The credit default swaps crisis is 40 or so times bigger than the real estate meltdown over subprime derivatives. The top 25 banks in the United States are loaded down with $13 trillion in credit default swaps and the deal is coming unraveled. If we accept the highly dubious assumption that the debt from the financial meltdown needs to be repaid by us, were looking at $43,000 a citizen right now. And we’re just starting.It didn’t get that way by accident. There was special legislation that enabled the current crisis.
The Money Party at Work
Huge majorities in both houses of Congress voted for legislation to allow the biggest bank heist of all time. But this time, it was the banks pulling the heist.
Our financial system looks ruined beyond repair. The credit default swaps crisis is 40 or so times bigger than the real estate meltdown over subprime derivatives. The top 25 banks in the United States are loaded down with $13 trillion in credit default swaps and the deal is coming unraveled. If we accept the highly dubious assumption that the debt from the financial meltdown needs to be repaid by us, were looking at $43,000 a citizen right now. And we’re just starting.
It didn’t get that way by accident. There was special legislation that enabled the current crisis.
This was classic Money Party strategy and tactics.
The strategic goal was to turn Wall Street into a big casino for the “in crowd” of major investors, funds, and institutions. No rules and no regulations: “let the market take care of it” was the philosophy.
The tactics were easy. First you set up a scholarly group called the Law and Economics movement to give your scheme legitimacy. Then you give money and other favors to members of Congress.
At the right moment, you call in your congressional markers to let the banks start doing what they did to spark the Great Depression. Walk into the Wall Street casino loaded with cash and spend like they’re on coke. Your corny academic group has a couple of judges who decide a case that gives legal grace to the scheme. The casino is legit says the court. You then go for the whole nine yards by bringing back the long outlawed derivatives, subprimes, credit default swaps, etc.
The corporate media either ignores your “long con” altogether or covers it on their back pages.
Done deal! It’s the perfect storm to create economic chaos allowing the most massive transfer of wealth since the Visigoths sacked Rome in 410 CE. It’s all about socialism for the rich and survival of the fittest for the rest of us.
But Congress and the Treasury Department will preserve the financial elite in perpetuity. Why? To begin with, they’d have to admit that they created the problem in the first place with their enabling legislation. Congress would also have to admit to absolutely zero oversight on this matter despite warnings.
Legislative, Judicial and Executive Branches — Acting in Unison Deliver the Goods
Three distinct events enabled the current economic chaos. The baseline requirement for the era of greed was satisfied in 1999 when Congress repealed key provisions of the Glass-Steagall act. That law was established during the first Great Depression. It tightly restricted the opportunities for reckless speculation by banks. They were barred from selling stocks and other speculative schemes. Title 1 of the Financial Services Modernization Act, 1999 says it all:
Facilitating affiliation among banks, securities firms and insurance companies
Commercial banks, brokerage firms, hedge funds, institutional investors, pension funds and insurance companies can freely invest in each others businesses as well as fully integrate their financial operations.
This was a bipartisan effort with the Senate version passing 90 to 8 and the House 362 to 57.
The once scorned derivatives had been the Holy Grail for “free” market radicals on Wall Street and elsewhere for years. They said that the restrictions on these products were unnecessary and stifled the free market (”free” for them). Even before Congress acted definitively in December 2000, the U.S. Court of Appeals for the 7th Circuit struck down the ability of the Securities and Exchange Commission (SEC) to rein in ruinous high risk financial schemes on Sept. 1, 1999.
Reagan appointees Richard Posner, then chief judge, and current chief judge Richard Easterbrook were key movers. They’re also heavily involved with the Law and Economics movement, a right wing, free market movement that opposes almost all regulation in Pavlovian fashion.
Credit default swaps and other derivatives had been illegal for decades. In 1981, specific rules were set up to tighten restrictions against these schemes. But all that changed on Dec. 21, 2000 when the lame duck Congress passed the “Commodity Futures Modernization Act of 2000′” making these products legal. The legislation also barred the gathering of information that would serve as early warning on the legalized gambling on credit worthiness. Regulators were helpless in looking out for the public. Here’s the title of theHouse version of the bill:
To reauthorize and amend the Commodity Exchange Act to promote legal certainty, enhance competition, and reduce systemic risk in markets for futures and over-the counter derivatives, and for other purposes.
This is the vital wording modifying the Securities Act of 1933 that undid the economy:
“Section 2A–Swap Agreements The Commission is prohibited from — promulgating, interpreting, or enforcing rules; or issuing orders of general applicability.” The Senate and House bills were combined in to H.R. 4577, anappropriations bill for the Departments of Labor, Health and Human Services, and Education signed by President Clinton. Someone had a perverse sense of humor.
In other words, Congress legalized what had been illegal for decades and it secured the 7th Circuit’s opening gambit of handcuffing the SEC in dealing with the new high risk financial products. Congress fixed the game so that the short staffed regulatory agencies couldn’t monitor the market even if they wanted that function.
Good luck trying to find the legislative debate on this momentous change. There was none. The enabling legislation for this disaster was passed by an overwhelming majority in the House of Representatives and by unanimous consent in the Senate.
It’s important to have a “Roll Call” for the sponsors of the “Commodity Futures Modernization Act of 2000.” They made it happen.
Expect More of the Same
The bailout and other efforts to save Wall Street firms and the large banks are essentially an effort to deal with the problems of derivatives and other market failures. Wall Street got the court decisions and legislation it wanted and then promptly proceeded to create today’s disaster.
They sold these risky products and now they have to pay off. But they don’t have the money even with the current bailouts. Where will they get it? The federal government was the only sucker left to tap and that bet came through to the tune of $4.6 trillion. There’s $4.6 trillion awaiting further requests from the Federal Reserve
The culprits are still in place at failing financial institutions.
Don’t hold your breath waiting for political action to fix the situation. Both parties were in on this mess. Huge majorities in both houses of Congress voted for key legislation to allow the biggest bank heist of all time. But his time, it was the banks pulling the heist.
That’s why the bankers have to stay in place. To remove them, would be telling, as William K. Black said recently:
But the other element of your question is we don’t want to change the bankers, because if we do, if we put honest people in, who didn’t cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.
But it was all legal, wasn’t it?