Because what if in the event of an accident, god forbid, something happens to you and you aren’t in a position to meet the challenges and rise to the occasion, rectifying whatever damages were incurred?
Is it the responsibility of innocent loved ones to suffer when you encounter a blow, to swallow the blow (BEND OVER, kiddies!), from which you may or may not recover?
Is it worth what may happen to your loved ones and the loved ones of all involved parties, which may include people better off than you, again god forbid, or people worse off, who will have an even harder time meeting challenges in times of financial strain?
Are you in the habit of thinking of yourself and yourself only?
Have you heard that we are not alone here, that nothing happens in a vacuum as we are all connected, all bound to one another, each having rights and privileges, which come with responsibilities, which you seem so willing to shirk, which you seem hell bent on shirking even as you cling to the freedoms you must imagine are free?
Because freedom isn’t free.
Because have you imagined what might happen, what conceivably will happen, god forbid, or are you so depraved that you have no powers of imagination, to say nothing of a sense of duty to your fellow man, so imaginatively bankrupt that you do not even entertain the very likely possibility that you are not an exception to the rule, the rules already not being in your favor or else would you even question that which everyone else dutifully accepts, owing no doubt to their firm grasp on the horrors that await them, not to mention their good will and faith in people like us—good people, people like you, with loved ones—to do the thinking, to do the worrying, to take care of all manner of horrors, to nip said horrors in the bud, so to speak, heading off disaster before disaster strikes, because it will strike, mark our words—whereas we can soften the blow and offer in place of the unspeakable horrors (which are as yet unknown, but of which we refer) the opposite of horror, horror being fear itself, can offer confidence in the assurance that you have guarded against the worst case scenario, that you have earned your rights and privileges with no thought of shirking, that you have spared your loved ones the indignity of bending over?
Because while you sit idly by contemplating the pros and cons as if there were a choice to be made, weighing an $81 per month fee for an annual total of $960 for liability and liability only against the value of a 1992 Honda Accord whose antenna makes a loud farting noise whenever the car is turned on or off and whose automatic windows on the driver’s and backseat passenger’s sides do not roll up, but must be pulled up while pressing the automatic window button and steering with one knee as you avoid lobbing off a finger or two in the up-pulling of the window, and which smells sometimes like cat pee, which you determine to be cat pee when a neighborhood cat is seen jumping out of the open window and again when cat pee is found sitting, just sitting, in a pool, on a plastic bag—we are calculating relevant numbers.
Because do you even crunch the right numbers?
Do you even think about the 2013 Bentley?
Do you know, as we do, that there are right now or at least conceivably could be ten 2013 Bentleys lined up—not innocently on a conveyor belt waiting to be shipped and sold, but on a freeway somewhere very close to you, to your freeway, the one you enter every day, that bastard freeway whose ground you curse whenever you come to a dead stop, stuck between work and home, between time off and fuck off as tick-tock!, the minutes in your non-working hours vanish, poof!, as fast as the interest accrues on a college loan for a degree you pay for but which never itself pays?
Because those 10 Bentleys might be lined up right now, before you or behind you, driven by 10 CEOs, say, with ivy-league lawyers bulging out of their eye sockets for a total of 10 Bentleys and 20 corporate lawyers with $enate aspirations, and have you truly imagined the worst case scenario, the damage a single car can do to 10 Bentleys in the event of an accident should, say, your brakes fail, and how do you know they won’t fail, that someone is not right now under the car tampering with them?
Because are you sure you didn’t need the air filter the service guy said you needed when you just wanted an oil change, and can you even be sure it was oil he put in your car after you so haughtily refused the air filter, quipping “My air filter is dirty because I keep it in my car,” to which he did not even crack a smile?
And even if your brakes don’t fail and the oil really is oil, can you be sure your foot will work, that you won’t sneeze, that someone else won’t sneeze, and did you tell the loved ones you love them or was the last thing you told them something sort of pissy like “I don’t want to hear it. You’re not going to ruin another day of my life by drawing me into your inconsequential quarrels,” and then shouting “I SAID GO! NOW!”
To a couple of eight-year-olds? Like something good can come of that? Like that’s not a form of child abuse? Like your whole life didn’t just amount to you being a giant bully to two 8-year-old girls climbing orange trees in the backyard as they bicker benignly about who’s a bigger liar when maybe, just maybe, the liar is you?
Because we’ll tell you who is not lying and who has thought all this out for you and taken the necessary precautions so that you don’t have to think about anything except how to be a better parent, how to be patient when the loved ones come to you because who are they supposed to go to if not you?
Because who are they supposed to think wise and look up to if not you who, having lived and learned, having made tough choices and accepted the responsibilities that come with rights and privileges by seizing opportunities to safeguard—opportunities which are illegal to refuse, making null and void or at least totally irrelevant all other reasons which we have kindly laid out for you at no extra charge to you?
It is we, that’s who!—we who are not lying when we tell you that your thoughts to shirk can land you in jail, can conceivably be the basis for losing your loved ones in a much publicized trial about your fitness as a parent, as a human being, during which your mistakes—such as bullying, such as a pattern of shirking and bad humor and a general ill will—may be aired and amplified, may be cause for further action?
Because we understand you, your needs, which are simple, really, the needs of a hard-working parent who wants only peace of mind, especially on that death trap they call a freeway, which we are offering to you for a small fee, which is a small price to pay for a better life, which is harder and harder to come by, but which can be yours, not through us, of course, we don’t do that, help you have a better life, but we can help you not have a worse life, which anyway is better than nothing, better than the worst case scenario, which you can bet on, believe us.
Tuesday, September 6, 2011
Sunday, May 9, 2010
Money Good
“To me, America is a guy doesn’t want to buy, you respect his not buying.”
George Saunders, “My Flamboyant Grandson”
Many of us will remember the look on George W. Bush’s face when he appealed to the American public for taxpayer dollars to bail out Wall Street as an amalgam of fear, desperation, guilt, and deception. Insofar as it reflected a host of national shames, there was a moment of truth in his expression, too—a sudden flash of recognition that the nation’s philosophical underpinnings had ceased to make sense.
Free trade, with the help of some naughty guys and gals, broke the world.
Washington was suddenly faced with the question: Should U.S. policies be designed to restore confidence in and induce return to the normal functioning of a self-correcting financial system or has the system, itself, become inherently unstable?
The question was posed in the pile of paperwork now front and center on Washington desks. Later in the Congressional report, writer Dick K. Nanto tried again:
On a more philosophical plane, the fundamental assumption that markets are self-correcting and that individuals pursuing their own financial interests like an “invisible hand” tend also to promote the good of the global community has been questioned (Nanto 46).
Nanto’s difficulty formulating the question—the awkward phrasing, complex sentence structure, dependent clause pile-up, qualifying verbs, and passive voice—signal the question’s obscurity in Washington. Not since FDR had the United States government felt compelled to grapple with it. In the early moments of a global catastrophe—when Alan Greenspan was still admitting he might have been wrong about everything he ever held to be true about free market economies—it suddenly seemed Congress was going to have to answer to a worldview that had become second nature to the globe’s neo-capitalists.
In the decade before the financial collapse, the global pool of money, a giant savings account of fixed income securities, doubled the amount it had taken several hundred years to squirrel away to a whopping $72 trillion. Around the globe, people with a stake in the pool itched for more, a fever that drove them, in the first decade of the 21st century, to the U.S. housing market.
By turning to the U.S. housing market, where home-owners were paying 5 or 10 percent interest on home loans, global financiers could make 5 or 10 times as much as they made buying U.S. treasury bonds that offered only a 1 percent return.
Rather than walk the slow road to wealth, world financiers beamed themselves there instead.
The deal required a series of players: A broker found a home-owner-hopeful, loaned the money for a mortgage, “bundled” mortgages and securitized them—a process that converts debts into assets or “mortgage-backed securities” known as “collateralized debt obligations” or CDOs. Brokers then sold CDO bundles or “tranches” to investors who stood to gain millions of dollars of profit instead of mere thousands. By selling loan pools instead of collecting on them, brokers turned a quick profit and didn’t have to worry about clients defaulting on loans. A company like Silver State, who might have $5 million, for instance, would borrow a hundred million from Citibank or Washington Mutual—a 20 to 1 ratio—to buy mortgages, assemble CDOs, sell them, and pay the money back once the CDOs had sold.
Whenever brokers passed the pen to a home-buyer, they had an eye on Goldman Sachs or Bank of America or Merrill Lynch, the guys who would buy CDOs and then rework them for sale or collect on them, purchasing “credit default swaps,” a kind of insurance against loan defaults. The swaps let a CDO holder transfer risk to an agency who collected a commission and fees in return. In other words, the CDO holder paid a fraction of a CDO’s value to an agency offering swaps.
Often named after towns like “Monterey”—which won the CDO of the Year at a 2008 awards conference—CDOs became the modern day equivalent of American plantations, the national cash crop. You could sell them and turn a quick profit, hold on to them and collect on loans, or insure them and collect when loans defaulted.
