Friday, February 19, 2010


I think one of the great frustrations for most Americans today is that we understand that we're getting screwed. The people who gave corporate America the favorable legislation they needed to wreck our economy, and the idiots on Wall Street who are stealing and looting from the U.S. Treasury, are still singing and dancing on the deck of the Titanic. They're acting as if the financial iceberg we just hit is no longer a concern because Captain Bernanke and his crew at the Federal Reserve think they see land on the horizon.

So Congress continues to play games with regulations that need to be created, or reinstated, while Wall Street continues to extract wealth from the American taxpayer.

Worse, as Tim Iacano at Iacano Reserch points out, we just gave Ben Bernanke another term at the Federal Reserve. We did this in spite of the fact that he clearly demonstrated that he had no idea that the financial icebergs floating in our economic waters before the market meltdown only represented a small portion of what was out there (what we see of icebergs generally represents about 10% of it's total mass).

If anyone needs reminding, this is what Captain Bernanke saw as he was asked about all the financial icebergs before the 2008 market collapse.

Well, hang on to your hats because it looks like we're taking on water again. Only this time it's just you and me, the American taxpayer, who's sitting in the sinking ship. But rather than floating us a life boat - or a yacht, like they gave Wall Street - the Federal Reserve is throwing the American taxpayer an anchor. And it's coming in the form more debt that we're going to have to pay for as we pick up the tab for the stupid decisions made on Wall Street. Here's how it's happening.

If you recall, not only did the Bush and Obama administrations commit $1.5 trillion in the form of TARP and stimulus program money, but the Federal Reserve and the Treasury Department have been working in tandem to commit trillions more guaranteeing and purchasing the failed business contracts that companies like AIG, Goldman Sachs, and Merrill Lynch wrote, but don't want on their books.

So, for example market players (they're not investors) would bundle up hundreds of thousands of debt contracts - car loans, credit card debt, mortgages, etc. - and repackage them as securities. Of course, in the process they paid themselves handsome fees and bonuses for writing these contracts. When they found gullible pension funds, foreign banks, and domestic institutions willing to buy these security contracts they did this over and over again (I say "gullible" because, as Brooksley Born pointed out during the Clinton adminstration - and as the FDIC made clear in 1998 - these markets were far from stable).

Still, as you can see from the graph below, contracts for unsecured or "non-agency" (no Fannie Mae or Freddie Mac backing) mortgage backed securities (MBS) reached over $1.1 trillion in value by 2005, and then climbed to $8.2 trillion in 2006 and $9 trillion in 2008 for all housing related securities.

Along the way came companies like AIG (among others) who insured these securities. And why not? Ben Bernanke was confident that the bank regulators were doing the right thing, "market fundamentals were strong," and housing prices don't fall, right?

Insurance + the sage words of Fed Chair Ben Bernanke helped make those who bundled up debt contracts feel secure. Since housing markets don't collapse why not write more security and insurance contracts, right? As a result, Wall Street and the financial titans of America actively went out and looked for more debt to write up, bundle up, and insure.

When people stopped paying their debts and mortgages (for whatever reason) what should have happened is that those who insured the securities should have paid up. Let me be clear here. When people stopped paying the debts and mortgages that made up the security what should have happened is that those who insured the securities should have paid up.

This is what happens in a real market economy. But it didn't. Why? I'd like to say because we don't have a real market economy. While this is true, in practical terms companies like AIG didn't have the money. In essence, they had been writing insurance contracts for products they didn't have the money to pay out.

Rather than have the holders of the securities that went bad lose their money, or force them to sue companies like AIG for their insurance money, big market players cried "market collapse." Instead of taking their lumps for diving into shaky debt markets Wall Street was able to convince the federal government to purchase, guarantee, or hold their bad deals.

How did they do this?

Between Congress and the President (both Bush and Obama) an environment had been created for the government (through the Federal Reserve) to loan money to the holders of failed or failing security contracts. In return the government the American taxpayer would accept as collateral the toxic securities that companies like AIG were supposed to have insured.

How much of this market crap is the government the American taxpayer currently holding? We're now sucking on trillions of dollars of downgraded and worthless crap. Check this out (don't be fooled by the term "Asset Side"; when it comes to MBSs they're ghost assets) ...

Yes, these trillions add up to much more than the $1.5 trillion President Bush and President Obama asked for and received from Congress. If you want to know what this looks like in real terms, this is what we're looking at ...

In practical terms, unless we do something on the jobs front and with regulations on Wall Street, we're looking at a long recession, higher taxes, inflation, and/or a mix of all three. It's not pretty.

So, the financial mandarins who caused this messs - by diving into debt markets, and insuring toxic crap they couldn't afford to pay out on - are now cruising away on their bailout yachts. You and me, however, are getting stuck with what's left of our debt-ridden ship. The names (Maiden Lane, TALF, etc.) of the bailout programs really don't matter at this point (names, explanations and amounts dumped on the U.S. taxpayer can be found here, with updates here). What matters is that in addition to losing jobs, suffering through pay cuts, home foreclosures, and enduring the uncertainty that wrecks families you and I are going to have to pay the tab for Wall Street's greed and stupidity.

A bunch of arrogant fools create a debt-driven bubble that they led everyone to believe they could manage. Then they dump it all on us, and get rich in the process. Does this seem right to you? 

- Mark

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