Wall Street Protesters

I am amazed when I listen to the Occupy Wall Street protesters. Under the banner of being part of the 99%, they claim a common agenda and join in protest. Multiple interest groups have attempted to join the protest to publicize their grievances--unions, public employees, Democrats and numerous other disgruntled groups. Their cries for the end to corporate greed and bailouts are most common, but it is clear that few of these people are productive members of society.  Based on numerous interviews, they lack any clear understanding about the system they seek to change.

Let's consider the subject of bank bailouts, a common complaint, and explore who is most responsible for that event. Simple as it might seem, but the web of events that lead to the credit crisis are complex and far reaching. For example, President Clinton was in the White House when Glass Steagal was repealed. This law was enacted after the market crash in 1929 and put an end to traditional banks engaging in securities brokerage. Do we blame President Clinton?

It is fair to say both political parties played a role and share blame. How about Wall Street greed as the cause? Unlike the days when your grandparents bought their home, most home loans are not made by your local banker and placed into that bank's investment portfolio. In order to increase home ownership, the Federal Government created Fannie Mae and Freddie Mac, quasi-private institutions that guarantee home loans to qualified buyers, with the word "qualified" being operative word. Because they are quasi-private and quasi-government, they are subject to political wisdom for both policy and leadership. Combine these institutions with Wall Streets' securitization of home loans, and access to home loans ballooned.

Loans not guaranteed by Fannie and Freddie are those that are either too large (a.k.a. jumbo loans) or too risky to meet Fannie and Freddie standards. However, heavy political influences from Barney Frank, Chris Dodd and others, operating under the authority of the 1970s Community Reinvestment Act, pushed for an increasing number of home loans made to the poor and disadvantaged racial groups. Banking institutions became less concerned about quality of loans because they were being sold off via Wall Street in the form of complex mortgage securities. Either way, the banks were making money by transacting loans, not placing home loans in their own investment portfolio.

Despite Republican calls to assess the risk being assumed by taxpayers via Fannie and Freddie loan portfolios, Barney Frank and Chris Dodd opposed tightening the rules and reducing the risk associated with low quality loans. After all, home ownership was expanding and the ever increasing value of real estate led to a worldwide economic boom. A self-fulfilling prophecy of ever growing home values expanded home ownership to an all-time high. To keep the momentum and profits going, qualifying standards were lowered to the point that anyone could buy a home. Not only did poor credit customers get loans, but home equity loans were offered to homeowners so they could use their "equity" to buy cars, boats and anything else they desired.

Key to this scheme was Wall Street's ability to sell these loans, especially loans with the coveted AAA rating. It was as if the credit rating companies agreed to stop looking at what they stamped AAA.  Why? Enter AIG, the company that found a way to make the smelliest of home loan portfolios look like winners.  AIG offered buyers a Credit Default Swap which guaranteed payment of principal in the event of default.  This made just about every mortgage pool a sure bet, and buyers couldn't acquire enough of these AAA mortgage pools.  These investments found their way into portfolios that would not ordinarilly touch these securities with a 10 foot pole.

There was only one small problem. AIG, the largest issuer of Credit Default Swaps, didn't call this insurance, and they didn't call it a security. Accordingly, the swaps were not regulated by any government agency.  Even when one sharp government bureaucrat blew the whistle, she was shut down by those in the Treasury and Federal Reserve.  Swaps weren't regulated by the SEC or the 50 state insurance commissioners, and nobody but AIG really knew how much of the mortgage market they had insured. The rocket scientist analysts at AIG determined the chance of default was less than 1 in 1,000. Boy, were they wrong!

When it blew up, buyers of mortgage pools had insurance that wasn't, and the buyers (states, counties and many other countries, like Iceland) were left holding the bag.  The market for mortgage securities dried up, and banks were stuck with loans they knew were not AAA or anything near it. It was an all-out meltdown, and cash became the only means of survival for every investment bank.  Because of the capital requirements for both banks and investment houses, they all stopped lending to each other and everyone else.  Soon, what started as a mortgage issue grew into a complete meltdown of the entire world of lending and borrowing.

The governments ingenious solution: merge banks and brokers, and make more institutions "too big to fail."  Who do we blame? AIG? The credit rating companies? The banks? The brokers? Barney Frank and Chris Dodd? Fannie and Freddie?

The question is, who do the Wall Street protesters blame? Bush and Obama supported the bailouts, as did the majority of Congress. Could they have stuck the banks and the brokers with the losses, and not we taxpayers? Simply, yes. However, few understand the complex web of players who had a big role in this event, and that includes the millions of homeowners who bought homes they could not afford. Just maybe those people in the park had the smallest role in this crisis, but it appears most are too young to own a home?