Thread: Calling Out the Culprits Who Caused the Crisis

Aftershocks

Calling Out the Culprits Who Caused the Crisis

By Eric D. Hovde
Sunday, September 21, 2008; Page B01

Looking for someone to blame for the shambles in U.S. financial markets? As someone who owns both an investment bank and commercial banks, and also runs a hedge fund, I have sat front and center and watched as this mess unfolded. And in my view, there's no need to look beyond Wall Street -- and the halls of power in Washington. The former has created the nightmare by chasing obscene profits, and the latter have allowed it to spread by not practicing the oversight that is the federal government's responsibility.

I find it hard to stomach the fact that investment banks that caused this financial crisis immediately ran to the government asking for assistance, which Bear Stearns received and Lehman Brothers, thankfully, did not. This is one of many eerie parallels that the current meltdown bears to the Great Depression, when Washington and the taxpayers had to step up and take unprecedented action to stabilize the financial markets and the economy. Unfortunately, the government today has already put enormous taxpayer resources at risk -- bailing out investment firm Bear Stearns, mortgage giants Fannie Mae and Freddie Mac and insurer AIG, and proposing to buy risky assets from the banking system -- to stop the economy from plummeting into another depression. But these events only underscore the toxic relationship between Washington and Wall Street that has brought us to this point.
ad_icon

To understand the role of that relationship in our current troubles, let's go back to 1999. That was when the hype about the Internet reached its pinnacle. Technology spending by the government and corporations was booming as both sought to address economic and security fears surrounding the so-called Y2K problem, a potential massive computer shutdown at the start of the year 2000.

In the run-up to the millennium, the Federal Reserve, led by then-Chairman Alan Greenspan, began to pump money into the capital markets to deal with any financial problems that might arise from a Y2K meltdown. In the end, 2000 arrived to nothing but a wonderful celebration. But the monetary stimulus, coupled with the aforementioned hype, created an unfortunate bubble in Internet, technology and telecommunications stocks.

At the center of this bubble were the large Wall Street investment banks, which understood the profit potential in promoting the technology boom to overeager clients looking for the investment of a lifetime. From mid-1999 to mid-2000, Wall Street firms took approximately 500 companies public, raising a total of nearly $77 billion for these companies through initial public offerings, or IPOs. For every IPO, the investment banks themselves earned an underwriting fee of 6 percent, returning them an enormous profit.

But apparently that was not enough for Wall Street. As the middlemen between the insatiable investor demand for anything technology-related and young tech entrepreneurs needing to raise capital, the investment banks demanded the opportunity to invest in these companies before the public offerings, when the companies's stocks were valued at a fraction of what they would bring post-IPO. It wasn't uncommon for Wall Street firms to invest tens of millions of dollars in "anything.com" before taking it public, charge a multimillion-dollar fee for the public offering and then watch their investment multiply within a matter of months.

Main Street investors, meanwhile, did not realize that the investment banks had essentially thrown away their underwriting guidelines, which had been in place since the Depression, to take companies public. Among these guidelines were rules requiring that a company be in business for more than five years, be profitable for two or three consecutive years and have certain levels of revenue and profitability. The business models of many of the companies that went public simply weren't viable. Once the Internet bubble burst and the dust settled, America's corporate landscape was littered with bankruptcies and mass layoffs, and investor losses have been estimated at more than $1 trillion.

In an effort to offset the economic strain from these losses, the Fed once again rapidly increased the money supply and slashed short-term interest rates to 1 percent -- a level that hadn't been seen in more than 45 years. This enormous monetary stimulus (along with significant federal spending) energized the overall economy, but it also led to the greatest housing boom -- and possible bust -- this country has ever encountered. From 2002 to 2006, housing values appreciated at an astounding rate of 16 percent per year. It became impossible for the typical American family to buy an average-priced house using a conventional 30-year fixed-rate mortgage. Wall Street found another perfect opportunity to propel and take advantage of another forming bubble.

The result was the explosion of toxic new mortgage products that enticed homebuyers into supporting escalating housing prices while eliminating the need for the traditional 20 percent down payment. Whether it was interest-only loans, low- or no-doc "liar loans," or piggyback home-equity loans, the mortgage and banking industries found a way to place almost anyone with -- or even without -- a credit score into a home. Wall Street played its part by packaging those mortgages into complex financial products and selling them to other investors, many of whom had no idea of what they were buying or the associated risks.

