"Those are my principles, and if you don't like them... well, I have others."
To paraphrase Einstein, he said that one definition of insanity is to repeatedly do the same thing and expecting the results to be different. It’s beginning to look like our political leaders are guilty of that mistake – at least with respect to economics. In the financial world, conservative professionals have been warning everyone that we have to stop kicking the can down the road. In other words, the party is over but no one wants to hear it. Our immediate future involves municipal defaults, mass layoffs, Recession (or Depression), a housing collapse and possibly another Wall Street collapse.
Some wanted to let the financial behemoths that were too far-gone to save – to fail, in 2008. Almost all except Lehman were saved with taxpayer (printed) money. Morgan Stanley, Goldman Sachs, JPMorgan, Citigroup, and a host of other banks were given secret loans, TARP money and had free access to the Discount Window at the Fed, i.e., unlimited credit. Insurance giant A.I.G. was supported with hundreds of Billions. And, Chrysler and GM were bailed out. Regardless of the cost, none of the “too big to fail” companies, were allowed to file for Bankruptcy and disappear.
So, kicking the can down the road is now the government policy. In other words, put off until tomorrow what we do not want to deal with today.
Unfortunately, it does not work. And, the question really is, who is being protected by this policy. It certainly is not shareholders or the American people. Suspiciously, it appears to be a policy that protects a rarified few— bankers and political allies, perhaps? The longer the truth takes to play out, the more safety there is for upper management to protect their personal assets through manipulation. The GM bailout, for example, wiped out the shareholders. Not so, its top officers.
We have real unemployment that is pushing 20 percent if you include those who have stopped looking for work and those full time workers who have had to accept part time work at a fraction of the hourly rate they once earned. And, in August, no new jobs were created. The future is bleak for workers and the unemployed and underemployed.
Corporations like Bank of America may fire as many as 30,000 workers once they admit that this “too big to fail bank” really is failing. They made bad decisions (buying Countrywide) and have lied about their financial viability. And, while the Fed is working behind the scenes to engineer yet another merger, you can bet that money is being shoveled into its coffers one-way or the other. Another big mistake. Yet, the bonuses keep coming.
The housing market is entering double-dip territory after, in some areas, having already fallen by 50% in value. A huge number of foreclosures are waiting in the wings to further depress the sales market once the auctions resume. That assumes, of course, that the fraud is uncovered and the depth of the bank malfeasance does not implicate the hundreds of thousands of mortgage brokers and mortgage bankers who cooked the books for the banks on the borrower’s side of this immense greed-driven bank fiasco. All of this was done to simply create more fodder (loans) for the S.I.V.’s (securitization) that were palmed off as C.D.O.’s, or Collateralized Debt Obligations, or mortgage bonds.
This is the next and final area, as the banks are probed, which will divulge the extent of the financial corruption that existed, and, that was permitted to continue. To the extent that irrational leverage existed, as in the case of Bear Sterns and Lehman, it still does exist. And, why should it stop? The Fed always bails them out. Hours after Paulson and Geithner warned everyone that there would be no more bailouts, A.I.G. received $185 Billion in order to stay alive, and, more importantly, stick around to make it appear that the hundreds of Trillions of dollars in derivatives— which are still unregulated— would have a counterparty to pay off the bet. That Goldman Sachs received $10 Billion from the government for its CDS (credit default swap) positions, 100 cents on the dollar, as the world financial system was imploding says it all about rewarding risk and government support of “friends.”
The fact that there have been no prosecutions of the banks only validates the fact that our government and banking are intertwined in a very self-serving and possibly criminal way. Only borrowers have been prosecuted, because it is easier and cheaper. Yet, there is hope. Lloyd Blankfein has recently hired outside counsel and the banks have been sued.
MortgageIt, now a division of Deutche Bank was sued last May for $1 Billion for mortgage fraud by the Justice Department and recently 17 banks have been sued by the government for $200 Billion for mortgage fraud.
Simultaneously, the Eurozone is in deep trouble. German Prime Minister Angela Merkel, supporter of Greek, Irish, Italian, Portuguese, Icelandic and Spanish bailouts, just lost an important election in her hometown. The Germans are in no mood to continue supporting other Sovereign nations as their economy starts to stall. This past Labor Day, the DAX (German stock market) was down 5% and is an indication of the deep divisions about supporting the Euro and the Union at Germany’s expense.
Buried in the balance sheets of many European banks, of course, is a substantial number of toxic bonds that our American “Investment Banks” pushed all over the world – long after they knew that they were worthless. Since they were insured (Credit default swaps), companies like Goldman Sachs were unconcerned. Further, the Eurobonds from the PIGS (Portugal, Ireland, Greece, Spain) and Italy are also held by the French and German banks.
If some European banks start to default, the ripple effects could be disastrous. It is useful to point out that there is no deposit insurance for individual’s bank accounts and bank runs may be next concern across Europe.
Of course, America has its own serious problems. We are, for all intents and purposes, flirting with default. An individual in the same shape as is the U.S. would certainly file for bankruptcy. As the world’s Reserve currency, however, the dollar continues to be a safety hedge. But, the more we print and as its value deteriorates, he bigger the problem becomes. Utah has started accepting silver coins for consumer transactions and there is discussion about gold being used for currency once again.
The longer we wait and allow any more banks and companies to be propped up like Charlton Heston in “El Cid”— a dead soldier strapped to his horse appearing to be alive to lead— the more dangerous will be the eventual demise for all of us.
This economic devastation was caused by one thing— leveraging of assets, which increased risk in order to increase profits for Wall Street Investment Banks dealing in CDO’s. Lehman funded its operations by obtaining its cash on a daily basis and leveraging this by up to 36 times what they held in collateral. They were alone in doing this.
The Housing market was the vehicle. And, when the market started to peak in 2005, the banks turned to brokers to cook the books in order to increase the number of closings via warehouse lines in order to create more loans to stuff their bonds with. They faked everything in order to keep the flow of loans with which to stuff the CDO’s. Underwriting was suppressed and due diligence unknown because the brokers were creating the paperwork, fixing appraisals and deluding borrowers into signing anything put in front of them. Of course, the banks claimed they had no knowledge of this. Recent Justice Department litigation against the banks proves otherwise.
Improvement in the housing market, increased employment flowing from a vibrant economy, improved purchasing power by consumers, and optimism for small business, all depend upon accepting Reality. We must stop supporting corporations and banks that continue to risk their capital because they have no fear of failing and accept a few years of flat growth. Only then can we begin to grow and hire workers again.