By Pam Martens and Russ Martens: August 12, 2016
Yesterday we published our 1,007th article here at Wall Street On Parade on the insidiously corrupt financial system in the United States known as Wall Street. It’s a system that now operates as an institutionalized wealth transfer mechanism that is hollowing out the middle class, leaving one of every five children in our nation living in poverty, while funneling the plunder to the top one-tenth of one percent.
Tens of millions of Americans clearly understand that an entrenched system of corruption such as this, perpetuated through a revolving door between Wall Street and Washington, while enshrined by a political campaign finance system that recycles a portion of the plunder to ensure greater plunders, will inevitably leave the nation’s economy in tatters — again. That’s because systemic corruption and legalized bribery within the financial arteries of the nation can only create grossly perverse economic outcomes.
The actual role of Wall Street is to fairly and efficiently allocate capital to maximize positive economic outcomes for the nation. Under the current model, Wall Street is focused solely on maximizing profits in any manner possible, including fraud and collusion, to maximize personal enrichment. When Senator Bernie Sanders said during his campaign stops and a presidential debate that “the business model of Wall Street is fraud,” there was a long, substantive archive of facts to back up that assertion.
Consider the intensely corrupt Wall Street analyst research practices that led to the Nasdaq crash at the turn of this century. Writing in the New York Times on March 15, 2001, Ron Chernow said it best: “Let us be clear about the magnitude of the Nasdaq collapse. The tumble has been so steep and so bloody — close to $4 trillion in market value erased in one year — that it amounts to nearly four times the carnage recorded in the October 1987 crash.” Chernow compared the Nasdaq stock market, filled with companies boosted by intentionally corrupt Wall Street research, to a “lunatic control tower that directed most incoming planes to a bustling, congested airport known as the New Economy while another, depressed airport, the Old Economy, stagnated with empty runways. The market functioned as a vast, erratic mechanism for misallocating capital across America,” said Chernow.
The financial rewards for this corrupt model flowed to the research analysts at the biggest Wall Street firms and their CEOs who reaped lavish bonuses for the outsized “profits.” The poster boy for this era was Jack Grubman, an analyst at Salomon Smith Barney, a unit of the serially corrupt Citigroup. Grubman was charged by the SEC for fraudulent research. He never went to trial or was criminally charged. He merely paid a $15 million fine, was barred from the industry, and walked away rich. According to the SEC, Grubman’s total personal haul at Salomon Smith Barney “exceeded $67.5 million, including his multi-million dollar severance package.” Let that sink in for a moment: you are barred from your industry for corruption and you still receive a multi-million dollar severance package. There is simply no better testament to the principle that fraud is now both an accepted business model, as well as a profit center, on Wall Street.
After the 2001 collapse of Nasdaq, nothing materially changed to stop the systemic corruption model. In fact, corruption accelerated. Instead of allocating capital to build new industries and new jobs to ensure America’s future, Wall Street allocated capital to unsound derivatives and to subprime borrowers, whom it knew from its own internal reports, did not have the ability to repay the loans. Wall Street then offloaded its derivatives risk to AIG and suckered Freddie Mac and Fannie Mae into buying its toxic subprime debt. All three institutions collapsed under the weight of this Wall Street corruption and, jointly, received over $367 billion in taxpayer bailouts.
In our exclusive report on May 20 of this year, we explained how the U.S. government has quietly been paying billions of dollars to Wall Street banks in recent years on behalf of Freddie Mac and Fannie Mae for derivative bets they are still saddled with. The public has yet to receive any definitive explanation of what is going on with these derivatives.
The Wall Street bailouts that the public knew about during the 2008 crash and its aftermath were chump change compared to the $13 trillion in cumulative loans that the Federal Reserve was secretly funneling to its Wall Street banking pals at below-market interest rates. While Citigroup was charging struggling consumers, in the midst of an economic crisis it helped engineer, over 15 percent on credit cards, it was getting a secret infusion of more than $2 trillion in cumulative loans from 2007 through at least 2010 from the nation’s central bank, much of it at less than 1 percent.
The cataclysmic financial crash of 2008 resulted in promises from the Obama administration that the Dodd-Frank financial legislation would forever reform the scurrilous looting by Wall Street. Not only has Wall Street not been reformed but its arrogance has been unbridled. Consider the following:
On February 16 of this year we reported that “AIG’s Board of Directors just appointed hedge fund titan, John Paulson of Paulson & Company, to its Board – despite the fact that he is named in a SEC complaint as a willful participant in the disgraceful Goldman Sachs deal that was designed to rip off investors while financially lining the pockets of Paulson and Goldman Sachs. While Paulson was not charged by the SEC, its complaint made clear he played a key role and profited greatly to the detriment of misled investors.” AIG became a ward of the taxpayer during the 2008 crash, in no small part because of derivative bets it couldn’t pay to Goldman Sachs. The taxpayer, courtesy of the U.S. government, paid those bets off to Goldman Sachs at 100 cents on the dollar.
Sheila Bair was the head of the Federal Deposit Insurance Corporation (FDIC), the Federal agency that insures the deposits of our nation’s banks, during the financial crash of 2008. After Bair stepped down from that role she wrote a definitive book on the crisis, Bull by the Horns. In the book, Bair exposed the government deceit that had surrounded Citigroup during the crisis, writing:
“By November, the supposedly solvent Citi was back on the ropes, in need of another government handout. The market didn’t buy the OCC’s and NY Fed’s strategy of making it look as though Citi was as healthy as the other commercial banks. Citi had not had a profitable quarter since the second quarter of 2007. Its losses were not attributable to uncontrollable ‘market conditions’; they were attributable to weak management, high levels of leverage, and excessive risk taking. It had major losses driven by their exposures to a virtual hit list of high-risk lending; subprime mortgages, ‘Alt-A’ mortgages, ‘designer’ credit cards, leveraged loans, and poorly underwritten commercial real estate. It had loaded up on exotic CDOs and auction-rate securities. It was taking losses on credit default swaps entered into with weak counterparties, and it had relied on unstable volatile funding – a lot of short-term loans and foreign deposits. If you wanted to make a definitive list of all the bad practices that had led to the crisis, all you had to do was look at Citi’s financial strategies…What’s more, virtually no meaningful supervisory measures had been taken against the bank by either the OCC or the NY Fed…Instead, the OCC and the NY Fed stood by as that sick bank continued to pay major dividends and pretended that it was healthy.”
Consider what’s happening today at Citigroup with not so much as a peep from its myriad Federal regulators. Citigroup is today bulking up on over $2 trillion dollars in notional value (face amount) of the riskiest derivatives, credit default swaps, that brought down AIG and helped make Citigroup the recipient of the largest taxpayer bailout in U.S. history.
Given these facts on the ground, another President who takes a hands off approach to Wall Street while installing Wall Street cronies in the cabinet, will leave this nation terminally financially crippled.