Once again, the investment banks raked in billions of dollars in fees, giving them incentive to keep lowering underwriting standards, allowing mortgage companies to originate and sell even the most unscrupulous home loans, which Wall Street then dumped onto the investment community. Wall Street never once questioned the ethics of these activities; it too was focused on the enormous rewards that allowed its firms to pay out an unfathomable $62 billion in bonuses in 2006 alone. Without Wall Street, the housing bubble would have ended shortly after the Fed started to raise interest rates in 2004, because no lenders would have originated these toxic mortgages if they had to keep the loans on their own balance sheets.

The price of all this greed? Sadly, because of the actions of the investment banks, the mortgage industry and the rating agencies, the investment community has now incurred an estimated $1 trillion and more in losses. Even more troubling, housing prices have dropped 20 percent from their July 2006 highs, with the very real likelihood that housing could contract another 15 to 20 percent -- essentially wiping out more than $4 trillion in housing values. This would be the biggest hit since the Depression to Americans' most important asset.

What is even more remarkable is that at the same time, firms such as Goldman Sachs and Lehman not only made billions of dollars packaging and selling these toxic loans, they also wagered with their own capital that the values of these investments would decline, further raising their profits. If any other industries engaged in such knowingly unscrupulous activities, there would be an immediate federal investigation.

Why is Washington so complicit in this intricate and lucrative affair? First, the Fed laid the groundwork for both these asset bubbles by lowering interest rates to historic lows. In an attempt to protect his legacy after the Internet-bubble collapse, Greenspan provided unprecedented stimulus to re-inflate the economy and maintain his popularity with Wall Street. (Remember the "Greenspan put"?) But in doing so, he spawned the largest debt and asset bubble in U.S. history.

At the same time, federal regulatory agencies such as the SEC stood idly by as Wall Street took advantage of the investment public during both the Internet and the housing bubbles. The SEC took almost no action against Wall Street after the dot-com implosion. And in the midst of the housing bubble, in 2006, only the Office of the Comptroller of the Currency pushed for any level of regulation to address subprime lending.

One has to wonder why Treasury secretaries under Presidents Clinton and Bush -- Robert Rubin and Hank Paulson, respectively -- took no action to curb these abuses. It certainly was not because they did not understand Wall Street's practices -- both are former chief executives of Goldman Sachs. And why has Congress been so silent? The Wall Street investment banking firms, their executives, their families and their political action committees contribute more to U.S. Senate and House campaigns than any other industry in America. By sprinkling some of its massive gains into the pockets of our elected officials, Wall Street bought itself protection from any tough government enforcement.

This is no doubt the same reason why so many members of Congress were consistently blocking attempts to reform and downsize Fannie Mae and Freddie Mac, which are essentially giant, undercapitalized hedge funds. These two entities have been huge money machines for Democrats in both the House and the Senate, many of whom recently had the gall to ask why these companies hadn't been reformed in the past. Nor should several Republican congressmen and Senators who likewise contributed to watering down legislation aimed at reforming these institutions be let off the hook.

Wall Street's actions are now profoundly hurting American families, communities and the entire U.S. financial system. People are being thrown out of their homes. Once seemingly indestructible financial entities are succumbing to the crisis they have created and have jeopardized the stability of the global financial system. Isn't it ironic that the same firms that preached free-market capitalism are now the ones begging for a taxpayer bailout? Many investment professionals operating in my world believe, as do I, that we are facing the greatest financial crisis since 1929.

Fortunately, today we have safety nets, such as federal deposit insurance, that were non-existent during the Great Depression. Yet there has not been a time since the 1920s when Wall Street has enjoyed as much influence over Washington as it has for the last 12 years. Let's hope that this influence fades rapidly -- and that this financial crisis doesn't end the same way as the one of nearly 80 years ago.

Eric D. Hovde is chief executive of Washington-based Hovde Capital and Hovde Acquisitions.

http://www.washingtonpost.com/wp-dyn/co ... 02808.html

We’re All Homeowners Now: 10 Reasons to be Cautious About This Housing Rescue Plan for Motherland USA.

“I’m shocked, shocked to find that gambling is going on in here!â€

Execute

By Dick Eastman
9-20-8



The damage has been done and will continue all the way to the bottom for us -- but not for them. The men behind Goldman-Sachs and JPMorganChase and BankAmerica are eliminating the competition, are gaining the assets they will no longer have to share with the lower circles of banking thought-they-were elites. This is a controlled economic event, a well-planned transfer of wealth, an intensified concentration of financial power among the credit monopolists. I offered the solution -- no not social credit, of course no one is going to adopt that right path and I know that -- but I offered a solution that was in the hands of American institutions that exist today, that would have ended the housing crisis and would have avoided the marble soul death of the American people -- I see that other countries' central banks are rushing to lower their reserve requirements to prevent the American disease from killing them too.

