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Wall Street Lies Blame Victims to Avoid Responsibility for Financial Meltdown
To hear it from the big financial companies, the big crash started when poor people bought homes they couldn't afford. But that was at most 1% of the problem.    

 
Editor's note: The following is an excerpt from Nomi Prins' new book, It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street.

The Second Great Bank Depression has spawned so many lies, it's hard to keep track of which is the biggest. Possibly the most irksome class of lies, usually spouted by Wall Street hacks and conservative pundits, is that we're all victims to a bunch of poor people who bought McMansions, or at least homes they had no business living in. If that was really what this crisis was all about, we could have solved it much more cheaply in a couple of days in late 2008, by simply providing borrowers with additional capital to reduce their loan principals. It would have cost about 3 percent of what the entire bailout wound up costing, with comparatively similar risk.

Just as great oaks from little acorns grow, so, too, can a Second Great Bank Depression from a tiny loan grow.  But so you know, it wasn't the tiny loan's fault. It was everyone and everything that piled on top. That's how a small loan in Stockton, California, can be linked to a worldwide economic collapse all the way to Iceland, through a plethora of shady financial techniques and overzealous sales pitches.

Here are some numbers for you. There were approximately $1.4 trillion worth of subprime loans outstanding in the United States by the end of 2007. By May 2009, there were foreclosure filings against approximately 5.1 million properties. If it was only the subprime market's fault, 1.4 trillion would have covered the entire problem, right?

Yet the Federal Reserve, the Treasury, and the FDIC forked out more than $13 trillion to fix the "housing correction," as Hank Paulson steadfastly referred to the Second Great Bank Depression as late as November 20, 2008, while he was treasury secretary. With that money, the government could have bought up every residential mortgage in the country — there were about $11.9 trillion worth at the end of December 2008 — and still have had a trillion left over to buy homes for every single American who couldn't afford them, and pay their health care to boot.

But there was much more to it than that: Wall Street was engaged in a very dangerous practice called leverage. Leverage is when you borrow a lot of money in order to place a big bet. It makes the payoff that much bigger. You may not be able to cover the bet if you're wrong — you may even have to put down a bit of collateral in order to place that bet — but that doesn't matter when you're sure you're going to win. It is a high-risk, high-reward way to make money, as long as you're not wrong. Or as long as you make the rules. Or as long as the government has your back.

bulldog10jw wrote:Oh. They didn't go out of business? Never mind.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

Ivytalk wrote:Well, kalm, the moon is in the seventh house, and Jupiter elides with Mars, and peace will guide the planets, and you will actually agree with today's WSJ lead editorial, "The Corporate Welfare State."

And you're old enough to remember where I got the astrological references from!

kalm wrote:

Ivytalk wrote:Well, kalm, the moon is in the seventh house, and Jupiter elides with Mars, and peace will guide the planets, and you will actually agree with today's WSJ lead editorial, "The Corporate Welfare State."

And you're old enough to remember where I got the astrological references from!

Indeed, but just barely.

An interesting article, although it fails to mention financial services subsidies. But I too see some commonality between the two movements.

Thanks for the contribution. Clearly shows how superior Harvard is to Yale.

Ivytalk wrote:

kalm wrote:
Indeed, but just barely.

An interesting article, although it fails to mention financial services subsidies. But I too see some commonality between the two movements.

Thanks for the contribution. Clearly shows how superior Harvard is to Yale.

Are you kidding? The whole article is about various kinds of subsidies. What do you think a loan guarantee is? Or a bailout?

kalm wrote:

Ivytalk wrote:
Are you kidding? The whole article is about various kinds of subsidies. What do you think a loan guarantee is? Or a bailout?

Maybe I missed the part where it listed Wall Street bailouts and Fed loans. Or maybe those aren't subsidies.

kalm wrote:
Valuable contribution as usual. Thanks!

CAA Flagship wrote:Ugh. I thought this thread would be about a Mick Jagger impersonator.

CAA Flagship wrote:Ugh. I thought this thread would be about a Mick Jagger impersonator.

bulldog10jw wrote:

CAA Flagship wrote:Ugh. I thought this thread would be about a Mick Jagger impersonator.

