusions.

Lochearn , Mar 12, 2019 5:30:48 PM | link
Through the history of Boeing senior executives lived in modest middle-class houses. They traveled on Boeing aircraft to get pilot's responses. But when Phil Condit (Wall Street's man) took over he immediately bought private jets and started living the lifestyle. The difference between productive capitalism and financial capitalism.
Tom Welsh , Mar 12, 2019 5:34:56 PM | link
"How or why did the FAA agree to accept the 737 MAX with the badly designed MCAS?"

Because it would be against the state religion to stop, or delay, a huge corporation earning even more money.

dave , Mar 12, 2019 5:36:39 PM | link
the broken dreams documentary above spells it out very clearly the documentary is from 2014.
it even has undercover folks in the boeing factory saying they would not fly on one.


if you fly you should watch that old al jazeera investigation.
the company does not pay tax and
the head of boeing paid himself 100s of millions of dollars

corporate manslaughter
could be

Zachary Smith , Mar 12, 2019 5:39:20 PM | link
But the bigger issue for the U.S. aircraft industry might be the damage done to the FAA's reputation.

I'd counter this by asking "what reputation?"

I've known for years how it took take a "smoking hole" for the FAA to get off the can and actually do something about a problem with an airplane or airline. But things evolve, and here we have TWO such smoking holes and the FAA still allows it to fly. I'm not trying to pick on the current FAA leader, for the man is utterly typical of the people who are allowed to gain his position. From his wiki:

But the bigger issue for the U.S. aircraft industry might be the damage done to the FAA's reputation.

Elwell joined Airlines for America (A4A) in 2013[3] where he was the Senior Vice President for Safety, Security, and Operations. Elwell left this role in 2015.

(Skipping to the A4A wiki:) Airlines for America
Officially, the A4A has announced five "core elements" of a national airline policy include reducing taxes on the industry, reducing regulation , increased access to foreign markets, making the industry more attractive for investors , and improving the air traffic control system.

I suspect that grounding the 737-MAX would contradict the goal of "making the industry more attractive for investors".

More on the FAA's Tombstone Mentality

About an hour ago I sent out an all-points email suggesting my family members avoid boarding a 737 MAX until the facts are better known and solutions are in place. The FAA may not care about them taking risks, but I sure do.

Tom Welsh , Mar 12, 2019 5:39:22 PM | link
Boeing has a get-out-of-jail-free card.

"Boeing is among the largest global aircraft manufacturers; it is the fifth-largest defense contractor in the world based on 2017 revenue, and is the largest exporter in the United States by dollar value".

https://en.wikipedia.org/wiki/Boeing

Jen , Mar 12, 2019 5:39:56 PM | link
I agree with Psychohistorian @ 1 in less forthright terms: the engineers did not "screw up". On the contrary they most likely did what they could with the money and the time deadline they were given to carry out what essentially was a patch-up job that would make Boeing look good, save money and maintain its stock in sharemarkets.

Probably the entire process, in which the engineers played a small part - and that part in which they had no input into whoever was making the decisions - was a disaster from start to finish. The engineers should have been consulted at an early stage in the re-design of the aircraft's flight and safety features. Only when the appropriate re-design has been tested, changed where necessary and given the thumbs-up by relevant pilots' unions and other organisations with regard to passenger safety can the marketing department go ahead and advise airlines who buy the redesigned planes what training their pilots need.

That the marketing department has more say than the engineers who design and test the hardware and the software in passenger jets tells us a great deal about the Potemkin-style workplace culture that prevails in Boeing and similar large US corporations. The surface sheen is more important than the substance. The marketing brochures and manuals are no different from mainstream news media in the level of BS they spew.

One can think of other organisations where the administration has more power in the corporate decision-making process and eats up more of the corporate budget while the people who do the actual work are increasingly ignored in boardrooms and their share of the budget correspondingly decreases. Hospitals and schools come to mind.

Lochearn , Mar 12, 2019 5:45:36 PM | link
@ 19

Boeing got taken over Wall Street, which means cheapest solution to anything. Engineers are stuck with what they are given. What part of that do you still not understand.

viking3 , Mar 12, 2019 5:55:18 PM | link
A mitigating factor to the flightcrew is the take-off to 10,000ft is the busiest time. There is enough going on without having to deal with runaway stab. This is especially true for new crew to a new aircraft. Rode in many cockpits before 9.11.01 when company employees were allowed and the standing rule was no conversations below 10,000 and keep you eyes open for traffic. I also include my Maintenance brethren in that equation. Spent 30 years as a Avionics Tech. on both military and commercial aircraft so I am not really fond of giving flightcrew a break but I might this time.
karlof1 , Mar 12, 2019 5:59:13 PM | link
Jen @19--

Dilbert , the comic strip , from today and yesterday nails the marketing angle. And this isn't the first time Scott Adams has targeted marketers.

ancientarcher , Mar 12, 2019 5:59:44 PM | link
Good point @4 Lochearn

Why is Boeing suffering from this design problem and not A320neo is that 737's wings are much lower to the ground than the A320. Unfortunately, more fuel-efficient engines require a larger air inlet, so the newer generation engines are much larger than the previously installed V2500 or CFM56 (anyone can verify that - the older engines are much, much smaller than the newer ones).

When Airbus introduced the Pratt & Whitney GTF on its A320s (calling it the neo - new engine option), it led to an increase (high single digits %) increase in fuel efficiency. Boeing had to respond to that. If they wanted to increase the height of the wings of the 737 from the ground, they would have had to redesign the fuselage which would have cost billions (and which they should have done, in hindsight). Instead, they listened to the investors and the bean counters as you have called them here and they jiggled the position of the wings a bit and introduced the new automatic stabiliser.

The people at Boeing are good or at least the engineers are. Imagine how many times this problem would have been brought up by someone for him/her to be shut down. It's not like they were not aware of the issue, but they were unwilling to let their bottom line suffer. Instead, they were okay with carrying the risk of killing hundreds of people.

That is what boggles my mind!

dh-mtl , Mar 12, 2019 6:00:43 PM | link
Lochearn | Mar 12, 2019 5:00:42 PM | 4;
Posted by: Ghost Ship | Mar 12, 2019 5:04:07 PM | 6

Agree with both of your comments. It looks like the 55 year old 737 air-frame design, which is very low to the ground when compared to more modern designs, is incompatible with the bigger engines required for fuel efficiency.

Being very low to the ground, Boeing was forced to put the engines out in front, which upset the airplane's balance, making the plane essentially unstable. To counter the instability they added the 'MCAS?' control system.

This solution violates a fundamental tenant of design for safety-critical systems. The tenant of 'fail-safe'. If something goes wrong the system is supposed to fail in a manner that preserves safety. For the 737 Max, when the this stability control system fails, the plane is fundamentally unstable. For this system it is not 'fail-safe'. It is 'fail-crash'.

Why would Boeing do this? Because Bombardier was building a clean sheet design, that would eat the 737's lunch. Boeing (and Airbus) were desperate to do something quick to minimize the 20% fuel burn advantage of the C-series. The more modern Airbus 320 air frame allowed it to re-engine their plane. Boeing's did not. But Boeing went ahead anyway and built an fundamentally unstable airplane, because the alternative was to walk away from their most important market.

To me, this looks like it could be catastrophic for Boeing. It reminds me of G.M.'s 'Corvair' moment (Unsafe at any speed), from the 1960s.

Jen , Mar 12, 2019 6:02:28 PM | link
Steven @ 13: The Indonesian Lion Air jet still crashed with all onboard dying, even after the pilots did as you said. B's post explains why: the MCAS system has to be deactivated separately as it is still active when autopilot is off and the pilots are flying manually. The Indonesian pilots did not have the time to figure out and realise that something else was controlling the plane's flight, much less deactivate what is effectively a second autopiloting system.
james , Mar 12, 2019 6:09:41 PM | link
how is this for reassuring? press release from boeing today... this info is from someone else, and i haven't verified it..

"For the past several months and in the aftermath of Lion Air Flight 610, Boeing has been developing a flight control software enhancement for the 737 MAX, designed to make an already safe aircraft even safer."

witters , Mar 12, 2019 6:10:37 PM | link
"Boeing got taken over Wall Street, which means cheapest solution to anything. Engineers are stuck with what they are given. What part of that do you still not understand."

Why they colluded with and indeed implemented what they knew to be - and now proven to be - a mass killing system. What do you not understand here?

james , Mar 12, 2019 6:11:02 PM | link
very un- assuring.. https://gizmodo.com/boeing-promises-to-release-software-update-for-737-max-1833224836
Whozhear , Mar 12, 2019 6:15:58 PM | link
Great article B.

There is much more behind the covering up of this "design flaw" from the start. The concept that, in this day and age, sensors used in the aviation field and close to brand new are defective is a stretch of the imagination. The current effort by Boeing to do a software upgrade, I suspect, is cover for something more damaging.

How easy is it these days to access the MAX's operation and flight control computers? Can it be done via WI-fi or Bluetooth from the airfield? We are well aware that in the newer heavies Seattle can take basic control via satellite.

Whozhear , Mar 12, 2019 6:19:12 PM | link
@ 5

You may also find this interesting........ https://colonelcassad.livejournal.com/4837334.html

Steven , Mar 12, 2019 6:24:25 PM | link
@jen @james

You clowns don't understand what you're telling me I'm "getting wrong." MCAS ISN'T part of the autopilot, and I never said it was.

737 pilots have to be able to do about 10 procedures in their sleep. One is when the electrical control of the horizontal stabilizers doesn't work; Aa few steps but basically pull a breaker and revert to manual control only, no power assist.

The crew on the previous flight did this and flew on with zero problem.

It's outrageous that lionair didn't find out why emergency procedures had had to be used and fix them before they let the airplane fly again.

If airlines do not adhere to Minimal safety standards, it's not Boeing's fault if it's planes crash.

Jonathan , Mar 12, 2019 6:35:04 PM | link
@35 Steven,

Is Boeing paying you to miss this part:

"This is the first description you, as 737 pilots, have seen. It is not in the AA 737 Flight Manual Part 2, nor is there a description in the Boeing FCOM (flight crew operations manual)," says the letter from the pilots' union safety committee. "Awareness is the key with all safety issues."
Kadath , Mar 12, 2019 6:41:49 PM | link
Well it's good to know that Canada is still allowing this death trap to fly, I couldn't bare the thought that Boeing might lose more stock value merely because of a defective product that kills! Seriously though, the silence from the Canadian media on this subject is deafening. CBC news didn't even cover the banning of these planes in the rest of the world until an hour ago and even then they seemed more concerned about the impact on Boeing then the you know 300 people killed because of this flawed plane. Eventually (before Friday) I think Canada will be forced to ground it's fleet of 737-8s. With the current corruption scandal, Trudeau is too weak right now to stand up in Question period and claim the 737-8s are safe to fly. Even Trump is getting in on the action and blaming Boeing for the accidents. FAA may end up being the biggest loser from this situations with a huge hit to its' trustworthiness, I remember when the FAA would issue emergency maintenance/inspection orders after any crash suspected to be caused by maintenance issues and ground entire fleets of aircraft if two planes crashed within 2 years. You know, the FAAs behaviour now reminds me of the old Soviet joke, "our planes never crash, their just indefinitely delayed"
Meshpal , Mar 12, 2019 6:46:17 PM | link
These people did not die they were murdered. Long ago, I had worked with Boeing on a computer project and I had the highest respect for the company and engineers. Facts and reality were paramount for Boeing. Things started a slow downhill slope when that TWA flight that was accidentally shot down by a missile. I noticed how uncomfortable the engineers were to talk about it – just a short comment that the fuel tank was not the cause. When politics and management go away from reality and facts, it is just a matter of time. But for the life of me I do not understand how Boeing can come to this:

Fault 1: As B says, it should never have been designed like this.
Fault 2: Don't tell the pilots about MCSA.
Fault 3: Real time flight tracking altitude data show wild swings – red light ignored. No need to wait for a plane to crash.
Fault 4: Lion Air Flight 610 crash showed that this MCSA system is at fault and nothing much was done. The murder of 189 people.
Fault 5: Ethiopian Airlines Flight 409 murdering an additional 157 people.
Fault 6: FAA says everything is ok.

Especially the Ethiopian Flight 409 crash should never have happened. This issue became well known to engineers and flight crews world wide after Lion Air. A good question is: was the disable MCSA switch now a memory item or a check list item for the flight crew? Or did Boeing want to wait for the final report of Lion Air?

I noticed that the Ethiopian pilot was not western, but looks like from Indian decent. I would not doubt his abilities, but rather say that he would follow the rules more than a western pilot. Western pilots would network and study this thing on their own and would not wait for Boeing. They would have penciled this into their flight deck routine - just to be safe.

JohnT , Mar 12, 2019 6:51:38 PM | link
David Park #5

I read this yesterday regarding the Venezuela power outages. Possible Stuxnet infestation ala Iran 2010?

https://www.strategic-culture.org/news/2019/03/11/trump-regime-electricity-war-in-venezuela-more-serious-than-first-believed.html

Alpi57 , Mar 12, 2019 6:54:45 PM | link
One can always find a benefit in the sanctions, albeit coincidental. Iran avoided a lot of damage from Boeing. They had ordered 140 of 737's. All got canceled. Congratulations.
ancientarcher , Mar 12, 2019 6:59:53 PM | link
@40 Alpi57
Iran always has the option of buying the Irkut MC-21 which in my opinion is the best narrowbody plane that anyone can buy now. Fully redesigned body with significantly higher composite percentage and comes with the best engine in the world for narrowbodies - the P&W GTF. And Russia will be happy.

What's not to like

Likklemore , Mar 12, 2019 7:07:19 PM | link
Before you guys and gals bash b, hop over to Zerohedge citing Dallas Morning News revealing FAA database Pilots on Boeing 737Max complained for months...Manual inadequate ...criminally insufficient .just for starters.
karlof1 , Mar 12, 2019 7:10:30 PM | link
james @32--

That Canada didn't is crazy :

"In a remarkable rebuke, nations from the U.K. to Australia have rejected public reassurances from the FAA and grounded Boeing's 737 Max."

Hoarsewhisperer , Mar 12, 2019 7:28:54 PM | link
I was a big fan of the 6-part BBC doco series Black Box from the 1990s. The main conclusion drawn was that the industry is way too fond of blaming as many mishaps as possible on Pilot Error, and way too slow to react to telltale signs that a particular aircraft model might have a fatal flaw. There was a tendency to ignore FAA edicts for inspection of a suspected design weakness. Two cases that come to mind were incorrectly locked DC 9 cargo doors ripping off with a big chunk of the plane plus half a dozen occupied seats, and a tendency of 727s to nose-dive into the "surface" at Mach 0.99.

I'll be very surprised if any part of b's analysis, conclusions and predictions turns out to incorrect.

World 3 - USA 0 , Mar 12, 2019 7:31:57 PM | link
Lights in Venezuela on. US Boeing stocks down. More evidence for the Lockheed f-16 downing. Reports it was a dogfight between an old MiG-21 (with modernised radar and missiles) that brought the modern US Lockheed f-16 down and maybe not from a launch of MiGs modern bvr missile.

Things are looking up.

Zachary Smith , Mar 12, 2019 7:33:32 PM | link
@ ancientarcher @41

The problem with a "new" airplane is the Western Content. Over a certain percentage, the US basically controls the situation. Another issue is servicing the things. If an airplane is sitting in Podunk Airport with a broken widget, the airline wants it fixed right now! Some planes like the 737 have been around for decades and there are probably parts for it - even at Podunk. A new plane will probably be grounded until a new part is transported in - a process which will take many hours even in the best of circumstances. Advantage to the 737 and other 'legacy' airplanes.

Just saw an interesting headline at Reuters - I'd suppose it is some friendly advice from Wall Street disguised as "news".

Breakingviews - Boeing needs to think faster than its watchdog

Change "watchdog" to "lapdog" and that would be about right. It seems to me a sensible proposal, for if Boeing must take a beating out of this, the company ought to at least adopt a pose of "really caring" and "doing the right thing". Try for the brownie points.

psychohistorian , Mar 12, 2019 7:40:55 PM | link
@ Zachary Smith who wrote
"
It seems to me a sensible proposal, for if Boeing must take a beating out of this, the company ought to at least adopt a pose of "really caring" and "doing the right thing".
"

China is coming to teach the West morals which are currently ranked below profit and ongoing private control of global finance

aspnaz , Mar 12, 2019 7:54:05 PM | link
@35 Steven

The Ethiopian airlines flight was an international flight, so the pilots will have been certified to international standards. I don't know the details of international standards for type training, but you are basically saying that the fault is not with Boeing, it is with the type training of international pilot crews. Can you elaborate and does this mean that we are equally in danger regardless of the aircraft model and that it is just coincidence that both these crew failures were on 737 Max models?

EV , Mar 12, 2019 8:07:08 PM | link
The evidences and recognizably legitimate information (there is always a lot of through-the-hat blather-yap from internet-"engineers") suggests thrust angle, not structure or CG destabilization. "larger" engines are not necessarily significantly heavier, but, today, and if more efficient, will be larger diameter for more fan, for more thrust (which in jet and fan engines is more power). Larger diameter nacelles will require modification of placement, higher, lower, larger weight will require modification of placement, forward, backward. Clearance restrictions may require modification of engine thrust-line angle, relative to fuselage, and fuselage-fit control surface lines (which include flight surfaces). Thrust changes with thrust changes, which means thrust-angle change will change thrust-effect at differing thrust amounts: Take-off and climb thrusts are near maximums, wherefore angular component will be near max then (cruise maximums are less, or less effective, or radical, for altitude air thinning).

What this means is that if larger engines on a 737 MAX, for larger bulk are slightly angled for clearance,the angling may have little effect except in specific instances and attitudes, such as take-off and climb. It sounds as if Boeing angled thrust slightly for engine fitting, and assumed a computer control fix could handle the off-line thrust component effect during the short duration times it was sufficient to effect flight characteristics, which, if the thrust-angling was up, would add a nose-up tail-down thrust rotation component, greater at greater power. to compensate which the software would add nose-down control surface counteraction, as incident described.

What it sounds like the pilot in the first, non-crash, case most likely did, that saved the aircraft, was not 'disable' an automatic system he had no information about, for it being not intended for disablement, but was reduce power, reducing the off-line thrust effect, so the auto system backed off. In the other incidents, especially if the airports were get-em-high-fast airports (to 'leave' the noise at the airport) the pilots would incline to not reduce power, and would be more likely to get into a war with the too automated auto-system, the way Tesla drivers can do with their over-automated systems.

All auto-control "AI" systems need human-override options built in, so that human-robot stand-offs to impact cannot occur. The real culprits in stand-off accident situations are the techie-guppies who think robotic control can always do everything better, and fail to think of the situation where the "right" response is wrong.

Jen , Mar 12, 2019 8:19:36 PM | link
Steven @ 35:

Lion Air's engineers had previously identified and tried to fix issues with the jet that crashed in October 2018.

The day before the jet took off from Jakarta airport and crashed, killing all 189 onboard, one of its Angle of Attack sensors had been replaced by engineers in Denpasar. Unfortunately the source I checked (see link below) doesn't say if this replacement AoA sensor was the one linked to the computer running the MCAS on the flight.

https://aviation-safety.net/database/record.php?id=20181029-0

fast freddy , Mar 12, 2019 8:26:15 PM | link
Bean Counters:

Delta once initiated a fuel saving measure whereby aircraft were insufficiently topped off with fuel to prevent pilots from wasting fuel. Once this information began to leak, the measure was ended.

psychohistorian , Mar 12, 2019 8:40:43 PM | link
@ fast freddy with the Bean Counters example

Thanks for Bean Counters! I so much wanted to use Bean Counters in my rant but thought I should stick to their standard appellation....

Bean Counters need to be taken seriously because they are not going to go away in any form of social organization and represent where the rubber meets the road when it comes to social decision making/risk management

Bean Counters (along with their bosses) need to be required to place morals as a higher value than profit and forced to operate with maximum public transparency and input; then, all will be good.

Pnyx , Mar 12, 2019 8:41:19 PM | link
Thank you for the accurate information. The basic problem seems to be that the low-consumption engines protrude too far. A well-designed, reliable aircraft becomes a faulty design. To try to solve this using software is a precarious approach. The FAA should have rejected this in principle. But because to design an aircraft completely from scratch naturally takes longer and would have given the competitor Airbus time to take over the to much market share, this 'solution' was accepted. This type of corruption will cost the u.s. a lot.

But first let's wait for Tronald's tweet, which will certainly be aired by tomorrow at the latest, in which he states that the 737 Max is a great, great aircraft - if not the best ever...

Kiza , Mar 12, 2019 8:49:51 PM | link
There is no doubt that both Boeing and FAA are to blame, but we pay the Government to ensure safety. Businesses have always chased profit, some more ruthlessly than others. But when the real corruption sets in then the Government regulator works for the businesses at the expense of the public . Regarding FAA reputation, there was a time when US was the leader in aviation, military as well as commercial. This means that the best experts were in US and thus FAA had the best and the most knowledgeable people. It is similar with FDA, all countries in the World used to follow the touchstone drug approvals by FDA. Now the "Federal" in any US acronym has become a synonym for "Corruption" (FBI anyone?).

The expertise does not matter any more, only greasing of the hands does. In the old times, anyone from FAA whose signature was on this planes approval to fly would get a life sentence in jail. But 330 people dead is less than a days worth of US global victims - business as usual for US. It is just that these victims are getting much more publicity than the silent victims. We will be lucky if anyone influential from FAA even resigns let alone goes to jail. There will be many more dead before the World understands this new reality.

Would you fly on any Boeing plane designed or delivered after the company was taken over by the Wall Street wizards in the 90s?

Peter AU 1 , Mar 12, 2019 8:53:28 PM | link

Re the engineers - they agreed to build an out of balance aircraft (thrust vs weight and drag) and to try and rectify this with software. What we will do for money. Both the bean counters and engineers are at fault, perhaps the beancounters and shiney butts more so as they did not inform buyers and pilots of the faults.
Hoarsewhisperer , Mar 12, 2019 8:56:22 PM | link
Posted by: fast freddy | Mar 12, 2019 8:26:15 PM | 52
(Fuel 'economy')

QANTAS once decreed that pilots rely on brakes and treat reverse thrust as emergency-only procedure, until a 747 skidded off the end of a runway with the nose-wheel inside the cabin and bruised engines = lots of down-time + very large repair bill.

Clueless Joe , Mar 12, 2019 8:58:46 PM | link
Fast Freddy:

Not just Delta; Ryanair did the same, at least until there was a major storm in Spain (Valencia, I think) and all flights had to be rerouted to other airports. That was fine, with dozens of planes flying around waiting for a window to land, until the handful of Ryanair planes that had been rerouted to Madrid and other places called for emergency landings, because they didn't have enough fuel to fly for even 30 minutes longer than planned flights.

I'm still amazed that the EU regulators and EU fucking commission didn't downright dismantle such a bloody greedy and downright criminal company. That they basically did nothing is proof enough, imho, of the insane level of capitalism-worship and of corruption going on in Brussels (of course it's even worse in Washington DC, but that's basically a given).

bevin , Mar 12, 2019 9:19:41 PM | link
the toronto star is carrying this story
Headline:
"Ottawa exempts Boeing 737 Max jets from standards meant to minimize passenger injuries"

"Air Canada and WestJet are flying the Boeing 737 Max aircraft exempt from regulatory standards meant to limit passenger injuries in the event of an accident, the Star has learned."

What does it mean?

Pft , Mar 12, 2019 9:51:59 PM | link
B is right. This is a criminal act of deception and fraud thats cost hundreds their lives. Boeing executives responsible should be prosecuted and then jailed.

Instead the safety agency regulating them will cover it up, backed by the criminal congress.

We see similar crimes against humanity being committed in many other areas. FDA, CDC, EPA, FCC , USDA, etc covering up for Big Agra, Big Pharma, Big Telecom with dangerous products like vaccines, glyphosate,4G/5G, GMO foods, gene edited livestock, etc. Safety standards are lax and inadequate, safety testing is minimal and in some cases fraudulent or completely lacking. Defects and adverse effects are covered up. A revolving door between these agencies and the industry they cover presents significant conflict of interest. These industries finance congressional members campaigns. Public safety is sacrificed for the greater good (profits and personal gain). Whistleblowers are muzzled, attacked or ridiculed as the MSM are their lap dogs.

That said, the airline industry has had a remarkable safety record over the last 30 years if you can overlook their failure to have adequate locks on cockpit doors in 2001. However, the lack of competition and increasing corruption and continuing moral decay we see in society , government and industry has obviously taken its toll on the industry. This is inexcusable. Heads should roll (dont hold your breath).

El Cid , Mar 12, 2019 9:57:08 PM | link
Congress flies on these aircraft to and fro from Washington to their districts. It is to their interests to have these Boeing 737 permanently grounded.
ben , Mar 12, 2019 10:13:18 PM | link
psycho @1 said;"The West is a world in which the accountants have more sway than engineers."

Case closed, and anyone who thinks senior execs should be prosecuted and jailed are right.

BUT, never would happen in today's pro-corporate U$A mentality..

Profits uber alles!!

Kadath , Mar 12, 2019 10:23:36 PM | link
Re: 59 Bevin, "Ottawa exempts Boeing 737 Max jets from standards meant to minimize passenger injuries"

- what this means is that Washington called Ottawa and ordered little Justin that he had to allow the 737 8's to fly and Justin said yes sir! However, someone at the Transportation Safety Board of Canada, told Justin that the threat these plane pose to travellers was so obvious that they couldn't just ignore it and that they would instead have to issue a waiver to show that they have done due diligence - apparently this person or someone else within the department then called the Star in order to leak the information and embarrass Justin into reversing his decision. I imagine tomorrow at 4:00pm during the question hour, Justin will get raked through the coals over his - Justin's whole defense of his actions during the Lavin scandal has been "I needed to protect Canadian jobs", I imagine the NDP or Conservatives will then retort something along the lines of "you'll break the law to protect Jobs, why won't you obey the law to protect Canadian lives!", I should point out that 8 Canadians were killed in the most recent crash in Ethiopia

paul , Mar 12, 2019 10:28:00 PM | link
Steven @ 35: watch this

from 2014: 32min in john woods aerospace engineer whistle blower https://www.youtube.com/watch?v=rvkEpstd9os

acementhead , Mar 12, 2019 10:39:09 PM | link
Steven is correct. Totally correct. I suspect that he is an airline pilot, as am I. Everybody else is wrong at least in part and most between 50% and 100%(The description of the cause of the QANTAS hull loss).

Pilots MUST know all about aircraft systems operation. It is crazy for Boeing to have functions not in the AFM.

The system in question is not operative with autopilot engaged. In manual flight if at any time one gets an uncommanded stab trim movement one should immediately disable electrical trim(One switch, half a second, no "procedure" required. In manual flight if the trim wheel moves and you hadn't touched the trim switches you have uncommanded trim. Immediately disable electrical trim.

There is procedure for reestablishment of electrical trim, that does take time. The defeat of the runaway trim does not take time. B737 has provision for manual trim(but it's very slow.

Bob , Mar 12, 2019 10:47:40 PM | link
Also a very interesting read about the JT610 Flight https://www.satcom.guru/2018/11/first-look-at-jt610-flight-data.html
VietnamVet , Mar 12, 2019 10:47:49 PM | link
I grew up reading Boeing's weekly employee newspaper. Times have changed too much since then. Moving the headquarters from Seattle to Chicago and a second 787 assembly line in South Carolina to bust their unions are proof that Boeing is a multinational corporation superior to national governments. The company is the Empire's armorer for profit. It is criminal to design an unstable passenger airplane that must be controlled by fly by wire sensors and computers to stay in the air. The problem is the aircraft industry duopoly and deregulation. Airbus has lost at least three aircraft to problems with the pilot computer interface. I was shocked when NBC put this first last night. I though it would be silenced. I blame Trump Derangement Syndrome. His trade wars and dissing have ticked off the world. When China grounded the 737 Max 8 everybody followed to show what they really think about the North American Empire. This could be devastating to the last manufacturing industry left in the USA.
Deal , Mar 12, 2019 10:58:29 PM | link
Boeing in my view took a cynical decision. That is, there would only be a few crashes within a set period. Thus the insurance companies would pick up the tab for their profits. However the loss of two planes so close together could destroy the company. The aforesaid insurance companies will not pay a single dime if they can stick corporate murder charges onto Boeing.

This smells of the Ford Pinto scandal where Ford knew that there was a problem with the fuel system if the car was rear-ended ( the vehicle burst into flames ) but it was cheaper to pay the compensation than fix the problem.

Kalen , Mar 13, 2019 12:25:40 AM | link
B is missing the point that fitting new engines caused airplane to take off close to stalling horizontal speeds and angles at very low altitude and more steeply ascending to flight altitude and that has left little time for pilots to react. That is very dangerous as much weaker tail wind may confuse pilots and sensors. To remedy that without recertification AI software was installed to react faster and overriding actions of pilot who was assumed not be aware of situation at the moment he had to immediately react at the latest.

Lack of sensor redundancy is also criminal as determination of sensor malfunction is critical for pilot. That is AI application correcting "human" physical mental deficiencies and that is deadly trap.

If it goes to court, interesting case will be, whose error was that as MCAS system acted correctly against pilot based on faulty sensor causing pilot to make mistake recovering from correct but suicidal software actions.

People must be warned of cultish trust in technology and AI which is ultimate guilty party together with greed that killed those people.

Pft , Mar 13, 2019 1:01:16 AM | link
Frances@70

There are unlimited dollars for any intervention they choose, publicly allocated or not. There is a reason 21 trillion in pentagon spending is unaccounted for. This does not count dark money from illicit means used to fund covert operations.

The fact its public just means Trump wants congress to sanction it, which they will. Seized Venezuela assets will serve as collateral for future reimbursement.

Grieved , Mar 13, 2019 1:02:08 AM | link
@65 acementhead - "It is crazy for Boeing to have functions not in the AFM"

No, it's criminal. And while all the technical discussion around how to fly a plane is truly interesting, what's really at issue here is corporate and institutional betrayal of trust.

The corporate aspect is Boeing, obviously. The institutional aspect is FAA, which used to lead the world in trust when it came to life and death matters.

But now, in what Bloomberg, even while trying to support FAA, has no choice but to report as a "stunning rebuff" to FAA's integrity, countries around the world are grounding this flawed plane. Germany, among others, has closed its airspace to the 737.

This situation has only a little to do with how to fly a plane. It has vastly more to do with the face of capitalism we see leering at us as our families live their last few moments, on the way to the ground. It has to do with how the corporate spin departments will attempt to cover up and evade responsibility for these crimes.

And it has to do with how the global consumer market will start to book its flights based not on price or time or seat location but on make of plane.

And despite your claim that "Everybody else is wrong at least in part..." , I doubt very much that most of the commenters here are wrong in their appreciation of the situation.

snake , Mar 13, 2019 1:07:41 AM | link
@68 No Deal

I don't think Boeing made a decision, they had little choice (stockholders were first, the jobs were essential to the politicians, and market share would become competitive if Boeing dropped out), it was the pressure of the system that charted their course.

Capitalism is about competition in a just, fairly well managed government regulated environment. In order for capitalism not to over step the bounds of competitive capitalism; government must remain present, to prevent foul play and to deny all hints of monopoly power...

Capitalism without an honest government becomes organized crime or, worse, it degenerates to allow private enterprise and special interest to dictate how the rule making and military arms of government should be used, against domestic and foreign competition. . Economic Zionism is what I call this last degenerative stage.

Defensively EZ teaches the winner to completely and totally destroy the infrastructure, the resources and the people (including competitive personnel with the brains to develop competition) of those who refuse to conform or those who insist on competing; offensively , EZ teaches the winner to take all and to take-over, own and keep the goodies taken from those destroyed, and in the matter of profit making and wealth keeping EZ teaches only winners are allowed to produce-and -profit everyone else is to be made to feed the monopoly that eliminated competition produced. The residual of eliminated, decimated competitive opposition = monopoly power

It is the king of the mountain monopoly that produces the wealth and power and feeds the corruption that makes the rich richer.

