This is the third of a multipart series on the state of the economy and how we got here.

 Wall Street is dangerously similar to German New Wave movies. Movies by Werner Herzog, Rainer Werner Fassbinder, Margarethe von Trotta, Volker Schlöndorff, Wim Wenders–you know the genre. Their movies are difficult and dense. Mostly, they are horrid. I hate these movies, but have never forgotten one.

I make the comparison because Wall Street, like German New Wave cinema, has always featured heroes with impossible dreams or people with unique talents in obscure fields. And like German New Wave, the obsessiveness of Wall Street’s main characters has also always taken the place of plot. The plan of Wall Street’s hot shots has always been that there is no plan. People are on their own. God is absent. Truth is elastic. The important thing is to keep on pushing.

In the lives of these characters, whether from German New Wave or Wall Street, a lot is improvised. For both groups, life is lived in the theater of the ridiculous. In the Wall Street version, that materializes in statements such as “I am ridiculously rich” or “I am ridiculously lucky.” It’s generally the opposite for characters in German New Wave.

In German New Wave movies, chickens often stand in for people. It’s too painful to watch a German New Wave movie without a little existential comic relief every now and then, and the directors know it. There are long shots of chickens on the beach, buried up to their necks in sand, as the tide comes in. Shots of dancing chickens. Hypnotized chickens. Cannibalistic chickens. Dwarves throwing chickens. Chickens talking to themselves. Chickens jumping off of cliffs.

Lately, the chickens have come home to roost on Wall Street. And like German New Wave cinema, the stories coming out of Wall Street this year are touched by the ridiculous, but more fundamentally Wagnerian in scope, influenced by operatic themes. Themes like character, ambition, greed, scandal, disgrace, bankruptcy, ignominy, shame and even justice.

Yes, justice.

Bear Stearns Bust

On Thursday, June 19, the FBI made its first big bust since last summer’s subprime mess, the first big bust since the housing and credit crises that followed the subprime mess pushed our country into a recession.

Hooray for the FBI. They busted hundreds of housing developers, mortgage lenders and brokers, lawyers, real estate agents and appraisers across the country, while two hedge fund managers on Wall Street were arrested in a separate but related case. (Incidentally, those two guys were referred to, but not named, in our May 28 article, “Secrets and Lies,” about Bear Stearns.)

FBI director Robert Mueller was quick to congratulate himself. “This dragnet operation is an example of our unified commitment to address a significant crime problem,” he told reporters. “The FBI will continue to direct its investigative and analytic resources toward the mortgage fraud and corporate securities fraud that threaten our nation’s economy.”

Nice start, Bob.

The fact that the investigation is ongoing underscores that the problems on Wall Street are not isolated to even a few hundred bad apples.

“These arrests make it clear that the causes of our credit problems are very broad-based and can’t be put at the feet of any one player,” Mark Zandi of Moody’s said at the same press conference. “It makes it clear that everyone was involved to one degree or another–from lender to investment banker to hedge fund manager–all the way from the bottom to the top.”

You forgot to mention someone, Mr. Zandi. You too, director Mueller.

Prime brokers. The new masters of the universe.

Among all their colleagues on Wall Street, it is the prime brokers who dream the most impossible dreams and who have the most unique talents in the most obscure fields.

If Werner Herzog were to make a movie about Wall Street today, he would be looking into the face of the prime broker. I’m reading from a possible movie review: “The face of the prime broker has the quality of a dream–at once vivid, but vague; easy to touch, but beyond reach; at once scary like science fiction and ethereally lovely like a fantasy. It is a beautiful face, reflected in the eerie blue of a computer screen, but in the end, it is the last face you will see before the market crashes.”

So who are they, these prime brokers? These guys who print the new money in the shadow banking system? These guys who live for all that is unregulated and opaque?

First of all, they are not regular people.

“They are professional madmen,” said Warren Buffet in his famous 2005 speech to shareholders at Berkshire Hathaway.

Except for Warren Buffet, nobody spoke up. Since Buffet’s speech, billions and billions of dollars, perhaps a trillion, were stashed in offshore accounts, as Wall Street managed its own fortune. (It’s a myth that Wall Street manages the fortunes of its clients. It does not. It serves itself the cake. We’re lucky if a few crumbs fall off the plate.)

Let’s now break this silence, and with it the omerta of prime brokerage.

‘Unspoken Terror’

It all started innocently enough, generically enough.

