Published CommPro.biz 2014.04.24

Another Wall Street Scam

Do you remember way back in the 1990s and early 2000s, when the monster banks came up with new investment deals that bundled mortgages together, stamped AAA by compliant rating agencies and sold to the suckers, remember? Then remember what happened next? It turned out that the bundles were really a bunch of crappy AAA. The banks had tricked unsophisticated wannabe home buyers into signing mortgages they couldn’t afford.

We’re sure you remember what happened next; the world economy collapsed. In America we bailed out the monster banks to avoid a depression. But, we neglected to put conditions on the bailouts. So the big banks went right back to gambling with our money instead of helping small businesses where the jobs are created. The fat-cat banks and their bonus hungry executives are fine, while folks who lost their jobs and the rest of us are still suffering.

Nothing like that could happen these days because we’ve made it so hard to get a mortgage that even people who can afford to buy a home have a tough time. The monster banks are doing great with the interest free bucks the Fed has been feeding them, but the number of high-stakes gambling deals –oops when banks gamble the law of the land calls it “investing”– is so limited. They got into commodities, speculating on nearly everything we use. Who cares if they were raising the prices we pay at the pump or the grocery check out? But there wasn’t enough quick and easy money. They are working their way out of that game.

What now to roll the dice on? Enter the private equity folks. Guess what they’ve been doing? They’ve been buying up hundreds of thousands of those homes that ended up on the market dirt cheap after the crash. They are renting them, often to the same people who lost them to foreclosure. But the hefty rents they are collecting are not enough, and too many of the houses are empty. What to do?

So they got together with their buddies in the monster banks and came up with a new investment vehicle, Rental Backed Securities (RBS). Same as the mortgage deals but this time rental deals. Just how long will it be before the empty houses they can’t rent fill up with people who can’t afford them? However, the package of homes in the RBS will look good; every home rented.

After the RBS packages have been sold to the suckers, how long will it be before the renters fall behind in their rent and the whole house of cards collapses? If this sounds familiar, it is.  It’s the whole 2007-2008 nightmare all over again. The crappy toxic investment packages collapse, we have to bailout the banks again, they come out great and we suffer. Congress? Not a chance they are too deep in campaign contributions from the banks. We’ll be out in the cold, again.  

Published in CommPRO.biz 2014.01.16

The Earnings Culture

Public companies are driven by the need to show earnings. The path they follow to that end determines their corporate culture. Horace Greeley, the dominant editor and publisher of the 19^th century, commented, “The darkest hour in any man's life is when he sits down to plan how to get money without earning it.” Problem is, some corporate leaders see any action to increase “earnings” as fully justified. Too many CEOs seek “earnings” by any means. They look at the fines and legal penalties incurred as -“oops”- no more than the cost of doing business.

Investors too often are not concerned how “earnings” are achieved. While the ethical business model is the proven best source of high earnings, some see the concern for employees, communities, vendors, and the environment that model requires as taking money out of their pocket. Some even see a focus on treating customers fair and square as a missed opportunity to increase profits.

We saw this in the run up to the current recession. The monster banks pushed the pipeline to produce more and more mortgages, ignore the details, don’t fret about income verification. Once in hand they threw together these shaky mortgages (“Crap” was the term they used), put a few good ones on top of the pile and sent them off to the rating agencies. The bankers were not hesitant to point out that as paying clients, the rating better be AAA.

These bundles of sure-to-fail “crap” were sold as if the triple A ratings were real. Adding insult to injury these banks placed bets that the “crap” they created and sold would fail. They bet against their own customers. They made money coming and going; money they called “earnings.” The shareholders loved it. J.P. Morgan Chase, Goldman Sachs and a handful of monster banks deliberately created financial products designed to fail.

When they were caught off guard by the collapse of their whole scheme, they turned to the taxpayers for help. While necessary, the bailout was designed by Bush Secretary of the Treasury, Hank Paulson, former CEO of a monster bank. He gave his mates the needed money but failed to attach any conditions. We the taxpayers continue to provide interest free funds to these banks believing that they will lend it to small businesses and create jobs.

Wrong! They are back to gambling with our money, this time boosting prices on basic commodities that folks strapped for cash have enough trouble paying for. As long as the banks’ “earnings” look good, the stock market booms. We are hard pressed to see these “earnings” passing the standard Horace Greeley set. The bank CEOs’ plans are obviously designed to get money without earning it. They set the culture and drove it down through the ranks. The people paid mightily these last five years for the sins of these arrogant banksters. They, however, are above the law. At least the Attorney General of the United States says they are.

Published in CommPRO.biz 2013.08.28

The Customer Is Not Always Right

Let’s review – America has been struggling to rise out of what has been called the Great Recession. A recession brought on by a systematic dismantling of safeguards that protected us for decades after the Great Depression. Engineered by lobbyists working for Wall Street banks and the super rich –the 1% of the 1%– this tearing down of the walls was not intended to cause a recession, just to allow those at the top to make more money.

