How Alan Greenspan makes huge salary betting that poor folks aregonna lose their homes

Alan Greenspan, Chair of the Federal Reserve Board at the time, testified before Congress in

favor of this legislation and asked that it be "expedited." Last week, Mr. Greenspan joined

the payroll of the hedge fund, Paulson & Company, which last year made $15 billion in

profits betting that poor people's homes would be foreclosed on while using the unregulated

over-the-counter contracts that Mr. Greenspan assisted in making possible.

$100 Billion and Counting How Wall Street Blew Itself Up

By PAM MARTENS

http://www.counterpunch.org/martens01212008.html

The massive losses by big Wall Street firms, now topping those of the Great Depression in

relative terms, have yet to be adequately explained. Wall Street power players are

obfuscating and Congress is too embarrassed or frightened to ask, preferring to just throw

money at the problem and hope it goes away. But as job losses and foreclosures mount and

pensions and 401(k)s shrink, public policy measures to address the economic stresses require

a full set of unembellished facts.

The proof that Wall Street is giving mainstream media a stage-managed version of what went

wrong begins with a strange revelation by Gary Crittenden, CFO of Citigroup, on the November

5, 2007 conference call where he discusses what have now become the largest losses in the

firm's 196-year history. Mr. Crittenden is asked by an analyst why the firm didn't hedge its

risk. Here's his response:

"I mean I think it is a very fair question...we are the largest player in this

[collateralized debt obligation; CDO] business and given that we are the largest player in

the business, reducing the book by half and then putting on what at the time was three times

more hedges than we had ever had at least in our recent history, seemed to be very

aggressive actions given that we were a major manufacturer of this product...once this

[decline in values] process started...the size was simply not there. The market is simply

not there to do it in size in any way and it would have been uneconomic to do it."

What Mr. Crittenden really seems to be saying is that Wall Street, with Citigroup leading

the pack, built a vast market of complex securities but neglected to put in place a liquid

and efficient marketplace for hedging this risk. Say, for example, big, liquid, exchange

traded indices and futures contracts that are routinely used to hedge everything from stocks

to soy beans to crude oil by as diverse a group as Iowa farmers to Saudi princes.

In fact, the unabridged story is breathtaking in its callous disregard for the economic well

being of this nation and its people. Exchange traded products did not emerge to hedge this

risk because, behind the scenes, Citigroup, along with 12 other big banks and securities

firms were funding a private company to gobble up all the necessary components to keep this

burgeoning cash cow to themselves in the opaque, unregulated, over-the-counter (OTC) market,

despite the fact that they knew it was dysfunctional.

The private company that would become Wall Street's ticker tape for pricing exotic credit

instruments (derivatives on subprime mortgages and credit default swaps) started out as

Mark-it Partners in 2001, the brain child of Lance Uggla while he was working for a division

of Toronto Dominion Bank, TD Securities.

The official story goes like this: Mark-it Partners needed big broker dealers to submit

daily price data. As an incentive, it offered 13 large security dealers options to buy

shares in the company providing they would be regular providers of pricing data: ABN AMRO,

Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Dresdner Kleinwort Wasserstein,

Goldman Sachs, JPMorgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, TD Securities, UBS.

By 2004, according to an archived company press release, all of the companies had kicked in

capital. The Financial Times would later report that these banks and brokerage firms held a

majority interest of approximately 67%, hedge funds owned 13%, and employees 20%. The firm's

web site currently says it has 16 banks as shareholders, without naming the banks.

Deutsche Bank, Goldman Sachs and JPMorgan were reportedly the first three firms to take an

equity stake in Mark-it on or around August 29, 2003 when the three firms sold a proprietary

database of credit derivative information to Mark-it. Since Mark-it is a private firm,

financial terms have not been disclosed.

What would have been the incentive for three big Wall Street players to build a proprietary

database and then, in a magnanimous gesture completely uncharacteristic of Wall Street

greed, hand it over to be shared with their largest competitors?

One likely answer is that around this time regulators with a fetish for orderly paper trails

(but myopic to the rapidly escalating financial hazard of this unregulated market) had

stumbled upon the fact that there was a growing backlog of credit derivative trades that

were never officially confirmed between the parties, reaching a peak of 153,860 unconfirmed

trades by September 2005. Of this, 97,650 trades were more than 30 days overdue; 63,322

trades were a stunning 90 days past due according to a Government Accountability Office

(GAO) report. (Although regulators knew about this spiraling trading nightmare as earlier as

2003, the GAO report did not come out until we were deep into the credit crisis in June

2007.) It was during this time that regulators got an agreement from the major dealers that

Mark-it Partners would begin collecting and aggregating the data on unconfirmed trades,

keeping individual dealer data confidential from other dealers and preparing a monthly

report of aggregated data for regulators.

