Sunday, September 15, 2013

Five years on

Five years ago this week Lehman Brothers collapsed when the Federal Reserve and the Treasury Department failed to come to their aid as they had with Bear Stearns earlier that year and began the crisis that would lead to the great recession. And yet, after five years, nothing has really changed. No one has been indicted. There have been modest attempts to create (relatively toothless) reform which is being fought at every turn by people who get million dollar bonuses. When will things change?

Inside Job - Documentary about
the Great Recession

The Genesis
The basic reason things started going south was the lax mortgage standards that were being applied. Everyone from individual mortgage brokers to the companies that packaged and resold those mortgages to the ratings agencies that gave them AAA ratings, everyone felt absolved of responsibility. Everyone knew that not requiring people to document their income was a bad idea but everyone felt there was a "somebody else's problem field" around the whole thing and on it went.
As a brief background, when banks used to lend money it was actually their money you were borrowing (well, their depositors' money). And they were generally pretty careful about it because they didn't want to go out of business. Then someone (who should burn in Hell) thought of packaging up these mortgages together into a "financial instrument" (called a "Collateralized Debt Obligation" or CDO) that they could then sell to someone else. The bank got its money back and the risk was now spread out among a lot of different mortgages and a lot of different investors. The banks didn't feel obligated to check the documentation of their borrowers that much because they were going to get paid back anyway and besides - if one or two of those mortgages went south, the whole CDO was still pretty sound.
The problem, of course, was that as more and more banks did this kind of thing, more and more CDOs were created with more risk. The mortgage brokers got paid (and got bonuses), the banks got their money (plus extra), and the market got flooded with financial securities that were worth less than the bits in the computer that represented them. And the ratings agencies - paid by the banks to rate these instruments - continually claimed that they were AAA rated (the highest rating possible).
When I was looking at getting a mortgage back in 2002, I was encouraged (by my investment advisor, no less) to look at ARMs. Why? Because wouldn't I be better off in a 5 or 7 years than I am today? And then I could refinance down to a lower rate if I wanted to. The president himself (GWB) was telling you that you deserved as good a house as anyone else.  What they peddled was "hope" - and Americans ate it up.

The Problem
The problem was, of course, that none of these really were AAA-rated securities - they were junk at best and the ratings agencies totally dropped the ball (or chose to look the other way) on these. But because they were AAA rated, large, stable groups (pensions and mutual funds) saw them as viable options. They were "safe" because they were AAA rated. Later, under oath, the heads of all three major ratings agencies said that ratings are just "their opinions", all the while convincing everyone that those "opinions" are extremely well-informed.
As Wall Street created more and more CDOs, a company called AIG (which you helped bail out) allowed people to insure against losses on those CDOs (called "Credit Default Swaps"). This in itself wasn't much of a problem as it was pretty much just an insurance policy. But AIG did something no other insurance company would do - it allowed people who had absolutely no relationship to the CDO to insure against it. This would be the same as having you and everyone else in your family separately insure your house. When your house burns down, you all get paid. Um, say what? Yes, that's what AIG did. Why? Dollar signs and lots of them. They thought the CDOs were stable (they ARE rated AAA, right?) and why not take all these suckers', I mean, investors' dollars if they want to bet against sure things?

The Collapse
When Lehman Brothers collapsed just over five years ago, suddenly everyone was on the hook for a lot of money. Lehman was one of the five main companies in the investment banking arena - the others being Morgan Stanley, Goldman Sachs, Merrill Lynch, and Bear Stearns which had collapsed and been bought up earlier in 2008. Lehman was forced to file bankruptcy immediately, which had a cascading effect. Other countries' bankruptcy laws effectively shuttered Lehman overnight - there was no opportunity to slowly unwind the debt. First, all of the transactions that Lehman was processing were stopped immediately. Then AIG owed $13 billion to CDS holders on Lehman's debt - and they didn't have it. The scariest thing that happened was that the commercial paper market dried up. Large companies use the commercial paper market (a short-term loan system) to get money for their expenses (payroll, purchasing, etc). Without those loans, the company can't pay its bills. Part of the reason for the TARP funding was to calm the commercial paper market. After that, things continued to go south.

The Consequences
The consequences to the American people has been devastating. To date, over 15.7 MILLION home have been foreclosed upon. Our unemployment rate climbed over 10%, the highest since 1982 and second highest since the Great Depression.
Yet the top 1% of the country (including many of those who run and work at the same companies that caused this mess in the first place) have continued to distance themselves from the less fortunate 99% below them. Also, many of the people in government (both the current Obama administration and the previous ones) have very close ties to Wall Street (being CEOs, on the boards of those companies, consulting with those companies, etc.).
Sadly, despite the potentially criminal behavior on the part of these people, nothing has been done about it. No indictments filed, no convictions, no fines... Nothing. Why? Because the people making the rules are so deeply in the pockets of the financial services companies.

The Next Steps
Today, Larry Summers (one of the architects of the deregulation of the financial system) withdrew his name from consideration to head up the Federal Reserve. I cannot be happier that we won't potentially have him taking over for Bernanke who took over for Greenspan - both of whom were primarily responsible for continuing the deregulation started in the Reagan administration.
I think that we need to consider industries, regardless of what they are, as we do children. There are times when raising children that, based on their maturity, you give them more responsibility and less oversight. If they abuse that responsibility, you need to institute more oversight (regulation in the government's case). If they continue to abuse it, you "ground them" (impose fines, more onerous regulation, etc.). What the financial industry has shown - without a doubt - is that it's behaving as a 5 year old amped up on caffeine and sugar (in actuality, cocaine and hookers).

What Can I Do?
The most important things that I think should be done are:

  1. Reinstate the Glass-Steagall separation of depositor funds from investments funds. When you can gamble with someone else's money, what do you have to lose? The answer is "nothing" and, in actuality, you have a lot to gain (as has been proven over the past 20 years). Senator Elizabeth Warren (D-MA) is pushing a bill right now to do this. Support Senator Warren's efforts to pass this bill!
  2. Regulate the industry, especially the ratings agencies, but also the investment banks. With evidence that Goldman Sachs was pushing investments on their customers while internally betting against those investments (going so far as to call them "shitty deals"), regulators need to go far above and beyond what they've done in the past.
  3. Prosecute, prosecute, prosecute. The Federal government seems completely unwilling to take any steps to actually pursue any cases against people involved. Everyone from those banks who bilked investors of billions of dollars has been allowed to keep that money. If that doesn't enrage you, you need to check your pulse. If the Feds won't do it, the states' Attorneys General should pursue cases. Eliot Spitzer did it while AG for New York and got $1.6 BILLION in fines levied against those companies. Now why would a company, with gazillions of lawyers on retainer, NOT go to court and pay millions in fines? Because they know they did something wrong and don't want to get persecuted in the court of public opinion. Maybe we should anyway.
These are just a couple of things, but they would be more than the symbolic efforts that have been attempted to date. Write to the president. Write to Jack Lew, Treasury Secretary, to take some action. Write to the SEC. Get your friends aware of what's happened - and especially what hasn't happened. Get mad. Start making some other people mad too (that's part of the purpose of this post). It's been five years. Are you better off today than you were five years ago? I'm guessing not. But guess who is? The people who created this mess. And I think it's time they were made accountable for it. Five years is five years too long.


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