Wednesday, April 1, 2009

The Great Delusion

While you're busy focusing your rage on the 163 million dollars in bonuses given out by AIG to executives in the division that gave us credit default swaps and the near ruin of the world economy in the process, consider that while AIG lost 61 billion in the 4th quarter and gave out those bonuses, the United States Federal Government lost over a trillion dollars for the year and gave out 1.5 billion dollars in bonuses to its employees.

You can also consider that as the Treasury Department hands out what's left of the 700 billion dollars in TARP funds to banks, the Federal Reserve has already very graciously extended a stunning 8.7 trillion dollars in loans and guarantees to banks. Two weeks ago, the Fed also printed up a trillion dollars in less than 48 hours. On average, we have about 4 to 5 trillion dollars in circulation. A trillion dollars printed up overnight represents a 20 to 25 percent hit on the value of our money. That's inflationary.

As you protest and wave signs around, thinking that you're actually accomplishing something, understand that Congress is in no hurry to repeal the two laws passed in the late nineties and the early part of this decade with near unanimity. That's right: everything that got us into this situation is still legal, and still possible.

So while you sit in your living rooms and believe that this is fixable, consider that those in charge of our nation are the very same people who got us into this mess. And while you hear that no one saw this coming know this: people did see it coming. Nouriel Roubini, an economist at Columbia University, saw this coming. He said it would happen for the past decade.

Nicholas Nassim Taleb also predicted that an outlying event (what he famously referred to as a "black swan") would occur, and he mocked the methods of risk management employed by Wall Street while calling their creators charlatans.

Meredith Whitney, a bank analyst for UBS, also called the current economic crisis before it happened.

People knew. Despite all the talk about how complicated the financial devices that created this mess were, despite all of the labryinthine methods of measuring and calculating risk, people knew. One doesn't get to an executive position in the banking industry by believing in a 33 to 1 debt to equity ratio. You can read all the hype about gaussian cupolas and complicated mathematical equations, and you can hear all the bewildering terms and acronyms like structured investment vehicles, CDO's, CDS's, LIBOR, and so on and so forth, but what created the current crisis was the willful pursuit of stupidity and the intentional suspending of common sense.

All of the brokers who falsified incomes on mortgage applications so that a librarian could claim an income of $250,000 a year in order to get a $500,000 mortgage, and all of their supervisors and the executives who looked the other way while this was going and pretended to believe that everything was fine knew that it wasn't fine. They also knew that such practices were widespread, that regulatory agencies had been starved of funds for enforcement and oversight, and that in all likelihood they would ride off into the sunset with their ill-gotten short term gains and bonuses and never face any sort of culpability for what they had done.

The executive in charge of AIG's London office, which pioneered and popularized credit default swaps, was a man by the name of Joseph J. Cassano. He began his career working under junk bond king Michael Milken. Milken would go to prison after pleading guilty to and being convicted of six felony counts, but Cassano would take his education under Milken over to AIG. Cassano knew that if even a small amount of the credit default swaps he'd issued as insurance for the securities made up of subprime mortgage debt were called, AIG didn't have the assets necessary to meet their obligation and cover the losses their clients faced on the securities.

He knew that it was mathematically impossible, because he's not a stupid man. He was fully aware of the reality that he was selling a product to cover losses on securities even though his company didn't have nearly enough assets to back the product. He went ahead with the sale of credit default swaps, and in the process, every security insured by an AIG credit default swap received a AAA rating, because AIG had a AAA rating as company. The net effect of this was that investors believed that those securities were a good investment when in fact they were not.

The banks that sold the securities knew that the mortgages which made up those securities had been attained with falsified incomes, and less than diligent checks on applicants, and so to cover this reality up they bought a credit default swap from AIG to make the securities and the mortgages contained within the securities look good. They knew that it was misleading, but that's why they did it.

The Congress which turned a blind eye to the financial sector for a decade and thus enabled the crisis to go deeper than it should have gone would engage in recrimination and hot aired rhetoric about bonuses and 25 million dollar jets from France, but the reality of the situation was that 25 million dollars was a distraction from what was a ten trillion dollar dissipation of shareholder wealth, and a 65 trillion dollar problem. That's how big the credit default swap and collateralized debt obligation market had become. It was four times the size of the United States economy.

They knew, and they allowed it to happen. They allowed it to continue on and on, because the financial services sector lined their campaign coffers with money, and employed members of Congress upon their retirement. Phil Gramm, the author of the Commodity Futures Modernization Act, went to work for UBS as an executive after he retired. The biggest contributor to Barney Frank's campaign was the financial services industry.

The Great Delusion has seized the imagination of the American people, causing them to believe that this was an unforeseeable and shocking event when in fact, it was foreseeable to anyone who would simply look at the facts and see them for what they were. The Great Delusion has caused the American people to focus on the meaningless outrages of expensive jets and minor bonuses for executives with taxpayer money, rather than looking at the larger picture of a govenrment that was complicit in the corruption and malfeasance which enabled this to happen. It's led people to rant and rave about 163 million dollars in bonuses and 700 billion dollars in bailout money while overlooking nearly nine trillion dollars in guarantees and loans from the Federal Reserve to banks.

It's time for the American people to get angry in a constructive way. It's time for them to start confronting the truth, which is this: our government will never fix this in its current form. If you want it fixed or resolved, you're going to have to remove the obstacle by protest or by force. That obstacle is Congress as it currently exists, and the myriad array of regulatory agencies staffed by men and women who have dual loyalties to their former employers on Wall Street and the national interest that they supposedly represent as enforcers of the nation's laws. We know which loyalty won out.

As it stands, we've had 700 billion dollars in bank bailout funds, 200 billion dollars in funds to AIG, 250 billion dollars to bailout mortgage holders, 1 trillion dollars in printed currency from the Federal Reserve, and nearly 9 trillion dollars in loans and guarantees to banks from the Federal Reserve. That's over 11 trillion dollars in total. How much more do you think we can afford?

We've got a Congress and President who want us to take on another 4 trillion dollars in deficits for the next year, on top of the trillion dollars in deficits for last year. Our national debt is exploding. We aren't rewarding competence, and we aren't holding those who created this crisis accountable. In America, we don't tolerate such wanton corruption.

When the colonists dumped tea in Boston Harbor, the tax on their incomes was a paltry 2%, and they were outraged enough to engage in lawless behavior because they believed that taxation without representation was manifestly unfair and lawless in and of itself. Is your Congress really representing you? Is it doing what you want it to do? If so, by all means, support it. If not, start considering your options. One of those options is unending and unceasing protest until political upheaval occurs in the form of mass resignation in order to pave the way for free and open elections.

Put an end to the delusion. Inform yourself, and act accordingly.