Before loan defaults came rolling in, the CDO and swap industry was like any other business where money typically goes one way—lucrative. Everyone was getting a cut of the interest home-owners were paying on houses, bringing new meaning to the favored term “tranch,” French for “slice.” Other than a little number-crunching, all investors had to do to get theirs was rest on their laurels, their laurels being a big reputable name invoking stockpiles of money, then sit back and watch as the money came steamrolling in, dumping millions of dollars on the desks of investors who expected the flow to last 30 years, the average life of a mortgage.
Like credit card and insurance companies, the derivatives trade—the business of transforming debt, a negative sum, into credit, a positive sum, and then slicing and parceling out interest to various investors—let Wall Street elbow its way into the industry of skimming money off the tops of American incomes.
Bound by law to insure their vehicles, most Americans pay out each month for a service they almost never collect on, so money typically goes one way. If a driver pays Geiko $80 a month every year for fifty years, for example, Geiko will have made $48,000 off one client before investing the money and collecting returns. Multiply that by the number of Americans insuring their vehicles and you have a multi-billion dollar industry, meticulously orchestrated to “recover losses” by raising the rates of clients who make claims. Most Americans realize the auto insurance industry is a racket, that a rates hike on a $1,200 fender-bender, say, will insure that the company recovers the $48,000 profit it was counting on when it signed the client, but the cost of opting out is too high: one ten-car pile-up could put the average person in the hole for life—especially if the cars piling up are Bentleys, the $200,000 cars raising the auto insurance rates of Americans throughout the country.
Health insurance profits are even more obscene, of course. One thirty-year, $400-a-month plan will net the company a cool million—a million dollars that, had the client put in a savings account in her own name, might have bailed her out of a bout with breast cancer—unless her insurer was WellPoint, who rigged its software to target breast cancer patients for investigation and drop their coverage. It might also have bailed her out of an eight-Bentley pile-up. If the worst case scenario didn’t materialize, she’d have the cash to buy a house outright, bypassing the interest on a home loan, and if her dream house was modest—say, half a million—she’d have enough left over to put her kids and the rest of the neighborhood through college.
However shady the auto and health insurance industries, they at least are regulated by the federal government—the very entity that handed the industries their clients by mandating auto and, more recently, health insurance. No agency looms over Wall Street’s shoulders to insure these guys have the money to pay out as promised. To the contrary, it’s K Street, Wall Street’s lobbying arm, that looms over Washington.
Still, for a minute, housing prices were booming, everything was good, everyone was making a killing. Lehman guys like Joe Gregory had a “personal annual spending budget of $15 million” and a “seaplane and helicopter for his daily commute”; his wife, Niki Gregory had a shoe closet “twice the size of the Jimmy Choo store in New York,” and a “personal staff of about 30.”
Once all the money came gushing up to the big Wall Street firms, a fraction of it trickled back down the line, too. Mortgage brokers recruited guys who had no experience or training in the mortgage market, plucking college dropouts from dead-end jobs to offer loans and build CDOs.
Business was so lucrative, in fact, that by 2003, people who could afford to buy a home had bought one: the market for houses was spent. Brokers responded by expanding their clientele, loosening loan guidelines to attract people who did not meet loan criteria and soliciting anyone and everyone for home loans. Increasingly, to do so, they had to bend reality to better suit their appetites. Because they made money throwing mortgage papers off their desks and onto someone else’s and transferred loan-default risks in the process, they had nothing to lose by loaning money to home-buyers who couldn’t afford it.
Brokers enticed new borrowers with “adjustable-rate mortgages” that began with low interest-interest rates, called “teaser rates.” Rating companies followed suit, inflating credit ratings to bolster business.
Soon, loans no longer required income-verification forms like a W2. Borrowers could simply state their incomes, and an accountant would verify the theoretical possibility that someone in that field could make that much. Then there were loans requiring no income-verified assets as long as borrowers had a certain amount of money in the bank. Then came NINAs—no income, no asset loans. In Ohio, 33 dead people were approved for home loans. Other brokers simply lied about a borrower’s income. NPR profiled one case in which a broker changed a client’s income from $30,000 to $195,000, for which the broker made $18,500 commission.
For Richard, the borrower, the effect of the lie was crippling. Had the broker held up a gas station instead, shooting Richard in the leg and paralyzing him—and getting away with it—the result would be similar. Now, Richard’s life has been reduced to the single, overwhelming concern of making each month’s mortgage payment.
At the height of the housing bubble, brokers could earn $1 million a year selling homes to people who “didn’t have a pot to piss in.” NPR offered the story of Glen, just out of college, who was making $75-100 grand a month. From the big open space of a high-ceilinged, cubicle-lined warehouse, “[They] lived mortgage.” All anyone did, Glen said, was wonder, “How we gonna get this one funded?”
Lowering standards to make more CDOs out of lower and lower-rated tranches, brokers pressed on. Credit rating agencies rated loans according to a scale—AAA, AA, A, B, BB, BBB. “Money good” sounds like caveman speak for the incentive driving the housing boom and guys like Glen, but in the industry, the term referred to good loans or triple As. Bad pools or “tranches” were called “toxic waste,” but investors had devised ways to make money off them, too, by re-tranching them before they were sold again, a kind of “financial alchemy” to clean them up.
Bad loan pools financed Glen’s penthouse, five cars, and nights out at clubs frequented by Tara Reid, where he and the guys would order 3 or 4 thousand-dollar bottles of Crystal served with firecrackers in the sparklers. Remembering it, Glen said, “Everyone wondered, ‘Woah, Who’s the cool guy?’ Well, we’re the cool guys.”
Driven by the incentive to keep the Crystal corks popping, the industry had innovated. There was no good or bad investment. Moving papers from a desk on the third floor to one on the tenth “made” money—or at least moved it.
Between 2003 and 2006, the effort to milk a dry market continued. Mortgage guys started pushing buyers to borrow for multiple properties. A&E produced TV shows like Flip This House and Flipping Out, instructing viewers in the art of buying a house with no money down and selling it for twice the starting price.
Refinancing was another industry boon. Bankers encouraged homeowners to borrow against the value of their houses via home equity lines of credit because refinancing increased the home’s market value and, more pointedly, seller commissions.
By 2004, 16% of mortgages were adjustable-rate mortgages, signed more often by borrowers in the lower and higher income brackets than those in the middle, including first-time homeowners and those wanting to flip. As the players enjoyed profitable skims off high-priced homes, high housing prices put homes out of the reach of modest-income Americans, and made those who’d signed on to variable interest rates vulnerable to rate increases and declines in home values. When the low introductory rates of sub-prime loans rose, the squeeze led to a spike in foreclosures. Homeowners began defaulting on their loans. Property values decreased. Then more loans defaulted, more prices dropped.
In the first quarter of 2006, California foreclosures increased 23.4%. The ripple was felt throughout Wall Street, where the emails flooded in: As of December 29, we are no longer buying CDOs with a stated income loan with a FICO less than whatever. No exceptions. Please do not call financing center.
No one was buying; no one could sell. Suddenly, guys like Glen were stuck with bad loans and a $100 million debt to Washington Mutual; Glen’s company was Washington Mutual’s bad loan. Companies whose wealth was tied to investments backed by credit rather than capital simply did not have collateral. As it turns out, this did not include a handful of small businesses, but banking giants like Bear Stearns (sold to JP Morgan Chase), Merrill Lynch (sold to Bank of America), and Lehman brothers (bankrupt).
Before they sunk, businesses like Lehman did their best to make a comeback, of course. Lehman knocked millions of dollars of debt off the books. Someone said take the repos to London and clean them up; they’ll pass. Snippets of their emails are available in the 2500-page report on Lehman’s last days.
“It’s basically window-dressing.”
“I see…so it’s legally do-able but doesn’t look good when we actually do it? Does the rest of the street do it? Also is that why we have so much BS to Rates Europe?”
“Yes, No and yes. :)”
The basic premise of this whole operation—that investors should take a cut from American homeowners because they could front the cash if homeowners couldn’t—was, well, a lie.
In February 2008, when Glen’s employer, Silver State, announced to its 600 employees it was closing its doors, employees well-versed in the logic that you get what you take rolled company computers and copy machines through the front door on their way out. Glen borrowed money from Dad and started defaulting on his home loan, paying enough to “keep them off [his] back” while he decided whether or not it paid to just walk away.
It was the moment guys like Michael Burry, a one-eyed, 32-year-old with Asperger’s had been waiting for.
* * *
A neurology resident before he bored of medicine and started investing full time, Mike Burry was living in the bubble’s epicenter, San Jose, California. In 2000, he opened his own hedge fund Scion Capital. By 2003, he understood “even nearly unlimited or unprecedented credit can no longer drive the [housing] market higher,” predicting “a 50% drop in residential real estate in the U.S” and collateral damage “orders of magnitude worse than anyone is considering.”
Watching the bubble near collapse, Burry had the idea he could bet against the housing market by buying bad debts and insuring them with credit default swaps. When the market crashed, he’d collect insurance on the bad debts from the CDO holders. As Lewis puts it, “It was as if you could buy flood insurance on the house in the valley for the same price as flood insurance on the house on the mountaintop.” After scrutinizing securities for criteria such as loan-to-value ratios, second liens, location, the absence of loan documentation and proof of borrower income, Burry bought 6 $10-million bonds on the worst loans, the triple-B-rated tranches.
