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Posted April 2011

“There’s none so blind as those who don’t want to see.”

So no one saw it coming – the big financial meltdown of 2008, when America suffered a devastating economic collapse, when once valuable securities lost most or all of their value, debt markets froze, stock markets plunged, and big financial firms went under; when millions of Americans lost their jobs, millions of families lost their homes and good businesses shut down.

Worse still, no one involved in creating the world’s greatest Ponzi scheme seemed to know what they were doing: not the poor homeowners, who got mortgages on basically no income; not the financial institutions, which created doubtful mortgage bonds on these subprime loans; not the ratings agencies, which were persuaded to rate these crappy bonds triple-A; and not the institutional investors, who thought these triple-A bonds were a safe long-term investment.

Could it really be true that no one had a clue? That fat-cat bankers, notorious for their inflated bonuses, big egos, crass manners, and foul language did not understand risk? And lacked plain common-sense?

Did they fall for their own spin, which termed subprime mortgage bonds, along with bonds backed by credit card loans, car loans and other whacky collateral, “asset-backed” securities?

Or didn’t they care to know what was in those arcane, artificial securities based on piles of doubtful mortgages because the machine (pay as little for home loans and charge as much as possible for mortgage bonds) made them rich?

On 13 April 2011 the U.S. Senate Permanent Subcommittee on Investigations into the origins of the 2008 financial crisis published its report which has been two years in the making.

The 650-page-tome provides the clearest picture yet of what took place inside the walls of some of the financial institutions and regulatory agencies that contributed to the crisis.

The investigation found that the crisis was not a natural disaster, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.” These are the report’s words, not mine.

The report makes depressing reading. Especially as concerns the role of banks.

Rather than acting on their clients’ behalf, “most major U.S. financial institutions began devoting increasing resources to so-called “proprietary trading,” in which the firm’s personnel used the firm’s capital to gain investment returns for the firm itself,” the report says.

Traditionally, U.S. banks, broker dealers, and investment banks had offered investment advice and services to their clients, and did well when their clients did well.

Over the last ten years, however, some firms began referring to their clients, not as customers, but as counterparties. In addition, some firms at times developed and used financial products in transactions in which the firm did well only when its clients, or counterparties, lost money,” the report flatly states.

Read that last sentence again: the banks made a fortune only when their clients lost money.

Did the banks and everybody else in this scam really think this could go on and on? That they were all too big to fail?

Perhaps, in a more sinister scenario they knew that when the whole edifice would come crashing down, governments (aka taxpayers like you and I) would bail the banks out to prevent a collapse of the world’s economy.

Which is what happened.

It may be small consolation to people who lost money and jobs because of the crisis that the Senate investigators will refer their evidence about Wall Street institutions including Goldman Sachs and Deutsche Bank to the U.S. Justice Department for possible criminal investigations, officials said on 13 April 2011.

Will anything come of it? Oh, sure, some could be fined and get their knuckles rapped. But ultimately, little else. Cynics say that it can happen again.

Because if you want to know who should be blamed, just look into the mirror. People from all walks fell into the trap of easy money. They took out second and third mortgages, they had multiple credit cards and they shopped around for risky investments which promised huge pay-backs. Who, for a second, stopped to ponder: “Shish, this could be damn risky?”

People like to live beyond their means. And, by the way, so do governments because they say there is “no alternative”.

The U.S. Senate report, entitled “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse” can be downloaded at

http://hsgac.senate.gov/public/_files/Financial_Crisis/FinancialCrisisReport.pdf

Alternatively you could read Michael Lewis’ “The Big Short: Inside the Doomsday Machine” (2010), available from amazon.com

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