Monday, September 22, 2008

Greenspan-Gramm's $45 trillion Fantasy Scam Becomes Self-Aware

Devilstower's great dkos diary tells the history, and intentions, behind the Wall Street/Financial debacle that has Bushco wants YOU to BAIL OUT NOW for 700 Billion Dollars, putting America in 11.7 Trillion Dollars Debt.

It's best to read the article, but just to get a sense of what's at the heartless heart of it, meet Phil Gramm and "Maestro" Alan Greenspan's financial cyborg: the name's credit default swaps.

As if bent on terminating America and its prosperity and riches altogether, Republican anti-regulationists decided to make greed the ultimate moral determinator: Greed = The American Dream. It is "Our Dream" to "Get Rich, or Die Tryin'", or better yet, let someone else die while the elite don't die, and get rich with a minimum of work (aka, "tryin'"). And John McCain's economic idol, Phil Gramm, helped author this anarchist, regulation-free debacle.

It all started with GOP icon Reagan and his voodoo economics, where the rich bilking the rest of us was supposed to result in some sort of drip-drip-drip down to... the rest of us. They de-regulated - i.e., put out into the Wild West with no laws - the Savings and Loan industry, which more or less exploded with greed and collapsed.

Then, after that debacle, Gramm & friends - notably, Alan Greenspan, American Financial Idol - worked very hard to build a totally lawless world of ever-expanding Finance, where Monsters eat Dogs, and Dogs eat Pipsqueaks, and Pipsqueaks pay taxes. And Monsters eat each other in Carnival Cannibalia, where no monster is too big to become bigger and, of course, bigger means better, right?

And in the middle of this greed, law-bashing fest was good ol' John McCain, basking in Republican elitism: grab the money, say we're defending America and the Individual. While in fact they are doing the exact opposite.

Gramm-Leach-Bliley reversed those rules, allowing not only more bank mergers, but for banks to become directly involved in the stock market, bonds, and insurance. Remember the bit about how S&Ls failed because they didn't have the regulations that protected banks? After Gramm-Leach-Bliley, banks didn't have that protection either.

Gramm wasn't done. The next year he was back with the Commodity Futures Modernization Act, which was slipped into a "must pass" spending bill on the last day of the 106th Congress. This Act greatly expanded the scope of futures trading, created new vehicles for speculation, and sheltered several investments from regulation.

As with both Gramm-Leach-Bliley and Garn-St. Germain, large parts of this bill were written by industry lobbyists. This famously included the "Enron Loophole" that exempted energy trading from regulation and was written by (big suprise) Enron Lobbyists working with Gramm. Not coincidentally, Senator Gramm, the second largest recipient of campaign contributions from Enron, was also key to legislating the deregulation of California's energy commodity trading.

Thanks to this fortunate trifecta of Gramm-crafted legislation, Enron was able to create "EnronOnline" and trade electricity in California with absolutely no oversight or transparency. They quickly worked out how to game the system. Previously, there had been only one Stage 3 rolling blackout in the history of California. Within months, the system had been manipulated by traders to generate 38 such blackouts and wholesale electrical prices had gone up more than 3000%. Despite production capacity equal to four times the demand during winter, energy traders even engineered a blackout in mid-January.

The Enron debacle, the S & L collapse, and now the meltdown of virtually everything on Wall Street - right after Republicans have changed the system to put retirement money for "ordinary Americans" - i.e., non-elite Americans - in Wall Street, all of this was engineered by Republicans Gramm and his senatorial supporters, including John McCain.

Notice that it's always propaganda selling Americans the false and misleading line: the Government is BAD because it wants to REGULATE us free & individualistic all-American Americans and we want America First!

Is that drivel or insanity? Then why do people buy this crap? Did anybody notice that all the meltdowns and disasters occurred from LACK OF REGULATION. They want to OVERREGULATE and SURVEILL YOU, the American People, while they, in their Big Elitist Superrich Protected Corporations and Agencies, go free unregulated, not subject to laws or scrutiny. They peer into your emails and underwear, while they want to fly "under the radar" while screwing you and this whole country for their own personal profit, power and fantasy ideologies.

Of these, the worst are the Credit Default Swaps.
Among those instruments which the CFMA sheltered from regulatory scrutiny was something called the "credit default swap." A kind of insurance one bank could exchange with another, credit default swaps supposedly made it safe for banks to take on ever riskier forms of debt. The Act didn't invent these swaps, though they were relatively new. Instead, by placing them in a state where they were not only unregulated but almost perfectly opaque, credit default swaps were turned into the perfect vehicle to fuel a Wall Street revolution. No one had any idea what these things were actually worth, they were traded "over the counter" without being administered by any exchange, and even the SEC could monitor their existence only indirectly.

So how did the Credit Default Swaps become self-aware???
A secondary market for trading swaps exploded into existence, and swaps were traded with absolutely no consideration for the nature or quality of the underlying investment. Swaps changed hands a dozen or more times, growing in "value" as they went. Worse still, no one regulated who could buy a swap, so it was (and is) perfectly possible for a company to acquire swaps that theoretically cover billions of dollars in loans, even if that company doesn't have a red cent on hand to cover those swaps should the loans default.

How big did this market become? Here's business correspondent Bob Moon and host Kai Ryssdal on American Public Media's Marketplace from back in the spring.

BOB MOON: OK, I'm about to unload some numbers on you here, so I'll speak slowly so you can follow this.

The value of the entire U.S. Treasuries market: $4.5 trillion.

The value of the entire mortgage market: $7 trillion.

The size of the U.S. stock market: $22 trillion.

OK, you ready?

The size of the credit default swap market last year: $45 trillion.
KAI RYSSDAL: That's a lot of money, Bob.

As in three times the whole US gross domestic product, Bob. And the truth is that Moon probably underestimated. The unregulated and poorly reported credit default swaps may have actually passed $70 trillion last year, or about $5 trillion more than the GDP of the entire world.

Look at what, of all people, Ben Stein said:
The crisis occurred (to greatly oversimplify) because the financial system allowed entities to place bets on whether or not those mortgages would ever be paid. You didn't have to own a mortgage to make the bets. These bets, called Credit Default Swaps, are complex. But in a nutshell, they allow someone to profit immensely - staggeringly - if large numbers of subprime mortgages are not paid off and go into default.

The profit can be wildly out of proportion to the real amount of defaults, because speculators can push down the price of instruments tied to the subprime mortgages far beyond what the real rates of loss have been. As I said, the profits here can be beyond imagining. (In fact, they can be so large that one might well wonder if the whole subprime fiasco was not set up just to allow speculators to profit wildly on its collapse...)

These Credit Default Swaps have been written (as insurance is written) as private contracts. There is nil government regulation of them. Who writes these policies? Banks. Investment banks. Insurance companies. They now owe the buyers of these Credit Default Swaps on junk mortgage debt trillions of dollars. It is this liability that is the bottomless pit of liability for the financial institutions of America.

Did you see that???
This is a mainstream financial analyst, Ben Stein.
So what if the whole subprime fiasco was "set up just to allow speculators to profit wildly on its collapse"?

So the Swaps themselves became real. Somebody has to pay. They got the US government in a back room, and gave them an ultimatum. Pay up, boys, or we take over.
Wonder why the entire government is jittery, paying up $700 Billion and more?
The Credit Default Swaps have become self-aware.
God help us.

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