Wrath of McGrath Blog
GULF OIL SPILL: GHOST OF FREE MARKET REAGANOMICS COME FULL CIRCLE, or, How Bankers Insuring the Exxon Valdez Spill Gave Birth 20 Years Ago to the Toxic Investments that Continue to Poison Our Economic Life (and Symbolically, Our Ocean) Today.
Written by Jim McGrath Wednesday, 09 June 2010 19:10
OVER THE NEXT 20 YEARS, THESE "INNOVATIONS" WERE REPEATED OVER AND OVER WORLDWIDE AS BANKERS, BROKERS AND INSURERS -- MONKEY SEE, MONKEY DO - COPIED HOW TO PASS ON THEIR BAD INVESTMENTS AND RISKS AS CLEVERLY DISGUISED FRAUD TO THE ENTIRE WORLD.
While history does not repeat itself exactly, sometimes the Almighty allows a repetition of an event to illustrate where we have been and why we are there. As Jason Linkin details the hidden history of these ills in The Huffington Post, we clearly see how the Gulf Oil Spill, which is beginning to poison the entire Gulf, reminds and reveals how a similarly horrific incident, the Exxon Valdez spill, 20 years ago, helped create the current economic crisis (enabled by lack of effective regulation, which is itself also partly responsible for the Gulf spill) that we suffer today.
In 1989, faced with the need to finance the Valdez clean up and insure against it, but lacking any real collateral, the financial world cleverly created the initial fraudulent financial innovations which became the CDOs, derivatives, credit default swaps and like instruments that we have all come to know and hate. The creation of something out of nothing for the Exxon Spill was indeed a breakthrough. Not content to create a few mere billions in fraud for an environmental disaster, financial witch doctors throughout the industry developed them further -- morphing them into the bundled poor-investment grade and subprime mortgages passed on as prime assets, with toxic mortgages as "collateral" - and other innovations -- all under the guise of spreading risk (while enhancing the fees and bonuses for the sellers). Financial hocus-pocus grew as it became further complex -- dressed up in false ratings, computerized formulas, spreadsheets based on fancy, all designed to fix the outcome for large bonuses and fees, but to stick the purchasers with junk - - fraud pure and simple. As The Huffington Post article reveals:
"..Exxon managed to get the amount of punitive compensatory damages [for the oil spill] reduced from the hoped-for $5 billion to a paltry $500 million. But, back when Exxon had reason to imagine it might actually have to part with the $5 billion, the oil giant needed to find a way to cover its hindquarters. Exxon found a savior in the form of J.P. Morgan & Co., who extended the beleaguered company a line of credit in the amount of $4.8 billion.
Of course, that put J.P. Morgan on the hook for any potential judgment against Exxon. So the bank went looking for a way to mitigate that risk. Its solution made history, [as told by New Yorker's John Lancaster in a 2009 piece entitled "Outsmarted":]
In late 1994, Blythe Masters, a member of the J. P. Morgan swaps team, pitched the idea of selling the credit risk to the European Bank of Reconstruction and Development. So, if Exxon defaulted, the E.B.R.D. would be on the hook for it--and, in return for taking on the risk, would receive a fee from J. P. Morgan. Exxon would get its credit line, and J. P. Morgan would get to honor its client relationship but also to keep its credit lines intact for sexier activities. The deal was so new that it didn't even have a name: eventually, the one settled on was "credit-default swap."
So far, so good for J. P. Morgan. But the deal had been laborious and time-consuming, and the bank wouldn't be able to make real money out of credit-default swaps until the process became streamlined and industrialized. The invention that allowed all this to happen was securitization.
...What securitization did was bundle together a package of these loans, and then rely on safety in numbers and the law of averages: even if some loans did default, the others wouldn't, and would keep the stream of revenue going, thereby diffusing and minimizing the risk of default. So there would be two sources of revenue: one from the sale of the loans, and another from the steady flow of repayments. Then someone had the idea of dividing up the securities into different levels of risk--a technique called tranching--and selling them off accordingly, so that riskier tranches of debt would pay a higher rate of interest than safer ones. Bill Demchak, a "structured finance" star at J. P. Morgan, took the lead in creating bundles of credit-default swaps--insurance against default--and selling them to investors. The investors would get the streams of revenue, according to the risk-and-reward level they chose; the bank would get insurance against its loans, and fees for setting up the deal.
