Wall Street Beware: It’s Payback Time for Widows and Orphans

Dan Petegorsky

After President Obama gave his major speech on Wall Street reform last week, labor educator Les Leopold (author of the must-read The Looting of America took the President to task on the idea that, as Obama put it, “there is no dividing line between Main Street and Wall Street.”

To the contrary, said Leopold:

The entire story of this crisis is about how we are not in this together. For the past three decades we have become more and more a nation divided between the super-rich and the rest of us. In 1970 the ratio of compensation of the top 100 CEOs to the average worker was 45 to one. By 2008 it was a whopping 1,081 to one.

Evidence of this sharp divide exploded last week in Eyjafjallajokullian fashion. It came in the form of “smoking gun” emails from Goldman Sachs traders gloating over their ability to make a killing while the mortgage market plunged by betting against that market even as they were selling poisoned mortgage-based bonds to, as the trader put it, “widows and orphans”.

(In Wall St. parlance “widows and orphans” normally refers to low-risk but high yield investments. In this case Goldman colluded with inside investors and ratings agencies to disguise radioactive bonds as low-risk investments.)

In the words of a song written to describe a very similar trade that was recently exposed, it was a bet against the American Dream.

Tomorrow Democrats will seek to bring a major Wall St reform bill to the floor of the Senate. Republicans are vowing to block it – and lying through their teeth to conceal the fact that they’ve come down squarely on Wall Street’s side.

Amazingly, even with trust in government at near historic lows, the public still wants much stronger government regulation of major financial companies by a huge 61-31% margin. Fortunately, members of Oregon’s delegation - especially Jeff Merkley - and Washington’s Maria Cantwell are leading the way in seeking to toughen the bill as it moves through the Senate. They need our strong support. And since the bill will go back to the House, we also need to let Greg Walden and Blue Dog Democrat Kurt Schrader know that we’re disgusted with their votes siding with the banks).

April 26-28 are national call-in days; let your voice be heard!

But there’s also more we can do at the state and local level. Across the country, community organizations like PICO and National People's Action, together with labor unions like SEIU and the AFL-CIO are confronting the big banks directly, demanding that they end usurious interest rates and stop foreclosures.

Oregon has already acted against predatory payday lenders. Washington has now followed suit, and organizers in Montana are seeking to do so via ballot initiative. Meanwhile, the State of Massachusetts will be withdrawing funds from Bank of America.

So the time is now!. Unless we take strong action, the same crew who crashed the economy while becoming the super-rich will go back to the same old same old. Let’s make sure that doesn’t happen.

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    It is well past time for this to happen, but since now is our chance, let's do it.

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    here's a link to the OSPIRG statement on the vote today: Reform Opponents’ Political Gamesmanship Serves Wall Street, Not Main Street http://bit.ly/9WGRAa

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    The Leopold quote is pure demagoguery, and it obscures rather than illuminates the causes of the financial crisis. Unfortunately, it's a fitting stage-setter for this sloppily argued post that flits from one emotional trope to another, stoking feelings without providing truly useful information.

    Greed is a constant on Wall Street, as it is on Main Street. High rates of compensation are nothing new either and have nothing whatsoever to do with the financial crisis.

    The traders on Wall Street were infected with the same stupid optimism as the people on Main Street. They were betting on the housing market to rise indefinitely. In other words, they put their faith in the bubble. Without the bubble, there would have been no crisis. What caused the bubble? Government interference in the housing market on a staggering scale.

    That intervention took the form of artificially low interest rates, rigged by the Fed, which made borrowing cheaper. Even more importantly, government policies gutted mortgage standards, in effect forcing banks to make bad loans.

    More home purchasing drove up prices. The bubble itself concealed the risks inherent to lower mortgage underwriting standards because, as the bubble expanded, mortgage holders were able to sell at high prices or refinance and kick the ball down the street.

    The mountains of rotten debt simply wouldn't have accumulated without heavy government intervention in the mortgage lending industry. Are you simply not aware of this? Is there another reason you don't address it?

    What do you think of the people who got rich by working with Fannie Mae and Freddie Mac, including the officers of the GSEs themselves? They have a lot more to answer for than the traders of Goldman Sachs do.

    The financial services industry could benefit from regulatory changes, for example with regard to leverage ratios and systemic risk management. But your column suggests none of this. These vulnerabilities were among the causes of the financial crisis, but the sine qua non of the catastrophe was the government-driven attempt to drive housing beyond what the market would bear.

    Frankly, it is depressing that such a colossal, easily demonstrable problem is ignored while envy-driven demagoguery masks the horrendous effects of bad policy, as well as preventing a sober understanding of the real regulatory issues in financial services.

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      First, I think you're confusing "envy" with outrage and disgust. And hell yeah, this is an emotional topic.

      To your substantive points, especially this: "Government policies gutted mortgage standards, in effect forcing banks to make bad loans."

      This is, to use your terminology, demonstrably false. I suspect you actually know that the worst of the sub-prime loans were not in fact originated by banks, and that at the other end of the spectrum it was the non-bank (and unregulated) entities that structured the poisonous bonds we're reading about daily.

      I suspect you also know that in fact the GSEs, while indeed highly exposed to the sub-prime market, were actually prohibited from underwriting or buying the most offending of the sub-prime loans, since they could only deal in conforming loans.

      So - please stop tossing out red herrings, sober or otherwise.

