Saturday, August 25, 2007


In the words of one hedge fund operator, financial managers in the U.S. smuggled their ill-gotten sub-prime loan "tranches" into otherwise apparently credit-worthy bond portfolios (thereby foiling the close oversight of credit rating agencies) and then sold them to overseas investors who had excess dollars burning a hole in their pockets. The source of these dollars? Trade surpluses and petro-dollars. You can't make up something so eerily interwoven like this. Their financial liquidity was a product of U.S. outsourcing and imported oil, two of the main culprits in America's indebtedness, its loss of independence and the decline of self-governance. Our weakness was turned into a sort of financial weapon: by packaging our indebtedness, the high finance boys got back some of our exported wealth - at least temporarily.

While everyone bemoans this "subprime mess," we hardly bother to ask, who did it? Many people, actually, all culpable in one way or another:

--Borrowers imprudently accepted loans that they might have been able to repay only under the most optimistic if wholly implausible scenario of eternally increasing home prices. Not having considered even a less-optimal scenario, and long accustomed to making debt a part of their daily lives ("what's the monthly payment?"), they effectively put themselves in a position tantamount to that of a thief.

--The lending industry, realizing that the housing market pyramid scheme was beginning to teeter, sought an untapped portion of the population that could enter the housing market and thereby prop up housing prices. If somewhat more cognizant of the unlikelihood of infinitely increasing home prices, they were confident that they could make these loans and then sell them as debt securities to other "investors." Thus, they would not be saddled with the responsibility for these loans when they went belly up (unlike those days when Mom and Pop got a mortgage from the local Savings and Loan which kept the loan on their books. You can bet they paid attention to whether you were likely to be able to pay back). These subprime lenders made the loans knowing that they would never be held directly accountable for the invevitable defaults. They also engaged in a form of legalized theft.

--And, finally, the high finance boys who bought these securitized packages for the sole purpose of further leverage (why would anyone be content to pocket the 8-10% interest these loans were "earning"?) confronted a domestic market that was growing wary of these debt instruments, and so they secreted these bad loans into packages of "good" debt and sold them to overseas "investors." They are also thieves - little different than a butcher who might hide rancid meat under a patina of fresh ground beef. We can also be pretty sure that these financial whizzes are graduates of America's finest academic institutions, the flower of our civilization, alumni of those very universities that were just ranked in the top 25 by the U.S. News and World Report. Why don't they count this kind of activity when they determine these rankings? I'll bet we'd get a somewhat different outcome.

About the packaging of these loans, the hedge fund manager wrote,

'Real money' (U.S. insurance companies, pension funds, etc.) accounts had stopped purchasing mezzanine tranches of U.S. subprime debt in late 2003 and [Wall Street] needed a mechanism that could enable them to 'mark up' these loans, package them opaquely, and EXPORT THE NEWLY PACKAGED RISK TO UNWITTING BUYERS IN ASIA AND CENTRAL EUROPE!!!!

"These CDOs were the only way to get rid of the riskiest tranches of subprime debt. Interestingly enough, these buyers (mainland Chinese banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, U.K. banks) possess the 'excess' pools of liquidity around the globe. These pools are basically derived from two sources: 1) massive trade surpluses with the U.S. in U.S. dollars, 2) petrodollar recyclers. These two pools of excess capital are U.S. dollar-denominated and have had a virtually insatiable demand for U.S. dollar-denominated debt . . . until now.

This is what they call a Ponzi scheme. Worthless objects are transferred from person to person until the greatest fool is fleeced. Yet, in this case, the greatest fool is none other than you and I, ultimately. Because the central banks will not allow the financial system to suffer the consequences of these shenanigans, they will 'monetize' this worthless paper in the form of inflation (they already have begun to do precisely this through their infusion of paper and reduction of interest rates). In the end, they will save the skins of the high finance boys, and in the process make our earnings and savings worth less. Or, maybe worthless. This is also theft, now courtesy of the Federal Reserve. Watch how low the dollar can go.

Got gold?

Credit: Ambrose Evans-Pritchard, "Brace Yourselves for the Insolvency Crunch"

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