Wednesday, March 16, 2011


Why is Wall Street a hollow shell of what it used to be? Because they want easy money, and Washington is more than happy to oblige them ...

The Background ...
One of the more interesting developments we've learned about over the past two years is how a number of accounting and industry gimmicks undermined the integrity of the market. Don't believe me? Check this out.

From insurance contracts that meant nothing when the chips were down (Credit Default Swaps), to market contracts that were built on toxic loans (securitized debt), to firms making stupid bets on all of this with borrowed money (borrowing at 40:1 ratios), one thing is clear: The 2008 market collapse was no accident. It was caused by the seemingly infinite stupidity of market players in the pursuit of easy money.

If we understand this we can understand why this Bloomberg piece on the Lehman Brothers collapse is so important.

It tells us that the market stupidity that led up to the 2008 market collapse went beyond simply betting on - and then insuring - toxic crap with borrowed money. Companies like Lehman Brothers were actually lending billions to themselves in a series of seedy financial transactions. These transactions saw firms like Lehman hide or flush it's toxic crap off the books (a process that worked something like this), which made it look like they were healthier than they actually were.

Standard Corruption (Continued)
Why is this so important today? Because, according to the Bloomberg piece, much of the financial smoke & mirrors that Lehman Brothers was engaged in before it went bankrupt - which included removing $50 billion in crap off of its books, and then lending itself $3 billion - "would elude the Dodd-Frank law designed to prevent such financial alchemy" today. Nice.

If you're keeping score at home this what it all means.

Apart from creating toxic assets, then covering them with worthless insurance policies - and then borrowing money to make it all work - firms like Lehman Brothers used a "rats maze" of financial tricks to both lend money to themselves, and to mislead regulators (who were both clueless and complicit). And it worked.

The problem is that this continues to go on today. This happens because most Americans are either too ill-informed or too busy working in the trenches to care. But perhaps the biggest reason this goes on is that, for years, Washington has been doing it's level best to provide political and legal cover for the financial mandarins on Wall Street when they screw up.

And it happens in a number of different ways.

An Offer They Can't Refuse ...
But Washington is doing more than simply providing political and legal cover with subsidies, favorable legislation, and bailouts. They are also setting the conditions for turning Wall Street's financial rat maze into a real hall of mirrors. Here's how it's happening ...

As I pointed out last summer, to secure bailout cash A.I.G. was given an offer that they couldn't refuse: "You either accept bailout money and waive your right to sue those who sold you crap, or you go under and suffer the financial and legal consequences."

The interesting thing here is that all of this occurred AFTER the Federal Reserve requested that "national security" procedures be followed before it would cough up to Congress key documents about A.I.G.'s transactions. If this request had been granted it effectively meant that none of the information A.I.G. shared with Congress would be made public.

Only the village idiot would believe that A.I.G. had no idea that these efforts were being made.

Put another way, A.I.G. was told, "Play ball with us and we'll do what we can to stuff you full of cash and protect you. But if you don't play ball, you're on your own." A.I.G. eventually waived their right to sue the firms that sold it toxic crap, and accepted the bailout money.

Some where, some place, Al Capone had to be smiling. He couldn't have done it better.

At the end of the day this offer was made because the biggest players (on Wall Street and in Washington) knew that if A.I.G. actually sued firms like Goldman Sachs, who sold them crap, that lawyers in discovery would've started digging into the deliberate and corrupt practices of Wall Street. This would have blown the cover off of their financial shell game.

Fortunately for Wall Street, their influence in Washington is only growing stronger.

Corruption, With a National Security Twist ...
We shouldn't be surprised by any of this. In 2006 the Bush administration granted it's top national security person, John Negroponte, broad authority to excuse publicly traded companies from standard accounting and securities-disclosure obligations. This authority used to be held only by the President of the United States. And it was only granted for legitimate cloak and dagger missions. Not to cover up Wall Street's stunning levels of stupidity and greed.

Seriously. This is how bad it's gotten. 

In the final analysis, Wall Street is no longer just about favorable legislation and bailouts. It can now call on their friends in Washington to: (1) secure A.I.G.-like extortion offers, (2) ask the Federal Reserve to request national security waivers, and then (3) cook the books and get cloak and dagger cover for their corrupt practices.

And you were wondering why Wall Street is corrupt.

- Mark

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