Just in Time for Christmas

As day after day of misery goes by in the lives of the little folks crushed by the financial crisis, one question lies in the back of their minds. Who did this to us? Who’s looking for them and when will they be punished? We have known the answer to the first question for some time. The Wall Street investment banks’ sophisticated (read Crappy) investment packages whipped up a perfect storm.

They sold this Crap (their term not ours) to people who should have known better based largely on stellar ratings from the agencies charged with vetting these investments. The ratings agencies were pushed by their customers (big banks)  and did not look – as hard as they should – at the packages.

And it turns out that the bailout bucks we knew about (TARP) were nothing when compared to the zero interest loans the Federal Reserve was handing out to keep the banks afloat, trillions in secret loans. Bloomberg Markets Magazine blew the lid off this program. It was ten times the size of TARP.  By far the biggest hunk of these bucks (63% of the daily average) went to the same gang that got us into this mess – six humongous banks.

How did these half-dozen too-big-to-fail banks position themselves to come out of any crisis they might create covered in gold? Over a couple of decades they conned Congress into repealing the laws designed to prevent things like the 2008 crash. They even got “The Fools on the Hill” (AKA the Congress) to exempt banks from State Lottery laws. Who helped this along?  Clinton’s Secretary of the Treasury, Robert Rubin, fresh from 26 years and the top job at Goldman Sachs.

When the house of cards collapsed, who came up with the plan to save the banks? Bush Secretary of the Treasury Hank Paulson, fresh from the top job at Goldman Sachs, led the charge to save his comrades.  It gets even better; in 2006 Goldman Sachs was able to foresee that the crap was really crappy and likely to crash. Did they sound the alarm? Of course not, that might have interfered with their efforts to sell crap to their customers. Instead they bet it would crash and reaped a huge profit.

What ties this all together? Two of the key players, Rubin and Paulson, both came from Goldman at just the right moment to get rid of the pesky banking laws. So in addition to the efforts of all the banking lobbyists, you might say it was an “Inside Job.”

However, our wait to make those responsible pay may be nearly over. The SEC has charged six former Fanny Mae and Freddy Mac executives. More important, New York State Attorney General Eric Schneiderman and other State AGs are looking at criminal and civil charges. It would be nice to see a few of the arrogant bankers on their way to jail?  When you think about it, what they did was harmful than Bernie Madoff’’s scams. “Pants-on-Fire” Goldman CEO, Lloyd Blankfein has another view; bankers, he says, are “doing God’s work.”

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

Doing Time

There has been endless speculation as to what and or who created the giant economic bubble that burst in 2007.  To prevent a global financial meltdown the Bush administration created a huge bailout program for banks and for the colossal insurer AIG. The bailout not only prevented a bad situation from becoming unimaginably worse, it has paid off for the taxpayers as the banks pay back the loans with interest. It appears that the bailout of General Motors and Chrysler may pay off as well.

None of this is very comforting to those who lost their jobs and homes. Those folks and many of the rest of us have been wondering when the high flyers whose reckless behavior triggered all this might get theirs. Perhaps that time has come.

Last week (4/13/11) the Senate Permanent Subcommittee on Investigations released its two-years-in-the-making report “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse.” Frankly, given the spineless catering to the special interests over a few modest reforms in the Dodd/Frank Bill, it was hard to imagine that this investigation would amount to much. Surprisingly the members of this Committee were on the job. They were, as the saying goes, “Taking names and kicking butt.”

They paint a detailed picture of the out-of-control atmosphere that saw investment bankers enabling downstream players, mortgage brokers and lenders to spread money across the housing market like there was no tomorrow. All showered with encouragement from the boneheads at Fannie Mae and Freddie Mac, not to mention the rating agencies and –of all people– the head of the Federal Reserve Bank.

People were encouraged –coached if you will– to falsify loan applications. They ended up owning property they could not afford and well, you know the story. These sure-to-fail loans were bundled into increasingly sophisticated –read deceptive– packages and sold as securities by the investment bankers.

It’s not that the bankers didn’t know they were selling crap; they even called it crap inside the trading desks. And they protected themselves; as they sold these so-called toxic securities they bet against them at the same time. Some bankers were more aware than others. Not that any of them had reason to miss what was really going on. Read Michael Lewis’ The Big Short for an inside view.  

Prosecutors are poring through the 650-page Senate Report looking for criminal behavior. Many believe that those who triggered the catastrophe are too big to go to jail, just as their organizations were too big to fail. Maybe not. No major public official in NY State ever headed behind bars until last Friday (4/15/11) when former Controller Alan Hevesi was led out of court in cuffs sentenced to one to four years in jail. So maybe there’s hope that we will see some of these arrogant bankers in cuffs on their way to jail.

It would be nice if the members of the Congress would rethink the laws that allowed all this to happen; that still allow Wall Streeters to gamble. Investment bankers need to get back to creating capital for business. That would help in a real way. It would create jobs. Isn’t that what they keep talking about in DC?

© 2011 GLG