I thought maybe a Brian Jones retrospective

kalm wrote:

bulldog10jw wrote:
I thought maybe a Brian Jones retrospective

Go take a leak

Keeping interest rates at zero in an effort to give the zombies time to heal their balance sheets has many harmful side effects for the rest of the global economy. It’s a wealth transfer from pensioners and others relying on the fixed returns of their savings to the banks’ coffers. That transfer reduces the disposable income for a section of society and thus their spending, which can become a major drag on the economy if it lasts for many years. Meanwhile, the rise in govern ment debt is a wealth transfer from future generations, who are forced to pay for their predecessors’ mistakes. As in the case of Japan, which has kept its interest rates near zero since 1995, it can also settle in culturally, creating expectations of stable or falling prices and cause delaying of consumption or investment decisions. “Twenty years of zero percent interest rates change the psychology of consumers and savers,” says Todd Petzel, chief investment officer at New York fund management firm Offit Capital Advisors. Petzel has calculated that the wealth transfer in the United States equates to $500 billion for each year that rates stay at these levels.

Traditionally, lower interest rates are central banks’ best weapon to stimulate economic activity. The thinking is that companies will borrow and invest when rates are lower; consumers will borrow and spend. Yet when there are zombie banks in the mix, the money provided at the low interest rate doesn’t necessarily trickle down to the consumers or the small enterprises. Zombies that borrow from the central bank at zero would rather lend to borrowers who can afford to pay higher rates since the zombie needs to heal its broken balance sheet as quickly as possible through profits. Thus, the current zero percent interest-rate policy has channeled funds to emerging market economies where returns are much higher, in double digits in some countries. That has caused overheating of their economies and could cause a crash the way Japan’s zero percent policy led to the Asian crisis of 1997–1998 when the free Japanese money found its way to neighboring countries.

Few people have made the connection, but even the events in the Middle East are an indirect result of the monetary easing in the West. Not only have the U.S. and European central banks kept inter est rates close to zero, but they’ve also pumped trillions of dollars of extra cash into the global financial system. This policy of so-called quantitative easing has led to commodity price increases, including agricultural commodities. For the impoverished majorities of Middle Eastern countries, small increases in the cost of food can be devastating and served as a catalyst in the uprisings from Egypt to Tunisia. Last time around, when food prices surged, they came down fast with the financial crisis’s onset. This time, the Western central banks are deter mined to keep pumping money until their banks can earn their way out of death, which can keep food prices high for much longer and lead to further unrest in poor countries.

Bailing out zombie banks can even bring down countries that have been otherwise prudent. Ireland joined Greece in seeking help from the EU in 2010, not because its government spending had been pro lific in the past two decades, but because it decided to back its banks that collapsed with the crash of a property bubble. Pumping money into its zombie banks, which have proved to be black holes, almost doubled its national debt and raised fears that it could not sustain paying such a heavy burden

Theckston says that borrowers made harebrained decisions and exaggerated their resources but that bankers were far more culpable — and that all this was driven by pressure from the top.

“You’ve got somebody making $20,000 buying a $500,000 home, thinking that she’d flip it,” he said. “That was crazy, but the banks put programs together to make those kinds of loans.”

Especially when mortgages were securitized and sold off to investors, he said, senior bankers turned a blind eye to shortcuts.

“The bigwigs of the corporations knew this, but they figured we’re going to make billions out of it, so who cares? The government is going to bail us out. And the problem loans will be out of here, maybe even overseas.”

One memory particularly troubles Theckston. He says that some account executives earned a commission seven times higher from subprime loans, rather than prime mortgages. So they looked for less savvy borrowers — those with less education, without previous mortgage experience, or without fluent English — and nudged them toward subprime loans.

http://www.nytimes.com/2011/12/01/opini ... asdkristof" onclick="window.open(this.href);return false;

By Jane Tavakoli, President Tavakoli Structured Finance

Is Crony Capitalism Wrong?
Posted: 12/ 3/11 02:02 PM ET

On Nov. 29, 2011, Bloomberg magazine's Richard Teitelbaum published an article revealing a secret meeting on July 21, 2008, with then secretary of the treasury and former Goldman Sachs CEO Hank Paulson, and around a dozen hedge-fund managers and Wall Street executives.

Five of the hedge fund managers were former Goldman Sachs employees. The meeting was held at the offices of the founder of hedge fund Eton Park Capital Management, Eric Mindich, a former 15-year employee of Goldman Sachs who rose to be the senior strategy officer of Goldman's executive office. He is also current chair of the asset managers' committee of the President's Working Group on Capital Markets.

Then Secretary Paulson asked the hedge fund managers what the market might think if he placed mortgage giants Fannie Mae and Freddie Mac into conservatorship, a move that would have wiped out value for the shareholders and possibly wiped out value for subordinated debt holders.

