Apparently there has been some debate as to whether or not it is, I don't know, accurate to blame the present "economic crisis" on the so-called "financial elite". (See also the Columbia Journalism Review).
Well if you ask me the answer couldn't be more self evident. While, yes, our market economy will by definition have its ups and downs, our present crisis has been desperately exacerbated by the overwhelming greed, complete recklessness and a borderline sociopathic total irresponsibility from the "financial elites" in many countries of the Western world, but most notably the United States. A contagion that has now spread globally and implicated pretty much everyone.
Let me explain:
Here we are over two months (give or take a year) into what at some times is being called the "credit crisis" while other times often referred to as "the worst economic crisis" to hit the world since "The Great Depression". For myself its triggered its own private odyssey into trying to figure out not only how to respond but just what has happened here in the first place and just how this all came to be - specifically. For until two months ago I hadn't even heard of most of this financial arcana. And I had certainly never heard of Credit Default Swaps. I had heard of Derivatives, but had very little sense as to what they were.
So I begin this post with the above article The End by Michael Lewis, an article that is being widely read, linked and sent all over the internet(s). Lewis is a former investment banker himself who ended up leaving that world to write a famous book about it all - Liar's Poker - way back in the eighties. And in The End he revisits it all and tries to make sense. It has been a valuable read for me in that not only does Lewis attempt to explain all this for people like myself who might not know anything about it, but because he comes the closest I have yet read as to explaining why these Investment Banks, Banks, Hedge Funds, Money Managers, Bond Traders, Insurance companies etc. all engaged in the practice of Credit Default Swaps (for instance) in the first place, or why they were allowed to, beyond the given - because greed is great and that for a while at least they were making gobs and gobs of money.
Lewis does this in part by telling the story of Steve Eisman, a former lawyer who became a financial analyst before then becoming a hedge fund manager based in New York City. Eisman appeared to see before most the looming catastrophe that lay ahead for the U.S. subprime mortgage market and figured out a way to make money out of it. A lot of money. He did this by "selling short". By selling short Credit Default Swaps on Collateral Debt Obligations.
Now forgive me my ignorance dear readers (you always do) though I have already confessed to being very much a financial luddite and a stock market illiterate with regards to all of this (just ask my banker) but I had to at first look into just what "selling short" involved. So I googled it - and this is what I found:
From the Yahoo Finance Glossary - Selling short:
Selling a stock not actually owned. If an investor thinks the price of a stock is going down, the investor could borrow the stock from a broker and sell it. Eventually, the investor must buy the stock back on the open market. For instance, you borrow 1000 shares of XYZ on July 1 and sell it for $8 per share. Then, on Aug. 1, you purchase 1000 shares of XYZ at $7 per share. You've made $1000 (less commissions and other fees) by selling short.
(and here is a Google search page: define: Selling Short.)
So "Selling Short" is gambling basically. Its making a calculated, even educated guess that a stock, or in this case a bond (essentially) is going to go down and then figuring out a way to capitalize on this. Though one is not actually manufacturing or contributing anything - the talent, the glory and the reward seems to come from one's prescience, foresight and willingness to assume and manage the risk involved. For if you gamble that a stock or a bond is going to go down and you decide that you might want to "sell it short" - you then go out and "borrow it", but then suppose it happens to start going up - well then I guess you're screwed and on the hook for what could potentially be a lot of money. And this is the stock and financial market for those looking to play the short game.
So what then is a Credit Default Swap?
A Credit Default Swap is on the face of it, in theory, a kind of insurance on all of this, I guess. If one made a bond purchase one could then buy a Credit Default Swap as insurance for the chance that the value of that stock, or in this case bond, happened to go down. And one would in turn pay premiums to the 'agency' who was selling you the 'swap', as with any insurance. Except in this case they don't call it "insurance" they call it "swaps" because to call it "insurance" would legally require that the market be regulated. And the Credit Default Swap (CDS) market is (was) totally unregulated. And the people who created and engaged in it certainly wanted it to remain that way.