You will recall that I proposed cutting the reserve requirement and having banks use the funds for interest free loans extending credit to the distressed homeowners and allowing stimulation of the people (as close as we could come to actually doing what social credit would do for us) -- the proposal was here: http://groups.yahoo.com/group/frameup/message/26239 -- and it is still a good answer, although there are so many many fewer of households left to save from ruin now. But you know that our financial elites -- who you know are our real ruling elites -- do not give bailouts to the common man, but only to themselves, bailing out their own derivatives and other malinvestments -- actually predatory investments knowing exactly that they could figure on the bailouts when they planned all of this. But of course they made it nearly impossible for us to declare bankruptcy from the condition their manipulations forced upon us. Of course they outlawed the people who have caught on to what was afoot from making their own short sells on this economy.

And the Rothschilds' IMF audited the Fed to learn exactly what could be gotten away with -- this will help you remember http://www.rense.com/general82/audit.htm . There are gainers, but the media would have you believe their are only losers. Don't be fooled; when Morgan and Goldman Sachs stocks go down in this crisis down it is only because they realized they were looking too good and standing too obviously pretty earlier in the week when everyone else was dying off and Morgan raised a penny. Their gains in monopoly power and in new regulatory advantage of incalculable wealth and advantage for them -- they gain like Israel after 9-11.

Anyway, I have been enjoying my retirement from "conspiracy theory" and home-schooling my 12-year-old daughter Madeleine is going well -- I don't even think about the world outside the house. My heath and happiness have increased -- only at night or when driving past the empty houses for sale and the boarded up businesses -- see picture above -- does the truth break out in my mind and a cloud comes over Dad's face.

I wrote a solution back March on what should be done "If the Banks Fail" which is still available on rense here: http://www.rense.com/general82/banks.htm

On Friday, I re-hook up the computer to let my daughter view the youtubes her young friends have made -- and when she is done I download my mail. The no-planers and gatekeepers are still controlling the 9-11 discussion. The pro-Obama, pro-Paul and pro- Barr people are still pretending to be on our side and most of you are believing it. But just as no herd of cattle was ever benefited by a maverick steer (especially one with the AIPAC brand) so we see that Obama's advisors are all money power Zionists -- his economic adivsors and his VP -- are as close to Bush as Bill Clinton was close to Newt Gingrich on every issue of the Rockefeller-Rothschild globalist agenda. And St. Paul of the Golden Cross was so clever to "endorse Barr, McKinney and Nader and a few others" making it look like he is resistance, when in fact by not zeroing in one any one opposition candidate to support he has in effect taken all of that support people have given him and wrapped it in a big wet sack and tossed it into the black and bottomless well of nowhere and never. Paul has done his job for his masters -- he has prevented real opposition from appearing, just as Kucinich and Perot before him.

I have been reading Plutarch's lives at night. His Lives of the Noble Greeks. Plutarch understood politics better than we do. If you ever homeschool your teens, have them read Plutarch's biography of Alcibiades -- and you will see the perfect type of the people who rule the world today. I was amazed that this account by Plutarch existed and that no one has told me about it before I discovered it from a copy purchased at Good Will when looking for some pants that fit. Every citizen of any commonwealth with any hope for saving his countrymen from penury and slavery should read this warning of what evil men are capable of and how they operate.

http://penelope.uchicago.edu/Thayer/E/R ... ades*.html

Or here:

http://www.bostonleadershipbuilders.com ... biades.htm

Now we know what the elites have been reading and why they love the classics and keep them to themselves.

You may also wish to read about the founder of Sparta -- for the type of man that we the people need today -- for that read Plutarch's history of Lycurgus

http://penelope.uchicago.edu/Thayer/E/R ... rgus*.html

http://www.constitution.org/rom/plutarch/lycurgus.htm

And that is about all from me this week.

The watchman on the wall must sound the alarm or the blood of his city will be on his hands.

Yours sincerely,

Dick Eastman
Yakima, Washington

Every man is responsible to every other man. oldickeastman@q.com

Comment
Bob Taft


Most of the "why's are well known but it is the dearth of solutions that most hesitate to suggest.

Apparently those in attendance at the meeting of politicians and bureaucrats that just decided on the current bailout of the banksters all went away "scared" according to reports. We should all be scared of what they have decided to do to us. Five million Main Street home owners indebted to the banksters vs. a handful of mega-banksters on Wall Street. More billions to come out of our hides. No question as to who wins.

On the solution side, there is one emergency plan that worked well in 1933 and could do so again. You can buy a catalog of DEPRESSION SCRIP, quite a big book, for collectors of such. When Roosevelt shut the bank doors for a few days - to save the banks - thousands of communities across the country, and in Canada, went to their local printers and had local currency printed up to keep local economies moving. Not all were political entities, many fraternal or business groups jumped in to run the programs. All it took was a few people with integrity. We know that this is seriously lacking in FedGov. To be sure, the banks quickly reopened, lest the people discover that they could get along quite nicely without them.

