It was five years ago today that I started writing about the market collapse, in real time. Today, the people on Wall Street are doing the same thing that blew up the market in 2008. Only this time, instead of terrible lending practices and bad investment decisions, we now have to worry about the fact that the financial institutions are much larger. Worse, they're now dependent on bailout programs and the easy money policies (QE) of the Federal Reserve.
Below I'm going to explain, in very general terms, how Wall Street and the largest financial institutions continue to do many of the same things they were doing before 2008. The focus below is on how they use their clients money to make stupid bets, which most people know nothing about. Since the details make this a complex topic for many I'm going to over simplify the story below (you can click on the links for the details behind the process).
With that, here's how Wall Street works today ...
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About a year and a half ago I wrote how Wall Street "borrows" the hard earned money of the investors who have accounts with them. What do they do with the money they borrow? They gamble on things that they think will pay off big time. When the Wall Street guys and the large financial institutions win big with your cash they get to keep it all and give themselves bonuses. To be sure, they return what they borrowed, but you get no cut for letting them use your account to bankroll their bets.
It's a long history, but borrowing money from customer accounts is an easy thing for the big financial institutions to do.
To be sure, it's not the same as you and me going to a bank and borrowing money (again, click on the links to understand the details). But let's be clear here. The guys on Wall Street can borrow and ride on the financial coattails of your accounts because favorable legislation from Congress allows it. Deregulation, you know.
Worse, many of the lobbyist influenced agencies that regulate this game essentially wink and nod at their practices.
In effect, what Wall Street does is the same thing the wayward child does when they "borrow" the family jewels (without any one's knowledge) and hock them at a pawn shop so they can gamble or "invest" it in some easy money scheme that they're sure will pay off in the end.
If the gamble pays off and the family jewels are returned - with no one the wiser - no harm is done (keep in mind this is Wall Street's logic).
But things don't always work out this way.
What ends up happening is what happened in 2008, and what's happening with former former Goldman Sachs CEO John Corzine now.
In a few words John Corzine - who was also a U.S. Senator and governor from New Jersey - is being sued by the federal government (the Commodity Futures Trading Commission, CFTC). The suit claims that as head of MF Global Corzine allowed his company to "borrow" and transfer over $1 billion in customer accounts to MF Global accounts in an attempt to prevent MF Globals collapse, and eventual bankruptcy, in 2011.
The CFTC lawsuit says that Corzine and MF Global essentially used customer accounts to try and pay off debts accumulated when MP Globals bets (they weren't investments) in Europe failed.
The counter argument by Corzine and MF Global is that things were happening so fast that they didn't know which money accounts they were using. Here's what MF Globals lawyers claim:
“If MF Global’s employees could not distinguish customer funds from proprietary funds in real time, then it was impossible for them to know whether any particular withdrawal from the customer segregated accounts in fact dipped into forbidden customer funds, much less intend to do so.”
In essence what Corzine and MF Global are saying is that "If we take big risks and win, great for us. If we lose big, Why in the hell should we blamed for our incompetent and klepto-like reactions when the financial ship is sinking and we're simply trying to find the life boats?" At the end of the day, we should just trust that they were doing the right thing.
I don't know whether Corzine and friends will get off or not. The rules are so opaque that Corzine and MF Global probably have little to worry about. Their claim that they didn't know what was happening will help them too (and proves why we need to use RICO-like statutes to go after Wall Street).
The sad reality is that 5 years after the events of 2008 we live in a world where borrowing and gambling with other people's money, on murky and unstable derivative products, are still the driving forces behind Wall Street's activities ... and the Achilles heal of the American economy.
So, yes, apart from doing what got us into trouble in 2008, these guys are bankrolled by you and me. Nice.
- Mark
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