And just because we are trying to be all definitive here for all the financial luddites like myself I might as well post the Wikipedia definition of Bond:
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. A bond is simply a loan in the form of a security with different terminology: The issuer is equivalent to the borrower, the bond holder to the lender, and the coupon to the interest. Bonds enable the issuer to finance long-term investments with external funds. Note that certificates of deposit (CDs) or commercial paper are considered to be money market instruments and not bonds. Bonds and stocks are both securities, but the major difference between the two is that stock-holders are the owners of the company (i.e., they have an equity stake), whereas bond-holders are lenders to the issuing company. Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely. An exception is a consol bond, which is a perpetuity (i.e., bond with no maturity).
Bonds are issued by public authorities, credit institutions, companies and supranational institutions in the primary markets. The most common process of issuing bonds is through underwriting. In underwriting, one or more securities firms or banks, forming a syndicate, buy an entire issue of bonds from an issuer and re-sell them to investors. The security firm takes the risk of issue not being sold to investors. Government bonds are typically auctioned.
But the thing apparently about these Credit Default Swaps is that one can buy this insurance, one of these "swaps", without ever having to own the original bond or "asset" in the first place. So a Credit Default Swap then in this sense amounts to a kind of sidebet. It is a sidebet. All kinds of sidebets actually. An entire interconnected network of sidebets made largely with borrowed money. And as I find myself reading and researching on all this stuff this is always the question I inevitably arrive at: How this came to be and why this is allowed in the first place is a total mystery to me. And this certainly goes to the moral issue at the heart of all this, I feel. For if someone wants go and gamble all their money away in say Vegas, or even in Niagara Falls, I guess that's their perogative. But when you are a professional money manager dealing with shareholder and investor money - other people's money - and when all that money is all interconnected within the global financial system with everybody's else's money, and savings and pension funds and mortgages etc. it seems to me that it soon becomes everybody's problem. These arcane and exotic "financial instruments" were developed and designed after all, essentially - it seems to me, as a way to displace risk. To extend the risk. And that risk was absolutley massive. And it seems that the riskier it became the more arcane and complicated the entire enterprise became. And now it has certainly become the problem of the hundreds of millions of taxpayers who never engaged in any of this stuff, or who like myself, never knew anything about any of it in the first place, the instant the bankers and executives came looking for and graciously accepting their subsequent billions and even trillions of dollars of bail out money. (Yes, I'm Canadian - but our government has now gone and "purchased" $75 billion dollars worth of residential mortgages in order to "stabilize the industry". At a ratio of 10 to 1 in terms of population that would be the equivalent of the 750 billion U.S. bailout - no? What's the exposure of Canadian banks in the American subprime mess, and in the derivatives and CDS market?)
But lets try to get specific again. Many of the bonds that were at the heart of these Credit Default Swaps, for example, were bonds issued by these Mortgage Companies who were dealing largely in subprime mortages and were issuing many, many tranches of Collaterlized Debt Obligations.
(If you, like myself until recently, don't know what a Collaterlized Debt Obligation you could read my first post in this series, or you could take the time to watch the following video from the NPR show Marketplace:
Now back to the story Steve Eisman.
Steve Eisman was managing a hedge fund called Frontpoint (I assume that's the right site) and he thought that whole subprime mortage market was a house of cards and thus he was making it his business to sell the stock in some of these companies 'short'. But he was frustrated because as Lewis writes: "Smart as these trades proved to be, they weren’t entirely satisfying. These companies paid high dividends, and their shares were often expensive to borrow; selling them short was a costly proposition.". So:
Enter Greg Lippman (now affectionately known as 'Shittman' to his many detractors), a mortgage-bond trader at Deutsche Bank. He arrived at FrontPoint bearing a 66-page presentation that described a better way for the fund to put its view of both Wall Street and the U.S. housing market into action. The smart trade, Lippman argued, was to sell short not New Century’s (a mortgage company) stock but its bonds that were backed by the subprime loans it had made. Eisman hadn’t known this was even possible—because until recently, it hadn’t been. But Lippman, along with traders at other Wall Street investment banks, had created a way to short the subprime bond market with precision.
