No Hair News

The standard excuse given by the government, Wall Street banks (if you will allow me to use that shorthand for banks, investment houses, and hedge funds based in NY, Charlotte, London, Frankfurt, and elsewhere), and their paid flacks, mouthpieces, and wholly-owned media companies has been that the crash of the real estate bubble was unpredictable and could not be foreseen. For those of you GOP true believers and all those others living under a delusion (or a rock), that lie has been thoroughly debunked. The reveal of this con has be a long time coming, in dribs and drabs over the last two years, but the evidence of corruption and market manipulation is clear for all who wish to see.

This week brings a report of yet another settlement by a big investment bank with the SEC over fraudulent CDOs. In this case, Citigroup has paid a fine of $285 million to settle a civil action brought by the SEC over sales of mortgage-backed securities which consisted of mortgages hand-picked by Citigroup to fail. Meanwhile, Citigroup, besides making millions in fees on the sale of these instruments to suckers sophisticated investors, was also betting against the same securities by buying billions in credit default swaps (insurance that they would be paid when the security inevitably declined in value). This fine represents little more than a slap on the wrist considering the billions made in profits by Citigroup on such trades, but it does reveal the scheme.

This type of behavior by these banks was common. In the last six months, there has been a previous settlement against Citigroup for another set of securities, a similar settlement with J P Morgan, and another with Goldman Sachs. Other big investment houses such as Deutsche Bank have also engaged in the same scam but, since they are not based in the US, have not been the target of SEC action.

The entire fraudulent mortgage security ecosystem is revealed in these stories. You have the investment banks who were reaping large profits from creating and selling these mortgage-backed securities and who realized that the money train was going to dry up because of a shortage of the raw material from which these profits were generated – home mortgages. They went to Countrywide and other borderline and subprime lenders, feted and bribed Mr. Mozillo and others, to induce them to generate new mortgages, regardless of quality. The investment banks then paid the bond rating agencies outsize fees to give these toxic securities a AAA rating – required as some investors such as retirement funds cannot buy bonds with any lesser rating. The “investments” were then sold to “CDO fools,” but more on that later.

Meanwhile, smart guys who worked in the financial industry figured out that these mortgage-backed securities would fail and how to bet against them. The hedge funds and banks went to AIG and other companies and bought insurance – so-called credit default swaps – against the predictable collapse of these securities’ value. The logical extension of this was to create instruments which were bound to fail. In the most bizarre aspect of this entire scam, you have an entire ecosystem of hedge funds and other experts which specialized in picking the mortgages most likely to fail. These investors were then able to buy credit default swaps which paid them when the bonds composed of these toxic mortgages failed even when they did not own the bond! As a result, you had the ridiculous situation where there was some $900 billion to $1.6 trillion in mortgage-backed securities issued by banks but credit default swaps on the same securities which amounted to about $70 trillion!

But the game is even more rigged in favor of the corrupt, but connected, financial firms. Even when the entire scheme had collapsed, the Wall Street banks were able to parlay their government connections into a direct pipeline to the Treasury. Goldman Sachs, for example, not only received over $10 billion in TARP money, essentially an interest free loan repayable at Goldman’s discretion. It also got another $30 billion from the Fed at 0.01% interest for which it put up as collateral the worthless mortgage-backed securities it had been unable to sell to CDO fools still held (a subsidy not revealed by the Fed until forced to do so by a law sponsored by Mr. Frank and others). In addition, it got another $12 billion plus from the US Treasury via the bailout of AIG, as payment at 100% for the credit default swaps help by Goldman. Not a bad day at the office.

The fraud perpetrated by Goldman Sachs and others was not a victimless crime. The billions they made selling securities they knew would collapse came out of the pockets of firemen, teachers, policemen, government and small business employees in the form of massive losses by their retirement funds.

And, when the fraudulent activity of all the players is revealed, we see not prosecutions but the courts acting as shields to protect the fraudsters. Perhaps the most outrageous recent example of this is the dismissal of the lawsuit by the Ohio attorney general charging the bond ratings agencies with fraud, collusion, and conflict of interest. “The Ohio funds make a bare allegation that the ratings agencies knew or should have known that their ratings were false or misleading,” [Judge] Graham wrote.

So, the rating agencies (presumably professionals who have been at this trade for decades), who are supposed to provide an independent, knowledgeable assessment of bond quality, could not possibly know that the bonds were crap – even though that is ostensibly their business. Yeah, yeah, I know. Their real business is to take money from the bond issuers in exchange for a phony seal of approval. Only in America would the obvious conflict of interest be waved off while Fitch’s, Moody’s, and the others continue to be paid by the investment banks to issue phony ratings on their bonds. Yes, the law is blind. You know, like it says on the steps of the Supreme Court building, it’s equal justice for all under the law, only some are apparently more equal than others.

The whole scam in nicely summarized by Les Leopold:

It was Wall Street banks and hedge funds, not home buyers, who created the enormous demand for high-risk mortgages to pool, to securitize, and to turn into Ponzi-like gambling structures with names like CDOs, CDO squared and synthetic CDOs. It was the money-grubbing rating agencies that blessed these pieces of garbage with AAA ratings. As a result, trillions of dollars of worthless toxic assets polluted our financial system. When the bubble they induced burst, our system crashed, causing 8 million working people to lose their jobs in a matter of months due to no fault of their own. Anyone who still blames low-income home buyers, or regulations, or Greece – or anyone other than Wall Street – should be checked for dementia.

Home values have collapsed and retirement funds have been ripped off. The Treasury has been depleted by handouts to the politically-connected financial interests. The collapse of the real estate market has shown us real trickle down economics as millions have lost their jobs. The political class’s response? Cut more from those pesky entitlement that help the poor and elderly. Chop Medicare and Social Security because they’re “unsustainable.” Let’s cut taxes on the rich and corporations because you know that creates jobs. How can you question that? The fact that tax rates for the wealthy and businesses are the lowest in 50 years while unemployment is probably pushing 20% (if real numbers were used instead of government propaganda) means nothing. And never, never cut corporate subsidies, defense funding, giveaways to agricultural, mining, oil, or lumber interests. That’s off the table; those are the job creators!

To echo Matt Talibi,

They’re not “rogue” for the simple reason that making insanely irresponsible decisions with other peoples’ money is exactly the job description of a lot of people on Wall Street. Hell, they don’t call these guys “rogue traders” when they make a billion dollars gambling.

No, they call them “VP in charge of Risk Management” or some such title. No, this was not the case of some one-off side bet going terribly wrong. As bad as UBS’ management is, as Simon Calkwell points out,

“I highly doubt that the losses at UBS took place over the course of one day; they are far more likely to have occurred over a year, so there must have been a lot of debiting done by this chap, he must have been making payments somewhere [which required authorisation by superiors].”

These “Delta desks” make huge profits by trading on the infinitesmal spreads between a derivative (like an ETF) and the underlying asset. And, in order to make a large profit from a small difference, a lot of money must be bet. Further, it was Adoboli himself who reported the losses to his superiors.

It reminds me of a story the Colonel told me. He was stationed at Ft. Eustis, the headquarters of the Army Transportation Corps. Every so often, there wold be a truck fire. And, you would be so suprised at what was on that truck when it burned up. Chairs, TVs, cans of fuel – all sorts of equipment and such which could not be accounted for in prior inventories and audits.

Stay tuned. You won’t hear the whole story; you’ll have to read between the lines. The black man will be drummed out of the business, the other traders in the unit will be transferred, his supervisor will receive a slap on the wrist promotion, and the stockholders will absorb the losses. But, hey, at least the books balance.