Sunday, November 2, 2008
In the days following Steinbrück’s jeremiad against the American financial system, the Germans and many other continental Europeans have found themselves wearing a good deal of egg on their faces, as the financial crisis has spread throughout Europe – effectively wiping out the economy of one European nation, Iceland – and it has become clear that European financial institutions have been as guilty as their American counterparts in engaging in foolish speculative activities that have endangered the global financial system. Indeed, Steinbrück and other Europeans have spoken with considerable admiration for the aggressiveness with which US Treasury Secretary Paulson has confronted the crisis, successfully overcoming Congressional opposition on the Left and the Right in order to enact an impressive program authorizing broad government intervention in the financial markets.
At heart, however, there is a good deal of truth in the German criticism of the American financial system. Banking in America, and the American legal and regulatory scheme governing the banking industry, is quite different from the rest of the world. In some respects, America’s unique banking system has been beneficial, helping to fuel the rapid economic growth that has been the hallmark of American history. However, the American banking system has also been very prone to financial “panics” – bursts of extreme financial instability – which have often been the harbinger of wider periods of economic recession and depression. In today’s world of capitalist globalization, it is very dangerous for America’s banking system to continue playing the role of the world's financial “maverick”, as its proclivity for financial instability can rapidly lead to worldwide economic crises.
America often reminds me of Madagascar. Evolutionary biologists love to study Madagascar because it has numerous species of plants and animals that are found nowhere else in the world. However, because Madagascar is an island that broke off from the African mainland in relatively recent geological time, it is possible to find common ancestors that link species found in Madagascar to those found in the rest of Africa. For example, lemurs are unique to Madagascar. They are primates that share common ancestors with the monkeys, apes and humans that evolved in Africa. However, lemurs went off in their own evolutionary direction on the isolated island of Madagascar.
Like Madagascar, America has evolved institutions that are often quite different from those in the rest of the world. America is one of the few countries in the world that is not metric; it is virtually the only country that does not have a VAT (a pet peeve of mine that I will write about some day). The American legal system has lots of rules that are unique – American civil juries have no analog in other countries and the American system of civil litigation, with its free-wheeling discovery, general lack of judicial supervision, and potential for generating enormous jury verdicts including punitive damages, is unlike any other legal system in the world. And, as the Germans have recently pointed out, the American banking system is different from the rest of the world.
Again, the analogy to Madagascar strikes me as very apt. Many of these unique American institutions can be traced to antecedents in Europe, primarily England, such as the jury system or the English system of measurement. However, because of its physical and political isolation, these institutions took a different evolutionary course in America.
To understand America’s unique banking system, we have to go back to the Presidency of Andrew Jackson. As readers of this blog may have noticed, I am quite prone to find the influence of “Jacksonian” ideology in many aspects of American life. The “Jacksonian Era” was the area of my concentration as an American History major in college, and, as I have often commented, I consider Walter Russell Mead’s essay, “The Jacksonian Tradition”, to be one of the most insightful pieces ever written about American ideology. The recent debate on the so-called “Wall Street bailout” had a very familiar ring to anyone who has studied the rhetoric of Jacksonian America. “Populists” on both the Right and the Left decried the greed and corruption of “Wall Street”, in contrast to the honesty and common decency of “Main Street.” These speeches could have been delivered almost verbatim in the 1820s, and they would have been completely comprehensible to the partisans of that era. So, in order to understand the world's current financial crisis, a journey into history is in order.
Modern banking got its start in the Dutch Republic in the late Sixteenth and early Seventeenth Centuries. There were a number of factors that caused Holland to become the first center of merchant capitalism. The Protestant Reformation broke down traditional Roman Catholic dogma that viewed all forms of money lending as sinful. Muslim and Jewish emigrants to the Netherlands fleeing the Spanish Inquisition brought with them an entrepreneurial culture and an understanding of the potential benefits of credit, that embodied the germs of a nascent financial system. The European discovery of the Americas and the beginnings of industrial capitalism promoted trade and sea travel, all of which was very expensive and could not take place without a system of credit. The Dutch golden age proved to the world that there was nothing inherently evil about credit and debt, and that an economy based on merchant capitalism, financed by credit, could generate hitherto unimagined levels of general wealth, and notably, a degree of wealth not restricted to the aristocracy but increasingly available to a new phenomenon in human history: a growing mass middle class.