Here’s where financial technology became suddenly, urgently relevant. The typical mortgage bond was still structured in much the same way it had been when I (Lewis) worked at Salomon Brothers. The loans went into a trust that was designed to pay off its investors not all at once but according to their rankings. The investors in the top tranche, rated AAA, received the first payment from the trust and, because their investment was the least risky, received the lowest interest rate on their money. The investors who held the trusts’ BBB tranche got the last payments—and bore the brunt of the first defaults. Because they were taking the most risk, they received the highest return. Eisman wanted to bet that some subprime borrowers would default, causing the trust to suffer losses. The way to express this view was to short the BBB tranche. The trouble was that the BBB tranche was only a tiny slice of the deal.
But the scarcity of truly crappy subprime-mortgage bonds no longer mattered. The big Wall Street firms had just made it possible to short even the tiniest and most obscure subprime-mortgage-backed bond by creating, in effect, a market of side bets. Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. It cost money to make this side bet, but nothing like what it cost to short the stocks, and the upside was far greater.
The arrangement bore the same relation to actual finance as fantasy football bears to the N.F.L. Eisman was perplexed in particular about why Wall Street firms would be coming to him and asking him to sell short. “What Lippman did, to his credit, was he came around several times to me and said, ‘Short this market,’ ” Eisman says. “In my entire life, I never saw a sell-side guy come in and say, ‘Short my market.’”
So what Eisman was doing was buying insurance on these lousy tranches of mortgages betting that they would go down and that the people who were selling him this insurance - in this case "Deutsche Bank or Goldman Sacks" - would have to in turn have to pay off. What really freaked him out was that the people he was buying these Credit Default Swaps from were actually encouraging him to do just that, something that this experienced hedge fund manager and short seller had never seen before. So - why?
As a guy named Russel in this NPR Planet Money link asks:
I too cannot figure out how shorting the CDO market was, in effect, propping it up.
Its the same question I keep asking myself. Its the same question Kevin Drum asks himself - here:
I still won't pretend that I fully understand this. In fact, every time I read a story like this, it seems to get right up to the good stuff — "They were creating them out of whole cloth. One hundred times over!" — and then suddenly moves on. But I want more! I want an entire 10,000 word piece on how the combination of CDOs and CDS allowed Wall Street to magnify their underlying subprime losses so catastrophically. Instead, I just get a teaser and then the story meanders off in a more colorful direction.
I'd like to read that piece too. But nonetheless, its the same question that Steve Eisner was apparently asking himself. Until he came to a kind of eureka moment while attending a subprime mortgage conference in Las Vegas of all places. Again, from the Lewis piece:
“You have to understand this,” he (Eisman) says. “This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says.
Later on he was having dinner with a guy who was a CDO manager whose job it was the sell these lowest of the low tranches of mortgages - what Eisman had taken to calling dogshit - and he assumed that the guy would be having a hard time but instead he told Eisman that he was selling everything out.
“Then he said something that blew my mind,” Eisman tells me (Lewis). “He says, ‘I love guys like you who short my market. Without you, I don’t have anything to buy.’ ”
That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”
I still don't quite understand why this is allowed either, but I'm still trying and I suppose I'm getting closer. David Kestenbaum in the same NPR Planet Money link as above makes his own attempt:
Ok, here's my stab at it:
Eisman was trying to find a way to bet that the housing market would crash. One of the ways he did this was by buying insurance on subprime mortgages, through something called a credit default swap.
