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Psychopaths Caused The Financial Crisis

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Two months ago, Barry Ritholtz wrote a piece for The Washington Post in rebuttal to New York Mayor Michael Bloomberg’s parroting of what has become The Big Lie of our time.  In response to a question about Occupy Wall Street, Mayor Bloomberg said this:

“It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.”

Ritholtz then proceeded to list and discuss the true causes of the financial crisis.  Among those causes were Alan Greenspan’s Federal Reserve monetary policy – wherein interest rates were reduced to 1 percent; the deregulation of derivatives trading by way of the Commodity Futures Modernization Act; the Securities and Exchange Commission’s “Bear Stearns exemption” – allowing Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns to boost their leverage as high as 40-to-1; as well as the “bundling” of sub-prime mortgages with higher-quality mortgages into sleazy “investment” products known as collateralized debt obligations (CDOs).

After The Washington Post published the Ritholtz piece, a good deal of supportive commentary emerged – as observed by Ritholtz himself:

Since then, both Bloomberg.com and Reuters each have picked up the Big Lie theme. (Columbia Journalism Review as well).  In today’s NYT, Joe Nocera does too, once again calling out those who are pushing the false narrative for political or ideological reasons in a column simply called “The Big Lie“.

Purveyors of The Big Lie are also big on advancing the claim that the “too big to fail” beneficiaries of the TARP bailout repaid the money they were loaned, at a profit to the taxpayers.  Immediately after her arrival at CNN, former Goldman Sachs employee, Erin Burnett made a point of interviewing a young, Occupy Wall Street protester, asking him if he was aware that the government actually made a profit on the TARP.  Unfortunately, the fiancée of Citigroup executive David Rubulotta didn’t direct her question to Steve Randy Waldman – who debunked that propaganda at his Interfluidity website:

Substantially all of the TARP funds advanced to banks have been paid back, with interest and sometimes even with a profit from sales of warrants.  Most of the (much larger) extraordinary liquidity facilities advanced by the Fed have also been wound down without credit losses.  So there really was no bailout, right?  The banks took loans and paid them back.

Bullshit.

*   *   *

During the run-up to the financial crisis, bank managers, shareholders, and creditors paid themselves hundreds of billions of dollars in dividends, buybacks, bonuses and interest.  Had the state intervened less generously, a substantial fraction of those payouts might have been recovered (albeit from different cohorts of stakeholders, as many recipients of past payouts had already taken their money and ran).  The market cap of the 19 TARP banks that received more than a billion dollars each in assistance is about 550B dollars today (even after several of those banks’ share prices have collapsed over fears of Eurocontagion).  The uninsured debt of those banks is and was a large multiple of their market caps.  Had the government resolved the weakest of the banks, writing off equity and haircutting creditors, had it insisted on retaining upside commensurate with the fraction of risk it was bearing on behalf of stronger banks, the taxpayer savings would have run from hundreds of billions to a trillion dollars.  We can get into all kinds of arguments over what would have been practical and legal. Regardless of whether the government could or could not have abstained from making the transfers that it made, it did make huge transfers.  Bank stakeholders retain hundreds of billions of dollars against taxpayer losses of the same, relative to any scenario in which the government received remotely adequate compensation first for the risk it assumed, and then for quietly moving Heaven and Earth to obscure and (partially) neutralize that risk.

The banks were bailed out.  Big time.

Another overlooked cause of the financial crisis was the fact that there were too many psychopaths managing the most privileged Wall Street institutions.  Not only had the lunatics taken over the asylum – they had taken control of the world’s largest, government-backed casino, as well.  William D. Cohan of Bloomberg News gave us a peek at the recent work of Clive R. Boddy:

It took a relatively obscure former British academic to propagate a theory of the financial crisis that would confirm what many people suspected all along:  The “corporate psychopaths” at the helm of our financial institutions are to blame.

Clive R. Boddy, most recently a professor at the Nottingham Business School at Nottingham Trent University, says psychopaths are the 1 percent of “people who, perhaps due to physical factors to do with abnormal brain connectivity and chemistry” lack a “conscience, have few emotions and display an inability to have any feelings, sympathy or empathy for other people.”