By the end of the Seventeenth Century, Britain replaced Holland as the dominant merchant capitalist power in the world. The British, however, learned an important lesson from the Dutch about managing an economy based on credit. While credit can be an extremely powerful force in promoting general prosperity, it can also be a very dangerous force if not managed wisely. A credit-based economy can be highly unstable, a characteristic that often spills over into the social and political spheres; Kevin Phillips’s work American Theocracy describes the tendency of societies that are excessively reliant upon credit to experience highly disruptive and often contradictory social phenomena, such as moral decadence and religious fanaticism.
In an effort to manage a credit-based economy more wisely than the Dutch had done, Britain developed a system of central banking. The Bank of England oversaw the activities of all lesser banks. The British modification of the Dutch financial system proved to be fabulously successful, as British trade came to dominate the world. The British were able to convert their mastery of the world’s financial system into political and military dominance, as the British victory in the Seven Years’ War confirmed Britain’s status as the dominant global power, a position it would hold for almost two-hundred years.
One of the most ardent admirers of the British system of central banking was America’s first Treasury Secretary, Alexander Hamilton. At Hamilton’s urging, President Washington supported the establishment of the First Bank of the United States, an institution modeled directly on the Bank of England. The Bank of the United States would serve as the repository of all revenues of the Federal government. This control over Federal revenues would give the Bank a position of dominance in the American financial system that would enable it to exercise direct control over the credit policies of all subordinate banks. Hamilton's system was very popular in the Northeast, especially New York and New England, where merchants and infant industrialists benefited from the fact the Bank gave credibility to the new American Dollar and established stability in credit markets. The agrarian South was less interested in credit, and Hamilton's Bank conflicted with the Jeffersonian ideology that favored "small government" and a society of "yeoman farmers", and distrusted trade and finance.
In 1811, Jefferson's successor, President James Madison, allowed the charter of the Bank of the United States to lapse. Madison, however, soon learned an important lesson in the importance of having a sound financial system. In 1812, Madison succumbed to pressure from the "war hawks" and picked a fight with England, the world's financial superpower. While the over-confident Americans were embarrassed during the early stages of the war - including the British capture of Washington, DC and the burning of the White House - the young American Republic did manage to eke out a draw. The financial consequences of the war, however, were devastating. Madison's Treasury Secretary, the Swiss-born Albert Gallatin, persuaded Madison to revive the Hamiltonian system of central banking and the Second Bank of the US was established in 1816.
Nicholas Biddle, the President of the Second Bank, was, by most accounts, a pretty obnoxious and corrupt individual. Biddle unabashedly used the economic power of the Bank to advance political ends. The two politicians who would later become the founders of the Whig Party, Daniel Webster and Henry Clay, were virtually hired hands of the Bank. Webster served as the Bank's principal lawyer, arguing on behalf of the Bank in the landmark Supreme Court case of McCulloch v. Maryland. Clay served as the Bank's principal agent in Washington, making liberal use of the Bank's economic power to provide benefits to politicians who worked with Clay to advance Biddle's fortunes. Nevertheless, in spite of his corrupt propensities, Biddle was an effective banker and the Second Bank succeeded in bringing about a prolonged period of prosperity and economic stability during the 1820s.
Andrew Jackson was elected President in 1828, and populist rhetoric directed against the Bank became a maninstay of his political agenda. The Bank was attacked as "aristocratic", and Biddle's abuse of the Bank's economic power as a means of extending his political influence made him a worthy target of much of this criticism. Jackson's attack on the Bank also carried an ethnic dimension. Jackson drew strong support among Scots-Irish immigrants, who had come to the US in large numbers in the years following the Revolution, and the Bank was targeted as an "English" type of institution, and Biddle and his supporters were pilloried as Anglophiles.
Jackson easily defeated the pro-Bank candidate Clay in the election of 1832. Getting rid of the Bank was the top priority of Jackson's second term. Not content to wait for the Bank's charter to lapse, Jackson set about to achieve his goal of the immediate destruction of the Bank. Jackson directed the Secretary of the Treasury to withdraw all Federal funds from the Bank and transfer the funds to various state-chartered banks that were run by Jackson's political supporters. Several Treasury Secretaries resigned rather than follow Jackson's order, which was of doubtful legality. Ultimately, Jackson designated his Attorney General and longtime political crony, Roger Taney, as the Secretary of the Treasury, and Taney carried out Jackson's directions. Soon thereafter, Jackson would reward the toady Taney by appointing him to succeed John Marshall as Chief Justice of the Supreme Court, where Taney would achieve notoriety and would again have an opportunity to change the course of American history, and not for the better, by writing the majority decision in the infamous Dred Scott case.