I think this case makes clear, privatization of government responsibility nearly always turns sour . The Government should take over and keep the operation of all of the Airlines strictly in government hands (privatization is proven to be problematic). When I grew up all of the airlines were so tightly regulated they were part of the government; the airlines were investors and operators following government rules and regulations. pricing was based on point to point fixed in price and terms (and the same for all airlines) and that was a time when aircraft design was not so accurate, meals were served and jets were nearly not existent but still there were very few accidents. Same for the Trucking Industry and the railroad.. Why should roads be government obligations, but rail, trucks and planes be privately owned?

I am not a communist or a socialist, I just know that private influence will always find a way to wrongly influence public sector employees when private interest wants something from government.

V , Mar 13, 2019 1:43:43 AM | link
VietnamVet | Mar 12, 2019 10:47:49 PM | 67

Agreed!

For a number issues/reasons, I quit flying in 2007, vowing never to set foot in an aircraft again. Trains or ships, okay. So far so good; the 737 Max just firms my rsolve...

Circe , Mar 13, 2019 2:17:54 AM | link
The aircraft did not undergo piece by piece certification or type certification . It underwent supplemental type certification that shortens the investigative process.

max 8 Certification

This is a potential disaster for Boeing. The stock is falling and it'll go into free fall if decision is made to ground this aircraft. FAA will also face a legal tsunami. If this is the reason they didn't ground the planes yet; it's going to look really damning when the find themselves in court later.

Hoarsewhisperer , Mar 13, 2019 2:21:34 AM | link
This is shaping up to be unnecessarily messy for the industry. Yesterday's Oz edition of PBS Newshour went over most of the topics touched on in b's posting but stopped short of finger-pointing although it insinuated that Boeing had blundered. Today's edition posed a question I was going to pose here...

"Should anyone be flying 737MAXes before the black box data has been evaluated?"

The answer, delivered by a female ex-Inspector General (of precisely what I didn't hear) is "No. Absolutely not!"

james , Mar 13, 2019 2:39:06 AM | link
@35 steven... i will take that as a compliment, referring to me as a clown.. i have high regard for clowns, although i don't think there is anything funny about the topic at hand.. innocent people dying and it being based on a corporation that might be negligent in it's responsibility to it's passengers, is something we will have to wait and find out about.. i am definitely not thinking it is pilot error here, as you suggest.. i saw what the canadian airpilot association said - essentially they don't believe Canada should be flying them either, as i read it..

@43 karlof1.. as i pointed out in the link @7 - the fact canada allows them to continue to be flown makes no sense to me..poor judgment call is what it looks like to me.. the canuck gov't and etc are living in the shadows of what b has described about the FAA.. a lot of credibility is on the line here as i see it..

i apologize for not reading all the comments, as i was out most of the day and just got back..

acementhead , Mar 13, 2019 2:48:25 AM | link

Kalen said

"...fitting new engines caused airplane to take off close to stalling horizontal speeds and angles at very low altitude and more steeply ascending to flight altitude and that has left little time for pilots to react. That is very dangerous as much weaker tail wind may confuse pilots and sensors. ..."

This is absolute garbage. Nothing but a "word salad" it has nothing to do with reality.

The Ethiopian crash is due to a useless pilot. A different crew, on the same plane, the day before had the same problem. They handled it correctly, which is EASY, and completed the day's flying without problem. Third world airlines have HUGE numbers of absolutely incompetent pilots.

Anyone interested in the operational aspects of this should go to an aviation site. PPRUNE has some good discussion of this event. There are a few idiots posting but very few. Most people there are very knowledgeable. I had a look at Airliners.net mostly rubbish.

Peter AU 1 , Mar 13, 2019 3:16:03 AM | link
Kalen 69
Installing the new engines changed the angle of thrust. In a balanced aircraft, engine thrust is pushing centrally on wight and drag.
If the thrust is below center of weight, it will nose up while accelerating. If thrust is below center of drag, the aircraft will be trying to nose up while cruising.

The original aircraft was most likely balanced, with thrust centered to weight and drag. Mounting new engines lower means the aircraft will tend to nose up when accelerating, and nose up during cruise. Relying on sensors and software to keep an unstable aircraft stable is not a good thing. To not notify pilots of this problem is worse than not a good thing.

psychohistorian , Mar 13, 2019 3:24:41 AM | link
@ acementhead with insistence that the pilot was at error.

Without the black box data you are sticking your **ck out a long way. I find it interesting that in both your comments you are insistent that the pilot was the problem. You wrote in your first comment
"
Pilots MUST know all about aircraft systems operation. It is crazy for Boeing to have functions not in the AFM.
"
The 2nd sentence is your only criticism of Boeing but then you spend the rest of the comment describing what the pilot should have done.....before black box data says what happened.

Kiza , Mar 13, 2019 3:45:44 AM | link
When a relative asked me recently why did the new Ethiopian plane crash, I generated a sound-bite like explanation. Before, the civilian airliners were falling out of the sky because of an immature technology, that is because of the learning curve. Now that the technology involved is fully mature the airliners are falling out of the sky for profit taking.

The scariest thing is that 737MAX model was a botched Boeing reaction to the market change towards budget flight. If the plane manufacturer and the approval authority were prepared to cut corners so badly to remain "market competitive", one can only imagine the compromises that budget airlines are making to sell cheap whilst increasing profits. Some airlines must be treating planes worst than buses are treated by the bus companies.

US citizens entrust their wallets to the private bank, The Federal=Corrupt Reserve, which prints money and gives it to the most exceptional among the exceptional (did you think that there was no hierarchy within the exceptionality?). We entrust our heads to the Federal=Corrupt Aviation Administration whose bureaucrats work for the porky revolving door consulting jobs that come after a stint in the Corrupt.

Kiza , Mar 13, 2019 4:01:48 AM | link
@Peter AU 1

As Aussies would say: using software to solve a hardware problem is like putting lipstick on a pig. More than 300 people dead are a terrible testament to this wisdom.

Yet, it is fascinating that you are blaming the engineers and some others are asking in the comments for whistleblowers in Boeing and FAA.

Well, if I were an engineer at Boeing I would probably have resigned if asked to do this design monstrosity of putting unfitting engines on a differently designed plane - creating a Lego airplane, but I never had a home mortgage over my head. Regarding whistleblowing, we all know how suicidal it is, why do supposedly intelligent people expect other to be so dumb to commit one? Before you expect others to self-sacrifice ask yourself if you would do so in their shoes.

b , Mar 13, 2019 4:01:57 AM | link
It seems that the U.S. now wants to manipulate the investigation of the Ethiopian Airlines crash. WSJ U.S., Ethiopia Maneuver Over Crashed Plane's Black Boxes Washington wants NTSB to download data from recorders, while African nation's officials prefer U.K. experts.
U.S. air-safety investigators on Tuesday engaged in intense behind-the-scenes discussions with their Ethiopian counterparts regarding where the black-box recorders found amid the wreckage of Ethiopian Airlines Flight 302 will be downloaded, according to people familiar with the matter.
Peter AU 1 , Mar 13, 2019 4:15:37 AM | link
Kiza 85 "Before you expect others to self-sacrifice ask yourself if you would do so in their shoes."
"Self sacrifice" ... Most of my life I have been self employed, but for a few years when I was young and then as I got older and ill health slowed me down, I have worked for others.

If told to do a job that I believed was destined to fail, I would pull out. What you call self sacrifice simply comes down to money, and as I put in an earlier comment "what we do for money" Engineers that put this schumozzel together were simply putting in the hours to received their pay check at the end of the week with no thought as to the people hurt or killed when this bodge job failed. The fault is equally with engineers who sell their souls for money and the bean counters who did not inform purchasers or pilots.

Kalen , Mar 13, 2019 4:16:24 AM | link
@aceme..

What you wrote is asinine garbage, my friend. Everybody except for bribed FAA dumped B737 Max 8 until notice. It is simply too dangerous to fly.

It is you who are trolling for Boeing, the problem was discovered five months ago never fixed, blamed pilots despite previous complaints. Now FAA admitted that fact by demanding software fix in April or they will ground the fleet. PILOT ERROR????? Of course not and they know it.

Not only worldwide airlines dumped this model so far but also they closed the airspace for them in EU, China, HK etc.,because the plane is dangerous and may require recertification of plane and pilots since Boeing lied about it and its flight parameters,p the trust was broken, they were cheating with deadly consequences was revealed. Expect hundreds of lawsuits, as American were also onboard.

Interestingly that anti-stalling software cannot be disabled on the ground only in flight in manual mode only after it was engaged exactly for reasons I mentioned about near-stalling dangerous flight parameters.

Peter AU 1 , Mar 13, 2019 4:27:42 AM | link
b 86

US Boeing are very much competing with France airbus and also the coming Chinese Russian airliner. The US is very much batting for the home team (as the mad monk told the Australian Broadcasting Commission to do so).

Kiza , Mar 13, 2019 6:14:40 AM | link
Is it really so hard to connect the secrecy about MCAS and why it was needed in the first place? The lawyers will have a ball of the decade with this: the defendant created a secret software solution to turn a Lego airplane into a real airplane, made the software dependent on a single sensor, and made it difficult to switch the software off.

The networked Western pilots learned how to compensate for the faulty design, but non-networked foreign pilots never got in on the flying tricks needed for this new plane because it was never been in their training. Also, the critical sensor may not be available on an airport in Ethiopia or Indonesia or .....

I cannot believe that Boeing shares dropped only 7.5%, this is a statement of how untouchable Boeing is and how protected it will be by the Corrupt.

[Mar 10, 2019] U.S. SEC to review stock trading rules in big potential shakeup by John McCrank

Mar 10, 2019 | finance.yahoo.com

NEW YORK (Reuters) - The U.S. Securities and Exchange Commission is launching a review of the main set of rules governing stock trading, opening the door to the biggest potential changes in a decade-and-a-half, the head of the agency said on Friday.

The possible changes are aimed at making it easier to trade illiquid stocks, making more trading information available to investors, and improving the speed and quality of public data feeds needed for trading.

The SEC in 2005 adopted a broad framework called Regulation National Market System that was largely aimed at ensuring retail investors get the best price possible and preventing trades from being executed at prices that are inferior to bids and offers displayed on other trading venues.

Since then, faster, more sophisticated technology has put a bigger focus on rapid-fire, high-speed trading. There has also been an influx of new electronic stock exchanges, fragmenting liquidity and increasing costs for brokers around exchange connectivity and market data needed to fuel algorithmic trading.

"It is clear that the market challenges we faced in the early 2000s are not the same as the issues that we confront over a decade later," Jay Clayton, chairman of the SEC, said at an event in New York.

To get a better grasp of current market issues, the SEC held a series of roundtable discussions with industry experts last year that led to potential rule-making recommendations around thinly-traded securities, combating retail fraud, and market data and market access, Clayton said.

Some areas the SEC is looking at include:

The 2019 review follows an active 2018 for the SEC.

The regulator adopted rules to increase transparency around broker-dealer stock order routing and private off-exchange trading venues. It also ordered a pilot program to test banning lucrative rebate payments that exchanges make to brokers for liquidity-adding stock orders.

(Reporting by John McCrank; Editing by Tom Brown)

https://s.yimg.com/rq/darla/3-6-3/html/r-sf.html

Sign in to post a message. 17 viewing1 person reacting

judi 1 hour ago What about Naked Shorting? It is out of control and no one including the SEC is doing anything to stop it??

Tara 41 minutes ago The rules implemented in 2005 did nothing to help retail traders with accounts under 25K.
When are you going to address the real issue of stock price manipulation? Also, bring back the uptick rule. And while you are at it, we need rules to punish dishonest analysts who publish opinions of price that are so far off the charts, they never reflect actual earnings often announced days later.

Rob 38 minutes ago They are going to make it more in favor of big boys aka the banks

[Dec 16, 2018] Trump Models His War on Bank Regulators on Bill Clinton and W's Disastrous Wars by Bill Black

Notable quotes:
"... By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Jointly published with New Economic Perspectives ..."
"... Wall Street Journal ..."
"... Wall Street Journal ..."
"... The idea that examiners should not criticize any bank misconduct, predation, or 'unsafe and unsound practice' that does not constitute a felony is obviously insane. ..."
"... The trade association complaint that examiners dare to criticize non-felonious bank conduct – and the WSJ ..."
"... I have more than a passing acquaintance with banking, banking regulation, and banking's rectitude (such an old fashioned word) in the importance for Main Street's survival, and for the country's as a whole survival as a trusted pivot point in world finance , or for the survival of the whole American project. I know this sounds like an over-the-top assertion on my part, however I believe it true. ..."
"... Obama et al confusing "banking" with sound banking is too ironic, imo. ..."
"... It was actually worse than this. The very deliberate strategy was to indoctrinate employees of federal regulatory agencies to see the companies they regulated not as "partners" but as "customers" to be served. This theme is repeated again and again in Bush era agency reports. Elizabeth Warren was viciously attacked early in the Obama Administration for calling for a new "watchdog" agency to protect consumers. The idea that a federal agency would dedicate itself to protecting citizens first was portrayed as dangerously radical by industry. ..."
"... Models on Clinton and Bush. What's not to like? Why isn't msm and dem elites showing him the love when he's following their long term policies? And we might assume these would be hills policies if she had been pushed over the line. A little thought realizes that in spite of the pearl clutching they far prefer him to Bernie. ..."
Dec 14, 2018 | www.nakedcapitalism.com
By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Jointly published with New Economic Perspectives

The Wall Street Journal published an article on December 12, 2018 that should warn us of coming disaster: "Banks Get Kinder, Gentler Treatment Under Trump." The last time a regulatory head lamented that regulators were not "kinder and gentler" promptly ushered in the Enron-era fraud epidemic. President Bush made Harvey Pitt his Securities and Exchange Commission (SEC) Chair in August 2001 and, in one of his early major addresses, he spoke on October 22, 2001 to a group of accounting leaders.

Pitt, as a private counsel, represented all the top tier audit firms, and they had successfully pushed Bush to appoint him to run the SEC. The second sentence of Pitt's speech bemoaned the fact that the SEC had not been "a kinder and gentler place for accountants." He concluded his first paragraph with the statement that the SEC and the auditors needed to work "in partnership." He soon reiterated that point: "We view the accounting profession as our partner" and amped it up by calling accountants the SEC's "critical partner."

Pitt expanded on that point: "I am committed to the principle that government is and must be a service industry." That, of course, would not be controversial if he meant a service agency (not "industry") for the public. Pitt, however, meant that the SEC should be a "service industry" for the auditors and corporations.

Pitt then turned to pronouncing the SEC to be the guilty party in the "partnership." He claimed that the SEC had terrorized accountants. He then stated that he had ordered the SEC to end this fictional terror campaign.

[A]ccountants became afraid to talk to the SEC, and the SEC appeared to be unwilling to listen to the profession. Those days are ended.

This prompted Pitt to ratchet even higher his "partnership" language.

I speak for the entire Commission when I say that we want to have a continuing dialogue, and partnership, with the accounting profession,

Recall that Pitt spoke on October 22, 2001. Here are the relevant excerpts from the NY Times' Enron timeline :

Oct. 16 – Enron announces $638 million in third-quarter losses and a $1.2 billion reduction in shareholder equity stemming from writeoffs related to failed broadband and water trading ventures as well as unwinding of so-called Raptors, or fragile entities backed by falling Enron stock created to hedge inflated asset values and keep hundreds of millions of dollars in debt off the energy company's books.

Oct. 19 – Securities and Exchange Commission launches inquiry into Enron finances.

Oct. 22 – Enron acknowledges SEC inquiry into a possible conflict of interest related to the company's dealings with Fastow's partnerships.

Oct. 23 – Lay professes confidence in Fastow to analysts.

Oct. 24 – Fastow ousted.

The key fact is that even as Enron was obviously spiraling toward imminent collapse (it filed for bankruptcy on December 2) – and the SEC knew it – Pitt offered no warning in his speech. The auditors and the corporate CEOs and CFOs were not the SEC's 'partners.' Thousands of CEOs and CFOs were filing false financial statements – with 'clean' opinions from the then 'Big 5' auditors. Pitt was blind to the 'accounting control fraud' epidemic that was raging at the time he spoke to the accountants. Thousands of his putative auditor 'partners' were getting rich by blessing fraudulent financial statements and harming the investors that the SEC is actually supposed to serve.

Tom Frank aptly characterized the Bush appointees that completed the destruction of effective financial regulation as "The Wrecking Crew." It is important, however, to understand that Bush largely adopted and intensified Clinton's war against effective regulation. Clinton and Bush led the unremitting bipartisan assault on regulation for 16 years. That produced the criminogenic environment that produced the three largest financial fraud epidemics in history that hyper-inflated the real estate bubble and drove the Great Financial Crisis (GFC). President Trump has renewed the Clinton/Bush war on regulation and he has appointed banking regulatory leaders that have consciously modeled their assault on regulation on Bush and Clinton's 'Wrecking Crews.'

Bill Clinton's euphemism for his war on effective regulation was "Reinventing Government." Clinton appointed VP Al Gore to lead the assault. (Clinton and Gore are "New Democrat" leaders – the Wall Street wing of the Democratic Party.) Gore decided he needed to choose an anti-regulator to conduct the day-to-day leadership. We know from Bob Stone's memoir the sole substantive advice he gave Gore in their first meeting that caused Gore to appoint him as that leader. "Do not 'waste one second going after waste, fraud, and abuse.'" Elite insider fraud is, historically, the leading cause of bank losses and failures, so Stone's advice was sure to lead to devastating financial crises. It is telling that it was the fact that Stone gave obviously idiotic advice to Gore that led him to select Stone as the field commander of Clinton and Gore's war on effective regulation.

Stone convinced the Clinton-Gore administration to embrace the defining element of crony capitalism as its signature mantra for its war on effective regulation. Stone and his troops ordered us to refer to the banks, not the American people, as our "customers." Peters' foreword to Stone's book admits the action, but is clueless about the impact.

Bob Stone's insistence on using the word "customer" was mocked by some -- but made an enormous difference over the course of time. In general, he changed the vocabulary of public service from 'procedure first' to 'service first.'"

That is a lie. We did not 'mock' the demand that we treat the banks rather than the American people as our "customer" – we openly protested the outrageous order that we embrace and encourage crony capitalism. Crony capitalism's core principle – which is unprincipled – is that the government should treat elite CEOs as their 'customers' or 'partners.' A number of us publicly expressed our rage at the corrupt order to treat CEOs as our customers. The corrupt order caused me to leave the government.

Our purpose as regulators is to serve the people of the United States – not bank CEOs. It was disgusting and dishonest for Peters to claim that our objection to crony capitalism represented our (fictional) disdain for serving the public. Many S&L regulators risked their careers by taking on elite S&L frauds and their powerful political fixers. Many of us paid a heavy personal price because we acted to protect the public from these elite frauds. Our efforts prevented the S&L debacle from causing a GFC – precisely because we recognized the critical need to spend most of our time preventing and prosecuting the elite frauds that Stone wanted us to ignore..

Trump's wrecking crew is devoted to recreating Clinton and Bush's disastrous crony capitalism war on regulation that produced the GFC. In a June 8, 2018 article , the Wall Street Journal mocked Trump's appointment of Joseph Otting as Comptroller of the Currency (OCC). The illustration that introduces the article bears the motto: "IN BANKS WE TRUST."

Otting, channeling his inner Pitt, declared his employees guilty of systematic misconduct and embraced crony capitalism through Pitt's favorite phrase – "partnership."

I think it is more of a partnership with the banks as opposed to a dictatorial perspective under the prior administration.

Otting, while he was in the industry, compared the OCC under President Obama to a fictional interstellar terrorist. Obama appointed federal banking regulators that were pale imitation of Ed Gray, Joe Selby, and Mike Patriarca – the leaders of the S&L reregulation. The idea that Obama's banking regulators were akin to 'terrorists' is farcical.

The WSJ's December 12, 2018 article reported that Otting had also used Bob Stone's favorite term to embrace crony capitalism.

Comptroller of the Currency Joseph Otting has also changed the tone from the top at his agency, calling banks his "customers."

There are many terrible role models Trump could copy as his model of how to destroy banking regulation and produce the next GFC, but Otting descended into unintentional self-parody when he channeled word-for-word the most incompetent and dishonest members of Clinton and Bush's wrecking crews.

The same article reported a trade association's statement that demonstrates the type of outrageous reaction that crony capitalism inevitably breeds within industry.

Banks are suffering from "examiner criticisms that do not deal with any violation of law," said Greg Baer, CEO of the Bank Policy Institute ."

The article presented no response to this statement so I will explain why it is absurd. First, "banks" do not "suffer" from "examiner criticism." Banks gain from examiner criticism. Effective regulators (and whistleblowers) are the only people who routinely 'speak truth to power.' Auditors, credit rating agencies, and attorneys routinely 'bless' the worst CEO abuses that harm banks while enriching the CEO. The bank CEO cannot fire the examiner, so the examiners' expert advice is the only truly "independent" advice the bank's board of directors receives. That makes the examiners' criticisms invaluable to the bank. CEOs hate our advice because we are the only 'control' (other than the episodic whistleblower) that is willing and competent to criticize the CEO.

The idea that examiners should not criticize any bank misconduct, predation, or 'unsafe and unsound practice' that does not constitute a felony is obviously insane. While "violations of law" (felonies) are obviously of importance to us in almost all cases, our greatest expertise is in identifying – and stopping – "unsafe and unsound practices" because such practices, like fraud, are leading causes of bank losses and failures.

Third, repeated "unsafe and unsound practices" are a leading indicator of likely elite insider bank fraud and other "violations of law."

The trade association complaint that examiners dare to criticize non-felonious bank conduct – and the WSJ reporters' failure to point out the absurdity of that complaint – demonstrate that the banking industry's goal remains the destruction of effective banking regulation. Trump's wrecking crew is using the Clinton and Bush playbook to restore fully crony capitalism. He has greatly accelerated the onset of the next GFC.


Chauncey Gardiner , December 14, 2018 at 2:01 pm

Thank you for this, Bill Black. IMO the long-term de-regulatory policies under successive administrations cited here, together with their neutering the rule of law by overturning the Glass-Steagall Act; de-funding and failing to enforce antitrust, fraud and securities laws; financial repression of the majority; hidden financial markets subsidies; and other policies are just part of an organized, long-term systemic effort to enable, organize and subsidize massive control and securities fraud; theft of and disinvestment in publicly owned resources and services; environmental damage; and transfers of social costs that enable the organizers to in turn gain a hugely disproportionate share of the nation's wealth and nearly absolute political control under their "Citizens United" political framework.

Not to diminish, but among other things the current president provides nearly daily entertainment, diversion and spectacle in our Brave New World that serves to obfuscate what has occurred and is happening.

RBHoughton , December 14, 2018 at 9:41 pm

I'm with you Chauncey. I believe the rot really got started with creative accounting in early 1970s. That's when accountants of every flavor lost themselves and were soon followed by the lawyers. Sauce for the goose.

Banks and Insurers and many industrial concerns have become too big. We could avoid all the regulatory problems by placing a maximum size on commercial endeavour.

chuck roast , December 14, 2018 at 4:28 pm

Sameo-sameo

A number of years ago I did both the primary capital program and environmental (NEPA) review for major capital projects in a Federal Region. Hundreds of millions of dollars were at stake. A local agency wanted us (the Feds) to approve pushing up many of their projects using a so-called Public Private Partnership (PPP). This required the local agency to borrow many millions from Wall Street while at the same time privatizing many of their here-to-fore public operations. And of course there was an added benefit of instituting a non-union shop.

To this end I was required to sit down with the local agency head (he actually wore white shoes), his staff and several representatives of Goldman-Sachs. After the meeting ended, I opined to the agency staff that Goldman-Sachs was "bullshit" and so were their projects.

Shortly thereafter I was removed to a less high-profile Region with projects that were not all that griftable, and there was no danger of me having to review a PPP.

Oh, and I denied, denied, denied saying "bullshit."

flora , December 14, 2018 at 10:08 pm

Thank you, NC, for featuring these posts by Bill Black.

I have more than a passing acquaintance with banking, banking regulation, and banking's rectitude (such an old fashioned word) in the importance for Main Street's survival, and for the country's as a whole survival as a trusted pivot point in world finance , or for the survival of the whole American project. I know this sounds like an over-the-top assertion on my part, however I believe it true.

Main Street also knows the importance of sound banking. Sound banking is not a 'poker chip' to be used for games. Sound banking is key to the American experiment in self-determination, as it has been called.

Politicians who 'don't get this" have lost touch with the entire American enterprise, imo. And, no, the neoliberal promise that nation-states no longer matter doesn't make this point moot.

flora , December 14, 2018 at 10:47 pm

adding: US founding father Alexander Hambleton did understand the importance of sound banking, and so Obama et al confusing "banking" with sound banking is too ironic, imo.

Tim , December 15, 2018 at 8:29 am

It was actually worse than this. The very deliberate strategy was to indoctrinate employees of federal regulatory agencies to see the companies they regulated not as "partners" but as "customers" to be served. This theme is repeated again and again in Bush era agency reports. Elizabeth Warren was viciously attacked early in the Obama Administration for calling for a new "watchdog" agency to protect consumers. The idea that a federal agency would dedicate itself to protecting citizens first was portrayed as dangerously radical by industry.

John k , December 15, 2018 at 12:14 pm

Models on Clinton and Bush. What's not to like? Why isn't msm and dem elites showing him the love when he's following their long term policies?
And we might assume these would be hills policies if she had been pushed over the line. A little thought realizes that in spite of the pearl clutching they far prefer him to Bernie.

[Aug 07, 2018] Bill Black Pre-Crisis 4506-T Studies Showed Massive Fraud in Liar's Loans; Fed Ignored Warning, DoJ Refused to Target Implic

Notable quotes:
"... By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Jointly published with New Economic Perspectives ..."
"... New Economic Perspectives ..."
"... The Pentagon Wars ..."
"... The Generals ..."
"... The Chickenshit Club ..."
Aug 07, 2018 | www.nakedcapitalism.com

Bill Black: Pre-Crisis "4506-T Studies" Showed Massive Fraud in Liar's Loans; Fed Ignored Warning, DoJ Refused to Target Implicated Banksters Posted on August 7, 2018 by Yves Smith Yves here. With the tsunami of "ten years after the crisis" stories that are already starting to hit the beach, I am endeavoring to focus on ones that contain new or significantly under-reported information or give particularly insightful overviews. Here Black gives a telling example of both how the authorities were warned of massive mortgage fraud and ignored it, and then later failed to use the same evidence to pursue the perps.

By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Jointly published with New Economic Perspectives

Steven Krystofiak formed the Mortgage Brokers Association for Responsible Lending, a professional association dedicated to fighting mortgage fraud and predation. On August 1, 2006. He tried to save our Nation by issuing one of the most prescient warnings about the epidemic of mortgage fraud and predation and the crisis it would so cause.

The context was Congress' effort to empower and convince the Federal Reserve to take action against what the mortgage lending industry called, behind closed doors, "liar's" loans. A liar's loan is a loan in which the lender does not verify (at least) the borrower's actual income. The industry knew that the failure to verify inherently led to endemic fraud. George Akerlof and Paul Romer's 1993 article on "Looting" by financial CEOs explicitly cited the failure to verify the borrower's income as an example of a lending practice that only fraudulent lenders would use on a widespread basis.

Congress gave the Fed the unique authority to ban all liar's loans in 1994, by passing the Home Ownership and Equity Protection Act (HOEPA). HOEPA gave the Fed the authority to ban liar's loans even by "shadow" sector financial firms that had no federal deposit insurance.

Liar's loans began to become material around 1989 during the savings and loan debacle where all good U.S. financial frauds are born – Orange County, California. In that era, they were called "low documentation" ('low doc') loans. We (the West Region of the Office of Thrift Supervision (OTS), were the federal regulator for these S&Ls, and we were overwhelmed dealing with the "control frauds" driving the debacle, who overwhelmingly used commercial real estate (CRE) as their accounting "weapon" of choice. Our examiners, however, made two critical points. No honest lender would make widespread loans without verifying the borrower's income because it was certain to produce severe "adverse selection" and produce serious losses. The examiners' second warning was that such loans were growing rapidly in Orange County and multiple lenders were involved.

We listened and responded well to our examiners' timely and sound warnings and made it a moderate priority to drive liar's loans out of the industry we regulated. The last of the major fraudulent S&L liar's loan lenders was Long Beach Savings. Long Beach set a common pattern for fraudulent lenders by also engaging in predation primarily against Latinos and blacks. In 1994, the same year HOEPA became law; Long Beach voluntarily gave up federal deposit insurance and its charger as a savings and loan. Long Beach's controlling owner, Roland Arnall, did this for the sole purpose of escaping our regulatory jurisdiction and our ability to examine, sue, and sanction the S&L and its officers. Arnall changed its name to Ameriquest, and converted it to a mortgage bank. Mortgage banks were essentially unregulated. Arnall successfully sought sanctuary in what we now call the "shadow" financial sector. The S&L debacle did not end. It found sanctuary in the Shadow and grew 50% annually for 13 years.

Ameriquest and its leading mortgage bank competitor, run by former S&L officers we (OTS) had "removed and prohibited" from working in any federally insured lender, became the leading "vectors" spreading the epidemic of fraudulent liar's loans through (initially) the shadow sector and later back into federally insured lenders. Many of Arnall's lieutenants eventually left Ameriquest to lead other fraudulent and predatory lenders making predatory liar's loans. Michael W. Hudson's book, The Monster , is a great read that presents this history. Ameriquest and its fraudulent and predatory peers grew at extraordinary rates for over a decade. They hyper-inflated the bubble and drove the financial crisis.

Alan Greenspan and Ben Bernake refused to use HOEPA to stop this surging epidemic of fraudulent and predatory liar's loans. This was the setting when Krystofiak, on his own dime and initiative took advantage of a Fed hearing on predatory lending near his home to warn us all of the coming disaster. Krystofiak was not the first warning. His written testimony cited the appraisers' and the FBI's prior warnings. The appraisers' 2000 petition explaining how lenders and their agents were extorting appraisers to inflate appraisals was superb. Chris Swecker's 2004 warning on behalf of the FBI that the developing "epidemic" of mortgage fraud would cause a financial "crisis" if not stopped was superb.

Krystofiak was also superb. The Fed did not want to conduct hearings on fraudulent and predatory liar's loans – Congress forced it to do so. The Fed's Board members were not interested in stopping fraudulent and predatory liar's loans. The Fed did not invite Krystofiak to testify. The Fed offered only a brief "cattle call" at the end of the hearing allowing (after a top Fed official had left to fly back to DC) the public to make a very brief statement.

The Fed's treatment of Krysofiak stood in sharp contrast to its fawning treatment of the Mortgage Bankers Associations' chosen witness. The MBA chose the leading originator of fraudulent liar's loans in California – IndyMac – to present the MBA's position. The MBA's position was that the Fed should not use its HOEPA authority to ban fraudulent and predatory liar's loans. The Fed officials cracked jokes with and treated the IndyMac officer like an old pal. They treated Krytofiak with cold indifference. The MBA witness presented utter BS. Krystofiak spoke truth to power. Power loved the BS. The truth discomfited the Fed officials.

Krytofiak's written testimony made many vital points, but I refer to only two related points here. First, he warned the Fed that the twin mortgage fraud origination epidemics – appraisal fraud and liar's loans – were so large that they were inflating the housing bubble. Second, his means of quantifying the incidence of liar's loan fraud showed the regulators and the prosecutors that they could use the same method to document reliably, cheaply, and quickly the incidence of liar's loan fraud at every relevant financial firm.

Data Collected by the Mortgage Brokers Association for Responsible Lending

A recent sample of 100 stated income loans which were compared to IRS records (which is allowed through IRS forms 4506, but hardly done) found that 90 % of the income was exaggerated by 5 % or more. MORE DISTURBINGLY, ALMOST 60 % OF THE STATED AMOUNTS WERE EXAGGERATED BY MORE THAN 50%. These results suggest that the stated income loans deserves the nickname used by many in the industry, the "liar's loan" (emphasis in original).

The MBA's anti-fraud experts, MARI, appears to have conducted the study for Krystofiak. They featured the 4506-T (the "T" stands for "transcript") study and its finding of a 90% fraud incidence in liar's loans. In 2006, MARI presented its fraud study at the MBA's annual meeting. The MBA sent MARI's report to every member, which included all the major mortgage players.

