Here’s a Pro Publica story that has been buried under the carpet, the buying of various unsellable parts of mortgage- backed securities by the selling banks, themselves.
Banks’ Self-Dealing Super-Charged Financial Crisis
Over the last two years of the housing bubble, Wall Street bankers perpetrated one of the greatest episodes of self-dealing in financial history.
Faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, the banks hit on a solution that preserved their quarterly earnings and huge bonuses:
They created fake demand.
A ProPublica analysis shows for the first time the extent to which banks — primarily Merrill Lynch, but also Citigroup, UBS and others — bought their own products and cranked up an assembly line that otherwise should have flagged.
The products they were buying and selling were at the heart of the 2008 meltdown — collections of mortgage bonds known as collateralized debt obligations, or CDOs.
As the housing boom began to slow in mid-2006, investors became skittish about the riskier parts of those investments. So the banks created — and ultimately provided most of the money for — new CDOs. Those new CDOs bought the hard-to-sell pieces of the original CDOs. The result was a daisy chain  that solved one problem but created another: Each new CDO had its own risky pieces. Banks created yet other CDOs to buy those.
Individual instances of these questionable trades have been reported before, but ProPublica’s investigation, done in partnership with NPR’s Planet Money , shows that by late 2006 they became a common industry practice.
An analysis by research firm Thetica Systems, commissioned by ProPublica, shows that in the last years of the boom, CDOs had become the dominant purchaser of key, risky parts of other CDOs, largely replacing real investors like pension funds. By 2007, 67 percent of those slices were bought by other CDOs, up from 36 percent just three years earlier. The banks often orchestrated these purchases. In the last two years of the boom, nearly half of all CDOs sponsored by market leader Merrill Lynch bought significant portions of other Merrill CDOs.
ProPublica also found 85 instances during 2006 and 2007 in which two CDOs bought pieces of each other’s unsold inventory. These trades, which involved $107 billion worth of CDOs, underscore the extent to which the market lacked real buyers. Often the CDOs that swapped purchases closed within days of each other, the analysis shows.
Nothing like greasing the wheels of commerce, particularly when the almighty ‘Free Market’ speaks!
Had the free market been allowed to function beginning in – say, 2005 or so – the entire credit- fueled real estate bubble and all the ‘garbage growth’ that emerged from it would likely have been stifled. Preventing market feedback enabled players to shift default risk, eventually onto the taxpayers of tomorrow.
Too bad the banking community distrusts the Free Market. Keep this in mind as the Gingrich retreads seek a return to the glory days of free market America as it existed during the Reagan Regime:
House Republicans to make a conservative ‘Pledge to America’
House Republicans will announce an expansive agenda on Thursday called a “A Pledge to America” that proposes to shrink the size of government and reform Congress, offering a conservative plan of action they will pursue if they win a majority in the midterm elections.
Republicans would slash $100 billion in government spending on non-military agencies and replace President Obama‘s landmark health-care legislation with a scaled-back version. Small businesses would be able to deduct from taxes up to 20 percent of their annual income, and the Pentagon would receive increased funding to more quickly implement a ballistic missile defense system.
The plan would also eliminate any unspent money from last year’s $814 billion stimulus package and from legislation that authorized hundreds of billions of dollars to prop up failing Wall Street firms.
Why prop up Wall Street firms when they are quite capable of propping themselves up, eh? The entire exercise suggests the 1994 Republican ‘Contract With America:
In the first 100 days of 1995, House Republicans passed nine of the 10 planks of their Contract, but much of the agenda failed in the Senate. The most significant law, signed by President Bill Clinton in 1996 after a bipartisan compromise, was a landmark reform of the welfare system.
Some Republicans are optimistic about the new agenda’s chances if they win control of Congress, while others have more limited goals.
What is desired is a return to the same conditions that spawned the maturing credit bubble/thievery in the first place; a ‘something for nothing’ or rentier form of entitlement to those best positioned to take advantage.
As for welfare ‘reform’ and the welfare state, here’s the Wall Street Journal:
Obstacle to Deficit Cutting: A Nation on Entitlements
Efforts to tame America’s ballooning budget deficit could soon confront a daunting reality: Nearly half of all Americans live in a household in which someone receives government benefits, more than at any time in history.
