Archive for June 17th, 2011
Michael Hirsh’s CAPITAL OFFENSE: HOW WASHINGTON’S WISE MEN TURNED AMERICA’S FUTURE OVER TO WALL STREET is a wry primer about Wall Street, the DC Beltway and its insiders, and money. The title is a hat tip to Hirsh’s style, as the term “capital offense” is a legal term used when a crime is punishable by the death penalty, and several of the Wall Street firms either went out of business or had to combine with other, larger banks in order to survive. But it has a secondary meaning, in that large “offenses” were made with the capital (money, wealth) of the United States by the Wall Street barons; Hirsh’s reporting is thus far the most comprehensive look at how, and why, the 2007-8 financial meltdown finally happened.
Hirsh starts off with the one person, Brooksley Born, who figured out something was about to go badly wrong in 1998. Born was the chairperson of the Commodity Futures Trading Commission, and she was concerned about derivatives trading — derivatives being the short-hand term for what Hirsh calls on page 2:
Derivatives were market contracts that bet on the upward or downward movement of some underlying asset that they “derived” their value from, like interest rates or mortgages. Using derivatives, global companies could protect their overseas profits from market gyrations, and investors from all over the world could place bets on some country’s currency, or get a piece of an entire state’s mortgage payment stream.”
Now, why did the Wall Street folks want to do this? Because they were always looking for new ways to “repackage” financial assets and sell them to new customers; derivatives were merely the latest “tool” in their arsenal. Born knew this was a problem because it was a completely unregulated market that amounted to multiple trillions of dollars in trading that was completely “off the books.” (Yes, Hirsh said “trillions.” It gets worse.) And she said this was wrong, in public, at Congressional hearings — but was ignored, belittled, and basically trampled upon by such luminaries as then-Federal Reserve Chairman Alan Greenspan and Treasury head Robert Rubin. Back in 1998, Greenspan and Rubin had luminous reputations; according to Hirsh, these two were seen as perhaps the “most effective Fed-Treasury team” ever, and they weren’t about to listen to a pipsqueak woman, no matter how much sense she made. Born was a lawyer, not an economist, and these two well-known financial icons believed they knew best.
But were, of course, quite wrong.
Going a bit further back, things started to go downhill in 1981 during Ronald Reagan’s first term as President. Reagan believed in degulation of financial matters, and started undoing many regulations that had been instituted in the 1930s after the Great Depression. This was done openly, but no one really paid attention; even after the great Savings and Loan scandal of the late 1980s, where 747 of 3234 S & Ls failed, no one seemed to realize that there wasn’t nearly enough oversight going on in Washington, DC.
And it got worse during George H. W. Bush’s administration, as he believed in the “markets policing themselves;” then, during the two Bill Clinton terms, Clinton actually employed a number of long-term Wall Street icons, including Robert Rubin, while keeping Greenspan on as chairman of the Federal Reserve . . . and this all seemed to work, as Clinton actually ended his two terms with a budgetary surplus.
However, then we came up to George W. Bush’s administration, and things rapidly worsened. This was partly because Bush the younger believed just as strongly as his father in market deregulation (as Bush had an MBA from Harvard’s Business School), and partly because some of what Born had seen years earlier came to pass — all of these unregulated markets started to cause problems, with fissures occurring in even the strongest-seeming banks world-wide.
So, by the time we got to 2007, where the markets started to fail, and into 2008, when the Wall Street firms, like Lehman Brothers (then the fourth-largest monetary institution in the United States), started to fail (with Lehman closing altogether), and big banks world-wide had to admit to enormous problems, the United States was stuck. Folks like Ben Bernanke, now head of the Federal Reserve, and Hank Paulson, head of the Treasury, had to step in or perhaps the whole economy would’ve collapsed — things were just that dire, and Hirsh says so at great length, starting with the housing crisis (the sub-prime mortgages starting to fail back in late ’06 and into ’07), then into August 9, 2007’s big problem in France.
Now, why was the last such a huge issue? Because as Hirsh points out on page 249, it was the first time since the 1930s when a big bank overseas (in this case, BNP Paribas) had said flat-out that it was not going to allow its customers to withdraw from certain funds at all, because it “could not determine the market for their holdings” when these holdings were from the United States. BNP Paribas’s statement (as quoted by Hirsh on p. 249) said:
The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating.
Which caused a major problem; to wit, markets were now, effectively, frozen. Because if you couldn’t figure out what assets really were held, and where, how could you possibly continue basing a country’s economy on those assets?
Following that, the European Central Bank said in what Hirsh calls an “unusual statement” that they were making money available for lending, which was a tacit indication that no one could trust anyone else’s holdings.
And then, the bailouts started, along with the mergers, and then the fall-out, as middle-class customers all over the world lost major money. (That middle-class people had been urged, at least in the United States, to view their investments as “safe,” almost as safe as if the money had been left in the bank to gather a small amount of interest, was the major difference between the 1929 Stock Market crash and the big problems of 2007 and 2008.)
And then, of course, came the finger-pointing . . . but out of all of that, we gained this scholarly, yet readable, book from Hirsh, so at least that’s something.
As far as ratings go, this one’s an A-plus, must-read book about the financial crisis — but be warned. Some who seem at first to be heroes, like Rubin, turn out to be unwitting villains, while some who are definitely heroines from the start, like Born, never get their due (or, rather, are only truly valued by Hirsh rather than the DC beltway players who helped set up this mess in the first place). And you may be just like me, wondering why these well-paid folks didn’t see the crisis coming from a common sense standpoint — much less wondering why when someone finally did point it out (like Born), it was ignored.**
— reviewed by Barb
** Note: If you feel like throwing something after reading about all the deregulation that led to this mess — or if you feel even more like throwing something after you realize how well Born understood the whole derivatives market problem, yet was completely marginalized and ignored rather than listened to at a time her warning should’ve done some good — feel free to break whatever you need. I will completely understand.