ECB Poised to Approve Italian Bailout of Monte dei Paschi Bank: An Instance of Federal-State Collusion?

Under the E.U.’s banking law enacted after the 2008 financial crisis, the state governments “are not supposed to inject fresh taxpayer money into a bank if it is deemed insolvent. When a bank gets into financial trouble, shareholders and bondholders, assumed to be sophisticated investors aware of the risks, are supposed to take the hit and bear the losses.” Much of the banking reforms were intended, moreover, “to prevent banks from becoming so big and so risky that they could hold the global economy hostage. Politicians and policy makers didn’t want taxpayers to be on the hook for the banks’ mistakes.” What about a mid-sized bank whose financial plight puts a state’s economy and reigning political elite in jeopardy? Should the E.U.’s central bankers look the other way and allow the state’s government to finance a bail-out so stockholders and bondholders need not feel the brunt?

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Goldman Sachs’ Venezuelan Bonds: Power Behind the Throne

Goldman Sachs paid about $865 million for $2.8 billion worth of bonds in May, 2017. This represents 31 cents on the dollar and translates into an annual yield of more than 40 percent.[1] The high yield is due to the high risk that is involved, for the bonds had been held by Venezuela’s central bank in what “the government’s opposition decried as a lifeline” to the regime then in power.[2] Indeed, the central bank’s foreign-currency reserves increased by $442 million to $10.8 billion the day the bond deal was completed, and the government needed to raise money it owed to key allies like Russia and China.[3] In indirectly aiding that government, Goldman Sachs risked the ire of the opposition. Writing to Goldman Sachs, Julio Borges, head of Venezuela’s opposition-controlled legislature, indicated that he would “recommend to any future democratic government of Venezuela not to recognize or pay on these bonds.”[4] Hence, the high risk, high return. Though I submit that the risk might have been considerably less than meets the eye on account of the influence of the bank on the U.S. Government.

Goldman Sachs had been “steadily increasing its Venezuelan holdings in recent months, betting that a change in government could more than double the value of the debt if the country, which sits atop the world’s largest oil reserves, reforms its economy.”[5] The American bank could arguably dismiss Borges’ ominous threat because of the bank’s formidable influence, or power, in the U.S. Government. Besides the lavish political-campaign contributions that the bank no doubt extended to members of Congress, prospective candidates, and to the sitting president at the time, the bank had an insurance policy of sorts in that one of its alums, Steve Mnuchin (formerly a partner at Goldman) was serving as U.S. Treasury Secretary and another, Gary Cohen (who had resigned from being the President at Goldman), was the U.S. President’s Chief Economic Advisor (i.e., head of the National Economic Council). Additionally, Steven Bannon, the chief strategist in the Trump administration, had worked in the bank. Ex-Goldman bankers thus held very senior positions in the U.S. Government as the bank was betting that future regimes in Venezuela would recognize the validity of the debt owed to the bank.

The expression, “power behind the throne,” expresses the underbelly of power that has existed without doubt since the dawn of human organization. The advent of the large corporation, whose astonishing accumulation of wealth stems from principles of the Industrial Revolution, meant that private power could trump publicly held power to an unprecedented extent. The governmental discretion of lawmakers and even heads of governments may actually be diminished because of the sheer power behind the strings. In spite of the dubious democratic legitimacy and the horrendous human-rights record of the regime in power in Venezuela when Goldman Sachs bought the bond that had been issued by the state oil company Petroleos de Venezuela, the policy of the U.S. Government could easily be to “look the other way” and even prop up that regime or support any prospective regime that agrees to “toe the line” on repaying the debt owed to Goldman. The power behind the American throne, in other words, might reduce to the bottom-line financial transactions of the large American banks, which, by the way, are too big to fail yet sufficiently powerful to vanquish even public debate on whether the banks should be broken up for the overall interest of the U.S. economies and financial system. In short, follow the money, not the ideals or even enlightened self-interest. The world, moreover, may be in a driverless ship—one whose route is simply a matter of large financial transactions. Those transactions themselves may be the true power, for not even the CEO at a major bank can realistically deviate from seeing them through; the shareholders would have his head.

