A "Voice" from the dark

How much cheating and fraud occurred on Wall Street over the last ten years has gotten scant coverage. That may be changing.

In this article from The Village Voice, a beacon of light is showing us a once dark corner that the financial controllers don't want us to see.

What Cooked the World's Economy? connects previously unconnected dots. It by no means gives us the complete picture. But it does succeed in giving us an outline. For the inquiring mind, it is a must read.

I have italicized some excerpts, with my comments in between.

"This was the beginning of the heyday of hedge funds. Unregulated investment houses were originally based on the questionable but legal practice of short-selling—selling a financial instrument you don't own in hopes of buying it back later at a lower price.'

Hedge Funds are private money, with the managers receiving up to 35% of the gains. These are the same guys that argued they should not be taxed at corporate rates, but at the individual tax rate for gains. Wildly successful at playing with money from only the well-heeled and well-connected, these hedge fund managers were known to make billions in a single year.

"But it wasn't magic. It amounted to the return of the age-old scam called "bucket shops." Also sometimes known as "boiler rooms," bucket shops emerged after the Civil War. Usually, they were storefronts where people came to bet on stocks without owning them. Unlike their customers, the shops actually owned blocks of stock. If customers were betting that a stock would go up, the shops would sell it and the price would plunge; if bettors were bearish, the shops would buy. In this way, they cleaned out their customers. Frenetic bucket-shop activity caused the Panic of 1907. By 1909, New York had banned bucket shops, and every other state soon followed.'

The full Federal Reserve Act was passed in 1914, and signed by Woodrow Wilson. Before the presidential campaign of 1912, Wilson wasn't contemplating running. That is until JP Morgan and the rest of Wall Street convinced him to run, and promised to fully finance his campaign. The political community laughed and said Wilson did not stand a chance.

By the end of the campaign, the bankers money won, outspending all other candidates by more than 10-1. Now the banks had their man in the oval office. Now the banks controlled the currency of the United States.

Wilson later regretted passage of the Federal Reserve Act. Please see my article "Fuel to the fire" for his remarks.

That single act has been blamed for every rise and fall in our economy since. Many historians believe the Great Depression would not have happened were it not for the Federal Reserve.

"In the mid-'90s, though, the credit-derivatives industry was hitting its stride and argued vehemently for exclusion from all state and federal anti-bucket-shop regulations. On the side of the industry were Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and his deputy, Lawrence Summers. Holding the fort for the regulators was Brooksley Born, who headed the Commodity Futures Trading Commission (CFTC). The three financial titans ridiculed the virtually unknown and cloutless, but brilliant and prophetic Born, who warned that unrestricted derivatives trading would "threaten our regulated markets, or indeed, our economy, without any federal agency knowing about it."' "But Congress loved Greenspan—a/k/a "the Maestro" and "the Oracle"—and Clinton loved Rubin. The sleepy hearings received almost no public attention. The upshot was that Congress removed oversight of derivatives from the CFTC and preempted all state anti-bucket-shop laws. Born resigned shortly afterward.'

Born resigned, and today no one knows who he is. Many other true patriots of this country have resigned, or tried, in vain, to warn us of the credit derivative scam. I say true patriots, because I know the leaders on Wall Street don't give a damn about this country.

I hope, as many others do, that the leaders of Wall Street may soon be described as having committed treason. What else would you call knowingly ruining the US economy while greedily lining your own pockets? What else would you call taking taxpayer money, claiming you will go bankrupt, then refuse to disclose how that money was used, all the while giving yourself a bonus, for losing billions?

"...what we are living through is the worst financial scandal in history. It dwarfs 1929, Ponzi's scheme, Teapot Dome, the South Sea Bubble, tulip bulbs, you name it. Bernie Madoff? He's peanuts.'

"Credit derivatives—those securities that few have ever seen—are one reason why this crisis is so different from 1929.'

The article gives $595 Trillion as the amount of derivatives out there. In all likelihood, it is probably a good deal more. We have no way of being sure, for they are all traded "in the dark," outside of any regulatory control, with no public bid/ask.

CDO's are securitized debt derivatives. CDS are protection derivatives, ie insurance on CDO's. As the big bankers on Wall Street were clamoring for more mortgages to make CDO's, no matter how loose the guidelines, they began buying CDS on the CDO's they were selling. They were betting they would fail.

Who sold these CDS, fully knowing the purchasers were betting the bond (derivative) they just sold was going to fail? AIG, Bear Stearns, Lehman Brothers, and many more. More importantly, why would they participate in this questionable trade?