Any honest originator, purchaser, or packager of liar's loans was on notice no later than mid-2006 that they could determine quickly, cheaply, and reliably the fraud incidence in those liar's loans by using the 4506-T forms to test a sample of those loans. Krystofiak aptly noted that while lenders typically required borrowers to sign the IRS 4506-T form allowing the lender to access their tax information, it was actually "hardly done." Lenders supposedly require the 4506-T because taxpayers have an obvious interest in not inflating their income to the IRS. The self-employed have to report their income accurately or face potential tax fraud sanctions.

The reason liar's loan mortgage lenders, purchasers, the packagers of toxic collateralized debt obligations (CDOs ) that typically were composed of large amounts of liar's loans, and credit rating agencies, "hardly [ever] used" or required the sellers to use their 4506-T authority is also clear if you understand "accounting control fraud." Any 4506-T study of liar's loans will document their pervasive frauds. Virtually all liar's loan and CDO sales required "reps and warranties" that they were not fraudulent. If a firm making or selling liar's loans conducted a 4506-T study and documented that it knew its reps and warranties were false, and it continued t make, sell, package, or rate those fraudulent loans under false reps and warranties it would be handling its counterparty a dream civil fraud suit. They would be handing DOJ the ability to prosecute them successfully for felonies that caused hundreds of billions of dollars in losses. The fraudulent mortgage money machine relied on the major players following a financial "don't ask; don't tell" policy.

The exceptions prove the rule. I have found public evidence of only two cases in which mortgage players (other than Krystofiak) conducted 4506-T audits of liar's loans. I have never found public evidence that any federal regulator or prosecutor conducted or mandated a 4506-T study. The two known cases of 4506-T audits were Wells Fargo (just disclosed by DOJ) and Countrywide (disclosed by the SEC investigation and complaint). Both audits found massive fraud incidence in the liar's loans. The risk officers presented these audit results to the banks' senior managers.

Bank Whistleblowers United's 4506-T Proposal

Two and-a-half years ago, Bank Whistleblowers United (BWU) discussed the senior officers of Countrywide's response to its 4506-T audit. We noted that BWU co-founder Michael Winston blew the whistle on Countrywide's frauds to the bank's most senior officers to try to prevent these frauds. Mr. Winston eagerly aided potential prosecutors – who failed to prosecute Countrywide's senior officers leading the frauds. BWU then explained the analogous response of Citigroup's senior officers to a different but equally reliable audit conducted by BWU co-founder Richard Bowen. We did so in a January 30, 2016 New Economic Perspectives blog urging presidential candidates in the 2016 election to pledge to implement the 60-day BWU plan to restore the rule of law to Wall Street.

As documented in the SEC complaint, Countrywide's managers conducted a secret internal study of Countrywide's liar's loans that, on June 2, 2006, confirmed Krystofiak's findings of endemic fraud in liar's loans. Fraud was the norm in Countrywide's liar's loans, a fact that it failed to disclose to its stockholders and secondary market purchasers. Instead of stopping such loans, Countrywide's senior officers caused it to adopt what they termed "Extreme Alt-A" loans offered by Bear and Lehman that "layered" this fraud risk on top of a half dozen additional massive risks to create what Countrywide's controlling officer described as loans that were "toxic" and "inherently unsound." "Alt-A" was the euphemism for liar's loans. Countrywide made massive amounts of "Extreme Alt-A" and acted as a vector spreading these "toxic" loans throughout the financial system. A member of our group, Dr. Michael Winston, tried to stop these kinds of abuses, which enriched top management but bankrupted Countrywide.

Similarly, a member of our group, Richard Bowen and his team of expert underwriters, documented that Citigroup knew that it was purchasing tens of billions of dollars of loans annually on the basis of fraudulent "reps and warranties" – and then reselling them to Fannie and Freddie on the basis of fraudulent reps and warranties. Bowen put the highest levels of Citigroup (including Bob Rubin) on personal notice in writing as the incidence of fraud climbed from 40% to 60%. (It eventually reached an astonishing 80% fraud incidence.) Citigroup's leadership's response was to remove his staff. Senior Citigroup officers also responded to the surging fraud by causing Citigroup to become a major purchaser of fraudulently originated liar's loans.

We can now add the senior leaders that determined Wells Fargo's response to its 4506-T audit. We draw on the Department of Justice (DOJ) disclosures in conjunction with its indefensible settlement of civil fraud claims against Wells Fargo's massive mortgage fraud. The DOJ press release revealed that "in 2005, Wells Fargo began an initiative to double its production of subprime and Alt-A loans." DOJ did not explain that this was after the FBI warned there was an emerging "epidemic" of mortgage "fraud" that would cause a financial "crisis" if it were not stopped. The settlement discloses that Wells' risk officers alerted senior managers that the plan to increase greatly the number of liar's loans would greatly increase fraud in 2005 before Wells implemented the plan.

The press release had other bombshells (unintentionally) demonstrating the strength of the criminal cases that DOJ refused to bring against Wells' senior officers. Wells Fargo's 4506-T audit found that its liar's loans were endemically fraudulent, and the amount of inflated income was extraordinary.

The results of Wells Fargo's 4506-T testing were disclosed in internal monthly reports, which were widely distributed among Wells Fargo employees. One Wells Fargo employee in risk management observed that the "4506-T results are astounding" yet "instead of reacting in a way consistent with what is being reported WF [Wells Fargo] is expanding stated [income loan] programs in all business lines."

The press release note some other actions by Wells' senior managers that show what prosecutors term "consciousness of guilt." Such actions make (real) prosecutors salivate. The press release's final substantive revelation is the unbelievable rate of loan defaults on Wells Fargo's fraudulent loans and the exceptional damages those loans and sales caused.

Wells Fargo sold at least 73,539 stated income loans that were included in RMBS between 2005 to 2007, and nearly half of those loans have defaulted, resulting in billions of dollars in losses to investors.

Typical default rates on conventional mortgages averaged, for decades, around 1.5 percent. The Wells Fargo liar's loans defaulted at a rate 30 times greater.

How Corrupt is Wells? Cheating Customers is "Courageous"

The press release does not contain the Wells Fargo gem that proves our family rule that it is impossible to compete with unintentional self-parody. Paragraph H of the settlement reveals that Wells' term for doubling its number of fraudulent liar's loans in 2005 was "Courageous Underwriting." Wells' senior managers changed its compensation system to induce its employees to approve even worse loans. Calling defrauding your customers "courageous" epitomizes Wells Fargo's corrupt culture built on lies and lies about lies.

DOJ's pathetic settlement with Wells Fargo has no admissions by the bank. It does not require a penny in damages from any bank officer. It does not require a bank officer to return a penny of bonuses received through these fraudulent loans. The settlement contains DOJ's statement that its investigation found that Wells' violated four federal criminal statutes. DOJ will continue to grant de facto immunity from prosecution to elite banksters. The Trump administration has again flunked a major test dealing with the swamp banksters.

Section H (b) of the settlement is factually inaccurate in a manner that makes it highly favorable to fraudulent lenders making liar's loans. There is no indication that DOJ ever investigated Wells' fraudulent loan origination practices. It was overwhelmingly lenders and their loan brokers that put the lies in liar's loans. DOJ's settlement documents do not refer to Wells whistleblowers, even though and competent investigation would have identified dozens of whistleblowers. Throughout its Wells documents, DOJ implies that borrowers overstated their income rather than Wells and its loan brokers.

The Jig is Up on DOJ's Pathetic Excuses for Refusing to Jail Elite Bank Frauds

We now know with certainty from the whistleblowers and the internal audits that the response of Citigroup, Countrywide, and Wells Fargo's senior leaders to knowing that most of their liar's loans and the reps and warranties they made about those loans were fraudulent. We know with certainty that Michael Winston and Richard Bowen's disclosures were correct. We know with certainty that each served up to DOJ on a platinum platter dream cases for prosecuting Citigroup and Countrywide's top managers. The senior managers' response to proof that their banks were engaged in endemic fraud makes sense only if the senior managers were leading an "accounting control fraud," which enriches the managers by harming the lender.

When the appraisers' warned of extensive extortion by lenders and their agents to inflate appraisals, when the FBI warned that mortgage fraud was becoming "epidemic" and would cause a financial "crisis" if not halted, and when the MBA publicized Krystofiak and MARI's warnings that liar's loans were endemically fraudulent, the fraudulent CEOs' response was always the same. In each case, they expanded what they knew were endemically fraudulent liar's loans and increased the extortion of appraisers.

Back to BWU's 4506-T Proposal

This brings us back to reminding the public what BWU proposed 32 months ago about 4506-T audits. Point 17 of our 60-day plan began:

Within 60 days, each federal financial regulatory agency directs any bank that it regulates to conduct and publicly report a "Krystofiak" study on a sample of "liar's" loans that they continue to hold. Krystofiak devised a clever study that he presented to the Federal Reserve in an unsuccessful attempt to try to get the Fed to stop the epidemic of fraudulent liar's loans. Lenders and secondary market purchasers routinely required borrowers to authorize the lender and any subsequent purchaser of the loan to obtain a "transcript" (4506-T) of the borrower's tax returns from the IRS to allow the lender to quickly and inexpensively verify the borrower's reported income.

Other parts of our 60-day plan called for DOJ appointees with the courage, integrity, and skills to restore the rule of law to Wall Street. We also explained the needs (and means) for the banking regulators to conduct the investigations (such as 4506-T audits), activate a legion of whistleblowers, and make the criminal referrals to DOJ essential to bring successful prosecutions.

Conclusion

Had the regulators (particularly the Fed through its HOEPA power) required each bank making liar's loans to conduct a 4506-T audit, the senior managers would have faced a dilemma. They could stop the fraudulent lending or provide DOJ with a great opportunity to prosecute them. The bank CEOs' response to the internal audits showing endemic fraud and the retaliation against the whistleblowers combine to offer superb proof of senior managers' 'specific intent' to defraud. The reasons for the failure to prosecute were some combination of cowardice and politics. If Democrats win control of the House they can use their investigative powers to force each bank regulator to cause every relevant financial institution to conduct a 4506-T audit.

Of course, the Republican Senate and House chairs could order those steps today . We are not holding our breath, but BWU's co-founders are eager to aid either, or both, parties restore the rule of law to Wall Street. Instead, we are rapidly creating an intensely criminogenic environment on Wall Street that will eventually cause a severe financial crisis.


Hayek's Heelbiter , August 7, 2018 at 5:35 am

Did John Stumpf (President of Wells Fargo 2007-2016) really say, "If one family loses their home, it is a tragedy. If ten million people lose their homes, it is a statistic?"

Tinky , August 7, 2018 at 6:33 am

Even by Black's lofty standards, this is an outstanding article. The fact that it won't be published in the mainstream media, and that the vast majority of regulators and politicians will ignore it, underscores once again just how broken and corrupted the American political and economic systems are.

Colonel Smithers , August 7, 2018 at 7:54 am

Thank you, Tinky.

It's the same in the UK with regard to mortgage fraud and reporting.

A colleague, brought in from the regulator to clean up our German basket case TBTF's brief and late in the day foray into the mortgage market, said the UK mortgage market was as corrupt / fraudulent. The same US firms were involved in many, if not most, cases. Lehman had an outpost, Ascendant, in my home county, Buckinghamshire, for such activity. Lehman, Merrill and Citi carved out the UK on geographical lines. One (US) firm was given the name of the Germanic tribe that settled in the area 1500 years before.

readerOfTeaLeaves , August 7, 2018 at 11:34 am

Agree about the excellence of this post.

FWIW, the kinds of government errors, cowardice, and confusions that Black relates – on top of having taxpayers foot the bill for it all – was a key factor IMVHO in people voting Trump as a kind of protest vote. He talks about 'fake news' to a huge number of Americans who faked income, or approved fake income.

The rest of us, I assume, continue to seethe and are supporting 'honest money, fair wages/salary' candidates like Warren and Sanders.

flora , August 7, 2018 at 11:54 am

+1

Tom Stone , August 7, 2018 at 7:49 am

In early 2005 I was working as a loan Broker when I met the World Savings rep or the first time.
The first words out of his mouth were a warning not to take more than 3 pints on the back end because it was greedy, the second sentence was "If there's a problem with the income the underwriter will drop the file on my desk, I'll call you and we'll fix it".
He's still in the business, a few rungs further up the corporate ladder, I got out of the business the following week.

Peter Pan , August 7, 2018 at 10:31 am

If Democrats win control of the House they can use their investigative powers to force each bank regulator to cause every relevant financial institution to conduct a 4506-T audit.

The establishment democrats that receive donor dollars from Wall Street banks? I wouldn't hold my breath waiting for them to even investigate much less do anything else to stop this criminal activity.

Otherwise another excellent post by Bill Black.

Tomonthebeach , August 7, 2018 at 3:31 pm

Also, is there a statute of limitations on this fraud? If so, both parties might just be running out the clock.

crittermom , August 7, 2018 at 7:43 pm

+1

Bewildered , August 7, 2018 at 10:41 am

Fabulous piece as usual from Mr. Black. Just makes the tenure of the previous administration all the more complicit in the current state of affairs. As Mr. Black details there was an obvious solution to uncover the fraud and go after senior execs, something that also could have also been done when the 'democrat' party held the House and at least a leverage position in the Senate. What the American public received instead was a giant con job/cover-up advertised as restitution and Obama goes on national TV to pathetically claim that grossly fraudulent behavior was simply unethical. Obviously that maneuver had a higher ROI for post-tenure legacy building and fundraising.

georgieboy , August 7, 2018 at 10:50 am

Wells Fargo -- doing it the Warren Buffet way! For that matter, Goldman Sachs -- doing it the Warren Buffet way!

Superb summary by Mr. Black, thanks Yves.

Bottom Gun , August 7, 2018 at 11:10 am

There is really a simple solution: fire everyone at DOJ and replace them with Air Force officers.

An Air Force officer is brave. He will fly through enemy fire if he has to in order to do his job. He gives no thought to the Taliban career opportunities that he might be forgoing by bombing them.

An Air Force officer is competent. He can fly through thunderstorms in the dead of night and get his bombs when and where the forward air controller down with the infantry needs them. Compare that to the experience of an honest IG official trying to get an indictment from DOJ for anyone at a mega-bank.

An Air Force officer knows how to get funding for his priorities. The Air Force annual budget, at $156 billion, is about 5 times that of DOJ. Enough said.

When you know these facts, the solution is obvious.

Kevbot5000 , August 7, 2018 at 4:36 pm

Go read The Pentagon Wars or Coram's Boyd . Air Force (or other service) officers have no particular claim to virtue. If you pulled mostly captains maybe it'd work, but the bravery and competence needed on the front line is vastly different from that needed from say a Colonel or General running programs/units which is likely the officers you'd be bringing in. Remember you're advocating bringing in people responsible for the boondoggle that is the F35 to shape up an organization. (which is not an isolated instance but emblematic of the upper tiers of the service)

Bottom Gun , August 7, 2018 at 8:00 pm

Thanks for the referrals; let me take a look. (I have read Thomas Ricks' The Generals , which I suspect makes a similar point to those.) The point is acknowledged, although I have not only read The Chickenshit Club but lived through it. There were many DOJ people I had to deal with whom I can only describe using Bundy's pungent phrase for the South Vietnamese political leadership: "the absolute bottom of the barrel." They contrasted starkly with the fellow junior officers I knew in my youth, but as you noted, those were junior officers.

Susan the other , August 7, 2018 at 12:08 pm

The simplicity of the 4506-T audits is as profound as the physics comparison of the diversity of the economy to GDP. These things don't work when all the chaos comes home to roost. In 1989 our economy was on the rocks and our corporations were offshoring as fast as they could; the USSR collapsed and we landed like a murder of crows to pick their bones and loot Russia. OPEC was naming their price; China was exporting massive deflation; our banks were already on the brink. But how to bring home all the loot from not just Russia but all the other illegal sources connected with our once and future imperialism? We were no longer a country of laws; we were looters, thieves and launderers. We were trying to salvage our "investments" or we were hoovering up flight capital or some other thing that had nothing to do with law and order and democracy. You name it. How else did all the banks, all of them, agree to forego their own standards and make all those conveyor belt loans? They prolly all had to become industrial laundromats and get rid of the stuff asap. Which was perhaps only one aspect to the ongoing collapse of "capitalism" as we once knew it – but were unable to protect it. I love Bill Black because he makes me come to uncomfortable explanations who knows how it all fell apart? Somebody does.

templar555510 , August 7, 2018 at 2:34 pm

Superb comment Susan. I make know how ' it all fell apart ' other than recognising that the early capitalists worked with stuff that had to be produced, and so despite vile excesses produced something useful to many , whereas these financial capitalists produce nothing of value to anyone except themselves and take away something from everybody else ( liar's loans being a key example ) . The question is , is there any here beyond here ? Clearly not with ANY of the present political incumbents ( I am in the UK it's the same for you and us ) . So that in two sentences is my answer to your question . My question is ' how on earth do we get beyond here ?'

Chauncey Gardiner , August 7, 2018 at 12:18 pm

Re Bill Black: " Instead, we are rapidly creating an intensely criminogenic environment on Wall Street that will eventually cause a severe financial crisis."

By design and intent with no fear of criminal prosecution for fraud, imprisonment, or even surrender of ill-gotten personal financial gains. All brought to us courtesy of the political donor class and large corporations, those they have corrupted, and the Supreme Court's Orwellian-named Citizens United decision and expanded executive branch powers that make it possible.

Look at any set of issues: Failure to pass and implement policies to address climate change, endless wars, defunding public education and infrastructure, the opioid crisis, manipulation of financial markets, federal government austerity, transfers of public lands and resources into private hands, privatization of public services, healthcare, stagnant real wages, loss of any semblance of economic equality, debt burdens placed on our young people seeking economic opportunity or family formation, lack of legal separation of bank depository and payments system functions from their market speculations, failure to enforce corporate antitrust laws, erosion of privacy and civil liberties, repeated bubbles, concentration of media ownership in the hands of a few, secret international tax havens, etc. and what do you see?

Tim , August 7, 2018 at 12:22 pm

In case you need comedy – George Carlin The Death Penalty from 1996

https://youtu.be/qDO6HV6xTmI

crittermom , August 7, 2018 at 8:02 pm

Thanks, Tim. Comedy was exactly what I needed after Bill Black's excellent article. (One of his best, IMHO)

I saw George Carlin in person at a small theater in Denver long ago. He was great, & still cracks me up.

shinola , August 7, 2018 at 12:49 pm

With the latest disclosures about WF stealing directly from their banking customers on top of their previous frauds, I'm just sure the regulators will come down hard on them this time (NOT!)

I wonder if Mr. Trump, with his involvement in commercial RE, ever "mis-stated" his his income, assets and/or liabilities when obtaining a loan. Nah, couldn't happen.

Tomonthebeach , August 7, 2018 at 3:37 pm

I wonder why anybody still banks with WF. My late mom had about 30K in a WF account under a trust that I could not close out for 24 months (Florida laws – WF had a branch in their eldercare facility.) I was delighted that my closeout check did not bounce.

Karma Fubar , August 7, 2018 at 1:22 pm

A while back I worked at a medical device startup operating within a formal (i.e. written and comprehensive) quality system. A quality system is required for any commercial sales of medical products; previously I had been involved in early stage R+D and had not been bound by such systems. So a lot of it was new to me.

Something that stuck out at the time, and probably ties in to the article above, was the sanctity of corporate internal audit files. The FDA could demand access to almost any company quality system document, except for internal audit files. They could be provided with summaries of these internal audits indicating something like "6 minor deficiencies found, 1 major deficiency found, 0 extreme deficiencies found" , but were not permitted access to the raw internal audits.

I suspect that financial firms have the same level of protection for their internal audits. Had they hired a consulting firm to investigate the accuracy of stated income in the loans they originated, the results of that outside investigation would probably be a document reviewable by government regulators (assuming they were interested in doing their job). But by pursuing this as an internal audit, executives knew that the results would never be reviewable, and give them plausible deniability that they knew of the systemic level of fraud.

There certainly must be other ways of investigating efficiency or compliance within a company, but by pursuing it as an internal audit they could easily bury the results.

Oregoncharles , August 7, 2018 at 1:52 pm

A quibble: comparing stated income to income tax forms may be misleading, although it is the standard. People have an interest in understating their income to the IRS, and in overstating it when seeking a loan. The logic is that they risk prosecution if they understate to the IRS, but there are plenty of situations where they're very unlikely to get caught. It's conceivable the loan application is more honest than the tax return.

perpetualWAR , August 7, 2018 at 7:57 pm

Neither is correct.

Enquiring Mind , August 7, 2018 at 3:09 pm

Loan officers I knew over the decades have changed their views. Asking them if they would lend their own money to the proposed borrower used to be more likely to elicit a Yes. When standards loosened (again) earlier this millennium, some answered No until realizing that they shouldn't care since the money wasn't theirs. What really mattered was getting that commission endorsed and deposited, given the rise of IBGYBG (I'll be gone, you'll be gone) thinking.

Another question I asked was about tracking borrower performance relative to loan officer compensation. Relationship building and longer term interactions declined with the rise of neo-liberalish (the -ish suffix indicates a primitive reaction to immediate perceived incentives without further investigation) mindsets. Portfolio lenders had more at risk but still laid off some of that on the deposit insurance funds. Loan buyers did not fully appreciate that they had to trust everyone preceding them in the value (destruction) cycle, from brokers and investment bankers through ratings agencies.

Internal audits, compliance functions and regulatory exams were often the only temporary inconveniences or obstacles to transactions and related income distribution.

Ron Con Coma , August 7, 2018 at 3:20 pm

Eric Holder for President – NOT!

steelhead23 , August 7, 2018 at 4:02 pm

If Democrats win control of the House they can use their investigative powers to force each bank regulator to cause every relevant financial institution to conduct a 4506-T audit.

Let us, for a moment, imagine this happens. Then what? The results would show widespread fraud and a pathetic lack of adequate vetting by the issuer. Then those fraudulent loans were aggregated into various RMBS and sold to others. I hope you can see that just this disclosure is likely to cause a substantial hiccup in the financial system, perhaps another full-blown crisis. And who would the public blame? The criminals – or the cops? I could see Dems, even Dems with little or no connection to the Street, deciding not to open Pandora's box.

That is one of the problems with the American political system. From defense appropriations to banking regulation, the pols live in fear of being tarred for doing the right thing, if the outcome is temporarily bad or unpopular. Yes, it would obviously be best to cleanse the wound, but doing so would hurt, so the pols decide that it would be best for their popularity to let the wound fester until it becomes too big to ignore or financial Armageddon occurs. Isn't that precisely the thinking of the Obama Administration?

Murgatroy , August 7, 2018 at 6:25 pm

All major Wall St banks and brokerages including Wachovia, Wells, BofA and even Citadel and a few foreign banks (ABN Amro, Deutsche Bank, Credit Suisse, etc) set up an offshore sub called CDS Indexco. This was used as a defacto cartel to control the prices of both Sub-Prime CDO issues and their respective Credit Default Swaps. They created the Markit BBB- index which was used by Paulsen, Ackman and a few other chosen ones to short the MBS sub-prime market. This is the truth.. CDS Indexco dropped that name in Nov. 2008 when the accounting rules forced Marked to Market accounting and also the Consolidation of VIE's (Special Purpose Financial Subs that got an exception to the Enron Rule). So in other words: if banks had been made to follow the "Enron Rule" the financial crisis wouldn't have happened. Goldman's own employee was the Chairman of CDS Indexco, I couldn't make this shit up. And Yves knows it too. Gramm Leach Bliley made it all possible – so banks could hold both the debt and the equity of an entity that they took no responsibility for. This was the precise reason for Glass-Steagall banks were manhandling the ownership of business due to inherent conflicts of interest between debt and equity holders.

steelhead23 , August 7, 2018 at 7:30 pm

My dear Murgatory, Wow. This is the first I have heard of CDS Indexco. You are suggesting that it was much more than a mere market clearinghouse. Where could I read more on this?

perpetualWAR , August 7, 2018 at 7:51 pm

Google it. I just did.
I. Am. Stunned.
Just when I think the shiitake can't get any deeper, it does.

perpetualWAR , August 7, 2018 at 7:34 pm

A former bank/trustee foreclosure attorney is running for a District Court judge position in Seattle. Remember Trott, the Foreclosure King, who Michigan sent to Congress? Yeah, this dude is trying to get on the bench.

crittermom , August 7, 2018 at 8:19 pm

Of course no bankers went to jail.

But does anyone remember this news from 2011, about the homeowner who did?
The lengths they went to 'catch him' once he was in their sites, says it all.
https://www.businessinsider.com/charlie-engle-2011-3

[Feb 11, 2018] Justice department's No 3 official to take Walmart's top legal job

Feb 11, 2018 | www.theguardian.com

Revolving door in action

Brand attracted interest because of her potential to assume a key role in the Trump-Russia investigation. The official overseeing the special counsel Robert Mueller's investigation, the deputy attorney general Rod Rosenstein, has been repeatedly criticized by Trump. If Rosenstein had been fired or quit, oversight would have fallen to Brand. That job would now fall to the solicitor general, Noel Francisco.

"She felt this was an opportunity she couldn't turn down," her friend and former colleague Jamie Gorelick said. Walmart sought Brand to be head of global corporate governance at the retail giant, a position Gorelick said has legal and policy responsibilities that will cater to her strengths.
"It really seems to have her name on it," Gorelick said.

[Dec 05, 2017] House Members Tee Up Bipartisan Bill to Kill CFPB Payday Lending Rule

Notable quotes:
"... By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans. ..."
"... The Unbanking of America: How the New Middle Class Survives ..."
Dec 05, 2017 | www.nakedcapitalism.com

Posted on December 4, 2017 by Jerri-Lynn Scofield By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.

Three Democrats and three Republicans have co-sponsored a resolution, under the Congressional Review Act (CRA), to scuttle the Consumer Financial Protection Bureau's payday lending rule.

CRA's procedures to overturn regulations had been invoked, successfully, only once before Trump became president. Congressional Republicans and Trump have used CRA procedures multiple times to kill regulations (as I've previously discussed (see here , here , here and here ). Not only does CRA provide expedited procedures to overturn regulations, but once it's used to kill a regulation, the agency that promulgated the rule is prevented from revisiting the issue unless and until Congress provides new statutory authority to do so.

Payday Lending

As I wrote in an extended October post, CFPB Issues Payday Lending Rule: Will it Hold, as the Empire Will Strike Back, payday lending is an especially sleazy part of the finance sewer, in which private equity swamp creatures, among others, operate. The industry is huge, according to this New York Times report I quoted in my October post, and it preys on the poorest, most financially-stressed Americans:

The payday-lending industry is vast. There are now more payday loan stores in the United States than there are McDonald's restaurants. The operators of those stores make around $46 billion a year in loans, collecting $7 billion in fees. Some 12 million people, many of whom lack other access to credit, take out the short-term loans each year, researchers estimate.

The CFPB's payday lending rule attempted to shut down this area of lucrative lending– where effective interest rates can spike to hundreds of points per annum, including fees (I refer interested readers to my October post, cited above, which discusses at greater length how sleazy this industry is, and also links to the rule; see also this CFPB fact sheet and press release .)

Tactically, as with the ban on mandatory arbitration clauses in consumer financial contracts– an issue I discussed further in RIP, Mandatory Arbitration Ban , (and in previous posts referenced therein), the CFPB under director Richard Cordray made a major tactical mistake in not completing rule-making sufficiently before the change of power to a new administration- 60 "session days" of Congress, thus making these two rules subject to the CRA.

The House Financial Services Committee press release lauding introduction of CRA resolution to overturn the payday lending rule is a classic of its type, so permit me to quote from it at length:

These short-term, small-dollar loans are already regulated by all 50 states, the District of Columbia and Native American tribes. The CFPB's rule would mark the first time the federal government has gotten involved in the regulation of these loans.

.

House Financial Services Committee Chairman Jeb Hensarling (R-TX), a supporter of the bipartisan effort, said the CFPB's rule is an example of how "unelected, unaccountable government bureaucracy hurts working people."

"Once again we see powerful Washington elites using the guise of 'consumer protection' to actually harm consumers and make life harder for lower and moderate income Americans who may need a short-term loan to keep their utilities from being cut off or to keep their car on the road so they can get to work," he said. "Americans should be able to choose the checking account they want, the mortgage they want and the short-term loan they want and no unelected Washington bureaucrat should be able to take that away from them."

[Rep Dennis Ross, a Florida Republican House co-sponsor]. said, "More than 1.2 million Floridians per year rely on Florida's carefully regulated small-dollar lending industry to make ends meet. The CFPB's small dollar lending rule isn't reasonable regulation -- it's a de facto ban on what these Floridians need. I and my colleagues in Congress cannot stand by while an unaccountable federal agency deprives our constituents of a lifeline in times of need, all while usurping state authority. Today, we are taking bipartisan action to stop this harmful bureaucratic overreach dead in its tracks."

As CNBC reports in New House bill would kill consumer watchdog payday loan rule , industry representatives continue to denounce the rule, with a straight face:

"The rule would leave millions of Americans in a real bind at exactly the time need a fast loan to cover an urgent expense," said Daniel Press, a policy analyst with the Competitive Enterprise Institute, in a statement after the bill's introduction.

Consumer advocates think otherwise (also from CNBC):

"Payday lenders put cash-strapped Americans in a crippling cycle of 300 percent-interest loan debt," Yana Miles, senior legislative counsel at the Center for Responsible Lending, said in a statement.

Prospects Under CRA

When I wrote about this topic in October, much commentary assumed that prospects for CRA overturn were weak. I emphasized instead the tactical error of failing to insulate the rule from CRA, which could have been done if the CFPB had pushed the rule through well before Trump took office:

If the payday rule had been promulgated in a timely manner during the previous administration it would not have been as vulnerable to a CRA challenge as it is now. Even if Republicans had then passed a CRA resolution of disapproval, a presidential veto would have stymied that. Trump is an enthusiastic proponent of deregulation, who has happily embraced the CRA– a procedure only used once before he became president to roll back a rule.

Now, the Equifax hack may have changed the political dynamics here and made it more difficult for Congressional Republicans– and finance-friendly Democratic fellow travellers– to use CRA procedures to overturn the payday lending rule.

The New York Times certainly seems to think prospects for a CRA challenge remote:

The odds of reversal are "very low," said Isaac Boltansky, the director of policy research at Compass Point Research & Trading.

"There is already C.R.A. fatigue on the Hill," Mr. Boltansky said, using an acronymn for the act, "and moderate Republicans are hesitant to be painted as anti-consumer.

I'm not so sure I would take either side of that bet. [Jerri-Lynn here: my subsequent emphasis.]

A more telling element than CRA-fatigue in my assessment of the rule's survival prospects was my judgment that Democrats wouldn't muster to defend the payday lending industry– although that assumption has not fully held, as this recent American Banker account makes clear:

After the payday rule was finalized in October , it was widely expected that Republicans would attempt to overturn it. It's notable, though, that the effort has attracted bipartisan support in the House.

.

Passage in the Senate, however, may be a much heavier lift. The chamber's vote to overturn the arbitration rule in late October came down to the wire, forcing Republicans to call in Vice President Mike Pence to cast the tie-breaking vote.

Bottom Line

I continue to think that this rule will survive– as the payday lending industry cannot count on a full court press lobbying effort by financial services interests. Yet as I wrote in October, I still hesitate to take either side of the bet on this issue.

Dpfaef , December 4, 2017 at 10:53 am

I think this whole article is totally disingenuous. There is a serious need for many Americans to have access to small amount, short term loans. While, these lenders may appear predatory, they do serve a large sector of society.

Maybe you need to read: The Unbanking of America: How the New Middle Class Survives by Lisa Servon . It might be worth the read.

GF , December 4, 2017 at 11:02 am

Where's the Post Office Bank when you need it. This overturning of the rule is just an effort to stop the Post Office Bank from gaining traction as the alternative non-predatory source of small loans to the people. Most pay day lender companies are owned by large financial players.

