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Wall Street’s Naked Swindle
Matt Taibbi, Rolling Stone
On Tuesday, March 11th, 2008, somebody — nobody knows who — made one of the craziest bets Wall Street has ever seen. The mystery figure spent $1.7 million on a series of options, gambling that shares in the venerable investment bank Bear Stearns would lose more than half their value in nine days or less. It was madness — “like buying 1.7 million lottery tickets,” according to one financial analyst.
But what’s even crazier is that the bet paid.
At the close of business that afternoon, Bear Stearns was trading at $62.97. At that point, whoever made the gamble owned the right to sell huge bundles of Bear stock, at $30 and $25, on or before March 20th. In order for the bet to pay, Bear would have to fall harder and faster than any Wall Street brokerage in history.
The very next day, March 12th, Bear went into free fall. By the end of the week, the firm had lost virtually all of its cash and was clinging to promises of state aid; by the weekend, it was being knocked to its knees by the Fed and the Treasury, and forced at the barrel of a shotgun to sell itself to JPMorgan Chase (which had been given $29 billion in public money to marry its hunchbacked new bride) at the humiliating price of … $2 a share. Whoever bought those options on March 11th woke up on the morning of March 17th having made 159 times his money, or roughly $270 million. This trader was either the luckiest guy in the world, the smartest son of a bitch ever or…
Or what? That this was a brazen case of insider manipulation was so obvious that even Sen. Chris Dodd, chairman of the pillow-soft-touch Senate Banking Committee, couldn’t help but remark on it a few weeks later, when questioning Christopher Cox, the then-chief of the Securities and Exchange Commission. “I would hope that you’re looking at this,” Dodd said. “This kind of spike must have triggered some sort of bells and whistles at the SEC. This goes beyond rumors.”
Cox nodded sternly and promised, yes, he would look into it. What actually happened is another matter. Although the SEC issued more than 50 subpoenas to Wall Street firms, it has yet to identify the mysterious trader who somehow seemed to know in advance that one of the five largest investment banks in America was going to completely tank in a matter of days. “I’ve seen the SEC send agents overseas in a simple insider-trading case to investigate profits of maybe $2,000,” says Brent Baker, a former senior counsel for the commission. “But they did nothing to stop this.”…
(14 Oct 2009)
Where Will the Jobs Come From?
Robert Borosage, The Huffington Post
They are popping the bubbly on Wall Street. Million dollar bonuses; the Dow at 10,000; the casino is open again. Forget President Obama who says we can’t go back to an economy where finance pockets 40% of the profits. We’re already headed there.
The current account deficit is down as Americans have cut back spending. But the deficit with China is hitting new records; companies are still shipping manufacturing jobs over there. The dollar is down, but not against the Chinese currency. Forget about Federal Reserve Chair Ben Bernanke who warns against going back to the unsustainable trade imbalances that led us over the cliff. The old patterns are coming back.
Bernanke has announced that the recession is over, the recovery has begun. But to date, we are looking at a reversion, not a recovery. We’ve stopped the free fall, but we haven’t changed direction. There can be no recovery to the old economy that crashed when the housing bubble burst. That economy depended on Americans spending more then they earned, borrowing ever greater amounts, treating their homes like at ATM machine, while the Chinese lent us the money to keep interest rates down so we could buy the goods our companies made with the jobs they shipped over there.
Now that old economy didn’t work very well when it was growing. We lost high wage manufacturing jobs during the supposed “recovery” under Bush. Most Americans lost ground even while the economy was expanding. Household debts reached new highs. Inequality soared to Gilded Age extremes.
But now we can’t even get back to that performance. Americans have lost some $13 trillion in assets. They are tightening belts, trying to pay down debts, terrified as jobs are lost, hours cut, benefits slashed. Consumers won’t drive the US economy, much less the world’s. And businesses aren’t investing because consumers are cutting back. They are increasing profits by laying off workers and cutting back expenses. States and localities are headed into severe layoffs of teachers and police. The economy isn’t going to be buoyed by soaring exports to a world in recession. The only thing holding the economy up now is the deficit financed stimulus plan and the automatic stabilizers like food stamps and unemployment benefits.
Where will the jobs come from? Wall Street can produce another bubble, but that won’t put the 15 million without jobs to work, one third of which have been out of work for at least six months.
Recovery requires fundamental reform of America’s economic strategy. The old shibboleths of the conservative era – small government, cut top end taxes, free multinationals to move jobs abroad, deregulate finance, war on labor unions, trade deficits don’t matter – have failed ignominiously. They must be discarded, like yesterday’s rotted fruit…
(20 Oct 2009)
New School of Thought Brings Energy to ‘the Dismal Science’
Nathaniel Gronewald, The New York Times
The financial crisis and subsequent global recession have led to much soul-searching among economists, the vast majority of whom never saw it coming. But were their assumptions and models wrong only because of minor errors or because today’s dominant economic thinking violates the laws of physics?
A small but growing group of academics believe the latter is true, and they are out to prove it. These thinkers say that the neoclassical mantra of constant economic growth is ignoring the world’s diminishing supply of energy at humanity’s peril, failing to take account of the principle of net energy return on investment. They hope that a set of theories they call “biophysical economics” will improve upon neoclassical theory, or even replace it altogether.
