June 11, 2013
by Jerry Alatalo
The revolutionary war was fought over the control of money. The first Americans printed their own currency and the British could not stand for it. You do not read this, the real reason for the war of independence, in your history books. Government finances its debt by selling its government bonds for interest. If the government took over the control of the money supply eventually government debt would be a thing of the past; debt-free money.
Thomas Jefferson had eight straight years with a balanced budget. Later in American history the hero of the monetary reform advocates, Andrew Jackson, paid off the national debt.
The current national debt, if private control of the monetary system is not replaced by government control of the money supply, can never be repaid. If the financial elites continue to stay in control of money then the economic life of America and the world will continue being strangled. The financial elites have betrayed the entire population of the world. Ask yourself why we have to borrow money from China and other nations. Ask yourself why the United States of America and most other countries of the world are suffering deep recessions, unemployment and unrest.
The rich get richer. The middle class suffers financial hardships. The poor get poorer. Assets are lost and bought up by those more fortunate. The financial system has exploited for a long, long time. Look at the results and ask yourself if it is not the time to take care of these problems. The private banks’ debt-money system has concentrated the wealth of the financial elites.
The historical accepted point of view around money has unfortunately led to the unequal distribution of it which has led to the negative effects we are now witnessing around the world.
Accumulating money became, for those who possessed large amounts, a game to see who could accumulate the most. Studies have shown that, since the passage of the Federal Reserve Act in 1913 the dollar has lost 95% of its value. The time to fix this inequity is now.
During the savings and loan scandals of the 1980’s there were around 1,500 convictions of those who committed fraud or other financial crimes. The economic crisis which culminated in 2008 was the result of financial fraud of a size never seen in human history. Words cannot adequately describe the unprecedented extent of the crimes. Simply, the frauds were epidemic. As opposed to the around 1,500 convictions during the 1980’s savings and loan scandal there were almost no convictions of those who committed fraud and other crimes during the economic crisis years of the late 2000’s.
Documentary filmmaker Charles Ferguson’s movie “Inside Job” won the Oscar for best documentary in 2011. The documentary is a powerful work which shows what really caused the 2008 economic crises and is one you will want to view. Please do so as you will add greatly to your knowledge of the financial industry. As Ferguson accepted his Oscar the first thing he pointed out to billions of Oscar viewers was that, three years after the crisis, no executive from the Wall Street firms that caused the crisis had been brought to face justice.
Now you understand real financial power. The lack of convictions even as rampant fraud occurred is almost criminal in itself. The government’s justice department and the regulatory agencies with the power to enforce the laws of the land could be seen as accomplices.
The allowance of fraud with impunity results in a crisis. To continue to allow fraud with impunity will only result in another crisis… and another crisis. The crisis of the late 2000’s destroyed tens of millions of jobs. The financial elites of Wall Street are weapons of mass destruction; mass destruction of jobs. During the savings and loan scandal of the 1980’s the infamous Charles Keating brought Alan Greenspan to his aid to fix the problem. Greenspan later became head of the Federal Reserve.
During the late 2000’s scandal seventeen of America’s largest banks left a trail of documentary evidence of fraud on massive scales. Many federal banks gave up their charters simply to become mortgage banks to escape the regulators. Everyone knew about the coming, disastrous economic time bomb that was on its way. The FBI warned Congress in 2004 that there was an epidemic of mortgage fraud which would result in an economic crisis. After the FBI warnings there was a massive increase in fraudulent mortgage loans. The lenders were the party that created so-called liars loans.
The largest banks in the world were actively involved in producing these millions of fraudulent mortgage loans. Then the loans were gathered up into complex financial instruments, given AAA ratings by the ratings agencies and flushed down the toilet or sold to the next unfortunate owner of the toxic assets. To add insult to injury there are ways for Wall Street speculators to bet that a stock will go down or that mortgages will go sour.
The same banks that bundled the toxic mortgages and sold them, knowing the customers would not be able to make the payments, bet large money that foreclosures would occur on those same mortgages they sold to someone as AAA. It seems that transactions which “win” because of others’ misery would be better off banned. Who invented the transaction where you can bet that a certain stock will decrease in value? Should not this type of transaction be banned as well, as it opens the way for all types of chicanery?
The main point is that the selling of these toxic assets, known by the seller as toxic meets the definition of insider trading. The fraudulent selling of assets.
Enron, before that house of cards fell, created the California energy crisis. Watch the 2005 documentary “Enron: The Smartest Guys in the Room” for the sordid story. There were regulations in the energy derivatives market and Enron took as much advantage of no regulations as they possibly could for financial gain, in spite of the California citizens who paid through the nose for electricity. The documentary has telephone recordings of Enron employees laughing at the “suckers” in California. Now you know why those who champion de-regulation take that position. The less regulation, the more you can get away with. You make more money, period.