There was one final component to the J. P. Morgan team's invention. The team set up a kind of offshore shell company, called a Special Purpose Vehicle, to fulfill the role supplied by the European Bank for Reconstruction and Development in the first credit-default swap. The shell company would assume $9.7 billion of J. P. Morgan's risk (in this case, outstanding loans that the bank had made to some three hundred companies) and sell off that risk to investors, in the form of securities paying differing rates of interest. According to J. P. Morgan's calculations, the underlying loans were so safe that it needed to collect only seven hundred million dollars in order to cover the $9.7-billion debt. In 1997, the credit agency Moodys agreed, and a whole new era in banking dawned. J. P. Morgan had found a way to shift risk off its books while simultaneously generating income from that risk, and freeing up capital to lend elsewhere. It was magic. The only thing wrong with it was the name, BISTRO, for Broad Index Secured Trust Offering, which made the new rocket-science financial instrument sound like a place you went to for steak frites. The market came to prefer a different term: "synthetic collateralized debt obligations."
As Lancaster notes: "Inevitably, J. P. Morgan's innovation was taken up by more aggressive and less cautious banks." Oh, you don't say!
Mortgage-based versions of collateralized debt obligations were especially profitable. These C.D.O.s involved the techniques that the J. P. Morgan team had developed, but their underlying assets were pools of mortgages--many of them based on the most lucrative mortgages, the now notorious subprime loans, which paid higher than usual rates of interest. (These new instruments could be pretty exotic: some consisted of C.D.O.s of C.D.O.s, pools of pools of debt.) J. P. Morgan was wary of them, as it happens, because it didn't see how the risks were being engineered down to a safe level. But institutions like Citigroup, U.B.S., and Merrill Lynch plunged in."
THERE YOU HAVE IT, THE STORY OF THE BIRTH OF MASSIVE FRAUD THAT CAUSED THIS CURRENT MESS.
So, while it is hard to imagine that the Gulf spill has a silver lining as our wildlife, fish and waters are being destroyed, we can take solace in the fact that at least it sheds light on the consequences of having let big business do whatever it wishes for a generation. The poisoning our southeastern shoreline is being caused by the greedy desire to cut corners at all costs, enabled by the Reagan Revolution paradigm of no cops on the beat. The federal government's watchful eye consists of one regulator for the entire oil drilling industry. As the oil spreads across the marshes, wetlands, beaches and waters, so the poisonous results of greed, fraud, and financial crimes enabled by this brand of free market philosophy spread throughout our system: toxic assets kept off the books of giant banks claiming profits, which hoard government largesse that allows them to stay in business while contracting the credit supply necessary for small business and the rest of us to prosper. Taxpayers subsidizing these industries, allowing them billions in bonuses, all to continue the same and worse risky behavior that should have already brought them down except for government rescue; and lastly, a near Depression, in which many are waiting for the second phase to work its way and produce more economic pain. All while the top one percent, those corporate thieves that created these tricks, gain more and more income as the income of most American wage earner stagnates.
Need more be said about an economic philosophy disproven by The Great Depression 80 years ago, but revived by a feel-good politician, itching the public's ears by offering us some city on a hill, but instead giving us an illusory prosperity by undercutting American workers, sending our industries to foreign countries, and luring American wage earners to borrow ever more for increasingly tantalizingly complex and technological toys and consumer products, all in order to enrich corporate pockets while enslaving the people by indebting them to the banking and corporate system that grows by leaps and bounds?
IS IT ANY WONDER THE ONLY FIRM THAT MADE HANDSOME PROFITS THROUGH THE FINANCIAL CRISIS, GOLDMAN SACHS, PLAYED THE BIG SHORT-- WAS THE MAJOR BETTOR AGAINST ITS OWN INVESTMENTS MADE UP OF THIS FRADULENT JUNK?
WHEN WILL THE PEOPLE SAY ENOUGH IS ENOUGH, AND DEMAND THAT THIS ILL-GOTTEN GAIN BE CLAWED BACK AND BONUSES RETURNED? WHEN WILL THEY DEMAND THEIR BONUSES, DEMAND THAT THESE BANKS BE BROKEN UP AND DEMAND THAT THESE SHEISTERS PLAY BY THE RULES THEY INSIST OTHER PLAY BY AND SUFFER ECONOMIC PAIN FOR THEIR HUCKSTERISM DISGUISED AS TRUE INVESTING?
WE ARE WAITING. WHILE IT IS OBVIOUSLY ONE RESPONSE THAT WOULD RESOLVE, BY FINANCIAL RETRIBUTION, THIS ILL-GOTTEN GAIN ONCE AND FOR ALL, LET US HOPE A TRULY GREATER DEPRESSION IS NOT THE ONLY ANSWER.