Goldman Sachs sold him his first set of triple Bs. Soon, Bank of America sold him another $5 million in credit-default swaps. Weeks later, he’d purchased $5 million packages from six other banks.
Shocked that companies would sell swaps on the worst loans, he “would play dumb quite a bit,” asking, “‘How do you do this again? Oh, where can I find that information?’ or ‘Really?’—when they tell [him] something really obvious.” The act wasn’t necessary. In June 2005, Goldman Sachs called to ask if he’d like to up his trade size from $10 million to $100 million.
In an April 3, 2010 op-ed piece for the New York Times, he writes:
I entered these trades carefully. Suspecting that my Wall Street counterparties might not be able or willing to pay when the time came, I used six counterparties to minimize my exposure to any one of them. I also specifically avoided using Lehman Brothers and Bear Stearns as counterparties, as I viewed both to be mortally exposed to the crisis I foresaw.
Soon, Burry received a string of phone calls. The head swap guy at Deutsche Bank, Gregg Lippman, wanted to buy back some swaps. Burry sold them back for a profit. Three days later, Goldman Sachs’s Veronica Grinstein called from her cell phone, asking for a “special favor”: Would Burry sell $25 million worth of swaps back to Goldman Sachs? Then Morgan Stanley wanted to buy insurance on subprime-mortgage loans.
Burry had bet the loans were structured to go bad and they had. By June 2008, while the rest of the country was reeling, Burry’s business Scion Capital had netted its investors, after fees and services, a 489.34% gain.
Scion Capital wasn’t the only one waiting to reap profits after the fall. One of Burry’s investors overheard Greg Lippman brag he was going to make “oceans” of money with an exuberance that was “a little scary.” Sure enough, Deutche Bank was putting together “synthetic CDOs” set to explode so “savvy investors”—like Greg Lippman—could wait with buckets once it rained. Synthetics were Wall Street’s way of cannibalizing already existing bonds once they’d run out of the home-buyers to coax into teaser-rate loans. Magnetar, a big Chicago hedge fund, was doing it. Goldman Sachs was doing it.
In 2007, Goldman Sachs created the investment vehicle Abacus 2007-AC1—at the request, according to the Securities Exchange Commission, of John A. Paulson, another hedge fund manager profiting off loan defaults. According to the SEC, for $15 million, Goldman let Paulson pick bonds that would fail before Goldman Sachs sold Abacus to the European banks ABN Amro, a big Dutch bank later absorbed by the Royal Bank of Scotland. Put simply, the Dutch bank agreed to take on the risk of American home loans in exchange for a quick $7 million. When Abacus crumbled, the Royal Bank of Scotland was buried in debt: it owed $840 million to Goldman Sachs, who owed it to John A. Paulson. Now the British government owns about 84 percent of the Royal Bank of Scotland.
While Goldman Sachs is under investigation for backdoor dealing, what guys like Mike Burry and John A. Paulson were doing was legal. As a spokesman for Paulson noted, “While it’s unfortunate that people lost money investing in mortgage-backed securities, Paulson has never been involved in the origination, distribution, or structuring of such securities.” Worth $36.1 billion by the end of 2008, Paulson didn’t break any law and didn’t admit he’d done anything wrong. In a 2009 interview with the New York Times, in fact, Paulson said, “We are very proud of our performance last year. We provided an oasis of profitable returns for our investors in a year where there were few sources of gains.” Paulson’s clients—pension funds, endowments, wealthy families and individuals—agreed, considering his short sales “ingenious.”
Paulson’s number-crunching had set off a series of events that not only broke the bank (the Dutch bank and the Royal Bank of Scotland), but tapped British taxpayers who were now paying the price of the furious dispersal of bad loans to Americans who had wanted homes.
In a final irony, Paulson gave $15 million to the Center for Responsible Lending to build a center devoted to providing foreclosure assistance to troubled borrowers, saying, “We are pleased to help them provide legal services to distressed homeowners, many of whom have been victimized by predatory lenders.”
Paulson’s story is the kind that raises the big questions—like what are words for if they can signify the very opposite of what they say? Why did British and American governments tax citizens to honor deliberately shady deals? And why is a home-owner’s debt for sale in the first place?
* * *
Across the country, strapped Americans were preoccupied with another question: Where had all the money gone? Had it vanished into thin air?
From Abacus alone, money had passed from the wallets of American home-buyers to the bank accounts of mortgage bundlers, Goldman Sachs, ABN Amro, the Royal Bank of Scotland, and back to Goldman Sachs, before it dropped—thanks to British taxpayers—into the arms of John A. Paulson and friends.
Money that was supposed to gush up in geyser fashion from American home buyers now came from taxpayers in whatever country a bank had sunk. Governments across the world told its citizens they really didn’t want to but they had to make good on these deals for that money to trickle back down after CEOs had had their way with it. Articles like “How the Housing Boom and Bust Affects You” drew charts illustrating “the vicious cycle” of banks unable to loan and the businesses and individuals that would fail as a result. These are the kind of “trickle-down” stories that leave out the bit about money rushing up, like oil wells, from the working and middle classes.
Money had shifted—more of it than usual—from one Wall Street to another, from Goldman to Mike Burry and John Paulson who were going to dole it out to a small entourage of investors. A different Wall Street than the Wall Street in bed with Washington laid claim to it now. Instead of money flowing to banks, it was going to a few individuals striking out on their own, seizing the opportunity to reach into a giant sack of pirated loot.
Wall Street’s displaced players understood this: to stay in the game, they needed money and turned to their Washington players to get it. In 2008, Congress pulled through for them, passing the Emergency Economic Stabilization Act authorizing former Goldman Sachs CEO, Henry Paulson, to establish the Troubled Asset Relief Fund (TARP), a $700 billion “relief plan” or “bailout” allowing the government to purchase “troubled assets” from industry bigwigs like AIG. Paulson justified the use of taxpayer funds with the statement that “The ultimate taxpayer protection will be the stability this troubled assets relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars.”
TARP’s critics didn’t imagine the plan a START button that would magically re-ignite the steady stream of profit overflowing the desks of global financiers. For some, TARP was more like REWIND. Ohio Representative Dennis Kucinich, a former U.S. presidential candidate, described Paulson’s vision as “too much money, in too short of a time, going to too few people, while too many questions remain unanswered,” and asked the piercingly salient question: “Is this the U.S. Congress or the board of directors at Goldman Sachs?”
Even normally corporate-friendly free-market buffs scorned TARP, believing that intervention would only exacerbate a temporary glitch in the market, including Kentucky’s Republican Senator Jim Bunning, the guy who single-handedly blocked extending unemployment benefits to jobless Americans, who described the “massive bailout” as “un-American”—“not a solution,” but “financial socialism,” saying “The Paulson plan will not bring a stop to the slide in home prices,” but “spend 700 billion taxpayer dollars to prop up and clean the balance sheets of Wall Street.” However confused Senator Bunning’s notion that propping up Wall Street more closely resembles “financial socialism” than business-as-usual, it’s hard to disagree with the sentiment that a massive corporate bailout is “un-American,” if by “un-American” Bunning means undemocratic. As 100 university economists from across the nation in an open letter to Congress on September 24, 2008, observed Paulson’s plan was a “subsidy to investors at taxpayers’ expense,” arguing that “Investors who took risks to earn profits must also bear the losses.” Profit was privatized—reserved for bankers—while loss was socialized. The people would pay for the maneuvering of hedge fund guys like Burry.
Henry Paulson’s plan to treat the crisis by tapping taxpayers—many of whom have lost their homes, jobs, and workplace benefits like health insurance—is worse than the do-nothing equivalent of a free-market philosophy that capitalism’s “invisible hand” will iron out the world’s enormous economic woes on its own. As Michael Mayer put it, “If companies were not implicitly backed by the taxpayers, then managements would get very reluctant to go out after that next billion […]. They’d look over their shoulder and say, ‘This is getting dangerous.’” In fact, what Paulson had orchestrated by pulling the strings of its mistress, the U.S. government, was not only a massive tax on all Americans, home or no home, but amnesty.
The U.S. Treasury Secretary’s plan to inject Wall Street with capital proved capitalism does not operate by an invisible hand, as Adam Smith fans believe; on the contrary, it is carefully and diligently operated by those who make extreme capital—the bulk of whom are today’s bankers, insurers, and creditors—i.e. the Wall Street investors and world financiers micromanaging the U.S. government, homeowners, and, taxpayers.
The events leading up to the permissive and volatile lending climate include the industry’s enormous, decades-long effort to reverse regulation at every turn, such as its successful repeal of the 1982 Garn-ST. Germain Depository Institution Act—a repeal allowing the “alternative mortgage transactions” that gave birth to teaser-rate adjustable loans. Signed by then President Ronald Reagan, the repeal was supposed to “revitalize the housing industry” by “strengthening the financial stability of home mortgage lending institutions and ensuring the availability of home mortgage loans” (FDIC 8676).
