We grew up believing that America is a champion of laissez faire economics, a land of opportunity where a free and fair market determines the winners. Unfortunately, two major factors have prevented this from being reality; 1. Deregulation throughout the last several decades that has created a lopsided market and the widest wealth gap in the developed world. 2. Political corruption which has seen our elected leaders favor the interests of their donors and spend much of their energy upholding the legal advantage for corporate interests. (If you can call it outright corruption, more so opportunism. This opens up an interesting conversation about ethics which I may dive into at some point). This series of posts exploring the insider connections and intimate ties that run our government is going to start with the 2008 crisis and explain a little bit of our deregulatory background, take you through the inside connections between Congress and Wall Street, finally ending with a discussion of quantitative easing and the legacy of our Federal Reserve.
The government would rather spend billions funding a billionaire space race or bailing out Wall Street instead of investing in the working class or building a society that could truly fit the American dream. They know the system is rigged, yet money talks; the security of millions in campaign donations and personal luxuries are more appealing to our Congressmen than upholding an economy that sees the average person able to generate wealth and live successfully.
Many of the deregulatory policies that have allowed a perpetuation of our savage capitalist structure has come at the behest of neoliberal dominated economics. Deregulation allowed the further spread of this style of American individualism, and tracking government action in the late 90’s and into the 2000’s reveals the intimacy with which our government has enabled this. Alan Greenspan was a neoliberal economist that helped Reagan and fellow free market champion Milton Friedman usher in the era of great deregulation and “small government.” He was then appointed head of the Federal Reserve again by Bill Clinton, and despite pleas for him to take preventative action during the dot com bubble when there was an obvious crash coming, he wouldn’t.
This was due to his determinant belief that markets would figure everything out given complete freedom. With the image of a villain twiddling their fingers as the economy collapses around them aside, Greenspan’s most important influence was in repealing the Glass-Steagall Act. The act had been implemented by FDR following The Great Depression in hopes to prevent another disaster by limiting banks’ ability to operate in a for profit manner. By cutting their leashes in repealing G-S, Clinton and Greenspan solidified the reign of neoliberalism and opened a slippery slope for banks to throw their money into risky investments.
Following suffrage for African Americans and women, along with the civil rights acts that were sweeping across America after the 1960’s, the upper class saw their grip on our country faltering as they couldn’t legally oppress lower classes into generating their wealth anymore. These folks that were in power and shaping the outcome of our country for their own benefit realized that they would need other means of ensuring their status, seeing increased opportunities coming to many communities as the beginning of the end for their outlandish little kingdoms. The solution for these people (overwhelmingly white men) was to extend the concepts of white supremacism that had applied to the physical world into the financial sphere.
The rich white folks who ran our government and the biggest financial institutions were able to find a way to take advantage of the increased wealth flowing into Americans’ hands without crafting outwardly restrictive laws; the manipulation of the market to ensure money flowed out of POC and poor hands straight into theirs. This solution presented itself in the deregulation that has been previously discussed, specifically the commoditization of financial securities that had previously been illegal. Clinton’s administration passed the Commodity Futures Modernization Act after heavy financial industry lobbying, with particular influence from Larry Summers; another neoliberal economist who was Treasury Secretary at the end of the Clinton admin.
Wall Street began quickly betting on derivatives that were tied in with assets for millions of ordinary people, now able to save up for and afford a home or good education for potentially the first time. Banks bundled together securities, loans, and commodities in massive packages that were traded on the futures index; an exchange that bets on price movements by certain dates and thus creates ‘speculative’ money out of thin air. The most lucrative of these bundles were very complex collateral structures called a CDO (collateralized debt obligation) that are constructed of issued loans that people owe debt on, such as a mortgage, student loans, auto payments, and so forth.