But even this nascent field finds itself divided, as evidenced by the vigorous and candid back-and-forth debate last week over where to go next. One camp says its models prove the world is headed toward a dramatic economic collapse as energy scarcity takes hold, while another camp believes there is still time to turn the ship around. Still, all biophysical economists see only very bleak prospects for the future of modern civilization, putting a whole new spin on the phrase “the dismal science.”
Last week, about 50 scholars in economics, ecology, engineering and other fields met at the State University of New York’s College of Environmental Science and Forestry for their second annual conference on biophysical economics. The new field shares features with ecological economics, a much more established discipline with conferences boasting hundreds of attendees, but the relatively smaller number of practitioners of biophysical economics believe theirs is a much more fundamental and truer form of economic reasoning.
“Real economics is the study of how people transform nature to meet their needs,” said Charles Hall, professor of systems ecology at SUNY-ESF and organizer of both gatherings in Syracuse. “Neoclassical economics is inconsistent with the laws of thermodynamics.”…
…The sharpest difference between biophysical economics and the more widely held “Chicago School” approach is that biophysical economists readily accept the peak oil hypothesis: that society is fast approaching the point where global oil production will peak and then steadily decline.
The United States is held as the prime example. Though the United States is still the world’s third-largest producer of oil, its oil production stopped growing more than a decade ago and has flatlined or steadily fallen ever since. Other once-robust oil-producing countries have experienced similar production curves.
But the more important indicator, biophysical economists say, is the fact that the U.S. oil industry’s energy return on investment has been steadily sliding since the beginning of the century…
(23 Oct 2009)
The greatest theft in American history
ilargi, the automatic earth
Most of us probably lose sight, from time to time, of the importance of the US housing market to the American banking system, the US economy and, for good measure, the entire global economy. Still, it’s virtually impossible to overestimate that importance. So when a good reason presents itself to return to the topic, we are well advised to do so, and recent developments more than justify it. Much more than.
In the past, I have repeatedly talked about the perverse role the US government plays in the domestic housing market, through government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which have total mortgage portfolio’s of between $5 trillion and $6 trillion on their books, as well as an unknown amount and degree of “involvement” in mortgage-backed securities, and whose common and preferred equity were recently assessed as “worthless” by an analyst team at Keefe, Bruyette & Woods. Which of course only confirmed a poorly hidden secret.
The KBW analysts concluded that the only way to deal with Fannie and Freddie would be a bad bank construction. The government, however, as I’ve pointed out before, seems to be ahead of them. A rapidly growing share of mortgage loans are now processed through the Federal Housing Administration (FHA) and the Government National Mortgage Association (GNMA, a.k.a. Ginnie Mae).
Unlike Fannie and Freddie, these are full-blooded government-owned agencies. And that makes them even easier tools to manipulate the housing market. Ginnie Mae guarantees mortgage-backed securities backed by federally insured or guaranteed loans issued by the Federal Housing Administration. In other words, the government guarantees securities backed by loans issued by the government. These loans, however and of course, don’t originate with the government…
…That principle is: the US government is busy actively raising home prices. And there we are back to what I’ve been saying about Fannie and Freddie for the longest time. While the reason given by Washington is that its involvement is driven by a desire to “stabilize” the markets, that is at best only part of the truth. What the White House and Capitol Hill are trying to do is “stabilizing” the markets at a level that they find acceptable. Which, if we recognize that their policies increase the number of homes on the market as well as their prices, evokes the image of a hamster on a flywheel. And that hamster WILL get tired at some point…
(24 Oct 2009)
Are You Ready for the Next Crisis?
Paul Craig Robert, Information Clearing House
One conclusive hallmark of a failed state is that the crooks are inside the government, using government to protect and to advance their private interests.
Another conclusive hallmark is rising income inequality as the insiders manipulate economic policy for their enrichment at the expense of everyone else.
Income inequality in the US is now the most extreme of all countries. The 2008 OECD report, “Income Distribution and Poverty in OECD Countries,” concludes that the US is the country with the highest inequality and poverty rate across the OECD and that since 2000 nowhere has there been such a stark rise in income inequality as in the US.
The OECD finds that in the US the distribution of wealth is even more unequal than the distribution of income.
On October 21, 2009, Business Week reported that a new report from the United Nations Development Program concluded that the US ranked third among states with the worst income inequality. As number one and number two, Hong Kong and Singapore, are both essentially city states, not countries, the US actually has the shame of being the country with the most inequality in the distribution of income.
The stark increase in US income inequality in the 21st century coincides with the offshoring of US jobs, which enriched executives with “performance bonuses” while impoverishing the middle class, and with the rapid rise of unregulated OTC derivatives, which enriched Wall Street and the financial sector at the expense of everyone else.
Millions of Americans have lost their homes and half of their retirement savings while being loaded up with government debt to bail out the banksters who created the derivative crisis…
(26 Oct 2009)
Related: Growing Poverty and Despair in America
Revolutionizing Economic Thought (video)
Frank Rotering, needsandlimits.org
In previous videos I urged humankind to abandon the logic of capitalism and to guide our economies through the rational assessment of our needs, our wants, and the limits of nature. This implies a revolution in economic thought. In this video I describe my proposal for this radical conceptual restructuring.
(20 Oct 2009)
From the author:
Follow up to my previous video “A critique of ecological economics”. It explains how current economic thought, including ecological economics, might be incorporated into a broader theory that effectively addresses the ecological crisis.
