I largely sympathize with the anger displayed by the “Occupy Wall Street” protests. Most of the financial woes we face can be traced back to reckless gambling on Wall Street. I have spent years studying the causes of the banking meltdown and the complete lack of consequences for the criminals who caused the housing/credit markets to collapse. However, their anger is misdirected and should be focused on Wall Street’s manipulation of government at all levels to avoid the consequences of their gambling and greed addiction. After all my research here is the broad overview of how it all went down:
Wall Street created a series of financial “products” that were designed to broaden the risk associated with banking across the economy. These “products”(which don’t produce anything) soared in popularity because they seemed to mitigate risk and offer a high reward. The “products” were especially popular in the commodities and housing markets because they also offered multi-tiered opportunities for the banks to make commissions. When the Federal Reserve lowered interest rates to nearly 0, and then actually 0, it incentivized all of these financial institutions to take what is essentially free money and dump it into their magical no-risk, high-reward financial instruments. The problem is that these financial instruments were, and continue to be, deeply flawed.
Here is how these “products” work in the housing market: A person takes a loan out with a bank to buy a home, a mortgage. The bank knows that a certain percentage of people will default on those loans, so they package those loans together with other loans to create a sense of security. That bundle of loans (mortgage backed security) can now be traded, sold, insured, and bet on, and every time a transaction happens with that loan, somebody makes a commission. Those commissions and unmitigated greed, coupled with the idea that these securities had no risk and free money from the Fed, led the institutions on Wall Street to abandon all prudence. Banks started borrowing more money to continue the betting on these securities, over leveraging themselves at a rate of 40-1, 50-1 or in some cases 80-1, but even that didn’t satiate their greed. They made a legislative push in all 50 states to repeal “prudence” laws that prevented administrators of state retirement and pension plans from investing in anything but the safest investments. To fuel their irresponsible gambling, these bastards literally used their money and influence to gain access to the money that hardworking people had set aside for their retirements.
The problem with these securities is that they blur the actual value of the collateral (the mortgages) and therefore cannot receive a proper valuation. As they are re-bundled and sold, they continue to get farther away from that original loan, which is the only source of real value. Even at the source, the loans were overvalued because the government had begun demanding that proper underwriting be waived to ensure “fairness.” Basically, federal government idiots thought that not making a loan to somebody who couldn’t pay it back was unfair/racist/classist and therefore should be punished. To acquiesce, the banks developed a whole new set of “products” like Adjustable Rate Mortgages (ARMs) and interest-only loans that created a false sense of ability to pay back. So a mortgage that was overvalued to begin with was then securitized with other overvalued mortgages, so that it could become even more grossly overvalued. Then the quietly unstable security was borrowed against to the tune of 50-1 or even 100-1.
Eventually, Wall Street realized that they had bet everything they had, everything they could borrow, and everything they could steal (retirement, pensions) on the incredibly overestimated value of these products, but by then everyone had bought into the game and the giant bubble they had created collapsed.
Sincerely,
Dustin Stockton
Co-Founder, Western Representation PAC
In other words, you may as well take a swim in a piranha infested lake as invest on Wall Street. For a while, I started to feel the same way about keeping money in a bank.
We are reading a great book you might like Jack – “Cinderella Man,” about the great James Braddock. At one point, he won a huge purse in a fight, and family convinced him to put it in the bank – about $29,000 – imagine having a fortune like that in the 1920 or 30’s. Smart guy – he didn’t quit his day job at the docks. Good thing – the bank failed, and he was penniless again, with three kids.
For years I told myself, “don’t worry, FDIC!” Then a couple of years ago, I was told I shouldn’t keep more than $100,000 in one bank? What the heck?!
I agree that “Occupy Wall Street” has it all wrong. They need to go down to Bernenke’s office with a bucket of tar and feathers.
Old Yiddish Proverb: When the fish stinks, it’s the head of the fish that stinks.
Good comment Juanita, thanks.
“However, their anger is misdirected and should be focused on Wall Street’s manipulation of government at all levels to avoid the consequences of their gambling ….”
I see, we shouldn’t be angry about run-amok and uncontolled financiers indulging their baser natures with out restraint …
but by run-amok and uncontolled financiers indulging their baser natures with (you really will have to concede) ineffective government restraint ….
And you point is, we should do what exactly about this?
Take to the streets, riot and pillage make believers out of the power of the people. Burn down Washington and lynch corrupt legislators!!! But, wait, you guys don’t own any guns…never mind.
Excellent analysis. Thank you Dustin Stockton.
There are also other significant influences that were at work here.