Stripped of its status as the sole repository of Federal revenues, the Second Bank withered away as an institution of importance in the American economy, and became irrelevant by the time its charter lapsed. The imperious Biddle endured a similar fate.
It is noteworthy that Jackson's attitude towards banking and credit differed significantly from that of the Jeffersonians. Jackson had no particular antipathy towards banks and a credit-driven economy, quite the contrary. Jackson's principal objection to the Bank had been based on its political power and its support for Jackson's rivals. Jackson also objected to the fact that the Bank of the United States tended to impede the growth of numerous state-chartered banks; again, many of these banks were owned by Jackson's political supporters. With the abolition of the Second Bank, there was in fact an explosion in both the number and the size of state-chartered banks. Without any central bank to place any controls on the activities of the state-chartered banks, and with little regulation being imposed by the highly corrupt state governments that chartered these banks, speculation of all sorts ran rampant throughout the American economy. This resulted in the Panic of 1837, initiating a period of serious economic dislocation. By this time, however, Jackson had left the White House and it was his successor, Van Buren, who would pay the price for this economic collapse, being defeated in 1840 by Whig candidate William Henry Harrison, who co-opted the same pseudo populist rhetoric that was Jackson's stock in trade.
Notwithstanding the unhappy experience of the Panic of 1837 and subsequent economic collapse, the American system of state-chartered, minimally-regulated banking instituted by Jackson remained largely unchanged for almost a century. The National Banking Act, enacted during the Civil War, established the Office of the Comptroller of the Currency to provide some minimal level of Federal oversight, but for the most part, no major changes occurred in the system. The most important changes in the American banking system during the Nineteenth Century occurred not because of new legislation or governmental regulation, but rather, because of changes within American society and the American economy. Specifically, the uniquely American bifurcation between commercial and investment banking began to take shape.
What we would ultimately call “commercial banking” came under the domination of J.P. Morgan. Morgan acted as the conduit for large amounts of foreign investment into the U.S., primarily from England. However, the minimally-regulated Jacksonian banking system made it possible for other tycoons to translate their wealth into financial clout. Oil magnates such as Mellon and Rockefeller transformed themselves into bankers. John D. Rockefeller bought up control of the Chase National Bank; brother William Rockefeller took over the First National City Bank, today’s Citibank.
Meanwhile, American ethnic divisions gave birth to a separate, much riskier branch of the banking industry, originally known as “merchant banking” and now known as “investment banking”. German Jewish financiers such as August Belmont (née “Schönburg”), Joseph Seligman, Jacob Schiff, and Marcus Goldman gave birth to the great investment banking firms of Wall Street. These financiers were locked out the world of mainstream banking by Morgan and other WASPs, but they compensated for the impact of such discrimination by opening doors for investments into the American economy by European Jewish financiers such as the Rothschilds and the Warburgs. (Stephen Birmingham’s brilliant work Our Crowd is an outstanding history of the great German Jewish families of New York who played a major role in establishing the leading investment banking firms and inventing “Wall Street.”)
This free-wheeling, unregulated system of commercial and investment banking fostered the smooth flow of capital into the American economy, leading to an era of economic growth in the U.S. virtually without precedent in human history. However, the system was prone to repeated financial “panics”, with increasingly destructive effects on the American economy. In order to mitigate the impact of these frequent disruptions to the American financial system, Morgan began to assume the role of a de facto central bank. During the Panic of 1907, Morgan did many of the same things Secretary Paulson proposed doing to deal with the current crisis. Morgan’s efforts proved to be extremely effective, mitigating significantly the economic impact of the 1907 financial crisis.
Morgan’s death in 1913 made it clear that something had to be done to bring some order to the American banking system. As a result, Congress created the Federal Reserve system.
While we often think of the Federal Reserve as the American central bank, it really isn’t one in the sense that central banks exist in most countries of the world, or in the sense of the Bank of the United States as it existed before Jackson did it in. The Federal Reserve has virtually no regulatory authority or capability with respect to the banking system as a whole. The Federal Reserve’s job is to regulate the size of the money supply, by setting the discount rate at which member banks borrow money and by buying or selling government bonds in order to either inject or withdraw funds from the banking system. What the member banks do with the money is, for the most part, not something that the Federal Reserve has any control over.
The minimally-regulated American banking system again helped to spur massive economic growth during the 1920s, as the historic distinctions between commercial and investment banking virtually disappeared and the large amounts of funds available to commercial banks flowed into highly-risky new investment ventures. As a result, the stock market soared to new heights. Also as a result, when the inevitable fall came, as it did in 1929, it was more catastrophic for the economy as a whole than any of the prior panics that had frequently rocked the American financial system.
