Tuesday, October 28, 2008

Meltdown for Dummies or Why is Socialism OK for Wall Street?

There is a simplistic explanation circulating among the conservative camp about poor people being the cause of the market meltdown because they bought houses they could not afford and defaulted on their mortgages. If you believe this then you are misinformed. The idea that a few thousand poor people who cannot make mortgage payments are capable of bringing down a world economy is simplistic to the absurd and intellectually dishonest. The present meltdown is a result of deregulated banks and securities firms selling bundled mortgages as commodities which morphed into a host of exotic financial derivative products that revalued bundled mortgages many times over. Current estimates value the cumulative total of derivative products flowing from repackaged mortgages at approx 48 to 1. These financial acrobatics increased the perceived market value of the mortgages in question to greater than the GNP of the planet. (Yes, the entire world). The creation of this market was done under the watchful eyes of Robert Rubin, Alan Greenspan, Larry Summers, Arthur Levitt, Ben Bernanke and Current Secretary of the Treasury, Henry Paulson, not exactly a platoon of liberals.
How does a mortgage become a derivative and why didn’t the Government stop it? “The radical banking deregulation legislation that McCain pushed so aggressively is what legally enabled those he condemned recently as “the Wall Street bankers and brokers who got us into this mess”. Have McCain supporters never heard of Phil Gramm, the man McCain picked to co-chair his presidential campaign, who sponsored the Gramm-Leach-Bliley Act and the Commodity Futures Modernization Act—both of which made legal, for the first time since the Great Depression, the credit swaps and hybrid instruments at the heart of the Wall Street scams?” (Robert Scheer, Truthdig.com)
The peak year for mortgage generation including sub-prime mortgages was 2004. The Federal Reserve is supposed to regulate corporate reserves to limit the growth of credit, but the Structured Investment Vehicles (SIV’s) created by Wall Street were one method to get around this rule. More leverage also meant more risk for the bank. This is all part of what's called the Shadow Banking System, meaning it gets around existing regulations. It was deregulation that led to the huge growth of the shadow banking system. In 2004 Wall Street successfully lobbied the Securities and Exchange Commission to loosen regulations on how much they could leverage against their capital reserves. This allowed the companies "to invest in the fast-growing but opaque world of mortgage-backed securities, credit derivatives, a form of insurance for bond holders; and other exotic instruments, according to the New York Times. The only real oversight left in place was self-policing by the investment banks themselves to determine if they were putting investors at risk.” (AlterNet.org, Gupta, Arun).
The trail leading to destruction of the international economy begins with the repeal of Glass / Steagall an act passed by Congress in 1933 that prohibited commercial banks from collaborating with full-service brokerage firms or participating in investment banking activities. Arun Gupta says that Wall Street’s goal was to figure out ways to increase profits while avoiding liability. There is a difference between structuring an investment to limit liability and structuring a series of investments to avoid liability. The street was moving everything off book to Structured Investment Vehicles to get around the rules of leveraging.
Gupta describes Wall Street as practicing wizardry in that they turn a debt (a mortgage) into a security (a stock). This is referred to as a Mortgage Base Security (MBS). The commercial bank sells the MBS to an investment bank. The mortgage payment finds its way to the holder of the Mortgage Based Security (MBS). The fee that the commercial bank charges the investment bank is approx. $1000 a mortgage. As you can see, this has to be a volume game or it’s not worth doing. The bank bundles hundreds of mortgages together, calls them securities; they then get rating companies to have the mortgages assured by Fannie Mae and Freddie Mac. The Bush administration was and is having trouble with the economy and job creation. In 2004 they saw the low interest rates and the rising value of the real estate market as a way to enhance the stock market. It was the Bush administration that pushed for broader acceptance of Sub-prime loans back in 2004.
The Sub Prime chapter begins here in earnest. Sub-Prime means that the loan is a higher risk but the investment returns are higher for lenders. Here is where the whole scheme comes off the tracks. Bundles of AAA rated mortgage backed securities (MBS) are sliced up and blended with BBB and or lower rated Sub Prime Mortgage Backed Securities. This product is called a Tranche. The purchaser of a Tranche may be a Hedge Fund, Pension Fund, Investment Bank, Money bank, or a Central bank. Something emerged called Collateralized Debt Obligation (CDO) where the banks are again using the same debt (your mortgage) as collateral to back up the purchase of the Tranche. To give the illusion of limited risk Credit Default Swaps (CDS) another product is a kind of insurance against default.
What you see happening here is for example, $40 billion in mortgages after leveraging is a potential liability of $1.6 trillion. The final chapter played out when the oversupply of housing spurred by apparent investment opportunities, and consumers using their house equity as a bank fell down like a house of cards. The real estate market got soft. ARMS (adjustable rate mortgages) reset to home owners, who were now, because of falling prices, upside down on the value of their houses. Financial institutions had nowhere near the cash reserves needed to cover all of the guarantees and insurances against failure because of the leveraged investments that had assumed a perpetual rise in housing prices.
The deregulation myth says that the market is self regulating and that Government has no place in their business. I beg to differ; the current meltdown is exhibit “A” in our case for oversight and regulation. It was the plethora of exotic and unworkable financial products that the market created to get around regulation that ultimately failed and melted down the economy. It was by no means the little guy who bought a house using an ARM because he was sold on the idea that the value of the house would go up and he could always cash out on the plus side of the deal.
Governments can’t run on air and the taxpayers cannot and should not bail out scoundrels. I see a corporate tax increase on financial business, and I see more regulation and oversight for investment companies. There has been enough corporate socialism for financial firms; it’s time we started to take care of the citizens of the USA. McCain is a big business socialist. Obama is working for middle class Americans - he is the choice.
Source http://www.alternet.org/workplace/102672/