The 1999 Clinton-signed repeal of the Glass-Steagall Act of 1933 didn’t help either. Passed in response to the collapse of American commercial banks and rampant securities fraud, the Glass-Steagalls Act drew clearer boundaries between commercial and investment bankers. Since the 1980s, the banking industry had lobbied to repeal the Glass-Steagall Act. By 1999, it had won despite a 1987 Congressional Research Service report recognizing that “Conflicts of interest characterize the granting of credit—lending—and the use of credit—investing—by the same entity”; because of the enormity of banks’ financial power, “its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments” since “Securities activities can be risky” and lead to “enormous losses” that the government would have to recover “if depository institutions were to collapse as a result of securities losses.”
Which is exactly what happened.
Nine years after the repeal known as The Commodity Futures Modernization Act of 2000, allowing commercial lenders to underwrite and trade CDOs and establish “structured investment vehicles” to purchase the securities, sub-prime loans constituted nearly 30 percent of mortgage lending, a 600 percent increase since 1998.
Behind Wall Street’s lobbying power to repeal industry regulations is the19th century victory that brought corporate America as we know it into being with a windfall of special rights never before afforded an entity—human or otherwise: the application of the 14th Amendment—that no person shall be denied equal protection under the law, and “no state shall deprive any person life, liberty, and property”—to corporations. Designed to protect African Americans from a concerted effort to deny their successful integration post-slavery, corporate lawyers won corporations “personhood” status for companies that incorporate, a declaration of independence, so to speak, whereby a business gains status as a “natural person” or an entity separate from the individual owners, affording it a legion of advantages like lower tax rates and prison evasion for criminal activities as well as superhuman privileges like “immanent permanency,” or the right of a corporation to exist forever, and “limited liability,” the right of a corporation to be accountable only for the amount of money it has invested.
The Supreme Court’s recent blow, rolling back a hundred years of campaign-financing caps—on the grounds that “corporations” are “people” and “money” is “speech”—knocked obscene gobs of ice cream atop the corporate pie, bringing new meaning to Reagan’s unofficial motto that “Government is the problem, not the solution.”
Cheated, overworked Americans frustrated by the wasteland aftermath of the housing crisis, whose primary news source is Fox news, might be tempted to believe Tea Party slogans berating government action. But it’s government inaction that makes it an accomplice. To the degree that Washington is in bed with Wall Street, the U.S. government can’t make good on its claim to democracy. Yet government is still the people’s best bet to win democracy back. The quagmire leaves Americans a single option: get Wall Street out of Washington.
* * *
As Americans reel in the wake of an economy broken by bankers and exacerbated by already-wealthy opportunists, The housing-market derivatives trade—this whole business of pooling home-buyer loans and slicing them up for profitable sale—Wall Street’s first real taste of sugar, whet its unquenchable thirst for more. Since the housing market crash, investors have marched on, scrambling for government handouts and new ways to expand derivatives trading and extend profits while fighting to kill regulations.
Ever-reaching, Wall Street innovated swap trades by turning to cities and schools. Swap advisors enticed an issuer—a school, say—to swap a 5 percent debt over 10 years for a 4.5 percent debt over thirty years. The contracts, however, assumed that rates would be basically stable, not accounting for the world’s financial plunge, partly because advisers got paid to move packages. It didn’t matter what they were moving.
Soon, cities and schools were saddled with higher interest rates than they were receiving, locked into the debt for 30 years instead of 10. As Gretchen Morgensen explains in “The Swaps that Swallowed Your City,”
Almost all tax-exempt debt is structured so that after 10 years, it can be called or retired by the city, school district or highway authority that floated it. But by locking in the swap for 30 years, the municipality or school district is essentially giving up the option to call its debt and issue lower-cost bonds, without penalty, if interest rates have declined.
Between April 2008 and March 2009, New York spent $103 million killing roughly $2 billion worth of swaps, 25 percent of which came from the Lehman’s bankruptcy and cost various New York State debt issuers $12 million.
The latest target is Hollywood, where Veriana Networks and Cantor Fitzgerald have won approval to create a swap market for films that “would allow investors to buy or sell—or ‘short’—contracts based on a movie’s box-office receipts, in essence betting on how well a film will do when released in theaters.” Cantor and Veriana say their exchanges “give Hollywood investors a way to mitigate their risks” since a distributor with second thoughts could short a film. But Bob Pisano, president of The Motion Picture Association of America, says “I don’t know of any major representative in our sector that is supporting it,” listing risks to the film industry such as “market manipulation in the rumor-fueled film world, conflicts of interest among studio employees and myriad contractors who might bet with or against their own films, the possibility that box-office performance would be hurt by short-sellers, difficulty in getting or holding screens for films if trading activity indicated weakness and the need for costly internal monitoring to block insider trades” as well as the possibility a speculator “might leak an early version of a film to the Internet and then profit from its subsequent poor performance at the box office”—all good reasons to avoid derivatives altogether, which Warren Buffett has called “weapons of mass destruction.”
Wall Street’s effort to kill re-regulation attempts is just the latest round. Even Larry Fink—known on Wall Street along with Salomon Brothers’ Lew Ranieri for “developing the multi-trillion-dollar debt-securitization market that transformed the face of finance,” the very market “of mortgages, and car and credit-card loans, purchased from banks, sliced into pieces, repackaged, and sold to thousands of investors” that would “bring the economy to its knees”—has lambasted lobbying attempts to defeat regulation. Now Fink, who helped advise Paulson’s structuring of TARP, is responsible for orchestrating the massive clean-up in his role as chairman and CEO of BlackRock, “the leading manager of Washington’s bailout of Wall Street,” receiving a “waterfall” or a “mountain” of government contracts—so many that one banking executive likened the firm to a “shadow government”—to help manage accounts with AIG, Bear Stearns, and Citigroup, among others. Fink’s moral compass goes wider than it goes deep, however. Attributing rage at Wall Street to the public’s desire to “externalize the enemy,” Fink says he doesn’t like pointing fingers because “it was the culture of America that was guilty. We were living fat and happy and the whole system was one of excess speculation and leverage.” All along, he says, “we should have all been asking why people were making so much money.”
He’s not totally off the mark, of course. Even the New York Times couldn’t hide its disdain for home buyers defaulting on their mortgages. On an eight-house block on Beth Court in Moreno Valley, three miles east of Riverside on I-60, where residents struggled with unemployment, sunk property values, and crushed dreams, residents fraught with anxiety over their house and car payments turned on each other, myopically focused on the cut of a neighbor’s lawn or an unsightly vehicle replacing a repossessed truck. None of us feels particularly good about homeowners using their homes as ATMs to buy BMWs, but it’s a dead end to rage against “a culture of America” or all individuals everywhere. Only systemic change—the province of government—can change whole cultures.
The question of why people were making so much money is one that brings us back to an old myth: Do individuals pursuing their own financial interests like an “invisible hand” promote the good of the global community?
The honest answer is no; the lesson Wall Street provided the world is simple: given the opportunity, the extremely moneyed capitalists whose every monetary move affects the world over will make every self-serving decision imaginable to pocket profit at the expense of the world’s inhabitants. So will members of Congress pocketing tens of thousands of dollars from interested lobbyists. So will mortgage guys plucked from the soul siphoning fifty-plus-hour-workweeks. So will our neighbors upgrading SUVs to Hummers.
There’s not one invisible hand. There’s Henry Paulson’s—that’s two. Then there are all of the invisible hands stretching from K Street to Washington where more invisible hands seek handouts while pretending to slap Wall Street wrists. Thousands of invisible hands have dipped into American savings accounts in the form of home, car, and college loans—and they’re just not done yet.
Unfortunately, honesty isn’t everyone’s goal.
By now, the global financial crisis is usually attributed to the loose lending practices made possible by the industry’s lack of regulation, particularly of “shadow bankers.” Of course, Wall Street likes this version since it suggests the economic upheaval is an anomaly, the fluke of a misalignment that only needs straightening out. When head of the Commodity Futures Trading Commission, an oversight contender of derivatives trading, Gary G. Gensler, a former anti-regulation advocate, proposed more transparency, suggesting big banks selling derivatives conduct trade in open, public exchanges and clear them through central “clearinghouses,” which would act as “circuit breakers, allowing investors to see the prices that dealers charge their customers, The International Swaps and Derivatives Association representing Wall Street banks denied derivatives were the cause of the crisis, pointing at subprime mortgages instead.
If lax lending is behind the derivatives debacle, resolving the problem would seem easy: simply reverse Wall Street’s steps—tighten loan criteria, impose industry regulations, install oversight committees. Current attempts to curb Wall Street’s freewheeling, for instance, propose protecting Americans from bailing out banks, limiting trading and risks accepted by bankers, setting new transparency rules for derivatives and other complex financial instruments, and instituting pay reforms to give investors and pension holders more say in the management of their investments.
In other words, the bills seek to reverse the repeal of regulations designed to prevent the crisis. A simple reversal brings us right back to 1999 when corporate titans were about to unwind regulations and begin the great economic freefall. Yet Congress can’t even get that far because of furious lobbying to kill reform.