One of the first pieces of legislation enacted during the New Deal was the Glass-Steagall Act of 1933. The principal author of the law, Senator Carter Glass of Virginia, was an extremely conservative legislator, and he had no desire to overturn the fundamentals of the American financial system. The law responded to the financial crisis not by creating a real central bank or by establishing a comprehensive regulatory scheme over all aspects of the financial industry, but rather, by creating a wall of separation between commercial banking and investment banking. In other words, the Glass-Steagall Act codified into law the separation between commercial and investment banking that had long existed in the American financial system. Commercial banking would enjoy the benefit of insured deposits through the creation of the Federal Deposit Insurance Corporation, but at the same time, commercial banks would be sharply restricted in the kinds of investments they could make. Specifically, commercial banks would be barred from making investments in equity.
The wall of separation created by the Glass-Steagall Act left the highly profitable equity markets as the exclusive preserve of investment banking firms. The Securities Act of 1933 and the Securities Exchange Act of 1934 imposed new disclosure requirements on equity markets, but in many ways, the business of investment banking continued to be highly unregulated and very risky. And for the firms that managed to succeed in the risky business of investment banking, the business was extraordinarily profitable.
The end of World War II and the subsequent Bretton Woods agreements left the United States as the world’s economic superpower. American financial institutions – both commercial banks and investment banks – prospered. By the 1970s, however, the Bretton Woods regime had broken down and capitalist globalization was on the march. By the 1980s, European and Japanese financial institutions had become dominant and few American banks made it into the lists of the world’s largest financial institutions.
The Glass-Steagall Act became a major target of lobbying by American commercial banks. The exclusion of American commercial banks from the highly profitable business of investment banking, an exclusion that did not apply to non-American financial institutions, was portrayed as a major drag on the competitiveness of American banks.
An attempt to make an end-run around the restrictions of the Glass-Steagall Act was made during the 1980s through the creation of equity-like debt instruments colloquially known as “junk bonds.” This experiment resulted in the savings and loan debacle and a consequent bloodbath for federal insurance, accompanied by the financial crisis of the late 1980s and the recession of the early 1990s.
Lobbying against Glass-Steagall by the commercial banks continued during the 1990s, and it began to get real traction when the Republicans gained control of Congress in 1994. The Gramm-Leach-Bliley Act of 1999 finally repealed almost all of what was left of Glass-Steagall.
What seems to have been forgotten when Gramm-Leach-Bliley was enacted was the fact that at its core, America continued to have the same minimally-regulated financial system that resulted from Jackson’s abolition of the Bank of the United States in 1833. Without Glass-Steagall to stop the spillover of the risky business of investment banking into commercial banking, there was little regulatory framework in place to ensure the stability of the American financial system. Not surprisingly, the financial activities of the past decade bear remarkable similarities to the pre-Glass-Steagall era of the 1920s. The commercial banks would move aggressively into investment banking. More importantly, new institutions that would be largely immune from the regulatory jurisdiction of the securities laws, hedge funds, and new financial instruments also largely outside of the jurisdiction of the securities laws, derivatives, came to play dominant roles in the financial industry. As a result, again, when the inevitable collapse came it caused a massive impact on the American economy. And because we now have a truly globalized economy, the effects of the collapse have been felt in every corner of the globe.
Where do we go from here? It seems clear to me that the American tradition of a minimally-regulated financial industry cannot be sustained. On the other hand, there is some legitimacy to the criticism of over-regulation in many European countries such as Germany. The free flow of capital is more important than ever in the era of globalization. The nascent capitalist boom in countries such as China, India, Brazil, Russia, etc., must be sustained in the interest of global economic and political stability. Overreaction in regulating the financial industry could have very harmful effects in choking off economic growth in these emerging economies.
My view is that this is a time for synthesis. I would, of course, like to see the establishment of a new Bretton Woods regime for the 21st Century. However, this should not lead to the creation of some new global central bank to impose an extensive regulatory scheme on all of the financial institutions of the world. Rather, I would foresee the new global regime as imposing certain minimal regulatory standards that the major nations of the world would impose on their financial institutions. The era of unregulated Jacksonian banking should end. However, it also seems that the world could learn something from the American experience under the Glass-Steagall act. Different levels of regulation may be appropriate for different types of financial activities. Risky forms of investment should not be discouraged by overreaction and over-regulation, but on the other hand, the inevitable losses resulting from such speculative investment activities should have limited ramifications, so as to avoid the kinds of massive, global financial collapses we have seen in 1929 and 2008.
