Facebook Hearings Will Miss the Point, Just Like the JPMorgan Chase Hearings

By Pam Martens and Russ Martens: April 9, 2018

Wall Street Street SignFacebook’s CEO, Mark Zuckerberg, will testify before a joint session of the Senate Judiciary Committee and Senate Commerce, Science and Transportation Committee tomorrow afternoon. He’ll head to the Hill again on Wednesday morning to testify before the House Energy and Commerce Committee. Zuckerberg’s testimony comes as a result of the stunning testimony that Cambridge Analytica whistleblower, Christopher Wylie, gave to the British Parliament on March 27 of this year on how tens of millions of Facebook users had their private information obtained without their permission by Cambridge Analytica, a company deeply involved in the presidential campaign of Donald Trump.

Zuckerberg conceded in a public statement on April 4 that the privacy breach by Cambridge Analytica could have affected as many as 87 million Facebook users. Zuckerberg also acknowledged that “most” of its 2 billion worldwide users may have had their profiles scraped by outside actors.

The scandal and Congressional hearings are reminiscent of JPMorgan Chase’s scandal, infamously known as the London Whale. Both Facebook and JPMorgan Chase have grown rich on dubious business models.

In 2012 and 2013 the U.S. Senate and House held various hearings on the fact that JPMorgan Chase, America’s largest bank, had been gambling in high risk derivatives in London and sustained losses of at least $6.2 billion. Buried from public debate among all the complex details covered by these hearings was the central issue: JPMorgan Chase had a perverted business model that allowed it to gamble in high risk derivatives with its depositors’ money, that was backstopped by Federal insurance which the U.S. taxpayer ultimately guaranteed.

On March 14, 2013 the Senate’s Permanent Subcommittee on Investigations released this statement on the London Whale trades:

“The whale trades were conducted by traders in the London office of the Chief Investment Office (CIO) of JPMorgan Chase & Co., America’s biggest bank and largest derivatives dealer. The Subcommittee’s investigation has determined that, over the course of the first quarter of 2012, the CIO used its Synthetic Credit Portfolio (SCP) to engage in high risk derivatives trading; mismarked the trading book to hide losses; disregarded multiple indicators of increasing risk; manipulated risk models; dodged regulatory oversight; and misinformed investors, regulators, and the public about the nature of its risky derivatives trading. The Subcommittee’s investigation has exposed not only high risk activities and abuses at JPMorgan Chase, but also broader, systemic problems related to the valuation, risk analysis, disclosure, and oversight of synthetic credit derivatives.”

All of this was true but it wasn’t the central problem for the American people. The central problem was that JPMorgan Chase wasn’t using its own capital to make its wild bets. It was using its depositors’ money. And that crazy business model was only possible because Congress had succumbed to the massive lobbying and campaign spending by Wall Street and had repealed the Glass-Steagall Act. That act had protected the U.S. financial system by separating banks holding insured deposits from the gambling casinos of Wall Street from 1933 until the repeal in 1999. Just nine years after that repeal, Wall Street had collapsed in epic fashion, taking down the U.S. economy just as it had in 1929-1932 when there was no Glass-Steagall.

When Facebook became a publicly-traded company on May 18, 2012, the prospectus it filed with the Securities and Exchange Commission made clear that it was advertisers that Facebook needed to please in order to stay in business and grow as a company. The prospectus noted:

“The substantial majority of our revenue is currently generated from third parties advertising on Facebook. In 2009, 2010, and 2011, advertising accounted for 98%, 95%, and 85%, respectively, of our revenue. As is common in the industry, our advertisers typically do not have long-term advertising commitments with us. Many of our advertisers spend only a relatively small portion of their overall advertising budget with us. In addition, advertisers may view some of our products, such as sponsored stories and ads with social context, as experimental and unproven. Advertisers will not continue to do business with us, or they will reduce the prices they are willing to pay to advertise with us, if we do not deliver ads and other commercial content in an effective manner, or if they do not believe that their investment in advertising with us will generate a competitive return relative to other alternatives…”

Tim Cook, the CEO of Apple, recently told an MSNBC Town Hall that Facebook’s business model is to “monetize” its customer. The implication was clear: Facebook has been allowing third parties, including marketers, advertisers and political campaign operatives to harvest data on Facebook users because that’s where its revenue stream comes from. Facebook does not charge its users a fee to use the site. It’s safe to say, however, that most Facebook users did not understand that their profiles were the “product” that Facebook was actually selling to third parties.

Facebook’s original IPO prospectus also indicated that it foresaw the possibility that it might “adopt policies or procedures related to areas such as sharing or user data that are perceived negatively by our users or the general public.”

Six months before Facebook went public in 2012, the Federal Trade Commission had already made clear in a consent decree that Facebook was monetizing its customer. The complaint included these charges:

“In December 2009, Facebook changed its website so certain information that users may have designated as private – such as their Friends List – was made public. They didn’t warn users that this change was coming, or get their approval in advance.

“Facebook represented that third-party apps that users’ installed would have access only to user information that they needed to operate. In fact, the apps could access nearly all of users’ personal data – data the apps didn’t need.

“Facebook told users they could restrict sharing of data to limited audiences – for example with ‘Friends Only.’ In fact, selecting ‘Friends Only’ did not prevent their information from being shared with third-party applications their friends used.

“Facebook had a ‘Verified Apps’ program & claimed it certified the security of participating apps. It didn’t.

“Facebook promised users that it would not share their personal information with advertisers. It did.

“Facebook claimed that when users deactivated or deleted their accounts, their photos and videos would be inaccessible. But Facebook allowed access to the content, even after users had deactivated or deleted their accounts.

“Facebook claimed that it complied with the U.S.- EU Safe Harbor Framework that governs data transfer between the U.S. and the European Union. It didn’t.”

The lead underwriters of Facebook’s IPO were three powerful Wall Street firms: Morgan Stanley, JPMorgan Chase and Goldman Sachs. All three engage in the dubious business model of combining insured depository banking with speculative securities trading and investment banking. The public can’t really expect these firms to blow the whistle on a dangerous business model when their own business model is so suspect. As Senator Bernie Sanders repeatedly said during his primary campaign for the Presidency in 2016: “the business model of Wall Street is fraud.”

Despite Wall Street’s research scandal that played a key role in the dot.com bust of 2000, where Wall Street firms issued buy ratings on stocks to the public while calling the companies “crap” or “dogs” internally, Congress never removed this huge conflict. The major Wall Street firms continue to put out buy ratings on publicly traded companies which they also are allowed to trade in their own Dark Pools – effectively unregulated stock exchanges inside the bowels of Wall Street.

According to the latest data from FINRA (Wall Street’s self regulator), the same lead underwriters that brought Facebook public are trading millions of shares each month in Facebook in their respective Dark Pools.

Until America has a Congress that is accountable to the American people and not large campaign donors like Wall Street — until campaign finance reform becomes a reality — our personal data, the country’s natural resources, even the environment will be monetized by the crony capitalist business model that now rules America.

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