First off, I’ve learned that our financial system is an elaborate house of cards. No. Wait. Cards are much too sturdy and tangible. Our system is more like a house built from a delicate, gossamer thread, spun by invisible fairies. In other words it’s a system built on wishful thinking, speculation, confidence, gut feelings and the opinions of others here and in other parts of the world. Wall Street is like a house which is only as strong as the people inside it think it is. Does that make sense? And the strength of the house changes from day to day depending on how confident Wall Street thinks it is.
To continue with the house metaphor – apparently a few years ago bankers and other capitalists decided that the mansion needed a new wing. Perhaps they wanted somewhere to put the new 102” plasma screen HDTV. So they created a new way to make profit.
Please admit the following simplification of the situation:
It was the turn of the new millennium and home values were booming. People were flipping properties and making profits by the basketloads. Greedy bastard mortgage loan officers made sales pitches worthy of used car hucksters on late night television commercials. “Bad credit, no credit? No problem!”
They offered loans for little or no money down, with no income verification. Granted there were greedy bastard homebuyers who bought 4,000 sq. ft. mcMansions they knew they couldn’t afford. But greedy bastard homebuyers were reinforced in their greed by greedy experts who told them, housing values ALWAYS increase. They don’t go down. So don’t worry about your adjustable rate loan. Don’t worry that you’ve got a $250,000 home with a household income of $80,000. In a few years, you’ll be able to turn around and sell that baby for a million dollars.
Enter the greedy bastard bankers who saw the potential for profit on these loans. The loans were turned into things called ‘mortgage backed securities.’ Again, I wouldn’t know an asset-backed security if it punched my grandmother in the throat, but apparently, if you’re holding someone else’s loan, you’re making money on the interest the borrower is paying. And if you’re holding 10,000 loans, especially sub-prime loans where the interest rates are 10, 12 even 15%, well, my friend you stand to make a shitload of money.
But, it doesn’t take a financial whiz to figure out that the loans won’t be worth the paper they’re printed on if the borrowers can’t pay them back. And that’s what started happening. People began defaulting on their loans, left and right. Unfortunately, some of the world’s biggest financial institutions like Lehman Bros. and Bear Stearns were holding billions of dollars in this bad paper. Worse than that, it turns out that one of the world’s largest insurance companies – AIG – was insuring those risky investments for the big financial institutions. These are the aforementioned ‘credit default swaps.’
So I’m asking myself, how did all these smart people, who already knew how to make millions of dollars get caught in a shitstorm without an umbrella? Seems to me, the millions weren’t enough. They wanted billions. And they didn’t like the rules which kept them from getting there like the Glass-Steagall act passed during the Great Depression (doy). 10 years ago Sen. Byron Dorgan predicted massive bailouts of the industry following the passing of the Gramm-Leach-Bliley Act which allowed big financial institutions to merge into mega-financial institutions:
You should read more about this – this is fascinating:
(You know who else voted against G-L-B? Paul Wellstone – bless his soul.)
My very good Libertarian friend Eric is fond of a saying that goes something like, ‘A government that is big enough to give you everything can also take it away.’
Well, I think Americans should be equally – no much, much more suspicious of big banks and big business. Unlike most of the government which is actually, pretty transparent, big banks and financial corporations don’t have to tell you what they’re doing unless they’re a public company and you’re a stockholder.
As this latest episode shows, financial institutions that are ‘too big to fail’ are just plain TOO BIG. And that’s because too many people are just too damn greedy to be trusted.