Jerri-Lynn Scofield Post author , December 4, 2017 at 11:11 am

I agree that's a far better approach and indeed, I discussed the Post Office bank in my October post– which is linked to in today's post. Permit me to quote from my earlier post:

The payday lending industry preys on the poorest financial consumers. One factor that has allowed it to flourish is current banking system's inability to provide access to basic financial services to a shocking number of Americans. Approximately 38 million households are un or underbanked– roughly 28% of the population.

Now, a sane and humane political system would long ago have responded with direct measures to address that core problem, such as a Post Office Bank (which Yves previously discussed in this post, Mirabile Dictu! Post Office Bank Concept Gets Big Boost and which have long existed in other countries.)

Regular readers are well aware of who benefits from the current US system, and why the lack of institutions that cater to the basic needs of financial consumers rather than focusing on extracting their pound(s) of flesh is not a bug, but a feature.

So, instead, the United States has a wide-ranging payday lending system. Which charges borrowers up to 400% interest rates for short-term loans, many of which are rolled over so that the borrower becomes a prisoner of the debt incurred.

Wisdom Seeker , December 4, 2017 at 3:23 pm

With phrasing like "unbanked" or "underbanked", I worry that you've bought into the banking-industry framing of this issue, which I'm sure is not your intent.

Ordinary people should not need any bank (not even a government or post office bank) for everyday life, with the possible exception of mortgages. De-financialization of the medium of exchange, and basic payments, is something the public should be fighting for.

lyman alpha blob , December 4, 2017 at 3:30 pm

I would consider myself an ordinary person and I pay in cash when purchasing day to day items the vast majority of the time and yet I'd still prefer to deposit my money in a bank rather than hiding it in my mattress for any number of good reasons.

Banks aren't the problem – their predatory executives are.

Wisdom Seeker , December 4, 2017 at 3:44 pm

But there are, or at least ought to be, safe and secure ways to store money other than by lending it to banks or stuffing it into mattresses. Or carrying wads of cash.

For instance, a debit card (or possibly cell phone) with a secure identity / password can already act as a cashless wallet. The digital cash could be stored directly on the device, and accounted for through something similar to TreasuryDirect, without any intermediaries. But this would require the Federal Government to get serious about having a modern Digital Dollar of some kind (not bitcoin, shudder)

Cary D Berkelhamer , December 4, 2017 at 4:32 pm

Even better would be State Banks. Every state should have one. I believe the State Bank of North Dakota made money in 2008. While the TBTF Banks came hat in hand to our Reps. Of course OUR Reps handed them a blank check and told them to "Make it go Away". However Post Office Banks would be GREAT!!

diptherio , December 4, 2017 at 11:08 am

This is the boilerplate argument that always gets brought up by payday loan defenders, and there is a good bit of truth to it. However, what you are not mentioning is that there are already far superior options available to pretty much any person who needs a small, short term loan. That solution is your friendly neighborhood Credit Union, most of which offer very low interest lines of overdraft coverage. I don't mind saying that it has saved my heiny on more than one occasion. Pay check a little late in arriving? No problem, transfer $200 from your overdraft account into your checking account on-line and you're good to go. Pay it back at your convenience, also on-line, at 7% APR.

Payday lenders are legal loansharks. The problems with their predatory lending model and the damage it does to low-income people are well documented. Simply pointing out that there is a reason that people end up at payday lenders is not a valid justification for the business practices of those lenders, especially when there are much better alternatives readily available.

Vatch , December 4, 2017 at 11:19 am

Payday lenders are legal loansharks.

Very true! There are several web sites that point out how the fees associated with payday loans raise the effective annual percentage rate into the stratosphere, ranging from 300% to over 600%. Here's one:

http://paydayloansonlineresource.org/average-interest-rates-for-payday-loans/

Off The Street , December 4, 2017 at 12:10 pm

One frustration that I have with legislation in general, and finance legislation in particular, is that it does not tell the truth, the whole truth and nothing but the truth.

In my Panglossian world, I envision a financial services bill that lays out the following:

Define the problem
Unserviced people: X percent( for discussion, say 10% to make the math easy) of people are un-serviced (or under-, or rapaciously-serviced) by conventional financial companies, whether banks, credit unions or other, whatever other is conventionally.
Unserviced and don't want: Y percent of that X percent (say, 50% of 10%, so 5%) doesn't want services.
Unserviced and want: 1-Y percent of that X percent (say, 50% of 10%, so 5%) wants services but can not get them. That could be due to various factors, ranging from bad credit (how defined?, say FICO < 600?) to geographic remoteness (no branches within miles, no internet, precious little slow mail service, whatever).

Within that deemed unserved 5% of the population, what are the costs to serve and what are the alternatives?

What would an honest service provider need to provide service, accounting for credit risks and the like, and still make a profit sufficient to induce investment?

If I knew how to make and add a nice graphic, I'd include a waterfall chart here to show the costs and components of the interest and fees paid in regular and default mode. Sorry, please bear with me as I make up numbers.

Regular costs
Interest at 30%
Less: cost of funds at, say, 10%
Less: personnel, overhead, everything else at, say, 5%
Pre-tax profit: 15%

Default mode costs:
Interest at 275%
Plus: Fees at 25%
Less: cost of funds 20%
Less: personnel, overhead, etc 5%
Less: added default cost not in personnel etc line, say 25%
Pre-tax profit: 250%

In that little example, who couldn't make money at those rates?

Extending the notion of APR and Truth-In-Lending to include payday lenders and anyone else without a brick-and-mortar branch who wants to do business in the US, how about mandating some type of honest waterfall chart as dreamt of above?

Then cross-reference and publicize the voting on finance legislation with the campaign contributions from payday people and their ilk, and layer in the borrower costs and credit scores and other metrics in those Congressional districts and zip+4 codes and census tracts and whatever other level of granularity will help provide any amount of disinfecting sunlight to help see the scattering cockroaches.

a different chris , December 4, 2017 at 12:57 pm

The problem I suspect is that your "friendly neighborhood credit union" is actually rarely anywhere near the neighborhoods where people who need these kind of loans live.

They don't have cars and mass transit is non-existent or so slow they couldn't get to the Credit Union during business hours, and back again, anyway. That's the problem with expecting Private Enterprise to be a solution for people at the bottom. They don't set up shop where those people live, or the ones that do are not exactly do-gooders.

lyle , December 4, 2017 at 7:33 pm

I just checked and a lot of credit unions let you apply for a loan online, (earlier you can set up membership online). So the issue of transport and time is lessened assuming folks have some form of net access.

JTMcPhee , December 4, 2017 at 1:04 pm

One might ask why there are millions of people reduced to having to get ripped off by payday and auto-title lenders, to somehow survive from week to week. Maybe because people can't make a living wage? Can't save any money, however prudent and abstemious they may be? Because inter-citizen cruelty and Calvinism are so very strong a force in this rump of an Empire?

Some of the comments here seem to build on the baseline assumption that's part of the liberal-neoliberal mantra, "You get what's coming to you (or the pittance we can't quite squeeze out of you yet)".

diptherio, I am guessing you may mean that there are models of better alternatives readily available, like paying a living wage, a social safety net for the worst off, a postal bank, national health care, stuff like that. I don't see that there are any alternatives actually available to most real people "on the ground."

Wukchumni , December 4, 2017 at 1:08 pm

There is an alternative to excessive payday loans, but only if you're in the military, where it's capped @ 36%.

Why not 36% for everybody?

diptherio , December 4, 2017 at 1:27 pm

You are, of course, correct in that the underlying problem is that so many people are forced to live on so little that they need payday loans in the first place. Thanks for pointing that out.

My point is simply that in the short-term, as a matter of practicality for those of us who don't always make it until payday before running out of money, a CU overdraft account is a very good option.

mpalomar , December 4, 2017 at 1:36 pm

Agree. The AB article from October deadpans a description of the ins and outs governing the hellishness of the company town we're living in.

lyman alpha blob , December 4, 2017 at 1:32 pm

This is a far superior option and thank you for bringing it up. The only problem is most banks and credit unions will not tell you it exists because they make a lot more money if you just keep bouncing checks.

I only learned about it when I worked for WAMU. We were tasked by management with promoting various new products to customers as a condition of being paid a monthly bonus which was the only thing that made the job pay enough to live on. Funny, they never asked us to promote the overdraft line of credit (aka an ODLOC), ever. I do remember one of my managers tell me that circa 2000 or so, WAMUs operating costs for the entire company for the entire year were offset just by the fees they collected off of bounced checks etc.

The fees or interest you pay for using an ODLOC are a small fraction of what you'd pay for bouncing just one check. IIRC, if I overdrew by $200 or so and paid it back on my next payday, the interest was generally less than $1. My local credit union has since added a $5 fee for accessing the ODLOC on top of the interest, but it's still much less than a bounced check fee or interest on a payday loan. I believe that depending on your credit history, you can get an ODLOC of up to $2500 or so which pretty much negates the need for any payday loans.

sd , December 4, 2017 at 11:14 am

A friend of mine was evicted from her apartment because of a payday loan. She failed to pay it off in full quick enough and it spiraled out of control tripling in a very short time. I really fail to see how usury is beneficial to society.

RepubAnon , December 4, 2017 at 11:55 am

Yes, there's a need for high-interest loans that bankrupt borrowers:

Mom-and-Pop Loan Sharks Being Driven Out by Big Credit Card Companies

Frank Pistone is part of the dying breed known as the American Loan Shark. Not so long ago, the loan shark flourished, offering short-term, high-interest loans to desperate people with nowhere else to turn. Today, however, Pistone and countless others like him are being squeezed out by the major credit-card companies, which can offer money to the down-and-out at lower rates of interest and without the threat of bodily harm

FluffytheObeseCat , December 4, 2017 at 12:25 pm

I read Servon's book. It is not a brief on behalf of the payday loan industry. She worked at a couple of payday lenders and explains how they serve the communities they're in, but a few things need to be noted:

The business she was most sympathetic with was a small, local one with only a couple of storefronts, in an east coast inner city. The owner and his help knew the customer base, often by name. Much of her sympathy came from her respect for the women who were dishing out the loans at the windows, not the owners and not the business model. This local joint operated like the most benign of old time pawnbroker/loansharking operation from the early part of the last century.

Most "Cash America" storefront shops (on shabby, midcentury shopping strips in inner ring scuburbs across the US) aren't this decent. They aren't "part of a community" in any sense. And the rates are usurious any way, for all of them.

Thank you to Ms. Scofield for continuing to cover this and related businesses. The upper, cleaner part of our finance industry derives more filthy lucre from these kinds of loan shops than they ever want you to know (sub-prime lending shops, title loans shops . there are a lot of modalities for fleecing the poor and the near-poor nowadays).

JTMcPhee , December 4, 2017 at 12:35 pm

The NC staff must be pleased that it seems like so many subtle apologists for the looters, predators, "intelligence community," and so forth, appear to be turning up here early in the opening of new site posts. I'm guessing the Elite are not exactly quaking in fear that NC's reporting will catalyze some change that might sweep the political economy in the direction of what the mopery would categorize as "fairness," but still

ger , December 4, 2017 at 12:42 pm

Raised the dollar definition of middle class and declared a 'new middle class' or could it be 'new middle class' is actually referring to the 'new middle poor'. The former middle class is desperately trying to avoid a plunge into the pits of the 'poor poor'. Payday Loan predators are greasing the handrails.

Matthew Cunningham-Cook , December 4, 2017 at 3:15 pm

"Where will the money-changers change money if not in the Holy Temple? Aren't we starving the priests of much-needed revenue? This Jesus guy is totally disingenuous."

John , December 4, 2017 at 9:32 pm

In good neo liberal fashion that Jesus dude got exactly what he deserved. The effrontry of that guy to chase those hard working money lenders out of the temple square. Got exactly what was coming to him.

sd , December 4, 2017 at 11:11 am

H.J.Res.122 – Providing for congressional disapproval under chapter 8 of title 5, United States Code, of the rule submitted by the Bureau of Consumer Financial Protection relating to "Payday, Vehicle Title, and Certain High-Cost Installment Loans".

December 1, 2017

Sponsor Rep. Ross, Dennis A. [R-FL-15] (Introduced 12/01/2017)
Rep. Hastings, Alcee L. [D-FL-20]
Rep. Graves, Tom [R-GA-14]
Rep. Cuellar, Henry [D-TX-28]
Rep. Stivers, Steve [R-OH-15]
Rep. Peterson, Collin C. [D-MN-7]

perpetualWAR , December 4, 2017 at 12:21 pm

Ahhh ..look at this list. TWO Florida lawbreakers introducing this banker bill. And one from Minnesota. Y'all know that Jacksonville, FL and St. Paul, MN are the two places where the forgeries continue to be provided to the financial crooks? So, it goes to figure that the lawbreakers are attempting to protect the financial crooks committing forgery in their prospective states! How appro.

jawbone , December 4, 2017 at 1:44 pm

If any of these House critters are "representing" you, time for lots of calls to them.

And thanks, SD, for listing them. I always wonder why our vaunted free press so seldom lists the sponsors of legislation when it's reported on . Hhmm .
m .

Mike R. , December 4, 2017 at 1:19 pm

I have mixed feelings about this specific issue.
The larger issue of a grossly skewed economic system is what needs to be fixed.
There will always be people that lack common sense and brains regarding money. There will always be people that will take advantage of that.
I don't know how or why you would try and legislate that away.
We need to move in the direction of solving the biggest problems and not get wrapped up in the little problems.
The numbers above sound horrendous, but 7 billion in profit on 46 billion loaned is 14% return. Credit card companies are worse. 7 billion in profit off of 12 million people is $600 per person. Alot for poor folks I recognize, but not necessarily life shattering for all.

The "system" loves to wrangle around with issues like this (trivial in my mind) so the handful of big ones go unattended.

nonclassical , December 4, 2017 at 1:46 pm

some have apparently not felt it necessary to bail out family members for aggressive, egregious and immediate interest rates and escalations charged by these scammers

but there certainly appears concerted effort by (likely) shills to perpetuate scams (and to discredit Consumer Financial Protection Agency and Liz Warren )

Warren-Sanders 2020

Wisdom Seeker , December 4, 2017 at 3:37 pm

I think there's an error in the original article, where it says:

CRA's procedures to overturn legislation had been invoked, successfully, only once before Trump became president. Congressional Republicans and Trump have used CRA procedures multiple times to kill regulations (emphasis added)

My understanding is that CRA gives Congress the power to overturn executive branch regulations , not legislation (which Congress already can overturn anyway). Is that incorrect?

P.S. It's sad that it might not even matter. Nowadays the public can't tell the difference between regulations (written by unaccountable, unelected officials who take the revolving door back to working at the firms they regulated) and legislation (written by unaccountable, only notionally elected politicians who get paid off in various ways by lobbyists for the same firms)

Jerri-Lynn Scofield Post author , December 4, 2017 at 8:07 pm

You're correct– fixed it! Slip of the fingers there that I didn't catch when I proofread the post. As the rest of the paragraph makes clear, CRA procedures are used to overturn regulations.

Thanks for reading my work so carefully and drawing the error to my attention.

John k , December 4, 2017 at 8:26 pm

Finally bipartisan!
Trump loves it
Obomber woulda loved it
She who cannot be named woulda loved it, too.
Time for them all to get over that little spat she did it before trump should appoint her to something useful I bet she'd love secdef

Taras 77 , December 4, 2017 at 10:40 pm

Where is the lovely Debbie Wasserman schultz in all of this? She has not surprisingly been a leading cheerleader for these pay day lender sharks. but hey, what the hey, the lobby money is good!

[Dec 05, 2017] Inside Casino Capitalism by Max Holland

Notable quotes:
"... Barbarians at the Gate: The Fall of RJR Nabisco ..."
"... The Wall Street Journal ..."
"... The triumph of gossip over substance is manifest in many other ways. Wall Street's deft manipulation of the business press is barely touched upon, and the laissez-faire ..."
"... Fulminations about the socially corrosive effects of greed aside, the buyout phenomenon may represent one of the biggest changes in the way American business is conducted since the rise of the public corporation, nothing less than a transformation of managerial into financial capitalism. The ferocious market for corporate control that emerged during the 1980s has few parallels in business history, but there are two: the trusts that formed early in this century and the conglomerate mania that swept corporate America during the 1960s. Both waves resulted in large social and economic costs, and there is little assurance that the corporate infatuation with debt will not exact a similarly heavy toll. ..."
"... the high levels of debt associated with buyouts and other forms of corporate restructuring create fragility in business structures and vulnerability to economic cycles ..."
"... Germany and Japan incur higher levels of debt for expansion and investment, whereas equivalent American indebtedness is linked to the recent market for corporate control. That creates a brittle structure, one that threatens to turn the U.S. government into something of an ultimate guarantor if and when things do fall about. It is too easy to construct a scenario in which corporate indebtedness forces the federal government into the business of business. The savings-and-loan bailout is a painfully obvious harbinger of such a development. ..."
"... The many ramifications of the buyout mania deserve thoughtful treatment. Basic issues of corporate governance and accountability ought to be openly debated and resolved if the American economy is to deliver the maximum benefit to society and not just unconscionable rewards to a handful of bankers, all out of proportion to their social productivity. It is disappointing, but a sign of the times, that the best book about the deal of deals fails to educate as well as it entertains. ..."
Washington DeCoded

Inside Casino Capitalism Barbarians at the Gate: The Fall of RJR Nabisco
By Bryan Burrough and John Helyar
Harper & Row. 528 pp. $22.95

In 1898, Adolphus Green, chairman of the National Biscuit Company, found himself faced with the task of choosing a trademark for his newly formed baking concern. Green was a progressive businessman. He refused to employ child labor, even though it was then a common practice, and he offered his bakery employees the option to buy stock at a discount. Green therefore thought that his trademark should symbolize Nabisco's fundamental business values, "not merely to make dividends for the stockholders of his company, but to enhance the general prosperity and the moral sentiment of the United States." Eventually he decided that a cross with two bars and an oval – a medieval symbol representing the triumph of the moral and spiritual over the base and material – should grace the package of every Nabisco product.

If they had wracked their brains for months, Bryan Burrough and John Helyar could not have come up with a more ironic metaphor for their book. The fall of Nabisco, and its corporate partner R.J. Reynolds, is nothing less than the exact opposite of Green's business credo, a compelling tale of corporate and Wall Street greed featuring RJR Nabisco officers who first steal shareholders blind and then justify their epic displays of avarice by claiming to maximize shareholder value.

The event which made the RJR Nabisco story worth telling was the 1988 leveraged buyout (LBO) of the mammoth tobacco and food conglomerate, then the 19th-largest industrial corporation in America. Battles for corporate control were common during the loosely regulated 1980s, and the LBO was just one method for capturing the equity of a corporation. (In a typical LBO, a small group of top management and investment bankers put 10 percent down and finance the rest of their purchase through high-interest loans or bonds. If the leveraged, privately-owned corporation survives, the investors, which they can re-sell public shares, reach the so-called "pot of gold"; but if the corporation cannot service its debt, everything is at risk, because the collateral is the corporation itself.

The sheer size of RJR Nabisco and the furious bidding war that erupted guaranteed unusual public scrutiny of this particular piece of financial engineering. F. Ross Johnson, the conglomerate's flamboyant, free-spending CEO (RJR had its own corporate airline), put his own company into play with a $75-a-share bid in October. Experienced buyout artists on Wall Street, however, immediately realized that Johnson was trying to play two incompatible games. LBOs typically put corporations such as RJR Nabisco through a ringer in order to pay the mammoth debt incurred after a buyout. But Johnson, desiring to keep corporate perquisites intact, "low-balled" his offer. Other buyout investors stepped forward with competing bids, and after a six-week-long auction the buyout boutique of Kohlberg, Kravis, Roberts & Company (KKR) emerged on top with a $109-a-share bid. The $25-billion buyout took its place as one of the defining business events of the 1980s

Burrough and Helyar, who covered the story for The Wall Street Journal, supply a breezy, colorful, blow-by-blow account of the "deal from hell" (as one businessman characterized a leveraged buyout). The language of Wall Street, full of incongruous "Rambo" jargon from the Vietnam War, is itself arresting. Buyout artists, who presumably never came within 10,000 miles of wartime Saigon, talk about "napalming" corporate perquisites or liken their strategy to "charging through the rice paddies, not stopping for anything and taking no prisoners."

At the time, F. Ross Johnson was widely pilloried in the press as the embodiment of excess; his conflict of interest was obvious. Yet Burrough and Helyar show that Johnson, for all his free-spending ways, was way over his head in the major leagues of greed, otherwise known as Wall Street in the 1980s. What, after all, is more rapacious: the roughly $100 million Johnson stood to gain if his deal worked out over five years, or the $45 million in expenses KKR demanded for waiting 60 minutes while Ross Johnson prepared a final competing bid?

Barbarians is, in the parlance of the publishing world, a good read. At the same time, unfortunately, a disclaimer issued by the authors proves only too true. Anyone looking for a definitive judgment of LBOs will be disappointed. Burrough and Helyar do at least ask the pertinent question: What does all this activity have to do with building and sustaining a business? But authors should not only pose questions; they should answer them, or at least try.

Admittedly, the single most important answer to the RJR puzzle could not be provided by Burrough and Helyar because it is not yet known. The major test of any financial engineering is its effect on the long-term vitality of the leveraged corporation, as measured by such key indicators as market share (and not just whether the corporation survives its debt, as the authors imply). However, a highly-leveraged RJR Nabisco is already selling off numerous profitable parts of its business because they are no longer a "strategic fit": Wall Street code signifying a need for cash in order to service debts and avoid bankruptcy.

If the authors were unable to predict the ultimate outcome, they still had a rare opportunity to explain how and why an LBO is engineered. Unfortunately, their fixation on re-creating events and dialogue – which admittedly produces a fast-moving book – forced them to accept the issues as defined by the participants themselves. There is no other way to explain the book's uncritical stance. When, for example, the RJR Nabisco board of directors tried to decide which bid to accept, Burrough and Helyar report that several directors sided with KKR's offer because the LBO boutique "knew the value of keeping [employees] happy." It is impossible to tell from the book whether the directors knew this to be true or took KKR's word. Even a cursory investigation would have revealed that KKR is notorious for showing no concern for employees below senior management after a leveraged buyout.

The triumph of gossip over substance is manifest in many other ways. Wall Street's deft manipulation of the business press is barely touched upon, and the laissez-faire environment procured by buyout artists via their political contributions is scarcely mentioned, crucial though it is. Nowhere are the authors' priorities more obvious than in the number of words devoted to Henry Kravis's conspicuous consumption compared to those devoted to the details of the RJR deal. In testimony before Congress last year, no less an authority than Treasury Secretary Nicholas Brady – himself an old Wall Street hand – noted that the substitution of tax-deductible debt for taxable income is "the mill in which the grist of takeover premiums is ground."

In the case of RJR Nabisco, 81 percent of the $9.9 billion premium paid to shareholders was derived from tax breaks achievable after the buyout. This singularly important fact cannot be found in the book, however; nor will a reader learn that after the buyout the U.S. Treasury was obligated to refund RJR as much as $1 billion because of its post-buyout debt burden. In Barbarians, more time is spent describing Kravis's ostentatious gifts to his fashion-designer wife than to the tax considerations that make or break these deals.

Fulminations about the socially corrosive effects of greed aside, the buyout phenomenon may represent one of the biggest changes in the way American business is conducted since the rise of the public corporation, nothing less than a transformation of managerial into financial capitalism. The ferocious market for corporate control that emerged during the 1980s has few parallels in business history, but there are two: the trusts that formed early in this century and the conglomerate mania that swept corporate America during the 1960s. Both waves resulted in large social and economic costs, and there is little assurance that the corporate infatuation with debt will not exact a similarly heavy toll.

As the economist Henry Kaufman has written, the high levels of debt associated with buyouts and other forms of corporate restructuring create fragility in business structures and vulnerability to economic cycles. Inexorably, the shift away from equity invites the close, even intrusive involvement of institutional investors (banks, pension funds, and insurance companies) that provide the financing. Superficially, this moves America closer to the system that prevails in Germany and Japan, where historically the relationship between the suppliers and users of capital is close. But Germany and Japan incur higher levels of debt for expansion and investment, whereas equivalent American indebtedness is linked to the recent market for corporate control. That creates a brittle structure, one that threatens to turn the U.S. government into something of an ultimate guarantor if and when things do fall about. It is too easy to construct a scenario in which corporate indebtedness forces the federal government into the business of business. The savings-and-loan bailout is a painfully obvious harbinger of such a development.

The many ramifications of the buyout mania deserve thoughtful treatment. Basic issues of corporate governance and accountability ought to be openly debated and resolved if the American economy is to deliver the maximum benefit to society and not just unconscionable rewards to a handful of bankers, all out of proportion to their social productivity. It is disappointing, but a sign of the times, that the best book about the deal of deals fails to educate as well as it entertains.

[Dec 03, 2017] Brood of Vipers

May 07, 2015 | jessescrossroadscafe.blogspot.com
"The power and influence of the financial sector threatens a continuation of the regulatory capture that contributed to the financial crisis. Financial firms, too often, have significant say in the appointment of high regulatory officials.

The tendency of some former government officials to obtain highly lucrative positions in the financial sector after leaving government may well act as an inducement to those remaining in government to serve the interest of the financial sector rather than those of the public."

Brooksley Born, Finance & Society Conference, May 5, 2015


The Western Banks are all over these markets, from commodities to equities. They are creating huge amounts of money debt, and providing it to the financial industry as top down stimulus. What results is little aggregate or 'organic' growth and a series of paper asset bubbles. They should be ashamed but they are too busy plundering to feel any twinge of conscience. They are like a herd of swine, racing for the abyss.

I had to chuckle when the pampered princesses and giggling jackals were talking about the jobs report tomorrow, and said that the ideal situation would be 'a strong jobs number with no wage growth,' a true 'goldilocks' scenario.

I have given up any expectation of reform from within. There will have to be some eye-opening incidents to shake the complacency of the fortunate few.

Non-Farm Payrolls tomorrow.

Have a pleasant evening.

[Nov 15, 2017] Alex Azar Can There Be Uglier Scenarios than the Revolving Door naked capitalism

Notable quotes:
"... By Lambert Strether ..."
"... So should Mr Azar be confirmed as Secretary of DHHS, the fox guarding the hen house appears to be a reasonable analogy. ..."
"... In this post, I'd like to add two additional factors to our consideration of Azar. The first: Democrat credentialism makes it hard for them to oppose Azar. The second: The real ..."
Nov 15, 2017 | www.nakedcapitalism.com

Alex Azar: Can There Be Uglier Scenarios than the Revolving Door? Posted on November 15, 2017 by Lambert Strether By Lambert Strether

Clearly, Alex Azar, nominated yesterday for the position of Secretary of Health and Human Services by the Trump Administration, exemplifies the case of the "revolving door," through which Flexians slither on their way to (or from) positions of public trust. Roy Poses ( cross-posted at NC ) wrote, when Azar was only Acting Secretary:

Last week we noted that Mr Trump famously promised to &#8220;drain the swamp&#8221; in Washington. Last week, despite his previous pledges to not appoint lobbyists to powerful positions, he appointed a lobbyist to be acting DHHS Secretary. This week he is apparently strongly considering Mr Alex Azar, a pharmaceutical executive to be permanent DHHS Secretary, even though the FDA, part of DHHS, has direct regulatory authority over the pharmaceutical industry, and many other DHHS policies strongly affect the pharmaceutical industry. (By the way, Mr Azar was also in charge of one lobbying effort.)

So should Mr Azar be confirmed as Secretary of DHHS, the fox guarding the hen house appears to be a reasonable analogy.

Moreover, several serious legal cases involving bad behavior by his company, and multiple other instances of apparently unethical behavior occurred on Mr Azar&#8217;s watch at Eli Lilly. So the fox might be not the most reputable member of the species.

So you know the drill&#8230;. The revolving door is a species of conflict of interest . Worse, some experts have suggested that the revolving door is in fact corruption. As we noted here , the experts from the distinguished European anti-corruption group U4 wrote ,

The literature makes clear that the revolving door process is a source of valuable political connections for private firms. But it generates corruption risks and has strong distortionary effects on the economy , especially when this power is concentrated within a few firms.

The ongoing parade of people transiting the revolving door from industry to the Trump administration once again suggests how the revolving door may enable certain of those with private vested interests to have excess influence, way beyond that of ordinary citizens, on how the government works, and that the country is still increasingly being run by a cozy group of insiders with ties to both government and industry. This has been termed crony capitalism.

Poses is, of course, correct. (Personally, I've contained my aghastitude on Azar, because I remember quite well how Liz Fowler transitioned from Wellpoint to being Max Baucus's chief of staff when ObamaCare was being drafted to a job in Big Pharma , and I remember quite well the deal with Big Pharma Obama cut, which eliminated the public option , not that the public option was anything other than a decreasingly gaudy "progressive" bauble in the first place.)

In this post, I'd like to add two additional factors to our consideration of Azar. The first: Democrat credentialism makes it hard for them to oppose Azar. The second: The real damage Azar could do is on the regulatory side.[1]

First, Democrat credentialism. Here is one effusive encomium on Azar. From USA Today, "Who is Alex Azar? Former drugmaker CEO and HHS official nominated to head agency" :

"I am glad to hear that you have worked hard, and brought fair-minded legal analysis to the department," Democratic Sen. Max Baucus said at Azar's last confirmation hearing.

And:

Andy Slavitt, who ran the Affordable Care Act and the Centers for Medicare & Medicaid Services during the Obama administration, said he has reason to hope Azar would be a good secretary.

"He is familiar with the high quality of the HHS staff, has real-world experience enough to be pragmatic, and will hopefully avoid repeating the mistakes of his predecessor," Slavitt said.

So, if Democrats are saying Azar is "fair-minded" and "pragmatic" -- and heaven forfend that the word "corruption"[2] even be mentioned -- how do they oppose him, even he's viscerally opposed to everything Democrats supposedly stand for? (Democrats do this with judicial nominations, too.) Azar may be a fox, alright, but the chickens he's supposedly guarding are all clucking about how impeccable his qualifications are!

Second, let's briefly look at Azar's bio. Let me excerpt salient detail from USA Today :

1. Azar clerked for Supreme Court Justice Antonin Scalia .

2. Azar went to work for his mentor, Ken Starr , who was heading the independent counsel investigation into Bill and Hillary Clinton's Whitewater land deal.

3. Azar had a significant role in another major political controversy when the outcome of the 2000 presidential election hinged on a recount in Florida . Azar was on the Bush team of lawyers whose side ultimately prevailed [3]

For any Democrat with a memory, that bio provokes one of those "You shall know them by the trail of the dead" moments. And then there's this:

When Leavitt replaced Thompson in 2005 and Azar became his deputy, Leavitt delegated a lot of the rule-making process to Azar.

So, a liberal Democrat might classify Azar as a smooth-talking reactionary thug with a terrible record and the most vile mentors imaginable, and on top of it all, he's an effective bureaucratic fixer. What could the Trump Administration possibly see in such a person? Former (Republican) HHS Secretary Mike Leavitt explains:

"Understanding the administrative rule process in the circumstance we're in today could be extraordinarily important because a lot of the change in the health care system, given the fact that they've not succeeded legislatively, could come administratively."

We outlined the administration strategy on health care in "Trump Adminstration Doubles Down on Efforts to Crapify the Entire Health Care System (Unless You're Rich, of Course)" . There are three prongs:

1) Administratively, send ObamaCare into a death spiral by sabotaging it

2) Legislatively, gut Medicaid as part of the "tax refom" package in Congress

3) Through executive order, eliminate "essential health benefits" through "association health plans"

As a sidebar, it's interesting to see that although this do-list is strategically and ideologically coherent -- basically, your ability to access health care will be directly dependent on your ability to pay -- it's institutionally incoherent, a bizarre contraption screwed together out of legislation, regulations, and an Executive order. Of course, this incoherence mirrors to Rube Goldberg structure of ObamaCare itself, itself a bizarre contraption, especially when compared to the simple, rugged, and proven single payer system. ( Everything Obama did with regulations and executive orders, Trump can undo, with new regulations and new executive orders . We might compare ObamaCare to a child born with no immune system, that could only have survived within the liberal bubble within which it was created; in the real world, it's not surprising that it's succumbing to opportunistic infections.[2])

On #1, The administration has, despite its best efforts, not achieved a controlled flight into terrain with ObamaCare; enrollment is up. On #2, the administration and its Congressional allies are still dickering with tax reform. And on #3 . That looks looks like a job for Alex Azar, since both essential health benefits and association health plans are significantly affected by regulation.

