We’ve written earlier about the whole financial mess in the three previous posts as well as back here. In our last instalment of the autopsy, we’re going to point some fingers.
First off, home buyers who fell for the luscious dreamy stories of the New American Dream. Your house would exponentially increase in value yearly and by refinancing the increased equity, you could get that big screen TV, the SUV, the xBox, the rims, the clothes and everything else you want. Sign here. Never mind the stuff about the balloon payment.
Second finger: Mortgage and loan officers who were compensated on the loans they wrote. Not if the loans are worth a pinch of manure, just the dollar volume of the loans they wrote. There was no control, no due diligence, no review. Why? Because the managers of the loan folks were compensated on how much their people wrote. Funny that.
Third finger: Fannie Mae and Freddie Mac. Supposedly these were mortgage lenders of almost last-resort for those who were borderline for a bank or mortgage company to touch, enabling risky credit borrowers to have a half a shot at getting a house. Fannie and Freddie started behaving like an investment bank, leveraging derivatives on derivatives, playing with mythical money that wasn’t theirs. Due diligence? None.
Fourth finger: The Security and Exchange Commission and the Federal Reserve Bank. Their role was to be policeman for the investment houses and the banks respectively, setting rules regarding how much and how far the investment houses and banks could go. Imagine being told not to do something by a fluffy white six week old kitten. The phrase ‘useless as tits on a bull’ comes to mind.
Fifth finger: The investment houses and banks who decided, using the assumptions of their quants, that Asset-Backed Commercial Paper, being AAA rated would let them invest in riskier instruments. Conceptually their back was always covered with the mortgage packages if things went wrong in that vanadium mine in Sudan, or the derivative of the derivative’s hedge on gold prices.
Sixth finger: Standard and Poor’s, Moody’s, Fitch and the other rating agencies. These shops and their quants were the ones who decided that these loans were AAA or better. It either means collusion with the financial community, or they were smoking crack and did ratings while high. Collusion means their ratings mean nothing today, have meant nothing before and will mean nothing in the future.
That sixth finger is the nasty one. It speaks to exactly how broken the system really is. Common sense, prudent, financial management has been replaced by quants, bond ratings and assumptions, run through a computer to do the high-end statistical math to prove or disprove something as fast as possible for shareholder value.
Truly, what we see, doing the autopsy here, is collusion from top to bottom. A fully broken system, based on a wink and a nod, designed to make money for everyone on the inside, but never for those poor mooks on the outside: The customers, the suckers, the government and anyone not privy to the insider line.
The solution? Jail time comes to mind, but that would entail arresting all of Wall Street, most of the banking industry and seven tenths of the homeowners more than one payment behind on the mortgage they know they can never pay down.
A better solution might be this. First off, the timeline for investments succeeding or failing is now down to the second. A simple fix is no stock, bond or other financial instrument can be bought or sold more than once in a 24 hour period. This takes significant edge away from the computerized machinations of the quants, derivatives and hedges. It rips up the global derivative market based on nothing more than working a clock and hallucinatory market wobbles.
These things aren’t real, but a lot of companies are making money on insider knowledge moving huge amounts of money quickly, upsetting what is near-real in the actual market. You’ve seen the market surge and fall based on nothing tangible in the last few months. That’s derivatives and hedges at work and they dramatically upset real business.
Business is based on real profits and real losses, not mythical derivatives. A 24 hour hold stops weird, incomprehensible swings in values based on nothing more than rumours and sunspots in a quants’ assumptions and higher math. Maybe investors will buy and hold stocks for more than a week.
Second, henceforth if you’re a bond rating agency, you become the insurance for an investment. If you haven’t got the balls and the bucks to back up your rating, then shut your pie hole. You don’t like it? Too bad. You screwed the rest of us with your bullshit ratings on decades of smoke and mirror jobs for your buddies. Don’t let the door hit your ass on the way out.
And no, you can’t pool the risk. If your company says an investment is AAA, your company is on the hook to insure it to 80 percent of the value. Have the cash on hand to back it up, or shut up.
Third. If you’re a bank, a bank holding company, an investment house, broker, investment instrument packager, or any other weasel term you care to invent to snake through some legal loophole, be prepared to have $1.00 on hand in cash money for every $3.00 you’ve got invested. Not stocks, not bonds, not derivatives, hedges, or market declared value. Cash. Gold will do. Actual gold bars. You have shown you can’t be trusted, so we’re going to enforce some serious rules.
If you exceed 3 to 1 debt to cash, the government will take your company in the course of an afternoon and send your miserable ass to jail on a felony Investment Fraud rap. It won’t be ClubFed either. Your cellmate will be a serial rapist named Three-Legged Lenny. He will be your new friend. You’ve had your last suck at the government teat. If you don’t like it, go die in a fire. The TARP has been rolled up.
Fourth. Fire every investigator and bureaucrat working for the SEC and the Fed. Remember that Dutch Regan fired all the air traffic controllers: It can be done. Hire new people. You will have several thousand applicants, many of whom will be ex-Wall Street insiders who have axes to grind with their former employers.
Their incentive will be this: For every stock scam, ponzi pyramid, insider trading rip-off and balloon float they uncover, they get 20% of the potential value of the scam as a non-taxable cash bonus. Choose the most savage ones as field investigators and set them loose.
The 20% bonus incentive will have the SEC and Fed investigators digging hard and finding the liars and bullshit artistes. Statements filed with the SEC will actually mean something.
There will be many arrests and many convictions. There will be ‘no-knock’ Federal warrants being served in the Hamptons at 0300 and a lot of bankers being perp walked in their shorts. Too bad.
The objective is a level, fair, playing field and insider trading is illegal. Always has been. Fraud is illegal. Always has been.
Convicted of Insider Trading or Investment Fraud? All your assets are forfeit. It’s called the RICO statutes and they’re already on the books. Nothing new to pass or legislate.
If the investment houses, banks and brokers are as squeaky clean, honourable and liquid as they say they are, then there’s no problem. They’ll come through rigorous investigations just fine. We need Wall Street fixed and fixed fast.
Plus, Three-Legged Lenny has friends inside who are lonely and want cellmates too.
Successful companies will thrive. If you make a product or service that makes sense and a profit, you’ll do fabulously as you should. People will always invest in good things that show a profit, long, medium or short term. Owners of those companies will make plenty of money by being smart and wise.
Employees of those companies will have jobs that they might be able to rely on for more than a week at a time.
Paper shuffles and investment dodges will be eaten alive, the bones spat out into the gutter to bleach white in the sun.
As for homeowners who are upside down, stuck in house they’ll never make the payments on? You get one shot at a renegotiation with your bank. You’ve got one year to show that you can make it work and the government will help, a little bit, perhaps with a small grant per month, otherwise you’re finished.
If that means you have to work three part-time jobs to make it work, then it means you work three part time jobs. Immigrants have been doing that for generations to get a piece of the American Dream, busting their ass to make a go of it.
If you don’t want to keep your house, or can’t keep your house, then you take the hit. You signed the mortgage. Nobody held a gun to your head. They might have lied to you, but you still signed up. Sorry.
Nobody said the American Dream came with a guarantee. All that you can hope for is a chance to try. Nothing more.