In the beginning, through the 1980s and ’90s, prime brokers were the guys at big investment banks like UBS, Morgan Stanley, Merrill Lynch, Goldman Sachs, Bear Stearns, Lehman Brothers, etc., who supported the nascent hedge fund industry with basic services.

A hedge fund start-up–and there were thousands of them back in the ’80s and ’90s, as many as 8,000 at one time–usually bought a basic package from a prime broker. The core services in the package included global custody (clearing, custody and asset servicing; no problem, all plain vanilla); securities lending (especially for what’s called “naked short sales,” which is illegal); financing (facilitating the crazy extreme leverage at hedge funds, sometimes as high as 40-to-1); customized technology (providing hedge funds with reporting necessary to value positions and risk; this is where things started to get funky); and operational support (prime brokers became the hedge fund’s primary operations contact with all other members of the broker-dealer community, and oh, did this invite abuse).

It is easy to see how young hedge funds became so dependent on prime brokers. Prime brokers served as incubators for hedge fund hatchlings that were proliferating like so many baby chicks at a Tyson chicken farm.

In addition to all the above services, prime brokers also provided what is quaintly called “value-added” services in the hedge fund industry, including capital introduction (introductions to the prime broker’s institutional clients and other possible investors, a blatant conflict of interest but nobody in Congress cared); office space leasing and services (read: free or discounted office space, replete with staff and support–a bribe for business? you bet); risk management advisory services (prime brokers advising hedge funds on the very same junk bonds they secretly wanted to dump on them); and something ambiguously called “consulting services” (often focused on how hedge funds could circumvent established regulatory requirements, usually by domiciling operations beyond the jurisdiction of U.S. law).

It got worse after 2000.

Introduce swaps and derivatives into the mix. Yeah, baby. Things suddenly got really interesting. Preserving the integrity of the balance sheet at hedge funds got thrown out the window as swaps and derivatives grew, including the exponential growth of something called “synthetic positions.”

“Synthetic” means fake, bogus, fixed, fraudulent. It’s that simple. Add to synthetic positions the liquidity of the first years of our decade as Alan Greenspan brought interest rates down to almost nothing, and you get the picture. In one year alone, from 2005 to 2006, the market for credit default swaps, just one product, grew from $12.4 trillion to $26 trillion.

Most markets are a zero-sum game, meaning there are an equal number of winners and losers. For every dollar someone makes, someone else loses a dollar. Prime brokers changed all that. Because prime brokers never lost.

Prime brokers acting as the hedge fund industry’s only interface with the world (see “operational support,” above) were able to create a shadow banking system where the counterparties to any hedge fund’s trades were unknown, even to the hedge fund. Add to that opaqueness a lack of infrastructure where a lot of trades are unconfirmed or delayed, and there are the makings for greatest bank heist in history.

While the Federal Reserve Bank has since 1996 published reports on these obvious problems, it wasn’t until September 2005 that the Fed addressed what was termed the “unspoken terror” of settlement issues among prime brokers.

Funny that it took two more years before Congress noticed. All it took to get their attention were last summer’s subprime mess, the blow-up at Bear Stearns and a country plunged into a recession.

Shadow Masters

Dreamers and those with unique talents in obscure fields are the folks who built the shadow banking system. They are the prime brokers.

Like actors in a Werner Herzog movie, they inhabit a strange new world, one as big as the traditional banking system or bigger, but where there are no federally insured deposits and where shadow banks neither have nor want–or even need–access to short-term borrowing from the Fed or any other central bank during times of crisis. It’s a world where no risk is too great, where collateral isn’t necessary, where there are no capital requirements and where counterparties are never identified. Shadow banks are beyond the reach of law, are almost always found offshore and redefine the term “international crime organization.” Indeed, because shadow banks always make money, they would even profit from the collapse of the global financial system. They might even cause it to happen.

Prime brokers have been the new masters, no question about it. But their primacy may finally be threatened.

“This bright new financial system–for all its talented participants, for all its rich rewards–has failed the test of the market place,” said Paul Volker, former president of the Federal Reserve, during a speech I attended in April. “It adds up to a clarion call for reform.”

Two months later, at a press conference where I was also present, Timothy Geithner, president of the Federal Reserve Bank of New York, answered that call.

“The structure of the financial system changed radically during the boom, with dramatic growth outside the traditional banking system,” Geithner warned in his speech, adding that unregulated growth in opaque assets made the last crisis difficult to manage and could make a future crisis impossible to manage.

