Monday, March 15, 2010

Beware the Ides of March

Wall Street Grifters Set Stage for Another Crash:

To appreciate how all of these (sometimes brilliant) schemes work is to understand the difference between earning money and taking scores, and to realize that the profits these banks are posting don't so much represent national growth and recovery, but something closer to the losses one would report after a theft or a car crash. Many Americans instinctively understand this to be true — but, much like when your wife does it with your 300-pound plumber in the kids' playroom, knowing it and actually watching the whole scene from start to finish are two very different things. In that spirit, a brief history of the best 18 months of grifting this country has ever seen:
Readers know how much I enjoy Matt Taibbi's insightful musings at Rolling Stone. Last week Taibbi confirmed what others, such as yours truly, have been saying for two years now: the "Great Recession" was the product of white-collar crime. In fact, Wall Street didn't even engage in traditional kinds of white-collar crime so much as they took good old fashioned street crimes (or "Street crimes"), hustles, pinches and scams, and turned them into a trillion dollar racket that brought down the economy and put millions in the unemployment line.
What is less understood is that the bailout of AIG counter-parties like Goldman and Société Générale, a French bank, actually began before the collapse of AIG, before the Federal Reserve paid them so much as a dollar. Nor is it understood that these counterparties actually accelerated the wreck of AIG in what was, ironically, something very like the old insurance scam known as "Swoop and Squat," in which a target car is trapped between two perpetrator vehicles and wrecked, with the mark in the game being the target's insurance company — in this case, the government.

This may sound far-fetched, but the financial crisis of 2008 was very much caused by a perverse series of legal incentives that often made failed investments worth more than thriving ones. Our economy was like a town where everyone has juicy insurance policies on their neighbors' cars and houses. In such a town, the driving will be suspiciously bad, and there will be a lot of fires.

AIG was the ultimate example of this dynamic. At the height of the housing boom, Goldman was selling billions in bundled mortgage-backed securities — often toxic crap of the no-money-down, no-identification-needed variety of home loan — to various institutional suckers like pensions and insurance companies, who frequently thought they were buying investment-grade instruments. At the same time, in a glaring example of the perverse incentives that existed and still exist, Goldman was also betting against those same sorts of securities — a practice that one government investigator compared to "selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars."
Taibbi goes on to illustrate how old confidence cons such as The Big Store ("popularized in movies such The Sting"), The Pig in the Poke (bait and swtich, and its attendant "letting the cat out of the bag"), The Rumanian Box (counterfeiting money), The Big Mitt (rigged poker games), and The Reload (repeatedly scamming the same victim over and over until the victim is sucked dry) all resurfaced in the investment banking and mortgage industries during the go-go 00's and directly led to the misery of today.

On the street, of course, scams such as Shell Games are illegal and will bring a quick law enforcement response. But on the Street, these scams are perfectly legal. It's ironic that following the great crash in '08, so many "experts" were saying that no one will ever understand these "brilliant" designs, such as credit default swaps and derivatives, because they were cooked up by so many "brilliant mathematicians" and the average person could never understand. Yet in reality, this wasn't so much "brilliance" as it was good old fashion grifting...con men in the suites instead of con men on the streets.

Worse, Taibbi argues the stage is being set for another bubble to burst since Washington dropped the ball on regulatory reform and failed to prosecute anyone for these crimes.
But by the end of 2009, the unimaginable was happening: The bubble was re-inflating. A bailout policy that was designed to help us get out from under the bursting of the largest asset bubble in history inadvertently produced exactly the opposite result, as all that government-fueled capital suddenly began flowing into the most dangerous and destructive investments all over again. Wall Street was going for the reload.
I wouldn't exactly call Taibbi a prophet, but as the Seer warned Caesar on his way to the theater that evening of the 15th, "beware the ides of March." It could happen again and this time it could be much, much worse.

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