All the above people are in the group I like to call "the few." "the few" is not limited to the pictures above, but to be a member of the few takes one special circumstance - you got filthy rich, I mean filthy "live on your yacht sailing the world for the rest of your life" rich, by creating the financial mess the world has only begun to experience.
What these people did was to create an environment which culminated with fraudulent bonds sold to unsuspecting investors. The story begins many years ago, and many accomplices were involved. Subtle changes to national lending laws meant to help the disadvantaged, elimination of regulatory controls over banks, creation of obtuse and opaque accounting rules were all used by those at the top of financial corporations to rig the system for profit, and lie to investors.
I say lie because "the few" gamed the system by conning the ratings agencies to give the same rating to risky bonds based on consumer debt as the rating given US Treasury Bonds. At the same time, they also convinced those in charge of policing them, ie. the SEC, the Fed, The Senate Banking Committee among others, that this was the new world order, the fantastic paradigm that the US would enjoy.
In fact, the economic model for the US since 1981 has been the elimination of good paying jobs here, in exchange for cheaper imported products in combination with more government spending via sale of US Treasuries, thus increasing the National Debt. In the 1980's, the US was able to increase GDP only through the massive increase of military build-up, which was funded increasingly by foreigners through the sale of US Treasury bonds, which they bought with the profits from the increasing exports we bought from them.
The benefit to the US economy came only after we increased the National Debt, and that money was filtered through military spending, not free market productivity. Our automobile manufacturers were not making more money, they were actually losing money in the 1980's, GM to the tune of $10 Billion per year from 1981-1990. We ceded electronics production to Asia and Latin America, textiles to the Indian sub-continent, and automobile advances to the Japanese and Germans. The swiftness of the manufacturing base dismantling was only buffeted by the increase in military spending.
Next, we began to get the Chinese on board. They relished having foreign capital, mainly from the US, pour into their country. US corporations took the savings they realized by eliminating good paying jobs here, and built shiny new state of the art factories there. It has grown today to such proportions that Peter Schiff calls it the "Tom Sawyer Effect." Schiff likens it to Tom convincing his friends that there was such joy in painting the fence, that his friends actually paid him to paint. Well, the sad part is there was only so much of the Sawyer's fence. That job was finite. And for Tom, he hoped they would finish before they realized painting was really not that joyful.
Unfortunately, the US economy, and the global economy, are not that finite. In 2007, the pace of production in China supported the consumption in America at a 5:1 ratio. That means it took 5 Chinese to meet the buying demands of 1 American. By November 2008, 50% of the toy factories in China have closed. The percentages for other goods is rapidly approaching that level. Just ask your local overhead fan supplier how sales are this year. Ask the hardware store. Ask your furniture store. All these businesses, plus most others based on the consumer, are not just slowly dying, they are at the grim reaper's door. And they all get the majority of the goods they sell from China.
Wall Street used this system to gain huge profits. American corporations that could eliminate jobs here the fastest were the ones whose stock price rose quickest. Bad news is the party could never last. Unless you have a consumer base that makes enough money to buy all the goods, the model would stop working. By 2000, we were at the end of that model. We no longer had enough good paying jobs to trade for cheaper imports.
Congress was convinced by Phil Gramm that Banking deregulation was the answer. Eliminate the wall between investment and commercial banks and large amounts of money will create more jobs was his argument. In 1998, passage of the Gramm, Leach Bliley Act accomplished just that, and removed one of the last vestiges of post-depression laws meant to keep the banking industry sound. Enron was a direct consequence of this law being passed.
In the late 1990's, many more banking regulations were removed by congress, yet nothing was keeping the economy from sinking into recession.
In comes the Fed. Greenspan recognized the need for a spark to rekindle spending. But how to create that spark was the answer. All the data pointed to wages going down. Less money = less spending. So in January 2001, at the behest of Wall Street and the incoming Bush Administration, Greenspan lowered the rate at which banks could borrow money. To fund this, he increased the number of US Treasuries for sale.
For a short time, it worked. Homeowners, under constant advertising from mortgage lenders, refinanced their homes en masse. There were even some homeowners who refinanced 6, 7, 8 times and more within a few years span. They were able to do so because as the stimulus of the lower Fed rate wore off, Greenspan, under encouragement from the White House, would lower the Fed rate again, and again, and again. Each time the rate lowered, it provided a little stimulus. Until the Fed rate got to 1%.
The Fed could not really go any lower. There is always a certain cost to doing business. For mortgages, the processors, underwriters, office space, office machines etc all need to be there to do business, so mortgage rates could not get any lower. Some money must be there to support the organization.