So, yes, there are worse scenarios than the revolving door; it's what you leave behind you as the door revolves that matters. It would be lovely if there were a good old-fashioned confirmation battle over Azar, but, as I've pointed out, the Democrats have tied their own hands. Ideally, the Democrats would junk the Rube Goldberg device that is ObamaCare, rendering all of Azar's regulatory expertise null and void, but that doesn't seem likely, given that they seem to be doing everything possible to avoid serious discussion of policy in 2018 and 2020.

NOTES

[1] I'm leaving aside what will no doubt be the 2018 or even 2020 issue of drug prices, since for me that's subsumed under the issue of single payer. If we look only at Azar's history in business, real price decreases seem unlikely. Business Insider :

Over the 10-year period when Azar was at Lilly, the price of insulin notched a three-fold increase. It wasn't just Lilly's insulin product, called Humalog. The price of a rival made by Novo Nordisk has also climbed, with the two rising in such lockstep that you can barely see both trend lines below.

The gains came despite the fact that the insulin, which as a medication has an almost-century-long history, hasn't really changed since it was first approved.

Nice business to be in, eh? Here's that chart:

It's almost like Lilly (Azar's firm) and Novo Nordisk are working together, isn't it?

[2] Anyhow, as of the 2016 Clinton campaign , the Democrat standard -- not that of Poses, nor mine -- is that if there's no quid pro quo, there's no corruption.

[3] And, curiously, "[HHS head Tommy] Thompson said HHS was in the eye of the storm after the 2001 terrorist attacks, and Azar had an important role in responding to the resulting public health challenges, as well as the subsequent anthrax attacks "

MedicalQuack , November 15, 2017 at 10:31 am

Oh please, stop quoting Andy Slavitt, the United Healthcare Ingenix algo man. That guy is the biggest crook that made his money early on with RX discounts with his company that he and Senator Warren's daughter, Amelia sold to United Healthcare. He's out there trying to do his own reputation restore routine. Go back to 2009 and read about the short paying of MDs by Ingenix, which is now Optum Insights, he was the CEO and remember it was just around 3 years ago or so he sat there quarterly with United CEO Hemsley at those quarterly meetings. Look him up, wants 40k to speak and he puts the perception out there he does this for free, not so.

diptherio , November 15, 2017 at 11:25 am

I think you're missing the context. Lambert is quoting him by way of showing that the sleazy establishment types are just fine with him. Thanks for the extra background on that particular swamp-dweller, though.

a different chris , November 15, 2017 at 2:01 pm

Not just the context, it's a quote in a quote. Does make me think Slavitt must be a real piece of work to send MQ so far off his rails

petal , November 15, 2017 at 12:52 pm

Alex Azar is a Dartmouth grad (Gov't & Economics '88) just like Jeff Immelt (Applied Math & Economics '78). So much damage to society from such a small department!

sgt_doom , November 15, 2017 at 1:21 pm

Nice one, petal !!!

Really, all I need to know about the Trumpster Administration:

From Rothschild to . . . .

https://en.wikipedia.org/wiki/Wilbur_Ross

Since 2014, Ross has been the vice-chairman of the board of Bank of Cyprus PCL, the largest bank in Cyprus.

He served under U.S. President Bill Clinton on the board of the U.S.-Russia Investment Fund. Later, under New York City Mayor Rudy Giuliani, Ross served as the Mayor's privatization advisor.

Jen , November 15, 2017 at 7:56 pm

Or from a "small liberal arts college" (which is a university in all but name, because alumni).

Tim Geitner ('82 – Goverment)
Hank Paulson ('68 – English)

jo6pac , November 15, 2017 at 2:13 pm

Well it's never ending game in the beltway and we serfs aren't in it.

https://consortiumnews.com/2017/11/15/trump-adds-to-washingtons-swamp/

Alfred , November 15, 2017 at 2:53 pm

I don't believe that the President's "swamp" ever consisted of crooked officials, lobbyists, and cronies I think it has always consisted of those regulators who tried sincerely to defend public interests.

It was in the sticky work of those good bureaucrats that the projects of capitalists and speculators bogged down. It is against their efforts that the pickup-driving cohort of Trump_vs_deep_state (with their Gadsden flag decals) relentlessly rails.

Trump has made much progress in draining the regulatory swamp (if indeed that is the right way to identify it), and no doubt will make considerably more as time wears on, leaving America high and dry. The kind of prevaricator Trump is may simply be the one who fails to define his terms.

Henry Moon Pie , November 15, 2017 at 4:13 pm

I think we've moved past the revolving door. We hear members of the United States Senate publicly voice their concerns about what will happen if they fail to do their employers' bidding (and I'm not talking about "the public" here). In the bureaucracy, political appointees keep accruing more and more power even as they make it clearer and clearer that they work for "the donors" and not the people. Nowhere is this more true than the locus through which passes most of the money: the Pentagon. The fact that these beribboned heroes are, in fact, setting war policy on their own makes the knowledge that they serve Raytheon and Exxon rather than Americans very, very troubling.

I suspect Azar's perception is that he is just moving from one post to another within the same company.

Watt4Bob , November 15, 2017 at 5:28 pm

Perfect cartoon over at Truthout

I'm amazed there is enough private security available on this planet to keep these guys safe.

Larry , November 15, 2017 at 8:01 pm

Big pharma indeed has so much defense from the supposed left. It combines their faith in technological progress, elite institutions, and tugs on the heart strings with technology that can save people from a fate of ill health or premature death. Of course, the aspect of the laws being written to line the pockets of corrupt executives is glossed over. While drug prices and medical costs spiral ever higher, our overall longevity and national health in the US declines. That speaks volumes about what Democrats really care about.

[Apr 27, 2017] Elizabeth Warren on Big Banks and Their (Cozy Bedmate) Regulators

Notable quotes:
"... "Regulatory failure has been built into the system," Ms. Warren said in our interview. "The regulators routinely hear from the banks. They hear from those who have billions of dollars at stake. But they don't hear from the millions of people across this country who will be deeply affected by the decisions they make." ..."
"... There was a time when everything that went through Washington got measured by whether it created more opportunities for the middle class," Ms. Warren said. "Now, the people with money and power have figured out how to invest millions of dollars in Washington and get rules that yield billions of dollars for themselves. ..."
"... "Government," she added, "increasingly works for those at the top." ..."
Apr 27, 2017 | www.nytimes.com

Wells Fargo's board and management are scheduled to meet shareholders at the company's annual meeting Tuesday in Ponte Vedra Beach, Fla. With the phony account-opening scandal still making headlines, and the company's stock underperforming its peers, it's a good bet the bank's brass will have some explaining to do.

How could such pernicious practices at the bank be allowed for so long? Why didn't the board do more to stop the scheme or the incentive programs that encouraged it? And where, oh where, were the regulators?

Wells Fargo's management has conceded making multiple mistakes over many years; it also says it has learned from them. In a meeting this week with reporters at The New York Times, Timothy J. Sloan, Wells Fargo's chief executive, said the bank had made substantive changes to its structure and culture to ensure that dubious practices won't take hold again.

But there's a deeper explanation for why Wells Fargo's corrosive sales practices came about and continued for years. And it has everything to do with the bank-friendly regulatory regime in Washington and the immense sway that institutions like Wells Fargo have there. This poisonous combination contributes to a sense among giant banking institutions that they answer to no one.

  • "This Fight Is Our Fight" contains juicy but depressing anecdotes about how our most trusted institutions have let us down. It also shows why, years after the financial crisis, big banks are still large, in charge and, basically, unaccountable for their actions.

    "In too many of these organizations, there are rewards for cheating and punishments for calling out the cheaters," Ms. Warren said in an interview Wednesday. "As long as that's the case, the biggest financial institutions will continue to put their customers and the economy at risk."

    Ms. Warren's no-nonsense views are bracing. But they are also informed by a thorough understanding of how dysfunctional Washington now is. This failure has cost Main Street dearly, she said, but has benefited the powerful.

    Wells Fargo got a lot of criticism from Ms. Warren, both in her book and in my interview - and on live television during the Senate Banking Committee hearing on the account-opening mess in September. She was among the harshest cross-examiners encountered by John G. Stumpf, who was Wells Fargo's chief executive at the time. "You should resign," she told him, "and you should be criminally investigated." (Mr. Stumpf retired the next month.)

    This week, Ms. Warren called for the ouster of the company's directors and a criminal inquiry into the bank.

    "Yes, the board should be removed, but that's not enough," she told me. "There still needs to be a criminal investigation. The expertise is in the regulatory agencies, but the power to prosecute lies mostly with the Justice Department, and if they don't have either the energy or the talent - or the backbone - to go after the big banks, then there will never be any real accountability."

    Banks are not the only targets in Ms. Warren's book. Others include Wal-Mart, for its treatment of employees; for-profit education companies, for the way they pile debt on unsuspecting students; the Chamber of Commerce, for battling Main Street; and prestigious think tanks, for their undisclosed conflicts of interest.

    My favorite moments in the book involve the phenomenon of regulatory capture: the pernicious condition in which institutions that are supposed to police the nation's financial behemoths actually come to view them as clients or pals.

    One telling moment took place in 2005, when Ms. Warren, then a Harvard law professor, was invited to address the staff at the Office of the Comptroller of the Currency, a top regulator charged with monitoring the activities of big banks.

    She was thrilled by the invitation, she recalled in the book. After years of tracking various problems consumers experienced with their banks - predatory lending, sky-high interest rates and dubious fees - Ms. Warren felt that, finally, she'd be able to persuade the regulators to crack down.

    Her host for the meeting was Julie L. Williams, then the acting comptroller of the currency. In a conference room filled with economists and bank supervisors, Ms. Warren presented her findings: Banks were tricking and cheating their consumers.

    After the meeting ended and Ms. Williams was escorting her guest to the elevator, she told Ms. Warren that she had made a "compelling case," Ms. Warren writes. When she pushed Ms. Williams to have her agency do something about the dubious practices, the regulator balked.

    "No, we just can't do that," Ms. Williams said, according to the book. "The banks wouldn't like it."

    Ms. Warren was not invited back.

    Ms. Williams left the agency in 2012 and is a managing director at Promontory, a regulatory-compliance consulting firm specializing in the financial services industry. When I asked about her conversation with Ms. Warren, she said she had a different recollection.

    "I told her I agreed with her concerns," Ms. Williams wrote in an email, "but when I said, 'We just can't do that,' I explained that was because the Comptroller's office did not have jurisdiction to adopt rules to ban the practice. I told her this was the Federal Reserve Board's purview."
    Interestingly, though, Ms. Warren's take on regulatory capture at the agency was substantiated in a damning report on its supervision of Wells Fargo, published by a unit of the Office of the Comptroller of the Currency on Wednesday.

    The report cited a raft of agency oversight breakdowns regarding Wells Fargo. Among them was its failure to follow up on a slew of consumer and employee complaints beginning in early 2010. There was no evidence, the report said, that agency examiners "required the bank to provide an analysis of the risks and controls, or investigated these issues further to identify the root cause and the appropriate supervisory actions needed."

    Neither did the agency document the bank's resolution of whistle-blower complaints, the report said, or conduct in-depth reviews and tests of the bank's controls in this area "at least from 2011 through 2014." (The agency recently removed its top Wells Fargo examiner, Bradley Linskens, from his job running a staff of 60 overseeing the bank.)

    "Regulatory failure has been built into the system," Ms. Warren said in our interview. "The regulators routinely hear from the banks. They hear from those who have billions of dollars at stake. But they don't hear from the millions of people across this country who will be deeply affected by the decisions they make."

    This is why the Consumer Financial Protection Bureau plays such a crucial role, she said. The agency allows consumers to sound off about their financial experiences, and their complaints provide a heat map for regulators to identify and pursue wrongdoing.

    But this setup has also made the bureau a target for evisceration by bank-centric politicians.

    "There was a time when everything that went through Washington got measured by whether it created more opportunities for the middle class," Ms. Warren said. "Now, the people with money and power have figured out how to invest millions of dollars in Washington and get rules that yield billions of dollars for themselves."

    "Government," she added, "increasingly works for those at the top."

  • [Apr 21, 2017] Elizabeth Warren on Big Banks and Their (Cozy Bedmate) Regulators - The New York Times

    Apr 21, 2017 | www.nytimes.com

    Wells Fargo 's board and management are scheduled to meet shareholders at the company's annual meeting Tuesday in Ponte Vedra Beach, Fla. With the phony account-opening scandal still making headlines , and the company's stock underperforming its peers, it's a good bet the bank's brass will have some explaining to do.

    How could such pernicious practices at the bank be allowed for so long? Why didn't the board do more to stop the scheme or the incentive programs that encouraged it? And where, oh where, were the regulators?

    Wells Fargo's management has conceded making multiple mistakes over many years; it also says it has learned from them. In a meeting this week with reporters at The New York Times, Timothy J. Sloan, Wells Fargo's chief executive, said the bank had made substantive changes to its structure and culture to ensure that dubious practices won't take hold again.

    But there's a deeper explanation for why Wells Fargo's corrosive sales practices came about and continued for years. And it has everything to do with the bank-friendly regulatory regime in Washington and the immense sway that institutions like Wells Fargo have there. This poisonous combination contributes to a sense among giant banking institutions that they answer to no one.

    Continue reading the main story Advertisement Continue reading the main story

    The capture of our regulatory and political system by big and powerful corporations is real. And it is a central and disturbing theme in the new book by Senator Elizabeth Warren , Democrat of Massachusetts.

    Advertisement Continue reading the main story

    "This Fight Is Our Fight" contains juicy but depressing anecdotes about how our most trusted institutions have let us down. It also shows why, years after the financial crisis, big banks are still large, in charge and, basically, unaccountable for their actions.

    "In too many of these organizations, there are rewards for cheating and punishments for calling out the cheaters," Ms. Warren said in an interview Wednesday. "As long as that's the case, the biggest financial institutions will continue to put their customers and the economy at risk."

    Ms. Warren's no-nonsense views are bracing. But they are also informed by a thorough understanding of how dysfunctional Washington now is. This failure has cost Main Street dearly, she said, but has benefited the powerful.

    Wells Fargo got a lot of criticism from Ms. Warren, both in her book and in my interview - and on live television during the Senate Banking Committee hearing on the account-opening mess in September. She was among the harshest cross-examiners encountered by John G. Stumpf, who was Wells Fargo's chief executive at the time. "You should resign," she told him , "and you should be criminally investigated." (Mr. Stumpf retired the next month.)

    This week, Ms. Warren called for the ouster of the company's directors and a criminal inquiry into the bank.

    "Yes, the board should be removed, but that's not enough," she told me. "There still needs to be a criminal investigation. The expertise is in the regulatory agencies, but the power to prosecute lies mostly with the Justice Department, and if they don't have either the energy or the talent - or the backbone - to go after the big banks, then there will never be any real accountability."

    Banks are not the only targets in Ms. Warren's book. Others include Wal-Mart, for its treatment of employees; for-profit education companies, for the way they pile debt on unsuspecting students; the Chamber of Commerce, for battling Main Street; and prestigious think tanks, for their undisclosed conflicts of interest.

    My favorite moments in the book involve the phenomenon of regulatory capture: the pernicious condition in which institutions that are supposed to police the nation's financial behemoths actually come to view them as clients or pals.

    Photo

    One telling moment took place in 2005, when Ms. Warren, then a Harvard law professor, was invited to address the staff at the Office of the Comptroller of the Currency, a top regulator charged with monitoring the activities of big banks.

    Advertisement Continue reading the main story

    She was thrilled by the invitation, she recalled in the book. After years of tracking various problems consumers experienced with their banks - predatory lending, sky-high interest rates and dubious fees - Ms. Warren felt that, finally, she'd be able to persuade the regulators to crack down.

    Her host for the meeting was Julie L. Williams, then the acting comptroller of the currency. In a conference room filled with economists and bank supervisors, Ms. Warren presented her findings: Banks were tricking and cheating their consumers.

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    After the meeting ended and Ms. Williams was escorting her guest to the elevator, she told Ms. Warren that she had made a "compelling case," Ms. Warren writes. When she pushed Ms. Williams to have her agency do something about the dubious practices, the regulator balked.

    "No, we just can't do that," Ms. Williams said, according to the book. "The banks wouldn't like it."

    Ms. Warren was not invited back.

    Ms. Williams left the agency in 2012 and is a managing director at Promontory , a regulatory-compliance consulting firm specializing in the financial services industry. When I asked about her conversation with Ms. Warren, she said she had a different recollection.

    "I told her I agreed with her concerns," Ms. Williams wrote in an email, "but when I said, 'We just can't do that,' I explained that was because the Comptroller's office did not have jurisdiction to adopt rules to ban the practice. I told her this was the Federal Reserve Board's purview."

    Interestingly, though, Ms. Warren's take on regulatory capture at the agency was substantiated in a damning report on its supervision of Wells Fargo, published by a unit of the Office of the Comptroller of the Currency on Wednesday.

    The report cited a raft of agency oversight breakdowns regarding Wells Fargo. Among them was its failure to follow up on a slew of consumer and employee complaints beginning in early 2010. There was no evidence, the report said, that agency examiners "required the bank to provide an analysis of the risks and controls, or investigated these issues further to identify the root cause and the appropriate supervisory actions needed."

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    Neither did the agency document the bank's resolution of whistle-blower complaints, the report said, or conduct in-depth reviews and tests of the bank's controls in this area "at least from 2011 through 2014." ( The agency recently removed its top Wells Fargo examiner, Bradley Linskens, from his job running a staff of 60 overseeing the bank.)

    "Regulatory failure has been built into the system," Ms. Warren said in our interview. "The regulators routinely hear from the banks. They hear from those who have billions of dollars at stake. But they don't hear from the millions of people across this country who will be deeply affected by the decisions they make."

    This is why the Consumer Financial Protection Bureau plays such a crucial role, she said. The agency allows consumers to sound off about their financial experiences, and their complaints provide a heat map for regulators to identify and pursue wrongdoing.

    But this setup has also made the bureau a target for evisceration by bank-centric politicians.

    "There was a time when everything that went through Washington got measured by whether it created more opportunities for the middle class," Ms. Warren said. "Now, the people with money and power have figured out how to invest millions of dollars in Washington and get rules that yield billions of dollars for themselves."

    "Government," she added, "increasingly works for those at the top."

    [Apr 06, 2017] Richmond Fed's Jeffrey Lacker Departs Due to Leak Defenestration as Coverup

    Apr 06, 2017 | www.nakedcapitalism.com
    From a trading perspective, the big news was at the top: "The minutes will show it will be unlikely that the labor market improvement will be substantial enough to stave off new Treasury purchases into 2013." And in the sixth paragraph it describes how the Fed was likely to vote as early as December to stop the part of its MBS buying designed to counter the bonds being paid off (due to foreclosures, home sales, refis) and buy roughly $45 billion a month of Treasuries instead.

    The amount of granular detail was stunning. For instance:

    The committee will attach a predictive timetable outlining the duration of these purchases The monthly MBS purchases of around $40 billion will continue along side the new program Tomorrow's minutes will reference a staff paper The minutes will show the dovish majority was ready .[to make] open ended MBS and Treasury purchases as early as last month.

    This is so specific that it comes of as if Medley either got its hands on an advance draft of the FOMC minutes or someone read it to her.

    The report also describes, again in depth, how the decision process prior to the September meeting departed from established norms as well as voyeristic tidbits, such as that finalizing the text of the policy recommendations kept staffers up until after midnight.

    Given how extraordinarily revealing this note was, Lacker's departure is unsatisfactory. Specifically:

    Either Lacker lied or the investigators aren't even close to getting to the bottom of this . Lacker has admitted only to taking a call from the Medley analyst, supposedly having her run insider detail by him, and indirectly confirming it by not getting off the phone. From his resignation letter, which was released by law firm McGuireWoods, not the Richmond Fed:

    During that October 2, 2012 discussion, the [Medley] Analyst introduced into the conversation an important non-public detail about one of the policy options considered by participants prior to the meeting. Due to the highly confidential and sensitive nature of this information, I should have declined to comment and perhaps have ended the phone call. Instead, I did not refuse or express my inability to comment and the interview continued. Additionally, after that phone call, I did not, as required by the Information Security Policy, report to any FOMC personnel that the Analyst was in possession of confidential FOMC information. When Medley published a report by the Analyst the following day, October 3, 2012, it contained this important detail about one of the policy options and I realized that my failure to decline comment on the information could have been taken by the Analyst, in the context of the conversation, as an acknowledgment or confirmation of the information.

    This reads like the equivalent of a plea bargain, that Lacker and his lawyers negotiated him to 'fess up to the most minimal breach possible provided he resign.

    Alternatively, if Lacker is being truthful, it means that one or more additional people provided the information to the Medley analyst, Regina Schleiger.

    [Apr 04, 2017] Lack Hawk Down

    Apr 04, 2017 | jessescrossroadscafe.blogspot.com

    The Richmond Fed's noted rate hawk and serial dissenter Jeffrey Lacker resigned today as a result of an investigation into a leak in 2012 of confidential information to an analyst that sells hard to get information to wealthy subscribers.

    The guest commentators, talking heads, and spokesmodels were attributing this resignation, or faux pas if you will, to an inadvertent slip by one of their own who is burdened with managing the finances of the US.

    They kept mentioning that they do not wish this incident to diminish the public's confidence in the FED. I guess fomenting serial asset bubbles and enabling historic financial inequality through hare-brained policies is not enough. LOL

    [Apr 04, 2017] Richmond Fed president, Jeff Lacker Quits Today After Improper Disclosure of QE to analyst at firm selling research to hedge funds

    Apr 04, 2017 | economistsview.typepad.com
    BenIsNotYoda April 04, 2017 at 10:25 AM
    https://www.bloomberg.com/news/articles/2017-04-04/fed-s-lacker-quits-today-after-improper-disclosure-ny-times

    Fed's Lacker Quits Today After Improper Disclosure: NY Times
    Richmond Fed president, Jeff Lacker, says he is resigning effective today after improperly disclosing confidential Fed information, NY Times said in tweet.

    Fed President involved in disclosing future QE to analyst at firm selling research to hedge funds.

    In other places, this is called insider information. At the Fed? I am shocked there is gambling at this establishment.

    We need to clean house at the Fed. Starting at the top.

    BenIsNotYoda , April 04, 2017 at 10:41 AM
    Statement Of Dr. Jeffrey Lacker

    During the past 13 years it has been my privilege to serve as President of the Federal Reserve Bank of Richmond. It has also been an honor to contribute to the development of our nation's monetary policy as a member of the Federal Reserve's Federal Open Market Committee ("FOMC").

    While transparency of the monetary policy process is important, equally important are the confidentiality policies that protect the internal deliberations of the FOMC and ensure the integrity of our financial markets. The Federal Reserve's confidentiality policies seek to guide participants in maintaining the balance between transparency and confidentiality. The FOMC has had in place for many years two specific policies relating to confidentiality. the FOMC Policy on External Communications of Committee Participants (the "External Communications Policy-) and the Program for Security of FOMC Information (the "Information Security Policy").

    In 2012, my conduct was inconsistent with those important confidentiality policies. Specifically, on October 2, 2012, I spoke by phone with an analyst ("the Analyst") concerning the September 2012 meeting of the FOMC. The Analyst authors reports on Federal Reserve matters on behalf of Medley Global Advisors ("Medley'). Medley publishes macro-economic policy intelligence for institutions such as hedge funds and asset managers and is owned by the Financial Times Limited.

    During that October 2, 2012 discussion, the Analyst introduced into the conversation an important non-public detail about one of the policy options considered by participants prior to the meeting. Due to the highly confidential and sensitive nature of this information, I should have declined to comment and perhaps have ended the phone call. Instead, I did not refuse or express my inability to comment and the interview continued. Additionally, after that phone call I did not, as required by the Information Security Policy, report to any FOMC personnel that the Analyst was in possession of confidential FOMC information. When Medley published a report by the Analyst the following day, October 3, 2012, it contained this important detail about one of the policy options and I realized that my failure to decline comment on the information could have been taken by the Analyst, in the context of the conversation, as an acknowledgment or confirmation of the information.

    I deeply regret the role I may have played in confirming this confidential information and in its dissemination to Medley's subscribers. In this episode, as in all of my communications with analysts, journalists and the public, it was never my intention to reveal confidential information. I further acknowledge that through this and other conversations with the Analyst, I may have contravened the External Communications Policy, which prohibits providing any profit-making person or organization with a prestige advantage over its competitors.

    Following these events, I was interviewed on December 10, 2012, as part of an internal review conducted by the General Counsel of the FOMC. In advance of that interview, on December 6, 2012, I provided written responses to a questionnaire issued by the General Counsel seeking, among other things, all relevant information regarding my communications with the Analyst. Althoug it was my intention to cooperate fully with the internal review, I regret that I did not disclose to the General Counsel, either in my December 6, 2012 questionnaire or the December 10, 2012 interview, that the Analyst was in possession of confidential information during my conversation with her on October 2,2012.

    In 2015, I was interviewed again as part of a separate investigation conducted by the United States Attorney's Office for the Southern District of New York, the Office of the Inspector General of the Federal Reserve Board, the Federal Bureau of Investigation, and the U.S. Commodity Futures Trading Commission. In this subsequent 2015 interview with law enforcement officials, I did disclose that the Analyst was in possession of confidential information during my October 2. 2012 conversation with her.

    I apologize to my colleagues and to the public I have been privileged to serve. I have always strived to maintain the appropriate balance between transparency and confidentiality, but I regret that in this instance I crossed the line to confirming information that should have remained confidential. I previously announced my intention to retire as President of the Federal Reserve Bank of Richmond in October 2017, and in light of these matters I have decided to make my departure from the Federal Reserve effective today.

    libezkova , April 04, 2017 at 11:26 AM
    "Fed President involved in disclosing future QE to analyst at firm selling research to hedge funds."

    "I am shocked there is gambling at this establishment."

    That's good -- Thank you --

    Now let me wear Anne hat :-). The proper quote is "I'm shocked, shocked to find that gambling is going on in here! "

    http://www.imdb.com/title/tt0034583/quotes?ref_=tt_ql_trv_4

    == quote ==
    Rick: How can you close me up? On what grounds?

    Captain Renault:
    I'm shocked, shocked to find that gambling is going on in here!
    [a croupier hands Renault a pile of money]

    Croupier: Your winnings, sir.

    Captain Renault: [sotto voce] Oh, thank you very much.

    [aloud]

    Captain Renault: Everybody out at once!

    [Mar 09, 2017] DrDick

    Mar 09, 2017 | profile.typepad.com
    said... The ProMarket piece is interesting, but really misses the point. "Regulation" in itself is not what matters, but rather what kinds of regulations and how they work. Some regulations, favored by the industries themselves (like taxi licensing in most metropolitan areas) tend to act to reduce competition and enhance company profits. Others, like the background checks mentioned in the article, serve to protect the public interest. Reply Thursday, March 09, 2017 at 07:42 AM Youarecorrect said in reply to DrDick ... You are correct to point out that a catchall phrase like regulation disguises many intentions. But there is a tension between motivations of regulation. A regulation that is supposed to increase reliability (e.g. vetting of entrants), can be essentially a rent seeking tool in disguise. That's the point of the ProMarket article. Reply Thursday, March 09, 2017 at 11:27 AM DrDick said in reply to Youarecorrect... This is really a question of looking at who is proposing or favoring the regulation and how it is structured and thus whose interests are being protected. If it is coming from established businesses, it is about rent seeking. Reply Thursday, March 09, 2017 at 01:53 PM

    [Feb 20, 2017] Problems of asymmetry in regulation: People who especially benefit from a particular regulation will be inclined to lobby or bribe government officials for it

    Feb 20, 2017 | economistsview.typepad.com

    Richard H. Serlin : February 18, 2017 at 07:51 PM

    "Mr. Friedman underscored problems of asymmetry in regulation: People who especially benefit from a particular regulation will be inclined to lobby or bribe government officials for it. On the other hand, members of the general public, who might suffer from such regulations, will not be attentive to the many rules that affect them, each in a small way." -- Shiller article

    This is the same Milton Friedman who assumed people had perfect information and expertise on everything in the market. They were all electrical engineers who knew the exact schematics of every toaster and refrigerator to know if it would burn down their house, but they had no idea what any government regulations or policies were -- Hey, it's ok, and so scientific, to just assume anything you want about human beings, as long as there's lots of math and internal consistency and microfoundations -- And, of course, it makes libertarianism look better.

    [Dec 27, 2016] Class Struggle In The USA

    Notable quotes:
    "... Rich individuals (who are willing to be interviewed) also express concern about inequality but generally oppose using higher taxes on the rich to fight it. Scheiber is very willing to bluntly state his guess (and everyone's) that candidates are eager to please the rich, because they spend much of their time begging the rich for contributions. ..."
    "... Of course another way to reduce inequality is to raise wages. Buried way down around paragraph 9 I found this gem: "Forty percent of the wealthy, versus 78 percent of the public, said the government should make the minimum wage "high enough so that no family with a full-time worker falls below the official poverty line." ..."
    "... The current foundational rules embedded in tax law, intellectual property law, corporate construction law, and other elements of our legal and regulatory system result in distributions that favor those with capital or in a position to seek rents. This isn't a situation that calls for a Robin Hood who takes from the rich and gives to the poor. It is more a question of how elites have rigged the system to work primarily for them. ..."
    "... the problem is incomes and demand, and the first and best answer for creating demand for workers and higher wages to compete for those workers is full employment. ..."
    "... if you are proposing raising taxes on the rich SO THAT you can cut taxes on the non rich you are simply proposing theft. ..."
    "... what we are looking at here is simple old fashioned greed just as stupid and ugly among the "non rich" as it is among the rich. ..."
    "... you play into the hands of the Petersons who want to "cut taxes" and leave the poor elderly to die on the streets, and the poor non-elderly to spend their lives in anxiety and fear-driven greed trying to provide against desperate poverty in old age absent any reliable security for their savings.) ..."
    "... made by the ayn rand faithful. it is wearisome. ..."
    "... The only cure for organized greed is organized labor. ..."
    "... A typical voice of American politics is the avoidance of saying anything real on real issues" ..."
    Mar 29, 2015 | Angry Bear

    Noam Scheiber has a hard hitting article on the front page of www.nytimes.com "2016 Candidates and Wealthy Are Aligned on Inequality"

    The content should be familiar to AngryBear readers. A majority of Americans are alarmed by high and increasing inequality and support government action to reduce inequality. However, none of the important 2016 candidates has expressed any willingness to raise taxes on the rich. The Republicans want to cut them and Clinton (and a spokesperson) dodge the question.

    Rich individuals (who are willing to be interviewed) also express concern about inequality but generally oppose using higher taxes on the rich to fight it. Scheiber is very willing to bluntly state his guess (and everyone's) that candidates are eager to please the rich, because they spend much of their time begging the rich for contributions.

    No suprise to anyone who has been paying attention except for the fact that it is on the front page of www.nytimes.com and the article is printed in the business section not the opinion section. Do click the link - it is brief, to the point, solid, alarming and a must read.

    I clicked one of the links and found weaker evidence than I expected for Scheiber's view (which of course I share

    "By contrast, more than half of Americans and three-quarters of Democrats believe the "government should redistribute wealth by heavy taxes on the rich," according to a Gallup poll of about 1,000 adults in April 2013."

    It is a small majority 52% favor and 47% oppose. This 52 % is noticeably smaller than the solid majorities who have been telling Gallup that high income individuals pay less than their fair share of taxes (click and search for Gallup on the page).

    I guess this isn't really surprising - the word "heavy" is heavy maaaan and "redistribute" evokes the dreaded welfare (and conservatives have devoted gigantic effort to giving it pejorative connotations). The 52% majority is remarkable given the phrasing of the question. But it isn't enough to win elections, since it is 52% of adults which corresponds to well under 52% of actual voters.

    My reading is that it is important for egalitarians to stress the tax cuts for the non rich and that higher taxes on the rich are, unfortunately, necessary if we are to have lower taxes on the non rich without huge budget deficits. This is exactly Obama's approach.