As a result, Boddy argues in a recent issue of the Journal of Business Ethics, such people are “extraordinarily cold, much more calculating and ruthless towards others than most people are and therefore a menace to the companies they work for and to society.”

Professor Boddy wrote a book on the subject – entitled, Corporate Psychopaths.  The book’s publisher, Macmillan, provided this description of the $90 opus:

Psychopaths are little understood outside of the criminal image.  However, as the recent global financial crisis highlighted, the behavior of a small group of managers can potentially bring down the entire western system of business.  This book investigates who they are, why they do what they do and what the consequences of their presence are.

Matt Taibbi provided a less-expensive explanation of this mindset in a recent article for Rolling Stone:

Most of us 99-percenters couldn’t even let our dogs leave a dump on the sidewalk without feeling ashamed before our neighbors.  It’s called having a conscience: even though there are plenty of things most of us could get away with doing, we just don’t do them, because, well, we live here.  Most of us wouldn’t take a million dollars to swindle the local school system, or put our next door neighbors out on the street with a robosigned foreclosure, or steal the life’s savings of some old pensioner down the block by selling him a bunch of worthless securities.

But our Too-Big-To-Fail banks unhesitatingly take billions in bailout money and then turn right around and finance the export of jobs to new locations in China and India.  They defraud the pension funds of state workers into buying billions of their crap mortgage assets.  They take zero-interest loans from the state and then lend that same money back to us at interest.  Or, like Chase, they bribe the politicians serving countries and states and cities and even school boards to take on crippling debt deals.

Do you think that Mayor Bloomberg learned his lesson  .  .  .  that spreading pro-bankster propaganda can provoke the infusion of an overwhelming dose of truth into the mainstream news?   Nawwww  .  .  .


 

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Be Sure To Catch These Items

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As we reach the end of 2011, I keep stumbling across loads of important blog postings which deserve more attention.  These pieces aren’t really concerned with the usual, “year in review”- type of subject matter.  They are simply great items which could get overlooked by people who are too busy during this time of year to set aside the time to browse around for interesting reads.  Accordingly, I’d like to bring a few of these to your attention.

The entire European economy is on its way to hell, thanks to an idiotic, widespread belief that economic austerity measures will serve as a panacea for the sovereign debt crisis.  The increasing obviousness of the harm caused by austerity has motivated its proponents to crank-up the “John Maynard Keynes was wrong” propaganda machine.  You don’t have to look very far to find examples of that stuff.  On any given day, the Real Clear Politics (or Real Clear Markets) website is likely to be listing at least one link to such a piece.  Those commentators are simply trying to take advantage of the fact that President Obama botched the 2009 economic stimulus effort.  Many of us realized – a long time ago – that Obama’s stimulus measures would prove to be inadequate.  In July of 2009, I wrote a piece entitled, “The Second Stimulus”, wherein I pointed out that another stimulus program would be necessary because the American Recovery and Reinvestment Act of 2009 was not going to accomplish its intended objective.  Beyond that, it was already becoming apparent that the stimulus program would eventually be used to support the claim that Keynesian economics doesn’t work.  Economist Stephanie Kelton anticipated that tactic in a piece she published at the New Economic Perspectives website:

Some of us saw this coming.  For example, Jamie Galbraith and Robert Reich warned, on a panel I organized in January 2009, that the stimulus package needed to be at least $1.3 trillion in order to create the conditions for a sustainable recovery.  Anything shy of that, they worried, would fail to sufficiently improve the economy, making Keynesian economics the subject of ridicule and scorn.

Despite the current “ridicule and scorn” campaign against Keynesian economics, a fantastic, unbiased analysis of the subject has been provided by Henry Blodget of The Business Insider.  Blodget’s commentary was written in easy-to-read, layman’s terms and I can’t say enough good things about it.  Here’s an example:

The reason austerity doesn’t work to quickly fix the problem is that, when the economy is already struggling, and you cut government spending, you also further damage the economy. And when you further damage the economy, you further reduce tax revenue, which has already been clobbered by the stumbling economy.  And when you further reduce tax revenue, you increase the deficit and create the need for more austerity.  And that even further clobbers the economy and tax revenue.  And so on.