Please don’t think that we are saying that all bankers are corrupt. Those who are honest would not commit frauds on the massive scale of those in the late 2000’s scandal. The honest bankers would not use these complex financial instruments in order to deceptively sell toxic assets to others. Honest bankers would not make the bad loans as this would result in their bank’s failure. They would not use appraisal fraud to increase illegally the values of the homes they finance. They would not make liars loans (false incomes) without any underwriting. Liars loans are not made by honest firms.
The epidemic of liars loans being made by most of the largest banks in America came to a point in 2006 where 1 out of 3 mortgage loans were liars loans. Approximately 2,000,000 liars loans were processed in the year 2006. That is 2,000,000 fraudulent loans. Every mortgage lender in America was aware of the liars loan problem and yet the loans increased. Congress and the regulators knew of the warnings and the situation.
How can the financial elites be allowed to loot the system with impunity? During the savings and loan scandal of the 1980’s between 500-700 financial elites faced justice for their crimes. The late 2000’s financial scandal resulted in 0 (zero) referrals, much less convictions of the larger number of criminals compared to the S+L scandal of the 1980’s. Estimates are that 10-12 trillion dollars were lost in the late 2000’s scandal. If the wealthy elites continue amassing wealth through worldwide fraud we will see crisis after crisis of increasing intensity and human suffering.
This system of plunder is a direct assault on the American people and on the entire human race.
During the S+L scandal of the 1980’s every member of Congress and every economist opposed re-regulation. The repeal of the Glass-Steagall act in 1999, originally passed in 1934 to prevent another depression was an act of deregulation. It opened the door wide open for commercial banks to engage in activities and affiliations with securities firms, illegal under Glass-Steagall. Do not listen to those who cry deregulation. These people and their companies absolutely have to be very aggressively regulated. Very significant increases in penalties associated with financial crimes are called for to deter future temptation. This means real prison time where, when those in the same area of commerce see the result of wrong choices and actions, the number of those crimes drops significantly.
In order to stop accounting control fraud by top bankers, very tough regulation, with the necessary personnel in white-collar crime is necessary. There is no alternative. Timothy Geithner was a total failure as a regulator when head of the New York reserve bank. Then he became the Treasury Secretary. The Federal Reserve has the authority to regulate every mortgage lender in the country. Alan Greenspan was anti-regulation and did nothing during the 2000’s scandal. Ben Bernanke did nothing to stop the abuses and frauds. How are people who are against regulation chosen as the top regulators? Attorney General Eric Holder and former Treasury Secretary Geithner prevented any type of widespread prosecution of the huge numbers of fraudsters.
The Federal Housing Finance Administration found that 17 of the largest banks in the country made sales to the two most powerful housing entities, Fanny Mae and Freddie Mac, and left a paper trail which proved the banks made the sales intentionally while knowing they were fraudulent. Every form of justice suffers violation when the justice department refuses to undertake prosecutions. At this time the justice department is willing to give immunity while not even investigating for massive frauds in exchange for minor monetary penalties and fines. We see nothing less than the United States government’s total surrender to crony capitalism.
Those who are in positions of authority whose job it is to regulate the financial markets and fail to do so need to be replaced. Too big to fail firms need to be made smaller so that their problems, associated with their systemic risks, do not become worldwide problems. All people everywhere need to express their concerns. Once again Alan Greenspan, Ben Bernanke and Timothy Geithner all could have stopped the damage of the late 2000’s economic crisis which spread worldwide. Those in power positions believe government regulation is the problem.
Crime pays at the largest financial institutions if nobody has to pay for it. The justice department has 20% of the number of FBI agents and prosecutors specializing in white-collar crimes than were available during the 1980’s S+L scandal. The dollar amount of the late 2000’s scandal is probably 50 times larger than the S+L scandal. White collar crime personnel need to be increased to a point where it is larger than it was during the 1980’s. Strong enforcement of regulations, re-regulation along with a new Glass-Steagall law need to be passed to end the rampant frauds and abuses in the financial industries. Shrink the size of the too big to fail companies so that their risks are eliminated.
One of the better news programs on television, “Frontline”, had an episode titled “The Warning” broadcast in October of 2009. You can find the program on YouTube and you will be astonished after viewing it. The story documents the efforts of one woman who tried to warn the federal government in 1998 of the derivatives “time-bomb” and was pummeled and ignored because of her efforts.
In 2005 there were economic cheerleaders everywhere. Things were booming in the economy with the housing bubble inflating steadily. It was a time of celebration. Alan Greenspan was given the Presidential Medal of Freedom by George W. Bush. Alan Greenspan was called the “wizard” and is an Ayn Rand disciple who believed separating the state and the economy. Federal Reserve chairman beginning in 1987 and ending in 2006 and a libertarian.
When Bill Clinton became President in 1992 there was a feeling in the country that government was the problem. Too much regulation by government was viewed as a problem. Deregulation came to be seen as the answer by many at that time. Clinton appointed former Goldman-Sachs head Robert Rubin as Treasury Secretary. Greenspan and Rubin held similar views on Wall Street. They both believed that there must be less regulation of Wall Street firms. Timothy Geithner and Larry Summers were also against “intrusive” regulations and on the Clinton economic team.
