By Pam Martens and Russ Martens: August 21, 2017
Wall Street appears to have a plan to get the deregulation it wants by pinning the start of the epic financial crash of 2007-2010 on (wait for it) the French, rather than its own unbridled greed, corruption and toxic manufacture of junk bonds known as subprime debt that it paid to have rated AAA by ethically-challenged and deeply conflicted rating agencies. (The same rating agencies that are getting paid by Wall Street to rate its debt issues today.)
One of the men helping to peddle this narrative is Steve Hanke, a Senior Fellow at the Cato Institute, a taxpayer-subsidized nonprofit that was secretly owned by the billionaire Koch brothers for decades.
Hanke’s bio at Cato lists him as a Professor of Applied Economics at John Hopkins University in Baltimore and provides the following titillating background:
“Prof. Hanke served as a State Counselor to both the Republic of Lithuania in 1994-96 and the Republic of Montenegro in 1999-2003. He was also an Advisor to the Presidents of Bulgaria in 1997-2002, Venezuela in 1995-96, and Indonesia in 1998. He played an important role in establishing new currency regimes in Argentina, Estonia, Bulgaria, Bosnia-Herzegovina, Ecuador, Lithuania, and Montenegro. Prof. Hanke has also held senior appointments in the governments of many other countries, including Albania, Kazakhstan, the United Arab Emirates, and Yugoslavia.”
Hanke is also a contributing writer at Forbes and in his latest submission he has this to say about the greatest financial crash since the Great Depression:
“It is worth mentioning that most Americans date the start of the Great Recession as 2008, when Lehman Brothers collapsed. In fact, the crisis started on August 9, 2007. That’s when France’s BNP Paribas barred investors from accessing three money-market funds that had subprime mortgage exposure, citing a ‘complete evaporation of liquidity.’ With that, Northern Rock, a bank that was formerly a building society, started to wobble, and eventually faced the first bank run in the U.K. since the Great Depression…These troubles eventually worked their way across the pond…”
Got that – the Wall Street crash actually was started by the French and then spread to the U.K. with the collapse of Northern Rock bank and then Europe’s troubles “eventually worked their way across the pond” to the heretofore unblemished markets of America. And, mind you, it wasn’t morally corrupt bankers who caused the financial calamity, it was, according to Hanke, the U.K. government’s fault for failing “to make ‘lender of last resort’ loans efficiently and promptly. This fiasco was clearly the result of government, not market, failure,” writes Hanke.
In a comparison of the Great Depression with the 2007-2010 Wall Street crash, Hanke states later in the article:
“Both catastrophes were laid at the feet of market failure (read: the capitalist system is inherently flawed and prone to failure). To correct for the alleged market failure associated with the Great Depression, Roosevelt came up with the New Deal. In short, the prescription was a massive increase in the scope and scale of the government’s reach and involvement in the economy. This type of intrusive response has also followed the Great Recession, ushering in a plethora of government regulations, particularly those that affect banks and financial institutions. And why not? After all, the politicians told us that banks (and bankers) caused the Great Recession (read: market failure).”
It wasn’t “the politicians” who told us that the banksters caused the Great Recession. It was an exhaustive report from the official Financial Crisis Inquiry Commission and another exhaustive 252-page report from the nonpartisan watchdog for Congress, the Government Accountability Office (GAO) which revealed that the U.S. central bank had secretly funneled a cumulative $16 trillion in almost zero-interest loans from 2007 to 2010 to prop up the insolvent carcasses on Wall Street. The GAO report unequivocally states that the U.S. crisis “began in the summer of 2007.”
But here’s the funniest part. Nowhere in Hanke’s missive does he indicate to his readers that the BNP Paribas funds in France collapsed because of their holdings of the toxic sludge manufactured by U.S. bankers on Wall Street. BNP Paribas issued a press release on August 7, 2007, the day it shut down redemptions on its three funds, which stated the following:
“The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly, regardless of their quality or credit rating.”
The U.S. “securitization market” was shorthand for the practice across Wall Street’s biggest firms to knowingly bundle residential mortgage loans (which they knew were destined to default as a result of their own internal warnings from whistleblowers) as AAA-rated securities and sell them to unsuspecting banks, credit unions, public and private pension funds around the globe, and anyone else dumb enough to buy their house of cards.
The Dow Jones MarketWatch report of August 9, 2007 spelled it out further, indicating that the three BNP Paribas funds “had fallen roughly 20% to just under 1.6 billion euros in less than two weeks” and had invested in “U.S. asset-backed securities, which are pools of debt that include mortgages.”
Hanke is not the only writer peddling this revisionist history of the Wall Street crash. A surprising number of other writers have joined the chorus.
On August 10 of this year, Wall Street Journal reporter James Mackintosh penned this 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.”
The well known Mohamed El-Erian, the former CEO and Co-Chief Investment Officer of PIMCO, the massive investment management firm, who continues to serve as Chief Economic Advisor to Allianz, PIMCO’s parent, had this to say last Thursday at Project Syndicate:
“Ten years ago this month, the French bank BNP Paribas decided to limit investors’ access to the money they had deposited in three funds. It was the first loud signal of the financial stress that would, a year later, send the global economy into a tailspin.”
In point of fact, the action by BNP Paribas on August 7, 2007 was far from “the first loud signal.”
As we previously reported, these were the loud signals occurring in the U.S. in the spring of 2007, long before the action of BNP Paribas:
“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.”
Wall Street desperately wants to shed its history of greed and hubris and its starring role in the greatest financial collapse since the Great Depression in order to get Congress to roll back the weak reforms that exist. The public should pay close attention to these maneuvers and stand ready to call them out.