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      Nonsense. The problem was the CDSs and derivatives thereof which, as Stephen Michael Amy pointed out down-thread far outstripped the underlying values of the assets themselves when in reality, nobody knew what their actual value was, but because it was unregulated allowed upwards of 50:1 leverage.

      The tired and completely vacuous claim that somehow the Feds forced the banks to make bad loans is pure unadulterated horse-crap. Fannie-Mae was late in the game when it began to underwrite some sub-prime loans and at a far lower percentage than the rest of the industry. On top of that,, the % of HUD backed loans failed than the privately underwritten ones. Fannie-Mae was not the cause of the mortgage bubble going pop. But if you want to blame Greenspan artificially low interest rates, be my guest. Though even then, it was the lack of regulatory oversight and the banks eager to blend crap loans in with good ones and sell off the risk to the next sucker, while buying the same sort tainted "securitized" products from others because they wrongly assumed that there was no risk, is the issue.

      That they got cheap money form the Feds was not the cause, but merely a facilitation of their actions.

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    I think Bill Bradbury's idea to follow North Dakota's lead and create a state bank to divest from the scoundrels and to capitalize Oregon businesses is a great way to move forward.

    Going back to the cause of this crisis, the infamous Graham-Leach-Bliley S.900 of 1999, only eight senators voted against it: Barbara Mikulski, Byron Dorgan (now retiring as the Obama Admin. killed his attempt to re-import medications), the ever-dependable Russ Feingold, the retired Richard Bryan on NV, the late, great Paul Wellstone, Barbara Boxer and Tom Harkin. Richard Shelby of Alabama voted against it!!! Fitzgerald of Illinois voted "present" and John McCain is recorded as "not voting" (which could be the best thing McCain ever did).

    Has anyone ever asked Ron Wyden why he voted for this?

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    Anthony Robert O'Donnell,

    I believe the derivatives (the credit-default swaps) that were taken out as side bets on the mortgages completely dwarf the entire amount of the mortgages by many times over.

    I believe Goldman-Sachs made the money by betting on credit-default swaps when it knew that the mortgage loans were not likely to be made good.

    So, whatever the process was as regards how the loans were made, the real heart of the problem, i.e., why A.I.G. had to be bailed out in the tens of billions, was the exposure due to the credit-default swaps. If the only problem had been a high rate of foreclosures, the whole thing would not have been a big deal and would not have required government intervention.

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    OT: So suddenly typing the s h * t version of crap is not allowed Kari?


    (shakes head)


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    Dan, envy and outrage are perfectly compatible emotions. If it's "demonstrably false" that government policies gutted mortgage standards," I invite you to demonstrate it. What exactly did make the GSEs go belly up? Was the risk they presented trivial? Did government policy NOT drive more housing? If it did, how did it do it? How much of the problem was subprime, per se, how much was ARM?

    Mitchell, I mentioned leverage, in case you didn't notice. What was it that made the CDs so dangerous if not the underlying debt created through bad underwriting across the mortgage lending industry? These decisions were not only made at Fanny and Freddie, of course, though these institutions were egregious for various reasons and in fact ended up owning or guaranteeing nearly $7 trillion in mortgages, or about half of the total U.S. market.

    If you think it's "vacuous" that the government forced bad loans, you must simply be unaware of the changes the government demanded in mortgage underwriting rules. When the rules are changed, either you sell under those conditions or you close your doors.

    How is "a facilitation of their actions" not a cause? I'm arguing that policy distorted the market to ill effect; making credit cheap is a notable distortion, and one that is all the more consequential when lax underwriting standards facilitate even more lending.

    Stephen Michael Amy, the CDO catastrophe you describe is a downstream result of the enormous bubble I describe above, and the bad debt associated with it. You argue as if that were irrelevant. To say that defaults/foreclosures didn't matter is to misunderstand both the magnitude of bad lending, its effect on real estate values, and the potential of such a large amount of bad debt to create a credit and liquidity crisis in a financial system. The reason the CDOs were toxic is that they were built on public policy that said a bad risk was a good one.

    Regarding the issue of financial reform: unless "too big to fail" is exchanged for "too big," government backstopping of huge entities will continue to distort the market. That policy favors not only Wall Street over Main Street, but the big Wall Street firms over smaller competitors.

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      You continue to act as if the GSEs were out front in driving the mortgage crisis, ignoring the fact that the bad lending you describe was far more rampant and toxic among the fully private institutions that were part of the mortgage security factory system completely separate from government regulation.

      A study just out from the National Community Reinvestment Coalition underscores this:

      "The Government Sponsored Enterprises (GSEs) appeared to have a moderating effect on risky and abusive lending practices; privately securitized loans went into foreclosure twice as often as loans backed by the GSEs."

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    Dan, the GSE's don't need to be "out front" for me to make my point, since the fully private lenders were affected by the government-driven relaxations of lending standards.

    Frankly, I think the NCRC report is finding what its agenda would dictate. Not that some kind of moderating effect would be impossible to discern, but it's hard to see how this (if it existed) would make up for the fact that the GSE's ended up with half the mortgage market anyway and were run into the ground. After all, they bought a lot of the loans originated by fully private banks. I think it's clear that whatever the GSE's might have moderated, they exacerbated a lot more.

    I recommend you take a look at Stan Liebowitz's "Anatomy of a Train Wreck" for the underwriting standards, and also Russell Roberts' "Gambling With Other People's Money" for the role of the GSEs, along with other causes of the financial crisis, including the way the system is designed to permit Wall Street firms to risk other people's money through high leverage ratios, etc.

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