Even as Goldman purports to support clearinghouses, according to spokesman Lucas van Praag, who said, “We’re in favor of central clearing for derivatives,” mincing his support with the statement “We also think that all derivatives that can be traded on an exchange should be, but we don’t think it is a good idea to insist that derivatives can only be traded if they’re on an exchange.” Industry lobbyists hoping to water down the regulations before they make their way through Congress have already managed to make some corporations exempt from transparency and clearinghouses.
The sheer energy required to minimize the damage Wall Street might sow throughout the globe attests to the scope of Wall Street’s grip on the nation.
These guys are not the capitalists that Karl Marx raged against in The Communist Manifesto. Those guys at least paid workers enough to reproduce the conditions of production—well, not the slave-owning ones. Our guys developed “credit” to do that job. That’s what the housing market was, that’s what derivative trading is, and that’s why they have failed. Before the last century’s neocapitalist turn, money typically had to have a positive value for it to be worth something. That is, there had to be money for a person to have money. In the last forty years, however, negative value counts as money, too. Credit cards and insurance companies, like traditional bankers, have figured out how to exploit profit from the struggles of everyday Americans, extracting cuts from the paychecks of Americans who aren’t buying anything at all but who can’t afford a new Bentley or a pile-up of them should their brakes go out on the commute to work and can’t afford to bankroll the appetites of the health care industry or big pharma should they get cancer and need the service of one of the machines the AMA has got plugged into the moon.
“Credit” is the “genius” of neocapitalists, a partnership between employers who don’t pay their employees enough to safeguard them against American booby-traps like the health care system and the insurance and credit card companies who collect monthly checks. Average Americans paying a mortgage and insuring their cars and health tithe about 90 percent of their incomes to bankers and insurers.
It’s worth remembering what all this genius is about as we listen to AIG justify bonuses twice the size of the salary of the United States President by citing talent and productivity. These guys didn’t cure AIDS, prevent oil spills, or simplify tax day. They created ways to make themselves even richer. Their “product” was a bigger personal bank account. The checks came rolling in right around the time health insurance lobbyists scrambled to fight health care reform, companies like Anthem introducing 32 percent rate hikes, and banks fought to stop regulation of “overdraft protection” fees. Today, as some confused Arizonans look to send immigrants back to Mexico and Republican senators balk at Wall Street reform, Americans risk losing their souls along with their homes and jobs.
As Karin Jack, wife of Lehman CEO Brad Jack, put it in an interview with Vanity Fair contributor Vicky Ward, “On Wall Street, they pay you so much that they own you […] They have your soul. You gave it to them for the money.”
In America, you don’t have to sell your soul to be a sell-out: anyone who will sell her own soul, won’t hesitate to sell yours. Today’s sell-out is the one who won’t get up and steal it back.
* * *
George Saunders, “My Flamboyant Grandson”
Many of us will remember the look on George W. Bush’s face when he appealed to the American public for taxpayer dollars to bail out Wall Street as an amalgam of fear, desperation, guilt, and deception. Insofar as it reflected a host of national shames, there was a moment of truth in his expression, too—a sudden flash of recognition that the nation’s philosophical underpinnings had ceased to make sense.
Free trade, with the help of some naughty guys and gals, broke the world.
Washington was suddenly faced with the question: Should U.S. policies be designed to restore confidence in and induce return to the normal functioning of a self-correcting financial system or has the system, itself, become inherently unstable?
The question was posed in the pile of paperwork now front and center on Washington desks. Later in the Congressional report, writer Dick K. Nanto tried again:
On a more philosophical plane, the fundamental assumption that markets are self-correcting and that individuals pursuing their own financial interests like an “invisible hand” tend also to promote the good of the global community has been questioned (Nanto 46).
Nanto’s difficulty formulating the question—the awkward phrasing, complex sentence structure, dependent clause pile-up, qualifying verbs, and passive voice—signal the question’s obscurity in Washington. Not since FDR had the United States government felt compelled to grapple with it. In the early moments of a global catastrophe—when Alan Greenspan was still admitting he might have been wrong about everything he ever held to be true about free market economies—it suddenly seemed Congress was going to have to answer to a worldview that had become second nature to the globe’s neo-capitalists.
In the decade before the financial collapse, the global pool of money, a giant savings account of fixed income securities, doubled the amount it had taken several hundred years to squirrel away to a whopping $72 trillion. Around the globe, people with a stake in the pool itched for more, a fever that drove them, in the first decade of the 21st century, to the U.S. housing market.
By turning to the U.S. housing market, where home-owners were paying 5 or 10 percent interest on home loans, global financiers could make 5 or 10 times as much as they made buying U.S. treasury bonds that offered only a 1 percent return.
Rather than walk the slow road to wealth, world financiers beamed themselves there instead.
The deal required a series of players: A broker found a home-owner-hopeful, loaned the money for a mortgage, “bundled” mortgages and securitized them—a process that converts debts into assets or “mortgage-backed securities” known as “collateralized debt obligations” or CDOs. Brokers then sold CDO bundles or “tranches” to investors who stood to gain millions of dollars of profit instead of mere thousands. By selling loan pools instead of collecting on them, brokers turned a quick profit and didn’t have to worry about clients defaulting on loans. A company like Silver State, who might have $5 million, for instance, would borrow a hundred million from Citibank or Washington Mutual—a 20 to 1 ratio—to buy mortgages, assemble CDOs, sell them, and pay the money back once the CDOs had sold.
Whenever brokers passed the pen to a home-buyer, they had an eye on Goldman Sachs or Bank of America or Merrill Lynch, the guys who would buy CDOs and then rework them for sale or collect on them, purchasing “credit default swaps,” a kind of insurance against loan defaults. The swaps let a CDO holder transfer risk to an agency who collected a commission and fees in return. In other words, the CDO holder paid a fraction of a CDO’s value to an agency offering swaps.
Often named after towns like “Monterey”—which won the CDO of the Year at a 2008 awards conference—CDOs became the modern day equivalent of American plantations, the national cash crop. You could sell them and turn a quick profit, hold on to them and collect on loans, or insure them and collect when loans defaulted.
Before loan defaults came rolling in, the CDO and swap industry was like any other business where money typically goes one way—lucrative. Everyone was getting a cut of the interest home-owners were paying on houses, bringing new meaning to the favored term “tranch,” French for “slice.” Other than a little number-crunching, all investors had to do to get theirs was rest on their laurels, their laurels being a big reputable name invoking stockpiles of money, then sit back and watch as the money came steamrolling in, dumping millions of dollars on the desks of investors who expected the flow to last 30 years, the average life of a mortgage.
Like credit card and insurance companies, the derivatives trade—the business of transforming debt, a negative sum, into credit, a positive sum, and then slicing and parceling out interest to various investors—let Wall Street elbow its way into the industry of skimming money off the tops of American incomes.
Bound by law to insure their vehicles, most Americans pay out each month for a service they almost never collect on, so money typically goes one way. If a driver pays Geiko $80 a month every year for fifty years, for example, Geiko will have made $48,000 off one client before investing the money and collecting returns. Multiply that by the number of Americans insuring their vehicles and you have a multi-billion dollar industry, meticulously orchestrated to “recover losses” by raising the rates of clients who make claims. Most Americans realize the auto insurance industry is a racket, that a rates hike on a $1,200 fender-bender, say, will insure that the company recovers the $48,000 profit it was counting on when it signed the client, but the cost of opting out is too high: one ten-car pile-up could put the average person in the hole for life—especially if the cars piling up are Bentleys, the $200,000 cars raising the auto insurance rates of Americans throughout the country.
Health insurance profits are even more obscene, of course. One thirty-year, $400-a-month plan will net the company a cool million—a million dollars that, had the client put in a savings account in her own name, might have bailed her out of a bout with breast cancer—unless her insurer was WellPoint, who rigged its software to target breast cancer patients for investigation and drop their coverage. It might also have bailed her out of an eight-Bentley pile-up. If the worst case scenario didn’t materialize, she’d have the cash to buy a house outright, bypassing the interest on a home loan, and if her dream house was modest—say, half a million—she’d have enough left over to put her kids and the rest of the neighborhood through college.
However shady the auto and health insurance industries, they at least are regulated by the federal government—the very entity that handed the industries their clients by mandating auto and, more recently, health insurance. No agency looms over Wall Street’s shoulders to insure these guys have the money to pay out as promised. To the contrary, it’s K Street, Wall Street’s lobbying arm, that looms over Washington.
Still, for a minute, housing prices were booming, everything was good, everyone was making a killing. Lehman guys like Joe Gregory had a “personal annual spending budget of $15 million” and a “seaplane and helicopter for his daily commute”; his wife, Niki Gregory had a shoe closet “twice the size of the Jimmy Choo store in New York,” and a “personal staff of about 30.”
Once all the money came gushing up to the big Wall Street firms, a fraction of it trickled back down the line, too. Mortgage brokers recruited guys who had no experience or training in the mortgage market, plucking college dropouts from dead-end jobs to offer loans and build CDOs.