And two weeks before the FBI busted those two guys at Bear Stearns, U.S. Treasury Secretary Henry Paulson said the Federal Reserve should “be allowed to collect information from large complex financial institutions.” He said, “Regulators should have a clear path toward figuring out how to intervene in a crisis and how to close a failed brokerage firm.”

Sounds like Paulson is expecting more trouble. If this were a New Wave German film instead of the banal horror of real life, someone would figure out that it must be time to pull out the chickens.

The Russian River Empowerment Center occupies a simple, two-story house a block behind Guerneville’s Main Street. To reach it from the west corner, you have to step into the narrow roadway to avoid a puddle–inexplicable in the middle of a drought–and the neighbor’s red canoe.

The hand-painted green-and-white sign and the small reception desk by the front door signify that it isn’t a private residence anymore. Otherwise, it seems like a family home. Inside, depending upon the time of day, a couple of people might be sitting on sofas waiting for a class, somebody might be cleaning up the kitchen after lunch or perhaps a small group will be seated around the redwood table on the back deck, enjoying a quiet conversation.

In the middle of a mental healthcare landscape fraught with frustration, controversy and compromises that satisfy no one, the Empowerment Center is an oasis of serenity.

“Everyone who comes here says, ‘Oh, it’s so calm,'” agrees Jess Wolfe, one of three staff members who run the center.

Wolfe, like colleagues Mary Black and Deanne Rocchietti, is a current or former mental healthcare consumer. Wolfe is a child-abuse survivor who has healed herself through a combination of traditional and alternative therapies. Her position as program coordinator at the center, she says, suits her perfectly because she has a lot of hard-won expertise to share.

The center is open Tuesdays through Fridays, offering a full schedule of support groups, dance, writing and stress reduction workshops, potluck lunches and beach hikes. There are also little self-guided stations set up with materials and suggestions for drawing and painting, writing and deep-breathing exercises. But mostly it is a safe place to spend some time, prepare a snack or meal in the fully supplied kitchen and cut through the isolation that surrounds many people who live with mental illness.

“A lot of what we do here is about relationships,” says Wolfe, her face beaming with happiness. “I’ve been homeless. I’ve been on welfare. We can all offer each other a different perspective or a way out of the mess we’re in.”

One of the regular members, Russian River resident Leah Clark, agrees.

“It’s about changing life’s stories. We’ve had some real breakthroughs,” she says.

The operating premise at the center is that people with mental illness are more than just their condition. And the center’s goal is to help people live full, productive lives.

There are 55 regular members of the center with an average of about 12 participating each day. All of the activities are free to anybody who wants to participate, whether or not they have an official diagnosis of mental illness. There are monthly meetings and basic rules of conduct to ensure that everyone is safe.

At What Cost Health?

Of course, all of this comes at a cost, which is currently covered by a grant from the state Mental Health Services Act (MHSA), approved by voters in 2004 as Proposition 63.

The act, funded by a 1 percent tax on Californians earning more than $1 million annually, poured $3.5 million into Sonoma County mental health services during the 2006-2007 fiscal year. Statewide, the total is about $1.2 billion per year, more than originally anticipated.

That might seem like peanuts considering that Sonoma County budgeted $47 million last year for its mental health programs, but as state and federal budgets get tighter every year, it is still significant.

In its first phase, the MHSA has provided Sonoma County with money for two peer-operated wellness centers, outpatient treatment for 50 offenders with mental illness through the county’s Mental Health Court and additional services for children, teens, families, adults and seniors, homeless people and substance abusers. Under the act’s provisions, at least 50 percent of the money has to be spent on partnerships with nongovernmental agencies.  

In addition to the cash infusion, which cannot be diluted by budget deficits, the act also sets out other provisions that make it unique. The framers of Proposition 63 included a requirement that all of the programs funded with the money must be new. That means that counties can’t use the money to supplement existing standard programs, potentially opening the door to new ways of doing things.

The MHSA also provides money to fund a planning process for each phase, a process that is open to the public. The first chunk of the money is designated for services; the second phase for prevention and early intervention. Smaller portions of the money are designated for innovations, capital facilities and technology, education and training.

Beginning in 2004, the county held dozens of meetings to determine how to spend the services portion of the money. Currently, it is in the middle of planning sessions for the prevention and intervention phases.

“The hard part of this is that the community is going to have to identify priority groups and priority approaches,” says Mike Kennedy of the Sonoma County Mental Health Department. “The trick is, do you want to go a mile wide and 12 inches deep, or do you want to really focus?”