"The heart of darkness was the AIG Financial Products (AIGFP) office in London, where a large proportion of the derivatives were written. AIG had placed this unit outside American borders, which meant that it would not have to abide by American insurance reserve requirements. In other words, the derivatives clerks in London could sell as many products as they could write—even if it would bankrupt the company.'

"Revenue from premiums for derivatives at AIGFP rose from $737 million in 1999 to $3.26 billion in 2005."

"....The scam bled AIG white. In mid-September, when it was on the ropes, AIG received an astonishing $85 billion emergency line of credit from the Fed. Soon, that was supplemented by another $67 billion. Much of that money, to use the government's euphemism, has already been "drawn down." Shamefully, neither Washington nor AIG will explain where the billions went. But the answer is increasingly clear: It went to counterparties who bought derivatives from Cassano's shop in London.'

Who is AIG's biggest customer? Goldman Sachs.

"After the relative worthlessness of these CDOs became clear, the raters rushed to downgrade them to junk status. This occurred suddenly with more than 4,000 CDOs in the first quarter of 2008—the financial community now regards them as "toxic waste."'

4000 CDO's. CDO's typically are well over $1 Billion, with many as high as $5 Billion. CDO's squared can represent as much as $20 Billion in securitized debt. And that is just from the first quarter of 2008.

"What about the $600 trillion in credit derivatives that are still out there, sucking vital liquidity and credit out of the system? It's the tyrannosaurus in the mall, the one that made Henry Paulson, the former Treasury Secretary who looks like Daddy Warbucks, get down on his knees and beg Nancy Pelosi for a bailout.'

Paulson threatened congress that martial law would be used if the bailout was not passed. I think he knows how bad it really is, afterall, he was the CEO of Goldman Sachs during their biggest years of selling CDO's and buying CDS.

".....according to William Black, an effective federal litigator and regulator during the 1980s savings-and-loan scandal, by 2004, the FBI perceived an epidemic of fraud. Now a professor of law and finance at the University of Missouri–Kansas City, Black has testified to Congress about the current crisis and paints it as "control fraud" at every level. Such fraud flows from the top tiers of corporations—typically CEOs and CFOs, who control perverse compensation systems that reward cheating and volume rather than quality, and circumvent standard due diligence such as underwriting and accounting.' "The environment from the top of the chain—derivatives gang leaders—to the bottom of the chain—subprime, no-doc loan officers—became "criminogenic," Black says. The only real response? Aggressive prosecution of "elites" at all stages in this twisted mess. Black says sentences should not be the light, six-month slaps that white-collar criminals usually get, or the Madoff-style penthouse arrest.'

"In finance, the bottom line is the bottom line. The bottom line in this scandal is that fantastically wealthy entities positioned themselves to make unfathomable fortunes by betting that average Americans—Joe Six-Packs and hockey moms—would fail.'

"No one knows how much could be clawed back from the soiled derivatives reap. Clearly, it's not $600 trillion. William Bergman, formerly a market analyst at the Chicago Fed in "netting"—what's left after financial institutions pay each other off for ongoing deals and debts—makes a "guess" that perhaps only 5 percent could be recouped, which he concedes is unfortunately low. Still, that's $30 trillion, a huge number, more than 10 times what the Fed can deploy and over twice the U.S. gross domestic product. Such a sum, if recovered through the criminal justice process, could ease the liquidity crisis and actually get the credit arteries flowing. Not everyone would like it.'

"Lehman drowned, but Goldman Sachs, where Paulson was formerly CEO, was saved. The day before AIG reaped its initial $85 billion bonanza, Paulson met with his successor, Lloyd Blankfein, who reportedly argued that Goldman would lose $20 billion and fail unless AIG was rescued. AIG got the money.'

"Had Goldman bought from AIG credit derivatives that it needed to redeem? Like most other huge financial traders, Goldman has a secretive hedge fund, Global Alpha, that refuses to reveal its transactions. Regardless, Paulson's meeting with Blankfein was a low point. If Dick Cheney had met with his successor at Halliburton and, the very next day, written a check for billions that guaranteed its survival, the press would have screamed for his head.'

"To say the bailout hasn't worked so far is putting it mildly. Since the crisis broke, Washington's reaction has been chaotic, lenient to favorites, secretive, and staggeringly expensive. An estimated $7.36 trillion, more than double the total American outlay for World War II (even correcting for inflation), has been thrown at the problem, according to press reports. Along the way, banking, insurance, and car companies have been nationalized, and no one has been brought to justice."

Let us hope that changes, soon. The financial world outside of this country is blaming our leaders, both financial and political, for all that ails their economies. Without prosecutions and punishment for those responsible, confidence in our financial system will be lost. That confidence cannot return unless we do the morally correct thing.