Business was so lucrative, in fact, that by 2003, people who could afford to buy a home had bought one: the market for houses was spent. Brokers responded by expanding their clientele, loosening loan guidelines to attract people who did not meet loan criteria and soliciting anyone and everyone for home loans. Increasingly, to do so, they had to bend reality to better suit their appetites. Because they made money throwing mortgage papers off their desks and onto someone else’s and transferred loan-default risks in the process, they had nothing to lose by loaning money to home-buyers who couldn’t afford it.
Brokers enticed new borrowers with “adjustable-rate mortgages” that began with low interest-interest rates, called “teaser rates.” Rating companies followed suit, inflating credit ratings to bolster business.
Soon, loans no longer required income-verification forms like a W2. Borrowers could simply state their incomes, and an accountant would verify the theoretical possibility that someone in that field could make that much. Then there were loans requiring no income-verified assets as long as borrowers had a certain amount of money in the bank. Then came NINAs—no income, no asset loans. In Ohio, 33 dead people were approved for home loans. Other brokers simply lied about a borrower’s income. NPR profiled one case in which a broker changed a client’s income from $30,000 to $195,000, for which the broker made $18,500 commission.
For Richard, the borrower, the effect of the lie was crippling. Had the broker held up a gas station instead, shooting Richard in the leg and paralyzing him—and getting away with it—the result would be similar. Now, Richard’s life has been reduced to the single, overwhelming concern of making each month’s mortgage payment.
At the height of the housing bubble, brokers could earn $1 million a year selling homes to people who “didn’t have a pot to piss in.” NPR offered the story of Glen, just out of college, who was making $75-100 grand a month. From the big open space of a high-ceilinged, cubicle-lined warehouse, “[They] lived mortgage.” All anyone did, Glen said, was wonder, “How we gonna get this one funded?”
Lowering standards to make more CDOs out of lower and lower-rated tranches, brokers pressed on. Credit rating agencies rated loans according to a scale—AAA, AA, A, B, BB, BBB. “Money good” sounds like caveman speak for the incentive driving the housing boom and guys like Glen, but in the industry, the term referred to good loans or triple As. Bad pools or “tranches” were called “toxic waste,” but investors had devised ways to make money off them, too, by re-tranching them before they were sold again, a kind of “financial alchemy” to clean them up.
Bad loan pools financed Glen’s penthouse, five cars, and nights out at clubs frequented by Tara Reid, where he and the guys would order 3 or 4 thousand-dollar bottles of Crystal served with firecrackers in the sparklers. Remembering it, Glen said, “Everyone wondered, ‘Woah, Who’s the cool guy?’ Well, we’re the cool guys.”
Driven by the incentive to keep the Crystal corks popping, the industry had innovated. There was no good or bad investment. Moving papers from a desk on the third floor to one on the tenth “made” money—or at least moved it.
Between 2003 and 2006, the effort to milk a dry market continued. Mortgage guys started pushing buyers to borrow for multiple properties. A&E produced TV shows like Flip This House and Flipping Out, instructing viewers in the art of buying a house with no money down and selling it for twice the starting price.
Refinancing was another industry boon. Bankers encouraged homeowners to borrow against the value of their houses via home equity lines of credit because refinancing increased the home’s market value and, more pointedly, seller commissions.
By 2004, 16% of mortgages were adjustable-rate mortgages, signed more often by borrowers in the lower and higher income brackets than those in the middle, including first-time homeowners and those wanting to flip. As the players enjoyed profitable skims off high-priced homes, high housing prices put homes out of the reach of modest-income Americans, and made those who’d signed on to variable interest rates vulnerable to rate increases and declines in home values. When the low introductory rates of sub-prime loans rose, the squeeze led to a spike in foreclosures. Homeowners began defaulting on their loans. Property values decreased. Then more loans defaulted, more prices dropped.
In the first quarter of 2006, California foreclosures increased 23.4%. The ripple was felt throughout Wall Street, where the emails flooded in: As of December 29, we are no longer buying CDOs with a stated income loan with a FICO less than whatever. No exceptions. Please do not call financing center.
No one was buying; no one could sell. Suddenly, guys like Glen were stuck with bad loans and a $100 million debt to Washington Mutual; Glen’s company was Washington Mutual’s bad loan. Companies whose wealth was tied to investments backed by credit rather than capital simply did not have collateral. As it turns out, this did not include a handful of small businesses, but banking giants like Bear Stearns (sold to JP Morgan Chase), Merrill Lynch (sold to Bank of America), and Lehman brothers (bankrupt).
Before they sunk, businesses like Lehman did their best to make a comeback, of course. Lehman knocked millions of dollars of debt off the books. Someone said take the repos to London and clean them up; they’ll pass. Snippets of their emails are available in the 2500-page report on Lehman’s last days.
“It’s basically window-dressing.”
“I see…so it’s legally do-able but doesn’t look good when we actually do it? Does the rest of the street do it? Also is that why we have so much BS to Rates Europe?”
“Yes, No and yes. :)”
The basic premise of this whole operation—that investors should take a cut from American homeowners because they could front the cash if homeowners couldn’t—was, well, a lie.
In February 2008, when Glen’s employer, Silver State, announced to its 600 employees it was closing its doors, employees well-versed in the logic that you get what you take rolled company computers and copy machines through the front door on their way out. Glen borrowed money from Dad and started defaulting on his home loan, paying enough to “keep them off [his] back” while he decided whether or not it paid to just walk away.
It was the moment guys like Michael Burry, a one-eyed, 32-year-old with Asperger’s had been waiting for.
* * *
A neurology resident before he bored of medicine and started investing full time, Mike Burry was living in the bubble’s epicenter, San Jose, California. In 2000, he opened his own hedge fund Scion Capital. By 2003, he understood “even nearly unlimited or unprecedented credit can no longer drive the [housing] market higher,” predicting “a 50% drop in residential real estate in the U.S” and collateral damage “orders of magnitude worse than anyone is considering.”
Watching the bubble near collapse, Burry had the idea he could bet against the housing market by buying bad debts and insuring them with credit default swaps. When the market crashed, he’d collect insurance on the bad debts from the CDO holders. As Lewis puts it, “It was as if you could buy flood insurance on the house in the valley for the same price as flood insurance on the house on the mountaintop.” After scrutinizing securities for criteria such as loan-to-value ratios, second liens, location, the absence of loan documentation and proof of borrower income, Burry bought 6 $10-million bonds on the worst loans, the triple-B-rated tranches.
Goldman Sachs sold him his first set of triple Bs. Soon, Bank of America sold him another $5 million in credit-default swaps. Weeks later, he’d purchased $5 million packages from six other banks.
Shocked that companies would sell swaps on the worst loans, he “would play dumb quite a bit,” asking, “‘How do you do this again? Oh, where can I find that information?’ or ‘Really?’—when they tell [him] something really obvious.” The act wasn’t necessary. In June 2005, Goldman Sachs called to ask if he’d like to up his trade size from $10 million to $100 million.
In an April 3, 2010 op-ed piece for the New York Times, he writes:
I entered these trades carefully. Suspecting that my Wall Street counterparties might not be able or willing to pay when the time came, I used six counterparties to minimize my exposure to any one of them. I also specifically avoided using Lehman Brothers and Bear Stearns as counterparties, as I viewed both to be mortally exposed to the crisis I foresaw.
Soon, Burry received a string of phone calls. The head swap guy at Deutsche Bank, Gregg Lippman, wanted to buy back some swaps. Burry sold them back for a profit. Three days later, Goldman Sachs’s Veronica Grinstein called from her cell phone, asking for a “special favor”: Would Burry sell $25 million worth of swaps back to Goldman Sachs? Then Morgan Stanley wanted to buy insurance on subprime-mortgage loans.
Burry had bet the loans were structured to go bad and they had. By June 2008, while the rest of the country was reeling, Burry’s business Scion Capital had netted its investors, after fees and services, a 489.34% gain.
Scion Capital wasn’t the only one waiting to reap profits after the fall. One of Burry’s investors overheard Greg Lippman brag he was going to make “oceans” of money with an exuberance that was “a little scary.” Sure enough, Deutche Bank was putting together “synthetic CDOs” set to explode so “savvy investors”—like Greg Lippman—could wait with buckets once it rained. Synthetics were Wall Street’s way of cannibalizing already existing bonds once they’d run out of the home-buyers to coax into teaser-rate loans. Magnetar, a big Chicago hedge fund, was doing it. Goldman Sachs was doing it.
In 2007, Goldman Sachs created the investment vehicle Abacus 2007-AC1—at the request, according to the Securities Exchange Commission, of John A. Paulson, another hedge fund manager profiting off loan defaults. According to the SEC, for $15 million, Goldman let Paulson pick bonds that would fail before Goldman Sachs sold Abacus to the European banks ABN Amro, a big Dutch bank later absorbed by the Royal Bank of Scotland. Put simply, the Dutch bank agreed to take on the risk of American home loans in exchange for a quick $7 million. When Abacus crumbled, the Royal Bank of Scotland was buried in debt: it owed $840 million to Goldman Sachs, who owed it to John A. Paulson. Now the British government owns about 84 percent of the Royal Bank of Scotland.
