Tuesday, May 20, 2014

We're doing it for consumers (not)

Last February, Comcast announced that it had agreed to acquire Time Warner Cable for a bit over $45 billion. The Comcast press release announcing the deal had the sub-head "Transaction Creates Multiple Pro-Consumer and Pro-Competitive Benefits, Including for Small and Medium-Sized Businesses." The press release had three discussions of the benefits that the merger would bring to consumers, and in subsequent Congressional hearings, both Comcast and Time Warner Cable executives have touted how their merger will benefit consumers.

Last Sunday, AT&T announced that it has agreed to acquire DirecTV for $49 billion. The joint AT&T/DIRECTV press release mentioned consumer benefits twelve times, including this quote from DIRECTV President and CEO Mike White: “This compelling and complementary combination will bring significant benefits to all consumers, shareholders and DIRECTV employees."

Earlier today, the National Association of Broadcasters, which represents the major broadcast networks, as well as radio and television station owners, issued its own press release questioning the consumer benefits of the AT&T/DirecTV deal, while emphasizing its own interest in looking out for consumers. NAB executive VP Dennis Wharton was quoted as saying “AT&T’s proposed merger with DirecTV demands a hard look in an increasingly consolidated broadband and pay television marketplace. It is hard to see how decreasing competitors in the pay TV marketplace – while increasing regulatory restraints on local TV stations – truly benefits consumers.”

Let's be clear: AT&T, Comcast, DIRECTV, the National Association of Broadcasters and Time Warner Cable couldn't give a damn about consumers. They're saying what they think they need to say in order to get the appropriate governmental agencies to approve or block the mergers. Let's look at what the parties really want or are afraid could happen:
  • Comcast wants Time Warner Cable's subscribers in order to increase its subscriber count to 30 million households, or about a third of all households in the U.S. that watch television. The merger will increase Comcast's revenues and profits dramatically, after years of little or no subscriber growth. It will also make it much riskier for broadcast and basic cable networks to threaten to black Comcast's channels out during retransmission negotiations, because losing Comcast's households would mean immediately losing a third of their viewers, and substantially more than that from major markets controlled by Comcast. That would directly impact ratings and force networks to make up the lost viewership to advertisers.
  • AT&T gets a national footprint by acquiring DIRECTV. It will be able to sell TV service, and to bundle mobile and TV service, anywhere in the U.S. It will be able to sell DIRECTV out of every AT&T mobile retail store. The merged company will have roughly 26 million subscribers--second only to the merged Comcast/Time Warner Cable. That will give AT&T the same leverage in retransmission negotiations that Comcast will have. AT&T also gets access to DIRECTV's unique programming, including NFL Sunday Ticket, which generates $300 of revenue per subscribing household each year.
  • The National Association of Broadcasters fears its members' loss of leverage in retransmission negotiations as much as Comcast and AT&T are looking forward to it. Instead of negotiating with ten big cable operators, two big satellite providers and two big IPTV providers (AT&T and Verizon,) broadcasters' negotiating partners are going to be Comcast, AT&T and everyone else. Broadcasters are afraid that Comcast and AT&T will squelch their ability to raise retransmission fees, and may even be able to lower them.
  • Smaller cable operators (represented by the American Cable Association) are concerned that if the broadcast and basic cable networks can't get the money they're looking for from Comcast and AT&T, they'll try to get it from the smaller cable operators, which have far less negotiating leverage.
None of this has anything to do with improving service or lowering costs for consumers. As Bloomberg Television pointed out yesterday, Comcast and AT&T could do something that would be of great benefit to consumers: For far less than the $45 to $49 billion that each merger will cost, they could dramatically increase consumers' Internet speeds to 1 Gigabit per second. That would give customers near-instantaneous access to Internet content and services. However, Comcast and AT&T are only planning to offer 1 Gigabit service in those markets where Google Fiber either already offers it or plans to offer it in the future.

The Justice Department: Your bank balance determines its prosecution strategy

Yesterday, the U.S. Justice Department announced that it had settled a criminal case against Swiss bank Credit Suisse for helping U.S. taxpayers to evade taxes by transferring funds to overseas locations. Credit Suisse agreed to plead guilty to the charges and paid $2.6 billion, in the form of $1.8 billion to the U.S. government, $715 million to the New York Department of Financial Services and $100 million to the Federal Reserve. Only $670 million of the $2.6 billion went to the IRS for compensation of actual lost tax revenues. A few Credit Suisse employees will be dismissed or reassigned, but no one will spend a day in jail.

The settlement, as are most settlements of this type, was announced at a self-congratulatory press conference led by Attorney General Eric Holder. Attorney General Holder said “This case shows that no financial institution, no matter its size or global reach, is above the law.” He also said “a company’s profitability or market share can never and will never be used as a shield from prosecution or penalty. And this action should put that misguided notion definitively to rest.” Anyone who’s followed the Justice Department’s actions since the financial collapse of 2008 knows just how untrue--in fact, how hilarious--that statement is.

If the target of a Justice Department investigation has vast financial assets, the Justice Department offers or accepts a settlement that involves payment of money to the U.S. Government in return for dismissal of all outstanding charges. The vast majority of the time, the target doesn’t need to plead guilty or take responsibility for anything. Even if the Department does manage to get a guilty plea, as in yesterday’s deal with Credit Suisse, no one within the company will go to jail. (In the Credit Suisse case, the Government prosecuted not to recover any of the trillions of dollars lost by individuals due to financial manipulation and malfeasance leading up to the Great Recession. It prosecuted to recover a few hundred million dollars of lost Federal taxes.)

