Four years ago, on an evening in March 2008, I received a call from the CEO of Bear Stearns informing me that they planned to file for bankruptcy in the morning.
Bear Stearns was the smallest of the major Wall Street institutions, but it was deeply entwined in financial markets and had the perfect mix of vulnerabilities. It took on too much risk. It relied on billions of dollars of risky short-term financing. And it held thousands of derivative contracts with thousands of companies.
Gee, and why was this a problem (other than for Bear Stearns and their shareholders)? For one simple reason -- the government had eviscerated the law -- Glass-Steagall -- that required "investment banks" and similar to obtain actual capital from somewhere rather than speculate with their depositor's funds.
The intent of this law was to prevent the unbridled creation of credit backed by nothing other than hot air. That action, incidentally, is both inflationary and dangerous, in that credit money spends the same as does economic surplus (that is, actual earned capital.)
In the spring of 2008, more Americans were starting to face higher mortgage payments as teaser interest rates reset and they could no longer refinance out of them because the value of their homes stopped rising—the leading edge of a wave of foreclosures and a terrible fall in house prices.
And in 2003-2007, Americans were made loans that the issuers knew were bogus. We know this now because there is under oath testimony to this effect complete with documentary proof that the boards of directors were told. I wrote on the issue before it became documented fact and said this had to be the case, because otherwise there was no issue and no risk -- sure, people would lose money, but that happens all the time when you do dumb things in the market, and it's good, not bad, as it cleans out those malinvestments.
But when commercial banks and other institutions lend money they don't have against collateral that is inflated in value via bogus appraisals and speculative credit flows, they are functionally insolvent long before the actual "boom" occurs. This is the root of the problem, yet neither you or anyone else in the Obama administration wants to deal with it.
A big part of "why" is that you were personally and explicit complicit in allowing this to happen, and as a consequence these financial institutions and their employees and executives literally stole value from the American people. The pyramid of lies you help construct bled America dry and robbed the nation -- not just investors, but ordinary people via pension funds as well.
The financial safeguards in the law at that moment were tragically antiquated and weak. Neither the Fed, nor any other federal agency, had the necessary comprehensive authority over investment firms like Bear Stearns, insurance companies like AIG, or the government-sponsored mortgage giants Fannie Mae and Freddie Mac.
You and others, including Greenspan and Bernanke, intentionally tore down the laws that had kept the system safe for 50 years!
As just one example of this wanton, intentional and reckless behavior Greenspan intentionally violated the law by allowing the Citibank and Travelers to merge, then lobbied to retroactively make the merger legal through repeal of Glass-Steagall. He, Bernanke, you and the rest of the clowns who did these things should all be rotting in federal "pound-you-in-the-ass" prison right here and now, because you are all personally and severably responsible for what happened.
A large shadow banking system had developed without meaningful regulation, using trillions of dollars in short-term debt to fund inherently risky financial activity. The derivatives markets grew to more than $600 trillion, with little transparency or oversight. Household debt rose to an alarming 130% of income, with a huge portion of those loans originated with little to no supervision and poor consumer protections.
And how did that happen? How does one create credit against nothing without committing fraud Turbo? Oh that's simple -- you lobby the government to make acts that are identical in form and function to counterfeiting the currency legal.
That's what they did. That's what you oversaw. And that's what you, and your predcessors and contemporaries, refused to stop.
You're a mendacious slug Geithner. You're like the arsonist who burns down a building and then tells the county commission at a later date "but your codes didn't require a sprinkler system!" while ignoring the fact that you spread gasoline all over the damn floor and then invited the closest cigarette smoker to toss his butts through the open door!
Some day perhaps someone in the mainstream media will call you out on this crap and hold you, and the rest of the government and quasi-government "regulatory apparatus" accountable for your sins.
Until then we'll be doing it here in the blogosphere.
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