Feb 11, 2008

First Class Migration

But, but the rich people pay all the taxes, right? right? And the rich finance all of America's financial growth, right?

(from C&L)
Bush: If they’re going to say, oh, we’re only going to tax the rich people, but most people in America understand that the rich people hire good accountants and figure out how not to necessarily pay all the taxes and the middle class gets stuck.

The subprime mess (details below) was enabled by the mythological big taxpayer at the top of the foodchain. The underlying "logic" was that big business, big financials, and the Daddy Warbucks 1%'ers of the American multimillionaires were paying the lion's share, and as such, well, it would be okay to cut them a little slack... Their money went back to America investitures, financing most of the growth of American business. This was true up until a certain point. But as Daniel Gross of Newsweek points out, when the transparency and accountability disappeared, and with it- the profitability, these 1%ers quickly began shifting their money out of the U.S., which had become, largely due to their own machinations, a losing bet.

(from Newsweek)
The latest investment trends similarly lead me to think you may not be acting in the national interest. America's private-equity firms are plowing into India, China, Asia and Latin America, and private bankers are urging clients to drop the home bias (don't think condos in Palm Beach and ski chalets in Aspen; think beachfront property in Thailand and ski resorts in the Alps). A Spectrem Group survey of people with more than $500,000 to invest found that 31 percent are putting more capital to work internationally than in the past. "The rich are investing a larger share of their capital overseas," says "Richistan" author Robert Frank.

Just when the economy has started to take on water—and we don't know if we've just sprung a leak or we've hit an iceberg—it seems like the wealthy are piling into the lifeboats. So consider this a plea not to abandon us. Ski at Sugarbush instead of Gstaad. Invest in P.F. Chang's China Bistro instead of China. It might not be as rewarding, financially or psychologically. But your country needs you now, more than ever. And after all we've done for you, it's the least you can do.

I am afraid that a plea to the rich to help the country surely falls on deaf ears. Patriotism falls a distant second to personal profit. Capitalism trumps National pride. Their sense of duty to the so-called "Free Market" is more powerful than any duty to our country and a real Democracy. It's the poor people's fault they're poor, after all. And as these rats jump from a ship they are helping to sink, they can only blame everyone else.

These multi-millionaires, who are running the country, and lately, running it into the ground, talk a big talk about what this country was built on. Underneath their loud bluster, the truth comes out of the sides of their disingenous mouths... Their constitution is a prospectus, their bible is book of tax exemption codes, and their savior is a savvy investment adviser who raises his hands and exhorts "Buy China!" from the mountaintop. Buying America is as foreign to today's billionaire as the concept that all men are created equal. They can spout the virtue of a Global economy all that they want: Their rush to fill their own pockets at the forefront of whichever economy they talk up only hastens the demise of the American economy.

The thought that they, the self-appointed American aristocracy, knew what was best for the country by simply filling their pockets as fast as they could seems so outlandish that you wonder how these people got rich in the first place. But most of them didn't make this money, they inherited it. Their predecessors (the people who made the bulk of the money for these inheritors of America's riches) seemed to understand the concept of an economy that perpetuated its growth. You gave back and pumped some of your profits into the system, from the bottom up, in order to keep your cash crop coming in. By failing to comprehend this key principle in their gluttony, they are dooming the American economy.

The Subprime situation and Asset Securitization is, as F. William Engdahl puts it- "The Last Tango" of the dance of the American assetmongers on their own graves...

(Excerpts from Financial Sense)
The New Finance was built on an incestuous, interlocking, if informal, cartel of players, all reading from the script written by Alan Greenspan and his friends at J.P. Morgan, Citigroup, Goldman Sachs, and the other major financial houses of New York. Securitization was going to secure a “new” American Century and its financial domination, as its creators clearly believed on the eve of the millennium.

Key to the revolution in finance in addition to the unabashed backing of the Greenspan Fed, was the complicity of the Executive, Legislative and Judicial branches of the US Government right to the Supreme Court. In addition, to make the game work seamlessly, it required the active complicity of the two leading credit agencies in the world—Moody’s and Standard & Poors.