The real bottom line is that America can no longer be Madagascar. The rest of the world can learn a lot from the unique American evolutionary history. But neither America nor the rest of the world can afford to have America continue to be the global financial “maverick”, maintaining the Jacksonian model of an unregulated financial industry whose inevitable failures rock the foundations of the world’s economy. In other words, it’s time to re-do the election of 1832.
Sunday, September 21, 2008
Two things have caused me to think about the great damage that has been caused by the belief that there is such a thing as “human nature”, and that this nature is inescapably violent. First, I have recently read Robert Kagan’s new book, The Return of History and The End of Dreams (it’s only a little over 100 pages long, so it’s really more like an essay than an actual book, but nevertheless, Kagan somehow got somebody to publish it as a stand-alone book). Second, I recently attended a fortieth anniversary special screening and panel discussion of Stanley Kubrick’s masterpiece, 2001 A Space Odyssey, a work of art that I admired greatly when I first saw it as a radical-wannabe teenager during the peak of the counterculture in 1968, but which now fills me with great misgivings when viewed through the eyes of a middle-aged liberal.
Friday, August 29, 2008
However, I'd also like to step back a moment and acknowledge a great American who in many ways made Senator Obama's triumph possible. He has been one of my heroes since I rang something like ten thousand doorbells for him thirty-six years ago: George McGovern.
Most people think of George McGovern only as the failed Presidential candidate of 1972, the ultimate liberal loser. He was so much more than that. Like Obama he was a powerful and courageous orator. He dared to stand up on the Senate floor and proclaim, "This chamber reeks of blood!" because of its support for the Vietnam War. He was a genuine war hero who flew numerous missions over Europe during World War II - but rarely mentioned the fact to further his political career. He ran an honest and honorable campaign, and the memories of my work in that campaign will always remain a constant source of hope and inspiration for me. And until this year, he was the only Presidential candidate of the Democratic Party who put forward an unabashedly progressive agenda - Obama's clarion call for radical progressive tax reform could have come straight out of the McGovern platform.
However, George McGovern's most lasting legacy was the work of the McGovern Commission, which completely revised the rules of the Democratic Party and brought about what may be one of the most sweeping, and certainly most under-appreciated, changes in the way American democracy works. That is George McGovern's contribution that made last night possible.
Much of the anger of the 1968 Democratic convention was process driven. Few remember, and many young people do not even know, that most of the delegates at the 1968 convention were not selected through primaries or caucuses. Most delegates were selected by the state committees of the Democratic Party, which were, for all intents and purposes, "smoke-filled rooms." What enraged liberal activists in 1968 was not merely the fact that the Democratic Party had rejected the antiwar movement, it was the fact that it had rejected democracy. In primary after primary (in the relatively few states that actually had binding primary elections), the voters chose the antiwar candidates, Kennedy and McCarthy. It seems astounding today, but Humphrey did not win a single primary. Yet, because of the backing he received from LBJ and other power brokers within the party, Humphrey was the inevitable nominee. That fact, even more than the substantive issues that were at stake, was what drove activists to the streets of Chicago.
In the wake of the disastrous 1968 convention and the defeat of the Democratic Party, George McGovern chaired a Commission to draft new rules for the procedures for the selection of delegates. Most party insiders would have favored cosmetic changes that left the fundamentals of the old system intact. That was not George McGovern's way. The McGovern Commission drafted new rules that required that every delegate be selected by means of some form of democratic electoral process, either a primary or a caucus. "Winner take all" primaries were abolished. The McGovern Commission rules required that the make-up of the convention that would choose the Presidential nominee of the Democratic Party represent the will of the voters, not the party bosses.
McGovern paid a steep price for these reforms. In 1972, McGovern himself was the first nominee selected through this newly-mandated democratic process. This did not sit well with some of the powers-that-be. A particularly loathsome organization called "Democrats for Nixon" came into being. It was not just McGovern's opposition to the Vietnam War and his espousal of a strong progressive agenda that turned the bosses against McGovern. It was the fact that they didn't select him and couldn't control him.
I believe that in time scholars of American political history will recognize the reforms of the McGovern Commission as one of the great milestones in the development of American democracy. It has taken the scope of our democracy to a whole new level. Combined with the growth of the internet that has created the potential for broad-based fund raising, first explored in the Dean campaign in 2004 and developed more dramatically through the Obama campaign this year, the process opens the door to change agents who want to upset the status quo and move the party in a different direction. In many ways, it is this process that has supplanted the need for third parties. If we don't like the direction in which the Democratic Party is headed, we have the power to change it.