Another “must read” blog posting was provided by Mike Shedlock (a/k/a Mish).  Mish directed our attention to a rather extensive list of “Things to Say Goodbye To”, which was written last year by Clark McClelland and appeared on Jeff Rense’s website.  (Clark McClelland is a retired NASA aerospace engineer who has an interesting background.  I encourage you to explore McClelland’s website.)  Mish pared McClelland’s list down to nine items and included one of his own – loss of free speech:

A bill in Congress with an innocuous title – Stop Online Piracy Act (SOPA) – threatens to do much more.

*  *  *

This bill’s real intent is not to stop piracy, but rather to hand over control of the internet to corporations.

At his Financial Armageddon blog, Michael Panzner took a similar approach toward slimming down a list of bullet points which reveal the disastrous state of our economy:  “50 Economic Numbers From 2011 That Are Almost Too Crazy To Believe,” from the Economic Collapse blog.  Panzner’s list was narrowed down to ten items – plenty enough to undermine those “sunshine and rainbows” prognostications about what we can expect during 2012.

The final item on my list of “must read” essays is a rebuttal to that often-repeated big lie that “no laws were broken” by the banksters who caused the financial crisis.  Bill Black is an Associate Professor of Economics and Law at the University of Missouri-Kansas City in the Department of Economics and the School of Law.  Black directed litigation for the Federal Home Loan Bank Board (FHLBB) from 1984 to 1986 and served as deputy director of the Federal Savings and Loan Insurance Corporation (FSLIC) in 1987.  Black’s refutation of the “no laws were broken by the financial crisis banksters” meme led up to a clever homage to Dante’s Divine Comedy describing the “ten circles of hell” based on “the scale of ethical depravity by the frauds that drove the ongoing crisis”.  Here is Black’s retort to the big lie:

Sixty Minutes’ December 11, 2011 interview of President Obama included a claim by Obama that, unfortunately, did not lead the interviewer to ask the obvious, essential follow-up questions.

I can tell you, just from 40,000 feet, that some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior on Wall Street, wasn’t illegal.

*   *   *

I offer the following scale of unethical banker behavior related to fraudulent mortgages and mortgage paper (principally collateralized debt obligations (CDOs)) that is illegal and deserved punishment.  I write to prompt the rigorous analytical discussion that is essential to expose and end Obama and Bush’s “Presidential Amnesty for Contributors” (PAC) doctrine.  The financial industry is the leading campaign contributor to both parties and those contributions come overwhelmingly from the wealthiest officers – the one-tenth of one percent that thrives by being parasites on the 99 percent.

I have explained at length in my blogs and articles why:

• Only fraudulent home lenders made liar’s loans
• Liar’s loans were endemically fraudulent
• Lenders and their agents put the lies in liar’s loans
• Appraisal fraud was endemic and led by lenders and their agents
• Liar’s loans could only be sold through fraudulent reps and warranties
• CDOs “backed” by liar’s loans were inherently fraudulent
• CDOs backed by liar’s loans could only be sold through fraudulent reps and warranties
• Liar’s loans hyper-inflated the bubble
• Liar’s loans became roughly one-third of mortgage originations by 2006

Each of these frauds is a conventional fraud that could be prosecuted under existing laws.

It’s nice to see someone finally take a stand against the “Presidential Amnesty for Contributors” (PAC) doctrine.  Every time Obama attempts to invoke that doctrine – he should be called on it.  The Apologist-In-Chief needs to learn that the voters are not as stupid as he thinks they are.


 

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A Preemptive Strike By Tools Of The Plutocracy

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The Financial Crisis Inquiry Commission (FCIC) was created by section 5 of the Fraud Enforcement and Recovery Act (or FERA) which was signed into law on May 20, 2009.   The ten-member Commission has been modeled after the Pecora Commission of the early 1930s, which investigated the causes of the Great Depression, and ultimately provided a basis for reforms of Wall Street and the banking industry.  As I pointed out on April 15, more than a few commentators had been expressing their disappointment with the FCIC.  Section (5)(h)(1) of  the FERA established a deadline for the FCIC to submit its report:

On December 15, 2010, the Commission shall submit to the President and to the Congress a report containing the findings and conclusions of the Commission on the causes of the current financial and economic crisis in the United States.

