By Pam Martens and Russ Martens: August 15, 2017
When there is an epic financial crash in the U.S. that collapses century old Wall Street institutions and brings about the greatest economic collapse since the Great Depression, one would think that the root causes would be chiseled in stone by now. But when it comes to the 2008 crash, expensive corporate media real estate is happy to allow bogus theories to go unchallenged by editors.
What is happening ever so subtly over time is that the unprecedented greed, corruption and unrestrained manufacture of fraudulent securities by iconic brands on Wall Street that actually caused the crash are getting a gentle rewrite. The insidious danger of this is that Wall Street is never reformed or adequately regulated – that it remains a skulking financial monster with its unseen tentacles wrapped tightly around every economic artery of American life, retaining its ever present strangulation potential.
On August 10 of this year, Wall Street Journal reporter James Mackintosh penned the following astonishing sentence: “The global financial crisis began 10 years ago this week, when a French bank suspended three money-market funds. What savers thought was money turned out to be merely credit, and the realization rapidly trashed U.S. money-market funds and the global banking system.”
Three days earlier, on August 7 of this year, Jim Puzzanghera of the Los Angeles Times stated in print that “The 2008 financial crisis was triggered by the failure of Lehman Bros” which filed for bankruptcy on September 15, 2008.
The factual reality is that the financial crisis certainly did not start with money market funds nor did it start with the 2008 failure of Lehman Brothers. As a mountain of documents obtained by the Financial Crisis Inquiry Commission (FCIC) and the General Accountability Office (GAO) prove beyond question, the financial crisis was well underway in the spring of 2007.
In February 2007, HSBC, one of the largest subprime lenders in the U.S. at the time, announced that it was increasing its provision for losses by a whopping $1.8 billion. The next month, New Century, which ran a close second to HSBC in subprime loans, said in an SEC filing that federal investigators were “conducting a criminal inquiry under the federal securities laws in connection with trading in the company’s securities, as well as accounting errors regarding the company’s allowance for repurchase losses.” The following month, April of 2007, New Century filed bankruptcy. Two months later, June 2007, two of Bear Stearns’ multi-billion dollar hedge funds were teetering. Bear conceded to counterparties that it lacked the cash to meet the margin calls on the funds and asked for a reprieve. None came. On July 31, 2007, both funds filed for bankruptcy.
By July 2007, the credibility of the pay-to-rate model of the U.S. rating agencies was collapsing. The tens of billions of dollars of structured subprime debt that had been given the preposterous rating of AAA, began its descent to junk bond status as the rating agencies began their downgrades.
According to documentation obtained by the FCIC, on August 14, 2007 the Federal Reserve sent a confidential memo to the Fed’s Board of Governors concerning Countrywide, another major subprime lender. The memo stated: “…The ability of the company to use [mortgage] securities as collateral in [repo transactions] is consequently uncertain in the current market environment. . . . As a result, it could face severe liquidity pressures. Those liquidity pressures conceivably could lead eventually to possible insolvency.”
Three days later, on August 17, 2007, the insured deposits held by a Countrywide owned bank were experiencing a customer panic and bank run. The Los Angeles Times reported: “Anxious customers jammed the phone lines and website of Countrywide Bank and crowded its branch offices to pull out their savings because of concerns about the financial problems of the mortgage lender that owns the bank.”
All of this was occurring a full year before Lehman Brothers filed bankruptcy.
On November 4, 2007 the deeply troubled Citigroup was forced to fess up to its problems. In a press release, it said it had experienced “declines since September 30, 2007 in the fair value of the approximately $55 billion in U.S. sub-prime related direct exposures in its Securities and Banking (S&B) business.” It estimated that “the reduction in revenues attributable to these declines ranges from approximately $8 billion to $11 billion (representing a decline of approximately $5 billion to $7 billion in net income on an after-tax basis.)”
The Government Accountability Office, which issued a 252-page report on the crisis, unequivocally stated that the crisis began in the summer of 2007. The report noted: “During the financial crisis that began in the summer of 2007, the Federal Reserve System took unprecedented steps to stabilize financial markets and support the liquidity needs of failing institutions that it considered to be systemically significant.”
Then there is the fact that the Federal Reserve secretly invoked its emergency lending authority in August 2007 and began sluicing what would eventually become a cumulative $16 trillion in almost zero interest loans to shaky Wall Street banks and their foreign peers. Reporters at Bloomberg News wrote in 2011 after the Fed was forced to disclose the secret loans:
“Citigroup was tapping six Fed programs at once. Its total borrowings amounted to more than twice the federal Department of Education’s 2011budget.
“Citigroup was in debt to the Fed on seven out of every 10 days from August 2007 through April 2010, the most frequent U.S. borrower among the 100 biggest publicly traded firms by pre-crisis market valuation. On average, the bank had a daily balance at the Fed of almost $20 billion.”
The most tragic part of this story is that the U.S. Congress passed the Dodd-Frank financial reform legislation in 2010 without an in-depth understanding of the severity of the crisis, the trillions of dollars in backroom bailouts by the Fed, and without an appreciation of the dangers that Wall Street continued to pose to the financial system. Details of the Fed’s secret loans were not revealed until 2011, following a lengthy court battle waged by the Fed.