For example regulators being in the pocket of the people they regulate and a lack of oversite by Congress and an unwillingnes to fix the problem.
In 1994 for the Republican controlled congress attempted to reform Fannie and Freddie to no avail. President Clinton and other Democrats ordered HUD to place Fannie and Freddie in the sub prime market. Falsification of signatures on Fannie transactions resulted in 27 million dollars of bonuses paid to top Fannie executives.
In 1999 Treasury secretary Summers warned about the growing financial risk of Fannie and Freddie. President Clinton responded by pressuring Fannie to loosen its lending standards and they did.
In 2000 Republican James Baker introduced a bill to reform Freddie and Fannie. Democrat Barney Frank said concerns were overblown and that there was no Federal liability. Other Democrats and some Republicans chimed in and said the rapid loan growth was nothing to worry about. Reform went nowhere.
In 2002 Baker again tried to reform Freddie and Fannie. The Bush White House asked for corporate rules to apply to Fannie and Freddie.
In 2003 Baker kept secret the Fannie salaries for a year because Fannie threatened to sue if he released the information. That same year Fannie admitted to a 1 billion dollar accounting error.
In 2004, a government report showed Fannie manipulated accounts to overstate profits. Baker AGAIN called for more for more regulation of Fannie and Freddie. Democrat Maxine Waters said it was not broke. Other Democrats echoed her opinion.
In 2005-2006, Republicans Hagel, Sununu, Dole, and McCain unsuccessfully attempted to regulate Fannie and Freddie. Greenspan warned of sizable risks if they were not regulated. Democrats had enough Republicans on their side to block the legislation.
In late 2007, and throughout 2008, the housing market collapsed.
Thank you Jay Wells of the American Thinker
Every contributing factor can be traced to government legislation or interference. Pie’s comment listed a number of reasons all of this happened. There is more to consider.
Interest rates were being kept artificially low. Banks can’t make money when interest rates are low. Their custmers are a lot less likely to invest in savings or CD’s when interest rates are low. Government interference was squeezing the banking industry from all sides.
Mortgage backed securities are not, in and of themselves, bad instruments. Bundled loans normally contained a small percentage of risky loans, everyone knew it and expected it. They were not high risk investments because most of the loans would be paid. They only became “toxic” (high risk) when government forced bankers to loan to people who could not under normal regulations qualify for, much less pay for, the loans. These loans forced the banks books toward the red and therefore their credit ratings suffered. Bundling these loans was the only way to survive what had been foisted upon them.
All along the way government legislators MADE SURE these toxic loans continued. Oversight was nonexistant or blocked.
If regulations were clear and concise, if government stayed out of business, and if regulators would do a good job none of this would or could happen.
Wall Street is not the source of the problem; GOVERNMENT IS THE SOURCE OF THE PROBLEM.
Take away government involvement, simplify and clarify the regulations, and prosecute those who refuse to stay within the regulatory bounds and this will end. As long as banks are forced to do stupid things and are restricted from making money honestly they will do whatever thay have to to influence those who regulate them. As we all saw, some banks had friends in high places and survived…others didn’t…that was no accident.
We can prosecute bad businessmen IF government will do its job.
But how do we prosecute the politicians that set this all up, blocked oversight and reform, and then lied to their constituents about the true causes? They have the gall to blame Wall Street when they controled everything that happened.
The only tool at our disposal is the vote. As long as voters buy the class envy greed screed, as long as voters let politicians get away with lying and blaming others, as long as we let them politicians act like innocent bystanders, this will continue to happen.
“Occupy Wall Street” is a bunch of fools (dupes) being used as tools for crooked politicians.
Why can congressmen be bribed is a better question.
The answer is that congress kritters like money more than they care about doing their jobs with integrity. They also know that people like you will put all the blame on big bad business…they literally get away with taking bribes even though they KNOW it is against the rules and morally corrupt.
Another question is, why would business people NEED to bribe congressmen?
The answer is congress critters insist on writing laws that pick winners and losers and that punish and reward. Business people are incetivised to try to be one of the winners. I can’t blame them for that.
Government was never meant to be a partner to business…congress, and presidents, have stepped way beyond the limits of their calling. They serve themselves or their parties, or special interests rather that the American people overall.
We are a Republic…not a collective…and certainly not a collective of special interests with higher priority.
Tina you are so right! I’m glad we understand this fundamental problem and can agree that it is a serious issue that needs to be fixed.
Tina let me ad my voice to yours now when I say to our readers, congressmen are, to a large part, victims of this election system that thrives on money and protects the careers of professional career politicians who must have the money to survive. That’s why Wall Street and any number of other special interests can buy their way into a congressman’s office and effect change.
