“The definition of insanity is doing the same thing over and over again and expecting different results.”
- Albert Einstein
America didn't arrive at our current predicament by chance. We got here by repeatedly applying the same solution to the same problem, over and over again, while ignoring the fact that it never worked. This has been true for decades, through both Republican and Democratic Administrations.
It makes a person wonder if the root cause has more to do with corruption than with ideology.
In December 1982, Reagan signed into the law the Garn-St Germain Depository Institutions Act. It was the culmination of four years of deregulation of the S&L Industry that began under the Carter Administration. Thus began a financial disaster.
What many people aren't aware of is how Wall Street profited from this, and caused it.
Immediately, money began flooding into regional thrifts from Wall Street investment firms through deposit brokers, who located S&Ls paying the highest interest rates and poured $100,000 deposits into those banks.
The large amount of money flowing into the regional thrifts from Wall Street firms like Merrill Lynch allowed the smaller banks to boost their reserves and make increasingly larger loans. Loans were made on bad real estate deals using inflated appraisals, directly to friends, family, and cronys, condominium development projects, commercial real estate developments, casinos, jets, and so on. Huge bonuses and salaries were paid out to bank presidents and everyone else involved in the scams.
Wall Street also profited on the other end of the transaction as well.
This all made S&Ls eager to sell their loans. The buyers – major Wall Street firms – were quick to take advantage of the S&Ls' lack of expertise, buying at 60%-90% of value and then transforming the loans by bundling them as, effectively, government-backed bonds.
When it finally blew up, the S&L's were shut down. However, the federal government stepped in and bailed out the bond holders (i.e. Wall Street) to the tune of $124.6 Billion.
A pattern had been set: the financial institution was deregulated, corruption and bad investments followed, and then the taxpayer would step in at the end to bail out Wall Street.
So what did Washington do about this disaster? Why they repealed the Glass-Steagall Act later that decade. Thus deregulating the entire banking system. Incompetence and theft had been rewarded.
In the mid-to-late 90's Long-Term Capital Management was a high-flying hedge fund that everyone wanted to be associated with. It averaged a return on investment of 40% several years in a row.
Then Russia defaulted on its sovereign debt and the bond market locked up. LCTM lost $4.6 Billion in just four months. Ironically it was Bear Stearns that was heavily involved in LCTM.
LCTM was so heavily leveraged, and had its fingers in so many different pies, that the Federal Reserve felt it necessary to arrange a bailout.
Goldman Sachs, AIGand Berkshire Hathaway offered then to buy out the fund's partners for $250 million, to inject $3.75 billion and to operate LTCM within Goldman's own trading division. The offer was rejected and the same day the Federal Reserve Bank of New York organized a bailout of $3.625 billion by the major creditors to avoid a wider collapse in the financial markets. The contributions from the various institutions were as follows:
* $300 million: Bankers Trust, Barclays, Chase, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, Merrill Lynch, J.P.Morgan, Morgan Stanley, Salomon Smith Barney, UBS
* $125 million: Société Générale
* $100 million: Lehman Brothers, Paribas
* Bear Stearns declined to participate.
Once again, capitalism had been saved from itself by the federal government.
The primary reason that LCTM got itself into trouble was through its derivatives trading. So what did the federal government do?
They deregulated the trading of derivatives in early 2001, of course.
Increasingly, institutions were trading the derivatives instruments that Mr. Gramm had helped escape the scrutiny of regulators. UBS was collecting hundreds of millions of dollars from credit-default swaps. (Mr. Gramm said he was not involved in that activity at the bank.) In 2001, a year after passage of the commodities law, the derivatives market insured about $900 billion worth of credit; by last year, the number hadswelled to $62 trillion.
Once again, Wall Street got what it wanted even after the federal government (with the backing of the taxpayer) had to save it from itself.
On October 18, 2001, all 15 stock analysts tracked by Thomson Financial/First Call rated Enron a "buy". In fact, 12 of the 15 rated it a "strong buy". On November 8, 2001, of those same group of analysts, 11 of the 15 still rated it as a "buy". Only one of them rated it a "sell".
On December 2, 2001, Enron was bankrupt and tens of thousands of stockholders were broke. This was also at the tail end of the dot-com implosion when stock analysts often gave buy signals right up to the point of bankruptcy for hopeless internet companies.
Because of these buy recommendations, a lot of the Wall Street insiders were able to unload these worthless stocks to suckers like you and me. But this blatant greed sometimes has a backlash.
So now, more than six years after Wall Street was going to clean up the stock analysts mess, what are the results?
Today, after the Nasdaq bust and the outbreak of the deepest financial crisis since the Depression, only about 5 percent of all stock recommendations on Wall Street advise investors to sell, according to Bloomberg.
Enron was the perfect example of Wall Street corruption. None of Enron's financing and accounting gimmickry could have happened without Wall Street's help and capital.
Investment banks and accountants played along. “To help disguise the company’s deteriorating financial position, many outside advisors and bankers either colluded in or acquiesced to these questionable transactions.
Now was the time for Congress to step in and protect the average investor on Main Street. Hearings were held and subpoenas rained.
Wall Street is the mother lode of political fund-raising, and 2002 is an election year. The congressional subpoenas were fishing lines with no bait and no hook. The exercise had everything to do with headlines and nothing to do with substance.
To put it simply. Nothing happened. There were no reforms. No one on Wall Street went to jail. There was no new regulation. The game continued.
Unlike the other examples I've already listed there was no formal bailout. However, the Federal Reserve dropped interest rates down to 1% and kept them there so that Wall Street banks could more easily weather the economic downturn that they created. This flood of easy money directly contributed to the housing bubble that has now burst and threatens the entire world with economic collapse...once again caused by Wall Street.
What can you say about an $8 Trillion Wall Street bailout that doesn't require a single executive to lose his job, a single reform to be put in place, or even any real congressional oversite. It can simply be described as The Biggest Taxpayer Rip-off in American History. Even the names haven't changed. These are the same banks who were involved in every single one of the scandals I listed above.
It isn't enough that they've been stealing from us for years. Now they want to steal from the next generation as well. Their greed has no limits.
'Coincidence' no longer applies
“Where justice is denied, where poverty is enforced, where ignorance prevails, and where any one class is made to feel that society is an organized conspiracy to oppress, rob and degrade them, neither persons nor property will be safe.”
- Frederick Douglass
Normally its pretty easy to attribute poor policy to simple incompetence, even when they consistently apply the exact opposite policy of what they should.
But then I noticed something from yesterday's news.
Illinois Gov. Rod Blagojevich getting arrested was a good thing. He certainly deserves it.
But that isn't what interests me. What interests me is that his arrest came just one day after he threatened Bank of America's business.
Coincidence? Remember Eliot Spitzer?
Is it just me or does the complaint implicating New York Gov. Eliot Spitzer in a frolic with a call girl read like it was written by people with a very large axe to grind with the now former rising star of the Democratic Party?
No one made more enemies on Wall Street than Spitzer. No one was more successful at prosecuting Wall Street crooks. He almost single-handedly kept what little credibility Wall Street still had, by enforcing what little regulation still existed.
Spitzer slapped Mutual Fund firms and Investment Banks. No one cheered more loudly when Spitzer went down than Wall Street.
Sure, Blagojevich was corrupt and Spitzer couldn't keep it in his pants. But when was the last time you heard of someone standing up to Wall Street and not paying the price for it? It appears that Wall Street holds both the carrot AND the stick. No wonder Washington appears to be a wholly owned subsidiary of Wall Street.