Join Us the Weekend of APR. 28 - MAY 1, along with the AFL-CIO and Affiliated Groups, to Protest Big Bank USA, Exec Bonuses, and the Wall Street Madness Leading Everyone But the Top One Percent to Ruin.
Written by Jim McGrath Tuesday, 13 April 2010 14:41
GREED REIGNS AND RUINS: The chart from published in "The Nation" says it all: income disparity between the top .01 percent and the lower 90 percent of earners is similar and worse to that of the 1920s, making for a destabilizing influence, harmfully inequitable distribution of resources and another Depression. It is subtitled, "Re-creating the Gap that Gave Us the Great Depression." Before the Reagan years, the top made 200 times more than the bottom 90 percent; this disparity has grown to almost 1,000 percent, based on the vast amounts of debt, fraudulent financial "innovations" and the last 30 years' "magic of the marketplace." See the stark, shocking graph here: http://www.thenation.com/doc/20080630/extreme_inequality
We are demonstrating in NYC against these ills, against granting bonuses for voodoo finance birthed by voodoo economics, and for meaningful financial reform to protect what is left of our prosperity for ourselves and our posterity. We ask you and all right thinking to join us! We will be joining the massive demonstration by the AFL-CIO and other allied groups on Thursday, April 29th. We also plan other demonstrations on the May Day weekend (April 30th - May 2, 2010). Join us! We are TENAC, the Tenants' Advocacy Coalition, This e-mail address is being protected from spambots. You need JavaScript enabled to view it , (202) 628-3688.
PICKETING WALL STREET AND
BIG BANK USA!
Some of us picketed against Wall Street and Big Bank USA in January along with representatives of The Catholic Worker in New York City. We plan to do so again on April 28 with Big Labor and allied groups and other times over the weekend. We invite any others and/or their organizations to join us. For further details, let us know.
Wall Street and Big Bank USA have put the entire U.S. economy and fiscal system into a coma, through their machinations and rip-offs. Worse still, they have done so with taxpayer bail-outs. They continue their massive non-lending practices and massive executive in-house bonus policies, and their escape from any regulatory action. Their non-lending policies hurt tenants especially in their "right-to-buy" their buildings in conversion situations. "Right to Buy:" means nothing, if you cannot get a loan to buy.
We say there must be a lot more Federal regulatory action and punishment, and we intend to push for it.
Jim McGrath
Chairman
TENAC
Tenants' Advocacy Coalition
WALL STREET + BIG BANK USA
CRIME BUT NO PUNISHMENT!
U.S. economic and fiscal meltdowns are right here - all around us - Wall Street + Big Bank USA. Here are the pirates responsible. Big Bank USA says NO to loans for the American people but YES to "mega-buck" bonuses for themselves! Big Bank USA has been subsidized by U.S. "bailout" funds, but Big Bank USA has "bailed out" on economic recovery and the American people. Goldman Sachs executives are getting so much gold -- man, their sacks "runneth over."
ENOUGH ALREADY!
"LESS BAIL, MORE JAIL"
WE SAY GIVE IT BACK!
The great Honore de Balzac, said: "Behind every great fortune lies a great crime!" We believe that there are many great crimes behind the fortunes looted from the American people by the Wall Street and Big Bank buccaneers. Remember the Holocaust, where all that killing went on and "nobody knew anything." In the midst of this financial holocaust, untold numbers made a financial "killing" at the enormous expense of all yet "nobody is to blame." The big boys on Wall Street and in Big Bank USA know where the money went and how it got there, and need to pay it back. We say "Less Bail, More Jail!"
ENOUGH ALREADY!
WE SAY GIVE IT BACK!
TO OUR FRIENDS IN GREECE: BEWARE GOLDMAN BEARING GIFTS IN SACKS!
Author Reveals That Behind Closes Doors, Even GOP Members of Congress Fuming Over Bank Behavior! WELCOME TO THE CLUB, JOHNNY-COME-LATELY'S!