It required a Congress and Executive branch that would repeatedly reject rational appeals to regulate over-the-counter financial derivatives, bank-owned or financed hedge funds or any of the myriad steps to remove supervision, control, transparency that had been painstakingly built up over the previous century or more. It required that the major government-certified rating agencies give their credit AAA imprimatur to a tiny handful of poorly regulated insurance companies called Monolines, all based in New York. The monolines were another essential part of the New Finance.
The Federal Reserve, the world’s largest and most powerful central bank with what was arguably the world’s most liberal market-friendly Chairman, Greenspan, would back its major banks in the bold new securitization undertaking. When Greenspan said risks “which seemingly challenge human understanding,” he signaled that he understood at least in a crude way that this was a whole new domain of financial obfuscation and complication. Central bankers traditionally were known for their pursuit of transparency among banks and conservative lending and risk management practices by member banks.

Not ‘ole Alan Greenspan.

Most significantly, Greenspan reassured his Wall Street securities underwriting friends in the Securities Industry Association audience that November of 1998 that he would do all possible to ensure that in the New Finance, the securitization of assets would remain for the banks alone to self-regulate.

Under the Greenspan Fed, the foxes would be trusted to guard the henhouse.

In the United States, between 1980 and 1994 more than 1,600 banks insured by the Federal Deposit Insurance Corporation (FDIC) were closed or received FDIC financial assistance. That was far more than in any other period since the advent of federal deposit insurance in the 1930s. It was part of a process of concentration into giant banking groups that would go into the next century.

In 1984 the largest bank insolvency in US history threatened, the failure of Chicago’s Continental Illinois National Bank, the nation’s seventh largest, and one of the world’s largest banks. To prevent that large failure, the Government through the Federal Deposit Insurance Corporation stepped in to bailout Continental Illinois by announcing 100% deposit guarantee instead of the limited guarantee FDIC insurance provided. This came to be called the doctrine of “Too Big to Fail” (TBTF). The argument was that certain very large banks, because they were so large, must not be allowed to fail for fear of the chain-reaction consequences it would have across the economy. It didn’t take long before the large banks realized that the bigger they became through mergers and takeovers, the more sure they were to qualify for TBTF treatment. So-called “Moral Hazard” was becoming a prime feature of US big banks.

That TBTF doctrine was to be extended during Greenspan’s Fed tenure to cover very large hedge funds (LTCM), very large stock markets (NYSE) and virtually every large financial entity in which the US had a strategic stake. Its consequences were to be devastating. Few outside the elite insider circles of the very large institutions of the financial community even realized the doctrine had been established.

Once the TBTF principle was made clear, the biggest banks scrambled to get even bigger. The traditional separation of banking into local S&L mortgage lenders, large international money center banks like Citibank or J.P. Morgan or Bank of America, the prohibition on banking in more than one state, one by one were dismantled. It was a sort of “level playing field” but level for the biggest banks to bulldoze over and swallow up the smaller and create cartels of finance of unprecedented scope.
J.P.Morgan thereby paved the way to transform US banking away from traditional commercial lenders to traders of credit, in effect, into securitizers. The new idea was to enable the banks to shift risks off their balance sheets by pooling their loans and remarketing them as securities, while buying default insurance, Credit Default Swaps, after syndicating the loans for their clients. It was to prove a staggering development, soon to hit volumes measured in the trillions for the banks. By the end of 2007 there were an estimated $45,000 billion worth of Credit Default Swap contracts out there, giving bondholders the illusion of security. That illusion, however, was built on bank risk models of default assumptions which are not public and, if like other such risk models, were wildly optimistic. Yet the mere existence of the illusion was sufficient to lead the major banks of the world, lemming-like, into buying mortgage bonds collateralized or backed by streams of mortgage payments from unknown credit quality, and to accept at face value a Moody’s or Standard & Poors AAA rating.
Very soon after, the new securitizing banks such as J.P. Morgan began to create portfolios of debt securities, then to package and sell off tranches based on default probabilities. “Slice and dice” was the name of the new game, to generate revenue for the issuing underwriting bank, and to give “customized risk to return” results for investors. Soon Asset Backed Securities, Collateralized Debt Securities, even emerging market debt were being bundled and sold off in tranches.