Barack Obama stood on many shoulders when he accepted the Democratic Party's nomination last night. Among them were the strong shoulders of a prairie populist, George McGovern.
Wednesday, August 20, 2008
In wandering around the internet, I came across some stories about the very shady history of the family of John McCain's wife, Cindy Hensley McCain. In fact, as soon as I saw the stories, the name "Hensley" rang a bell with me, being pretty familiar with the annals of major white collar crime in America. I had just never made the connection to McCain's wife.
The stories raised some very pointed questions about the sources of the Hensley family wealth, a family fortune that has made John McCain a successful politician and one of the wealthiest members of Congress. Specifically, these questions relate to the criminal history of various members of the Hensley family, including Cindy McCain's father, Jim Hensley, and the alleged connections the family has had to organized crime. These questions are certainly worthy of scrutiny, and hopefully, they will find their way out of the blogosphere and into the mainstream media.
At the outset, I would like to point out one of the shortcomings of some of these stories as they appear on the internet. The stories often appear in highly unreliable right-wing, anti-Semitic and racist websites. Indeed, much of the information on the Web relating to the criminal connections of the Hensley family comes from right-wing sources (including Jerome Corsi) who have long-standing vendettas against McCain. Unfortunately, these tainted sources may have caused many people in the media to shy away from the story, assuming that it is merely the lunatic ravings of McCain's right-wing enemies. But the information is real, and it can be verified through numerous sources independent of the right-wing lunatic fringe.
A second problem with this story is, why is it relevant? Much of the information about the Hensley family's criminal past goes back many years, and one can legitimately ask what bearing this should have on McCain's current candidacy. I believe the story is relevant for several reasons.
First, the Hensley family wealth, and the political connections that went along with it, have been the key to McCain's success. The Hensley family history is well-known in Arizona. Even better known is the history of Kemper Marley, the principal benefactor of the Hensleys and a man who was, in possibly every sense of the word, the Godfather of the Arizona Republican Party. When John McCain married Cindy Hensley, starting his political career almost immediately after they got married, it is inconceivable that McCain could have been ignorant of the connections he was making.
In fact, when the controversy recently arose about McCain's inability to recall how many homes he and his wife own, he told Katie Couric on 60 Minutes that he had been "blessed" to have benefited from the wealth of the Hensley family. McCain also described his father-in-law Jim Hensley as a "role model" who had succeeded in business by fulfilling the American Dream. http://www.politico.com/news/stories/0808/12754.html McCain did not mention that Hensley was a convicted felon with ties to organized crime figures.
The unsavory Hensley history also links directly with some of the most distasteful aspects of McCain's own career. The Hensleys introduced McCain to Charles Keating, a long-standing friend of the Hensleys and a co-venturer in a shopping mall in which the Hensleys invested a great deal of money (approximately $400,000). Keating contributed heavily to McCain's campaigns and provided private jets for McCain's usage. McCain returned the favor.
Finally, the most egregious aspect of the story is the way this has all been covered up by the mainstream media. For that reason alone, the story of the Hensley family's criminal background is highly relevant to the current campaign.
A good place to start looking at this story is with the puff-piece cover story that Newsweek ran about Cindy McCain in its June 30, 2008 edition entitled "In Search of Cindy McCain." http://www.newsweek.com/id/142650 The full extent of what Newsweek reported about the history of the Hensley family wealth is as follows:
"Her [Cindy's] father, Jim Hensley, was one of the most prominent men in the state. A World War II bombardier, he was shot down over the English Channel. After the war, he and his wife, Marguerite, borrowed $10,000 to start a liquor business. Through the years, it grew to become one of the largest Anheuser-Busch distributorships in the country."
A reader of this story would view the Hensley success story as a sort of Mom and Pop operation that made good through old-fashioned hard work. The truth appears to be a good deal more complicated, and sordid. An article entitled "Haunted By Spirits", which appeared in the Phoenix New Times in February 2000, provides an excellent overview of the story. http://www.phoenixnewtimes.com/2000-02-17/news/haunted-by-spirits/1
In fact, the funding for the Hensley liquor distributorship did not come from a mere "loan"; it reputedly came from Kemper Marley. Marley is the key figure in the history of the Hensleys, and therefore McCain, and a towering figure in Arizona politics. Marley was also a known criminal who is widely believed to have had extensive connections to organized crime. Jim Hensley had worked for Marley going back to the 1920s, when Marley was the most powerful bootlegger in Arizona. After World War II, Hensley again went to work for Marley, who had by then started a major liquor distributorship, United Distributors, following the repeal of Prohibition.
