You can learn a lot from Kos Diarists. Brooklyn Reader posted an excellent analysis today about Wall Street and the economic crisis. Brooklyn Reader has a link to an excellent article on the creation of the credit derivatives market.
http://www.dailykos.com/...
SORRY Folks!!Try the links now.
Affixing Blame
Affixing blame is an American sport. After a failure, a blowup or a disaster brought on in the public arena, the searching for parties responsible is the inevitable outcome. This is not just a search for a scapegoat or a fall guy. It is a process of self examination to get to the bottom of the problem and its causes so reasonable correction and response can be formulated.
Since this process is a typical American activity, those who perpetrate are often quiet skilled at placing the blame on others to avoid scrutiny of their own actions. The current financial meltdown is no different. The parties coming to the forefront:
- Wall Street Banks
- The Mortgage and Real Estate Industry
- Government Regulators and Legislators
- The Consumer, the American Public
Now in the fantasy world of our pal, the former governor of my state, the Alzheimer Puppet Reagan, "supply side" or trickle down economics has a structure and hierarchy. The 1-4 list emulates the trickle. According to our hero, the aforementioned Reagan and his disciples, wealth trickles down in roughly that order but so does blame.
Now the moneyed elite of Wall Street are not going to stand still and take the blame for the economic collapse. Not when you own the media and a lot of the government (think massive corporate campaign contributions). Even with the sub prime battering the Mortgage and Real Estate industry holds a lot of allure and credibility with the American public. Especially the home owning middle class Americans who still scour those Real Estate sections of the local paper looking for some validation that their house has not lost 30% of its paper value in the last year, it must be some one else’s.
So the blame rolls down to the bottom two tiers. It must be government regulators and legislators or it must be the consumer... the American public who is to blame. How else could you possibly justify pumping $8.4 trillion in cash and guarantees upward to the financial geniuses who had no clue this meltdown was coming?
http://www.sfgate.com/...
Of course 1, 2, and 3 do not want to totally alienate the American consumer, 1 and 2 want your money, your business to continue the status quo, them on top you on the bottom and 3 wants your vote. So the best strategy would be to... what did Napoleon call it? Divide and Conquer? So the standard playbook is differentiate the American public. Give some a better deal, symbolize them as good and virtuous. Then take a portion of the public, usually with little political and financial resources and unable to defend themselves to demagogue and scapegoat.
Oh those irresponsible bad credit losers who took out loans they could never afford. Regional and local papers abound with the "typical" family story of these wretched credit losers. How they bought that second house on ARM. Took out cash from that first house to put the down payment on the second and buy an SUV all the while only a high school education and a warehouse job! With Wall Street and the US business sector urging them on I might add... What irresponsible losers to bring down the economy.
That is a myth narrative designed to propagandize the American public to affixing the blame for the economic destruction on an easy target. This is an easy sell to the American public. It efficiently keeps the blame away from the parties at the top who are responsible.
Brooklyn Reader’s diary provides an excellent link to an article from Portfolio.com entitled:
"The $58 Trillion Elephant in the Room"
A concise little history of the credit markets at the center of today’s economic problems.
http://www.portfolio.com/...
Securitization has been around since the 1970s. In such a transaction, a group of loans—for example, mortgage, credit card, or corporate loans—is bundled together and sliced up into pieces called tranches. The lowest portion, called the equity, is exposed to the first losses. The next slice up is exposed to the following losses, and so on, until you get to the top. The slices are usually rated by the rating agencies. (Often, the media and even some on Wall Street colloquially refer to tranches of securitizations as derivatives; they aren’t. Tranches are securities backed by a pool of cash-producing assets.)
A little factual history about Wall Street investment banks, what? Misleading investors and ratings agencies? Sheer conspiracy theory lunacy! Except this article comes from the inside, analysts sizing up investments:
During that first major deal, the credit-rating agencies, which were supposed to be impartial, were already deeply enmeshed in the give-and-take of the process. A former Morgan banker who helped create Bistro recalls that Standard & Poor’s was giving the bank a tough time. The rating firm would run the deal through its models, and "each time, it came up with disastrous results. We did some tinkering and all of a sudden, it could rate the deal," the banker says.
The pattern was set. The rating agencies would become integral to the creation of the structures. Standard & Poor’s says questioning that first deal was appropriate and stands by its original rating. It further says it doesn’t get involved in structuring deals. But the close relationships between the rating agencies and the Wall Street firms were heavily criticized following widespread mortgage-related securities failures after the housing bubble burst.
Simply good marketing ... or Bait and Switch /Fraud:
One major problem was that banks had the ability to substitute loans in and out of the structure, as long as the loans had the same credit rating. This allowed managers to scour their books for a loan that looked shaky but still retained a good credit rating and swap it in for a healthier one. The tranche’s credit rating would remain the same, making the whole deal look better on paper than it actually was.
How we got to today:
Warning signs piled up. After the tech bubble burst in 2000, myriad similar deals performed terribly. Some were backed by corporate loans. Many were Bistro-like constructs with credit derivatives. As a class, they hadn’t made it through a cycle of corporate defaults profitably, the acid test of any stable credit product. In his recounting of the period, Das writes, "The credit models failed miserably."
Despite the obvious failure of the first round of this wizardry, Wall Street was at it again by 2003, this time with mortgages. Investment banks sold billions of structured securities, made up mostly of housing loans to subprime customers with shaky credit. As the market got going, Wall Street bundled leveraged loans made to companies that had junk ratings from the credit-rating agencies. At the peak in 2006, Wall Street issued $89 billion worth of Bistro-like structures called synthetic collateralized-debt obligations. Many of the $415 billion worth of the main type of C.D.O. carried embedded credit derivatives as well.
It’s not surprising that they failed again. Investors and financial firms lost hundreds of billions of dollars as part of the housing and corporate loan meltdown. Only then did the credit-rating agencies come under assault for being too closely involved in helping Wall Street create the complex structures. It took until this year for the structured-finance market to come to a screeching halt
Marketing = Advertising = Propaganda = Bullshit:
Wall Street likes to call its innovations "technologies" to convey a weighty sense of importance. What Demchak and Masters did was combine two of these technologies—securitization and credit derivatives—for the first time.
This is nothing short of an outstanding, factual and informative article recommend by a Kos diarist. It is really worth reading and exploring other articles on the site. Thanks Brooklyn Reader.
Conclusions?
This isn’t a bottom up crisis of foolish consumers taking out loans they could not afford. If 60% of Americans paid more than they had to for mortgages between 2004 and 2007, does that suggest to you that perhaps the consumer was being mislead? What was the name of that consumer activist who has warned us about consumer fraud? You know corporate ownership of the two parties in the last 3 presidential elections? You know that left wing loony GM suing lawyer?
The culture and "Wrecking Crew" of the Wall Street banks and investing class, the upper 1% if you will are responsible for this meltdown.
Top down, not bottom up. So why hand the same old morons vast amounts of tax payer money with no strings and no oversight to continue right along business as usual?
Time to slice and dice the Wall Street banks in to small packages so they are more easily marketable. Just like the same brainiacs on Wall Street did to debt. Unlike Wall Streets version, chopping the Wall Street banks into smaller not larger entities is a necessary move because nothing should be too big to fail so as not to threaten the economy.