Money for Nothing, or, The Free Market ... by gimleteye

The US economy is in the midst of a "time release depression". A Phd in economics isn't necessary to understand that the federal government has the capacity-- and willingness-- to paper the value of our currency by running printing presses 24/7-- allowing for the semblance of order like a mannequin in a store window. It all looks real and something that we'd like to buy. Instead of rampant unemployment characteristic of the Great Depression, we have 10 percent plus the long-term unemployed and chronic under-employed.

Here is what the Bureau of Labor Statistics has to say about that: "About 2.5 million persons were marginally attached to the labor force in February, an increase of 476,000 from a year earlier... These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Among the marginally attached, there were 1.2 million discouraged workers in February, up by 473,000 from a year earlier. ... Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.3 million persons marginally attached to the labor force had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities." (March 5, 2010)

The scope of devastation is hard to take in. For the New York Times, book reviewer Michiko Kakutani put it this way in a review of Michael Lewis', The Big Short: "The global financial crisis of 2008 which economists estimate could result in several trillion dollars of losses and which has already cost American taxpayers billions of dollars in government bailouts, was triggered not by war or recession but by a crazy-man-made money machine, built on flawed mathematical models that most financial executives did not really understand themselves... The insanity of this growing and highly leveraged trade in mortgage derivatives continued even as the quality of the underlying loans grew increasingly likely that the American housing bubble was going to pop. The clear and present danger posed by this deranged edifice built on the unstable foundation of subprime mortgages was not foreseen by the chief executives of America's premier banks." (March 15, 2010)

"Not foreseen" puts too neat a bow on it. Those chief executives may have seen over the horizon and decided the best course of action was to take as much for themselves as possible in compensation, bonuses and stock options. In the late 1990s, massive wealth was being created overnight from dot.com companies whose executives didn't even shave yet. Even when the dot.com boom busted, a whole new way to vast wealth had been paved for the top echelon of American CEO's and their board of directors based on speculation and financial engineering.

In "Money For Nothing: How the Failure of Corporate Boards is Ruining American Business and Costing Us Trillions", Gillespie and Zweig write: "Under any system, elites always will run business. Even the Soviet communists proved that. The question is, whom do they serve? In our free enterprise system, at a minimum we expect them to serve us, the shareholders, more than they serve our hired hand-- the CEO-- and certainly more than they serve themselves. But the system as it exists today, together with the incentives and reforms instituted with the intent of making corporate governance more responsible and effective have ended up being perverted to serve the self-interests of the elite at the expense of the greater good." (page 96)

Lewis Ranieri, a star Wall Street bond trader for Solomon Brothers in the late 1970's, was one of the first to understand the opportunities though I doubt he would have guessed his innovation in bond markets would trigger the greatest jeopardy to the national economy since the Great Depression. Ranieri invented the market for mortgaged based securities by exploiting the spread between debt issued by government housing agencies and US Treasuries and corporate debt. By early 1985, the market for these securities had burgeoned to $270 billion. A 2004 Business Week report wrote, “… Ranieri recognized that "mortgages are math." He hired PhDs who developed the "collateralized mortgage obligation," which turns pools of 30-year mortgages into collections of 2-, 5-, and 10-year bonds that could appeal to a wide range of investors."

In 1988, Ranieri bought Florida's Bank United, that became a major lender to real estate developers. His bank ownership enabled Ranieri to do for mortgage banking what Ford did for cars: vertically integrate derivative finance from Wall Street trading desks to the issuance of an original dollar of debt through a Florida mortgage owned by a homeowner looking for their slice of heaven in Florida.

Ranieri sold the bank in 2000, after tripling his investment in just a couple of years, to Washington Mutual. Little did Ranieri know that the hugely profitable formula he had created was about to be taken on a midnight joy ride fueled by historic low monetary policy championed by Alan Greenspan, then chair of the Federal Reserve. We know what happened next.

It took less than a decade for Washington Mutual to become the biggest bank failure in US history, brought down by its book of financial derivatives that had nevertheless already rained fees in the billions to lawyers, accountants, bond salesman, Wall Street executives, and the Engineering Cartel. But if you were to ask industry executives about the causes of the historic meltdown that took down Lehman Brothers, Bear Stearns and hundreds of banks around the country to date, the answer you would get would be along the lines of a blameless financial tsunami, a perfect storm, a 100 year hurricane.

It wasn't blameless. In late January 2003, HUD Secretary Mel Martinez -- soon to be a US Senator from Florida-- layed out The Ownership Society to the annual meeting of the National Association Homebuilders in Las Vegas: “We … must work in close partnership to dispel the myth that our nation is experiencing a "housing bubble”. Bubbles of course do burst, but the housing market is not in the same category of other weaker and less competitive sectors of the economy… this Administration is making it easier for people to purchase their own homes - a change that will help drive home development and sales. And, it will help more minorities become homeowners.”

One of the ways the Bush Ownership Society worked to the benefit of the top CEO's was inhibiting regulation of financial derivatives at the same time as throttling regulation that blocked the growth of subdivisions and sprawl in the fastest growing areas of the nation, like California, Texas, Nevada, and above all-- Florida-- where the president's brother, Jeb Bush, had made it a primary purpose to innovate ways to assist development and construction and infrastructure industries knock down regulatory barriers to faster growth. Wetlands? Trust business to use market based mechanisms to protect them. Water quality? Trust industries to come up with better solutions than environmental agencies. The list goes on.

Here is what it also happened in 2003: Fannie Mae CEO, Franklin Raines, earned $20 million while using the nation's largest clearinghouse for mortgages to provide a key gear of the housing asset machinery. It was all about to go bust. When Raines left Fannie Mae in December 2004, the company had to make a $6.3 billion restatement of earnings, inflated to jack up his compensation and the compensation of key employees. It was only the first blow: there was more, much more to come.

Fannie Mae never recovered, and by the time the dust cleared, more than $90 billion in shareholder value had been wiped out. In 2006, the OFHEO sued Raines in order to recover some or all of the $90 million in payments made to him on the overstated earnings. An editorial in The Wall Street Journal called the few millions surrendered by Raines a "paltry settlement" which allowed him and the other two executives to "keep the bulk of their riches." But the paper might have anticipated the unsustainable levels of greed that layed the foundation for the worst crisis since the Great Depression.

The massive wealth destruction that is transforming the US economy is still a work in progress. There is still no accountability of those CEO's and their corporate boards that unleashed so much jeopardy to our national economic security. It used to be called "the free market" but for a select few, it truly was money for nothing.