As I watched the Senate subcommittee grilling of Goldman Sachs speculators yesterday, I almost grew ill. Their defiant and cavalier attitude to how they’d legally gutted millions of people yet felt no remorse at all, made me physically ill. One particular miscreant who led their mortgage –CDO unit, when asked directly by Sen. Levin if he felt he’d done any wrong- merely feigned a look of mock surprise and said ‘No’.
What did these golden boys, including the notorious Goldman trader supreme Fabrice Tourre do? They sold packages of mortgage securities called CDOs (collateralized debt obligations) which they knew with 99% probability would fail, then bet on them to fail in the CDS (credit default swap) market to make money on the losses. While Goldman packed away the samolians, banks that bought the “toxic waste” (in trader parlance) were brought to the edge of ruin as the mortgage market melted down.
Is Goldman guilty of law-breaking? I doubt it. Why? Because since the helter-skelter Reagan speculator era (when the 1984 Bank Holding de-regulations went into effect) the speculators have been allowed free reign. Remember Michael Millken and his “junk bonds”? Laws full of loopholes were thereby engineered, often with the help of traders turned lobbyists, to give the “masters of the universe” plenty of latitude to take risk and get a perfectly legal 'Amscray! Get out of Jail free card'.
Around this same period, a whole raft of mortgage securities emerged, which were piled into bond funds. These included CMOs, collateralized mortgage obligations (the forerunners of CDOs) and interest only strips (Ios) and other trash (e.g. inverse floaters). The inclusion of so much garbage in bond funds was a major reason why many of them performed poorly, though the gullible masses were led to believe “bonds were safe”. (Actually, bonds are safe- T-bonds! Not bond FUNDS!)
The same laws that protected the bundling of CMOs into bond funds in the eighties, also later (with re-workings and tweaks) protected the bundling of CDOs into mortgage securities. Were the late 1980s and mid 1990s bond fund purveyors obligated to disclose to clients the specific content? No, they were not. So you could say the law was an ass, or at least in the court of the speculators. In the same way, the law under its letter did not require the likes of Goldman to disclose to its buyers the content of its (falsely rated) mortgage securities.
By “falsely rated”, I mean that the implicit bond grade was just a level above junk (maybe BBB) if that, but the bond rating agencies (like Moody’s, or AIG), bought into the uber-trader spiel and rated them “AAA” – which generally is reserved for only the highest quality instruments, not toxic waste. E-mail content disclosed last week (in the WSJ) from some of the bond raters actually revealed the stress they were under in making these specious ratings, to the extent they likely knew they were playing the margins of what was legal, and certainly crossing ethical margins.
Where things went wrong, in my opinion, was Goldman legally being allowed to “short” (bet against) the very products they almost certainly knew would go bust (one choice “brand” named “Timber wolf” was described in one e-mail read at yesterday’s Senate hearings as “shitty” by a Goldman trader) and make the short with the instruments’ AAA tag on the bond markets. Of course, this was how Goldman made its money, or most of it. Was it legal? Evidently yes, especially after the 1935 Glass-Steagall protections were repealed in 1999, allowing investment banks and commercial banks to mix. Was it ethical? Hell no!
Sadly, the Goldman Sachs episode is just the tip of a noisome “iceberg” of speculation gone wild in this country. Even as some deluded citizens have preened and posited about what a “godly nation” we have, the speculator cult has virtually locked the U.S. into a vise with no sign of abating. The Federal Reserve is even content to feed this speculative mania by having interest rates so low the money is almost "free", at least for the speculators! Wonder why the DOW kept heading higher? That "low cost" money was one huge reason. And then, even in the midst of it, we beheld Ben Bernanke, fretting over the growing deficits like other elites, calling for possible cuts to Social Security & Medicare! Not so fast, Ben! Before making direct cuts to those programs, go and collect some of the $4.3 trillion in IOUs still owed SS!)
Indeed, according to a recent TIME piece, what Goldman did is nothing that others on Wall Street – including Morgan Stanley and Lehman- weren’t also doing: Using other people’s money to make insane, risky bets in an obscure credit derivatives market- governed by a ridiculous equation (the Gaussian copula) that attempted to link and quantify entities that weren’t remotely related.
In an earlier blog I mentioned how the speculator cult has mutated so much that it’s now become invested in ghoulish products, such as insurance securities in which investors “bet” on when a person will die. If the bet is timed well, and the former policy holder (i.e. who has sold the policy to the investor, or more likely had his policy packaged with others) dies on time, then money is made. Else, it becomes a gruesome waiting game. "Jeebus, look! It's eighteen months past his projected death date! We've lost $500, 000! When will he just kick the bucket so we can cut our losses!)
If people think that’s as bad as speculation has become in this forlorn country, think again. According to The Wall Street Journal (‘States Bristle as Investors Make Wagers on Defaults’, April, 27, p. C1) the latest speculation craze is for “investors to short sell or bet against countless cities, towns and bridges and more than a dozen states, including California, Michigan and New York”.
Again, enter the derivatives called credit default swaps. Only in this case, the rabid speculators (I won’t even dignify by the title ‘investor’ since no investor I know is a Vegas-style gambler) are betting on the cities or towns to fail, and also for their bridges to collapse. Never mind hundreds may get killed or injured, as occurred in Minneapolis some years ago, if a bet can be made which will make them money they will do it. Gruesome and macabre, but that’s what we’ve come to. Apparently, these crass speculators might be the "canaries in the coal mine", they see the imminent and literal collapse of the country and they're determined to at least make some money off it! And meanwhile, untold millions extol that the grand old US of A is a “Christian nation” despite its having deformed laws that permit this sort of perverted, ghoulish gambling.
In his terrific book, Arrogant Capital, author Kevin Phillips observed that the final phase of a collapsing nation is when it becomes embroiled in a speculative mania. Such a mania entails wild and immoral speculation on any and everything, even as the financial centers of the country come to depend upon sleazy and obscure instruments for advancing it. Phillips noted that the collapse of both the earlier Dutch and British Empires was immediately preceded by a phase of speculative frenzy that lasted from 10-50 years.
We are in that phase now. We have become a nation that depends on variable, phantom fiat money (which goes up or down with the P/E ratios in the stock market, or interest rates in the bond markets) as opposed to plain, old fashioned, and stodgy saving. We want it all and want it now. We want our Medicare and health reforms but prefer not to have any increased taxes to pay for it.
We are a people totally divorced from reality even as we make the next cynical bet that the towns and bridges of our fellow citizens will come crashing down. Or that the people whose insurance policies have been bundled into a new security will all die “on time” so we can collect on them.
But, never mind, “God” is still with us and his magic hand is steering us through.
The $64 question is: Which god?