Ok, selling insurance may seem like a strange way to place that bet. But imagine there is a house by the ocean and you want to bet that it's going to get hit by a hurricane. One way to do that would be to take out an insurance policy on the house, even though you don't own it. So every month you pay a small premium for the insurance, maybe $200. This goes on for a couple years. Then the house gets hit. And the insurance policy pays off, for say $1,000,000. You've lost a couple thousand, but made close to a million.
The reason the CDO expert was happy that Eisman was buying insurance, was that the expert had clients that were dying to sell that insurance. These were people who wanted to buy up mortgages, but there just weren't enough around. So they sold insurance instead. In a sense it was the same thing, owning mortgages and selling insurance. If you own someone's mortgage, then you get steady interest payments. If you sell insurance on someone's house, then you get paid steady insurance premiums. The two are similar on the downside also. In each case, if things go bad, you could lose an amount equal to the total value of the house.
There was a whole industry build up around this similarity. In a regular CDO (collateralized debt obligation) you actually own some mortgages in a pool. In a synthetic CDO you're selling insurance on a slice of mortgages in a pool. They're similar instruments, but constructed from different pieces. In one you own the mortgages. In another you're selling insurance on them.
Still confused? Me too. But I'm still doing my best. If you like, you could watch another video from Marketplace - this one specifically about Credit Default Swaps:
(Why is that the American public media is doing a much better job of following and explaining this story, it seems to me.)
Or you could read this NYT piece from last Febuary 17 ('08) that attempted to foresee what was coming:
Few Americans have heard of credit default swaps, arcane financial instruments invented by Wall Street about a decade ago. But if the economy keeps slowing, credit default swaps, like subprime mortgages, may become a household term.
Credit default swaps form a large but obscure market that will be put to its first big test as a looming economic downturn strains companies’ finances. Like a homeowner’s policy that insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts.
The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market.
$45 trillion? That's so last year. I've been reading numbers as high as $72 trillion. To put this in perspective remember that the entire annual GDP of the United States itself, the largest economy in the world, is (according to the CIA) 13.3 trillion dollars. The GDP of the entire global economy (circa 2007) is thought to be just over 65 trillion dollars. That doesn't blow your mind? The entire Derivatives market itself - according to the NYT as of 2007: "is valued at $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago.".
So just what is a derivative? A derivative is a piece of paper that can be bought and sold for real money but isn't attached to a real asset. Its value is simply derived from something tangible -- hence the name. You hear a lot of talk these days about the "real" nuts-and-bolts economy, and derivatives are in essence the exact opposite: They represent an unreal economy, created by financiers in mahogany-paneled office suites in New York and London, and it's this shadow economy that teeters on the edge of collapse today, threatening to bring down much of the real economy with it.
There are all sorts of derivatives. They are essentially bets -- you can bet that a market will go up, or down, or that a particular company will do well or poorly. You can bet on interest rates going up or down, or the value of a country's currency, or you can make more exotic bets about just about anything in the world -- even what the weather will be like at some point in the future.
(BUDDY: I'll bet a million dollars it snows this afternoon.
JOE SCHMOE: Oh yeah. You think you're so smart - what kind of flakes asshole? Maybe you should be in the "flakes derivative market". Because you know, the Inuit have over a hundred words for snow. Real men play the flakes. Just saying.
But then it doesn't snow, so BUDDY in a anxious panic, desperate about his financial future, incredulous as to the way things have turned out, calls his Congressman. He knows him. They went to Yale together.)
He links to this Andrew Leonard Salon piece - Panic on Wall Street - and Leonard also picks up on this useful NFL metaphor as a way of explanation:
A metaphor might be useful here. The real economy is like the Super Bowl. Real men on a real field push each other around and play with a real ball for a set period of time, and the team with the most points at the end wins. But while all this is going on, millions of outsiders who are not physically involved in the game bet on its outcome. Only they don't bet just on the outcome. They also bet on the spread -- how badly one team might beat the other. Or they can get more creative and bet on what the combined score of the teams might be, or which team's quarterback will be the first to be injured. There's absolutely no limit to the things that you can bet on, as long as you can find someone to take your bet.
