AIArchitect

my God, i thought you were going to chip in with some decisive insght at the end there, not leave it to you to decide.

This American Life has a t.v. show on Showtime and is very well put together. I don't agree with their lack of telling the whole story all the time, but it's NPR and usually biased in one way or another. It is entertaining though. Two thumbs up.

On another note, in response to everyone's thoughtful posts I have one question: When Enron and MCI tanked, the congress whooped and hollered about how horrible these business owners were and had them prosecuted and jailed (although Ken Lay died before serving time). What about these Congressmen, the head of Fanny and Freddie who have profited off their botched policies and have wreaked world wide havoc? I'm very angry at what has happened and I took that anger with me to the polls this morning to early vote. I'm relatively young, but informed, and I just don't understand why a trillion dollar bailout package that was passed in Congress is under the control of the same crooks who got us in this mess in the first place!! There is so much blame to go around, but the people we elect to make good law to have a stable economy have gotten away with financial murder. I want to see politicians go to jail. Follow the money, because there is a lot in those guys' bank accounts.

This is not a "mortgage crisis"; it is a world bank fraud crisis. The following is distilled from Frank Partnoy's book, FIASCO, published in 1994.

A 1993 DERIVATIVES TRADE IN TEN EASY STEPS

1. A Major Mexican Bank (MMB) owns undervalued, peso-denominated bonds that it wants to sell to get them off its balance sheet. Because Mexico can print money to back up the value of its own currency, these peso-bonds are rated investment-grade.

2. The derivatives group of a Large New York Investment Bank (LNYIB) offers to help. It engages politically-connected lawyers in Bermuda to form a new company (a Special Purpose Entity, or SPE) to buy the MMB bonds and to issue new securities denominated in dollars “derived from” the underlying value of these undervalued peso-bonds.

3. To avoid a tax bite, the Bermuda SPE sells all of its new stock to a Bermuda charity whose beneficiaries include a Catholic high school for girls. The LNYIB donates $12,000 to the girls to enable the purchase of this stock, and pays the Bermuda government an annual fee of $1,600 to allow the SPE, now seemingly “owned” by the charity, to issue $1.5 billion of new bonds.

4. To make its new bonds marketable, the LNYIB splits them into two classes (80% apparently safe and 20% probably worthless), agrees to add a few US Treasury bonds to the pot, then pays Standard & Poors (S&P) a fat fee of maybe $1 million to obtain an AA- rating on 80% of the bonds. It then gives the unrated 20% to the MMB.

5. The investment-grade rating from S&P comes with a condition; a mandatory disclaimer (otherwise known as opaque fine print) in the bond offering must state that the rating does not reflect any risk of fluctuation in the exchange rates between dollars and pesos.

6. The new AA- bonds are offered with a high interest rate and the LNYIB easily sells $1 billion worth to many of the top US investment funds, large insurance companies, and even to the State of Wisconsin, in the process pocketing up to $15 million in fees.

7. By retaining the unrated bonds, the MMB is permitted by Generally Accepted Accounting Principles (GAAP) to be treated as the actual “owner” of the entire Bermuda SPE for accounting purposes, and thus, still “owns” its original bonds even after it has sold them for cash.

8. This neat trick allows the MMB to treat the sale of its original, undervalued bonds as a simple transfer to itself, and to avoid booking a loss on its balance sheet.

9. The net effect is that fund managers can get US dollars for investing in Mexican bonds while appearing to be prudent, disclosing to their investors only that they have purchased AA- bonds issued by a Bermuda company. Investors in the MMB are kept in the dark about the true state of its balance sheet. And everybody’s happy, until the Mexican economy tanks in 1994.

10. As Warren Buffett once said, if you don’t know who the sucker is, the sucker is you.

one opinion:

There is no shortage of blame for the financial debacle rocking America and scaring the world. And among the names popping up in the pathology of this vicious malaise are former Fed Chairman Alan Greenspan, former Treasury Secretary Robert Rubin, former Texas Senator Phil Gramm, and former President Bill Clinton. It was on their watch that the banking strictures of the 1933 Glass-Steagall Act were dismantled. Some critics say tearing down the barriers between commercial and investment banks contributed to the current crisis because it allowed commercial banks such as Citigroup (C) to trade mortgage-backed securities. In fact, former Citi CEO Sandy Weill led the fight for deregulation. President Clinton was in New York this week for the annual meeting of his philanthropy, the Clinton Global Initiative, and I asked him about the banking crisis.

MARIA BARTIROMO
Mr. President, in 1999 you signed a bill essentially rolling back Glass-Steagall and deregulating banking. In light of what has gone on, do you regret that decision?

FORMER PRESIDENT BILL CLINTON
No, because it wasn't a complete deregulation at all. We still have heavy regulations and insurance on bank deposits, requirements on banks for capital and for disclosure. I thought at the time that it might lead to more stable investments and a reduced pressure on Wall Street to produce quarterly profits that were always bigger than the previous quarter. But I have really thought about this a lot. I don't see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch (MER) by Bank of America (BAC), which was much smoother than it would have been if I hadn't signed that bill.

Phil Gramm, who was then the head of the Senate Banking Committee and until recently a close economic adviser of Senator McCain, was a fierce proponent of banking deregulation. Did he sell you a bill of goods?

Not on this bill I don't think he did. You know, Phil Gramm and I disagreed on a lot of things, but he can't possibly be wrong about everything. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence. But I can't blame [the Republicans]. This wasn't something they forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for [commercial banks] to go into the investment banking business as Continental European investment banks could always do, that it might give us a more stable source of long-term investment.

businessweek.com/magazine/content/08_40/b4102000409948.htm

I listened to the first This American Life piece regarding the mortgage crisis back in the summer. Perhaps my memory fails me, but the story missed one critical part which is in 1999 Congress rolled-back depression era regulations that prevented commercial banks from engaging in risky investments. Perhaps reinstating some of the repealed regulation is necessary to prevent a future crisis.

What's most disturbing is that so many are involved in causing this meltdown, but where do you begin prosecuting those most responsible? Banking and credit industries have more than encouraged us to live beyond our means. We all "bought" into this. In the modern age of dodging and deflecting personal responsibility, how do we encourage our children to do the right thing when those holding the highest of offices behave the way they do? Can we indict a few bank CEOs and feel safe that the punishment will prevent similar activity in the future? After all it's only been about 16 years since we experienced a similar situation. Should the Presidential administration be held responsible along with the Congress that passed the legislation for deregulation? We know who voted, we know deregulation doesn't work from the past, and I find it hard to believe that bank lobbyists didn't "help" those that helped them. This was no "oops", the risk of attempting to boost a sagging economy several years ago hasn't exactly worked out as history should have told us.

Call me a conspiracy theorist, but I find it quite disturbing that when the wealthiest people get massive tax breaks for a certain period of time the economy seems to always tank, people lose their homes, and wealthy people (who save lots of money from not paying their fair share of taxes) turn around and buy up foreclosures. They call this a real estate cycle, but how come it seems to mostly happen as a certain party leaves office? This directly affects our livelihood!

The frightening thing is that back then we weren't living in quite the credit based society that we are today and those of us in the business at the time remember how devastating the S&L bailout back then was to our profession. Will this be worse? The entire world has been affected by this current crisis in a way we've never seen before. Projects are going on hold, firms are laying off, and who knows when this will end. What I do know is that WE need to find a way to prevent this in the future as I think it's rather clear how it began!