According to the article, one hedge fund manager had a short position in these stocks when he walked into the meeting. He was shocked that Secretary Paulson blabbed specifics, and the hedge fund managers therefore believed the Treasury Department would implement the plan. Seven weeks later, it did.

The hedge fund manager called his lawyer at a break in the meeting, and his lawyer told him Paulson had divulged non-public material information. His lawyer advised him to stop trading in the shares of these companies immediately. Ironically, that meant the hedge fund manager could not cover his short positions, so he profited by riding the value of the shares all the way down to the bottom. If he hadn't been at the meeting, and if he had any doubts, he might have covered his short position earlier and made less money. One will never know, because Secretary Paulson tied the hedge fund manager's hands.

But the more interesting implication is for the other managers in attendance. If they didn't already have a short position in Fannie Mae and Freddie Mac, they now had non-public material information that would allow them to almost certainly profit mightily by initiating such a trade. They could even be more confident in shorting other financial institutions that would likely take a shellacking.

Richard Teitelbaum quoted me: "What is this but crony capitalism? Most people have had their fill of it."...

http://www.huffingtonpost.com/janet-tav ... 27166.html" onclick="window.open(this.href);return false;

Since the GSEs blew up, advocates have asserted that the poison that killed Fannie and Freddie is the government’s mandate that the GSEs meet an affordable-housing mission. This, it is said, forced Fannie and Freddie to do things management would otherwise have foresworn. Thus, it is concluded, the government killed off the GSEs. And, from this, it is further concluded that the government should never regulate financial institutions, at least as far as anything that might smack of a policy goal.

However, the facts asserted by the SEC tell a far different tale. There is only one brief mention of the affordable-housing goals, and it’s just quoting Dan Mudd saying that subprime bookings met them. The SEC’s facts paint a picture in which it wasn’t high-minded government mandates that did the GSEs wrong, but rather the monomaniacal focus of top management on marketshare. With marketshare came bonuses and with bonuses came risk-taking, understood or not.

Ivytalk wrote:Well, kalm, the moon is in the seventh house, and Jupiter elides with Mars, and peace will guide the planets, and you will actually agree with today's WSJ lead editorial, "The Corporate Welfare State."

And you're old enough to remember where I got the astrological references from!

kalm wrote:Here is another one citing the SEC's findings regarding Freddie Mac and how greed, rather then the conk conspiracy of housing mandates sunk the ship. Evidently Fannie and Freddie were actually late to the subprime dance.

Since the GSEs blew up, advocates have asserted that the poison that killed Fannie and Freddie is the government’s mandate that the GSEs meet an affordable-housing mission. This, it is said, forced Fannie and Freddie to do things management would otherwise have foresworn. Thus, it is concluded, the government killed off the GSEs. And, from this, it is further concluded that the government should never regulate financial institutions, at least as far as anything that might smack of a policy goal.

However, the facts asserted by the SEC tell a far different tale. There is only one brief mention of the affordable-housing goals, and it’s just quoting Dan Mudd saying that subprime bookings met them. The SEC’s facts paint a picture in which it wasn’t high-minded government mandates that did the GSEs wrong, but rather the monomaniacal focus of top management on marketshare. With marketshare came bonuses and with bonuses came risk-taking, understood or not.

http://www.fedfin.com/index.php?option= ... &Itemid=30" onclick="window.open(this.href);return false;

native wrote:

kalm wrote:Here is another one citing the SEC's findings regarding Freddie Mac and how greed, rather then the conk conspiracy of housing mandates sunk the ship. Evidently Fannie and Freddie were actually late to the subprime dance.




http://www.fedfin.com/index.php?option= ... &Itemid=30" onclick="window.open(this.href);return false;

What is the active political affiliation of the majority of the greedy (and dishonest) bastards, k?
e.g., Raines, Howard, Johnson...

And what is the political affiliation of the majority of the (corrupt) political beneficiaries?
e.g., Dodd, Frank...

native wrote:The problem is neither capitalism nor free markets, but the lack thereof.

Crony capitalism and pay for play are not capitalism.

kalm wrote:

native wrote:
What is the active political affiliation of the majority of the greedy (and dishonest) bastards, k?
e.g., Raines, Howard, Johnson...

And what is the political affiliation of the majority of the (corrupt) political beneficiaries?
e.g., Dodd, Frank...

Oh in the case of F and F I'd imagine it's democratic. As for the rest of Wall Street, I'd imagine they are fairly apolitical. If you have enough money it doesn't really matter which side you back as long as they are both willing to play ball.