The Real Problems Are Finally Beginning to Show in the Financial Sector

Sunni's picture

To be blunt about it, the real problems aren’t the burst bubbles in the home mortgage market, in credit default swaps (CDS), in commercial real estate, nor in credit. It’s the systemic fraud masquerading as government policy that encouraged too much of the risky behavior that allowed bubbles to begin in the first place.

Olivier Garret may have tagged the situation properly, in titling a recent essay Bigger Than Watergate? (I have spelled his name correctly here). For those whose first inclination might be to scoff at such an idea, consider the relative impact of Watergate and the ongoing financial scandals. Watergate merely brought into the light what any thinking person should be able to figure out for himself: the electoral political process is plagued with dishonorable people drawn to power, and tends to corrupt in some way the honorable few who manage to become insiders. Already, the meltdown of Wall Street has changed the lives of every person who has financial dealings in and/or with the USSA. Some of the more obvious ways include: investments wiped out in stock market losses; equity in homes and/or home ownership itself destroyed as speculation and lack of due diligence (on both sides of the mortgage loan officer’s desk) ran rampant; retirement and pension funds evaporated via ridiculous (fraudulent?) CDS plays; continued earthquakes in the banking sector; generally tight credit conditions, and outrageous interest rates and penalty fees on credit cards and home equity lines of credit; and the continued devaluation of the dollar. In fact, it’s something akin to a miracle to me that the dollar’s held up as well as it has—it certainly speaks to the power of habit and inertia.

Garret’s essay focuses on the revelation that Hank “Strong Dollar” Paulson and Ben “Too Big to Fail” Bernanke strong-armed then Bank of America CEO Ken Lewis to proceed with the merger with Merrill Lynch. And here’s the key, all emphasis mine:

[T]he part of the story that could really break Al Paulson and Don Bernanke’s necks is the failure to inform the Securities and Exchange Commission, as well as Bank of America’s shareholders, of the extent of toxic waste Bank of America was forced to accept. That’s fraud, pure and simple.

And that’s a pretty good sign that this is not going to go away. Some of the Casey Research editors ... think it’s going to be huge, especially since the scandal happened on President Bush’s watch and the Democrats are in control of Congress. Chances are that either Paulson or Bernanke is going down, depending who cuts a deal with prosecutors first. Their “friends in high places” may be able to keep the Justice Department out of it, but they won’t be able to control ambitious state officials like Cuomo. There’s blood in the water, and this is a career maker for a prosecutor.

That it is ... but the fact that the fraud is endemic, reaching even those who are supposed to be regulating these players, leaves me skeptical.

Another crack emerged late yesterday, as NY Fed chair resigns amid [Goldman Sachs] stock purchase questions. [Funny, though ... the story wasn’t on my Google News home page just now, nor in the “top headlines” on the Reuters home page. Instead, included there is a story on how the financial crisis “inspires Tori Amos’ latest album”. Now that’s news, innit?] Don’t fall for their attempted Jedi mind trick that compliance with the rules means nothing improper was done; when someone in such a position of power buys stock in one of the entities he is supposed to regulate, at the very least that’s a conflict of interest. Some are calling it fraud; and I don’t disagree. And I think we’re still quite early in this game of Find the Fraudsters.

So why am I skeptical that those responsible will be held accountable? Because the fraud pervades the top levels of the financial sector as well as the federal government. Goldman Sachs “alumni” are all over the place in D.C.—and I don’t think that’s by chance. Their execs, along with other banksters, donate generously to federal officials’ campaigns. Remember the stories revealing that some congressvermin got sweetheart deals on their mortgages and/or home equity lines of credit? Do you really think Barney Frank isn’t firmly in someone’s pocket? Between all the inbreeding and colluding going on, I think that even bulldog state prosecutors like Cuomo are going to find the row very tough to hoe. I hope I’m wrong.

