Monday, December 15, 2008

The Fix

When it rains it pours. By now everyone knows about Madoff's ponzi scheme gone bust, but calling it the biggest theft in history ignores the $700B just handed over on a platter to the banks with no strings attached. In fact, what's tragic is that I heard Chris Dodd himself say that provisions were stipulated for the banks to use the money (in part) for credit. As we all know, that hasn't happened, and the banks instead used and are using the money to go shopping for themselves.

Yup - my bugaboo; further conglomeration.

You think it's bad now that oil, auto, media, and cell phone oligarchs have consolidated, just watch what happens with just a few super banks dominating everything. It's a gambling law: NEVER put all your chips on one bet unless you have "the nuts," the best hand.

Does anyone out there honestly think and can you rationally argue as to how a few super banks is "the nuts," the best possible bet for America...? On the other side of the ledger, that club ("And YOU and me ain't in it," -George Carlin) where the elites sit, they absolutely know what to do: conglomerate!

What's going on is stupefying on a level that would make Marx's and Ayn Rand's heads explode. Well, maybe not Rand's, but you get what I mean.

Long ago, in a financial disaster far, far away, there was a company named Enron who played a game, the game of "now monetize this." And there was a referee, Andersen, to make sure that Enron dotted it's "i's" and crossed its "t's." And there was trickery afoot in Ken Lay's house, and it burned down.

And when the smoke cleared all was revealed - the refs had been in on the fix.

August 31, 2002
Arthur Andersen surrenders its license to practice accounting in the United States. 85,000 people lose their jobs. Nine billion dollars in annual earnings disappears.

Just like the NBA ref who got caught fixing games, the biggest sports story in the past decade in my opinion. Know how much money transacts on Vegas sports books? Some estimate it dwarfs all other forms of gambling.

Yep, Andersen was the REAL story of the fall of Enron. So what does this have to do with Bernie-Boy Madoff? Well, where in the hell were the refs, that is, the SEC???

Michael Ocrant wrote a story in 2001 for MARHedge, which covers the hedge fund industry, about how some traders, money managers and financial consultants questioned Madoff's record of 72 winning months in a row. "When I spoke to them about something not being right … they were adamant — there's no way this could be real," says Ocrant, now at Institutional Investor. "There's no one in history with that kind of results." [sic] He says Madoff smoothly dismissed the questions when he interviewed him at the time. "You could see why people would trust him, particularly since he'd been running a successful business for years."(2)

That's seven years ago that people in the industry knew. Now, if you're a watchdog, shouldn't you at the very least be reading and keeping up with industry trades? And if nothing else, a winning streak of 72 months long is statistically highly improbable. Realistically speaking, it's impossible.

But here's where American capitalism has taken a cue from show biz, of all things. The glitz, the glamour (think Trump, "Lifestyles of the Rich and Famous") and the talking heads, both high and low. Shit, it even has its own channels such as CNBC and Bloomberg thanks to cable's wild west channel fest. In movies it was Hedda Hopper on through to Rona Barrett to Pauline Kael and Noel Burch. The corollary body in finance are the analysts (and journalists, too). Now consider this:

In 1975, deregulation of brokerage commissions opened up a Pandora’s box of competition for securities analysts. Suddenly discount brokerages abounded and took business from investment banks. As trade commissions declined, brokerage firms had diminished resources to fund analyst services. As a result, stock analysts relied less on brokerage fees for income and more on investment banking fees. They began to be judged more for their investment banking skills than their insights or analysis, and this is how what many regard as a systemic conflict of interest was born.(3)

In regards to the mortgage debacle, one thing stands out: the credit rating agencies, such as Standard & Poor's and Moody's. In other words, the analysts, or referees, this time in the form of credit raters. Because while there are barely six AAA rated companies in America such as Microsoft, ADP and GE, the way over-leveraged financial products containing toxic mortgages (some of these "products" leveraged over TWENTY times!) that eventually blew up and caused the house of cards to collapse were being rated AAA, the top blue chip rating.(4)

Bottom line? The present-day game of American capitalism's rigged and, surprise, it's not in your favor. How do we know? Easy; the refs are in on the fix.

1. From the PBS series Independent Lens and their page on Enron: The Smartest Guys in the Room. This is from the sub-section, "Enron Timeline: 2002." Despite Andersen's shredding a ton of Enron related documents when under the gun, the fix appears in yet another incarnation, this time as judges. On May 31, 2005, the U.S. Supreme Court overturns the conviction of the Arthur Andersen accounting firm for obstructing justice by shredding thousands of Enron documents. Andersen’s top Enron accountant withdraws his guilty plea when prosecutors drop their case.

2. Financial world still amazed over Madoff's downfall
By David Lieberman, Pallavi Gogoi, Theresa Howard, Kevin McCoy and Matt Krantz, USA TODAY 12/15/08

3. From the PBS series Independent Lens and their page on Enron: The Smartest Guys in the Room. This is from the sub-section, "How the Stock Market Works."

4. 60 Minutes this past Sunday ran a frightening story on the next wave of mortgages set to default, the ones just above the absolute shit sub-primes that we are now experiencing.

The trouble now is that the insanity didn't end with sub-primes. There were two other kinds of exotic mortgages that became popular, called "Alt-A" and "option ARM." The option ARMs, in particular, lured borrowers in with low initial interest rates - so-called teaser rates - sometimes as low as one percent. But after two, three or five years those rates "reset." They went up. And so did the monthly payment. A mortgage of $800 dollars a month could easily jump to $1,500.

Now the Alt-A and option ARM loans made back in the heyday are starting to reset, causing the mortgage payments to go up and homeowners to default.

A Second Mortgage Disaster On The Horizon?
60 Minutes: New Wave Of Mortgage Rate Adjustments Could Force More Homeowners To Default
December 14, 2008 broadcast