At the same time, the fraction of American households not paying federal income taxes has also grown—to an estimated 45% in 2010, from 39% five years ago, according to the Tax Policy Center, a nonpartisan research organization.
A little more than half don’t earn enough to be taxed; the rest take so many credits and deductions they don’t owe anything. Most still get hit with Medicare and Social Security payroll taxes, but 13% of all U.S. households pay neither federal income nor payroll taxes.
“We have a very large share of the American population that is getting checks from the government,” says Keith Hennessey, an economic adviser to President George W. Bush and now a fellow at the conservative Hoover Institution, “and an increasingly smaller portion of the population that’s paying for it.”
The dimensions of the budget hole were underscored Monday, when the Treasury reported that the government ran a $1.26 trillion deficit for the first 11 months of the fiscal year, on pace to be the second-biggest on record.
It’s not just individuals, corporate America from Fannie/Freddie, the large banks, automakers, highway and defense contractors, states and municipalities on down are all sucking on the Federal teat; the Taxpayers of Tomorrow.
All this skirts the real problem which is a social order that legitimizes and promotes waste as a form of economic development. ‘Useless’ natural resources are converted to goods that are metered out to eager consumers world- wide, the metering itself being the primary end of the process that ends in the ocean, the landfill or atmosphere. The country (world) has reached to point where the waste paradigm only works when the free- market mechanism that restrains it is short circuited by fraudulent practices or by the efforts of the sovereign(s).
Now that the sovereigns are beginning to buckle under the unsupportable burden, who will bail these entities out? Who will bail out China? Germany? Isn’t the US too big to fail? We are (all) at the end of the road. Unless there is an ‘Invasion of Bankers From Outer Space’ with more capital, we have run out of saviors.
An idea is bankrupt when its promoters are reduced to invoking icons. Here, the savior is ‘Ronald Reagan': by renaming airfields and highway interchanges the Republicans suggest the name itself has real power as might the Shem HaMeforash or the unspeakable name of Yahweh . The power to do what, exactly? It would seem that twenty years of post- Reaganism is insufficient to prove the bankruptcy of the ‘rentier- free lunches for insiders trickle- down’ approach. Instead, more ideological purity, more dogmatism is required, along with more giveaways to big business, more frauds, more self-dealing, more corruption, more bailouts, more ‘stimulus’, more credit; more always more. The ship of State has a large hole in the bottom where the fuel tank used to be, the Reagan Solution is to chop some more holes elsewhere while invoking Reagan’s name.
That just has to work, right?
Meanwhile, the insiders continue to cash out converting illiquid securities into cash dollars courtesy of the Fed and Treasury. Where is the Republican ‘Plan’ to prosecute wrongdoers?
Where is the ‘Law and Order’?
The search is on for the next ‘Real Reagan'; the pretenders – Clinton, Dubya, Obama, Gingrich – have come up short. The edited Reagan paradigm has been conveniently adjusted to avoid anything that suggests accountability. Who can fill the imaginary Ronald McDonald shoes? Palin? Eric Cantor? Republican Gingrich plagiarist Kevin McCarthy? The rehash suggests more gridlock leading to a government shutdown on one hand – along with the accompanying default – or the more concrete establishment of the one- party state. A Demo- publican monolith that exists to reward finance at the expense of all else.
Isn’t this what we have right now?
The establishment has abdicated. Events are determining outcomes, now. Even if the consequences of the abdication are not visible, the fact of it speaks for itself.
EDIT: An interesting sidebar to the Steve Keen article I posted a couple of days ago emerged out of a comment on Larry Doyle’s blog, Sense On Cents:
Most of recent bank earnings are due to loan loss reserve writedowns, so bonuses are being paid on phantom income.
I agree with you, rather than reducing reserves, reserves should be increasing to more accurately reflect the real risk of default.
The changing rate of writeoffs acts a stimulus so that the bankers can reward themselves. Tres Reagan, no? Doyle’s article is worth a read as well …