The betting economy is the unreal economy. All those sports bets, no matter how kooky, are financial exercises whose value and meaning are derived from what happens on the field. Theoretically speaking, the betting economy exists in a separate dimension from the actual game, but we all know that's not true. There's so much money involved in gambling that the temptation to fix the results becomes irresistible. Players and referees, for instance, can be bribed.
We can call a bribed NBA official an example of "spillover" from the betting economy into the sports economy. The very same thing happens in the real and unreal economies. So much money is riding on all the derivative bets connected to the housing sector that Wall Street speculators essentially rigged the housing sector to make their bets pay off.
And then remember to take into account that the money (and I would guess most, certainly the majority of the money) that was used to engage in all of these practices was "leveraged". That is to say that it was borrowed money. Somebody else's money, if it ever even existed at all. As Joshua Holland explains:
This brings us to a key issue in the banking mess, one that has serious ramifications for how we move forward in the future. Obscured by the finger-pointing is a simple question: How could a drop in the value of the American housing market -- even a 20 percent drop in home prices -- threaten to bring down the entire global economy?
Part of the answer is "leveraging" -- using a limited amount of cash to buy a much larger position in an investment. Leveraging is a common investment tool, but there are rules in effect in regulated markets like the major stock and bond markets that limit the amount that an investor can leverage -- for example, the SEC says you have to put up at least 50 percent of the cost to buy a stock on American stock exchanges. But these fancy debt-backed investments are contracts between two gamblers and are not subject to those rules. They're traded "over the counter" -- in an opaque and largely unregulated exchange.
He links to Nouriel Roubini who explains:
Today any wealthy individual can take $1 million and go to a prime broker and leverage this amount three times; then the resulting $4 million ($1 equity and $3 debt) can be invested in a fund of funds that will in turn leverage these $4 millions three or four times and invest them in a hedge fund; then the hedge fund will take these funds and leverage them three or four times and buy some very junior tranche of a CDO that is itself levered nine or ten times. At the end of this credit chain, the initial $1 million of equity becomes a $100 million investment out of which $99 million is debt (leverage) and only $1 million is equity. So we got an overall leverage ratio of 100 to 1. Then, even a small 1% fall in the price of the final investment (CDO) wipes out the initial capital and creates a chain of margin calls that unravel this debt house of cards. This unraveling of a Minskian Ponzi credit scheme is exactly what is happening right now in financial markets.
Indeed, as this NYT article - Agency's '04 Rule Let Banks Pile Up New Debt - explains in 2004 representatives of the major investment banks had demanded and received a meeting of the Securities and Exchange Commission where they asked for a change in the laws governing just how much they were legally bound to keep in capital reserve:
On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.
They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.
The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.
And they got what they wanted:
After 55 minutes of discussion, which can now be heard on the Web sites of the agency and The Times, the chairman, William H. Donaldson, a veteran Wall Street executive, called for a vote. It was unanimous. The decision, changing what was known as the net capital rule, was completed and published in The Federal Register a few months later.
With that, the five big independent investment firms were unleashed.
In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.
Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio — a measurement of how much the firm was borrowing compared to its total assets — rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt. The ratios at the other firms also rose significantly.
(This article is one of many in the recent NYT series on the 'financial crisis': The Reckoning.)
Indeed, the lobbying arm of this industry, the International Swaps and Derivatives Association had always fought hard against any kind of regulation or government oversight and in 2000, in the last vote of the then lame-duck Congress they achieved what has been described "the final nail in the regulatory coffin" with the passage of the Commodity Futures Modernization Act. After the collapse of Enron, which up until all this recent crisis had been the largest corporate failure in the history of the United States, the Act was famous for what came to be known as its Enron loophole which exempted over the counter energy trades from government regulation. The Act was championed by then Senator Phil Gramm of Texas, who has subsequently became famous for the following remarks made while he was an advisor on economics with the McCain/Palin campaign:
Or you could do what I've been doing a lot lately which is to read the blog and listen to the podcasts from NPR's Planet Money. They post great posts on all of this stuff like: AIG and the trouble with Credit Default Swaps. Its where I found that great This American Life Podcast - The Giant Pool of Money for my first post in this series. And they also have a new podcast specifically about Credit Default Swap market - NPR - another Frightening Show about the Economy . I'd quote from it directly but they haven't issued the transcript.