    Comments (87)

    Jerry Critter

    March 29, 2015 10:40 pm

    Get rid of tax breaks that only the wealthy can take advantage of and perhaps everyone will pay their fair share. The same goes for corporations.

    amateur socialist

    March 30, 2015 11:42 am

    Of course another way to reduce inequality is to raise wages. Buried way down around paragraph 9 I found this gem: "Forty percent of the wealthy, versus 78 percent of the public, said the government should make the minimum wage "high enough so that no family with a full-time worker falls below the official poverty line."

    I'm fine with raising people's taxes by increasing their wages. A story I heard on NPR recently indicated that a single person needs to make about $17-19 an hour to cover most basic necessities nowadays (the story went on to say that most people in that situation are working 2 or more jobs to get enough income, a "solution" that creates more problems with health/stress etc.). A full time worker supporting kids needs more than $20.

    You double the minimum wage and strengthen people's rights to organize union representation. Tax revenues go up (including SS contributions btw) and we add significant growth to the economy with the increased purchasing power of workers. People can go back to working 40-50 hours a week and cut back on moonlighting which creates new job opportunities for the younger folks decimated by this so called recovery.

    Win Win Win Win. And the poor overburdened millionaires don't have to have their poor tax fee fees hurt.

    Mark Jamison, March 30, 2015 8:09 pm

    How about if we get rid of the "re" and call it what it is "distribution". The current foundational rules embedded in tax law, intellectual property law, corporate construction law, and other elements of our legal and regulatory system result in distributions that favor those with capital or in a position to seek rents.

    This isn't a situation that calls for a Robin Hood who takes from the rich and gives to the poor. It is more a question of how elites have rigged the system to work primarily for them. Democrats cede the rhetoric to the Right when they allow the discussion to be about redistribution. Even talk of inequality without reference to the basic legal constructs that are rigged to create slanted outcomes tend to accepted premises that are in and of themselves false.

    The issue shouldn't be rejiggering things after the the initial distribution but creating a system with basic rules that level the opportunity playing field.

    coberly, March 30, 2015 11:03 pm

    Thank You Mark Jamison!

    An elegant, informed writer who says it better than I can.

    But here is how I would say it:

    Addressing "inequality" by "tax the rich" is the wrong answer and a political loser.

    Address inequality by re-criminalizing the criminal practices of the criminal rich. Address inequality by creating well paying jobs with government jobs if necessary (and there is necessary work to be done by the government), with government protection for unions, with government policies that make it less profitable to off shore

    etc. the direction to take is to make the economy more fair . actually more "free" though you'll never get the free enterprise fundamentalists to admit that's what it is. You WILL get the honest rich on your side. They don't like being robbed any more than you do.

    But you will not, in America, get even poor people to vote to "take from the rich to give to the poor." It has something to do with the "story" Americans have been telling themselves since 1776. A story heard round the world.

    That said, there is nothing wrong with raising taxes on the rich to pay for the government THEY need as well as you. But don't raise taxes to give the money to the poor. They won't do it, and even the poor don't want it except as a last resort, which we hope we are not at yet.

    urban legend, March 31, 2015 2:07 am

    Coberly, you are dead-on. Right now, taxation is the least issue. Listen to Jared Bernstein and Dean Baker: the problem is incomes and demand, and the first and best answer for creating demand for workers and higher wages to compete for those workers is full employment. Minimum wage will help at the margins to push incomes up, and it's the easiest initial legislative sell, but the public will support policies - mainly big-big infrastructure modernization in a country that has neglected its infrastructure for a generation - that signal a firm commitment to full employment.

    It's laying right there for the Democrats to pick it up. Will they? Having policies that are traditional Democratic policies will not do the job. For believability - for convincing voters they actually have a handle on what has been wrong and how to fix it - they need to have a story for why we have seem unable to generate enough jobs for over a decade. The neglect of infrastructure - the unfilled millions of jobs that should have gone to keeping it up to date and up to major-country standards - should be a big part of that story. Trade and manufacturing, to be sure, is the other big element that will connect with voters. Many Democrats (including you know who) are severely compromised on trade, but they need to find a way to come own on the right side with the voters.

    coberly, March 31, 2015 10:52 am

    Robert

    i wish you'd give some thought to the other comments on this post.

    if you are proposing raising taxes on the rich SO THAT you can cut taxes on the non rich you are simply proposing theft. if you were proposing raising taxes on the rich to provide reasonable welfare to those who need it you would be asking the rich to contribute to the strength of their own country and ultimately their own wealth.

    i hope you can see the difference.

    it is especially irritating to me because many of the "non rich" who want their taxes cut make more than twice as much as i do. what we are looking at here is simple old fashioned greed just as stupid and ugly among the "non rich" as it is among the rich.

    "the poor" in this country do not pay a significant amount of taxes (Social Security and Medicare are not "taxes," merely an efficient way for us to pay for our own direct needs . as long as you call them taxes you play into the hands of the Petersons who want to "cut taxes" and leave the poor elderly to die on the streets, and the poor non-elderly to spend their lives in anxiety and fear-driven greed trying to provide against desperate poverty in old age absent any reliable security for their savings.)

    Kai-HK, April 4, 2015 12:23 am

    coberly,

    Thanks for your well-reasoned response.

    You state, 'i personally am not much interested in the "poor capitalist will flee the country if you tax him too much." in fact i'd say good riddance, and by the way watch out for that tarriff when you try to sell your stuff here.'

    (a) What happens after thy leave? Sure you can get one-time 'exit tax' but you lose all the intellectual capital (think of Bill Gates, Warren Buffet, or Steve Jobs leaving and taking their intellectual property and human capital with them). These guys are great jobs creators it will not only be the 'bad capitalists' that leave but also many of the 'job creating' good ones.

    (b) I am less worried about existing job creating capitalists in America; what about the future ones? The ones that either flee overseas and make their wealth there or are already overseas and then have a plethora of places they can invest but why bother investing in the US if all they are going to do is call me a predator and then seize my assets and or penalise me for investing there? Right? It is the future investment that gets impacted not current wealth per se.

    You also make a great point, 'the poor are in the worst position with respect to shifting their tax burden on to others. the rich do it as a matter of course. it would be simpler just to tax the rich there are fewer of them, and they know what is at stake, and they can afford accountants. the rest of us would pay our "taxes" in the form of higher prices for what we buy.'

    Investment capital will go where it is best treated and to attract investment capital a market must provide a competitive return (profit margin or return on investment). Those companies and investment that stay will do so because they are able to maintain that margin .and they will do so by either reducing wages or increasing prices. Where they can do neither, their will exit the market.

    That is why, according to research, a bulk of the corporate taxation falls on workers and consumers as a pass-on effect. The optimum corporate tax is 0. This will be the case as taxation increases on the owners of businesses and capital .workers, the middle class, and the poor pay it. The margins stay competitive for the owners of capital since capital is highly mobile and fungible.Workers and the poor less so.

    But thanks again for the tone and content of your response. I often get attacked personally for my views instead of people focusing on the issue. I appreciate the respite.

    K

    coberly, April 4, 2015 12:34 pm

    kai

    yes, but you missed the point.

    i am sick of the whining about taxes. it takes so much money to run the country (including the kind of pernicious poverty that will turn the US into sub-saharan africa. and then who will buy their products.

    i can't do much about the poor whining about taxes. they are just people with limited understanding, except for their own pressing needs. the rich know what the taxes are needed for, they are just stupid about paying them. of course they would pass the taxes through to their customers. the customers would still buy what they need/want at the new price. leaving everyone pretty much where they are today financially. but the rich would be forced to be grownup about "paying" the taxes, and maybe the politics of "don't tax me tax the other guy" would go away.

    as for the sainted bill gates. there are plenty of other people in this country as smart as he is and would be happy to sell us computer operating systems and pay the taxes on their billion dollars a year profits.

    nothing breaks my heart more than a whining millionaire.

    Kai-HK

    April 4, 2015 11:32 pm

    Sure I got YOUR point, it just didn't address MY points as put forth in MY original post. And it still doesn't.

    More importantly, you have failed to defend YOUR point against even a rudimentary challenge.

    K

    coberly, April 5, 2015 12:45 pm

    kai,

    rudimentary is right.

    i have read your "points" about sixteen hundred times in the last year alone. made by the ayn rand faithful. it is wearisome.

    and i have learned there is no point in trying to talk to true believers.

    William Ryan, May 13, 2015 4:43 pm

    Thanks again Coberly for your and K's very thoughtful insight. You guys really made me think hard today and I do see your points about perverted capitalism being a big problem in US. I still do like the progressive tax structure and balanced trade agenda better.

    I realize as you say that we cannot compare US to Hong Kong just on size and scale alone. Without all the obfuscation going Lean by building cultures that makes people want to take ownership and sharing learning and growing together is a big part of the solution Ford once said "you cannot learn in school what the world is going to do next".

    Also never argue with an idiot. They will bring you down to their level then beat you with experience. The only cure for organized greed is organized labor. It's because no matter what they do nothing get done about it. With all this manure around there must be a pony somewhere! "

    Last one.

    coberly , May 16, 2015 9:57 pm

    kai

    as a matter of fact i disagree with the current "equality" fad at least insofar as it implies taking from the rich and giving to the poor directly.

    i don't believe people are "equal" in terms of their economic potential. i do beleive they are equal in terms of being due the respect of human beings.

    i also believe your simple view of "equality" is a closet way of guarantee that the rich can prey upon the poor without interruption.

    humans made their first big step in evolution when they learned to cooperate with each other against the big predators.

    Jerry Critter, May 17, 2015 12:10 am

    it is mildly progressive up to about $75,000 per year where the rate hits 30%. But from there up to $1.542 million the rate only increases to 33.3%.

    I call that very flat!

    Jerry Critter, May 17, 2015 11:20 am

    "i assume there are people in this country who are truly poor. as far as i know they don't pay taxes."

    Read my reference and you will see that the "poor" indeed pay taxes, just not much income tax because they don't have much income. You are fixated on income when we should be considering all forms of taxation.

    Jerry Critter, May 17, 2015 9:25 pm

    Oh Kai, cut the crap. Paying taxes Is nothing like slavery. My oh my, how did we ever survive with a top tax rate of around 90%, nearly 3 times the current rate? Some people would even say that the economy then was pretty great and the middle class was doing terrific. So stop the deflection and redirection. I think you just like to see how many words you can write. Sorry, but history is not on your side.

    [Dec 22, 2016] Regulatory Capture 101

    It's not regulation per se is deficient, it is regulation under neoliberal regime, were government is captured by financial oligarchy ;-). But that understanding is foreign to WSJ with its neoliberal agenda :-(.
    Notable quotes:
    "... Impressionable journalists finally meet George Stigler. ..."
    "... The secret recordings were made by Carmen Segarra, who went to work as an examiner at the New York Fed in 2011 but was fired less than seven months later in 2012. She has filed a wrongful termination lawsuit against the regulator and says Fed officials sought to bury her claim that Goldman had no firm-wide policy on conflicts-of-interest. Goldman says it has had such policies for years, though on the same day Ms. Segarra's revelations were broadcast, the firm added new restrictions on employees trading for their own accounts. ..."
    "... On the recordings, regulators can be heard doing what regulators do-revealing the limits of their knowledge and demonstrating their reluctance to challenge the firms they regulate. At one point Fed officials suspect a Goldman deal with Banco Santander may have been "legal but shady" in the words of one regulator, and should have required Fed approval. But the regulators basically accept Goldman's explanations without a fight. ..."
    "... The journalists have also found evidence in Ms. Segarra's recordings that even after the financial crisis and the supposed reforms of the Dodd-Frank law, the New York Fed remained a bureaucratic agency resistant to new ideas and hostile to strong-willed, independent-minded employees. In government? ..."
    "... "as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit." ..."
    "... Once one understands the inevitability of regulatory capture, the logical policy response is to enact simple laws that can't be gamed by the biggest firms and their captive bureaucrats. ..."
    "... And it means considering economist Charles Calomiris's plan to automatically convert a portion of a bank's debt into equity if the bank's market value falls below a healthy level. ..."
    Oct 05, 2014 | Casino Capitalism and Crapshoot Politics
    Regulatory Capture 101

    Impressionable journalists finally meet George Stigler.

    The financial scandal du jour involves leaked audio recordings that purport to show that regulators at the Federal Reserve Bank of New York were soft on Goldman Sachs . Say it ain't so.

    ... ... ...

    The secret recordings were made by Carmen Segarra, who went to work as an examiner at the New York Fed in 2011 but was fired less than seven months later in 2012. She has filed a wrongful termination lawsuit against the regulator and says Fed officials sought to bury her claim that Goldman had no firm-wide policy on conflicts-of-interest. Goldman says it has had such policies for years, though on the same day Ms. Segarra's revelations were broadcast, the firm added new restrictions on employees trading for their own accounts.

    The New York Fed won against Ms. Segarra in district court, though the case is on appeal. The regulator also notes that Ms. Segarra "demanded $7 million to settle her complaint." And last week New York Fed President William Dudley said, "We are going to keep striving to improve, but I don't think anyone should question our motives or what we are trying to accomplish."

    On the recordings, regulators can be heard doing what regulators do-revealing the limits of their knowledge and demonstrating their reluctance to challenge the firms they regulate. At one point Fed officials suspect a Goldman deal with Banco Santander may have been "legal but shady" in the words of one regulator, and should have required Fed approval. But the regulators basically accept Goldman's explanations without a fight.

    The sleuths at the ProPublica website, working with a crack team of investigators from public radio, also seem to think they have another smoking gun in one of Ms. Segarra's conversations that was not recorded but was confirmed by another regulator. Ms. Seest means. For example, a company offering securities is exempt from some registration requirements if it is only selling to accredited investors, such as people with more than $1 million in net worth, excluding the value of primary residences.

    The journalists have also found evidence in Ms. Segarra's recordings that even after the financial crisis and the supposed reforms of the Dodd-Frank law, the New York Fed remained a bureaucratic agency resistant to new ideas and hostile to strong-willed, independent-minded employees. In government?

    ***

    Enter George Stigler, who published his famous essay "The Theory of Economic Regulation" in the spring 1971 issue of the Bell Journal of Economics and Management Science. The University of Chicago economist reported empirical data from various markets and concluded that "as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit."

    Stigler knew he was fighting an uphill battle trying to persuade his fellow academics. "The idealistic view of public regulation is deeply imbedded in professional economic thought," he wrote. But thanks to Stigler, who would go on to win a Nobel prize, many economists have studied the operation and effects of regulation and found similar results.

    A classic example was the New York Fed's decision to let Citigroup stash $1.2 trillion of assets-including more than $600 billion of mortgage-related securities-in off-balance-sheet vehicles before the financial crisis. That's when Tim Geithner ran the New York Fed and Jack Lew was at Citigroup.

    Once one understands the inevitability of regulatory capture, the logical policy response is to enact simple laws that can't be gamed by the biggest firms and their captive bureaucrats. This means repealing most of Dodd-Frank and the so-called Basel rules and replacing them with a simple requirement for more bank capital-an equity-to-asset ratio of perhaps 15%. It means bringing back bankruptcy for giant firms instead of resolution at the discretion of political appointees. And it means considering economist Charles Calomiris's plan to automatically convert a portion of a bank's debt into equity if the bank's market value falls below a healthy level.

    GS4

    [Nov 19, 2016] What Did Draghi Know About Potential Loss And Abuses At Italys Largest Bank

    Notable quotes:
    "... Apparently lax and/or incompetent regulation of systemically important banks by bureaucrats, central bankers, and politicians may not be just a recent American phenomenon. ..."
    "... He related how he was not only ignored by his bank, the Irish regulator but also all the major political parties. He then pointed out that the Irish regulator claims that it always – and it is the law after all – informs the regulator of the home country of banks which have subsidiaries in Ireland, about any serious problems. ..."
    "... Mr Sugarman suggested Mr Draghi should be asked point-blank of he did or if he did not know . If he did not then the Irish regulator was at least incompetent, and may have lied, misled and perhaps even broken Irish laws. If he was told and did know, then Mr Draghi has serious questions to answer regarding his own dereliction of duty. ..."
    Nov 19, 2016 | www.zerohedge.com
    Via Jesse's Cafe Americain blog,

    Apparently lax and/or incompetent regulation of systemically important banks by bureaucrats, central bankers, and politicians may not be just a recent American phenomenon.

    As we read this, it could imperil the soundness of the financial system in Europe as well, as is still apparently the case with The Banks in the states, despite assurances to the contrary.

    Golem XIV asks some very good questions in the article below, recently posted on his blog here.

    Whistleblowers Testify in EU Parliament

    Yesterday a very high-powered panel of international banking whistleblowers met and told their stories in the European parliament . The questions raised were important. Among them was the Irish Whistleblower, Jonathan Sugarman, who when UniCredit Ireland was breaking the law in very serious ways reported it to the Irish regulator.

    He related how he was not only ignored by his bank, the Irish regulator but also all the major political parties. He then pointed out that the Irish regulator claims that it always – and it is the law after all – informs the regulator of the home country of banks which have subsidiaries in Ireland, about any serious problems.

    In the case of UniCredit that would mean the Italian Central bank would have been told that Italy's largest Bank was in serious breach of Irish law in ways that could endanger the whole banking system. The head of the Italian Central Bank at the time was a certain Mr Mario Draghi.

    Mr Sugarman suggested Mr Draghi should be asked point-blank of he did or if he did not know . If he did not then the Irish regulator was at least incompetent, and may have lied, misled and perhaps even broken Irish laws. If he was told and did know, then Mr Draghi has serious questions to answer regarding his own dereliction of duty.

    Surely not I hear you say. Well perhaps someone might ask him? Or is he above the law?

    http://www.guengl.eu/news/article/whistleblower-protection-what-must-be-done

    [Nov 15, 2016] Suspected 5th Column blogger Streetwise Professor Defends Elites

    Notable quotes:
    "... Earning your living in finance or the related co-dependent fields such as economics, business management, certain areas of law and, most especially, information technology, you quickly pick up on the cult mentality that pervades it. ..."
    "... When, like so many of us, you're desperate to try to cling onto some semblance of middle class status, you're an easy and, although I'd strongly qualify this statement, understandable, target for buying into the group-think. ..."
    "... " Markets " do not " demand " anything. ..."
    "... But a "market" can - at the very most, through the use of pricing signals - induce actors to consider entering into a transaction. ..."
    "... They provided credit to low income customers because it was insanely profitable. The reason it was insanely profitable was that the loans to the low income customers could be securitised and the commissions the banks earned on the sale of those securities paid for massive bonus pools which directly benefitted bank employees. ..."
    "... Yes, I'd always be the first to agree with the proverb "In Heaven you get justice, here on Earth we have the law". The law and our legal systems are not perfect. But they are not that shabby either. ..."
    "... If it is regulatory interventions, rather than criminal indictments, that the Streetwise Professor is referring to, the banks can and do leave no political stone unturned in their efforts to water down, delay and neuter regulatory bodies. Look , if you can do so without wincing, at what has happened to the SEC. ..."
    "... It wasn't a " pre-crisis political bargain " that caused the Global Financial Crisis. It was financial innovation that was supposed to "free" the financial services industry to allow it to soar to ever greater heights, heights that couldn't be reached with cumbersome "legacy" thinking. If that sounds a lot like Mike Hearn's Blockchain justifications, it's because it is exactly the same thing. ..."
    "... Innovation must never be viewed only through separate, disconnected lenses of "technology", "politics", "ethics", "economics", "power relationships" and "morality". Each specific innovation is subject to and either lives or dies by the interplay between these forces." ..."
    "... I agree - however, "I don't mind people doing dangerous things" should require a little elucidation. What you likely meant to say was you don't mind people doing dangerous things, WITHIN REASON. ..."
    "... Also, there is the rank unwillingness on the part of regulators to, you know, actually do their jobs. I can no longer count the number of times Yellen has sat in front of the Senate banking committee like a deer in headlights ..."
    "... Excellent points, I thought that the Bush Wars were initiated to alleviate an oncoming recession as well as ensure W's reelection ..."
    "... It did take them a while to get the pieces in place, the Banksters Real Estate Fraud Appraisals were identified as early as 2000, then the Banksters Fraudulent Loans peaked in 2006, and then we had the Banksters Fraudulent Reps and Warranties . ..."
    "... Ah, the neo-liberals and the libertarians make their arguments by redefining terms and eliding facts. Once the audience agrees that up is down, why then their arguments are reasonable, dispassionate, and offered in dulcet tones of humble sincerity and objectivity. ..."
    "... What a pleasure, then, to read your cold water smack-down of their confidence game. Perhaps they believed their own nonsense. Who knows. ..."
    "... A third consequence of modern-day liberals' unquestioning, reflexive respect for expertise is their blindness to predatory behavior if it comes cloaked in the signifiers of professionalism. ..."
    "... The difference in interpretation carries enormous consequences: Did Wall Street commit epic fraud, or are they highly advanced professionals who fell victim to epic misfortune? modern day liberals pretty much insist on the later view . Wall Street's veneer of professionalism is further buttressed by its technical jargon, which the financial industry uses to protect itself from the scrutiny of the public ..."
    Nov 15, 2016 | www.nakedcapitalism.com
    Posted on November 14, 2016 by Clive

    Earning your living in finance or the related co-dependent fields such as economics, business management, certain areas of law and, most especially, information technology, you quickly pick up on the cult mentality that pervades it.

    When, like so many of us, you're desperate to try to cling onto some semblance of middle class status, you're an easy and, although I'd strongly qualify this statement, understandable, target for buying into the group-think. Or at least going along with it on the promise of continued employment. While I'm letting myself off the hook in the process, I think that's forgivable. I and others like me need the money. Besides, in our spare time, we might try to atone for our misdeeds by using whatever means we have available, such as contributing to Naked Capitalism in whatever way we can, to try to set the record straight.

    Not quite so easily forgivable, though, are the members of an altogether different cadre who don't give the impression of having to live paycheck to paycheck. What is it that motivates them? Why do they willingly devise clever - and, I have to say it, some are exceptionally adept - ruses to defend and further the causes of our élites?

    ... ... ...

    As readers with not-so-long memories will recall, in the run-up to the Global Financial Crisis, the TBTFs did indeed exercise the " FU Option ". As asset prices for the securities they held fell precipitously, they held more and more of those assets on their balance sheets, refusing to - or unable to - off-load them into a market that was shunning them. Eventually their capital cushions were so depleted because of this, they became insolvent. Staring catastrophe in the face, governments were put into a double-bind by the TBTFs: Rescue us through bail-outs or stand by and see our societies suffer major collateral damage (bank runs, a collapse of world trade, ruining of perfectly good and solvent businesses with the likelihood of mass unemployment and civil unrest).

    In that situation, who was the " U " who was being " F "'ed? It was governments and the public.

    Faced with an asymmetry of power, in a reverse of the scenario painted by the Streetwise Professor for OTC trading (where a notional seller tells a theoretical buyer they can go to Hell if they don't want to pay the price the seller is asking), governments - and us - found themselves on the buy-side of an " FU Option ". "F the-rest-of-us By Necessity" was a better description as we were turned into forced buyers of what no other "market participant" would touch.

    My dear Professor, allow me to give you , if I may risk the label of being impudent, a lesson. If I am selling my prized Diana, Princess of Wales tea cups in a yard sale and you make me a offer for them, that - I'm sure we'd agree on this point - is an OTC transaction. There's no exchange (mercifully) for Diana, Princess of Wales tea cups. I put a price sticker on them. If you want them, you pay the price I'm asking. Or else, you make me a different offer. If you don't pay the price I want, or I don't accept the price you're offering, we do, indeed, have a genuine " FU Option " scenario. But if instead my mother-in-law threatens to saw your face off with her cheese grater if you don't buy my Diana, Princess of Wales tea cups at the price shown on the sticker, then we no longer have an OTC transaction. We have extortion. See the difference?

    That's not all. The piece discusses the differences between a proposed smart-contract based settlement compared with a centralised counterparty which brings up some very valid points. But then it makes a serious blunder which is introduced with some subtly but is all the more dangerous because of it. I'll highlight the problem:

    So the proposal does some of the same things as a CCP, but not all of them, and in fact omits the most important bits that make central clearing central clearing. To the extent that these other CCP services add value–or regulation compels market participants to utilize a CCP that offers these services–market participants will choose to use a CCP, rather than this service. It is not a perfect substitute for central clearing, and will not disintermediate central clearing in cases where the services it does not offer and the functions it does not perform are demanded by market participants , or by regulators.

    Did you catch what is the most troubling thing in that paragraph? The technicalities of it are fine, but the bigger framing is perilous. "Market participants" is given agency. And put on the same level as actions taken by regulators. This is at best unintentionally misleading and at worse an entirely deliberate falsehood.

    The fallacious thinking which caused it is due to a traditional economist's mind-set. But this mind-set is hopelessly wrong and every time we encounter it, we must challenge it. Regardless of what other progressive goodies it is being bundled up with.

    " Markets " do not " demand " anything.

    A regulator or central bank can demand that a bank hold more capital and open its books to check the underlying asset quality. The CFPB can demand that Wells Fargo stops opening fake accounts. Even I can demand a pony. The power structures, laws, enforcement and levels of trust (to name the main constraints) governing who is demanding what from whom determine how likely they will be to have their demands met.

    But a "market" can - at the very most, through the use of pricing signals - induce actors to consider entering into a transaction. The pricing signal cannot make any potential actor participate in that transaction. Not, probably, that it would have helped her much, but Hillary Clinton could have created a market for left-wing bloggers to shill for Obamacare by offering Lambert $1million to start churning out pro-ACA posts on his blog. But that market which Hillary could create could not "demand" Lambert accept her offer. Lambert would not take that, or any other monetary amount, and would never enter such a transaction. Markets have limits.

    Whether unintentionally or by design, we have a nice example of bait and switch in the Streetwise Professor's Blockchain article. If you run a critique of Blockchain, you'll likely attract an anti-libertarian audience. It's a classic example of nudge theory . If you can lure readers in with the promise of taking a swipe at disruptive innovation nonsense but then lead them to being suckered into a reinforcement of failed conventional free-market hogwash, that can be a powerful propaganda tool.

    But perhaps the Blockchain feature was an aberration, just a one-off? No.

    Take, for example, this feature on Deutsche Bank from earlier this month which I'll enter as Exhibit B - It's not the TBTFs Fault, the Regulators / Governments / Some Guy / Made Us Do It

    I'll leave the worst 'til last, but for now let's start with this little treasure:

    the pre-crisis political bargain was that banks would facilitate income redistribution policy by provide credit to low income individuals. This seeded the crisis (though like any complex event, there were myriad other contributing causal factors), the political aftershocks of which are being felt to this day. Banking became a pariah industry, as the very large legal settlements extracted by governments indicate.

    No, Streetwise Professor, banks did not provide credit to low income individuals as part of some "political bargain". They provided credit to low income customers because it was insanely profitable. The reason it was insanely profitable was that the loans to the low income customers could be securitised and the commissions the banks earned on the sale of those securities paid for massive bonus pools which directly benefitted bank employees.

    Almost unimaginable wealth could be generated by individuals (the Naked Capitalism archive details the full sordid story of the likes of Magnetar). The fact that this would all blow up eventually was certainly predicable and even known by many actors in the prevailing milieu but they didn't care. They knew they'd have already set themselves up for life financially even after just a few years in that "game". Politics, for once, had nothing to do with it, save perhaps that regulators, which are the politicians' responsibility, should have been better able to spot what was going on.

    But the Streetwise Professor is only just getting started with the counterfactual misinformation:

    It is definitely desirable to have mechanisms to hold financial malfeasors accountable, but the Deutsche episode illustrates several difficulties. The first is that even the biggest entities can be judgment proof, and imposing judgments on them can have disastrous economic externalities. Another is that there is a considerable degree of arbitrariness in the process, and the results of the process. There is little due process here, and the risks and costs of litigation mean that the outcome of attempts to hold bankers accountable is the result of a negotiation between the state and large financial institutions that is carried out in a highly politicized environment in which emotions and narratives are likely to trump facts. There is room for serious doubt about the quality of justice that results from this process.

    A casual skim could leave the reader with the impression that the Streetwise Professor is lamenting, rightly, the persistency of the TBTF model. But there's something really dastardly being concocted here - the notion that in our societies, the rule of law is always and inevitably fallible and not fit for the purpose of bringing errant TBTFs to justice. And that, if a case is brought against a TBTF like Deutsche, then it can't help but become a political football.

    Yes, I'd always be the first to agree with the proverb "In Heaven you get justice, here on Earth we have the law". The law and our legal systems are not perfect. But they are not that shabby either. Any quick parse through the judgments which the U.S. Supreme Court, the U.K. Supreme Court or the European Court of Justice (to name only a few) hand down on complex cases - often running to hundreds or even a thousand pages - demonstrates that courts can and do consider fairly and justly the evidence that prosecutors present and make balanced rulings. And banks can utilize the same legal safeguards that the law provides - they're not likely to be short of good legal advice options. Trying, as the Steetwise Professor does, to claim that the TBTFs can't get justice is an insult to our judicial systems and acceptance of this notion followed by any routine repetition serves to undermine faith in the rule of law.

    If it is regulatory interventions, rather than criminal indictments, that the Streetwise Professor is referring to, the banks can and do leave no political stone unturned in their efforts to water down, delay and neuter regulatory bodies. Look , if you can do so without wincing, at what has happened to the SEC.

    It wasn't a " pre-crisis political bargain " that caused the Global Financial Crisis. It was financial innovation that was supposed to "free" the financial services industry to allow it to soar to ever greater heights, heights that couldn't be reached with cumbersome "legacy" thinking. If that sounds a lot like Mike Hearn's Blockchain justifications, it's because it is exactly the same thing.

    In summary, when you throw brickbats at a fellow blogger, it seems to me that you have a moral obligation to put your cards on the table, to explain your motivations. I don't have to write for a living ("just as well", I hear forbearing readers shout back). I don't take a penny from Naked Capitalism's hard-wrung fundraisers, although Yves has generously offered a very modest stipend in line with other contributors, I cannot conscientiously take anything for what I submit. I write in the hope that I have some small insights that would help to undo some of the damage which big finance has done to our cultures, our shared values and our aspirations for what we hope the future will be for us and others.

    That's what motivates me, anyway. After reading his output, I'm really still not at all sure what is motivating the Streetwise Professor. Certainly there is nothing at all to suggest that he is interested in rebuking or revising any of the traditional thought-forms which pass for the so-called science of economics. Conventional economic theory is the ultimate in betrayal of the use of rational methodology to provide air-cover for élite power grabs. It'll take more than a refutation of Blockchain spin to convince me that the Streetwise Professor is ready to kick away the more odious ladders - like being a professional economist - that have given him the leg-ups to the lofty perch he enjoys occupying.

    About Clive

    Survivor of nearly 30 years in a TBTF bank. Also had the privilege of working in Japan, which was great, selling real estate, which was an experience bordering on the psychedelic. View all posts by Clive →

    vlade November 14, 2016 at 7:15 am

    I disagree on the first bit. Even at this blog, Yves mentiones not quite rarely the dangers of tight coupling. The central exchanges create exactly that. Yes, the FU option of OTC is dangerous. But then, everything is dangerous, and if I have to choose between tight coupling dangerous option and loose coupling one, I'll chose the lose coupling one.

    The problem is that the regulators refused to recognise that the institutions gamed the regulations – moving stuff from trading to banking books. It is recognised now, under the new regulation, although I still have some doubts about its effectivness.

    To me all the para says is: markets demand services, and CCP don't offer them – and don't have to. Regulators demand services (to be offered by CCP), and CCP deliver.

    And sorry, I also disagree with your "markets participants demand". The text says "services [ ] are demanded [by potential clients and by regulators]". I can't honestly see what's the problem with that. Of course, regulatory demand, and a client demand are two different things – the former you ignore at your peril, the second you can ignore to your heart's content.

    But markets (or, I'd say agents that want to purchase – or sell) _always_ demand something, and always offer something – otherwise there would not be any market or exchange of services (it doesn't have to be there even with offer and demand, but in the absence of one it definitely won't be there).

    You could happily change the word to "require" "want" etc. and the meaning of the para would remain unchanged.

