"Privileged people don't march and protest; their world is safe and clean and governed by laws designed to keep them happy. I had never taken to the streets before; why bother? And for the first block or two I felt odd, walking in a mass of people, holding a stick with a placard..." Michael Brock in John Grisham's The Street Lawyer (Doubleday, 1998).
I’ve been waiting for three years for Americans to get out in the street and protest the actions that created the Financial Crisis that sparked the Great Contraction. As ng.com frequent commenter Richard Reep put it back at the beginning: “What happened to people's outrage? Where are the torch-bearing citizens marching on Washington?” If some third-world leader had pillaged the national treasury on their way out of town the way Hank Paulson did – with the full and enthusiastic support of New York Fed chief and now Treasury Secretary Timothy Geithner – when he convinced Congress to spend $750 billion to bailout the Wall Street banks, there would be angry mobs, riots and possibly UN Peacekeepers.
Three years later, all we can muster is a sort of hippy sit-in – but I’ll take it! It’s better than letting it run over us, drip-by-drip, until there is no middle in our increasingly bifurcated economy.
Let me summarize what 99% of Americans should protest. It started in the early 2000s with good intentioned policies directed toward leveling the playing field by re-designing consumer credit ratings to allow more Americans to own homes. The move was embraced by Mike Milken and his followers as a way to further the cause of The Democratization of Capital – oddly enough, an idea born out of the outrage of the Watts Riots of August 1965.
Republicans and Democrats alike joined in the movement and a great boom in home prices was born. Expanding homeownership opportunities, especially for minorities, was a fundamental aim of the Bush Administration’s housing policy, one strongly supported by Democrats in Congress. Then everyone got greedy, including wanna-be real estate moguls who started flipping houses instead of working for their living.
Banks that were writing mortgages soon turned to securitization – bundling mortgages into bonds called mortgage-backed securities – so they could use the proceeds to lend more money to subprime borrowers. The banks were collecting fees at every step. They charged fees for making the mortgage loan and for putting together the bond deal; then they charged commissions for trading the bonds. The interest paid on the bonds was high because the interest charged on the mortgages was high – after all, these were less-than-credit worthy borrowers by traditional standards. The banks wanted to be compensated for taking the risk – even though they were selling the risk to someone else. It was all about making money on money and eventually demand overtook supply. But that didn’t stop Brother Banker!
According to a story on PBS (originally aired November 21, 2008), managers at Standard & Poor’s credit rating agency were pressured to give mortgage bonds triple-A ratings in the pursuit of ever higher fees. In essence, the banks paid credit rating agencies to get triple-A ratings for their mortgage bonds so that insurance company and pension fund money could be added to the scheme. Insurance companies and pension funds are highly regulated in order to protect investors who rely on them for compensation in disasters and retirement.
If the bank couldn’t get the top credit rating for some mortgage bonds, they turned to selling an unregulated kind of insurance called Credit Default Swaps. The swaps became so popular that people who didn’t even own the bonds were buying the swaps. Eventually, there were more credit default swaps than there were bonds – and the banks were making fees on top of fees with no incentive to stop. In the end, there was more money to be made in mortgage defaults than mortgage payoffs and some banks even stopped taking mortgage payments to force the defaults. It was a little like the failing businessman who burns down his own shop because he can make more on the insurance than he can trying to sell it.
When the swaps came due, companies like AIG collapsed under the pressure of the payments – and American taxpayers were left holding the bag. Using your insurance and pension benefits to create their bonfire, Wall Street staged a weenie-roast! Two years ago you could have purchased all the common stock of Lennar Homebuilders for $1.2 billion – but if they went bankrupt you could collect $40 billion on the swaps. (The European Union fixed this problem in their markets – the US did not.) Like any Ponzi scheme, this one also required that “new money” continue to flow in so that the early investors could receive payouts – hence the need to get your benefit money invested in these things. When Uncle Sam took 80% ownership of AIG in Hank Paulson’s bailout scheme, again approved by our current administration’s financial geniuses, the US Treasury in combination with the Federal Reserve provided an unlimited source of new money. THAT is what you should be protesting today because it can – and probably will – happen again.
Critics of the protesters like to equate Wall Street with all the companies that create jobs. This ignores how the stock market works. The only time that a company gets money from its stock is in the initial public offering. Those shares are mostly sold to syndicates, underwriters, and primary dealers, not the general public. What happens day in and day out on Wall Street is simply stirring the pot. When the company’s stock goes up, it is the next seller and his broker that make money, not the company. The stock market should have everything to do with jobs. When households have excess earnings – more money than they need for their expenses – they make savings deposits or investments in the stock market through banks. Banks channel savings from households to entrepreneurs and businesses. Entrepreneurs use the money to create new businesses which employ more people, thus increasing the earnings that households have available for savings and investment, which would bring the process fully around the virtuous circle. But Wall Street doesn’t exactly do that anymore. It just makes jobs for Wall Street.
The other argument is that the problem isn’t Wall Street, it’s the government. Anyone who thinks that only one or the other is to blame doesn’t understand how politics is financed. According to the MAPLight.org’s analysis, Senator Barack Obama’s presidential campaign received more money in 2007-2008 from Wall Street than anyone else, but it was only $2 million more than the $22,108,926 that went to Senator John McCain.
Blame the government and blame the Wall Street banks that sponsor their political campaigns – they are blaming each other anyway. The occupy protestors - with the possible exception of the violent black band anarchists - are not the perpetrators we need to put in handcuffs.
The sad fact is that nothing in Washington, D.C. or Wall Street, NYC has changed since that day in September 2008 when Hank Paulson told Congress that the world would end if they didn’t give him $750 billion to spread around Wall Street. For many people, like a Michael Brock, it takes a life-changing event to make you look at the truth all around you. Fixing our broken financial markets requires systemic reform of a great scale.
I think a lot of people who joined the 2008 tea parties – myself included – thought we were mounting a petition against bank bailouts and the misuse of public funds. The U.S. Government Accountability Office audit of the Federal Reserve, released in July 2011, proves that petition failed. Call your Representative, write to your Senator, and show up for the #Occupy or Tea Party events in your city. Like Michael Brock, you may find yourself savoring the exercise in civil protest.
A version of this article appeared in the Omaha World Herald on November 4, 2011.
Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. She participated in an Infrastructure Index Project Workshop Series throughout 2010. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets
Occupy Wall Street Photo by Paul Stien.