BAILOUTS

Eventually, JP Morgan (with a $30 billion cash infusion from the U.S.) bought
Bear Stearns for $2 a share plus the government’s guarantee on Bear’s toxic assets!
(This was later revised to $10 a share.) Then U.S. Secretary of the Treasury,
Henry (Hank) Paulson, warned Wall Street, that the Bear Stearns bailout was a one
time deal. The phrase “moral hazard” was bandied about. In essence, if Wall
Street knew they would always be bailed out for mistakes that were their fault,
what would prevent them from making those same mistakes again? Does that
sound familiar vis a vis Kabbalah? Moral hazzard basically says if you constantly
bail out people with no accountability on their part, it promotes, “bread of shame.”
Also, think of moral hazzard in relation to Tikkun. Remember, if we fail to
correct, we will be faced with additional obstacles to overcome in the future. And,
again, those obstacles are likely to increase in severity and frequency until we
correct.
Before we get back to the 2008, specifically the reaction to the meltdown, I would
like to quote a section from “The Big Short” by Michael Lewis. Pay close
attention, to the concepts of planting seeds, and “time, space and motion,”
discussed earlier.
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“What people did with it (money)
had consequences, but they were so
remote from the original action that
the mind never connected the one with
the other. The teaser-rate loans you
make to people who will never repay
them will go bad not immediately but
in two years, when interest rates rise.
The various bonds you make from
those loans will go bad not as the loans
go bad but months later, after a lot of
tedious foreclosures and bankruptcies
and forced sales. The various CDOs
you make from the bonds will go bad
not right then but after some trustee
sorts out whether there will ever be
enough cash to pay them off.
Whereupon the end owner of the CDO
receives a note … We regret to inform
you that your bond no longer exits.”
Here are some more additional examples of planting seeds, and their
consequences:
In 1981, The CEO of Salomon Brothers, John Gutfreund, took that company
public. It was the first private partnership on Wall Street to go public. Next, they
leveraged their balance sheet, using investor’s money for all sorts of risky
investments. It’s fairly doubtful that they would do that if only the partners owned
the company. It’s also doubtful that they would leverage the company with $35 of
debt for every $1 of capital, or hold $50 billion in crappy CDOs, then sell them to
their customers. But in 1981, Gutfreund knew he could make a fortune going
public and the other firms followed.
The Mezzanine CDO, invented in 1987 by Drexel Burnham’s junk bond
department, took 20 years to help take down the world economy.
The first mortgage backed CDO was created by Credit Suisse in 2000. Within a
few years, CDOs were marketed that were filled with thousands of toxic subprime
mortgages like ticking time bombs.
Also in 2000, The U.S. Congress passed The Commodities Futures Modernization
Act, banning the regulation of derivatives (basically the CDS). Moreover, there
are numerous examples of state and local governments passing laws to combat
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predatory lending and other abusive lending practices only to see those laws
consistently stuck down by courts, legislatures and federal preemption all
orchestrated by lending industry lobbyists. In fact, according to the Wall Street
Journal, from 2002-2006, Countrywide spent $8.7 million lobbying to defeat antipredatory
lending legislation, while Ameriquest and it's executives spend $20.5
million!
By 2008, every CEO of the major Wall Street firms either led their companies into
bankruptcy or was bailed out by the U.S. Government. So, if the market is always
right, then all those CEOs went bankrupt as well, and wound up penniless, correct?
Unless you’ve been living in a cave for the past four years, you know that those
CEOs kept tens, if not hundreds, of millions of dollars. Some lost their jobs, but
many stayed on to help resolve the financial crisis they had either facilitated or
failed to foresee.
By September of 2008, Hank Paulson, a “market conservative,” had to adopt a
different philosophy – he pleaded and persuaded Congress to spend $700 billion to
buy the SPM assets from the banks. This was known as TARP, The Troubled
Asset Relief Program. The $13 billion AIG owed to Goldman Sachs to cover its
CDS liabilities was paid off 100% by the U.S. Government. Citigroup received
$25 billion and weeks later "went back to daddy" for another $20 billion, as well as
secured a $306 billion U.S. Government guarantee on Citigroup assets. In return,
the U.S. got shares of preferred stock in those banks. Preferred stock is a class of
ownership in a corporation that has priority over common stock for the assets and
earnings of the corporation. Technically, the U.S.' shares are equity for the
taxpayers, but there's no maturity date on that money to return, so it's a safe
addition to capital for those TARP recipients. Did the government extract anything
else? Changes to the existing management? Changes in the compensation
packages for the CEOs? An agreement to accept new regulations? Directives on
what to do with the funds, i.e. start lending again? Nothing of the sort! While the
capital infusion was not a gift, it certainly didn't have significant “strings attached.”