Written by Jim McGrath Thursday, 08 April 2010 15:25
Michael Lewis, author of "The Big Short" tells how G.O.P. members of Congress (seemingly a group never one to truly indulge in fact finding on committee panels, or be well-informed about anything but distorted talking points and death panels), naturally skipped a Banking Committee hearing to attend a briefing by Lewis. Once told clearly and plainly what Citi, AIG and the rest had done, the GOP members were fuming. Well, see what happens when they step away from their trickle-down talking points supplied by Bane-er, McConnell and the other Palins? But we think they do get some credit -- for "smoking ears" about all this. Perhaps there is some good in them after all besides wanting a campaign contribution check. (For the story, see The Huffington Post at, http://www.huffingtonpost.com/2010/04/07/house-republican-book-clu_n_528385.html
What struck author Lewis was how uninformed the GOP members were. Not us. Especially not after hearing their level of debate during the 2008 election and since. However, we understand his reaction -- it is astonishing our elected officials could be so uninformed -- that it stretches belief, raises the eyebrows, bothers the mind and bristles the back, no matter how many times we hear it, because its seems more and more unfathomable and deeper and deeper with each encounter, be it sound bite, town hall debate, newsmaker shows, or floor speech. We suggest they devote less time to Fox News, Rush Limbaugh and GOP talking points, and more to reading up on the issues with sites like The Huffington Post, Business Insider, Zero Hedge Fund and others. They may learn something besides the marketplace is magical, trickle down works and all government is bad.
WHAT TO DO ABOUT ALL THIS CRISIS AND THE BANKS NOW-SOLIDIFIED POSITIONS THAT GUARANTEE MORE CRISES AND ECONOMIC HELL?
WE SUGGEST THE GOP UNITE WITH THEIR DEMOCRATIC OPPOSITION AND SHOW A LITTLE RIGHTEOUS ANGER IN PUBLIC -- BY PASSING REAL REFORM, THAT WILL PREVENT LIKE CATASTROPHES, NOT PAP LIKE DODD'S COMPROMISE VERSION, WHICH "REFORMS" THINGS LIKE HIDE THE PROPOSED CONSUMER FINANCIAL PROTECTION AGENCY IN THE FED (RUN BY THE BANKERS, FOR THE BANKERS) TO CONSOLIDATE, PERPETUATE AND IMMORATALIZE BANK POWER, TOO BIG TO FAILS, AND THE REST OF GOP-INSPIRED PHILOSOPHY THAT HAS STARTED (at least SO FAR), A NEAR DEPRESSION.
WHAT TO DO ABOUT IT? WE SUGGEST THAT OUR READERS, ALL INTERESTED PARTIES, AND EVEN THE MORE THINKING GOP, JOIN OUR DEMONSTRATIONS ON WALL STREET AND MAY DAY PROTESTS ON THE WEEKEND OF APRIL 28 - MAY 1ST, 2010. More to come, stay tuned for details.
Real Solutions for Real Health Care: VOTE FOR THE GRAYSON BILL, OR, Go the Way of the World of Finance: BROKE!
Written by Jim McGrath Saturday, 13 March 2010 12:20
GENIUS IS SIMPLICITY! Congressman Grayson (D- FL) is offering the simplest, easiest and perhaps most effective way to solve the burgeoning health care crisis: ALLOW THE PUBLIC TO BUY INTO MEDICARE! Grayson make sense. Congress should vote on it as an inclusion to the reconcilation bill, and if it passes, all the better. GRAYSON IS RIGHT! WE NEED TO GIVE PEOPLE THE CHOICE. He tells it like it is:
"And to the right-wing loons who call it socialism, we say, 'if you want to be a slave to the insurance companies, that's fine. If you want 30% of your premiums to go to 'administrative costs' and billion-dollar bonuses for insurance CEOs who figure out new and creative ways to deny you the care you need to stay healthy and alive, that's fine. But don't you try to dictate to me that I can't have a public option!' "
"This simple four-page bill lets any American buy into Medicare at cost. You want it, you pay for it, you're in. It adds nothing to the deficit; you pay what it costs.
Let's face it. Health insurance companies charge as much money as possible, and they provide as little care as possible. The difference is called profit. You can't blame them for it; that's what a corporation does. Birds got to fly, fish got to swim, health insurers got to rip you off. And if you get really expensive, they've got to pull the plug on you. So for those of us who would like to stay alive, we need a public option.
In many areas of the country, one or two insurers have over 80% of the market. They can charge anything they want. And when you get sick, they can flip the bird at you. So we need a public option.
And they face no real competition because it costs billions of dollars just to set up a national health care network. In fact, the only one that's nationwide is . . . Medicare. And we limit that to one-eight of the population."
For the full story, see http://www.huffingtonpost.com/rep-alan-grayson/hr-4789-the-public-option_b_496977.html
The Grayson bill is the SIMPLEST AND EASIEST WAY TO GET INCLUSION AND DEFRAY COSTS.
