Banksters Gone Wild: Wall Street's Bad Boys....
*Anarcissie*
CounterPunch December 7, 2007
Wall Street's Bad Boys and Their Washington Enablers
Banksters Gone Wild
By Pam Martens
Imagine you moved in next door to a mischievous child.
Over the years, you watched the parents scold ever so
lightly as the deviant behavior grew from stealing
loose change to petty larceny to bank robbery. You
knew for sure the child would eventually get caught and
end up in prison; but you didn't count on one thing:
the parents used their political clout with each
ratcheting up of the crimes to avoid prosecution,
effectively turning the overseers of the public
interest into criminal enablers. As the enablers
"fixed" the outcome of each crime, they also sealed the
records from public view and historical perspective.
That scenario typifies how criminal behavior has
exploded on Wall Street and why President Bush,
Congress and the regulators are stumbling around in
the dark looking for cures for a financial crisis that
they can neither understand nor contain: they're
enablers in denial.
Nothing more dramatically illustrates the criminal
contagion than the fact that for the second time in 13
years, Orange County, California has found Wall Street
toxic sludge threatening its public funds.
Here's what happened the first time around: a Merrill
Lynch stockbroker, Michael Stamenson, sold billions of
dollars of complex securities to Orange County, which
ran a pooled investment fund for close to 200 cities
and school districts in the county. The county lost
$1.7 billion when the highly leveraged fund imploded,
the county filed bankruptcy, resulting in serious job
losses and cutbacks in social services to the poor. In
all, Merrill made approximately $100 million in fees
with Stamenson collecting $4.3 million in just the
two-year period of '93 and '94.
Stamenson was immortalized in evidence produced in
court as the star of a Merrill Lynch training tape for
rookie brokers where he maps out the road to success on
Wall Street: "the tenacity of a rattlesnake, the
heart of a black widow spider and the hide of an
alligator."
As the evidence against Stamenson and higher ups at
Merrill played out in court, Merrill Lynch continued
to pay annual compensation of $750,000 to Stamenson and
eventually settled the case for $400 million and
sealed the documents. It also paid $30 million to the
county to settle and abruptly end a grand jury
investigation, leading to loud cries of foul play.
Once again, the documents and testimony were sealed
from public view. This is what consistently happens on
settlement when a customer or employee attempts to sue
a Wall Street firm and is ushered instead into a Wall
Street Star Chamber called mandatory arbitration.
Today, Orange County is hardly an isolated case of
banksters gone wild. The same type of sludge sits in
public funds for schools, cities and pensions from
coast to coast.
A Local Government Investment Pool in Florida recently
saw a run on its assets after it was revealed that $1.5
billion of defaulted and downgraded debt, courtesy of
Wall Street, was part of this supposedly safe money
market fund for hundreds of towns and school districts
in Florida.
Even four small Norwegian towns near the Artic Circle
have lost $64 million from complex securities created
by Citigroup and sold to them by a local broker, Terra
Securities. Additionally, billions of dollars of the
sludge sit stealthily in Mom and Pop money market
funds at some of the largest and most prestigious
financial institutions in the U.S.
And if the situation were not dangerous enough, the
U.S. Treasury Secretary, Hank Paulson, has misdiagnosed
the problem (wittingly or unwittingly). Mr. Paulson
would have you believe that if he can help enough
people avoid foreclosure on their homes, by changing
their teaser mortgage rate to a fixed rate on their
subprime loan, he will have taken a big step forward
in alleviating the financial crisis. While any
constructive step to keep people in their homes is to
be applauded, what is blowing up all over the globe is
not just subprime mortgages. The real problem arises
from Structured Investment Vehicles (SIVs) and Special
Purpose Entities (SPEs) which, just like Enron, hide
enormous amounts of debt from public scrutiny, making
companies appear more profitable and solvent than they
really are.
Mainstream media has also been implanting the idea
that it's all about homeowners and mortgage loans
instead of banksters hiding bad debt. On December 5,
2007, the Associated Press, which is syndicated to
newspapers across the country, carried this inaccurate
statement: "SIVs are investment funds created by banks
like Citigroup Inc. or HSBC Holdings PLC and sold to
investors. The funds borrow short-term money and use it
to buy mortgage debt, profiting off the difference
between what they collect on the mortgage debt and
what they pay to borrow."
Mortgage debt?
According to Citigroup, the largest purveyor of the
black hole SIVs with over $83 billion in seven SIVs as
of September 30, 2007, 58% of its SIV holdings is
financial institution debt, with 32% mortgage related,
5% student loans, 4% credit cards and 1% other. It
goes on to say that just $70 million of this $83
billion has indirect exposure to U.S. subprime assets.
On November 30, 2007, Moody's put on review for
possible downgrade (as well as actual downgrades on
some securities) debt totaling $64.9 billion that was
issued by six Citigroup SIVs. [1]
In other words, financial institution debt, together
with imploding mortgages, off-balance-sheet mountains
of debt and the worst transparency we've had since
1929, are the full set of problems.
Why would positioning this crisis by the President or
U.S. Treasury Secretary as a subprime mortgage problem
be preferable to laying out the full scope of the
crisis to the American people?