While Goldman Sachs is under investigation for backdoor dealing, what guys like Mike Burry and John A. Paulson were doing was legal. As a spokesman for Paulson noted, “While it’s unfortunate that people lost money investing in mortgage-backed securities, Paulson has never been involved in the origination, distribution, or structuring of such securities.” Worth $36.1 billion by the end of 2008, Paulson didn’t break any law and didn’t admit he’d done anything wrong. In a 2009 interview with the New York Times, in fact, Paulson said, “We are very proud of our performance last year. We provided an oasis of profitable returns for our investors in a year where there were few sources of gains.” Paulson’s clients—pension funds, endowments, wealthy families and individuals—agreed, considering his short sales “ingenious.”
Paulson’s number-crunching had set off a series of events that not only broke the bank (the Dutch bank and the Royal Bank of Scotland), but tapped British taxpayers who were now paying the price of the furious dispersal of bad loans to Americans who had wanted homes.
In a final irony, Paulson gave $15 million to the Center for Responsible Lending to build a center devoted to providing foreclosure assistance to troubled borrowers, saying, “We are pleased to help them provide legal services to distressed homeowners, many of whom have been victimized by predatory lenders.”
Paulson’s story is the kind that raises the big questions—like what are words for if they can signify the very opposite of what they say? Why did British and American governments tax citizens to honor deliberately shady deals? And why is a home-owner’s debt for sale in the first place?
* * *
Across the country, strapped Americans were preoccupied with another question: Where had all the money gone? Had it vanished into thin air?
From Abacus alone, money had passed from the wallets of American home-buyers to the bank accounts of mortgage bundlers, Goldman Sachs, ABN Amro, the Royal Bank of Scotland, and back to Goldman Sachs, before it dropped—thanks to British taxpayers—into the arms of John A. Paulson and friends.
Money that was supposed to gush up in geyser fashion from American home buyers now came from taxpayers in whatever country a bank had sunk. Governments across the world told its citizens they really didn’t want to but they had to make good on these deals for that money to trickle back down after CEOs had had their way with it. Articles like “How the Housing Boom and Bust Affects You” drew charts illustrating “the vicious cycle” of banks unable to loan and the businesses and individuals that would fail as a result. These are the kind of “trickle-down” stories that leave out the bit about money rushing up, like oil wells, from the working and middle classes.
Money had shifted—more of it than usual—from one Wall Street to another, from Goldman to Mike Burry and John Paulson who were going to dole it out to a small entourage of investors. A different Wall Street than the Wall Street in bed with Washington laid claim to it now. Instead of money flowing to banks, it was going to a few individuals striking out on their own, seizing the opportunity to reach into a giant sack of pirated loot.
Wall Street’s displaced players understood this: to stay in the game, they needed money and turned to their Washington players to get it. In 2008, Congress pulled through for them, passing the Emergency Economic Stabilization Act authorizing former Goldman Sachs CEO, Henry Paulson, to establish the Troubled Asset Relief Fund (TARP), a $700 billion “relief plan” or “bailout” allowing the government to purchase “troubled assets” from industry bigwigs like AIG. Paulson justified the use of taxpayer funds with the statement that “The ultimate taxpayer protection will be the stability this troubled assets relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars.”
TARP’s critics didn’t imagine the plan a START button that would magically re-ignite the steady stream of profit overflowing the desks of global financiers. For some, TARP was more like REWIND. Ohio Representative Dennis Kucinich, a former U.S. presidential candidate, described Paulson’s vision as “too much money, in too short of a time, going to too few people, while too many questions remain unanswered,” and asked the piercingly salient question: “Is this the U.S. Congress or the board of directors at Goldman Sachs?”
Even normally corporate-friendly free-market buffs scorned TARP, believing that intervention would only exacerbate a temporary glitch in the market, including Kentucky’s Republican Senator Jim Bunning, the guy who single-handedly blocked extending unemployment benefits to jobless Americans, who described the “massive bailout” as “un-American”—“not a solution,” but “financial socialism,” saying “The Paulson plan will not bring a stop to the slide in home prices,” but “spend 700 billion taxpayer dollars to prop up and clean the balance sheets of Wall Street.” However confused Senator Bunning’s notion that propping up Wall Street more closely resembles “financial socialism” than business-as-usual, it’s hard to disagree with the sentiment that a massive corporate bailout is “un-American,” if by “un-American” Bunning means undemocratic. As 100 university economists from across the nation in an open letter to Congress on September 24, 2008, observed Paulson’s plan was a “subsidy to investors at taxpayers’ expense,” arguing that “Investors who took risks to earn profits must also bear the losses.” Profit was privatized—reserved for bankers—while loss was socialized. The people would pay for the maneuvering of hedge fund guys like Burry.
Henry Paulson’s plan to treat the crisis by tapping taxpayers—many of whom have lost their homes, jobs, and workplace benefits like health insurance—is worse than the do-nothing equivalent of a free-market philosophy that capitalism’s “invisible hand” will iron out the world’s enormous economic woes on its own. As Michael Mayer put it, “If companies were not implicitly backed by the taxpayers, then managements would get very reluctant to go out after that next billion […]. They’d look over their shoulder and say, ‘This is getting dangerous.’” In fact, what Paulson had orchestrated by pulling the strings of its mistress, the U.S. government, was not only a massive tax on all Americans, home or no home, but amnesty.
The U.S. Treasury Secretary’s plan to inject Wall Street with capital proved capitalism does not operate by an invisible hand, as Adam Smith fans believe; on the contrary, it is carefully and diligently operated by those who make extreme capital—the bulk of whom are today’s bankers, insurers, and creditors—i.e. the Wall Street investors and world financiers micromanaging the U.S. government, homeowners, and, taxpayers.
The events leading up to the permissive and volatile lending climate include the industry’s enormous, decades-long effort to reverse regulation at every turn, such as its successful repeal of the 1982 Garn-ST. Germain Depository Institution Act—a repeal allowing the “alternative mortgage transactions” that gave birth to teaser-rate adjustable loans. Signed by then President Ronald Reagan, the repeal was supposed to “revitalize the housing industry” by “strengthening the financial stability of home mortgage lending institutions and ensuring the availability of home mortgage loans” (FDIC 8676).
The 1999 Clinton-signed repeal of the Glass-Steagall Act of 1933 didn’t help either. Passed in response to the collapse of American commercial banks and rampant securities fraud, the Glass-Steagalls Act drew clearer boundaries between commercial and investment bankers. Since the 1980s, the banking industry had lobbied to repeal the Glass-Steagall Act. By 1999, it had won despite a 1987 Congressional Research Service report recognizing that “Conflicts of interest characterize the granting of credit—lending—and the use of credit—investing—by the same entity”; because of the enormity of banks’ financial power, “its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments” since “Securities activities can be risky” and lead to “enormous losses” that the government would have to recover “if depository institutions were to collapse as a result of securities losses.”
Which is exactly what happened.
Nine years after the repeal known as The Commodity Futures Modernization Act of 2000, allowing commercial lenders to underwrite and trade CDOs and establish “structured investment vehicles” to purchase the securities, sub-prime loans constituted nearly 30 percent of mortgage lending, a 600 percent increase since 1998.
Behind Wall Street’s lobbying power to repeal industry regulations is the19th century victory that brought corporate America as we know it into being with a windfall of special rights never before afforded an entity—human or otherwise: the application of the 14th Amendment—that no person shall be denied equal protection under the law, and “no state shall deprive any person life, liberty, and property”—to corporations. Designed to protect African Americans from a concerted effort to deny their successful integration post-slavery, corporate lawyers won corporations “personhood” status for companies that incorporate, a declaration of independence, so to speak, whereby a business gains status as a “natural person” or an entity separate from the individual owners, affording it a legion of advantages like lower tax rates and prison evasion for criminal activities as well as superhuman privileges like “immanent permanency,” or the right of a corporation to exist forever, and “limited liability,” the right of a corporation to be accountable only for the amount of money it has invested.
The Supreme Court’s recent blow, rolling back a hundred years of campaign-financing caps—on the grounds that “corporations” are “people” and “money” is “speech”—knocked obscene gobs of ice cream atop the corporate pie, bringing new meaning to Reagan’s unofficial motto that “Government is the problem, not the solution.”
Cheated, overworked Americans frustrated by the wasteland aftermath of the housing crisis, whose primary news source is Fox news, might be tempted to believe Tea Party slogans berating government action. But it’s government inaction that makes it an accomplice. To the degree that Washington is in bed with Wall Street, the U.S. government can’t make good on its claim to democracy. Yet government is still the people’s best bet to win democracy back. The quagmire leaves Americans a single option: get Wall Street out of Washington.
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As Americans reel in the wake of an economy broken by bankers and exacerbated by already-wealthy opportunists, The housing-market derivatives trade—this whole business of pooling home-buyer loans and slicing them up for profitable sale—Wall Street’s first real taste of sugar, whet its unquenchable thirst for more. Since the housing market crash, investors have marched on, scrambling for government handouts and new ways to expand derivatives trading and extend profits while fighting to kill regulations.