In 1948, Jim Hensley and his brother, Eugene Hensley, were convicted in Arizona Federal Court of conspiracy to falsify the records of United Distributors. According to the testimony at trial, the Hensley brothers had created phony invoices to cover up unreported cash sales of liquor out of the business. Eugene Hensley was sentenced to one year in prison and Jim Hensley received a sentence of six months, which was later suspended. Marley was not charged, and neither Hensley testified.
Jim Hensley was again indicted for Federal liquor violations in 1953. This time Hensley, as well as Marley's company, were acquitted. A young Arizona lawyer named William Rehnquist was part of the defense team.
Jim Hensley started his Anheuser-Busch distributorship in Phoenix in 1955. Allegedly, Marley bestowed this business upon Hensley as a favor for having kept his mouth shut during the earlier criminal trials. According to AmericanMafia.com, Marley was closely connected with Peter Licavoli, Jr., a Detroit mobster who relocated his operation to Arizona in the 1940s and became known as the "Mafia Prince" of Arizona. http://www.americanmafia.com/Feature_Articles_219.html AmericanMafia.com, a non-political website containing the writings of well-known crime writers and former law enforcement people, describes the linkages among Hensley, Marley, and the Mafia:
"Take the recent example of Senator John McCain, Presidential candidate and Senator from Arizona. Very few people outside the world of organized crime realize that the father of the Senator's second wife is James W. Hensley. And who was James W. Hensley, you ask. He was an Arizona businessman who fell in with the wrong crowd a while back, and ended up taking the rap for a wheeler-dealer named Kemper Marley, Sr. over a liquor violation case back in 1948. Although Hensley was represented by the best defense Arizona cash could buy, the services of future Chief Justice of the United States Supreme Court, Justice William Rehnquist, he got slammed away for a whole year. But it all worked out. When Hensley strolled out of the joint, Marley bought his silence with a lucrative Phoenix-based Budweiser beer distributorship. So, who is this Kemper Marley Sr? To answer that you have to go back to a sweltering summer day in 1976 when Don Bolles, a reporter for the Arizona Republican Newspaper, stepped into his Datsun, put his foot on the peddle and was blown to bits. Parts of the reporter's body were found ten feet from the burning car. Bolles had been poking into Arizona's local and state governments and discovered a land fraud ring, influence peddling, and shady deals that appeared to lead to the very top of Arizona's power structure and to Senator Barry Goldwater's doorstep. If the purpose of murdering Bolles was to cover a series of crimes, it was a big mistake. An enraged news media descended on Arizona, determined to uncover the facts behind the Bolles killing. The investigation led to a Phoenix liquor magnate and one time Bookie named Kemper Marley Sr., who had ties to Arizona's resident Mafia Prince, Peter Licavoli. Marley was a major financial and political power in the state and wanted to take back his seat on the Arizona Racing Commission. He had already been appointed to the post in 1976 by the Governor, only to resign several days later when his ties to organized crime surfaced. The reporter who made the connections between the mob and Marley was Don Bolles."
Interestingly, when the Obama campaign began running ads criticizing McCain for his inability to recall how many homes he owned, McCain responded by running an ad attacking Obama for having purchased his family's one home in part by arranging for a loan from Antonin Rezko, whom the McCain campaign emphasized is a "convicted felon." McCain is the beneficiary of far greater financial largess derived from Jim Hensley, also a "convicted felon."
Notably, Hensley's criminal record did not prevent him from owning a liquor distributorship, at least not in the eyes of Arizona authorities. Hensley filed a false disclosure form in 1988 concealing his Federal conviction, but Arizona authorities took no action against Hensley.
The Budweiser distributorship was not the only business venture that the Hensleys entered into with Marley. In December 1952, Jim and Eugene Hensley purchased a controlling interest in Ruidoso Downs, a racetrack in Albuquerque. However, subsequent litigation revealed that a concealed owner of Ruidoso was Teak Baldwin, a well-known Arizona bookmaker and associate of Marley. According to the New Mexico State Police, the Hensleys and Baldwin were acting as fronts for Marley in the venture. Baldwin would later be convicted of tax evasion. In 1955, Jim Hensley sold his stake in Ruidoso to his brother Eugene.