    Clive Post author November 14, 2016 at 8:20 am

    The problem I had with the notion that OTC reduces tight coupling is that it gives the appearance of reducing tight couple but doesn't actually do this. While "the market" is functioning within its expected parameters, OTC is less tightly coupled than an Exchange. But as we saw first-hand in the GFC, those markets function, right up until the point where they don't. By continuing to function, or certainly giving the appearances of continuing to be functioning, they hide the stresses which are building up within them but no-one can see. Unless you are deeply plumbed in to the day-to-day operational activities of the OTC market and can spot signs - and that's all they are, signs, you don't get to take a view of the whole edifice - you simply don't have a clue. There were, at most, only a couple of dozen people in the organisation itself and outside it who knew that my TBTF was a day away from being unable to open for business. That was entirely down to information asymmetry and that asymmetry was 100% down to OTC prevalence.

    And all the while TBTF isn't fixed, then as soon as the OTC market(s) fall off a cliff, the public provision backstops can be forced to kick in. Yes, everything is dangerous. I don't mind people doing dangerous things. But I do mind an awful lot being asked to pick up the pieces when their dangerous things blow up in their faces and they expect me to sort the mess out. If that is the dynamic, and to me, it most definitely is, then I want the actors who are engaged in the dangerous things to be highly visible, I want them right where I can see them. Not hiding their high-risk activities in an OTC venue that I'm not privy to.

    And I stick by my objection to the - what I can't see how it isn't being deliberate - fuzziness or obfuscation about who gets to "demand" and who is merely allowed "invite" parties to a transaction to either perform or not perform of their own volition. This isn't an incidental semantic about vocabulary. It goes to the heart of what's wrong with the Streetwise Professor's assessment of innovation.

    Innovation must never be viewed only through separate, disconnected lenses of "technology", "politics", "ethics", "economics", "power relationships" and "morality". Each specific innovation is subject to and either lives or dies by the interplay between these forces. My biggest lambaste of the Streetwise Professor's commentaries is that he examines them only in terms of "technology" and "economics". In doing so, he reaches partial and inaccurate conclusions.

    A 10 year old child might "demand", "require", "ask for", "insist", "claim a right to have" (use whatever word or phrase you like there) a gun and live ammunition. But they are not, and should not be, permitted to enter into a transaction to obtain the said gun and ammo based only on the availability of the technology and the economics that would allow them to satisfy the seller's market clearing sale price if they saved their pocket money for a sufficient amount of time. The other forces I listed in my above paragraph are also involved, and just as well.

    Ulysses November 14, 2016 at 9:30 am

    "Innovation must never be viewed only through separate, disconnected lenses of "technology", "politics", "ethics", "economics", "power relationships" and "morality". Each specific innovation is subject to and either lives or dies by the interplay between these forces."

    Very well said. I would argue further that "power relationships" structure how all the other lenses actually operate. In the early sixteenth century the power relationship between the Church, and Martin Luther, was such that the latter had an opening to redefine "morality"– in such a way that the Pope's moral opinion was eventually no longer dispositive for Protestants.

    In other words, the French invasion of Italy, late in the fifteenth century, weakened the papal states enough to allow for defiance.

    Ulysses November 14, 2016 at 10:02 am

    That last sentence, is of course a gross over-simplification! Anyone wishing to know the nitty-gritty details of how foreign domination over the Italian peninsula was established by the middle of the sixteenth century should read Machiavelli and Guicciardini.

    The latter author's appeal to skepticism, when interpreting the actions and motivations of powerful people, rings very true five centuries later:

    " perché di accidenti tanto memorabili si intendino i consigli e i fondamenti; i quali spesso sono occulti, e divulgati il più delle volte in modo molto lontano da quell che è vero."

    ( Storia d'Italia , XVI, vi)

    animalogic November 15, 2016 at 5:12 am

    "Yes, everything is dangerous. I don't mind people doing dangerous things. But I do mind an awful lot being asked to pick up the pieces when their dangerous things blow up in their faces".

    I agree - however, "I don't mind people doing dangerous things" should require a little elucidation. What you likely meant to say was you don't mind people doing dangerous things, WITHIN REASON.

    And let's face it, much of the prior GFC behaviour was unreasonably dangerous. As it turned out, not that dangerous to its perpetrators .

    Danger, like risk, is a cost-benefit calculation. When that calculation ONLY includes benefits for its originator & suppresses any (real & calculatable) cost for the community it's already looking suspiciously like an unreasonable danger .

    Uahsenaa November 14, 2016 at 9:04 am

    The problem is that the regulators refused to recognise that the institutions gamed the regulations – moving stuff from trading to banking books. It is recognised now, under the new regulation, although I still have some doubts about its effectivness.

    Also, there is the rank unwillingness on the part of regulators to, you know, actually do their jobs. I can no longer count the number of times Yellen has sat in front of the Senate banking committee like a deer in headlights as Warren tries to get her to give anything like a straight answer as to why, to this day, many if not most TBTFs have no rapid selloff/solvency plan (which is required by the Dodd-Frank law) or why those banks that fail their stress tests (again and again) suffer no consequences as a result.

    How is any of this supposed to work when so many are clearly acting in bad faith?

    bmeisen November 14, 2016 at 9:06 am

    Bravo bravo encore encore! Especially the characterization of Sorkin and the account of the crisis at the start of exhibit B. Clive for President!

    Synoia November 14, 2016 at 9:44 am

    Earning your living in finance or the related co-dependent fields such as economics, business management, certain areas of law and, most especially, information technology, you quickly pick up on the cult mentality that pervades it.

    If you do not subscribe to the "cult mentality," although I'd prefer to call it a dogma, because it is a unswerving belief in an unproven fact in the face of evidence the fact is not only unproven, but wrong, one is "not a team player" and then penalized.

    If these libertarian want "open markets" and innovation they have to shed the human response to proof. In their behavior they are no better than the medieval pope, and his court, who did not want to believe a the earth travels around the sun.

    WJ November 14, 2016 at 8:32 pm

    Medieval popes were probably more open to Pythagorean/Copernican cosmologies than early 17th century Jesuits (i.e. Bellarmine); the opposition of the latter to Galileo had nothing to do with science and everything to do with Protestantism and Protestant biblical interpretation. Bellarmine was wrong and what happened to Galileo was shameful. But many of the best astronomers of the time were in fact Jesuits, and the traditional way the story is told is inaccurate on almost every level (and a product of late 19th century Italian nationalism).

    susan the other November 14, 2016 at 12:02 pm

    this was very interesting stuff. Since a lot of things were coming together in the 90s and 2000s that were all connected in a mess too big to understand simply as immoral banking (freeing up capital like that was crazy but there must have been a reason to try it besides windfall profiteering and flat-out gambling), I imagine the following: Greenspan and the TBTFs knew returns were diminishing and set out to do something about it. Because growth and expanding markets were the only thing that could keep up with a demand by pension funds (and then little Bush's idiotic war) for a minimum 8% return. But growth was slowing down so the situation required clever manipulations and incomprehensible things like financial derivatives. Makes sense to me. And if this is even partially true then there was a political mandate all mixed up with the GFC. The banks really did crazy stuff, but with the blessing of the Fed. Later when Bernanke said about QE and nirp: "now we are in uncharted territory" he was fibbing – the Fed had been in uncharted territory, trying to make things work, for almost 20 years. And failing.

    madame de farge November 14, 2016 at 12:47 pm

    Excellent points, I thought that the Bush Wars were initiated to alleviate an oncoming recession as well as ensure W's reelection

    It did take them a while to get the pieces in place, the Banksters Real Estate Fraud Appraisals were identified as early as 2000, then the Banksters Fraudulent Loans peaked in 2006, and then we had the Banksters Fraudulent Reps and Warranties .

    WORSE then a bunch of Used Car Salesman, but what else would you expect from people who KEEP the State Income taxes withheld from their employees checks

    Lambert Strether November 15, 2016 at 12:00 am

    > "how long does that take" and he said "minimum of ten years, 15 is better"

    Via Extra, Extra – Read All About It: Nearly All Binary Searches and Mergesorts are Broken Google Research, 2006:

    This bug can manifest itself for arrays whose length (in elements) is 230 or greater (roughly a billion elements). This was inconceivable back in the '80s, when Programming Pearls was written, but it is common these days at Google and other places. In Programming Pearls, Bentley says "While the first binary search was published in 1946, the first binary search that works correctly for all values of n did not appear until 1962." The truth is, very few correct versions have ever been published, at least in mainstream programming languages.

    Sorting is, or ought to be, basic blocking and tackling. Very smart, not corrupt people worked on this. And yet, 2006 – 1946 = 60 years later, bugs are still being discovered.

    The nice thing about putting your cash in a coffee can in the back yard is that it won't evaporate because some hacker gets clever about big numbers.

    flora November 14, 2016 at 7:30 pm

    Ah, the neo-liberals and the libertarians make their arguments by redefining terms and eliding facts. Once the audience agrees that up is down, why then their arguments are reasonable, dispassionate, and offered in dulcet tones of humble sincerity and objectivity.

    What a pleasure, then, to read your cold water smack-down of their confidence game. Perhaps they believed their own nonsense. Who knows.

    flora November 14, 2016 at 8:28 pm

    What is the Streetwise Professor's (note the word "professor") real view? Has he thought much about it or simply imbibed his "owners'" views, making him a useful tool. I don't know.

    From the book "Listen, Liberal."

    " A third consequence of modern-day liberals' unquestioning, reflexive respect for expertise is their blindness to predatory behavior if it comes cloaked in the signifiers of professionalism. Take the sort of complexity we saw in the financial instruments that drove the last financial crisis. For old-school regulators, I am told, undue financial complexity was an indication of likely fraud. But for the liberal class, it is the opposite: an indicator of sophistication. Complexity is admirable in its own right. The difference in interpretation carries enormous consequences: Did Wall Street commit epic fraud, or are they highly advanced professionals who fell victim to epic misfortune? modern day liberals pretty much insist on the later view . Wall Street's veneer of professionalism is further buttressed by its technical jargon, which the financial industry uses to protect itself from the scrutiny of the public. "
    -Thomas Frank

    [Oct 25, 2016] Mergers Raise Prices, Not Efficiency

    Oct 25, 2016 | economistsview.typepad.com

    RC AKA Darryl, Ron : October 25, 2016 at 04:56 AM RE: Mergers Raise Prices, Not Efficiency

    https://www.bloomberg.com/view/articles/2016-10-24/mergers-raise-prices-not-efficiency

    [IMO, Noah muddles the message, but it is a important topic that gets muddled by everyone else too. Economists with a financial bent had no problem apparently with the bank mergers that started in the seventies and everyone loved the auto maker mergers of the first half of the 2oth century.

    Efficiency itself is an amorphous term. Mergers can be an efficient use of capital since they deliver lower competition and higher profits. JP Morgan did not want to be in a industry that he could not dominate. Efficiency is different for a fish than a capital owner. Mergers are good for regulatory capture and ineffishient for fish. Mergers are inefficient for workers that want higher wages or the unemployed that want jobs. Market power and regulatory capture can be efficient vehicles for taking advantage of trade agreements to offshore production and increase returns to capital all while lowering both prices and quality as well as reducing domestic wages. Efficiency is in the eyeballs of the beholder especially if they make good soup.] Reply Tuesday, reason -> RC AKA Darryl, Ron... , October 25, 2016 at 06:58 AM

    But Keynes was saying something quite different - he wasn't actually talking about policy but about economics (the task of economists). He was saying that understanding short term fluctuations was as important as predicting the long term. Still relevant in this age of irrelevant general equilibrium models.
    RC AKA Darryl, Ron -> reason ... , October 25, 2016 at 09:56 AM
    Sorry, I thought that the whole purpose of the study of macroeconomics was to guide policy decisions. I stand corrected.
    RC AKA Darryl, Ron -> RC AKA Darryl, Ron... , October 25, 2016 at 10:02 AM
    I always looked at Keynes as a fellow traveler, one who wrote obtusely at times for the express purpose of couching his meaning in sweetened platitudes that at a second glance were drenched in cynicism and sarcasm, at least when it came to his opinions of economists and politicians and the capital owning class that they both served.
    RC AKA Darryl, Ron -> RC AKA Darryl, Ron... , October 25, 2016 at 10:39 AM
    OK, "obtusely" was a poor choice of words, at least with regards to Keynes. Keynes realized WWI was a big mistake, the Treaty at Versailles was an abomination with regards to German restitution, and he was accused of anti-Semitism just for being honest about Jewish elites in the Weimar Republic. It was not that Keynes was insensitive, unpatriotic, or anti-Semitic, but that Keynes was just correct on all counts.
    JohnH -> RC AKA Darryl, Ron... , -1
    This is a good example of economists working in lock step with investors: "Economists with a financial bent had no problem apparently with the bank mergers that started in the seventies and everyone loved the auto maker mergers of the first half of the 2oth century."

    I think it has been questioned for decades whether increased efficiency in banking actually materialized in the wake of industry consolidation. Local market oligopolies may well have generated higher profits and the appearance of more efficiency. And concentration certainly facilitated collusion as we have seen in many markets, including LIBOR.

    What concentration indisputably caused was a dramatic increase in the political power of the Wall Street banking cartel, which owns not only the Federal Reserve but also a lot of powerful politicians...a subject on which 'liberal' economists are generally agnostic, since politics is outside their silo.

    point -> RC AKA Darryl, Ron... , October 25, 2016 at 10:26 AM
    The article ignored the effect of mergers on supplier relationships, often one of near monopsony (oligopsony?). DOJ seems to be focused on unit pricing to consumers(though perhaps not with cable) to the point that most managements understand that they have free rein to squeeze suppliers. And so they merge to do so.

    It may be that more contribution to increasing margins is from purchase prices than selling prices.

    RC AKA Darryl, Ron -> point... , October 25, 2016 at 10:41 AM
    Doubly so with global supply chaining.

    [Oct 20, 2016] This is the smoking gun behind the corruption of the Fed during the 2008 crisis

    Oct 20, 2016 | www.moonofalabama.org

    psychohistorian | Oct 19, 2016 8:29:29 PM | 99

    I just read this posting at ZH and believe that this information when fully grokked will take the market down.

    http://www.zerohedge.com/news/2016-10-19/never-seen-secret-memo-aig-bailout-feds-tarullo-obama-revealed-podesta-emails

    This is the smoking gun behind the corruption of the Fed during the 2008 crisis. I want to see how they tell the world that this was all legal.

    END PRIVATE FINANCE! The folks that own private finance also own the US and many other governments.....with or without vote rigging as one of their tools.

    [Sep 15, 2016] Elizabeth Warren on Thursday requested a formal investigation into why the Obama administration did not bring criminal charges individuals and corporation involved in the 2008 financial crisis

    www.nakedcapitalism.com
    L

    "Massachusetts Senator Elizabeth Warren on Thursday requested a formal investigation into why the Obama administration did not bring criminal charges individuals and corporation involved in the 2007-2008 financial crisis" [International Business Times]. Why now? Liz edging her hat toward the ring if Clinton comes up lame?

    I can see two possible interpretations for this.

    First, as much as I hate to draw the analogy, she could be positioning herself to take the reigns after a loss in the way that Richard Nixon, Paul Ryan, and later Bill Clinton did. Richard Nixon sat back and concentrated on building up credibility as Barry Goldwater melted down and then quietly stepped in to take over the party after the loss to set up his eventual run. Paul Ryan quietly permitted or perhaps aided the coup against Boehner. And Bill Clinton, through the DLC teed up his control of the party after Dukakis lost.

    Second, with Wells-Fargo and bank fraud once again in the news she could be working to keep prior decisions current both to force better action this time or to nudge the Clinton and Trump into making promises of stronger action in the future.

    Lambert Strether Post author

    It seems to me that both those objectives would be served by continuing to hammer on Wells Fargo, so the question "Why now?" isn't really answered in your comment.

    But if you wanted to take out an option on running a full-throated populist campaign - and throwing bankers in jail would be wildly popular across the entire political spectrum (except Clinton's 10%-ers on up) - in the unhappy event that the party's candidate came up lame, then calling for an account of regulatory decision making in 2009 would be one way to signal that. Note also that would call Obama's "legacy" into question, too; the whole "stand between you and the pitchforks" thing. This is a big deal.

    [Sep 15, 2016] American Antitrust Is Having a Moment: Some Reactions to Commissioner Ohlhausen's Recent Views

    Sep 14, 2016 | economistsview.typepad.com
    Chris Sagers at ProMarket:
    American Antitrust Is Having a Moment: Some Reactions to Commissioner Ohlhausen's Recent Views : Over the summer, Federal Trade Commissioner Maureen Ohlhausen took me and several others to task in a speech , subsequently published as a journal article ... The theme we'd all written about is whether we in the United States have a "monopoly problem," and whether federal policy should try to do something about it. ...

    Commissioner Ohlhausen had some pretty strong words. ... Specifically, she implies a very strong presumption against public interference in private markets, as indicated by her argument that there is not yet sufficient evidence that we have a monopoly problem. The argument seems to be that we must wait until we are very, very sure, beyond any reasonable econometric doubt, apparently, that there's something wrong before we step in. ...

    She is mistaken, and she ignores roughly a library-full of well-known..., sophisticated empirical work. ...

    In the end, the irony of these remarks is captured in this point: Commissioner Ohlhausen is pretty witheringly dismissive of a certain kind of evidence of market power, and implies that it would not support increased enforcement unless it can overcome a high methodological bar. But for her own countervailing evidence that in fact American markets are "fierce[ly] competiti[ve]," she says this: "Consider the new economy, which is a hotbed of technological innovation. That environment does not strike me as one lacking competition."

    In other words, the presumption against antitrust is so strong that evidence of harm must meet the most exacting standards of social science. To prove that markets are in fact competitive, however, needs nothing more than seat-of-the-pants anecdotes. Again, I mean no disrespect, and I think we have an honest difference of opinion. But this stance is not social science, and it is not good, empirically founded public policy. It is just ideology. ...

    It's definitely true that the agencies have brought a bunch of challenges to a bunch of nasty mergers, and perhaps total enforcement numbers have gone up a bit. But that is because we are in the midst of a merger wave in which parties have been proposing breathtakingly massive, overwhelmingly consolidating horizontal deals. While there is a track record to be proud of in the administration's enforcement, especially, as the commissioner observes, in the Commission's campaign against hospital mergers, reverse-payment deals, SEP problems, and patent trolls, and who knows how many other matters, the fact remains that by and large the administration has mostly not taken action that any administration would not have taken, including the Reagan and both Bush administrations. ...

    DrDick : , Wednesday, September 14, 2016 at 11:13 AM

    If we were actually serious about antitrust, which we very much should be, we would not only block most of these mergers, but break up many of existing behemoths (like the big banks, the media giants, Comcast, and many others).
    pgl -> DrDick... , Wednesday, September 14, 2016 at 11:18 AM
    I'm all for breaking up the behemoths when they are indeed stifling competition. The Reagan Revolution to anti-trust was based on a contention that some mergers were about efficiency effects. I think this argument is sometimes overblown but it is not per se false. I do object (see below) to the weak evidence that goes like this. Collective shareholder value rose so ergo the merger is about efficiency effects. Anyone who argues that (see Don Luskin and the premium ice cream proposed merger) is not very bright.
    DeDude -> pgl... , Wednesday, September 14, 2016 at 11:49 AM
    Exactly. Corporations being able to suck more profit out of the costumers (and as a result share prices rising) is the proof that anti-trust has failed. In a fully functional competitive market companies do not make much profit.
    pgl -> DeDude... , Wednesday, September 14, 2016 at 12:07 PM
    Accounting profits? Maybe you should read that paper by the commissioner as she makes a very clear statement about what accounting profit would look like in a competitive market. And it is not zero. Return to capital? Hello?
    DeDude -> pgl... , Wednesday, September 14, 2016 at 12:30 PM
    No if it was zero the whole thing breaks down. However, a small return on capital is an indication that companies are forced to cut prices because of competition- and that is a healthy market. So yes there is (some but) not much profit in a fully functional competitive market.
    pgl -> DeDude... , Wednesday, September 14, 2016 at 12:36 PM
    Let's define "small return". Standard financial economics puts this at the risk-free rate plus a premium for bearing systematic risk. OK - the risk-free return now is quite small. Say 2%. But if the risk premium is say 4%, then we are talking about a 6% expected return to assets. If that is what you mean by small - cool.

    Of course I have seen a lot of "professionals" argue for much higher returns. Of course these professionals would flunk a Finance 101 class.

    DeDude -> pgl... , Wednesday, September 14, 2016 at 12:49 PM
    I don't think the risk premium needs to be more than about 2% unless/until the economy enter a phase where demand outstrips supply (and more investment money needs to be attracted). If there is a glut of investment money then the price of it (=risk free returns) should go down.
    pgl -> DeDude... , Wednesday, September 14, 2016 at 02:05 PM
    This is the kind of thinking that got Hassett and Glassman to tell us about DOW 36000. Some people overestimate the risk premium but 2% is what a regulated utility or a leasing company gets. And neither bears commercial risk. Dude - you can make up whatever number your heart desires but there is market evidence on these things.
    DeDude -> pgl... , Wednesday, September 14, 2016 at 06:25 PM
    Exactly - even those are hugely overcompensated for this supposed risk.
    Gibbon1 -> DeDude... , Wednesday, September 14, 2016 at 04:14 PM
    Ability to better suck profit out of a captive base of customers is an efficiency of a sort. Instead of investing in risky new business processes or technologies one merely has to buy out your competitors. This is practically risk free.
    pgl : , Wednesday, September 14, 2016 at 11:15 AM
    A comment about this:

    "Though she says that "[e]fficiencies are real"-citing no evidence for it in a speech critical of everyone else for failure to supply evidence-there is in fact no meaningful proof that consolidation generates social benefits. Especially in the case of mergers, a large and sophisticated empirical literature has been hunting for decades for evidence that mergers produce "efficiencies" or other benefits. The evidence has not been found. At least with respect to deals among publicly traded firms, the evidence tends to suggest that mergers do no good on average for shareholders of either acquiring or target firms, and if there were some efficiencies or larger social benefits, they should be measurable as benefits to shareholders. The empirical evidence has therefore confirmed the popular wisdom shared on Wall Street for years-that all this activity is not serving any good social purpose, though it might be helping executives and their bankers quite a lot."

    The conservative (Reagan) approach to anti-trust did indeed ask DOJ and FTC to consider whether the merger was about beneficial efficiency effects v. anti-competitive effects. But let's suppose two firms merged and their collective value did rise benefiting shareholders. That does not prove the efficiency effects dominate. No – mergers that lead to less competition will often raise shareholder value even if there are no efficiency effects. Those mergers should be disallowed.

    kurt : , Wednesday, September 14, 2016 at 11:21 AM
    Proof of Monopoly Power - Verizon and ATT's pricing and apparent lack of any interest in maintaining or even knowing where their physical plant is installed. Also - see directTV's recent price increases.
    pgl -> kurt... , Wednesday, September 14, 2016 at 12:07 PM
    Can you hear me now? Oh wait - the Verizon dude now works for Sprint.
    El Epicúreo Del Taco : , Wednesday, September 14, 2016 at 11:26 AM
    American markets are "fierce[ly] competiti[ve]," she says this: "Consider the new economy, which is a hotbed of technological innovation. That environment does not strike me as one lacking competition."

    In other words, the presumption against antitrust is so strong
    "

    You are assumed properly competing until proved monopoly-based. The burden of proof is on the victims. Tell me something!

    Does the government always appear as crystal clear as the mirror of Alice? When we look at local, county, state, and federal rulers, do we always see ourselves? Our own bias? Our own agenda? The government apes its voters.

    Do you see how today's polity is begging for less competition? Less free trade from our trading partners? Do you see how we want to make a monopoly out of America? Build a fence around it so that nobody is allowed to buy anything from anyone other than our monopoly?

    " We have identified the enemy, ourselves. " ~~Pogo~

    DeDude : , Wednesday, September 14, 2016 at 11:46 AM
    Yes you need at least a dozen independent businesses delivering the same (substitutable) products to ensure that there is indeed a competitive market that will not be gamed against the consumers. This is not just needed to ensure that consumers will be offered a fair price, but also to ensure that companies will be forced to continue to innovate and offer better and better products. The oversight of mergers has been a scandal and needs to be tightened by new laws. Obviously we have to make the "dozen rule" a law rather than just common sense guidance.
    pgl -> DeDude... , Wednesday, September 14, 2016 at 12:10 PM
    The dozen rule? Where did that come from? Depends on the market but I would hope we have more than 12 suppliers of beer. BTW - it would be nice to have 12 health insurance companies but we could break up this oligopoly with such one more - the government aka the public option.
    DeDude -> pgl... , Wednesday, September 14, 2016 at 12:34 PM
    Yes some products can benefit from more variation, but at least with 12 suppliers you would not have anybody able to corner the market. The dozen rule is mine, that is how I get my eggs. If Ohlhausen can just make it up - so can I.
    pgl -> DeDude... , Wednesday, September 14, 2016 at 12:37 PM
    Do you remember the 1970's? Something called OPEC? But yea - I buy my eggs by the dozen too.
    pgl -> DeDude... , Wednesday, September 14, 2016 at 12:39 PM
    Speaking of breakfast, consider the maple syrup cartel:

    http://fortune.com/2016/02/26/maple-syrup-cartel

    DeDude -> pgl... , Wednesday, September 14, 2016 at 12:52 PM
    Yes cartels (regardless of number of members) also have to be broken up - for markets and capitalism to work properly.
    Tom aka Rusty : , Wednesday, September 14, 2016 at 12:59 PM
    The FTC has ignored a many major health care mergers but has gone litigation guns a blazin' into small mergers in such less-than-major metro centers as Moscow Idaho and Toledo Ohio.

    Is there a "too big to litigate" standard?

    pgl -> Tom aka Rusty... , Wednesday, September 14, 2016 at 02:06 PM
    Rusty calling for rational regulation as in the FTC doing its job. Stop the presses!
    Tom aka Rusty said in reply to pgl... , Thursday, September 15, 2016 at 04:53 AM
    I'm just asking for coherent policy, something often missing from the Obama administration.
    Anon : , Wednesday, September 14, 2016 at 08:30 PM
    The sad fact is that the right-wing Law and Economics scholars have literally been trained to believe that the only correct null hypothesis is "free markets are good". When the null is not rejected with a 95% confidence interval, they actually think they've won the argument, while you're sitting there scratching your head saying, but when the null hypothesis is "free markets are bad", we can't reject that either. I've never seen logic get much traction with this crowd, because they are literally willing to tell you that economics demonstrates that "free markets are good", so that's the correct null.

    It's very sad, but also very common when talking to lawyers. In fact, I often wonder whether the right-wing didn't create the "Law and Economics" movement in order to slow the exposure of the legal profession to the actual tools of modern economic analysis.

    reason : , -1
    It would be a start if we would simply stop seeing hostile takeovers as something positive (you know ex-ante efficiency improvements) and start seeing them for the interference in natural selection that they actually are (no 40-40 foresight exists).

    [Sep 14, 2016] Bill Black We Send Teachers to Prison for Rigging the Numbers, Why Not Bankers

    Notable quotes:
    "... By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Jointly published with New Economic Perspectives ..."
    "... he's pursued abroad many also intuitively believe that there's no one who will hit back harder. There's some of that 'he may be a son-of-a-bitch but he's our son-of-a-bitch' quality to the president's support on national security issues. ..."
    "... Hence teachers weren't divisive enough and therefore are/were seen as part of the "problem". ..."
    Apr 02, 2015 | naked capitalism

    Yves here. One has to wonder if the prosecutorial investment in bringing down a public school test-cheating ring has less to do with concern about the students and more to do with charter schools.

    By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Jointly published with New Economic Perspectives

    The New York Times ran the story on April Fools' Day of a jury convicting educators of gaming the test numbers and lying about their actions to investigators.

    ATLANTA - In a dramatic conclusion to what has been described as the largest cheating scandal in the nation's history, a jury here on Wednesday convicted 11 educators for their roles in a standardized test cheating scandal that tarnished a major school district's reputation and raised broader questions about the role of high-stakes testing in American schools.

    On their eighth day of deliberations, the jurors convicted 11 of the 12 defendants of racketeering, a felony that carries up to 20 years in prison. Many of the defendants - a mixture of Atlanta public school teachers, testing coordinators and administrators - were also convicted of other charges, such as making false statements, that could add years to their sentences.

    This was complicated trial that took six months to present and required eight days of jury deliberations. It was a major commitment of investigative and prosecutorial resources. But it was not investigated and prosecuted by the FBI and AUSAs, but by state and local officials. In addition to the trial success, the prosecutors secured 21 guilty pleas.

    Atlanta's public schools, of course, did not engage in "the largest cheating scandal in the nation's history." The big banks' cheating scandals left the Atlanta educators in the dust.

    The two obvious questions are why the educators cheated and how they got caught. "High-stakes testing" cannot explain the scandal because we have had such tests for over 50 years. The article explains the real drivers – compensation, promotions, fear, and ego (aka "reputation").

    "Officials said the cheating allowed employees to collect bonuses and helped improve the reputations of both Dr. Hall and the perpetually troubled school district she had led since 1999.

    Investigators wrote in the report that Dr. Hall and her aides had 'created a culture of fear, intimidation and retaliation' that had permitted "cheating - at all levels - to go unchecked for years."

    Any reader familiar with my work should be running over in their mind Citigroup's vastly larger cheating frauds that senior managers produced by using exactly the same tactics to produce hundreds of billions of dollars in fraud.

    How did people become suspicious and decide to conduct a real investigation? They realized that the reported results were too good to be true. That too is directly parallel to Citi, where massive purchases of "liar's" loans known to be 90% fraudulent supposedly led to massive profits.

    The dozen educators who stood trial, including five teachers and a principal, were indicted in 2013 after years of questions about how Atlanta students had substantially improved their scores on the Criterion-Referenced Competency Test, a standardized examination given throughout Georgia.

    In 2009, The Atlanta Journal-Constitution started publishing a series of articles that sowed suspicion about the veracity of the test scores, and Gov. Sonny Perdue ultimately ordered an investigation.

    Wow, a newspaper did a series of articles, and documented a scandal built on deceit. Imagine if the New York Times and the Wall Street Journal were to do an "unsparing" investigation into banking fraud – and into Attorney General Eric Holder's refusal to prosecute. What if they actually looked at culpability in the C-suites?

    The inquiry, which was completed in 2011, led to findings that were startling and unsparing: Investigators concluded that cheating had occurred in at least 44 schools and that the district had been troubled by "organized and systemic misconduct." Nearly 180 employees, including 38 principals, were accused of wrongdoing as part of an effort to inflate test scores and misrepresent the achievement of Atlanta's students and schools.

    The investigators wrote that cheating was particularly ingrained in individual schools - at one, for instance, a principal wore gloves while she altered answer sheets - but they also said that the district's top officials, including Superintendent Beverly L. Hall, bore some responsibility.

    Dr. Hall, who died on March 2, insisted that she had done nothing wrong and that her approach to education, which emphasized data, was not to blame. "I can't accept that there's a culture of cheating," Dr. Hall said in an interview in 2011. "What these 178 are accused of is horrific, but we have over 3,000 teachers."

    But a Fulton County grand jury later accused her and 34 other district employees of being complicit in the cheating. Twenty-one of the educators reached plea agreements; two defendants, including Dr. Hall, died before they could stand trial.

    Of course, Hall's "approach to education" did not "emphasize data" – it emphasized faux data – like Citi's accounting alchemists under Robert Rubin who transmuted fraudulent net liabilities (liar's loans) into supposedly wondrously valuable assets that had zero risk (Super Senior CDO tranches).

    A more general point is in order. Atlanta is the culmination of destructive national trends and failing to mention Houston in the story was unfortunate. First, the "reinventing government" movement decided the public sector was bad and the private sector was magnificent and said that the public sector should adopt private sector approaches including quite specifically "performance pay" based on quantitative measures. This brought to the public sector the perverse incentives that were ruining the private sector and about to bring on Enron-era fraud epidemic and then the most recent three fraud epidemics. Second, we were assured by proponents of the change that a concern for "reputation" would trump any perverse incentives. What the proponents failed to see, of course, was that in both the private and public sectors the way to create a superb reputation was to report inflated data.