On the other hand, if the Justice Department decides to go after someone without vast financial resources, or if it has to defend its own actions, its tactics are dramatically more aggressive. In fact, after decades of fighting organized crime, the Justice Department seems to have adopted organized crime’s tactics. It’s gotten to the point where it’s almost impossible to determine who the “good guys” are, and a scorecard doesn’t help.

If the Justice Department’s target is an individual without large financial assets, it uses intimidation in the form of threats of prosecution with trumped-up charges and the potential of decades of prison to get the subject to plead guilty to a reduced set of charges. It does that even (or especially) if it knows that it’s unlikely to get a conviction if the case goes to trial. A good example is Aaron Swartz, who downloaded a huge cache of academic journal articles, most of which had been written with taxpayer dollars and should have already been in the public domain. However, the Justice Department charged Swartz with two counts of wire fraud and 11 violations of the Computer Fraud and Abuse Act. The charges came with a maximum of a $1 million fine and 23 years in prison, which the U.S. Attorney told Swartz’s attorney that she intended to ask for in court. After two years of government harassment and two days after a plea bargain offered by his lawyer was rejected by the U.S. Attorney, Aaron Swartz committed suicide. Rather than discipline or dismiss the U.S. Attorney who refused the plea bargain, Attorney General Holder commended her.

If the target might be helpful in testifying against a bigger target, the Justice Department uses the same tactics, often stretching out the case for years in order to destroy the reputation of the target, eventually dropping the case before going to trial. The reputation and business of the target cannot be reestablished with an innocent verdict, so the individual or business is destroyed. Last week, Bloomberg reported on three previously unknown philanthropists who have created a $9.7 billion trust that’s bigger than the Carnegie and Rockefeller Foundations combined and is bigger than all of them except the Gates, Ford and Getty foundations. The three philanthropists were once part of a company called Princeton-Newport Partners, the world’s first quantitative hedge fund. Four Princeton-Newport managers were charged with racketeering and tax fraud (the three philanthropists were never charged with anything.) The Justice Department’s goal was to get the Princeton-Newport managers to testify against Michael Milkin. There’s no evidence that the Justice Department could have won a conviction against the Princeton-Newport employees if the case had gone to trial. The Justice Department eventually dropped all charges, but the reputation of Princeton-Newport was destroyed and the company collapsed.

If the Justice Department itself or the U.S. Government is the target of a civil or criminal case, it actively withholds evidence and lies to the court. A good example is the ACLU’s case last year in front of the U.S. Supreme Court to have the FISA Amendments Act ruled unconstitutional. The Supreme Court never ruled on the constitutional issues, instead ruling that the ACLU and its plaintiffs didn’t have standing to pursue the case—they weren’t affected by the Government’s actions because the Government wasn’t surveilling them. The Guardian reports that the Supreme Court came to that conclusion because the Justice Department told it “1) that the NSA would only get the content of Americans' communications without a warrant when they are targeting a foreigner abroad for surveillance, and 2) that the Justice Department would notify criminal defendants who have been spied on under the FISA Amendments Act, so there exists some way to challenge the law in court.” Both of these statements were outright lies.

In the case of #1 above, one of Edward Snowden’s revelations was that the NSA engages in what the agency calls “about” surveillance, in which it captures an enormous number (trillions) of emails and text messages between anyone in the U.S. and anyone outside the country, whether or not either party is in any way under investigation. Thus, the NSA got the content of Americans’ communications without a warrant AND without a targeted foreign party. In the second case, last July, the Justice Department admitted “that the government hadn't been notifying any defendants they were being charged based on NSA surveillance, making it actually impossible for anyone to prove they had standing to challenge the FISA Amendments Act as unconstitutional.” In most cases, the Justice Department acknowledges and alerts the court in question when it has given false statements or presented false evidence, but in this case, the Justice Department has refused to do so.

The Guardian explains what Attorney General Holder’s Justice Department has instead done, which is to deny its behavior and confuse the issue:
” The government's response, instead, has been to explain why it doesn't think these statements are lies. In a letter to Senators Ron Wyden and Mark Udall that only surfaced this week, the government made the incredible argument that the "about" surveillance was classified at the time of the case, so it was under no obligation to tell the Supreme Court about it. And the Justice Department completely sidestepped the question of whether it lied about notifying defendants, basically by saying that it started to do so after the case, and so this was somehow no longer an issue.”
In the FISA Amendments case, by any measure, the Justice Department should have at least been disciplined by the Court for deliberately lying, but nothing is going to happen. If the Justice Department can lie to the Supreme Court with impunity, it can lie to Congress, targets of prosecution and the American people with equal impunity. In fact, after looking at these cases and many others, it’s difficult to distinguish between the Justice Department’s actions and what it accuses its targets of.

The Justice Department has played a critical role for decades in civil rights, prosecution of organized crime and political corruption. It’s an essential part of our legal system, and I’m the last person who would argue that we don’t need it. However, we need a Justice Department that’s worthy of the people of the United States, and today, we don’t have that.