In 1966, Eugene Hensley was convicted of Federal tax evasion for having skimmed large amounts of money out of Ruidoso to make improvements on his home in Scottsdale and to transfer funds to his family. (The cases of Hensley v. United States, 406 F.2d 481 (10th Cir. 1968) and Ruidoso Racing Association v. Commissioner of Internal Revenue, 476 F.2d 502 (10th Cir. 1973) are very well-known in the law of tax fraud). The United States Tax Court described the evidence of Hensley's fraud as "overwhelming." Eugene Hensley was sentenced to five years' imprisonment. Before reporting to prison, Hensley transfered ownership of Ruidoso to Newco Enterprises, which immediately entered into a long-term contract with Emprise Corporation. Emprise had a long history of problems with governmental authorities as a result of organized crime connections. Emprise reorganized and moved its operations to Arizona, with strong backing from Kemper Marley. Marley had contributed heavily to then Arizona Governor Raul Castro, and Castro appointed Marley to Arizona's racing commission in 1976.
Marley's dubious activities drew the attention of Don Bolles, an investigative reporter for the Arizona Republic. As a result of Bolles' revelations, Governor Castro removed Marley from the racing commission. In June 1976, Bolles was killed by a car bomb. The organization Investigative Reporters and Editors ("IRE") started the "Arizona Project" to probe the background of Bolles' murder. http://www.ire.org/history/arizona.html A tow-truck driver and dog track operator, John Charles Adamson, pleaded guilty to having planted the bomb that killed Bolles and testified against two others who had hired Adamson to commit the murder. Bolles' last words were, "Adamson, Emprise, Mafia." Adamson later testified that he was told by the man who paid him to plant the bomb that killed Bolles that Marley had wanted Bolles killed, as well as then Arizona Attorney General Bruce Babbitt, who was conducting an antitrust investigation of the Arizona liquor industry. Marley was never charged for the murder of Bolles.
In the wake of Bolles' murder, the subject of organized crime infiltration of Arizona businesses and politics became a matter of national attention. In March 1977, the Albuquerque Journal ran a major story about the Hensleys and their connections to organized crime, which was re-reported in the New Mexico Independent this past June. http://newmexicoindependent.com/view/the-politics-of-beer Time magazine ran a major story in March 1977 entitled "Putting the Heat on the Sunbelt Mafia" addressing Marley's alleged role in Bolles' murder. http://www.time.com/time/magazine/article/0,9171,914845-3,00.html
It is in this context that John McCain comes on the scene. McCain met Cindy Hensley in early 1979, he divorced and remarried in 1980, and after retiring from the Navy, McCain settled in Arizona and promptly went to work for the Hensley distributorship in a "public relations" capacity. The job gave McCain a handsome salary and a high profile in the state.
It is important to remember a few facts about McCain's personal background. McCain was a Navy brat, born in the Panama Canal Zone, who spent his entire life moving around military bases and never setting down roots. He had no personal connections to Arizona, or indeed, to anyplace else. If he was intent upon establishing a political career, it was essential that he establish strong connections with the local political establishment. It strains credulity to believe that McCain was unaware of the Hensley family history and the family's close connections to Marley, one of the most powerful men in the state.
In 1982, less than two years after marrying Cindy and going to work for Hensley Distributors, McCain ran for a seat in Congress. The seat in Arizona's First Congressional District was open because of the recent retirement of Republican Congressman John Rhodes. The Hensley family bought a house in the District in order to enable McCain to run. McCain won the election, angrily challenging "carpetbagger" allegations that were made against him by pointing to his status as a Prisoner of War in Vietnam.
In 1986, McCain took over the Senate seat long held by Barry Goldwater, another recipient of Marley's support. As noted, another Hensley family friend and business partner, Charles Keating, helped finance McCain's rise. The members of the Hensley family, including Cindy and her father, were also business partners with Keating in an Arizona shopping mall. The Hensley investment in that Keating venture was made through the same real estate partnership that purchased the home in Arizona's First Congressional District that launched McCain's political career.
McCain would later reach out to Federal regulators on Keating's behalf when Keating's massive savings and loan fraud began to unravel. McCain was officially chastised by the Senate for showing bad judgment in his dealings with Keating, although he escaped the more severe discipline meted out to other Senators. McCain adamantly refused to answer questions, however, about the Hensley family's business relationships with Keating, calling reporters from the Arizona Republic "idiots" and "liars" for having inquired about the Hensley transactions. Once again, McCain relied upon his background as a POW in Vietnam to deflect any questions challenging his integrity.
I think this is a story worth knowing about. It would be nice if somebody reported it.