Ever-reaching, Wall Street innovated swap trades by turning to cities and schools. Swap advisors enticed an issuer—a school, say—to swap a 5 percent debt over 10 years for a 4.5 percent debt over thirty years. The contracts, however, assumed that rates would be basically stable, not accounting for the world’s financial plunge, partly because advisers got paid to move packages. It didn’t matter what they were moving.
Soon, cities and schools were saddled with higher interest rates than they were receiving, locked into the debt for 30 years instead of 10. As Gretchen Morgensen explains in “The Swaps that Swallowed Your City,”
Almost all tax-exempt debt is structured so that after 10 years, it can be called or retired by the city, school district or highway authority that floated it. But by locking in the swap for 30 years, the municipality or school district is essentially giving up the option to call its debt and issue lower-cost bonds, without penalty, if interest rates have declined.
Between April 2008 and March 2009, New York spent $103 million killing roughly $2 billion worth of swaps, 25 percent of which came from the Lehman’s bankruptcy and cost various New York State debt issuers $12 million.
The latest target is Hollywood, where Veriana Networks and Cantor Fitzgerald have won approval to create a swap market for films that “would allow investors to buy or sell—or ‘short’—contracts based on a movie’s box-office receipts, in essence betting on how well a film will do when released in theaters.” Cantor and Veriana say their exchanges “give Hollywood investors a way to mitigate their risks” since a distributor with second thoughts could short a film. But Bob Pisano, president of The Motion Picture Association of America, says “I don’t know of any major representative in our sector that is supporting it,” listing risks to the film industry such as “market manipulation in the rumor-fueled film world, conflicts of interest among studio employees and myriad contractors who might bet with or against their own films, the possibility that box-office performance would be hurt by short-sellers, difficulty in getting or holding screens for films if trading activity indicated weakness and the need for costly internal monitoring to block insider trades” as well as the possibility a speculator “might leak an early version of a film to the Internet and then profit from its subsequent poor performance at the box office”—all good reasons to avoid derivatives altogether, which Warren Buffett has called “weapons of mass destruction.”
Wall Street’s effort to kill re-regulation attempts is just the latest round. Even Larry Fink—known on Wall Street along with Salomon Brothers’ Lew Ranieri for “developing the multi-trillion-dollar debt-securitization market that transformed the face of finance,” the very market “of mortgages, and car and credit-card loans, purchased from banks, sliced into pieces, repackaged, and sold to thousands of investors” that would “bring the economy to its knees”—has lambasted lobbying attempts to defeat regulation. Now Fink, who helped advise Paulson’s structuring of TARP, is responsible for orchestrating the massive clean-up in his role as chairman and CEO of BlackRock, “the leading manager of Washington’s bailout of Wall Street,” receiving a “waterfall” or a “mountain” of government contracts—so many that one banking executive likened the firm to a “shadow government”—to help manage accounts with AIG, Bear Stearns, and Citigroup, among others. Fink’s moral compass goes wider than it goes deep, however. Attributing rage at Wall Street to the public’s desire to “externalize the enemy,” Fink says he doesn’t like pointing fingers because “it was the culture of America that was guilty. We were living fat and happy and the whole system was one of excess speculation and leverage.” All along, he says, “we should have all been asking why people were making so much money.”
He’s not totally off the mark, of course. Even the New York Times couldn’t hide its disdain for home buyers defaulting on their mortgages. On an eight-house block on Beth Court in Moreno Valley, three miles east of Riverside on I-60, where residents struggled with unemployment, sunk property values, and crushed dreams, residents fraught with anxiety over their house and car payments turned on each other, myopically focused on the cut of a neighbor’s lawn or an unsightly vehicle replacing a repossessed truck. None of us feels particularly good about homeowners using their homes as ATMs to buy BMWs, but it’s a dead end to rage against “a culture of America” or all individuals everywhere. Only systemic change—the province of government—can change whole cultures.
The question of why people were making so much money is one that brings us back to an old myth: Do individuals pursuing their own financial interests like an “invisible hand” promote the good of the global community?
The honest answer is no; the lesson Wall Street provided the world is simple: given the opportunity, the extremely moneyed capitalists whose every monetary move affects the world over will make every self-serving decision imaginable to pocket profit at the expense of the world’s inhabitants. So will members of Congress pocketing tens of thousands of dollars from interested lobbyists. So will mortgage guys plucked from the soul siphoning fifty-plus-hour-workweeks. So will our neighbors upgrading SUVs to Hummers.
There’s not one invisible hand. There’s Henry Paulson’s—that’s two. Then there are all of the invisible hands stretching from K Street to Washington where more invisible hands seek handouts while pretending to slap Wall Street wrists. Thousands of invisible hands have dipped into American savings accounts in the form of home, car, and college loans—and they’re just not done yet.
Unfortunately, honesty isn’t everyone’s goal.
By now, the global financial crisis is usually attributed to the loose lending practices made possible by the industry’s lack of regulation, particularly of “shadow bankers.” Of course, Wall Street likes this version since it suggests the economic upheaval is an anomaly, the fluke of a misalignment that only needs straightening out. When head of the Commodity Futures Trading Commission, an oversight contender of derivatives trading, Gary G. Gensler, a former anti-regulation advocate, proposed more transparency, suggesting big banks selling derivatives conduct trade in open, public exchanges and clear them through central “clearinghouses,” which would act as “circuit breakers, allowing investors to see the prices that dealers charge their customers, The International Swaps and Derivatives Association representing Wall Street banks denied derivatives were the cause of the crisis, pointing at subprime mortgages instead.
If lax lending is behind the derivatives debacle, resolving the problem would seem easy: simply reverse Wall Street’s steps—tighten loan criteria, impose industry regulations, install oversight committees. Current attempts to curb Wall Street’s freewheeling, for instance, propose protecting Americans from bailing out banks, limiting trading and risks accepted by bankers, setting new transparency rules for derivatives and other complex financial instruments, and instituting pay reforms to give investors and pension holders more say in the management of their investments.
In other words, the bills seek to reverse the repeal of regulations designed to prevent the crisis. A simple reversal brings us right back to 1999 when corporate titans were about to unwind regulations and begin the great economic freefall. Yet Congress can’t even get that far because of furious lobbying to kill reform.
Even as Goldman purports to support clearinghouses, according to spokesman Lucas van Praag, who said, “We’re in favor of central clearing for derivatives,” mincing his support with the statement “We also think that all derivatives that can be traded on an exchange should be, but we don’t think it is a good idea to insist that derivatives can only be traded if they’re on an exchange.” Industry lobbyists hoping to water down the regulations before they make their way through Congress have already managed to make some corporations exempt from transparency and clearinghouses.
The sheer energy required to minimize the damage Wall Street might sow throughout the globe attests to the scope of Wall Street’s grip on the nation.
These guys are not the capitalists that Karl Marx raged against in The Communist Manifesto. Those guys at least paid workers enough to reproduce the conditions of production—well, not the slave-owning ones. Our guys developed “credit” to do that job. That’s what the housing market was, that’s what derivative trading is, and that’s why they have failed. Before the last century’s neocapitalist turn, money typically had to have a positive value for it to be worth something. That is, there had to be money for a person to have money. In the last forty years, however, negative value counts as money, too. Credit cards and insurance companies, like traditional bankers, have figured out how to exploit profit from the struggles of everyday Americans, extracting cuts from the paychecks of Americans who aren’t buying anything at all but who can’t afford a new Bentley or a pile-up of them should their brakes go out on the commute to work and can’t afford to bankroll the appetites of the health care industry or big pharma should they get cancer and need the service of one of the machines the AMA has got plugged into the moon.
“Credit” is the “genius” of neocapitalists, a partnership between employers who don’t pay their employees enough to safeguard them against American booby-traps like the health care system and the insurance and credit card companies who collect monthly checks. Average Americans paying a mortgage and insuring their cars and health tithe about 90 percent of their incomes to bankers and insurers.
It’s worth remembering what all this genius is about as we listen to AIG justify bonuses twice the size of the salary of the United States President by citing talent and productivity. These guys didn’t cure AIDS, prevent oil spills, or simplify tax day. They created ways to make themselves even richer. Their “product” was a bigger personal bank account. The checks came rolling in right around the time health insurance lobbyists scrambled to fight health care reform, companies like Anthem introducing 32 percent rate hikes, and banks fought to stop regulation of “overdraft protection” fees. Today, as some confused Arizonans look to send immigrants back to Mexico and Republican senators balk at Wall Street reform, Americans risk losing their souls along with their homes and jobs.
As Karin Jack, wife of Lehman CEO Brad Jack, put it in an interview with Vanity Fair contributor Vicky Ward, “On Wall Street, they pay you so much that they own you […] They have your soul. You gave it to them for the money.”
In America, you don’t have to sell your soul to be a sell-out: anyone who will sell her own soul, won’t hesitate to sell yours. Today’s sell-out is the one who won’t get up and steal it back.
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