| December
7, 2007
Wall
Street's Bad Boys and Their Washington Enablers
Banksters
Gone Wild
By PAM
MARTENS
Imagine
you moved in next door to a mischievous child. Over the years, you
watched the parents scold ever so lightly as the deviant behavior
grew from stealing loose change to petty larceny to bank robbery.
You knew for sure the child would eventually get caught and end
up in prison; but you didn't count on one thing: the parents used
their political clout with each ratcheting up of the crimes to avoid
prosecution, effectively turning the overseers of the public interest
into criminal enablers. As the enablers "fixed" the outcome
of each crime, they also sealed the records from public view and
historical perspective.
That
scenario typifies how criminal behavior has exploded on Wall Street
and why President Bush, Congress and the regulators are stumbling
around in the dark looking for cures for a financial crisis that
they can neither understand nor contain: they're enablers in denial.
Nothing more dramatically illustrates the criminal contagion than
the fact that for the second time in 13 years, Orange County, California
has found Wall Street toxic sludge threatening its public funds.
Here's
what happened the first time around: a Merrill Lynch stockbroker,
Michael
Stamenson, sold billions of dollars of complex securities to Orange
County, which ran a pooled investment fund for close to 200 cities
and school districts in the county. The county lost $1.7 billion
when the highly leveraged fund imploded, the county filed bankruptcy,
resulting in serious job losses and cutbacks in social services
to the poor. In all, Merrill made approximately $100 million in
fees with Stamenson collecting $4.3 million in just the two-year
period of '93 and '94.
Stamenson
was immortalized in evidence produced in court as the star of a
Merrill Lynch training tape for rookie brokers where he maps out
the road to success on Wall Street: '' the tenacity of a rattlesnake,
the heart of a black widow spider and the hide of an alligator.''
As
the evidence against Stamenson and higher ups at Merrill played
out in court, Merrill Lynch continued to pay annual compensation
of $750,000 to Stamenson and eventually settled the case for $400
million and sealed the documents. It also paid $30 million to the
county to settle and abruptly end a grand jury investigation, leading
to loud cries of foul play. Once again, the documents and testimony
were sealed from public view. This is what consistently happens
on settlement when a customer or employee attempts to sue a Wall
Street firm and is ushered instead into a Wall Street Star Chamber
called mandatory arbitration.
Today,
Orange County is hardly an isolated case of banksters gone wild.
The same type of sludge sits in public funds for schools, cities
and pensions from coast to coast.
A
Local Government Investment Pool in Florida recently saw a run on
its assets after it was revealed that $1.5 billion of defaulted
and downgraded debt, courtesy of Wall Street, was part of this supposedly
safe money market fund for hundreds of towns and school districts
in Florida.
Even
four small Norwegian towns near the Artic Circle have lost $64 million
from complex securities created by Citigroup and sold to them by
a local broker, Terra Securities. Additionally, billions of dollars
of the sludge sit stealthily in Mom and Pop money market funds at
some of the largest and most prestigious financial institutions
in the U.S.
And
if the situation were not dangerous enough, the U.S. Treasury Secretary,
Hank Paulson, has misdiagnosed the problem (wittingly or unwittingly).
Mr. Paulson would have you believe that if he can help enough people
avoid foreclosure on their homes, by changing their teaser mortgage
rate to a fixed rate on their subprime loan, he will have taken
a big step forward in alleviating the financial crisis. While any
constructive step to keep people in their homes is to be applauded,
what is blowing up all over the globe is not just subprime mortgages.
The real problem arises from Structured Investment Vehicles (SIVs)
and Special Purpose Entities (SPEs) which, just like Enron, hide
enormous amounts of debt from public scrutiny, making companies
appear more profitable and solvent than they really are.
Mainstream
media has also been implanting the idea that it's all about homeowners
and mortgage loans instead of banksters hiding bad debt. On December
5, 2007, the Associated Press, which is syndicated to newspapers
across the country, carried this inaccurate statement: "SIVs
are investment funds created by banks like Citigroup Inc. or HSBC
Holdings PLC and sold to investors. The funds borrow short-term
money and use it to buy mortgage debt, profiting off the
difference between what they collect on the mortgage debt
and what they pay to borrow." [Italicized emphasis added.]
Mortgage
debt? According to Citigroup, the largest purveyor of the black
hole SIVs with over $83 billion in seven SIVs as of September 30,
2007, 58% of its SIV holdings is financial institution debt, with
32% mortgage related, 5% student loans, 4% credit cards and 1% other.
It goes on to say that just $70 million of this $83 billion has
indirect exposure to U.S. subprime assets. On November 30, 2007,
Moody's put on review for possible downgrade (as well as actual
downgrades on some securities) debt totaling $64.9 billion that
was issued by six Citigroup SIVs. [1]
In
other words, financial institution debt, together with imploding
mortgages, off balance sheet mountains of debt and the worst transparency
we've had since 1929, are the full set of problems.