The CDOs were grouped by likelihood of default in the loans and assets underlying them, with that risk reflected in prime ratings (AAA-BBB) and subprime ratings (B and below) that were based on the credit scores of loanees. Therefore an AAA loan would have better interest rates for the borrowers, as payment was close to a guarantee in the vein of something like a government issued bond. CDOs made a lot of money because in theory, highly rated loans are one of the safest bets. Financial entities felt secure dumping billions into futures bets on these AAA rated, “safe” CDOs, composed of loans that are supposed to have a certainty of payment due to the underlying asset’s credit scores.
Derivatives also have insurance that can be taken out against them in the event of a crash called a CDS (credit default swap). The fun part about derivatives like a CDO or CDS is that they let as many investors buy in on speculation who want to. In a very condensed explanation, imagine a CDS insurance policy that covered a house; 10, 100 or even 10,000 people could purchase a CDS for that property. If that house burns down then the issuer of the CDS would owe however many people bought in the insurance payment. Wall Street came to the realization that they could maximize their profits by taking subprime CDOs and falsely labelling them as prime. They would get increased payments from the underlying interest on loans in the CDO, since those loans went to CCC, C, and D rated creditors who wouldn’t qualify for AAA rates. In addition to this revenue, banks now had more speculative lures with hundreds of manufactured highly rated loans, suckering investors into placing bets on what they thought were guarantees. Wall Street had colluded with ratings agencies such as Moody’s and Fitch, paying out billions to these companies to help hide shit securities.
Due to the ingrained racism and white supremacy that shaped every institution of our country, banks and other lenders saw African Americans specifically as bad investments, and thought they were likely to default on newly acquired properties and commodities. Thus they would offer them loans with worse interest rates but present them in a predatory manner that this would be the best deal they’d get. Starting in the late 90’s financial institutions began a process of separating black loanees into subprime CDO categories, lumping together the loans that “lesser” consumers had taken out into one big pile of mush. POC were placed into these subprime categories along with actual bad creditors that had high chances of defaulting, since the ingrained bias driving banks was that POC were going to default regardless of their credit score.
We know how banks then started to take the subprime CDOs and passed them off as a more secure investment through rating agencies, tricking investors into spending their life savings on this ponzi scheme. This process in the 90’s served as a sort of test run for financial institutions, as they realized that they could package up a C grade CDO derivative from a bunch of African American investors and pass it off as AAA to make massive profit margins as the assets grew in value. This profit came in part because a majority of the loanees in the subprime groupings paid, even if they had to sacrifice other necessities to keep the roofs over their heads. These were hard working POC families who wanted freedom from their historical oppression but due to their loan being considered a ‘C’ level grouping, the interest rates that they signed into were way higher than their white counterparts who applied for the same types of loans.
Banks targeted populations that may not have had high financial literacy, and then pushed predatory loans on them that promised more money at a higher interest rate. They would do this while knowingly fucking people over with higher interest rates because their credit scores would have been good enough to qualify for a prime loan, but because of ingrained bias elite interests thought black communities deserved it because they weren’t educated on the intricacies loans. Subprime creditors were roped into loans that forced $17,000 – $43,000 more in interest payments per $100,000 borrowed than a conventional, “prime” loan would. Within the first four years of a loan, subprime borrowers (remember mostly POC to begin with) were charged an average of $5,222 more in interest.
Black homeowners who had saved and scraped together what little money they had for years in order to put a down payment on a house were treated as risky buyers due to racial bias, and even though a majority had good credit that would qualify for a better loan, they were extorted into subprime borrowing with higher interest rates from predatory institutions trying to maximize profit off of disenfranchised populations. Then, due to banks passing these loans off as better than the terms actually were, these families appeared to all other institutions as getting the better interest rates they were owed based on their real credit score. Overcharging consumers with these loans not only allowed banks to put more money in their pockets, subprime derivatives with AAA labels also made loan packages seem like a good investment to other big institutions. After seeing the results from these subprime experiments play out, Wall Street realized that the predatory loans targeting POC families could be expanded to include even more unsuspecting Americans, squeezing higher interest rates out of them too.