The recession was an unintended consequence. The big banks had been buying up mortgages to create bundles that investors, pension funds and the like could stash away and collect interest on month after month. What could be safer, we all know real estate never loses value; it always goes up, right? Besides, the banks had these packages checked out; the credit rating services marked them AAA.

This new idea caught on like wildfire. Pretty soon the supply of mortgages wasn’t keeping pace with the need. So the banks pushed the mortgage brokers down the line for more and more mortgages. The brokers urged people to buy, coaching them and fudging the numbers when they didn’t qualify. The banks learned to pile the mortgages with the not-so-nice on the bottom. The rating services were overwhelmed. Under intense pressure from the banks to anoint the investment packages with top ratings, it appears that the services buckled. Soon packages the bankers were calling “Crap” were gaining AAA ratings and being sold by those same bankers to trusting customers.

To understand why the rating services would hang a AAA on what the bankers called “Crap,” we have to look at their business model. The banks asking for AAA ratings paid for them. The banks are the rating service’s customers. They feared that saying no to the banks would just send them to another rating service. They anointed the “Crap” AAA to keep the bucks coming through the door.

That’s pretty much what the Justice Department is saying that Standard & Poor’s did when they sued the rating agency for $5 billion. The DOJ and 14 states are suing S&P, the largest of the rating services. The other two, Moody’s and Fitch, are likely to be next. The $5 billion suit is moving through the California court of District Judge David Carter. S&P rated $4 trillion in various bank investment vehicles over the four years leading up to the collapse.

While S&P is facing the $5 billion lawsuit, keep in mind that the real bad guys are the handful of monster banks that put together the piles of crap and coerced an AAA out of the rating services. What’s more the same banks are back at it– gambling wildly secure in the knowledge that we will have to bail them out again when they stumble. We like to think that doing the right thing is easy. It’s not, what’s easy is taking that first step in the wrong direction

Crooks?

Three years after the big banks drove our economy off the cliff we are beginning to call some of the players to task. It’s been no secret that mortgage entities lured people into buying properties they could not afford. They coached them on deceptive practices, like lying about their income and most everything else. These subprime (read unlikely to be repaid) mortgages were gobbled up largely by the big Wall Street banks who demanded more, ever more from these small time con artists.

The banks bundled them into investment instruments called Collateralized Debt Obligations (CDOs). These mortgage packages were blessed with AAA (the very best) ratings by Standard & Poor’s, Fitch Ratings, and Moody’s Investor’s Service. Soon they were being bought and sold all over the world. This charade* carried on until the rotten mortgages in these packages began to collapse.

The agency that oversees Fanny Mae and Freddie Mac (who live on taxpayer dollars) is gearing up to sue a bunch of the big banks for +/- $30 billion in losses (our money). Add to this, lawsuits from various individuals along with AIG – they got suckered into insuring some of the banks against losses from these loans. And the Attorneys General of all 50 states who are in settlement negotiations with a bunch of the big banks. There’s trouble on Wall Street.

As you can imagine, this has triggered a flurry of finger pointing. The banks shrug and point to the rating agencies, ignoring the obvious. The agencies were seriously overmatched by the fast talking bankers. Plus, the banks are among the rating agencies’ best customers. Everybody is pointing to the “sophisticated investors, who knew what they were buying.” Again, maybe overmatched by the fast talking bankers?

This whole dance is ridiculous. The California farm hand earning $14,000 a year had to be conned into buying a $750,000 house, as did many like him who had never heard of a subprime mortgage. The big banks knew what they were buying; they cynically put decent mortgages on top of the losers in the CDOs to make them smell better. Internally they referred to these CDOs as “Crap.” They hustled this “Crap” to their customers; all the while buying insurance to cover the “Crap” they were holding.

When it all fell apart, the taxpayers were forced to bail them out to keep the banking system from collapsing. A generation ago we had the S&L crisis. An avalanche of bad mortgages threw the nation into a recession. The savings banks took a hit, nearly 750 were closed, about a fourth of the national total. The taxpayers took a $90 billion hit – the beginning of the national debt that has been building over the last decade.

There’s a difference between what happened to the peddlers of “Crap” in the last decade and those responsible for the S&L disaster twenty years ago. The S&L flimflammers (AKA crooks) were nailed for racketeering and other crimes. They were fined and in some cases jailed. The flimflammers who triggered the recession we are now suffering through still have their big jobs, big pay checks and bonuses, just as if nothing happened. Meanwhile the poor and the middle class suffer. What’s wrong with this picture?

*Dictionary.com – “Charade”  A blatant pretense or deception,  

especially something so full of pretense as to be a travesty.  

© 2011 GLG