It’s a tough question when there are so many gaps in the county’s mental health services. One of the big holes already identified is the lack of intervention programs for youngsters who exhibit early signs of mental illness.

If a program were already in place, it’s possible that Sebastopol teen Jeremiah Chass might still be alive. His family might have had the resources to help him before he had a March 2007 episode of mental decompensation and was shot to death by sheriff’s officers in his own driveway.

With at least two other police killings of mental health patients in less than a year, the county is experiencing a mental health crisis of its own. Families of two of the victims have filed suit in federal court. Chass’ family is suing the Sonoma County Sheriff’s Department, and both the wife and mother of the late Richard De Santis, a bipolar man killed by police in September 2007, are suing the Santa Rosa Police Department.

Point Arena resident Valerie Barber, whose mentally ill son Jesse Hamilton was killed by Santa Rosa police in January, says that he had been released too soon from a halfway house into a group home with minimal supervision and was unable to take care of himself. Hamilton had stopped taking his medication and was allegedly wielding a knife when police shot him.

“[The halfway house staff] said he had graduated,” she explains. “They told me, ‘Why are you trying to hold him back?’ They belittled me for being concerned. They told me there wasn’t any more funding [for him] for that level of care. They don’t pay for ongoing care in a halfway home if you’re not sick enough to be in a hospital.”

Nowhere to Go

Sonoma County’s mental healthcare system made headlines recently over the closures of two acute psychiatric inpatient facilities. Last June, the county shut down Santa Rosa’s Psychiatric Emergency Services, known more familiarly as the Norton Center, saying it was losing $2 million to $3 million a year because the average daily population had dropped to less than half the facility’s capacity. And this February, Santa Rosa Memorial Hospital closed its psychiatric hospital on Fulton Road, claiming $22 million in losses.

That leaves the county with no inpatient care for people facing acute mental health problems. The county provides emergency care at Norton for 23 hours or up to three weeks in a six-bed halfway house. After that, it sends patients to Marin General in Greenbrae and two Seventh-Day Adventist-run hospitals in St. Helena and Vallejo.

To fix the problem, the county has initiated roundtable discussions with representatives from local hospitals. The two alternatives being considered are a 60- to 84-bed regional hospital at the Fulton Road facility, which would be run by a private company, Psychiatric Solutions, or a 16-bed hospital at an undetermined location, which would be shared by Kaiser Permanente and the county. Norton is too costly to retrofit, says Art Ewart, Sonoma County’s director of mental health.

Sonoma County isn’t alone in facing a broken and bleeding mental healthcare system, says Rosemary Milbrath, director for the National Association on Mental Illness Sonoma County, who estimates that California has lost 700 mental health beds in the last year. And, she adds, it is a nationwide trend.

Part of the loss can be attributed to new, noncustodial ways of treating those with mental illness, but a lot of it comes down to lack of money. Ewart says that the state’s mental health budget is underfunded by 50 percent. Locally, that means one worker is generally responsible for 30 to 40 clients. Ideally, Ewart says, it should be a 10-to-1 caseload.

“The people we serve in the community are not getting sufficient treatment,” he says.

According to retired county mental health worker Marty Gerber, mental health services in California were at their peak in 1982. Since then, it’s all been downhill, with clients and overworked clinicians paying the price.

Mobile Medicine

One program falling victim to funding loss was a mobile crisis unit that teamed mental health workers with police officers. Sonoma County tried it for six months a decade ago but dropped it when the money ran out.

“It’s difficult to prove a program like that works,” Ewart says, who was there when it happened.

But mobile units seem to be doing their job in San Mateo County and in Berkeley, where such a program has been in place since the 1970s.

Officer Andrew Frankel of the Berkeley Police Department agrees that it isn’t possible to prove for certain that the city’s Mobile Crisis Response Unit makes a difference, but he says his fellow officers consider the mental health workers “valued members of the team.”

“We work hand in hand,” he says. “They come to the roll calls at the change of shift twice a day [when officers debrief their shifts]. They are a great resource for us. We can call for help anytime there is erratic behavior from a suspect. It is nice to get on the radio and have a subject-matter expert show up at the scene.”

While there may be no way to determine if the Mobile Crisis Response Unit has been a factor, Frankel says that there haven’t been any police-involved killings in Berkeley in the eight years he has been on the force.

“It’s become part of the way officers act with cases,” says therapist and mobile crisis unit member David Wee.

The unit is on call from 11am to 11pm every day. Members carry police radios so they can either do joint response to calls with the police or be available for consultation and backup.

