We Was Robbed

By

Mike Pulaski

October 23, 2008

Today, most people on Main Street think that Wall Street bankers stole their money.  Truth is they did. And they did it without breaking any laws.

So don’t count on getting your money back from them.

The amount of money that was stolen from hard-working, trusting folks from Main Street is staggering.  No one really knows exactly how much was stolen.  That’s because each day we learn about more areas of the global economy that were ripped off.

Here is how it happened.

• Lobbyists convinced Congress to relax the banking regulations put into place during the Great Depression that prevent another depression.
• Republican and Democrat politicians bought votes by passing laws that provided unqualified people to get low interest (subprime) home loans. 
• The Federal Reserve kept interest rates low in order to stimulate the economy. 
• There was an explosive expansion of the mortgage lending business due to the availability of easy money in an unregulated environment.  A housing bubble was created.
• Greed by borrowers and lenders quickly grew this bubble.
• Traditional mortgage lending, where the lender holds a loan and receives the payments, was replaced by loan “repackaging”.  Wall Street hedge funds bought mortgages from lenders and bundled them with thousands of other mortgages and re-sold them like investment bonds.
• These packages (called subprime mortgages) were held as assets by financial institutions. Their value as an asset was overstated because no one understood them or how to value them.
• About 18 months ago, the subprime mortgages that were first issued began to default.
• Once people recognized that subprime mortgage packages were not worth what was originally thought, a wave of panic selling began.
• The financial marketplace was flooded with these packages, sending their market price progressively lower.
• As the subprime market fell, banks and hedge funds holding these packages as assets desperately tried to replace them.  Those that couldn’t either declared bankruptcy, merged with another financial institution, or asked for a government bailout.

Now let’s see how this affected Main Street by following the money trail.

·       Mortgage lenders received a commission for each mortgage they made.  Since they didn’t have to hold the mortgage, they weren’t at risk to suffer the consequences of a default.  They had incentive to make risky loans because they would earn more commissions.

·       Hedge funds that bought these mortgages had one goal: quickly repackage the loans and sell a bundle of them to another party for huge sales commissions.  They had no risk but had the potential for huge gains.

·       The hedge funds not only sold their packages domestically, but also globally.  European, Middle Eastern, Chinese, and many other Asian banks bought them.

Thus, we can see from this scenario that a global Ponzi Scheme was created, where those who started it reaped fortunes from those who ended up holding worthless paper.

In this scheme, trillions of dollars changed hands.  All the money from personal and corporate bankruptcies as well as government bailouts went to pay commissions to mortgage lenders and hedge fund brokers.  Corporate bankruptcies caused millions of people to lose their jobs.  Millions more stockholders and pension fund investors in these bankrupted companies lost their investments.

Aside from an economic catastrophe, we now have a moral and ethical problem.  If the money was stolen by way of fraud, then why not legally force the Wall Street bankers to repay it?

In his book “The Economics of Innocent Fraud”, Harvard economist John Kenneth Galbraith describes the increasing gap between reality and "conventional wisdom" that we have in today’s society.  It perfectly describes what we are experiencing now in our current crisis.

Simply, the reality is that those mortgage brokers and hedge fund operators didn’t break any laws; however, conventional wisdom says that they managed to defraud millions of people out of billions of dollars.  They violated human moral and ethical standards, but they won’t be found guilty of any crime because there is no law against doing what they did.

This means we won’t be able to recover the hundreds of billions of dollars that were stolen from a large segment of the world’s population by a very few wily individuals.

Political ideology and rampant greed were the root causes of our sorry situation.  The neoconservative ideology of unrestrained market place capitalism caused us to abandon protective banking regulations.  The greed of brokers, hedge fund managers, and those who took out mortgages to get something for nothing completes the picture.

It will take decades for us to regain our financial stability and we, our children, and grandchildren will be paying for it.

Think about it.