Tuesday, November 15, 2011

Meltdown Redux?

David Cay Johnston reports in Reuters, Meltdown redux:
The U.S. politician-businessman that Congress put in charge of determining the reasons for the 2008 financial crisis has a sobering message for us: “It’s going to happen again.”

Phil Angelides, the real estate developer and former California state treasurer who chaired the Financial Crisis Inquiry Commission, said on Friday that “all across the marketplace the warning signs were there” of a coming disaster but the mechanisms and political will to stop it were not.

He and I both spoke at a University of Missouri-Kansas City Law School symposium on the financial crisis and the commission set up to examine it.

Angelides warned of a recurring economic nightmare unless Congress and the next president start paying attention to the facts and stop listening to the people who caused, profited from or failed to detect the crisis.

While Wall Street and laissez faire Republicans have attacked the commission’s final report — all 22 footnoted chapters of it — Angelides boasted that not one fact had been proven wrong.

Statements from the leading Republican presidential candidates, as well as the tepid actions of President Barack Obama, show an active interest not in fixing the problems, but rather in enabling Wall Street to go on doing business pretty much as it chooses.


For months now, a canard has gained popular currency through mere repetition: no one could have seen the meltdown coming.

The commission’s report shows that a number of people did see what was coming but they were squelched or ignored. Clear back in 1998, four months before the Long-Term Capital Management collapse, Brooksley Born, then chairwoman of the Commodity Futures Trading Commission, wrote a paper predicting that disaster would flow from the unregulated sale of derivatives. Congress responded by making sure derivatives were not regulated.

Then there were the internal reports at failed mortgage banker Countrywide Financial, which warned there was little-to-no hope that many borrowers would ever repay. Freddie Mac and Fannie Mae tried to resist these shaky mortgages, but they had to keep taking them after Countrywide founder Angelo Mozilo applied political pressure.

In early 2004, after detecting a mortgage bubble in the data, I wrote two pieces for the New York Times warning of the problems. If a mere journalist who was not even reporting on real estate could discern the problem, what excuse was there for those whose job it was to monitor the situation?

Wendy Edelberg, who was the commission’s executive director, said on Friday that “while you can never predict all panics, the flip side is this crisis was caused by human actions and was avoidable.”

She showed with hard numbers that, contrary to the nonsense being peddled by Wall Street and the politicians it finances, the meltdown was a Wall Street creation.

Edelberg presented charts showing that loan delinquencies “were lower by an order of magnitude” for government-sponsored Fannie and Freddie than for Wall Street’s mortgage-backed securities. Delinquencies at one point were 15 percent for Fannie and Freddie versus 40 percent for Wall Street.

Edelberg also outlined who bought the obviously bad loans. No one did.

She compared the bad loans to soup with so much fat no one wants it, so it is put in the refrigerator. Once the mixture chills the fat rises to the top and is skimmed off.


By 2006 more than 80 percent of the sure-to-fail loans were inside collateralized debt obligations that were being repackaged and resold like so much excess fat. “No one was actually buying the risk,” she said. “It was just being recycled.”

This is exactly what Washington politicians in both political parties, with their eye on donations from Wall Street, do not want to hear.

One of the best proofs of official lack of interest in learning the facts is the size of the commission budget Congress authorized: $9.8 million.

That is a tiny fraction of the $175 million spent investigating the Space Shuttle Challenger disaster in 1986, and that was in 1980s dollars. It is less than a quarter of what Kenneth Starr spent investigating President Bill Clinton‘s dalliance with an intern.

And then there is the official hostility to the commission. When the report was issued in January, Representative Darrell Issa, a California Republican and one of the richest self-made men in Congress, mounted an investigation.

Angelides characterized the move as a search for just one email showing the inquiry was motivated by ideology rather than truth-seeking. Issa came up dry, but his message was loud and clear: don’t mess with Wall Street.

What the commission’s report has shown is that leaving Wall Street alone will ensure a future of continuing panics, to the detriment of everyone who is not part of Wall Street.

There were plenty of warning signs of the 2008 crisis. How do I know? Because I saw the nonsense firsthand as pensions invested in illiquid, complex hedge fund strategies and even sold CDS thinking that 10-sigma events are impossible. Nobody bothered listening to many smart people warning of impending collapse. The world's best pension & investment analyst saw it all coming back in the summer of 2006 as I did my research on CDO-squared and cubed, but in the end I was fired for being "too negative."

Homo Homini Lupus! Always go after your weaker members, which is exactly what's going on in Europe where speculators continue hammering Italian bonds, and of course in Greece, where only a carcass is left and Greeks have woken up to the harsh reality that their grandchildren will be paying off bankers and defense contractors for a lifetime. This is the road to serfdom that awaits the restless many in Greece and elsewhere.

Even in the "land of opportunity," most Americans now realize the dream is lost:

A new survey by Yahoo! Finance shows Americans have a disturbing lack of hope and a frightening lack of retirement planning.

Among the highlights of the poll:

-- 41% of Americans say the 'American Dream' has been lost.

-- 37% of adults have NO retirement savings and 38% plan to live off Social Security.

-- 63% of Americans believe the economy is getting worse, including 72% of those over the age of 55.

These findings are consistent with broader trends The Daily Ticker has reported on in the past year: Despite macro data showing the economy has technically recovered from the 'Great Recession', the majority of Americans just aren't feeling it.

Considering 49 million Americans are living in poverty, the "real" unemployment rate is 16% and millions of Americans are facing foreclosure, it's no wonder many believe the recession never ended.

Of course, rich and powerful Congressmen like Darryl Issa don't see any problems and are attacking the findings of the financial commission's report. No wonder Americans are up with absolute power corrupting their political system. But just like in Europe where their cunning plan is turning out to be political suicide, US politicians will soon realize that bending over backwards, pandering to greedy bansksters will spell their ultimate doom.

As for Occupy Wall Street, the latest police raid will backfire on them, and it will only lead to bigger protests ahead. My worst fear is that these movements, which to be frank lack leaders and goals, will be sabotaged by violent anarchists which is what happened in Greece. At that point, we'll see the ultimate fallout of financial meltdown -- total social anarchy. See RT clips below (warning: videos contains graphic images).

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