This continued into the 2000’s, and the Commodity Futures Modernization Act was passed at the turn of the century which completely deregulated the derivatives market so that Wall Street could turn their predatory test run into reality for the whole American population. By 2006 AIG and other massive financial entities were up to their eyebrows in CDO investments they thought would be guaranteed money. Under Bush, financial insiders had continued to be appointed to office. Among the top figures were Treasury Secretary Henry Paulson (an ex CEO of Goldman and Sachs) and Ben Bernake, who had intimate connections with Merrill Lynch. By the time defaults began happening in the CDOs on the supposedly safe futures market in 2007, companies like AIG and the biggest banks had doled out unfathomable amounts of money in bonuses to their top executives. They knew that if and when death came knocking, someone else would be footing the bill due to the sheer enormity of the market.
Even with this shift to take advantage of the broader market between 2000 and 2006 financial institutions still heavily targeted POC and other marginalized communities. The Wall Street Journal found that 61% or more of the population targeted by predatory subprime loans in 2006 had credit that was good enough to qualify them for a conventional one with better terms. It doesn’t come as a coincidence then that 64% of the foreclosures from 2007-2008 were directly caused by subprime mortgages that backed families into financial corners they couldn’t afford, and 94% of those subprime loans were made out of regulation in accordance with the Community Reinvestment Act (CRA). This act was designed to encourage institutional lenders to accept loanees from marginalized communities, creating guidelines to ensure that those renters are given loans that align with their financial situation and won’t lead to default on the institution.
Wall Street knew they could make more by offering a subprime rate, so they continued to sociopathically saddle families with vastly disproportionate interest rates. This created financial hell for individuals in the real world but led to billions of dollars in speculative profits for Wall Street, so it was justifiable in the billionaires’ book. We saw warning signs of the Great Recession in 2006 when foreclosures among minority and very poor homeowners began to rise significantly, but due to ingrained white supremacy it was just assumed that those populations were going to default anyway as they were lesser and incapable.
The problem was that the domino effect came for the more secure borrowers next, as many white Americans and even the government didn’t realize the extent to which Wall Street had lumped these shit sandwiches together. By the time that more middle class white creditors had started to default in 2007 and the country woke up to the reality of subprime CDO’s, the snowball was too big to stop and many people were trapped while seeing their mortgage rates skyrocket. It is estimated that over 2 million families alone lost their homes during the Great Recession. While 56% of those families were white, Latino and African American populations were still most disproportionately affected by the disaster. Per 10,000 loans doled out by Wall Street institutions, 790 African Americans and 769 Latino Americans lost their homes; nearly double the 452 white families that foreclosed per 10,000. In total over 10 million foreclosures were submitted, with 21.4% of Latino, 21.6% of African American, 16.5% of indigenous, and 14.8% of white homeowners at risk of losing their home from 2006-2010. It is estimated that from the end of the initial crisis until 2012, $194 billion was taken out of black communities, and $177 billion from latinos, due to exorbitant spillover costs that foreclosures necessitate.
When Wall Street saw the impending crisis they went into panic mode, scrambling to throw other people over the cliff first to cushion their own fall. Firms like Goldman Sachs bought huge amounts of CDS packages from AIG against their own CDOs when they saw the meltdown coming. They also began selling CDOs that were designed to net them increased profits the more money that investors in the derivatives lost. Paulson was called in to advise major banks in a closed door meeting where it was decided that Lehman Brothers would declare bankruptcy before any markets opened, leaving their foreign employees and many regular people who had invested with absolutely nothing when they woke up.
Bernake and Paulson also ensured that the CDS packages firms like Goldman had bought were paid to the full price of a dollar, despite theoretically being able to create a lower exchange rate. This inflicted maximum pain to the firms that had sold CDSs such as AIG, and thus American taxpayers, as we bailed them out in an over $700 billion package that was drawn up overnight. Money flowed from our pockets, to AIG, then straight to the coffers of Goldman and other Wall Street firms. Paulson and his buddies got to escape with billions of dollars of American’s hard earned money. It wasn’t just them either as bankers like Angelo Mozillo made over $140 million by dumping Countrywide’s stock, his own company, throughout 2007 – 2008. The head of Merrill Lynch was allowed to resign before the crash and collected $161 million in severance. His company was then bailed out by taxpayers, and billions more in bonuses were approved by the board to be doled out to the remaining top executives. Wall Street has no regulation, and can throw cash around like fucking candy.
