Nothing in all the world is more dangerous than sincere ignorance and conscientious stupidity. –Martin Luther King Jr.
Nobody wants to believe that there are a handful of Wall Street bankers so intractably evil that they would rather destroy the entire world economy than give up their vacation home in the Hamptons. Nobody wants to believe that there are a handful of Washington politicians so intractably evil that they would steal the life savings of millions of people just to preserve their government perks and pensions. Nobody wanted to believe that the Weimar Republic could devolve into National Socialism in only four years – but it did.
I understand why some would think I’m a conspiracy nut. Had I not seen it with my own eyes, heard it with my own ears, touched it with my own hands and lived it every day for the last 25+ months, I would think I was kooky, too. But the facts are right out in the open for anyone who cares to read a balance sheet.
The financial establishment, (which funds Washington through political donations and funds the mainstream financial media through advertising), love to say “nobody saw this coming” but they are either liars or idiots. Lots of people have been warning that the world is heading for a credit crisis for at least the last 3 years. I can name several right off the top of my head: Karl Denninger, Mish Shedlock, Bill Fleckenstein, Reggie Middleton, Peter Schiff, Nouriel Roubini, Gary North and Marc Faber have all written extensively about it for years. Their record is both long and public.
These guys deal in hard facts. Not conjecture, not theories, not “interpretations” – mathematics. And the mathematics were there in the publicly posted balance sheets of every major bank on Wall Street for all to see. The mathematics were there in the balance sheets of Fannie Mae and Freddie Mac, there in the balance sheets of AIG. The balance sheets said these organizations were all doomed when the loans they made to people who couldn’t pay all went bad.
The loans went bad. The money dried up. The banks are technically insolvent. The only reason they haven’t been shuttered is because they own the regulators, they own the Congress, they own the executive branch and they own the Federal Reserve.
Their “profits” are illusions, but the debts are real. There are only two ways to deal with debt: pay it off or default. The banks won’t default, and they can’t pay it off, so here’s what they have done – they stole the money from the US Taxpayer.
How did they do it? Let’s look:
The S&P 500, which is a proxy for the entire market, has been trading at over 140 times earnings since last summer. What that means for you non-financial types is that the price of the stock market is 140 times the value of the profit the combined companies made. (I would post a link to this statistic, but Standard & Poors removed the link from their website in October.) For comparison, the long term, (80+ year) historical average of the S&P 500 is 15 times earnings. In other words, in an economy with “official” unemployment hovering at 10%, “official” underemployment over 20%, a housing market that has crashed, major banks, insurance companies and auto makers that would be bankrupt if not for the injection of literally trillions of dollars in taxpayer money, plummeting tax receipts, states struggling with historic budget deficits and the largest financial bubble in history – the stock market is trading ten times higher than it’s historical average. Is this economy ten times better than average?
How is that possible?
Follow the money:
March 16 2008 – The Fed & Treasury give JPMorgan a $29B gift if they agree to buy Bear Stearns for $2/share. (When the stock closed on Friday, March 14, it was trading at $22/share. The final purchase price was later negotiated to $10/share.)
July 2008 – Congress gives Fannie Mae & Freddie Mac $800B to keep them from bankruptcy.
Early September 2008 – Lehman goes bankrupt. This event triggers the payment of credit default swaps AIG has sold to various banks around the world. They don’t have the money to pay. Congress authorized an $85b payment to AIG, (later increased to $145b), to keep AIG from BKing. Most of the money that goes in the front door of AIG went right out the back door into the pockets of banks such as Goldman, Morgan-Stanley, Deutsche Bank, UBS, Citibank – the usual suspects.
Late September 2008 – The Big Banks are in fact insolvent, so Hank Paulson, (ex-CEO of Goldman Sachs and current SecTreas), goes to Congress and threatens global apocalypse if Congress doesn’t cough up the dough to bail them out. Congress caves. Hundreds of billions are funneled to the banks through the Federal Reserve. Blomberg files a FOIA request with the Fed to see where the money went. The Fed ignores it. Bloomberg takes ’em to court. The judge rules in Bloomberg’s favor. The Fed ignores them. To date, the Fed still hasn’t turned over the information.
February 2009 – Obama demands another $800b to help goose the economy. Most of it goes to banks.
March 2009 – the S&P500 hits an intraday low of 666, almost a thousand points below the all time high it hit in October 2007.
Since then, unemployment continues to rise, housing defaults rise, commercial real-estate tanks, sovereign debt crises spread around the globe. Where did ALL THAT MONEY we gave to the banks go?
Look at the stock market. We are currently trading right at 1200 on the S&P, a rise of a little less than 100% in a year. Only one sector of the market has profits consistent with a 100% rise in just over 12 months: Financials. One sector of the market has shown the biggest increase in price in the last year: Financials. One sector of the market makes more donations to Washington than any other: Financials. One sector of the market got hundreds of billions in taxpayer dollars: Financials.
Conclusion: The Wall Street banks took the money that they were supposed to be loaning out to Main Street, and used it to drive up the price of their shares.
How’d they do that?
Front-running, co-located servers and high-frequency trading.