The Greed Stampede
by Eric Margolis
NEW YORK Western nations have been rightly scourging China for
flooding world markets with toxic food, toys, nutritional products,
clothing and other tainted goods. Chinas government closed its
eyes to this malefaction.
But meanwhile, Wall Street was exporting toxic financial
instruments called sub-prime mortgages around the globe.
Washingtons regulatory monkeys saw no more evil than those in
Beijing.
Heres how the sub-prime mess developed. A single mother, say in
East St Louis, was peddled an initially low interest adjustable
mortgage by a flim-flam broker. When rates rose sharply, she
couldnt pay and was forced to abandon the home she should never
have bought to begin with. Multiply this little human tragedy by
hundreds of thousands, and, voilà, the spreading sub-prime mortgage
crisis.
Meanwhile, the worlds leading financial institutions built a $500
billion to $1 trillion house of cards based on these sleazy
mortgages. They were bundled, chopped up like stolen cars, and
peddled everywhere as secure, high-yielding American
securities.
Once the sub-prime crisis broke, banks holding such `Chinese
paper, to use an old Wall Street term, panicked. Not only couldnt
they find any more stupid buyers, the wildly inflated values they
gave these securities turned out to be totally bogus. This, in
turn, gravely undermined the asset base of lending institutions
holding `Chinese paper.
Britains Northern Rock (aka `Northern Wreck) suffered a run on
the bank and is now clinically dead. CIBC lost up to $2 billion.
Two of the worlds biggest banks, Citicorp and UBS, lost $9 and $10
billion respectively. They nearly capsized, and had to be rescued
by Gulf Arabs and Singapore. Merrill Lynch and Morgan Stanley face
$9-10 billion of write-downs. More banks will soon reveal billions
of losses, all thanks to `innovate finance.
How could the brightest Wall Streets financiers, who claim
unrivaled expertise in managing clients assets, be so stupid and
incompetent?
After the flu and bad taste, few diseases are more contagious than
greed. So began the greed stampede as Wall Street bulls charged
into the sub-prime Valley of Death.
Blame begins with the Bush Administration. Faced with hugely
expensive foreign wars and the dot com bubble, the White House got
Alan Greenspan at the Federal Reserve to lower interest rates to
nearly nothing. This produced the monster property bubble that is
now bursting. Cheap credit became a dangerous drug, financial
`speed arousing false economic euphoria that helped keep
Republicans in power and fueled swarms of unregulated, parasitic
hedge funds.
Rock bottom US interest rates made bankers and investors search out
higher paying investments. Sub-prime mortgages were Wall Streets
answer. In a giant Ponzi scheme, new investor money was used to pay
off old investors, building a giant pyramid that collapsed this
past fall.
The US Federal Reserve, which is supposed to regulate mortgages,
failed its duty. So did other US financial regulators, like
Treasury and the SEC. They, and auditing firms, allowed banks to
egregiously misvalue their mortgage holdings and create `conduits
and `off balance sheet vehicles that were new forms of accounting
fraud.
Many bankers and managers simply failed to understand the
mind-numbing complexity of financial derivatives. President George
Bush lauded `the new finance as the model of Republican economic
policy. It turned out to be the financial equivalent of Iraq.
Worryingly, no one knows how much the worlds rickety financial
structure now depends on these arcane financial alchemies. We enter
2008 threatened by the prospect of new financial earthquakes and
recession.
Instead of facing fraud indictment, CEOs of the big peddlers of
`Chinese paper got millions worth of golden handshakes, or raises.
While government was busy prosecuting Conrad Black over $3 million,
the public was defrauded of tens of billions. No one has yet been
prosecuted for these outrageous crimes.
If there was a time for government to justify its existence, its
now. Prosecute the sub-prime fraudsters, from salesmen to CEOs.
Forget golden handshakes. They deserve steel handcuffs.
http://www.ericmargolis.com/archives/2007/12/the_greed_stamp.php