Why
would positioning this crisis by the President or U.S. Treasury
Secretary as a subprime mortgage problem be preferable to laying
out the full scope of the crisis to the American people?
To
state the truth would be admitting that the Bush administration
and its crony capitalists failed to properly audit the largest banks
in America; failed to pay attention as they stashed hundreds of
billions of dollars off their balance sheets in a replay of Enronomics;
failed to prosecute the banksters when they parked this toxic waste
in Mom and Pop money market funds across the country; and failed
to jail the banksters before they burned down the bank and became
a global threat to financial stability.
Now,
these very same banks don't know what's hidden off each others balance
sheets, how much their largest industrial customers have hidden
off balance sheet, courtesy of Citigroup's propensity to set up
SPEs for others; if the bank that is a counterparty to its credit-default
swaps is going to be in business when those insurance policies are
most needed. Therefore, they say, we'll just stop doing business
with each other since we're all guilty by association with the same
corrupt enablers in Washington.
And
while the Securities and Exchange Commission (SEC), Federal Reserve
Board (FRB), and Congress bear much blame for the financial crisis,
the Office of the Controller of the Currency (OCC) stands out as
the quintessential enabler of corruption on Wall Street.
Consider
the July 25, 2007 testimony of the Consumer Federation of America
on behalf of itself and other leading consumer groups to the Committee
on Financial Services in the U.S. House of Representatives:
Any
discussion about the quality of federal financial services regulation
must begin by mentioning the “elephant in the living room....”
The Supreme Court’s recent ruling in Watters vs. Wachovia
Bank, N.A., upheld a regulation by the Department of Treasury’s
Office of the Comptroller of the Currency (OCC) that permits operating
subsidiaries of national banks to violate state laws with impunity.
The court ruled that the bank’s operating subsidiary is
subject to OCC superintendence – even if there effectively
is none – and not the licensing, reporting and visitorial
regimes of the states in which the subsidiary operates...The OCC
has even sought to prevent state attorneys general and regulators
from enforcing state laws that it concedes are not preempted.
The recent court ruling encourages national banks and their subsidiaries
to ignore even the most reasonable of state consumer laws.
To
underscore that the overarching problem here is an interbank crisis
of confidence over black holes of corruption and crony regulation,
rather than the narrowly defined "subprime mortgage mess,"
let's look at the time line of what happened. Beginning this past
July, the credit-default swaps of a British bank, Northern Rock,
begin to tick higher; by August, they made an additional sharp move
upward, signaling a solvency problem. In September, there's a run
on the bank (the first in Britain since 1866). The bank collapses
and the Bank of England has to use taxpayer money to bail it out
to the tune of approximately 29 billion pounds or close to $60 billion.
What
does that have to do with a U.S. financial crisis? As it turns out,
this small bank of 6,000 employees has set up Channel Island-based
debt structures called Granite, stuffed them with $104 billion of
U.K. residential mortgages (which are now showing an increasing
propensity to default). Adding further intrigue and local outrage,
the offshore trust named a charity for Down's Syndrome children
as part of its funding subterfuge, without the permission or knowledge
of the charity. This has sparked a full scale investigation by British
authorities.
Terrifying
banks on this side of the Atlantic is the knowledge that (1) two
of our biggest Wall Street firms, Citigroup and Merrill Lynch, underwrote
tens of billions of that Channel Island paper, Granite Master Issuer,
and sold it here in the U.S.; (2) Citibank, the commercial banking
unit of Citigroup, is the principal paying agent; (3) big chunks
of that paper, as of SEC filings on September 30, 2007, is sitting
in money markets and fixed income mutual funds in the U.S., raising
some serious liability issues for Citigroup and Merrill; and (4)
30 percent of the mortgages have a loan to value (LTV) ratio of
90 to 100 percent while over 50 percent have a LTV of 80 to 100
percent. [2]
It
smells Enronesque and Parmalatesque (the bankrupted Italian dairy
firm) to a wide swath of the legal and banking community and given
that Citigroup will finally face public trials in both of these
earlier swindles next year, the timing could not be less propitious
for confidence building.
The
British Parliament is grilling all the players and regulators for
answers to the financial crisis in public hearings while here in
the U.S. we prefer to fashion remedies for a financial crisis we've
yet to investigate or understand.
To
recap: there has been the first bank run in 140 years in Britain.
We've had the first run on a public money market fund here in Florida.
The U.S. debt markets have been barely functioning for four months.
Our largest banks don't trust each other.
Perhaps one of the presidential candidates could leave the campaign
trail long enough to prove their leadership skills by calling for
emergency hearings in Congress, the venue in which we the people
pay them to do the people's work.
Pam Martens worked on Wall Street for 21 years; she has no securities
position, long or short, in any company mentioned in this article.
She writes on public interest issues from New Hampshire.
[1] Citigroup's
3rd Quarter 10Q filing with the SEC discussing its SIV
[2] Granite
Master Issuer securitization filing with the SEC:
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