The discretion, whether in the large corporations or in the halls of government, may really only reside at the point at which the decisions are taken to proceed with a given large transaction. Only an investment banker would know how much discretion is truly present in the decision of whether to commit funds to an investment. In the case of Goldman’s purchase of the Venezuelan state-related bonds, the anticipation of the artificial risk-reduction by means of financial-to-political power could mean the allure of a 40% return on investment is too much to resist (i.e., greed). Yet such a prospect being deemed realistic could mean that Goldman’s managers faced a de facto fiduciary duty to the stockholders to make the non-bet “bet.” The availability of alternative profitable uses of the funds available for a bank like Goldman Sachs could give the bank’s managers some leeway in line with not propping up a regime that suffers democratically and in terms of human rights. It is only on the margins, I suspect, that ideals can get a glimpse of sunlight in a political economy in which large financial transactions hold sway in terms of both financial and political power. Yet the greed leaning strongly toward the 40% return, which crucially is made so realizable only by the bank’s power over political power in the U.S. Government, is hard for human nature to resist, especially that which is well ensconced in the culture on Wall Street. Accordingly, large financial transactions may take on a deterministic hew.

In any case, once a transaction is committed to, power goes to the transaction itself, with its private and public defenders feeling they have little practical choice but to act in the transaction’s own interest. Indeed, bank managers can be fired and government officials can be turned out if they don’t “play along.” The logic of the existing financial transactions may be determinative for the ship of state as well as an economic system. It is no wonder, therefore, that the general public should fear the prospect of a distant iceberg coming unawares over the bow, and that ideals for a better world should fall off along the way like ice melting off the rails. 

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1. Kejal Vyas, Anatoly Kurmanaev, and Julie Wernau, “Goldman Sachs Under Fire For Venezuela Bond Deal,” The Wall Street Journal, May 30, 2017.

2. Ibid.

3. Ibid.

4. Ibid.

5. Ibid.

Violence at a Trump Campaign Rally Spurs Lawsuits against the Candidate: A Case of Incitement?

Is it natural for people to become enraged at other people at political events? Is violence simply part of the territory? Even if war stems from political differences, a political rally is a long way from being on a battle-field. The psychology, I submit, should be very different, and yet some people at campaign rallies cross the line as if they have no control over their emotions and behavior. That some protesters and a Trump supporter sued U.S. President Donald Trump for his role in inciting violence at one of his campaign rallies makes the matter of rage and violence at political events more public, and thus subject to analysis. The issue, I submit, goes beyond whether Don Trump incited violence against protesters at his political rallies. 

In Ceder Rapids, Iowa on Feb 1, 2016 at a Trump-for-President rally, the candidate told supporters there to “knock the crap out of” anyone preparing to throw a tomato.” He added, “I promise you. I will pay for the legal fees. I promise. I promise.”[1] The next month, at a similar rally in Louisville, Kentucky, he bellowed, “Get ‘em out of here!” in response to several protesters interrupting his rally.[2] Matthew Heimbach, a Trump supporter, “gave a hard shove in the back” to Kashiya Nwanguama, “who had been holding up a poster depicting [Trump’s] face on the body of a pig.”[3] Implying that Trump had incited the violence, Heimbach would go on to say of Trump, “He knew what he was asking for.”[4] So Nwanguama and two other protesters sued Trump, contending incitement—the legal argument being that the candidate was legally liable because the violent Trump supporters had been acting as his agents. In fact, Heimbach also filed a civil suit against Trump, arguing “he was responsible for any injuries [Heimbach] might have inflicted because [Trump] directed him and others to take action.”[5]

According to Samuel Issacharoff, an instructor of constitutional law at New York University, the central issue raised by the federal civil suits “is how society should deal with the passions which are necessarily unleashed in political events. The courts bend over backward to protect the freedom of political exchange in this country, even when it’s ugly.”[6] Trump’s lawyers argued that the candidate’s public statements are protected by the First Amendment. Moreover, the lawyers contended that there was no evidence that Trump intended for his followers to harm anyone. As an eye-witness to another case of incitement at a Trump rally, I question this claim.