    Reputation, instead of the "trump" ensuring good conduct, was a leading motive to engage in bad conduct. Third, we were told that giving public administrators far more power to squash teachers was the key to success in education. Lord Acton warned that absolute power leads to absolute corruption whether in Atlanta or Citi's C-suite.

    Houston should have been mentioned because the modern movement toward educational fraud began in Houston under Rod Paige – who became Secretary of Education based on massive fraudulent misrepresentation of data. Paige kicked off the testing insanity, claiming it would produce objective, fact-based policies based on what educational measures actually worked. As a famous takedown of Paige's claims ends – the lesson is that it was too good to be true. President Bush, however, bought it hook, line, sinker, bobber, rod, and the boat Paige rowed out in.

    In any event, if Fulton County, Georgia can jail educators who lie and gimmick the data, Holder can send the elite bankers to prison on the same grounds.

    lakewoebegoner, April 2, 2015 at 10:41 am

    *** One has to wonder if the prosecutorial investment in bringing down a public school test-cheating ring has less to do with concern about the students and more to do with charter schools. ***

    I believe it's even simpler than that…..prosecuting teachers is perfect fodder for the local 11 o'clock news-you're prosecuting publiclly paid low-hanging fruit, the crime is understandable (versus explaining accounting fraud or intentional misvaluation of assets) and of course-my gosh, think of the children!

    NotTimothyGeithner, April 2, 2015 at 11:07 am

    Local DAs have incentive to prosecute large cases, and Holder made sure to make token plea deals with the banks. A successful state AG who brought down a major financial player would destroy the Obama Administration just by existing two years into the first term because there would be no excuse. Plenty of loyal Team Blue voters if pressed will explain the lack of prosecution as a GOP plot, but with a counter example in the papers they would be more demoralized than they are.

    RUKidding, April 2, 2015 at 12:11 pm

    Neither Team Blue or Team Red voters want to confront reality and truly see and acknowledge what's going on. The crooks in the District of Criminals have perfected their Kabuki Show of "hiding" behind each other's skirts and blaming the other side for all kinds of ills and perfidy. Tribalistic authoritarians can be lazy and not have to think for themselves and really DO something; just pass the clicker; lets all watch some "reality" tv show instead. Talk about the matrix….

    An example is my rightwing family members just recently celebrating quite a bit that Harry Reid has announced his retirement – as IF that'll be this amazingly good thing. Like: what will happen then? HOW, exactly, will "things get better" just bc they can't kick Harry Reid around anymore.

    Disclaimer: no love lost on my part vis Harry Reid. He's as much of a crook and worthless waste of space as all of the others, no matter which Team Jacket they wear. My take? What possible difference will it make if Reid retires or stays in the Senate indefinitely?

    RUKidding, April 2, 2015 at 10:59 am

    Teachers have no money. Bankers have a TON of money. Sucks to be in the 99s.

    Good comments. Right now, too, teachers have been deliberately painted to be the evilest of the vile because unions! get paid too much! can't be fired! blah de blah…. it's something easy for the masses to grasp – all those dreadful overpaid teachers who can't be fired "robbing" us of our taxes, while allegedly doing a totally shitty job. Yeah right. Of course privatized school teachers would most definitely do a "better" jawb.

    It's all "look over there!!!!!" while the bankers are the ones robbing us blind deaf dumb stupid etc.

    And yes, Charter Schools! Another way for the crooks at the top to rip off the 99s! woot!

    And the beat down goes on…..

    djrichard, April 2, 2015 at 12:09 pm

    I remember back when the Supreme Court was debating W vs Gore, I put it to my neighbors that W would be under the influence of big oil and other powers that be. One of my neighbors countered that Gore would be under the influence of teachers. I was the minority opinion in that conversation.

    RUKidding, April 2, 2015 at 12:14 pm

    No love lost on my part vis Gore, but seriously??? LIke Gore is "under the influence" of teachers??? Yeah, unions, but really? Like it's just so ridiculous. Teachers v Big Oil. Uh, er, that's pretty much like David v Goliath, but in this case Goliath/BigOil has totally crushed David/the 99s.

    djrichard, April 2, 2015 at 12:37 pm

    I'm surprised I found this, but I think this captures it.

    Bush's bully-boy campaign tactics play to his strengths, albeit unstated and unlovely ones. Many of the polls of the president have shown that while people don't necessarily agree with the specific policies he's pursued abroad many also intuitively believe that there's no one who will hit back harder. There's some of that 'he may be a son-of-a-bitch but he's our son-of-a-bitch' quality to the president's support on national security issues.

    This was from W v Kerry days. But I think the same principle was operating during W v Gore. During 2004, the idea was to continue to inflict W on the middle east. During 2000, I think the idea was to inflict W on the "deserving elements" inside the US (whatever those deserving elements are/were at the time).

    Teachers if anything represent a "big tent" mind-set, one in which there are no losers, or vice-versa one in which everyone is deserving of winning. Hence teachers weren't divisive enough and therefore are/were seen as part of the "problem".

    [Aug 26, 2016] Lots of Smoke Here, Hillary

    Notable quotes:
    "... If Hillary Clinton wins, within a year of her inauguration, she will be under investigation by a special prosecutor on charges of political corruption, thereby continuing a family tradition. ..."
    "... Of 154 outsiders whom Clinton phoned or met with in her first two years at State, 85 had made contributions to the Clinton Foundation, and their contributions, taken together, totaled $156 million. ..."
    "... Conclusion: access to Secretary of State Clinton could be bought, but it was not cheap. Forty of the 85 donors gave $100,000 or more. Twenty of those whom Clinton met with or phoned dumped in $1 million or more. ..."
    "... On his last day in office, January 20, 2001, Bill Clinton issued a presidential pardon to financier-crook and fugitive from justice Marc Rich, whose wife, Denise, had contributed $450,000 to the Clinton Library. ..."
    Aug 26, 2016 | www.theamericanconservative.com

    Prediction: If Hillary Clinton wins, within a year of her inauguration, she will be under investigation by a special prosecutor on charges of political corruption, thereby continuing a family tradition.

    ... ... ...

    Of 154 outsiders whom Clinton phoned or met with in her first two years at State, 85 had made contributions to the Clinton Foundation, and their contributions, taken together, totaled $156 million.

    Conclusion: access to Secretary of State Clinton could be bought, but it was not cheap. Forty of the 85 donors gave $100,000 or more. Twenty of those whom Clinton met with or phoned dumped in $1 million or more.

    To get to the seventh floor of the Clinton State Department for a hearing for one's plea, the cover charge was high. Among those who got face time with Hillary Clinton were a Ukrainian oligarch and steel magnate who shipped oil pipe to Iran in violation of U.S. sanctions and a Bangladeshi economist who was under investigation by his government and was eventually pressured to leave his own bank.

    The stench is familiar, and all too Clintonian in character.

    Recall. On his last day in office, January 20, 2001, Bill Clinton issued a presidential pardon to financier-crook and fugitive from justice Marc Rich, whose wife, Denise, had contributed $450,000 to the Clinton Library.

    The Clintons appear belatedly to have recognized their political peril.

    Bill has promised that, if Hillary is elected, he will end his big-dog days at the foundation and stop taking checks from foreign regimes and entities, and corporate donors. Cash contributions from wealthy Americans will still be gratefully accepted.

    One wonders: will Bill be writing thank-you notes for the millions that will roll in to the family foundation-on White House stationery?

    [Jul 03, 2016] Thank you, Elizabeth Warren, for picking up untitrust mantle by Beverly Mann

    Notable quotes:
    "... I didn't just mean Walmart and the like, I explained. I also meant the monopolistic powers that aren't obvious to the general public. Such as wholesale suppliers and shippers. And such as Visa and Mastercard, which impacts very substantially the profitability of small retailers and franchisers. ..."
    "... Which brought me then, and brings me again, to one of my favorite examples of how the Dems forfeit the political advantage on government regulation by never actually discussing government regulation, in this instance, what's known as the Durbin Amendment. It limits the amount that Visa and Mastercard-clearly critical players in commerce now-can charge businesses for processing their customers' credit card and ATM card transactions. ..."
    "... Talk to any owner of a small retail business-a gas station franchise owner, an independent fast food business owner, an independent discount store, for example-about this issue, as I did back when the Durbin Amendment was being debated in Congress. See what they say. ..."
    "... The Durbin Amendment was one of the (very) precious few legislative restrictions on monopolies, on anticompetitive business practices, to manage to become law despite intense lobbying of the finance industry or whatever monopolistic industry would be hurt by its enactment. To my knowledge, though, it was never mentioned in congressional races in 2010 or 2014, or in the presidential or congressional races in 2012. Antitrust issues have been considered too complicated for discussion among the populace. ..."
    "... And also presumably, it's why the news media ignored Elizabeth Warren's speech on Wednesday entirely about the decisive, dramatic effects of the federal government's aggressive reversal over the last four decades of antirust regulation and the concerted failures of one after another White House administration (including the current one) to enforce the regulation that remains. ..."
    "... Washington Monthly ..."
    "... What amazed me yesterday was how Warren synthesized the main points of virtually everything we've published into a single speech that, while long and wonky, was Bill Clintonesque in its vernacular exposition. You can imagine average Americans all over the country listening, nodding, understanding . ..."
    "... Though many in the press didn't notice the speech, you can best believe Hillary Clinton's campaign operatives were paying attention (Trump's too, I'll bet). That's why I think the speech has the possibility of changing the course of the campaign. The candidate who can successfully incorporate the consolidation message into their campaign rhetoric will an huge, perhaps decisive advantage. Hillary has already signaled, in an op-ed she published last fall, that she gets the larger argument. Yesterday, Elizabeth Warren showed her how to run on it. You can read the full prepared text below. ..."
    "... I'm thrilled. Except for that parenthetical that says "even the "populist" candidates running president have shied away from it, which is inaccurate regarding Bernie Sanders. The link is to an article by Glastris in the November/December 2015 edition of Washington Monthly titled " America's Forgotten Formula for Economic Equality ," which regarding Sanders concludes based upon an answer to a question by Anderson Cooper at a then-recent televised debate in which Sanders asked the question about how he expected to win the presidency as a democratic socialist failed to mention the issue of antitrust, that Sanders did not campaign on the issue of the demise of antitrust law and enforcement. ..."
    "... We already know from the DNC's public description of the latest draft of the platform that it includes things such as a general commitment to the idea of a $15-per-hour minimum wage; to expanding Social Security; to making universal health care available as a right through expanding Medicare or a public option; and to breaking up too-big-to-fail institutions. ..."
    "... Eliminating conflict of interest at the Federal Reserve by making sure that executives at financial institutions cannot serve on the board of regional Federal Reserve banks or handpick their members. ..."
    "... Banning golden parachutes for taking government jobs and cracking down on the revolving door between Wall Street and Washington. ..."
    "... Prohibiting Wall Street from picking and choosing which credit agency will rate their product. ..."
    "... Empowering the Postal Service to offer basic banking services, which makes such services available to more people throughout the country, including low-income people who lack access to checking accounts. ..."
    "... Ending the loophole that allows large profitable corporations to defer taxes on income stashed in offshore tax havens to avoid paying less taxes. ..."
    "... Using the revenue from ending that deferral loophole to rebuild infrastructure and create jobs. ..."
    "... Okay, folks. While being credited to Sanders, this far more likely is a blunt-force impact of Warren, since every one of these points concerns Warren's particular area of interest: financial industry regulation. ..."
    "... In other words, Warren is the intermediary between the Clinton and Sanders campaigns. And in exchange for her unbridled campaigning for and with Clinton has combined her own top priorities-precise legislative ones that Warren has the deep expertise to demand and to draft, e.g., items 1 and 3-with one very specific one of Sanders and with more generic ones of his as well, e.g., items 2 and 5. ..."
    July 1, 2016 | angrybearblog.com
    A detailed update follows the original post.

    Is the window closing on Bernie Sanders's moment? A number of folks, your humble blogger included , have suggested as much. We've argued that with Democrats seeming to unite behind Hillary Clinton, it's possible that the longer Sanders withholds his endorsement for her in the quest to make the party platform more progressive, the less leverage he'll end up having.

    But a new battleground state poll from Dem pollster Stan Greenberg's Democracy Corps suggests Sanders' endorsement could, in fact, still have a real impact, meaning he may still have some genuine leverage to try to win more concessions designed to continue pushing the party's agenda in a more progressive direction.

    A Sanders endorsement of Clinton could still make a big difference , Greg Sargent, The Plum Line, Washington Post, yesterday at 3:24 p.m.

    Paul Glastris reports that a speech Elizabeth Warren gave that was virtually ignored by the news media could provide a template for an argument about the economy that changes the course of the presidential election . - gs

    – Greg Sargent, The Plum Line, Washington Post, yesterday at 6:21 p.m.

    Just about exactly a year ago-early last summer-as Clinton was picking up the pace of her campaign appearances and formulating her substantive arguments, she said something that the news media caught onto immediately as really strange. In an attempt to woo aspiring and current small-business owners, she did her default thing: She adopted a Republican slogan and cliché, this one that government regulation and bureaucracy are the main impediments to starting and expanding small businesses, and are, well, just making the lives of small business owners miserable.

    Federal regulations and bureaucracy, see.

    It shouldn't take longer to start a business in America than it does to start one in France, she said, correctly. And it shouldn't take longer for a small-business owner to fill out the business's federal tax forms than it takes Fortune 500 corporations to do so. Also, correctly. And as president she will … something.

    There were, the news media quickly noted, though, a few problems with this tack. One was that regulations that apply varyingly to other than a few types of small businesses-those that sell firearms and ammunition, for example-small-business regulations are entirely state and local ones and are not of the sort that the federal government even could address.

    Another was that Clinton was relying upon a survey report that provided average times to obtain business licenses in various cities around the world, for companies that would employ a certain number of employees within a numerical, midsize range (or some such), and that cited Paris as the only French cities; showed that the differences in the time it took on average to obtain a business license there and in several American cities was a matter of two or three days, and that only Los Angeles (if I remember correctly) among the American cities had a longer average time than did Paris; and that the all the cities listed had an average of less than two weeks.

    Some folks (including me, here at AB) also noted that the actual time it takes to open a small business depends mostly on the type of business, often the ease of obtaining a business loan, purchasing equipment such as that needed to open a restaurant, leasing space, obtaining insurance, and ensuring compliance with, say, local health department and fire ordinances.

    And one folk (me, here at AB) pointed out that the relative times it takes to fill out a federal tax form for a business depends far more on whether your business retains Price Waterhouse Coopers to do that, or has in-house CPAs using the latest software for taxes and accounting, or relies upon the sole proprietor to perform that task.

    But here's what I also said: Far, far more important to the ease of starting a business and making a profit in it than regulatory bureaucracy-state and local, much less and federal ones-is overcoming monopolistic practices of, well, monopolies.*

    I didn't just mean Walmart and the like, I explained. I also meant the monopolistic powers that aren't obvious to the general public. Such as wholesale suppliers and shippers. And such as Visa and Mastercard, which impacts very substantially the profitability of small retailers and franchisers.

    Which brought me then, and brings me again, to one of my favorite examples of how the Dems forfeit the political advantage on government regulation by never actually discussing government regulation, in this instance, what's known as the Durbin Amendment. It limits the amount that Visa and Mastercard-clearly critical players in commerce now-can charge businesses for processing their customers' credit card and ATM card transactions.

    Talk to any owner of a small retail business-a gas station franchise owner, an independent fast food business owner, an independent discount store, for example-about this issue, as I did back when the Durbin Amendment was being debated in Congress. See what they say.

    The Durbin Amendment was one of the (very) precious few legislative restrictions on monopolies, on anticompetitive business practices, to manage to become law despite intense lobbying of the finance industry or whatever monopolistic industry would be hurt by its enactment. To my knowledge, though, it was never mentioned in congressional races in 2010 or 2014, or in the presidential or congressional races in 2012. Antitrust issues have been considered too complicated for discussion among the populace.

    Which presumably is why the news media never focused on the fact that Bernie Sanders discussed it regularly in his campaign. And that it resonated with millennials.

    And also presumably, it's why the news media ignored Elizabeth Warren's speech on Wednesday entirely about the decisive, dramatic effects of the federal government's aggressive reversal over the last four decades of antirust regulation and the concerted failures of one after another White House administration (including the current one) to enforce the regulation that remains.

    Here's what Glastris wrote in preface to his republishing of the full Warren speech:

    Yesterday, straight off her high-profile campaign appearance Monday with Hillary Clinton, Sen. Elizabeth Warren gave a keynote address about industry consolidation in the American economy at a conference at the Capitol put on by New America's Open Markets program. Though the speech has so far gotten only a modicum of attention-the press being more interested in litigating Donald Trump's Pocahontas taunts-it has the potential to change the course of the presidential contest. Her speech begins at minute 56:45 in the video below.

    Warren is, of course, famous for her attacks on too-big-to-fail banks. But in her address yesterday, entitled "Reigniting Competition in the American Economy," she extended her critique to the entire economy, noting that, as a result of three decades of weakened federal antitrust regulation, virtually every industrial sector today-from airlines to telecom to agriculture to retail to social media-is under the control of a handful of oligopolistic corporations. This widespread consolidation is "hiding in plain sight all across the American economy," she said, and "threatens our markets, threatens our economy, and threatens our democracy."

    As our readers know, economic consolidation is a subject the Washington Monthly has long been obsessed with-see here , here , here , here , here , here , here , here , here , and here . In our current cover story , Barry Lynn (impresario of yesterday's event) and Phil Longman argue that antitrust was the true legacy of the original American Populists and a vital, under-appreciated reason for the mass prosperity of mid-20 th Century America. But this legacy, and the new Gilded Age economy that has resulted from its abandonment, is not a narrative most Americans have been told (one reason why even the "populist" candidates running president have shied away from it).

    What amazed me yesterday was how Warren synthesized the main points of virtually everything we've published into a single speech that, while long and wonky, was Bill Clintonesque in its vernacular exposition. You can imagine average Americans all over the country listening, nodding, understanding .

    Though many in the press didn't notice the speech, you can best believe Hillary Clinton's campaign operatives were paying attention (Trump's too, I'll bet). That's why I think the speech has the possibility of changing the course of the campaign. The candidate who can successfully incorporate the consolidation message into their campaign rhetoric will an huge, perhaps decisive advantage. Hillary has already signaled, in an op-ed she published last fall, that she gets the larger argument. Yesterday, Elizabeth Warren showed her how to run on it. You can read the full prepared text below.

    I'm thrilled. Except for that parenthetical that says "even the "populist" candidates running president have shied away from it, which is inaccurate regarding Bernie Sanders. The link is to an article by Glastris in the November/December 2015 edition of Washington Monthly titled " America's Forgotten Formula for Economic Equality ," which regarding Sanders concludes based upon an answer to a question by Anderson Cooper at a then-recent televised debate in which Sanders asked the question about how he expected to win the presidency as a democratic socialist failed to mention the issue of antitrust, that Sanders did not campaign on the issue of the demise of antitrust law and enforcement.

    But as it happens, I knew that was incorrect. One of my fondest memories of the Sanders campaign dates back to a detailed first-person report by a journalist covering the Sanders campaign in Iowa last summer, who attended a rally not as journalist but instead from the cheap seats in the midst of the attendees. I can't remember the journalist or the publication, and was unable to find it just now in a search. But I remember this: He sat next to a young woman, blond, cheerleadery-looking, who whenever Sanders said a word or phrase referencing one of his favorite topics, would stand up, thrust her arm up in a punch-the-air motion, and shout the word or phrase. Cheerleader-like, the reporter said.

    One of the words? Antitrust. Or, as the young woman said it, "ANTITRUSSSTTT!"

    In searching for that article, which as I said I couldn't find, I did find a slew of references by Sanders to antitrust-the economic and political power of unchecked and ever-growing monopolies-in reports about his rallies. One, about a rally in Iowa, for example, quoted Sanders as saying that Agribusiness monopoly has reduced the prices human farmers receive for their products well below their market value in a competitive economy.

    Other statements made clear the critical reason that Sanders has so focused on the call to break up the big banks: their huge economic and political power. Including the resultant demise of community banks of the sort that made America great when America was great-for obtaining small-business loans and mortgages, anyway.

    So here's my point: If you click on the link to that Democracy Corps poll, you'll see what so many people whose heads are buried in the sands of the pre-2015 political era (including the ones who constantly trash me in the comments threads to my posts like my last one ) don't recognize. All that the Democrats need do in order to win a White House and down-ballot landslide is to campaign on genuinely progressive issues, and genuinely explain them.

    Which is why Warren is so valuable to the Dems up and down the ballot. And why Sanders is, too.

    Warren endorsed Clinton last week, and on Tuesday campaigned with her in a speech introducing her, singing her praises, and trashing Donald Trump. Headline-making stuff. But not the stuff that will matter most. When she goes on the road and repeats her Wednesday speech, not her Tuesday one, and then asks that people vote Democratic for the White House on down, it will matter far more.

    And that is true also for Sanders. But I don't expect many politicos over the age of 40 to recognize that.

    Glastris's piece yesterday in titled " Elizabeth Warren's Consolidation speech Could Change the Election. " Yes. Exactly. Consolidation . As in, monopolies . And monopolistic economic practices and political power .

    Antitrusssttt!

    Surprisingly, apparently in response to the release of the Democracy Corp poll yesterday, hours after suggesting that Clinton was about to begin campaigning as a triangulator because Sanders was refusing to endorse her, and anyway that's what some Clinton partisans have been urging, someone in the Clinton campaign rescinded that , indirectly. Presumably, it was someone under the age of 40.

    Or someone who reads Angry Bear . Probably someone who's under 40 and reads Angry Bear.

    Rah-rah! Sis-boom-bah!

    * Sentence edited slightly or clarity. 7/2 at 10:43 a.m.

    UPDATE: Greg Sargent is reporting now:

    The latest draft of the Democratic Party platform, which is set to be released as early as this afternoon, will show that Bernie Sanders won far more victories on his signature issues than has been previously thought, according to details provided by a senior Sanders adviser.

    The latest version of the platform, which was signed off on recently by a committee made up of representatives for the Sanders and Clinton campaigns and the DNC, has been generally summarized by the DNC and characterized in news reports. Sanders has hailed some of the compromises reached in it, but he has vowed to continue to fight for more of what he wants when the current draft goes to a larger Democratic convention platform committee in Orlando coming weeks, and when it goes to the floor of the convention in Philadelphia in late July.

    But the actual language of the latest draft has not yet been released, and it will be released as early as today. It will show a number of new provisions on Wall Street reform, infrastructure spending, and job creation that go beyond the victories that Sanders has already talked about. They suggest Sanders did far better out of this process thus far than has been previously thought. Many of these new provisions are things that Sanders has been fighting for for years.

    We already know from the DNC's public description of the latest draft of the platform that it includes things such as a general commitment to the idea of a $15-per-hour minimum wage; to expanding Social Security; to making universal health care available as a right through expanding Medicare or a public option; and to breaking up too-big-to-fail institutions.

    Warren Gunnels, the chief policy adviser to the Sanders campaign, is Sargent's source. Gunnels listed six additions to the platform draft:

    1. Eliminating conflict of interest at the Federal Reserve by making sure that executives at financial institutions cannot serve on the board of regional Federal Reserve banks or handpick their members.
    2. Banning golden parachutes for taking government jobs and cracking down on the revolving door between Wall Street and Washington.
    3. Prohibiting Wall Street from picking and choosing which credit agency will rate their product.
    4. Empowering the Postal Service to offer basic banking services, which makes such services available to more people throughout the country, including low-income people who lack access to checking accounts.
    5. Ending the loophole that allows large profitable corporations to defer taxes on income stashed in offshore tax havens to avoid paying less taxes.
    6. Using the revenue from ending that deferral loophole to rebuild infrastructure and create jobs.

    Okay, folks. While being credited to Sanders, this far more likely is a blunt-force impact of Warren, since every one of these points concerns Warren's particular area of interest: financial industry regulation.

    But there are, I believe, clear Sanders hallmarks in there, too: particularly item 4, empowering the Postal Service to offer basic banking services, which makes such services available to more people throughout the country, including low-income people who lack access to checking accounts.

    In other words, Warren is the intermediary between the Clinton and Sanders campaigns. And in exchange for her unbridled campaigning for and with Clinton has combined her own top priorities-precise legislative ones that Warren has the deep expertise to demand and to draft, e.g., items 1 and 3-with one very specific one of Sanders and with more generic ones of his as well, e.g., items 2 and 5.

    This will be an unbeatable platform and team. During the campaign, and in the four years that follow.

    Game on.

    [Jun 18, 2016] Greenspan Shocked Disbelief by Robert Borosage

    Greenspan phony "Shocked disbelief" reminds classic "...I am shocked - shocked, there is gambling going on in this establishment...." "...here are your winnings..." exchange between Humphrey Bogart & Claude Rains in Casablanca. Compare with "... "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief," he said. ..."
    Notable quotes:
    "... "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief," ..."
    "... Greenspan spurned the Republican acolytes trying desperately to defend the faith and blame the crisis on the Community Reinvestment Act and the powerful lobby of poor people who forced powerless banks to do reckless things. ..."
    "... Private greed, not public good, caused this catastrophe: "The evidence now suggests, but only in retrospect, that this market evolved in a manner which if there were no securitization, it would have been a much smaller problem and, indeed, very unlikely to have taken on the dimensions that it did. It wasn't until the securitization became a significant factor, which doesn't occur until 2005, that you got this huge increase in demand for subprime loans, because remember that without securitization, there would not have been a single subprime mortgage held outside of the United States, that it's the opening up of this market which created a huge demand from abroad for subprime mortgages as embodied in mortgage-backed securities. ..."
    "... But having admitted the failure of his faith, Greenspan could not abandon it. Credit default swaps had to be "restrained," he admitted. Those who create mortgages should be mandated to retain a piece of them to insure responsible lending. Otherwise, the old faith still applied. No new regulations were needed, because the markets "for the indefinite future will be far more restrained than would any currently contemplated new regulatory regime." ..."
    "... The only Guantanamo that the United States has any business running is a concentration camp for the hundreds of wall street executives and their cronies in Bushland that conspired to defraud the American people from their hard earned dollar. ..."
    "... There are no free markets in America, any more than there is free lunch. ..."
    "... So it wasn't the military-industrial complex that did us in after all . . . ..."
    "... It's clear from comments on this contribution that few readers of Truthout believe Alan Greenspan's sorry testimony before Congress. What has faith in something to do with enforcing the policies of fiduciary responsibility already on the books? All these so-called "experts" on capitalism are now coming out to say "I'm sorry." Well, I won't be sorry for them until they are held monetarily and criminally responsible for their actions, inept or not. ..."
    "... If it looks like class warfare, as David Harvey, author of Neoliberalism, has stated, call it class warfare and act accordingly. ..."
    "... it doesn't take a genius to understand that when financial instruments are created based on crap (subprime mortgages), that eventually problems will occur with those instruments. In fact, Greenspan and his cronies knew that, which is why they resisted these instruments being regulated by the SEC or even the CFTC. ..."
    "... Sounds like the "maestro" hit a flat note in his orchestra of greed and deregulation. ..."
    "... Did anybody even bother to consult the Math PhDs who created these instruments to run possible scenarios -- just in case? why bother when you know you can scare congress, the president and the treasury and ultimately the people into bailing your ass out of worldwide collapse? ..."
    "... Shocked Disbelief is a ploy. When they were all riding high, they didn't give a crap. They were going to come out richer than hell anyway. ..."
    "... Where's Ayn Rand when you need her? Give me a break Mr Greenspan. Never let history and reality get in the way of the big unregulated celebration of greed like we have had since "Saint Ronald Wilson Reagan", and the other "Free Market" "government is the problem" ideologues ..."
    "... What about the 1994 Act of Congress that required the Fed to monitor and regulate derivatives? The Act Greenspan ignored? ..."
    "... "...I am shocked - shocked, there is gambling going on in this establishment...." "...here are your winnings..." exchange between Humphrey Bogart & Claude Rains in Casablanca ..."
    Oct 24, 2008 | truthout.org

    by: Robert Borosage, The Campaign for America's Future

    On October 23, former Federal Reserve Chairman Alan Greenspan testified before a House Oversight and Government Reform Committee hearing on the role of federal regulators in the current financial crisis.

    It marks the end of an era. Alan Greenspan, the maestro, defender of the market fundamentalist faith, champion of deregulation, celebrator of exotic banking inventions, admitted Thursday in a hearing before Rep. Henry Waxman's House Committee and Oversight and Government Reform that he got it wrong.

    "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief," he said.

    As to the fantasy that banks could regulate themselves, that markets self-correct, that modern risk management enforced prudence: "The whole intellectual edifice, however, collapsed in the summer of last year."

    Greenspan spurned the Republican acolytes trying desperately to defend the faith and blame the crisis on the Community Reinvestment Act and the powerful lobby of poor people who forced powerless banks to do reckless things. Greenspan dismissed that goofiness in response to a question from one of its right-wing purveyors, Rep. Todd Platts, R-Pa., noting that subprime loans grew to a crisis only as the unregulated shadow financial system securitized mortgages, marketed them across the world, and pressured brokers to lower standards to generate a larger supply to meet the demand. Private greed, not public good, caused this catastrophe:

    "The evidence now suggests, but only in retrospect, that this market evolved in a manner which if there were no securitization, it would have been a much smaller problem and, indeed, very unlikely to have taken on the dimensions that it did. It wasn't until the securitization became a significant factor, which doesn't occur until 2005, that you got this huge increase in demand for subprime loans, because remember that without securitization, there would not have been a single subprime mortgage held outside of the United States, that it's the opening up of this market which created a huge demand from abroad for subprime mortgages as embodied in mortgage-backed securities.

    But having admitted the failure of his faith, Greenspan could not abandon it. Credit default swaps had to be "restrained," he admitted. Those who create mortgages should be mandated to retain a piece of them to insure responsible lending. Otherwise, the old faith still applied. No new regulations were needed, because the markets "for the indefinite future will be far more restrained than would any currently contemplated new regulatory regime."

    Now hung over from their bender, the banks could be depended upon to remain sober "for the indefinite future." Or until taxpayers' money relieves their headaches, and they are free to party once more.


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    Comments

    This is a moderated forum. It may take a little while for comments to go live.

    The only Guantanamo that the

    Sun, 10/26/2008 - 23:37 - Captain America (not verified)

    The only Guantanamo that the United States has any business running is a concentration camp for the hundreds of wall street executives and their cronies in Bushland that conspired to defraud the American people from their hard earned dollar.

    What they did dwarfs the damage caused to this country by 911, (no disrespect for the many innocents who died). However, here, every single citizen is a victim of fraud and corruption on a scale that was heretofore inconceivable. Greenspan, Bush and now Paulson have done more than Bin Laden and his hordes could do in a 100 years.

    By the way, if you protest YOU wind up locked up for being un-American. What happened America ?

    There are no free markets in

    Sun, 10/26/2008 - 19:27 - pink elephant (not verified)

    There are no free markets in America, any more than there is free lunch. The game was always fixed and Greenspan was the ultimate shill for the fixers. The past thirty years have been an orgy of greed with common sense shoved aside for the sake of uncommon expediency. Americans became infatuated by arcane formulas and dense incomprehensible mathematics to the point that they forget simple arithmetic. America wake up it was only a dream, and a bad one at that.

    So it wasn't the

    Sun, 10/26/2008 - 19:07 - Anonymous (not verified)

    So it wasn't the military-industrial complex that did us in after all . . .

    It's clear from comments on

    Sun, 10/26/2008 - 15:40 - afrothethics (not verified)

    It's clear from comments on this contribution that few readers of Truthout believe Alan Greenspan's sorry testimony before Congress. What has faith in something to do with enforcing the policies of fiduciary responsibility already on the books? All these so-called "experts" on capitalism are now coming out to say "I'm sorry." Well, I won't be sorry for them until they are held monetarily and criminally responsible for their actions, inept or not. The truth is as plain as the nose on your face: Greenspan, the Federal Reserve, the investment banks, the Bush administration and several members of Congress unobtrusively acted to consciously and knowingly to rob the national treasury for the sake of capitalism's sacred cow: capital accumulation on behalf of the nation&#