Greed stampede: Wall Street bulls should have known better than to charge into sub prime fiasco

By Eric Margolis

Created Dec 23 2007 - 8:29am

Western nations have been rightly scourging China for flooding world markets with toxic food, toys, nutritional products, clothing and other tainted goods. China's government closed its eyes to this apparent malefaction.

Meanwhile, Wall Street was exporting toxic financial instruments called sub prime mortgages around the globe. Washington's regulatory monkeys saw no more evil than those in Beijing.

Here's how the sub prime mess developed. A single mother, say in East St Louis, was peddled an initially low interest adjustable mortgage by a flim-flam broker. When rates rose sharply, she couldn't pay and was forced to abandon the home she should never have bought to begin with. Multiply this little human tragedy by hundreds of thousands, and, voila, the spreading sub prime mortgage crisis.

Meanwhile, the world's leading financial institutions built a $500 billion to $1 trillion house of cards based on these sleazy mortgages. They were bundled, chopped up like stolen cars, and peddled everywhere as secure, high-yielding American securities.

Once the sub prime crisis broke, banks holding such paper panicked. Not only couldn't they find any more stupid buyers, the wildly inflated values given to these securities turned out to be totally bogus. This, in turn, gravely undermined the asset base of lending institutions holding this worthless paper.

Britain's Northern Rock (aka "Northern Wreck") suffered a run on the bank and is now clinically dead. CIBC lost up to $2 billion. Two of the world's biggest banks, Citigroup and UBS, lost $9 billion and $10 billion respectively. They nearly capsized, and had to be rescued by Gulf Arabs and Singapore. Merrill Lynch and Morgan Stanley each face $9-10 billion of write-downs. More banks will soon reveal billions of losses, all thanks to "innovate finance."

BLEW IT

How could so many of the brightest Wall Street financiers, who claim unrivaled expertise in managing clients' assets, be so stupid and incompetent?

After the flu and bad taste, few diseases are more contagious than greed. So began the greed stampede as Wall Street bulls charged into the sub prime Valley of Death.

Blame begins with the Bush administration. Faced with hugely expensive foreign wars and the dot com bubble, the White House got the Federal Reserve to lower interest rates to nearly nothing. This produced the monster property bubble that is now bursting. Cheap credit became a dangerous drug, financial "speed" arousing false economic euphoria that helped keep Republicans in power and fueled swarms of unregulated, parasitic hedge funds.

Rock-bottom U.S. interest rates made bankers and investors search out higher paying investments. sub prime mortgages were Wall Street's answer. In a giant Ponzi scheme, new investor money was used to pay off old investors, building a giant pyramid that collapsed this past fall.

The U.S. Federal Reserve, which is supposed to regulate mortgages, failed in its duty. So did other U.S. financial regulators, such as Treasury and the SEC. They, and auditing firms, allowed banks to egregiously misvalue their mortgage holdings and create "conduits" and "off balance sheet" vehicles that were new forms of accounting fraud.

COMPLEXITY

Many bankers and managers simply failed to understand the mind-numbing complexity of financial derivatives. President George Bush lauded "the new finance" as the model of Republican economic policy. It turned out to be the financial equivalent of Iraq. Worryingly, no one knows how much the world's rickety financial structure now depends on these arcane financial alchemies. We enter 2008 threatened by the prospect of new financial earthquakes and recession.

Instead of facing fraud indictment, CEOs of the big peddlers of this worthless junk got millions worth of golden handshakes, or raises. While government was busy prosecuting Conrad Black over a few million dollars, the public was defrauded of tens of billions. No one has yet been prosecuted for these outrageous crimes.

If there was a time for government to justify its existence, it's now. Prosecute the sub prime fraudsters. Forget golden handshakes. They deserve steel handcuffs.

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About author Eric Margolis's web site is Eric Margolis's web site is ericmargolis.com