Or you could watch the following two videos from 60 Minutes on both the Credit Default Swap and Derivatives markets:
Or just in case you wanted to read just one more football metaphor on who is responsible for all of this you could read Matt Taibbi cut to the chase in his original post on the subject - Wall Street: Less Responsible Than a Coked-Out NFL Running Back :
I plead guilty. I'm not an expert on any of this. Anyone who is, is welcome to write to me and fill me in. And obviously it wasn't just CDOs and CDS and MBS that caused this crash. Everything points to a confluence of many different bad or unsound practices. There are plenty of people out there who actually know what they're talking about who are describing these issues – the predatory lending, those crazy subprime mortgages in which the low teaser rates were like the free drinks that brought borrowers to the blackjack table (hoping they would hit 21 via continually rising real estate prices), the ramping back of one Roosevelt-era regulation after another (culminating in the repeal of the Glass-Steagall Act), the generally high level of speculative home-buying, etc.
But the root cause of all of this is the same thing that has caused every speculative bubble since the tulip craze. It's a bunch of assholes who think that because they spent a few days scribbling some equation on a napkin, the laws of nature have been repealed. You can't turn a Kingston charcoal briquette into a diamond no matter how hard you squeeze and you can't conquer the problem of "risk" in investing by slicing a bunch of mortgages up into itty bitty pieces and then mixing the good ones up with the bad ones (so that it all looks kosher from a distance, if you squint).
The reason I thought it necessary to even write about this at all is that I haven't anywhere seen anyone say what absolutely needs to be said about this crash. You see finance/media people on TV just kind of moping around, with this hangdog look on their face that says, aw, man, this blows, what shitty luck. Like this downturn in housing prices was some terrible accident, like a hurricane or a flood.
Bullshit! These people on Wall Street – who are often the cream of our educational crop, the products of our most advantaged families – exist in society for exactly one reason. Yes they're supposed to create wealth (and it's great if they can figure out a way to do more with a dollar than you or I would). But the number one thing they're supposed to do is not fucking lose wealth. That is the number one justification for their enormous salaries and astonishingly privileged existences. These people are not writing Huck Finn, they're not painting Still Life With Apples, they're not inventing the Atlas rocket, they're not designing timeless buildings or making inspiring speeches.
They do exactly one thing, and that is guard our money. Their first, second, third, fourth, fifth, sixth, seventh, eighth and ninth moves of every day have to be utterly conservative. They are the people we trust with the keys to the car. That's why they get to sleep in the grownups' room. That's why they get to live in palaces and work in eighty-story obelisks. Because if you just give some dude at a bar nineteen billion dollars, he's going to spend half of it on beer and the rest betting on the Phillies. Right? That's why you have to give it to the guy with two degrees from Yale, the guy who's studied every great book on economics since The Wealth of Nations, the guy who spent eight years in the best schools in the world learning the difference between a calculated risk and a seat-of-the-pants gamble.
Well, apparently not. What we're finding out about this crisis is that you basically couldn't have found a weather-beaten crack hound on the streets of the worst ghetto in America who would have taken worse care of our nation's treasure than this community of risk-addicted craps-playing blowhards.
Sports fans out there, you know who Travis Henry is? That guy who played running back for the Bills, Titans and Broncos? Travis Henry made many millions of dollars playing football over the years, but we found out this fall that he's broke and deep in debt because a) he fathered at least ten children by ten different women b) he's got an apparently incurable drug problem and c) he tried to get out of his financial problems by dealing coke and ended up getting arrested doing it. Now those ten kids are really in trouble for about the next 18-25 years.