Who were the banks and brokerage houses responsible for this unmitigated mess? With only a

few exceptions, the exact same firms with a majority ownership in Mark-it Partners.

To grasp the magnitude of this wild west world of trading, one needs to understand that we

are not talking about a market of a few billion dollars. According to the International

Swaps and Derivatives Association, the credit derivatives market has grown from an estimated

total notional amount of nearly $1 trillion outstanding at year-end 2001 to over $34

trillion at year-end 2006.

According to the U.S. Office of the Comptroller of the Currency (OCC), JPMorgan, Citigroup

and Bank of America handled about 90 percent of this trading among U.S. commercial banks in

the fourth quarter of 2006. (These are the same three banks that were backing the scheme

last year with the U.S. Treasury to create a $100 Billion bailout fund for exotic

instruments that also had never seen the light of day of exchange trading. That plan failed

when it appeared to be a thinly disguised artificial pricing mechanism to inflate values for

the worst hit firms on Wall Street: namely, Citigroup.)

According to the GAO report, significant progress was achieved for a period in bringing down

these unconfirmed trades but by November 2006, the numbers had climbed again: there were

over 81,000 unconfirmed trades with around 31,000, or 54 percent, remaining unconfirmed for

over 30 days. Raising images of the early 1900s curb market in lower Manhattan where traders

posted securities for sale on lampposts, the report notes that this vast market is being

handled manually to a significant extent. (Our nation has apparently devolved not only on

torture and constitutional rights and habeas corpus and election integrity but we now seem

to have wiped out 100 years of trading advances.)

The obvious solution, a transparent, regulated, automated, exchange traded model does not

seem to have occurred to the Masters of the Universe or their timid regulators.

It did, however, occur to four Exchanges: Eurex, the Chicago Mercantile Exchange (Merc), the

Chicago Board of Exchange (CBOE) and the Chicago Board of Trade (CBOT). In 2007, all four

created exchange traded instruments to hedge the risk of credit defaults. Some traders call

the response from the Wall Street firms a boycott; others call it a cabal that circled the

wagons. According to a Bloomberg article in April 2007, "Banks and securities firms are

keeping a stranglehold on the market, which has swelled to cover debt sold by more than

3,000 companies, governments and industries." A call to the CBOT on January 18, 2008

confirmed that they are still not seeing any business from the big Wall Street firms in

their credit default product.

The track for this train wreck was put in place in December 2000 when Congress passed the

Commodity Futures Modernization Act giving a free pass on regulation to the over-the-counter

trading between sophisticated individuals and institutions. Brooksley Born, then Chairperson

of the regulatory body, the Commodities Futures Trading Commission (CFTC), literally begged

Congress to slow down the train and carefully consider the future ramifications of this

legislation. Speaking before the House Committee on Banking and Financial Services on July

24, 1998, Ms. Born said:

"The CFTC or its predecessor agency, the Commodity Exchange Authority, has regulated

derivative instruments for almost three-quarters of a century. Its authority is contained in

the Commodity Exchange Act ("CEA" or "Act"), which is the primary federal law governing

regulation of derivative transactions. The CEA vests the CFTC with exclusive jurisdiction

over futures and commodity option transactions whether they occur on an exchange or over the

counter. The Act generally contemplates that, unless exempted, futures and commodity options

are to be sold through Commission-regulated exchanges which provide the safeguards of open

and competitive trading, a continuous market, price discovery and dissemination, and

protection against counterparty risk."

Alan Greenspan, Chair of the Federal Reserve Board at the time, testified before Congress in

favor of this legislation and asked that it be "expedited." Last week, Mr. Greenspan joined

the payroll of the hedge fund, Paulson & Company, which last year made $15 billion in

profits betting that poor people's homes would be foreclosed on while using the unregulated

over-the-counter contracts that Mr. Greenspan assisted in making possible.

The counter-party risk that Ms. Born highlighted in her testimony is now set to take center

stage in 2008. As it turns out, this non-exchange based market of darkness totaling $34

trillion has done business with some parties that are unable to pay up or are teetering on a

death spiral due to looming ratings downgrades. Last week, Merrill Lynch announced it was

writing down over $3 Billion as a result of problems with its counter-parties.

