Part One: What's the Emergency?
Do you remember the old Wendy's commercials, "Where's the beef?"
Well, I have a similar question:
"Where's the proof" ... that the world would collapse without the "emergency" bailout?
Treasury Secretary Hank Paulson, President George W. Bush, and Fed Chairman Ben Bernanke suddenly, out of nowhere, warned us all of certain Financial Armageddon if Congress didn't pass a $700 billion government bailout package immediately. Members of the House of Representatives were even prodded with threats of Marshall Law, if the bill wasn't passed right away. They need $700 billion right away!
Why? Why $700 billion? How was this number calculated?
"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday (emphasis added). "We just wanted to choose a really large number."
I feel better about the plan already. Hey, if they had to pull a number out of thin air, it suddenly makes sense to print money out of thin air too!
And monkey's are gonna fly out of my butt ... I digress.
Many banks wanted nothing to do with the bailout, but Secretary Paulson, invoking Tony Soprano, forced it on them by "putting a gun to their heads."
In the mean time, the Federal Bureau of Investigation (FBI) has started probing the following four major financial institutions looking for the possibility of fraud.
- Fannie Mae
- Freddie Mac
- Lehman Brothers Holdings Inc.
- American International Group Inc.
An FBI investigation into Countrywide Financial Corporation had already started last March (2008).
A Brief History of the Investment Banks:
In 1991, Salomon Brothers manipulated the Treasury bond market by fraudulently using their clients' names (without authorization) to buy bonds so that they could get away with exceeding the limits set by law designed to prevent disproportionate control over the market by one firm.
Salomon wasn't the only firm involved, but in 1994, they paid the largest single fine excised for this manipulation, $40 million, via Smith Barney who by then owned them.
Fast forward to 2003, and we find 10 Wall Street investment banks - Citigroup, Merrill Lynch, Goldman Sachs, Bear Stearns, Credit Suisse First Boston, Lehman Brothers, J.P. Morgan Securities, Morgan Stanley, UBS Warburg LLC, and U.S. Bancorp Piper Jaffray - paying a $1.4 billion settlement for securities fraud.
Moving up to 2006, Citigroup reports in their 10k that "The Company's mortgage loan securitizations are primarily non-recourse, thereby effectively transferring the risk of future credit losses to the purchasers of the securities issued by the trust." These types of "off-balance sheet" arrangements may not be illegal, but they are exactly what caused the collapse of Enron in 2002. Remember that one?
To hide as much liabilities as they could, these firms created various types of special purpose entities (SPEs) in which they didn't hold a controlling share. For example, Company A and Company B would create Company C, and A and B would each take a 50% interest - meaning neither company has a controlling interest.
These SPE's then packaged mortgage-backed security products (or bought them), sold them to investors, and sent the profits up to the investment banks who created them (companies A and B in our example), making the executives of the investment banks heroes as they enjoyed lavish bonuses on these supposed "spectacular" earnings.
The problem, however, was that the SPEs continued to become more lax in their underwriting standards, taking on greater and greater risks. Another case of "too good to be true?"
In what should have been no one's surprise, investors became increasingly hesitant about buying mortgage-backed securities. So, facing a declining market for this profitable scheme, the investment banks started guaranteeing the mortgage-backed securities, hence, landing the liabilities right on their balance sheets.
I think you know where that got us.
In summary, the "crisis" suddenly thrown upon us wasn't such an immediate emergency after all. It's been years in the making. Doesn't the real question here the become:
"Why was it this all allowed to go on for so long?"
In Part Two, we'll go directly to Congress, and take a look at the role the "regulators" played in these shenanigans.
Will the FBI investigate Congress? They should, but I certainly won't hold my breath.