Well, Travis Henry would have done a better job of things than Wall Street did with the world's wealth. These guys didn't just bet the house on their investments. They bet fifty times the house! They bet a thousand times the house! They were absolute fucking madmen. All those brilliant ways they thought up to make four hundred different bets with the same dollar made them infinitely more dangerous to society than some coke-freak running back pumping his jism into two cookies on every road date. Think about that. If Travis Henry had been in charge of all that money, we'd be FINE now! Even Travis Henry couldn't even imagine the scale of desperate irresponsible greed we're talking about with these guys. They were like a bunch of rabbits on strychnine. You don't get to an almost mathematically inexpressible financial collapse through merely ordinary greed and irresponsibility of the type you might encounter in your home life, or even on the Buffalo Bills. You need an advanced education to dig this big a hole.
Things like the CDO and the CDS are just the tools these idiots used to dig that hole. There were plenty more. But the basic concept is the same across the board. They were supposed to safeguard our money and instead they gambled with it like a bunch of coke addicts. You know how a coke addict goes from having money to buy his own coke, to selling the shit in his house to buy coke, to stealing items from his mother's place to buy coke, and then finally ends up in Jayson Blair/Maureen McCormick territory, sucking cocks to get the money to buy the coke? Well, these guys in Wall Street were about fifty stages past that. They were promising to promise to suck a cock to get the money to buy the coke. This crash happened when the dealer finally decided they weren't good for it.
Just don't let anyone tell you this was all bad luck. If they'd been doing their jobs, the possibility of bad luck would have been figured into the equation.
Or as George Packer wrote:
The moral code of these Wall Street executives corresponds to stage one of Lawrence Kohlberg’s famous stages of morality: “The concern is with what authorities permit and punish.” Morally, they are very young children. The Swiss bankers are closer to stage four, most common among late teens, where a concern for maintaining the good functioning of society takes hold. Stage six, an elaboration of universal moral principles based on an idea of the good society, is a distant dream for the titans of global finance.
In private life, extreme indebtedness, bankruptcy, the ruin of those close to you, and dependence on the government dole are generally thought to be causes for anguish, self-denial, and a degree of shame. But if you’re a financial executive with an exalted title, a big enough salary, a deep enough debt, and a vast enough handout, these same disasters entitle you to go on living and feeling about yourself much as you did before. You even have a right to think that the taxpayers owe it to you—that it’s for their own good, not yours. You don’t have to explain yourself; you certainly don’t have to apologize.
I would like to see these malefactors of great wealth apologize to the country. I would like to see them organize their own press conference in a lineup on Wall Street and, in the manner of disgraced Japanese officials, bow low to the pavement, express contrition, and beg their countrymen’s forgiveness. Such a scene would go some way toward cleansing the smell of the financial crisis.
Of course, nothing like this is going to happen. So instead, like the parents of two-year-olds, the next Congress should summon them to Washington and publicly punish these executives who, in Kohlberg’s terms, “see morality as something external to themselves, as that which the big people say they must do.”
But we will give Steve Eisman the last word:
"It was like feeding the monster," Eisman says of the market for subprime bonds. "We fed the monster until it blew up."
So there it is. I rest my case.
The monster blew up. So bring on The Monster.