In light of the fact that it took the FCIC eight months to conduct its first hearing, one shouldn’t be too surprised to learn that their report had not been completed by December 15.  The FCIC expects to have the report finalized in approximately one month.  This article by Phil Mattingly and Robert Schmidt of Bloomberg News provides a good history of the partisan struggle within the FCIC.  On December 14, Sewell Chan of The New York Times disclosed that the four Republican members of the FCIC would issue their own report on December 15:

The Republican members of the panel were angered last week when the commission voted 6 to 4, along partisan lines, to limit individual comments by the commissioners to 9 pages each in a 500-page report that the commission plans to publish next month with Public Affairs, an imprint of the Perseus Books Group, one Republican commissioner said.

Beyond that, Shahien Nasiripour of the Huffington Post revealed more details concerning the dissent voiced by Republican panel members:

During a private commission meeting last week, all four Republicans voted in favor of banning the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report, according to a person familiar with the matter and confirmed by Brooksley E. Born, one of the six commissioners who voted against the proposal.

I gave those four Republican members more credit than that.  I was wrong.  Commission Vice-Chairman Bill Thomas, along with Douglas Holtz-Eakin, Peter Wallison, and Keith Hennessey issued their own propaganda piece as a preemptive strike against whatever less-than-complimentary things the FCIC might ultimately say about the Wall Street Plutocrats.  The spin strategy employed by these men in explaining the cause of the financial crisis is to blame Fannie Mae and Freddie Mac for the entire episode.  (That specious claim has been debunked by Mark Thoma and others many times.)  This remark from the “Introduction” section of the Republicans’ piece set the tone:

While the housing bubble, the financial crisis, and the recession are surely interrelated events, we do not believe that the housing bubble was a sufficient condition for the financial crisis. The unprecedented number of subprime and other weak mortgages in this bubble set it and its effect apart from others in the past.

Many economists and other commentators will have plenty of fun ripping this thing to shreds.  One of the biggest lies that jumped right out at me was this statement from page 5 of the so-called Financial Crisis Primer:

Put simply, the risk of a housing collapse was simply not appreciated.  Not by homeowners, not by investors, not by banks, not by rating agencies, and not by regulators.

That lie can and will be easily refuted —  many times over —  by the simple fact that a large number of essays had been published by economists, commentators and even dilettantes who predicted the housing collapse.

Yves Smith provided a refreshing retort to the Plutocracy’s Primer at her Naked Capitalism website:

This whole line of thinking is garbage, the financial policy equivalent of arguing that the sun revolves around the earth.  Yes, the US and other countries provide overly generous subsidies to housing, and curtailing them over time would not be a bad idea.  But that’s been our policy for decades.  Calling that a major, let alone primary, cause of the crisis, is simply a highly coded “blame the poor” strategy.  In reality, both the run-up to the crisis and its aftermath were one of the greatest wealth transfers from the citizenry at large to a comparatively small group of rentiers in the history of man.

*   *   *

This pathetic development shows how deeply this country is in thrall to lobbyists.  But these so-called commissioners, who are really no more than financial services minions out to misbrand themselves as independent, look to have overplayed their hand.  This stunt shows more than a tad of desperation on the part of banks and their operatives in their excessive efforts block any remotely accurate, and therefore critical, report on the industry.

Perversely, this development may be a positive indicator on several fronts.  First, the FCIC report may be tougher and more probing than I dared hope.

The fact that a pre-emptive strike by the Plutocratic “Gang of Four” has been initiated with the release of their Primer could indeed suggest that that their patrons are worried about the ultimate conclusions to be published by the FCIC next month.  The release of this Primer will surely draw plenty of criticism and attract more attention to the FCIC’s final report.  Nevertheless, will the resulting firestorm motivate the public to finally demand some serious action beyond the lame “financial reform” fiasco?  Adam Garfinkle’s recent essay in The American Interest suggests that such hope could be misplaced:

Obsessed with vacuous celebrity, Americans make it easier than ever for plutocrats to sail under the radar.  Corporate heavyweights and bankers may be suborning Congress and ripping off  “we the people” left and right, but we’re too busy dancing with the stars to notice.

Will this situation ever change?