Following the Great Recession, banks were consolidated even more as Bank of America bought Lynch, JP Morgan took over Bear Stearns, and the Financial Services Roundtable lobby gained paramount influence. Not only did the wealthy rebound from the crisis, they flourished afterwards. As the average American struggled to make back the money they lost during the recession, rich interests saw their net worth rise significantly off the backs of lower class debt and struggle; specifically black and other POC communities. The wealthy have been able to consolidate their power and material possessions to levels unheard of in this country since 2008, disenfranchising the rest of America to have no control over their financial situation. They sit on golden thrones above us while we are left to fight for the leftover resources in a free for all.
Money flowed from our pockets, to AIG, then straight to the coffers of Goldman and other Wall Street firms. Paulson and his buddies got to escape with billions of dollars of American’s hard earned money. It wasn’t just them either as bankers like Angelo Mozillo made over $140 million by dumping Countrywide’s stock, his own company, throughout 2007 – 2008. The head of Merrill Lynch was allowed to resign before the crash and collected $161 million in severance. His company was then bailed out by taxpayers, and billions more in bonuses were approved by the board to be doled out to the remaining top executives. Wall Street has no regulation, and can throw cash around like fucking candy. Following the Great Recession, banks were consolidated even more as Bank of America bought Lynch, JP Morgan took over Bear Stearns, and the Financial Services Roundtable lobby gained paramount influence. There are roughly 5 lobbyists per member of Congress that represent Wall Street, and financial institutions spend billions every year lobbying for lower taxes, looser oversight, or generally asking politicians and regulators ‘nicely’ to turn the other cheek as they slide themselves huge bonuses and exploit their laborers. Deregulation and willful oversight on the part of the government have cost American taxpayers trillions, yet the machine that drives infinite growth speculation for the 1% keeps churning.
The Fed and its collusion with Wall Street, along with insider political connections, have perhaps been the most responsible forces in the last decade or so for the economic inequality that America is continuously battling with. In part II of this series I will discuss the intimate ties to business that our Congressmen and women have. This corruption spans party lines, as politicians left and right alike will perk up like a dog at the sound of money deposited into their accounts. I would also like to again highlight the link that all of the topics I discuss have. White supremacy, zero sum thought, and the ethos of rugged individualism all contributed to the Great Recession. As with many of the issues that face the American economy and our society in general, ‘exceptionalism’ and lack of care for anything besides personal gain have driven the country into multiple recessions. More worrisome, there were absolutely no meaningful changes put in place to protect us after 2008 and we are headed rapidly towards another speculative driven crash. During the pandemic commercial real estate began defaulting at skyrocketing rates. The same type of closures that we’re seeing today happened in 2007, and Wall Street was able to kick the can for about a year. This time though, the market is even more of a bubble as the stock market hits its highest prices ever. There’s a reason that billionaires are starting to get divorced and memes like GME to the moon are actually making people money. After this impending crash my only hope is that we can collectively decide to protect laborers and the working class instead of forcing them to again pay billions for satisfying these Wall Street pigs’ greed.
9 thoughts on “A Tale of Economic Corruption Part I – Wall Street and 2008’s Great Inside Job”
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Reblogged this on kommonsentsjane and commented:
Reblogged on kommonsentsjane/blogkommonsents.
To put “lipstick on a pig” is a rhetorical expression, used to convey the message that making superficial or cosmetic changes is a futile attempt to disguise the true nature of a product or person .
You can put all the lipstick on these pigs – but, they are still pigs.
For your information.
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