Now Wall Street needed something else. Since the lowering of interest rates had the effect of allowing more buyers into the real estate market, real estate was making dramatic climbs in value. At the same time, since the Fed rate was so low, so were the Treasury yields low. Wall Street, hungry for more profit, and knowing certain investment vehicles such as annuities, pension programs and the like needed a guaranteed rate of return much higher than the the 3.5% of Treasuries, went to work.
First, in order for the plan to work, the ratings agencies must agree. The largest pools of money available for investing reside with entities that, by law in most cases, are allowed to buy only AAA rated securities. So a plan was hatched that the ratings agencies could be convinced to give certain securities, otherwise deemed risky, the highest ratings. The Mortgage Backed Security was born. MBS were, in theory, structured in a way that they contained both good (prime) mortgages and bad (subprime) mortgages, and the argument Wall Street used was since only a portion of the MBS had risky mortgages, and historical models show only a certain rate of default, then if we plan for that default as reflected in the overall rate of return, then the MBS is extremely safe.
Next, Wall Street began selling MBS at a rabid pace. Investors were clawing for greater returns than government bonds. Soon, all the mortgages that could be securitized had been securitized. Wall Street needed more.
The birth of the CDO now came. Several MBS were combined, and packaged as a new type of bond. An average MBS may have contained between $50 - $100 Million worth of mortgages. The CDO's would be a bet on the performance of as many as 10, sometimes more, MBS in one single bond. Most CDO's were sold for more than $1Billion. Wall Street sold these new bonds, the CDO's, CLO's, CMO's, as the way for fixed income investments to realize the rate of return they needed. What Wall Street did not tell these investors is the underlying MBS owned the mortgages, not the CDO. Wall Street did not tell them the CDO was only a bet on the positive performance of the underlying MBS.
The fees were enormous. The demand from pension funds, money market account managers, sovereign wealth funds, annuity funds etc. for higher yield than Treasuries was increasing. Wall Street needed more loans. So the system expanded. Some banks, such as Wamu and IndyMac, already were realizing greater profits from lowering guidelines, and Wall Street was buying all of their loans. Some dealers set up internal channels to service loans they could then package into MBS, and then CDO's. It got to the point that people with very poor credit histories were being given loans that exceeded the value of the property by as much as 25%. Debt to income ratios, forever at the 35% or less level, were raised sometimes to as high 60%. Some people were even allowed to have three, four or more properties at one time with these new guidelines.
Very few people lied to get a mortgage, they did not have to. Wall Street and the banks were eager to let someone into a house, fully knowing the terms would never be filled, because they were selling the risk of that loan defaulting to someone else.
Again, Wall Street was selling the risk to someone else, at huge profits. They were doing everything they could to get more loans in, even giving loans to people they knew never had a chance of fulfilling the obligation.
The real problem with all of this is housing values must keep increasing at an escalating rate greater than at the time of origination of the MBS. If a plateau is reached where housing prices remain steady, the people who had been given loans that exceeded their ability to pay had no way to get out of the house without default. If they had borrowed more than the house was worth, and housing prices remained flat, they could not flip the house for profit.
This was compounded by the credit card companies giving new homeowners cards with $10,000 to $50,000 limits. This practice escalated in 2005 when the banks figured out that a lot of people were buying houses, putting in granite counter tops and new appliances and selling the house for profit as the market rose. Why not give them a seperate line of credit through a card which would be used at Home Depot, then paid off at the closing when they sold the house?
Well, as we all know, housing prices not only have remained flat, they have fallen. More than 25% nationally. This has grave consequences for the buyers of CDO's. Since the MBS that the CDO is a bet on owns the mortgages, the CDO gets nothing from a short sale, deed in lieu or loan modification. The CDO is a 100% loss.
A 100% loss.
Among the coming casualties will be any and all pension funds. If you have money, or are being paid from any pension program, get ready. Most pension programs are near half the value they were one year ago. And the bottom is nowhere in sight. Money market accounts - find out today if they have anything besides US Treasuries. If they do, it is only a matter of time before that account will be valued lower. Most insurance companies bought these to bolster their annuity funds - Guess what - sometime in the near future the billions represented by derivatives will be marked down.
Here is why I call "the few" the architects of destruction. There are somewhere over $500 Trillion in derivatives that have been sold over the last 6 years by American Investment Banks.
There isn't enough money in the world, let alone the US Treasury, to replace the capital losses of even half of the derivatives. In most cases, derivatives will have a 100% loss by the end of this.
It is hard to believe that "the few", who have been called "the smartest people on the planet" by many, did not know what they were creating.
That's the really scary part
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