Bush Housing Crisis Policy 4 — Too Big to Ignore

Bush Housing Crisis Policy --- Too big to Ignore

Continued from Inventive Interventions

September 2008.

Uh-oh. What’s that rumbling noise? The very earth is shaking! An earthquake? The sound of stomachs on the floor of the New York Stock Exchange? No. It’s AIG.

is an AIG? American International Group, a collection of businesses. Some sell insurance. Some sell conventional investment instruments. But the biggest business of AIG is selling something kinda like insurance, kinda like a security. Not insurance or equities, of course; those are regulated. Who can make big bucks off those? AIG sells credit default swaps, CDSs, agreements that AIG will buy your debt-based securities if they lose money.

Now that’s a relief. Who cares if the subprime mortgages underlying securities go bad just because loan officers are giving mortgages to anyone who breathes and claims to have a job? In a world of skyrocketing housing and securities prices, AIG swaps pieces of paper called CDSs for money and prospers.

AIG credit default swaps fan the flames of the hot housing and finance markets. Build more houses; sell more houses with subprime mortgages; bundle bales of mortgages; sell slices of mortgage bundles as securities; trade mortgage-backed securities to each other, union and government retirement funds, mutual funds, world markets, world governments. U.S. Mortgage-backed securities are hot! They can’t go bad; they’re guaranteed by AIG-issued CDSs, and those AIG swaps are backed by . . . um, backed by . . . uh-oh.

That’s right. Thanks to the “Commodity Futures Modernization Act of 2000” (more famous as the Enron Loophole Law), these CDS transactions are beyond regulation, merely private agreements in the marketplace. The legislation passed both houses of Congress without debate.  The Enron debacle must have been due to secret skullduggery done behind the back of Enron Board Member Dr. Wendy Gramm, wife of Senator Phil Gramm. it couldn’thave been because of the underlying legislation championed by Senator Gramm. Market deregulation is a good thing, an American principle, a Republican principle.

America’s greatest export becomes unregulated securities based on (or derived from) the preposterously inflated housing prices American consumers are encouraged to accept through absurdly available (and often absurdly-worded) mortgages. Suddenly (surprise!) the risky mortgages go bad; the securities based on those mortgages go bad; AIG-issued CDS issues come due, and it becomes clear that the swaps are backed by nothing but wishful thinking. Result: major meltdown. AIG rick puts the whole system at risk.Too Big To Fail.

Enter Sheriff George W. Bush on a palamino, hands full of pop guns. After lettin’ the market mob string up naughty little Lehman Brothers (founded 1850), the Republican Posse rides to the rescue. AIG has become Too Big To Fail. The gummint circles the market-trading wagons, not to look out and defend against outside raiders, but looking inside, so they each keep an eye on the other lyin’ varmints.

AIG is nationalized, and taxpayers become responsible for making good on the trillions of dollars in piles of worthless CDS paper that, due to the globalized financial market and absence of domestic regulation, has become the de facto financial policy of the United States of America. Sheriff G.W. Bush and his Republican Posse provide covering fire for the entire U.S. financial system, even the value of the U.S. dollar, using taxpayer funds (and T-bills to be paid by taxpaying generations yet to come) to defend worthless financial institutions until their most profitable subsidiaries can be sold off to the few solvent U.S. companies left, or to foreign corporations.

How much will it cost? Don’t be fooled by the estimates you hear: nobody knows. Thanks to deregulation, nobody knows how many CDS instruments are out there, nobody knows what mortgage-backed securities are “insured” by them; nobody knows whose mortgages were swapped to whom for what.

Until a few weeks ago, “maverick” cowpokes and moose-shooting amateurs were campaigning for more market deregulation, even “privatization” of the federal Social Security retirement system and U.S. healthcare. Now they pretend they invented market regulation and were for it all along, invent scapegoats, or change the subject.

Thay’s the story so far. You get to write the ending on Tuesday, November 4, 2008.

Bush Housing Crisis Policy 4 -- Too Big to Ignore


Images by Mike Licht. Download the top one here and the bottom one here. Creative Commons license; credit Mike Licht, NotionsCapital.com

One Response to “Bush Housing Crisis Policy 4 — Too Big to Ignore”

  1. HL Says:

    Under the Sherman Anti-Trust Act:

    “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.”

    Could it be that every bailout of a mega-corporation that is “too big to fail” is an admission by the Feds that they’ve permitted that corporation to reach felonious anti-competitive size?

    Teddy Roosevelt, a Republican, might have some thoughts on this…

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