Actually there are hundreds of communities already in position, using local currencies to a limited extent. Like UticaHours in NY state. While all our political subdivisions in the US are corporate entities functioning with huge asset accumulations as shown in their CAFRs, there are undoubtedly many thousands of local politicians and local government employees who when the chips are down, as they are about to be, will side with their fellow citizens and against the faceless banksters who manage the huge accumulations of wealth in government coffers. Actually all wealth, governments' included, is placed at risk by the criminal minds on Wall Street and in the Fed, which is actually owned by Wall Street and their ilk.

It will soon become critically important for all communities to have a currency available to keep their economies viable. It would be great of the several states would do this so their currencies might keep larger territories functioning. Better yet, it would be great if the states would use their own ability to create currency, and the threat thereof, to force US Treasury to go back into money creation and to DUMP the FedRes. So what if the 1787 ConJob says only the US may create money. They have abandoned that mandate for nearly a century. It is time the American people demanded the government do what their ConJob requires of them. OR ELSE, the states will take charge. All revolutions need not be bloody ones. The system is collapsing. Time is of the essence. Screw Wall Street.

Best regards,.
Bob Taft
The Taft Ranch
Upton, Wyoming


Comment
Jim Kirwan

Excellent analysis Dick, but equally dire because you care so much about those of us that are trapped at the bottom of the ladder

In so many ways you and I are very much alike, and yet in many ways we are also polar opposites, not by nature, but by circumstance and environment. I just finished a trio of articles on this same topic, but I've lived and worked "among them" for many many years. And what I gleaned from that experience is that they always eat their young along with all those they are sometimes forced to come in contact with: once anyone comes to "know" this they violate the margins of their own survival by failing to remember who these butchers truly are.

In many ways I envy your 'place apart' but I could never live there. I wanted to go to college many decades ago, to actually get an education, and while I had three full scholarships lined up each one met with complete disaster for one reason or another, until I figured out that I wouldn't be going to college - so I set about educating myself instead. I'm pleased with how that worked out, but that's also part of what separates our views in these treacherous times. My 'education' is of the kind where there are very seldom any second chances, hence there is almost no room to retain too much illusion. Imagination and creativity - YES, but expecting the junk-yard-dogs to suddenly lie down with new-born infants isn't part of these equations.

I love literature and the arts, but for me; when I first began to paint I wore a 32 Berretta in a shoulder-holster, with a paint brush in my other hand, and because of where I was and how I was living that was not extreme. That 'kid' seems to have remained alive at least inside, even though I no longer wear a gun: but I have come to understand that part of fighting for anything is the willingness of spirit to see the value in that native expression: "It's a Great Day to Die." I realize that this only works for some people, it is certainly not something that would work for most. This by way of saying that whenever anyone wants to change anything major in this world, then we must be prepared to fight those enemies where they live, but with our weapons, not theirs.

I've shed some blood over the things I believe in, and lost some of my own in that process. I've survived a number of 'contracts' on my life, over the years by some equally determined people from the other side. I'm still here, most of them are not. But no one can remain lucky or careful enough forever, and none of us gets out of this experience alive. What has carried me a lot further than I could ever have imagined are the invisible means of support that I've been fortunate enough to find along the way. That is indicated by the bright line of fire near the knees that indicates the strength of the invisible- means-of-support, that anyone with them can fall back upon. http://www.kirwanesque.com/deck/crossroads/xii.htm

I imagine that you have had similar experiences. Please revisit your power-bases and recharge the batteries, because the worst is yet to come, and we need you in one piece for the war that's coming!

Critical thinking in my case came out of the need to survive in a world where I was very small and without most of the resources that tend to assist the downtrodden with small victories. The logic and reason that have survived in my world have been tempered in cauldrons of fire and caves of ice: it's part of what has shaped me, and at the same time it sets my views apart from most of the others that roam the fringes of society today.

Please stay in the fray Dick, do not let the bastards grind you down - they will ultimately fail, because no cause or person can survive with the kind of Karma they're currently dragging around, and the world 'knows' this, as clearly as we do.

Thank you for the article! It will take some time to absorb it all, given everything else you sent as well, but I'm sure there will be much in there that will go further than you might imagine at this moment - because nature still has lots of cards to play, and nothing is yet written in stone! These creatures brought us the first major depression and everything from then till now, but that does not mean that they have a license to continue doing this to all the rest of us, in perpetuity!

Please keep writing. . .

kirwan

http://www.rense.com/general83/exech.htm