But as I've already come this far - let me see if I've actually got this straight:
At the risk of portraying this as some how exclusively a Republican problem (which it decidedly is not) let's take this time in these final days to recall that after pretty much stealing the Presidential election in 2000 the Administration of George W. Bush assumed office with projected ten year budget surpluses of 5.6 trillion dollars - he immediately enacted and then enacted again tax cuts that amounted to about a one trillion dollar return - primarily to wealthiest one percent in the United States (over a ten year period up and until the time that the spending on old age benefits for retiring baby boomers begins to kick in). He also started at least two wars including the war in Iraq where he deliberately mislead his people as to the reason why it needed to be fought with no plan for the subsequent occupation. Its a war that continues to cost about twelve billion dollars a month officially, and alongside the War in Afghanistan is presently projected to ultimately cost more than three trillion dollars and growing. (Not to mention the fact by some estimates over one million Iraqi civilians have now been killed, alongside over 4200 American soldiers, with maybe 100 000 wounded) And there is presently no end in sight for either war. The overall Defense Budget under George W. Bush has also now officially risen to 612 billion dollars, but as Chalmers Johnson explains:
Our annual spending on "national security" -- meaning the defense budget plus all military expenditures hidden in the budgets for the departments of Energy, State, Treasury, Veterans Affairs, the CIA, and numerous other places in the executive branch -- already exceeds a trillion dollars, an amount larger than that of all other national defense budgets combined.
And the U.S. budget deficit itself might soon reach a trillion dollars, with the debt now on its way to $11 trillion dollars.
But meanwhile, back on Wall Street,
while all this other stuff has been going on apparently the "financial elites" (forgive me, I can't come up with a better term) of the United States have been engaging in the financial practices of "exotic" and "arcane" instruments like Credit Default Swaps and Derivatives - trading in what has been termed a "shadow economy", completely unregulated (and maintained as such through deliberate political pressure and design), extremely opaque to the general tax paying public at best, totally and completely unknown at worst. Practices that essentially gamed
the real economy - creating an unreal economy to a market value of hundreds of trillions of dollars. An unreal economy that began in the late eighties but really, really took off after the year 2000.
And now that unreal economy is imploding with catastrophic effects spilling out all over into both the real and unreal worlds alike, resulting in things like - one in five American homeowners now owing more on their mortgages than the worth of their actual houses (underwater, as they call it), an economy that has shed 1.2 million jobs in three months, the bankruptcy and collapse of one of the country's oldest investment banks, and the bailout of the largest insurance company in the world - leading ultimately to this massive combined bailout from the federal government, now - here, in these final days of the Bush Administration. A cash outlay from the U.S. Treasury that presently amounts to more than $4.6 trillion dollars - $4.6165 trillion as of November 25. If that is indeed the correct number - if this article is to be believed, for instance. And if it is than that would mean that this bailout has now cost more than the:
"• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion
TOTAL: $3.92 trillion"
And (as the author goes on to state) - this is more than the entire cash outlay for the entire American commitment to World War II:
The $4.6165 trillion dollars committed so far is about a trillion dollars ($979 billion dollars) greater than the entire cost of World War II borne by the United States: $3.6 trillion, adjusted for inflation (original cost was $288 billion).
Go figure: WWII was a relative bargain.
But this is the low estimate.
According this Edmund L. Andrews article in the NYT the real cost is more in the order of $7.8 trillion:
In the last year, the government has assumed about $7.8 trillion in direct and indirect financial obligations. That is equal to about half the size of the nation’s entire economy and far eclipses the $700 billion that Congress authorized for the Treasury’s financial rescue plan.
Those obligations include about $1.4 trillion that has already been committed to loans, capital infusions to banks and the rescues of firms like Bear Stearns and the American International Group, the troubled insurance conglomerate. But they also include additional trillions in government guarantees on mortgages, bank deposits, commercial loans and money market funds.
So there you have it.
And for some reason, dear reader (if you've made it this far) I just can't think of all of this stuff without remembering the fact that, you know, people in Haiti are eating mud in order to force off imminent starvation.
Over three billion people live on less than $2.50 a day. Over 80% live on less than ten dollars a day.
And yet trillions of dollars are presently flowing out of government coffers (most of it borrowed - from whom and for how long?) in order to help prop up the financial industry, and some of the richest people on the planet, and ultimately save the entire global economic system, as they say.
Because if we don't, and they didn't get that money ...