Garret’s essay closes with questions as to whether Americans will rise up against this pervasive fraud. Even if it happens, that may not be enough to bring about meaningful change (and that doesn’t mean a new version of Glass–Steagall). There are other actions one can take, including shunning the banks. Can’t do business without one, you say? Don’t be so sure. Have you looked into any of those check-cashing places? Yes, they take a percentage of the check as their fee, but mightn’t having the rest of your check as cash in your pocket be worth that price, instead of your bank’s check-clearing delays, limits on ATM withdrawals and/or debit card purchases in one day, etc.? There’s a lot of fear-mongering regarding those businesses, along with payday loans and pawn shops, but some research shows [PDFs] the banksters to be just as bad, if not worse. If one is interested in starving these monsters—and that may be the only action that starts to grab their attention—alternatives to traditional banks and their services are worth exploring.

Emphasis Mine

Inbreeding! That is fantastic! A great way to characterize this!


Murphy's Bye-Laws

Cash Value

It's not clear to me that those check-cashing places provide a real alternative -- they simply extract a greater percentage of your hard-earned money, and at the end of the process all you've got is numerous slips of green paper. We know that the solution is trading things of real value, which traditionally has meant gold and silver (plus some barter on the side, though large-scale trade requires a currency of some kind). Rather than depending on some centralized bank to institute a currency based on precious metals (yeah, right!), I keep casting about for a decentralized, bottom-up approach to financial reform. I think that Internet services like Craiglist might provide some pointers in that direction. After all, who's to know that when you sell that old sofa the person who walks out of your house with it gave you ten ounces of silver instead of a pile of FRNs? Perhaps the entire idea is quixotic, since we would be attempting to overcome Gresham's Law, and people might not have the discipline to do that. But we won't know unless we try...

Not about the alleged value of FRNs

It's not clear to me that those check-cashing places provide a real alternative -- they simply extract a greater percentage of your hard-earned money, and at the end of the process all you've got is numerous slips of green paper.

I think we’re speaking from differing contexts. I was thinking of individuals who need to have paychecks cashed. (And I’m not entirely sure that the check-cashing places do extract a larger percentage of one’s FRNs, especially if one factors in taxes on applicable bank accounts. One of the reports I linked to—or maybe it was a different paper by one of the authors—suggested that if one has a typical bank account, overdraft and penalty fees peg out at a much higher APR than check-cashing store percentages do.)

That option might seem tangential at best to your points, but I see it as a first step in weaning individuals away from a market sector that has become monolithic and barely gives lip service to providing customers actual service these days. All their concern about the “underbanked” is nothing more than the banksters looking for more pockets to bleed.

Does Bill St. Clair’s project fit in to your vision? Quixotic hasn’t stopped me before ... and it won’t stop me here.

(Oh, and congratulations on the publication of your book! Is that supposed to be a RUS on the cover?)


That animal on the cover is the world's smallest ungulate, called the lesser mouse deer or kanchil. Now that I've finished the book, I "can chill". :)


Congrats on the book!!!

When I tried to access the web link above for the book, I received a security warning that I've never seen before...any advice would be welcome, as I'd like to know more about your book etc :-)


Yes, I host my blog via Secure Sockets Layer (SSL) using a digital certificate issued by StartCom. They are recognized so far only by Mozilla (Firefox 2 and above), Apple Macintosh OS X Leopard, and I think various flavors of Linux (most conspicuously not Internet Explorer on Windows -- not sure about Opera on various platforms). They're working on getting included in Windows and other systems, but convincing an operating system vendor (e.g., Microsoft) to include a certificate authority's root certificate in an OS is probably 10% technical and 90% political, so it might take time. If you use Firefox you should be able to view my site just fine. As to why I host my site via SSL -- well, people who register with my blog might log in using a username and password, and I don't want unauthorized entities to access that data as it passes over the 'net. But then again I also use PGP to encrypt my email, generate strong random passwords for all the websites and other Internet services where I have an account, etc. Unfortunately, once you start to learn about information security (or the lack thereof) you become more and more strict about your security practices. Or at least that has been my experience...

Laughing so hard ...

I can barely type. That has to be the most unusual basis for a book cover ever!


I think there is no basis. The problem is that the publisher started years ago with animals on the covers of their books as their signature look, and they're fast running out of the kind of animals you'd want to see on a book (i.e., no creepy insects or what have you). So either they choose really obscure animals like the lesser mouse deer or they give up their distinctive approach to book covers. It's a dilemma. :)