Police can also use the radios to keep tabs on mental health workers when they respond to a situation on their own. According to Wee, emergency dispatch refers about half of the incoming calls for help directly to the unit. But when there is the threat of violence, police show up first and the mental health workers “provide the response once the situation is safe.”

Police and Mobile Crisis Response Unit members can also work together to help people with mental health problems before they reach a crisis.

This kind of close cooperation between law enforcement and mental health workers is also the key to the success of the San Mateo County Mental Health Assessment and Referral Team (SMART) in the South Bay.

The team is made up of specially trained paramedics who can assess a person with apparent mental health problems, place her on a 72-hour hold if necessary and escort her to the county’s inpatient psychiatric facility.

“Basically how it works,” says Teri Wilcox, clinical services manager for SMART, “is somebody calls 911, the operator calls a police officer to respond. The officer assesses the situation and calls for a SMART paramedic if it is a code 2 [nonviolent] situation. The SMART paramedic arrives, talks with the person, consults with a mental health clinician or psychiatrist by phone, and then recommends what action should be taken. If the paramedic decides to take the person to a hospital or other facility, he or she provides the transportation in a special vehicle.”

The Assessment and Referral Team is on duty 24/7, and there are always mental health clinicians on call for consultation.

The county’s mental health department also provides crisis-intervention training for officers so that they can better respond to suspects with mental health problems.

“One of the main things about the training is to help the officer understand what’s going on with the patient. It teaches the officer to react with words and compassion,” Wilcox says.

In addition to working together in the field, officers, mental health clinicians and other agencies also meet monthly to “discuss difficult cases” and find solutions.

“It really helps when law enforcement and other groups work together to help people turn their lives around,” Wilcox says.

Several officers in the Santa Rosa Police Department and the Sonoma County Sheriff’s Department, and one from Healdsburg, recently participated in the same training. Wilcox says Mike Kennedy of the Sonoma County Mental Health Department took the training in San Mateo and then brought it back.

The county paid for the training with MHSA money, according to Kennedy, who plans on continuing the three-day training sessions with other police departments in the county.

“If over the next couple of years we can train 300 officers, it would make a big difference,” he says.

Taxpayer, Tax Thyself

Officers schooled in responding to people with mental illness would fill some of the gaping holes in a structure that is in serious need of repair. But the mental healthcare system still needs more money, and retired county mental health worker Marty Gerber, who worked within the system for 20 years, has a plan. Sonoma County residents should tax themselves for mental health services like they do for open space acquisition.

“I believe a one-quarter of 1 percent sales tax will take care of many, if not all, of our mental health services financial woes,” he wrote in a letter to Sonoma County supervisors. “Terminating or privatizing services will not solve our problems.”

Gerber believes voters would be willing to pay if supporters mounted a serious campaign, door-to-door and at shopping malls. Family members of the mental health patients killed by police would put a human face on the campaign by endorsing it.

Meanwhile, at least one supervisor is trying to drum up cash in another way. Sonoma Valley supervisor Valerie Brown, who is also a licensed therapist, went to Washington, D.C., in March with a group from the National Association of Counties to lobby for more mental health dollars.

She said the U.S. Department of Justice “isn’t aware of the sheer number” of mentally ill inmates and the importance of more and better mental health services to keep them out of jail.” So she gave them the facts and the figures. 

“Our hope is the federal government will see what is going on and will provide money to treat the mentally ill outside the jails,” she says, still not knowing if her efforts paid off in cash.

Through it all–the budget shortages and the screaming headlines–mental healthcare providers have organized on their own to make the system better.

Stella Rijeka is the coordinator for the four-year-old Mental Health Coalition of Sonoma County. Her regular job is in the community benefits department of Santa Rosa Memorial Hospital, and the time she spends with the mostly volunteer coalition is her boss’ in-kind contribution to the effort.

Rijeka says that the coalition has been organizing a website and a social marketing campaign in the hopes of making mental health services more accessible to the public and removing the stigma that mental illness carries in the community. The group has created binders with a list of mental healthcare resources for distribution to hospitals, clinics and other healthcare providers. The list will be posted on the coalition’s website this summer.

The coalition is also organizing a series of public forums in the fall to bring together everybody in the county involved in mental healthcare to tie together the loose and fraying ends of what it calls “the continuum of care.”

“We want to shift people’s consciousness,” Rijeka says. “When we say mental health, we mean health, not illness.”

BOXES

 Warning Signs

The American Psychiatric Association lists these as signs that adults may be experiencing the onset of mental illness: