Sunday, April 10, 2011

How Wall Street Helps Itself and Hurts America

This post has been long in coming, inspired as it was by my belated viewing of the Oscar-winning documentary, Inside Job, which offers a nice breakdown of the subprime debacle on Wall Street. This, together with another Oscar-nominated documentary, Client 9; Michael Lewis’ book, The Big Short; and Matt Taibbi’s Rolling Stone article on naked short-selling, should be required reading/viewing for every American who is unfamiliar with how the financial crisis really went down.

Not all were equally informative. The Big Short and Matt Taibbi’s article were by far the more educational (for me at least), detailing exactly how collateralized debt obligations, mortgage securities, and credit default swaps were used to execute one of the most despicable financial heists since Enron, and certainty the largest wholesale transfer of wealth from the working and middle classes to the very rich. It is difficult to avoid the conclusion that these guys are criminals who deserve a lifetime behind bars.

It bears repeating: it is one thing to vaguely suspect that Wall Street bankers had ridiculous amounts of hubris and wildly miscalculated the risks they were generating for the global financial system. It is something else again to suspect that they built up what amounts to a ponzi scheme and profited hugely when taxpayers were forced to bail them out. The reality is that it was a giant scam, the intricate details of which will take your breath away.

Basically, this is how it worked:

Step 1: Bundle high interest (and thus high yield) mortgage-backed securities and divide them into tranches according to risk of default.

Step 2: Convince the rating agencies (which are paid by the very firms they rate—conflict of interest, anyone?) that the top tranches should receive the highest triple A rating (usually reserved for government bonds and other low risk investments) because a very high percentage of borrowers would have to default before these securities would go bad, something that is statistically very unlikely.

Step 3: Sell the said triple-A rated subprime mortgage-backed securities to sovereign governments, pension funds and other unsuspecting suckers and chumps.

Step 4: Take out insurance on said triple-A rated securities in the form of credit default swaps, meaning that if these securities collapse in value, then someone else (AIG, for the most part) will be left holding the bag.

Step 5: When the supply of qualified subprime borrowers (which feeds the system) starts to ebb, encourage lenders to falsify loan applications to draw in borrowers with no chance of paying back their mortgages.

Step 6: Cash out before the inevitable crash; if stuck holding the bag, convince relevant government officials (themselves ex-bankers) that a taxpayer bailout is necessary to avoid a financial Armageddon.

Step 7: Armageddon safely averted, use zero-interest loans from the Feds to pay off TARP; continue investing in risky financial derivatives, paying record bonuses to executives;

Step 8: Where loan documents proving bank ownership cannot be located, forge the paperwork needed to foreclose on delinquent borrowers.

Step 9: If the public complains, get media lackeys to scream about government takeovers and socialization; mobilize right-wing activists (enter Tea Partiers) around the meme that the government is stifling growth and should get out of the way of business.

Step 10: Use massive financial clout to lobby against new financial regulations, ensuring return to business-as-usual.

If ever there was an industry composed of unmitigated, irredeemable sociopaths, Wall Street would be it. If the entire edifice of investment banks in the U.S. disappeared tomorrow, we would probably all be better off. Not one of these con artists is in jail; they knew exactly what they were doing and did it anyway. And why wouldn’t they? If their wild bets pay off, they are rich; if their bets blow up in their faces, then the taxpayers are forced to bail them out. And of course no one is ever to blame—who could have known that home prices would drop nationwide after creating a massive, ridiculous housing bubble?

Gee…yeah, who could have seen that that party would end? Surely not the rating agencies that specialize in assessing securities risk. Surely not the army of financial analysts on CNBC--the television network that purportedly provides sound investment advice to the public. Not the former fed chairman, Alan Greenspan, the widely-acclaimed financial “maestro,” nor the current fed chairman, whose doctoral dissertation analyzed the causes of the 1929 stock market crash. Not any of the top executives of investment firms and hedge-funds whose financial acumen is supposedly worth hundreds of millions a year on the open market.

There are simply no downsides to Wall Street sociopaths playing us again…and again…and again. The system attracts and cultivates a class of scumbagitude the likes of which rarely thrive outside of organized crime and corrupt dictatorial regimes. Besides, putting the global economy at risk and ripping off countless investors, these guys (and yes, they were nearly all guys) are avid fans of strip joints and high-end escort services; they buy private jets, yachts and vacation homes; they do mountains of blow. They make Michael Milken, the famed 80's junk-bond king, look like a veritable boy scout. In the end, the CEO of Lehman Brothers, the firm with the most toxic assets on its book, made off with 425 million USD before the firm went belly-up. Meanwhile, the CEO of Countrywide, the most egregious of predatory lenders, made 470 million USD as a result of the subprime scam; rather than face criminal prosecution, he was ordered to pay a relatively modest fine, most of which was covered by his firm. Indeed, in the run-up to the financial crisis, the CEOs of major financial firms cashed out their stock options for tens of millions of dollars.

That this army of white collar criminals would emerge relatively unscathed from a catastrophe of their own making will not surprise anyone who understands that the rich nearly always come out on top. In fact, the richest of the rich have done spectacularly well over the past 30 years. Furthermore, the richer you are, the greater your rewards.

This graph shows that from the 1960s to present, the top one percent of America's income-earners has increased its share of national income from 8 percent to over 18 percent. But what is even more striking is the even more massive gains flowing to the top one percent of the top one percent of income earners (about 15,000 families) who today earn 6 percent of the national income or one in every 17 dollars earned in America; it is to these families that the bulk of income gains in America have gone over the past 30 years.

And who are these income-earners? Most are neither celebrities nor heirs of great American fortunes, but rather CEOs, very often in the financial services sector. Some of these individuals, far from job-creators or producers of society, are rewarded with great fortunes even after running their firms into the ground.

As bonuses on Wall Street soared while evidence of malfeasance mounted, were regulators taking notice? Perhaps not surprisingly, the SEC engaged in no serious investigation of major investment firms throughout the entire 2001-7 housing bubble. What happened to those who attempted to regulate the industry or investigate the worst offenders? Eliot Spitzer, the DA of New York, targeted mortgage lenders for predatory lending practices, AIG for fraud, and investment firms for inflating stock prices, among other things. For his troubles, Spitzer was taken down by Republican rat-fuckers who caught him patronizing a call girl service--the very crime that sitting U.S. Senator and diaper-fetishist David Vitter (R, LA) has openly admitted to with zero repercussions. In the late 1990s, Brooksley Born, the head of the nascent Commodity Futures Trading Commission, attempted to introduce regulations for complex financial derivatives and was soundly stomped by Wall Street enablers--Greenspan, Larry Summers and Robert Rubin—and railroaded out of derivatives regulation altogether, with Congress ultimately deeming such regulation an unnecessary and harmful brake on financial "innovation."

To conclude, here are some of the things I have learned (okay, most of this I knew already):

  1. Wall Street fraudsters and Republican operatives paid this skeevy Nixon-era dirty trickster to smear Eliot Spitzer Lewinsky-style for investigating Wall Street elite;
  2. There really is a vast right-wing conspiracy, and right-wing activists openly serve corporate America;
  3. Banks on Wall Street knowingly sold toxic financial derivatives to public pension funds, sovereign governments, and other investors, creating a "mortgage time bomb";
  4. Goldman Sachs sold securities they privately deemed “pieces of crap” to investors, then bet that their pieces-of-crap derivatives would tank—bets that ultimately paid off;
  5. Glen Hubbard (chair of Columbia University business school) is an epic a-hole;
  6. Wall Street bankers believe they are worthier human beings than the rest of us;
  7. Anti-financial regulation economists are, for the most part, corporate shills;
  8. You can bring down an entire company by counterfeiting company shares and shorting them;
  9. The reason Wall Street swindler Bernie Madoff went to jail (where he suffered "facial fractures, broken ribs, and a collapsed lung"), while other Wall Street miscreants continued to reap fat bonuses, was that Madoff swindled rich people instead of minorities and the poor;
  10. Wall Street and its denizens are literally above the law, so long as they limit their predation to the politically irrelevant.

This brings me to the lie propagated by evangelical privatizers that if you make long-term investments in a broad base of stocks, as in an S&P 500 index fund, you will have enough to retire on by the time you are 65. With the stock market barely budging over the last 10 years, investment gurus now peddle the myth that picking and choosing the right companies and sectors will give us healthy returns even if the stock market itself remains flat or tanks. When is someone going to point out the obvious: that the system is rigged in favor of the insiders; the rest of us are basically the bottom rung of a giant ponzi scheme and will always be left holding the bag when the system collapses?

The EU has issued a report that warns that the growing number of EU citizens moving to private pensions could find themselves with "inadequate pensions." USA Today has reported that those with public pensions are far better off than those with private pensions on average. Much of this is to do with the fact that private pension schemes are based on individual contributions alone rather than a mix of individual and employer contributions, but also with the fact that defined contribution schemes are only as good as one's investments in the stock market. Moreover, the growing financialization of the global economy means that the global economy is increasingly threatened by the instability of markets, which undermines the stability and health of private pensions. This uncertainly also means that people with private pensions will be less able to plan their retirement.

I have said this before, but it bears repeating: Americans consent to privatizing social security at their peril. By recent estimates, half of retirees in the U.S. rely mostly or entirely on their meager social security checks. Just imagine if this amount were reduced, the retirement age raised, and Americans forced to live on their winnings from the corrupt casino that is Wall Street. No doubt many will invest their contributions wisely (luckily?) and be left with a nice nest-egg at the point of retirement. Most, however, will be left with insufficient earnings and may even lose money. Taxpayers, as usual, will be left holding the bag.