WHY? BECAUSE WE WILL NEED ANYTHING FROM A PUBLIC OPTION TO A SINGLE PAYER, TO AN ACTUAL MASSIVE GOVERNMENT TAKEOVER OF HEALTH CARE, NOT TOO MANY YEARS FROM NOW -- AS COSTS CONTINUE TO PROLIFERATE. AN ESTIMATED 50 PERCENT, HALF OF OUR GDP, WILL BE SPENT ON HEALTH CARE. HALF OF ALL OUR PRODUCTIVITY! LIKE WE NOW HAVE THE SEMI-NATIONALIZATION OF THE BANKS: THE EXCESSES IN THE SYSTEM, UNCHECKED BY, GASP, GOVERNMENT, LEAD TO THE NEED FOR MASSIVE GOVERNMENT INTERVENTION AND HELP. DOES IT MAKE SENSE TO TAKE A LITTLE MEDICINE NOW INSTEAD OF A MAJOR OPERATION LATER?
IN SUM, DIDN'T THEY LEARN ANYTHING FROM THE FINANCIAL CRISIS? Essentially, that government IS the cop on the beat. What can help against power that corrupts absolutely? It is the only thing that has enough power to rein them in when (it should be BEFORE, idiots) they ruin (actually continue to ruin) the country.
IN THE LATEST, MOST TOPSY TURVY DEVELOPMENT, THE DEMOCRATIC LEADERSHIP SEEMS TO BE ABANDONING WHAT THEY HAVE ALWAYS FOUGHT FOR -- national health care -- ALL FOR A VICTORY, OR WORSE, ALSO TO CATER TO THE LOBBYISTS. The Huffington Post reports that Pelosi said, "I'm not having the Senate, which didn't have a public option in its bill, put any of that on our doorstep," she said. "It did not prevail. What we will have in reconciliation will be something that is agreed upon, House and Senate, that they can pass and we can pass... It isn't in there because they don't have the votes."
HOWEVER, Congressmen like Grayson and Senators like Sanders and others (now 41 senators and counting) are not giving up. Many disagree and say they do have the votes, and the leadership and White House are not supporting it. WE DO. WE SAY, BE A PATRIOT AND BUCK THE LEADERSHIP IF THAT IS WHAT THEY ARE DOING, BY VOTING FOR GRAYSON'S BILL.
Then, if it passes, watch all these tea party members buy in...because they won't be able to afford private insurance!
Master of the World? NOW GEITHNER WANTS TO DRAG DOWN ALL OF EUROPE WITH THE U.S., Warning the EU Not to Regulate Hedge Funds Without Prior U.S. Approval of Any Regulations (Which, We See, On This Side of the Pond, Means No Regulation At All)
Written by Jim McGrath Thursday, 11 March 2010 14:57
The New York Times reports: "U.S. Secretary Tim Geithner has written to the European Commission warningt that plans to regulate hedge funds and private equity firms could cause tensions with Washington, The Financial Times reported.
Citing a letter but not quoting directly from it, The Financial Times wrote to Michel Barnier, the European Commissioner in charge of market regulation on March 1 saying the EU was headed for a clash with the United States and Britain if the planned rules prove overly protectionist..."
Not content to wreck only one country for profit (Greece), Geithner, Goldman Sachs and the rest of Big Bank USA are setting their sights on the entire EU. The big boys smell a kill, and too bad for all of Europe, eh? Because there's gold in them thar hills -- er, I mean les provinces, die stadts, and le reggione, too!
Too bad, Geithner, too bad, pigs at the trough. If Europe has enough sense to outlaw all this toxic poison, more power to them. If the U.S. continues as it has, with blind corporate greed running this all (though the vast majority of Americans oppose it), then go ahead and lose your economic power and go to economic h** in a handbasket -- as you have been for the past 20 years. But don't say we didn't warn you and try to stop the madness.
More Articles...
- Banking Reform Turns Into "Chump Change" to Empower the Banks Further and Ruin Us All, Thanks to Dodd and the G.O.P... Second Crisis, Anyone? LET THEM EAT SUBPRIME!
- Hey Greece! Beware Goldman Sachs Bearing Gifts!
- $100 Million Instead of $120 Million is Still Wrong, Especially Wall Street's Fallacious Argument: We Must Honor Bonuses as "Contract Commitment" When They Dishonor & Change Labor's Contracts All the Time
- Demonstation Against Goldman Sachs and Bonuses a Success
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