This has been an acute problem that has not been addressed with legislative reform because, well, there’s too much money involved. Both major parties have become addicted to the money! Everybody who could fix it is either on the take or ideologically swayed to misunderstand what they supporting by this inherently corrupt system that has evolved into a monster.
Money doesn’t equal free speech, it is the adversary of free speech!
We will get the kind of government we want and need when it doesn’t cost a million bucks to elect a Congressman, or a half million bucks to elect a state Senator or an Assemblyman. When there is no longer a need to have college educated career campaign managers and professional consultants crafting the talking points and using psychological tricks and gimmicks from the ad-world to win over voters or worse…deceive voters! Money causes too many deceptions in ads, trying to trick voters into thinking they’re voting for one thing when they’re voting against it or vice versa.
It’s all become such a carnival and the money, the really big money is the driving force behind it that has made it necessary for politicians to be in a constant state of fund raising with their hand out stretched… EVEN while they are drafting and passing important legislation. Talk about a conflict of interest and yet we’re somehow too oblivious to see it? That part just amazes me.
No matter how much we try to get this rather simple point across to people, we will always have many more voices from the right (and sometimes the left) beating us up and telling me how money has nothing to do with election or legislative outcome and how so-and-so was elected and THEY didn’t outspend their opponent, they were voted in because they were the best, yadda, yadda. And while this rare example may be true, the bigger picture says that in over 92% of the elections it was money that decided who won and who lost, not ideas and not idealism.
Money equals power! Well guess what….power corrupts! And virtually everything a politician must do to advance themselves up through their partisan ranks as they climb that ladder to higher and higher elected position, the money is right there and the temptations for corruption increase exponentially the higher they go. It’s often why by the time they arrive at their highest potential they aren’t worth voting for and it’s why we have so much dumb-ass special interest legislation that gets passed when real priorities go unaddressed for a lack of time or interest.
Some day people may wake up and HEAR what I am saying, what I’ve been saying for the last 20 years and maybe voters will force the change they need, but I’m beginning to doubt it. Sorry, I got a little carried away, but this is one subject that I’m extremely passionate about because I’ve researched it very well and know things about elections that most of don’t and it scares the hell out of me.
Jack I have always admired and respected you for that passion.
I don’t think money is the problem as much as I think corruption is. Corruption is fueled by an electorate that just doesn’t seem to care unless/until the bottom falls out as it has now.
Money can be away to express support for a candidate or party, just as volunteering ones time is. The problems arise when the system is corrupted with the acceptance of bribes, monet laundering schemes and the like. these are all done by corrupt people; the money is just a vehicle or means to a corrupt end.
I don’t believe all money spent on campaigns is corrupt. There is a difference between someone making a large donation because he believes in the overall message of a campaign or party (speech) and quite another to make specific, personal deals behind the scenes for contributions (bribe). There’s a difference between big pacs making donations and big packs making deals.
Taking money in exchange for writing laws or changing regulations so they favor the contributor is illegal and flat out wrong. But we have all looked the other way for so long it’s become a way of life.
Simplified laws and regulations and smaller government would make bribe taking much more difficult. More prosecutions would also help.
The president today acknowledged that banks were not doing anything illegal when he was asked why there weren’t more prosecutions after the melt down. This is a fine example of corruption. I have no idea if money was promised for this legislation but I do know votes were guaranteed.
The American people are not as honorable as we once were generally…it’s a sad state of affairs.
Laws that have a corrupting consequence should be thrown out. As far as I know they are still pressing banks to make bad loans to the “disenfranchised” poor.
Tina, it’s possible on this one that we can both be right, or at least to a greater extent.
My belief is that there is corruption within all of us and that corruption is restrained by the strength of our character. It’s easy to avoid temptation when the rewards are not too much, but what about those ever increasing rewards that are constantly being thrust upon individuals going up the ladder of political office. At each station in that life they are told they must play ball, that their party demands it, that the financial backers demand it, and it is ultimately going to be good for their own goals.
From each office holder starting at a school board or city council and going right up the line there is this NEED, this demand, that they take the money, just give us a little help in exchange, okay, they ask? At what point does a person of good character lose sight of what is right and needed for a squeaky clean election and start that long process of bending ones ethics until corruption is firmly instilled? We don’t know do we? Its different for each of us, all we know is that it usually happens sooner or later because the system itself is a plan to corrupt office holders. It is a rare individual that can go through this for many years and still remain from clear of the taint of corruption. A truly virtuous person, that favors no special interest and acts for what is right will get blackballed and tossed out before they can even begin to succeed.