On November 2, 1999, only ten days before Bill Clinton signed the Act repealing Glass-Steagall, thereby opening the doors for money center banks to acquire brokerage business, investment banks, insurance companies and a variety of other financial institutions without restriction, Alan Greenspan turned his attention to encouraging the process of bank securitization of home mortgages.
Former Secretary of Labor, economist Robert Reich, identified a core issue of the raters, their built-in conflict of interest. Reich noted, “Credit-rating agencies are paid by the same institutions that package and sell the securities the agencies are rating. If an investment bank doesn't like the rating, it doesn't have to pay for it. And even if it likes the rating, it pays only after the security is sold. Get it? It's as if movie studios hired film critics to review their movies, and paid them only if the reviews were positive enough to get lots of people to see the movie.”

Reich went on, “Until the collapse, the result was great for credit-rating agencies. Profits at Moody's more than doubled between 2002 and 2006. And it was a great ride for the issuers of mortgage-backed securities. Demand soared because the high ratings had expanded the market. Traders didn't examine anything except the ratings…a multibillion-dollar game of musical chairs. And then the music stopped.”

The raters under US law were not liable for their ratings despite the fact that investors worldwide depend often exclusively on the AAA or other rating by Moody’s or S&P as validation of creditworthiness, most especially in securitized assets. The Credit Agency Reform Act of 2006 in no way dealt with liability of the rating agencies. It was in this regard a worthless paper. It was the only law dealing with the raters at all.
Moody’s or S&P could say any damn thing about Enron or Parmalat or sub-prime securities it wanted to. It’s a free country ain’t it? Doesn’t everyone have a right to their opinion?

US courts have ruled in ruling after ruling that financial markets are “efficient” and hence, markets will detect any fraud in a company or security and price it accordingly…eventually. No need to worry about the raters then…

That was the “self-regulation” that Alan Greenspan apparently had in mind when he repeatedly intervened to oppose any regulation of the emerging asset securitization revolution.

The securitization revolution was all underwritten by a kind of “hear no evil, see no evil” US government policy that said, what is “good for the Money Trust is good for the nation.” It was a perverse twist on the already perverse saying from the 1950’s of then General Motors chief, Charles E. Wilson, “what’s good for General Motors is good for America.”
None of that would have been possible without securitization, without the full backing of the Greenspan Fed, without the repeal of Glass-Steagall, without monoline insurance, without the collusion of the major rating agencies, and the selling on of that risk by the mortgage-originating banks to underwriters who bundled them, rated and insured them as all AAA.

In fact the Greenspan New Finance revolution literally opened the floodgates to fraud on every level from home mortgage brokers to lending agencies to Wall Street and London securitization banks to the credit rating agencies. Leaving oversight of the new securitized assets, hundreds of billions of dollars worth of them, to private “self-regulation” between issuing banks like Bear Stearns, Merrill Lynch or Citigroup and their rating agencies, was tantamount to pouring water on a drowning man.

(full article "The Financial Tsunami Part IV, by F. William Engdahl here

Which leaves us where we are now. And I hope that this will leave you with the FUNDAMENTAL knowledge that:

A "Free Market" does not regulate itself at all.
Greed is not a virtue. It is not a creator of wealth.
Capitalism without proper oversight destroys the many at the benefit of the very few.


Lubbock Left said...

Man fade, that was a good post!

I have a hard time selling (ha!) the idea that greed isn't a virtue, which is especially ironic given that we're in the buckle of the bible belt.

Fade said...

I thought it was one of the better posts, myself. The longer the post is, the fewer comments I get, and no one usually touches the economic posts at all..

Yeah, I might be more religious if I hadn't been born here, in the midst of so much classismm and racism amongst the "better" people- the rich white holier-than-thou West Texas faithful...