To state the truth would be admitting that the Bush
administration and its crony capitalists failed to
properly audit the largest banks in America; failed to
pay attention as they stashed hundreds of billions of
dollars off their balance sheets in a replay of
Enronomics; failed to prosecute the banksters when they
parked this toxic waste in Mom and Pop money market
funds across the country; and failed to jail the
banksters before they burned down the bank and became a
global threat to financial stability.
Now, these very same banks don't know what's hidden
off each others balance sheets, how much their largest
industrial customers have hidden off balance sheet,
courtesy of Citigroup's propensity to set up SPEs for
others; if the bank that is a counterparty to its
credit-default swaps is going to be in business when
those insurance policies are most needed. Therefore,
they say, we'll just stop doing business with each
other since we're all guilty by association with the
same corrupt enablers in Washington.
And while the Securities and Exchange Commission
(SEC), Federal Reserve Board (FRB), and Congress bear
much blame for the financial crisis, the Office of the
Controller of the Currency (OCC) stands out as the
quintessential enabler of corruption on Wall Street.
Consider the July 25, 2007 testimony of the Consumer
Federation of America on behalf of itself and other
leading consumer groups to the Committee on Financial
Services in the U.S. House of Representatives:
Any discussion about the quality of federal financial
services regulation must begin by mentioning the
"elephant in the living room...." The Supreme
Court's recent ruling in Watters vs. Wachovia Bank,
N.A., upheld a regulation by the Department of
Treasury's Office of the Comptroller of the Currency
(OCC) that permits operating subsidiaries of national
banks to violate state laws with impunity. The court
ruled that the bank's operating subsidiary is subject
to OCC superintendence - even if there effectively
is none - and not the licensing, reporting and
visitorial regimes of the states in which the
subsidiary operates...The OCC has even sought to
prevent state attorneys general and regulators from
enforcing state laws that it concedes are not
preempted. The recent court ruling encourages national
banks and their subsidiaries to ignore even the most
reasonable of state consumer laws.
To underscore that the overarching problem here is an
interbank crisis of confidence over black holes of
corruption and crony regulation, rather than the
narrowly defined "subprime mortgage mess," let's look
at the time line of what happened. Beginning this past
July, the credit-default swaps of a British bank,
Northern Rock, begin to tick higher; by August, they
made an additional sharp move upward, signaling a
solvency problem. In September, there's a run on the
bank (the first in Britain since 1866). The bank
collapses and the Bank of England has to use taxpayer
money to bail it out to the tune of approximately 29
billion pounds or close to $60 billion.
What does that have to do with a U.S. financial
crisis? As it turns out, this small bank of 6,000
employees has set up Channel Island-based debt
structures called Granite, stuffed them with $104
billion of U.K. residential mortgages (which are now
showing an increasing propensity to default). Adding
further intrigue and local outrage, the offshore trust
named a charity for Down's Syndrome children as part of
its funding subterfuge, without the permission or
knowledge of the charity. This has sparked a full
scale investigation by British authorities.
Terrifying banks on this side of the Atlantic is the
knowledge that (1) two of our biggest Wall Street
firms, Citigroup and Merrill Lynch, underwrote tens of
billions of that Channel Island paper, Granite Master
Issuer, and sold it here in the U.S.; (2) Citibank, the
commercial banking unit of Citigroup, is the principal
paying agent; (3) big chunks of that paper, as of SEC
filings on September 30, 2007, is sitting in money
markets and fixed income mutual funds in the U.S.,
raising some serious liability issues for Citigroup
and Merrill; and (4) 30 percent of the mortgages have
a loan to value (LTV) ratio of 90 to 100 percent while
over 50 percent have a LTV of 80 to 100 percent. [2]
It smells Enronesque and Parmalatesque (the bankrupted
Italian dairy firm) to a wide swath of the legal and
banking community and given that Citigroup will finally
face public trials in both of these earlier swindles
next year, the timing could not be less propitious for
confidence building. The British Parliament is
grilling all the players and regulators for answers to
the financial crisis in public hearings while here in
the U.S. we prefer to fashion remedies for a financial
crisis we've yet to investigate or understand.
To recap: there has been the first bank run in 140
years in Britain. We've had the first run on a public
money market fund here in Florida. The U.S. debt
markets have been barely functioning for four months.
Our largest banks don't trust each other.
Perhaps one of the presidential candidates could leave
the campaign trail long enough to prove their
leadership skills by calling for emergency hearings in
Congress, the venue in which we the people pay them to
do the people's work.
__________
Pam Martens worked on Wall Street for 21 years; she has
no securities position, long or short, in any company
mentioned in this article. She writes on public
interest issues from New Hampshire.
[1] _Citigroup's 3rd Quarter 10Q filing with the SEC discussing its
SIV_
http://www.citigroup.com/citigroup/fin/data/q0703c.pdf
[2] _Granite Master Issuer securitization filing with the SEC_
http://www.sec.gov/Archives/edgar/data/1136894/000090514807007032/0000905148-07-007032.txt