In July 2009, Rolling Stone published Matt Taibbi’s “Inside the Great American Bubble Machine,” a scathing critique of the colossal investment bank Goldman-Sachs. His description of G-S quickly went viral: “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
This image fits not only G-S but the whole network of Wall Street behemoths such as AIG, Citigroup, Bank of America, JP Morgan Chase and Morgan Stanley. Most of American society is still in an economic sick-bed, pale and under-nourished despite repeated transfusions. But Wall Street is pulsating, flush with jobs and money and bloated by huge bonuses.
The harm done to our country was largely due to the reckless greed and incompetence of the princes of Wall Street, helped by the regulatory failures of a government blinded by market fundamentalism and a Congress awash in Wall Street money. The story of what they did to us is very complicated, which is partly why what happened in Cairo’s Tahrir Square hasn’t yet erupted on America’s Main Street.
The financial giants played enormously risky games with derivatives (financial contracts whose value is based on an underlying asset). For instance, they created derivatives (CDOs) based on risky sub-prime mortgages, many of which were originated through fraudulent lending practices.
Then they created derivatives (credit/default swaps) to bet on the future performance of these CDOs. Then they used these derivatives as collateral to borrow more money to make more bets.
As Nomi Prins detailed in The American Prospect (May 4, 2010), from 2002-2008 lenders created $1.4 trillion in sub-prime mortgages. On top of these precarious loans, Wall Street created $14 trillion in derivatives. When the housing bubble burst, this $14 trillion house of cards collapsed.
The burst bubble would have bankrupted the financial giants because the ratio (leverage) between their shareholder equity (net worth) and the vast sums they had borrowed to bet on derivatives was too high (as much as 40-to-1). As a result, the lost value of the derivatives they bought with borrowed money was about to wipe out their equity.
The assets of the Wall Street giants were interdependent in a web of financial contracts with each other. At the same time, they jointly controlled a commanding share of the nation’s financial assets. Each was too big to fail without bringing down the others, and thereby the U.S. economy.
So we taxpayers had to bail them out. The victims had to restore the victimizers. According to SourceWatch, as of September 2010, “we the people” had committed $13.86 trillion (including guarantees) — an amount larger than the national debt! We disbursed $4.72 trillion, of which $1.93 trillion is still unreimbursed.
In addition, we were hit with the Great Recession:
— From the end of 2007 to the end of 2009, nearly 8.4 million jobs were lost in the U.S. (Bureau of Labor Statistics)
— According to the Pew Financial Reform Project’s report: “The combined peak loss from declining stock and home values totaled nearly $100,000, on average per U.S. household, during the July 2008 to March 2009 period.”
The deep recession created by the financial collapse has seriously eroded federal and state tax revenues at the very time when the growing ranks of the unemployed create added demands on social programs.
This has resulted in trillion-dollar deficits at the federal level and states cutting back on personnel and basic services. Federal bailouts may be needed to avoid state bankruptcies. The GOP has jumped on all this as an excuse to gut social programs.
Behind the big numbers is a world of misery: the psychological and financial stress of unemployment, job insecurity, ruined retirement plans, foreclosures, personal bankruptcies and young, heavily indebted college graduates unable to get adequate employment.
But Wall Street is doing just fine. As Bloomberg News reports: “Wall Street’s biggest banks, rebounding after a government bailout, are set to complete their best two
years in investment banking and trading, buoyed by 2010 results likely to be the second-highest ever.”
G-S has set aside a bonus pool for 2010 that equates to an average of $430,700 per worker. The New York Post reports that “high-powered, lucrative jobs are returning to Wall Street, causing critical shortages of skilled financial services workers.”
In 2008-09, even as it was being bailed out with taxpayer money, the financial industry spent $1.4 million per day lobbying to weaken financial reform legislation. One result is that the Wall Street giants were allowed to continue to be too big to fail.
These mega-corporations will still be able to borrow their gambling money in vast amounts cheaply because lenders know that the government won’t let them go under. There will be another crash.
The president and both parties in Congress have betrayed us, selling our future in return for campaign contributions. The magnitude and urgency of this evil transcends all other political issues in our country today.
Brian Cooney is emeritus professor of philosophy at Centre College.