An Incomprehensible Financial Meltdown Explained

November 3, 2008

AIG

The entire story is pretty-much incomprehensible, this so-called financial crisis currently tormenting the entire planet.
No one seems to know anything about what to do and Alan Greenspan, that great monetary wizard, blubbered last week he was shocked at the whole affair, as if he couldn’t see it coming a mile away.

  • Greenspan: Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity are in a state of shocked disbelief.

If that old asshole had a strong physiological reaction to all this shit, what about the rest of us?

(Illustration found here).

In today’s New York Times:

  • The Treasury building is ground zero for the Bush administration’s $700 billion rescue of the financial system — an ambitious, increasingly embattled program that passed an early milestone last week when the government wired the first $125 billion to the nine largest banks in the United States.
    Having been handed vast authority and almost no restrictions in the bailout law that Congress passed a month ago, a committee of five little-known government officials, aided by a bare-bones staff of 40, is picking winners and losers among thousands of banks, savings and loans, insurers and other institutions.

    Among the problems, critics say, is that despite earlier promises of transparency, the process is shrouded in secrecy, its precise goals opaque.
    Treasury officials have refused to disclose their criteria for deciding which banks are healthy enough to get money — and which are too sick.

And why not — “shrouded in secrecy”?
These people are the same people who led greed run wild — Hank Paulson, the big-shit-head-honcho of this federal bailout made $37 million as big-shit-head-honcho at Goldman Sachs the year before he was tapped by Decider George to head treasury — and this entire financial fiasco is a reverse/inside-out version of the old adage of fox minding the hen-house.

Indeed.
Just this week, the New York Fed hired, of all freakin’ people, the “chief risk officer” at Bear Stearns to be, of all freakin’ things, a bank regulator.
From Reuters:

  • Numerous analysts say the government is effectively rewarding Michael Alix, an individual deeply involved in fomenting the worst credit crisis in generations, with a taxpayer-funded salary.
    At Bear Stearns, the investment bank that collapsed in March and has become hallmark of the global credit crisis, Alix served as chief risk officer from 2006 to 2008 and global head of credit risk management from 1996 to 2006.
    “It’s like putting the fox in charge of the hen house,” said Malcolm Polley, chief investment officer at Stewart Capital Advisors in Indiana, Pennsylvania.
    The appointment goes to the heart of a growing problem that has cropped up along with the myriad rescue efforts aimed at reviving the financial system: Few people actually know what was in the risky mortgage bonds that brought the system to a halt.

Although I’ve tried to read up on this shit, and some analysis have tried to tried to explain it, the whole shebang remains a mystery, other than it’s rolling across the planet, just today a German bank for the first time sought bailout aid from its federal government.
What little I’ve gleaned, is that this whole caper is based upon derivatives, which somehow are based upon, or just little pieces of, loans, bonds or other forms of credit — and real estate loans, like mortgages.
Still don’t make a damn bit of freakin’ sense.

The best overall explanation of this thing has come from populist writer Jim Hightower, from off his monthly Hightower Lowdown.
I first found the piece today at AlterNet.

A natural, folksy-kind-of-writer, always interesting, Hightower wraps his commentary around the big five knuckleheads who created, stoked and encouraged this debacle from day one — the two above-mentioned nitwits, Paulson and Greenspan, along with SEC chairs Chris Cox and William Donaldson, and former Sen. Phil Gramm, who probably is neck-in-neck with Ted Stevens as most-repugnant dude in DC.
In his examination of Gramm, that oracle who called US peoples a nation of whiners, Hightower discusses how the Jackboot John McCain adviser destroyed a financial code and then near-secretly created our current shit-storm.

  • But repealing Glass-Steagall was only step one for this free-market holy roller.
    In literally the dead of night, just before Congress’s Christmas break in 2000, Chairman Gramm snuck a short provision into an 11,000-page appropriations bill.
    The item, which only a few lobbyists and lawmakers knew had been inserted, became law when the larger bill was signed by then-President Bill Clinton.
    Gramm’s little legislative sticky note decreed that a relatively new, exotic, and inherently risky form of investments called “derivatives” were not to be regulated–or even monitored–by the government.
    It should be noted here that Democrats were also butt-deep in the dereg orthodoxy.
    Such Wall Street sycophants as Sen. Chuck Schumer (D-NY) had drunk deeply from the holy cup of derivatives deregulation, and Clinton’s top economic advisors Robert Rubin (formerly with Goldman Sachs and now with Citigroup) and Lawrence Summers (also a veteran of Wall Street) were in harness with the Republicans on this effort.
    By 2008, the freewheeling derivatives market, including derivatives based on those lowly subprime housing loans, bloated to a stunning $531 trillion. That’s 531 followed by 12 zeroes!
    These little-understood, essentially secret investment schemes came to dominate our entire financial system — and when thousands of regular folks began defaulting on their subprime loans, the derivatives based on them essentially became worthless.
    Investment houses, which were up to their corporate keisters in these funny-money subprime derivatives, began collapsing, and the now-interlocked banks and insurance companies began tumbling down with them.
    Gramm’s deregulatory “wave of the future” had become a financial tsunami.

Hightower’s piece seems to make comprehensible the who and the how.
A must read.

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