Saturday, October 18, 2008

Republican Mess Requires House Cleaning

It's time for Democratic values to lead the way

Looking back over the last eight years the landscape is littered with financial, military and social rubble. Americans deserve better than the false choices that are presented by Republican ideologues. We don't have to choose between freedoms in the Bill of Rights and the War on Terror. We don't have to fight them over there so we don't have to fight them here. These foolish "retail patriotisms" divide the country. While we are fighting about all of these divisive ideas, the Bush administration chips away at our hard won freedoms, like taking away habeas corpus. McCain will continue that tactic of wiping out our rights.Out of one side of his mouth McCain tells us our troops are fighting for our liberties on the battlefields of Iraq, and from the other side of his mouth he votes yes to take away our liberties on the floor of the Senate. We lose our troops over there, and our liberties over here; something is really screwed up with this picture.

Obama has the better tax plan. His plan will provide help where it is needed the most; it will help those at the lower end of the earnings scale. We are already upside down on property values due to the slumping real estate market. Reject the Bush tax cut. While you are voting, elect leaders focused on helping Main Street not placating Wall Street. Sweep out of office those who speak against financial regulation - vote for Obama.

Speaking of Wall Street, stocks are melting down and will be years in recovering. Business will take a hit because of the current credit restrictions, and shoppers are pulling back and being more cautious and frugal. All because of the conservative’s deregulation myth, that markets are self correcting. The republicans forgot to tell you that some market corrections are train-wrecks.

We continue to send ten billion dollars a month to Iraq which is already sporting a price tag in the trillions. (What is today’s reason for being in Iraq?) How do we support the world’s biggest most expensive military if McCain wants to excuse the top 5% wealthiest from paying taxes? His answer will be the same as Bush, cut Medicare and Social Security so he can keep sending $10 billion a month to Iraq. McCain’s plan is not acceptable. The Iraqis want us to leave, let’s get out and put that 10 billion to work over here.

Why should we excuse the top 5% wealthiest in our country from paying more taxes?
Bush said that a tax cut would stimulate business - that was 7 years ago …. Where is the new business? Where are the new jobs? Where is the prosperity? The Reagan years are over; there is no valid trickle down model. Promise the masses tax cuts but don’t mention that the tax cuts do not include payroll taxes which are what the vast majority of Americans pay. The Tax cuts it turns out are for corporations,on capital gains paid by successful investors and inheritance taxes paid only by multi-millionaires.

A vote for republicans will guarantee the social rubble is going to include no single payer national health care, reduced Social Security, and Medicare benefits. Add to that reduced funding for education at the local level and for college tuition; that will be part of the price of staying the course, and that will be the price of four more years of Republicans in the White House.
It’s time for a change: Vote for Obama.