In fact, shortly after the TARP passage by Congress, Wall Street announced
billions of dollars of bonuses to banking executives. The public was virtually
apoplectic over the granting of bonuses, after the banks were bailed out with
taxpayer dollars, to the very people at the heart of the crisis. In March of 2009,
President Obama summoned 13 Wall Street executives to the White House, telling
them that he was the only thing "between them and the pitchforks." But, in a
stunning failure on Obama's part, no demands were made upon the bankers in that
room who had already received over $180 billion of bailouts. No accountability,
and no correction.
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By bailing out firms deemed "too big to fail," we create an incentive for
corporations to be gigantic and also promote financial irresponsibility. Before the
crisis in 2008, the 5 largest U.S. banks controlled roughly $5.1 trillion of assets.
Today they control roughly $8.5 trillion worth of assets, and control 52% of the
financial industry's assets--up from 17% in 1970. Those same banks also control
56% of U.S. GDP (up from 43% before the crisis). If we were worried before
about systemic financial failure because the banks were too big to fail, they're far
bigger and fewer now. By the beginning of 2009, the Federal Reserve began
buying SPM bonds directly from the banks because the $700 billion TARP was
insufficient. The risk of loss on $1 trillion worth of crappy and reckless
investments was passed from Wall Street to the U.S. taxpayer.
This is not to say the bailouts per se were bad or unnecessary. But when you
understand the concept of bread of shame, (the feeling of discontent that
accompanies unearned good fortune) perhaps this life saving infusion of capital to
failing banks without real strings attached helps us understand how these
remaining banks now fight tooth and nail to prevent Congress from instituting any
meaningful financial reforms or regulations. This is also not to create the
impression that regulations are a panacea. Moreover, regulations without teeth,
without meaningful enforcement by a competent staff are feckless. Case in point,
days before Bear Stearns failed, then SEC Chairman, Christopher Cox,
pronounced: we have a good deal of comfort about the capital cushions at these
firms at the moment."
Between 1998 and 2006, roughly 1.4 million first time home buyers obtained
subprime loans; that translates to roughly 9% of all subprime borrowers. The other
91% of subprime loans went to refinancings and second home purchases. By the
second quarter of 2010, the homeownership rate had fallen to 66.9%, right back to
where it was before the housing bubble. All that pain and suffering and no net
homeownership gains!
In 2010, President Obama signed the Dodd/Frank Wall Street Reform and
Consumer Protection Act as a reaction to the financial crisis. Many believe it is
“Glass-Steagall light,” yet one of the political parties (Hint: It begins with an "R")
is constantly trying to defund it, delay its enactment, or repeal it outright. And, as
mentioned above, Wall Street is lobbying hard to obliterate Dodd/Frank.
Perhaps this is a good segway to discuss the influence of lobbyists. During the S &
L scandal of the 1980s, at a congressional hearing, Charles Keating, the notorious
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banker who was convicted of fraud, was asked if his $1.5 million worth of
contributions to a few politicians could actually buy influence. He answered, “I
certainly hope so.” The financial services sector employs over 3,000 lobbyists;
that’s five per each member of Congress. From 1996 to 2006, Fannie and Freddie
alone spent $170 million lobbying Congress. Since passage of Dodd/Frank, the
banking industry has spent over $320 million lobbying lawmakers to weaken or
repeal regulations. The Dodd/Frank provision known as the “Volcker Rule,”
named after former Federal Reserve Chairman, Paul Volcker, would force Wall
Street to choose between traditional customer banking and proprietary trading—a
cornerstone of the Glass-Steagall Acts. The Volcker Rule was originally ten
pages, but since lobbyists have picked away at the bill, it now has over 300 pages
of loopholes and exemptions, effectively removing any regulatory teeth. Now,
influence peddling has the legal stamp of approval with the 2010 Citizens United
decision by the U.S. Supreme Court. That decision reversed one hundred years of
precedent, by equating political contributions to free speech and thereby allowing
corporations and wealthy individuals to buy government without transparency, and
paving the way for the political phenomenon-- the “SuperPac.” In fact, one month
before the 2012 presidential election, a total of 57% of all SuperPac dollars
contributed to the campaigns had been made by just 47 people!