Big Banker Bingo
Let’s play Russian Roulette. My rules.
I’m betting $1,000 the chamber will be empty. You hold the gun to your head and pull the trigger. Click. You owe me $1,000. Next round, same rules, you hold the gun to your head and fire. Click. Now you’re down $2,000, but why complain? You’re still alive, aren’t you? Isn’t that worth $2,000?
Next round, you’re not so lucky. Since there doesn’t seem to be anyone left to collect the bet I just lost, I take my $2,000 and go looking for the next patsy.
If my rules seem unfair, at least they’re founded on well-established precedents. Big hedge funds and investment banks have figured out how to make billions on heads-I-win, tails-you-lose games of high risks and very high but entirely one-sided rewards.
It’s a sweet deal. They take your investment money – along with that of other investors like pension funds – and make huge bets on derivatives at, say, thirty to one leverage. So two billion dollars acts like 60 billion, and a 20% gain in a currency arbitrage or a commodities play or credit default swaps earns $12 billion – of which they keep 20% on top of the big fees they charge you each year just to invest in the fund.
Or they get it wrong … blow $12 billion, and the hedge fund goes bust.
Leverage works both ways. You and the pension plan retirees may see your entire investment go up in smoke. The hedge fund manager loses maybe his desk and his fax machine, but he’s still got the billions he’s “earned†in prior quarters and years, so he skips away, somewhat chastened but ready to set up his next magic show.
Oh, and that $12 billion dollar meltdown?
There’s always the chance that it could trigger a cascade of failures in other funds and big investment banks like Bear Stearns. Then the Fed has to bail out the losers to save the system – until the day comes when the next big crisis metastasizes beyond the Fed’s powers of salvation, and the whole financial system and possibly the economy crashes, as in the 1930s.
But if the Fed does succeed, guess who pays whatever it costs? You and those pension plan participants and the rest of us taxpayers. First you lose your money, then you pay to save the people who lost the money you entrusted to them.
Call it Hedge Fund Roulette. Or Big Banker Bingo.
It’s an addictive form of gambling in which the winners always keep their winnings, but when they lose, they don’t pay.
The public pays – and for what? For the privilege of living in the presence of such brilliance? True, investment banks sometimes do contribute to the health of the economy, but not when their main energies are being devoted to bundling up worthless loans into worthless securities and rating those securities AAA to sell them off to the ignorant, the gullible, the inattentive, and the daft.
Of course people have a right to risk their own money. Some may even be trusted to risk other people’s money, in their role (and under the strictures of fiduciary responsibility) as managers of mutual funds, pension funds, public or private trusts.
But I’m not allowed to bet your house on the horses.
Why should anyone be given a license to risk the entire financial system or the economy as a whole in a scheme for personal profit?
The largely unregulated shadow banking system risks a global financial collapse or a depression that could inflict untold misery on hundreds of millions of people for many years to come. Even if all goes well, they’ve risked your wellbeing and mine for their own personal gain. If they win, they win big. If they lose, they don’t pay – you do.
It’s now clear that this is the game a great many financiers have been allowed to play. As Wall Streeters, they know that for huge gains, you have to take huge risks. Imagine how much you can make if you risk the whole country!
Presumably, that’s why there’s talk about reform, but look who’s talking. Key players in financial system reform include Senator Richard Shelby — a mega-landlord, real estate developer, and title insurance magnate in Alabama – and Treasury Secretary Henry Paulson, former chairman of Goldman Sachs, who doesn’t want to place limits on leverage or on the extremes in risk-based executive pay and bonuses that made him rich. What meager changes Paulson recommends are tantamount to requiring boldface type on the restroom signs:
“Employees must wash hands of all responsibility.â€
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Proving your point is the great Barney Frank talking on News Hour Thursday in regards to Republican opposition to any federal assistance to homeowners facing foreclosure which is unacceptable to the Reps but the Bear Stearns bailout was fine.
REP. TOM PRICE: Well, how — how do you get to the bottom of this housing problem and challenge that we have? You get to the bottom when the market determines that housing prices have fallen to an appropriate amount. And, hopefully, we still believe that markets ought to be how we determine what housing prices ought to be, and not that the government ought to be determining that.
When we get to that bottom, then housing prices will — the demand will increase and housing prices will begin to come up. You can’t artificially change that by congressional action, by governmental action.
When you try to do that, all you do is manipulate the market and, I believe, prolong the challenges and the pain that — that we’re feeling. And, just as a point on that $300 billion, it’s extremely important. The chairman is very accurate in what he says all the time. And he’s very accurate in what he puts in bills. And the $300 billion is in there for a reason.
It’s because that’s the ultimate exposure if in fact the worst thing would happen — were to happen. And that’s important to appreciate.
REP. BARNEY FRANK: That’s the silliest thing people will hear today, even if they watch the Cartoon Network. That would be if every mortgage totally failed, and you recovered nothing from it.
By the way, I probably shouldn’t have been here, because Mr. Price could have debated himself, because when he says have the government stay out of the market, that contradicts his bragging about FHA Secure and the HOPE NOW, which were also government interventions in the market.
MARGARET WARNER: Congressman…
REP. BARNEY FRANK: So, there’s just a total contradiction here about what you do or don’t do.
MARGARET WARNER: OK.
But, Congressman Frank, let me get you to respond to Congressman Price’s point that, essentially, by doing this, you’re creating a — basically a false floor under house prices and that the only way to get out of this is just let them fall where they’re going to fall and then come back.
REP. BARNEY FRANK: Well, the answer, first of all, is, if he really believed that, he wouldn’t be bragging about FHA Secure and the other federal program. So, there’s a kind of contradiction there.
Secondly, no, this is not stopping prices from going. As a matter of fact, this begins with the holders of the mortgages being told, you better reduce the amount you think you’re going to get.
And we are only going to give a guarantee if they get down to 85 percent of the appraised value. The government isn’t appraising. The government is going to rely on private appraisers. No, we assume prices are going to be going down. And there’s nothing in here that’s going to stop prices from going down.
Again, the lender is being told, you’re not going to get what that mortgage says. And, by the way, that’s 85 percent of the value of the house. It will be less than 85 percent of the value of these loans, because the loans are above the value of the house. So, we’re telling the lender, you’re going to have to take a very substantial reduction in what you thought you could get if you want to participate in this.
And, so, there’s no — no one is stopping the market from ultimately adjusting prices.
Comment by mike — May 10, 2008 @ 11:46 am
Great exchange! Good old Barney Frank. Price is a good example of how completely tone-deaf the Republicans have become (and how transparent the greed factor has become), and they’re going to pay dearly for it come November. Even people who have never had any stomach for economic details are beginning to understand how they’ve been lied to and victimized.
Comment by Al — May 10, 2008 @ 10:53 pm