At the rally I attended, Trump repeatedly urged that protesters be taken out of the arena. At one point, a small section of protesters behind him interrupted, and he asked explicitly for his private security employees to remove the protesters. When one such employee later in the rally was removing a lone (Caucasian) protester who was wearing a KKK hood to protest Trump as a racist, Trump continued to bellow, “You’re disgusting!” even as a Black military man—a Trump supporter—jumped into the aisle, threw down the protester, and, in intense motions, literally stomped on the protester. I saw Trump watching the stomping as he was continuing to denigrate the protester. This, I contend, is particularly revealing: that the candidate was continuing to bash the protester while watching the violence. I was left with the clear impression that Donald Trump not only condoned and was inciting the violence, but also actually enjoyed it. I said to the black woman sitting next to me, referring to Trump, “I don’t think he values democratic principles.” Observing the Trump supporters in our area, I added, “I thought it was just hyperbole, but this really does feel like what the Nazi rallies must have been like.” The woman next to me shook her head in agreement and we both looked on in silence—both of us feeling the surreal nature of that particular rally.

So I do believe that Donald Trump as a candidate did not respect people who protested his candidacy. I suspect that his anger was directed at the disapproval itself. As for the military man who felt compelled to stomp on the protester, whom I think was a woman, the matter may go beyond the incitement, which I believe existed. Both the intensity of the anger of the Trump supporters at the rally directed to the (mostly isolated) cases of protest and the “flash-point” intense violence of the military man suggest to me that Issacharoff’s assumption that passions are necessarily unleashed in political events may be wrong. Heimbach’s legal argument may contain the assumption that he had no choice but to act as Trump’s agent at the rally in Kentucky, or at least that acting violently as Trump’s (self-appointed?) agent was normal for the type of occasion.

I question whether such extreme passions as can so easily “jump the fire line” onto violent acts are necessarily a part of political events—whether our expectation that such acts are just part of political life is valid. Alternatively, what we may be seeing is mental illness on full display thanks to the societal excuse of sorts that tacitly permits or normalizes rage at political events. It does not follow that just because someone holds a firm belief—whether it be political or religious—that violence-level anger inexorably kicks in against a “non-believer.” In the realm of religion, Feuerbach, a nineteenth-century European philosopher of religion, argues in his text, The Essence of Christianity, that faith contains a malevolent principle predicated on the salience of belief. That is, hatred toward non-believers is part and parcel of having faith in a belief, such as that God exists. Hence the many atrocities in the name of religion may stem from religious faith itself. I think we can broaden this out to any firmly held belief.

I do not find a reasonable enough basis for a person to feel severe or intense anger in the presence of a person merely disagreeing with a strongly-held belief, for homogeneity of belief is not part of the human condition. In other words, the expectation that you and I have that people should naturally believe what we respectively believe may be the underlying problem. The flawed assumption here may trigger the anger, which may actually be angst railing against the truth of the matter—that firmly holding a belief is not as important as we think or feel it to be, and that people are naturally going to have divergent beliefs. I don’t believe that the anger is a reflex against the latent (psychological or empirical) threat in the “I disagree with your belief.” Rather, I think we humans have an instinctual dislike of people who hold a divergent belief or opinion, yet the level of the dislike is not in itself, I submit, enough to trigger violence. Rather, flawed thinking in some people supports the fallacy of an expectation that people should naturally hold the same beliefs (especially one’s own!) and psychological pathology exaggerates the anger for some people such that they lapse into violence. Free speech should not give open license to normalizing this dysfunction at political events; in fact, the culprits, whether protesters or supporters, should be called out even just on their excessive emotion, and certainly the violence should be stopped as soon as it erupts. Continuing to denigrate the victim can thus be labeled as part of the pathology, rather than as natural to politics.

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[1] David Zucchino, “A Trump Campaign Rally Led to Shoving, and Legal Wrangling, Too,” The New York Times, May 27, 2017.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.