Week of 04/05/2010

End The Financial Lottery Game
– by David Matthews 2

There’s an old joke about the farmer who supposedly gets a message from God to sell his farm and all his belongings and fly on out to Las Vegas. God then tells the farmer to go to a specific casino, to a specific roulette table, and to bet everything he has on a specific square. He does everything as requested, except the ball lands on a completely different slot. He loses everything, and at that point God only says “NUTS!”

Well, imagine doing that every day on the assurance that you COULDN’T lose. And then you take the money and you roll it back into another wager that you believe you COULDN’T lose.

Sounds like a really sweet deal, huh? It’s a real money-maker of a program. Provided, of course, you didn’t lose.

Welcome to Wall Street’s most infamous scheme: the credit default swap.

Here’s how it works: a credit default swap is basically an assurance. You can apply it to anything that you want. For instance, you can put $50,000 on the belief that the sun will rise tomorrow morning and guaranteed by the next morning you’ll get that money back with interest.

But that example is just too simple. It’s extremely unlikely that the Earth will suddenly stop spinning, or that the sun would disappear. How about adding some real RISK to the equation? How about… putting some money up on the promise that your neighbor will keep paying his mortgage payments on time? Or how about a whole neighborhood?

Sounds like a sure bet, right? Everyone in the neighborhood making their mortgage payments on time, no delays, no foreclosures...

Yeah, if it was before 2007, it would be a sure bet. Operative word being “BET”.

Because that’s all that a credit default swap really is, folks. It is a WAGER. It is a GAMBLING BET! And it usually is a wager on something that is considered a sure bet. In this case, it is the WAGER that a segment of the populace will be able to keep up with their mortgage payments.

And that wouldn’t be too bad except that people then MARKETED these wagers on Wall Street! Investment firms used this as part of their portfolios. Retirement accounts counted on these wagers to pay out.

And it all relied on people being able to keep paying their mortgages.

But what if the bottom falls out from under that idea? What if people suddenly found themselves overwhelmed by the tricks and “Gotcha gimmicks” of some of these mortgages? What if people lost their jobs? What if they couldn’t afford to keep up with the payments? What if there were… foreclosures? Like… the kind of record foreclosures that began in 2007 and continued on through to 2008?

Then the people holding those credit default swaps would have to pay up. If they had the money to, that is. If they didn’t make the mistake of the farmer in betting everything they had.

And they did. And they went begging to Washington for a bailout.

And we gave it to them. Hundreds of billions of dollars in money that we really don’t have went to Wall Street bailouts over the so-called “toxic assets” in October of 2008.

In other words, we covered their losses.

Oh, we gave such “noble” reasons behind it. We said that we NEEDED to do this or else the whole financial world - the backbone of this nation - would have collapsed. That was also the justification for the URGENCY of this measure. It not only NEEDED to be done, but it NEEDED to be done immediately.

So we did it. Once again we rushed head-first into the fearmongering rhetoric that defined the eight-year imperial reign of George W. Bush and pledged hundreds of billions of dollars that we did not have into covering those bets for Wall Street.

WELL... actually there was talk about BUYING those toxic assets outright, but once we bought into the fearmongering rhetoric and committed ourselves to the bailout plan, Wall Street’s best friends in the White House changed their minds and just covered the bets.

Now you would think that Wall Street would learn their lesson… right? You would think that after being burned as badly as they did that they would take this bailout as a wake-up call and change their ways and find other ways to make their money, especially since the threat of even more foreclosures is still present.

Maybe they WOULD have learned that… if we didn’t bail them out.

But because we did bail them out, they didn’t learn their lesson. The toxic assets are still in play. Banks and Wall Street are still playing their legalized gambling games.

And now, after pulling off the big healthcare reform coup, the Obama Administration and the Democrats in Congress are looking at reforming the financial world. And unfortunately they’re making the same mistakes as not only their predecessors, but also the same mistakes of their previous pet project.

The 2008 Bailout created a watchdog group that was all “watch” and absolutely no “dog”. Banks took the money, used it however they felt they needed, and then continued to play the same games as before to pay off the money so they wouldn’t have to go through any “gotcha” conditions afterwards. The financial death spiral continued unabated.

So how does any of that change with Barack Obama in the Oval Office? It really doesn’t.

First of all, this whole reform package has to go through the same people in Congress that handled the 2008 bailout and the follow-up bailout in 2009. You know; the ones that created the useless watchdog group with no power or authority. Despite their tough-talk and their empty promises to “hold Wall Street accountable”, these guys have a history of bending over backwards for the Wall Street lobbyists more times than a room full of Romanian gymnasts trying out for the Olympics.

Remember the last time they wanted to help out the “little people” with the banks? Credit card reform that really wasn’t too much of a reform, but it gave the banks the perfect excuse to further screw over their customer base.

This commentator has little hope that the proposed Consumer Protection Agency could help the great unwashed from what’s been going on in the financial world, especially given the abysmal history of such empty promises.

Remember Sarbanes-Oxley? Even though the Security and Exchange Commission was given unprecedented power to seize a failing business and exile the inept executives from ever holding an executive position ever again, they have NEVER USED IT! AIG, Lehman Brothers, Morgan Stanley, Countrywide, any number of major bank failures could have been given that kind of “death penalty” approach under already-existing laws. So why weren’t they? They had the power to step in and stop these failures. Why didn’t they?

And what about some of the most egregious abuses? What about the credit default swaps? What about the Wall Street Lottery?

Well, as this commentator understands it (and it could still be subject to change), Washington plans on leaving the lottery in place. “Too big to fail” is still the operative motto in Wall Street, on K Street, and up and down Pennsylvania Avenue.

Let’s get brutally honest here… we don’t DESERVE better from Congress… we NEED them to DO better! The Wall Street lottery needs to end, or at least be tapered. If they continually expect the taxpayers to come running to their rescue with money that we do not have, then that help cannot be in a vacuum! There MUST be consequences!

The Great Depression that scarred the world in the 1930’s was created partially because of war debts but also because the institutions that were in place to supposedly prevent such a financial meltdown FAILED to do their jobs. Wall Street ran rampant, financial abuses were encouraged and rewarded, and then everyone acted surprised when the bill came due in October of 1929.

So why we are surprised that history is REPEATING itself over and over again? Clearly the people who PROMISE to prevent it are FAILING to do that, and as long as they are allowed to remain in positions of power and authority and in continual DENIAL of that reality, they will CONTINUE to drive not just the United States, but also the rest of the world, in to an endless spiral of misery and destitution.

Much like the farmer at the beginning of the article, the joke’s really on us… because the people whispering in our ears to sell our belongings and bet them all on a roulette spin are certainly not God, and this is one kind of wager that we certainly should NOT be covering.