As the threat of some antiseptic sunshine and competition from the exchanges reached the big

Wall Street players late last year, Mark-it Partners, now known as Markit Group Ltd., had

yet another amazing burst of good fortune. In November 2007, two consortiums owned by

essentially the same group of banks and brokerage firms that were early investors in Mark-it

Partners, who conveniently also owned the major credit default indices, CDS IndexCo and

International Index Co., up and sold themselves to little Markit Group Ltd. Included in the

deal by CDS IndexCo were the two subprime indices, ABX and TABX, along with the prominent

CDX index which acquired much of its respectability by previously having the name Dow Jones

in front of its three letters.

ABX and TABX were the indices Citigroup should have been able to hedge itself with if this

over-the-counter market was liquid, functional and able to handle pesky details like proof

the trade happened. Instead, 401(k) plans, endowments, public pensions and Citigroup

employees' deferred compensation plans, loaded up to their eyeballs in Citigroup's bizarrely

large float of 5 billion shares, have watched the stock value decline by 53% over the past

12 months as toxic debt that was never hedged comes home from holiday in the Caymans to blow

up on Citigroup's books.

It was four years after the crash of 1929 before the major titans of Wall Street were forced

to give testimony under oath to Congress and the full magnitude of the fraud emerged. That

delay may well have contributed to the depth and duration of the Great Depression. The

modern-day Wall Street corruption hearings in Congress were cut short by the tragedy of

9/11. They must now resume in earnest and with sworn testimony if we are to escape a similar

fate.

Pam Martens worked on Wall Street for 21 years; she has no securities position, long or

short, in any company mentioned in this article. She writes on public interest issues from

New Hampshire. She can be reached at pamk741@aol.com

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There's a new page describing the social aspects of American Fascism at

http://politicsusaweb.com/RootsOfFascism.html

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Still the most concise explanation of how we are who we are:

"Let me give you a word of the philosophy of reform. The whole history of the progress

of human liberty shows that all concessions yet made to her August claims, have been

born of earnest struggle. The conflict has been exciting, agitating, all-absorbing,

and for the time being, putting all other tumults to silence. It must do this or it

does nothing. If there is no struggle there is no progress. Those who profess to favor

freedom and yet depreciate agitation, are men who want crops without plowing up the

ground, they want rain without thunder and lightening. They want the ocean without the

awful roar of its many waters."

"This struggle may be a moral one, or it may be a physical one, and it may be

both moral and physical, but it must be a struggle. Power concedes nothing without a

demand. It never did and it never will. Find out just what any people will quietly

submit to and you have found out the exact measure of injustice and wrong which will

be imposed upon them, and these will continue till they are resisted with either words

or blows, or with both. The limits of tyrants are prescribed by the endurance of those

whom they oppress."

---Frederick Douglass

Source: Douglass, Frederick. [1857] (1985). "The Significance of

Emancipation in the West Indies." Speech, Canandaigua, New York, August 3,

1857; collected in pamphlet by author.

http://www.buildingequality.us/Quotes/Frederick_Douglass.htm

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A reasonably just and well-ordered democratic society might be possible,

and . . . justice as fairness should have a special place among the political

conceptions in its political and social world. . . [M]any are prepared to accept the

conclusion that a just and well-ordered democratic society is not possible, and even

regard it as obvious. Isn't admitting it part of growing up, part of the inevitable

loss of innocence? But is this conclusion one we can so easily accept?

The answer we give to the question of whether a just democratic society is

possible and can be stable for the right reasons affects our background thoughts and

attitudes about the world as a whole. And it affects these thoughts and attitudes

before we come to actual politics, and limits or inspires how we take part in it. . .

If we take for granted as common knowledge that a just and well-ordered democratic

society is impossible, then the quality and tone of those attitudes will reflect that

knowledge. A cause of the fall of Wiemar's constitutional regime was that none of the

traditional elites of Germany supported its constitution or were willing to cooperate

to make it work. They no longer believed a decent liberal parliamentary regime was

possible. Its time had past.

The regime fell first to a series of authoritarian cabinet governments from 1930 to

1932. When these were increasingly weakened by their lack of popular support,

President Hindenburg was finally persuaded to turn to Hitler, who had such support and

whom conservatives thought they could control.

~ John Rawls "Political Liberalism" pg. lx

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