The market soared with the dot.com/internet bubble euphoria of the mid to late 1990’s. These were economic boom times.
Brooksley Born was one of seven women in her years attending Stanford law school during the 1960’s. She was the first woman to become President of the Stanford Law Review and graduated at the top of her class in 1964. She had a long career in the legal field including in the areas of financial transactions and derivatives. Her name eventually came up as a possible choice for Attorney General under Bill Clinton but the post went to Janet Reno. She accepted the post to head the Commodities Futures Trading Commission (CFTC) in April 1994.
Brooksley Born was 55 years old when she accepted the CFTC position in 1994. Ms. Born had seen in her legal career the worst of the markets and knew how important regulation was. She had lunch with Alan Greenspan and became taken aback when Greenspan said, “the market will take care of fraud.”
In her job, she and her team found one area which caught their attention. That area was over-the-counter derivatives transactions. These were transactions called swaps, were unregulated and had no transparency. Derivatives are traded over-the-counter by banks, insurance companies or other funds and companies. They were unregulated, big, growing rapidly and the number of transactions was going out of sight. They are a form of gambling or bets; Ms. Born found $27 trillion worth and growing dramatically.
Investigators for the CFTC eventually learned that the transactions were of a type that fraud was highly possible. In 1993 Bankers Trust sold derivatives to Proctor and Gamble which resulted in Proctor and Gamble suing Bankers Trust for fraud. Secret recordings of people at Bankers Trust included wording by their employees that “we are going to clean their clocks (Proctor and Gamble).” CFTC learned of the possible problems associated with these financial instruments after Proctor and Gamble and others sued Bankers Trust.
There was no record keeping, no reporting, no idea how large, trillions of dollars in transactions were secret, and the market was growing rapidly. Born and her team put together a concept release to start regulation of over-the-counter derivatives/swaps. She had to get involved with Greenspan, Rubin and Larry Summers. At the time Greenspan was saying of the economy “the economy is the best I have ever witnessed in 50 years…” When Brooksley Born told Larry Summers of her intention to start regulating over-the-counter derivatives, Summers read her the riot act. “You don’t get it!” The banking industry begged to “get this lady off our backs!” Ms. Born found the reactions to her decision to regulate very suspicious. The President’s working group, handpicked by Rubin, consisted of Rubin, SEC Chairman Arthur Levitt, Fed chair Greenspan, Larry Summers and CFTC Chair Brooksley Born.
Born’s concept release was to begin the process of regulating the derivatives market. Greenspan and Rubin were 100% against the regulating. “No, no, no. Deregulation has given us boom times.”… “You do not have legal authority.” Born replied that she did have authority. Greenspan was angry, “this was serious mistake, unwise… tremendous damage…” “She’s not playing ball, we will kill this.”
Born had her staff publish the concept release which landed her in the crosshairs of Greenspan, Rubin and Leavitt. They thought that Congress must act to stop this. They began making Born to look like a power grabber.
Before Congressional committee Greenspan made the case against Born while she was pummeled by members of Congress, of which 90% knew nothing of derivatives; of their immense size and scope. In 1998 Born testified four times. She was up against very powerful forces and had no political capital and no support. Then Born’s warnings became prophecy.
Trillion dollar hedge fund Longterm Capital Management was near collapse in 1998. LTCM used derivatives to leverage $5 billion into $1 trillion using a secret mathematical formula to create a “fool-proof” money machine. 44%, 40%, 29% returns… Then their computer models began failing. LTCM was doing transactions with fifteen of America’s largest banks, was unregulated and investors could not check LTCM’s exposures. The Russian economic disaster at that time left LTCM close to collapse. The systemic risk of the collapse of LTCM was real and very scary. The entire economy was in jeopardy. After four days Wall Street banks bailed out the company and the crisis passed.
This is what happens when there is no regulation of the gambling, Wall Street elites. Regulation of the over-the-counter derivatives market was necessary then and needed now. Greenspan then told Congress, “This was an anomaly… No new regulations… Regulation of the o-t-c derivatives market is quite adequate to maintain a degree of stability in the system…” Over-the-counter derivatives were left unregulated by Congress. Born was told there would be a regulatory freeze/prohibition on regulation of derivatives due to intense pressure exerted by the financial lobby and by Congress.
Brooksley Born resigned on June 1, 1999.
In 2007 the derivatives market grew to a mind-boggling $595 trillion (yes, trillion). Estimates as of 2012 are $1,250 trillion; an unbelievable statistic. The time bomb explosion came in 2007, ten years after the collapse of Longterm Capital Management. On September 15, 2008 the collapse of Lehman Brothers made everyone aware of a financial crisis in both the U.S. and world capital markets.
Brooksley Born remained silent until 2009 when she said:
“The market grew so enormously, with so little oversight and regulation, that it made the financial crisis much deeper and pervasive than it otherwise would have been.”
SEC Chairman Arthur Leavitt changed his opinion of Brooksley Born:
“I could have made a difference… I could have done much better.”
In a stunning testimony Alan Greenspan said to Congress after retiring:
“Markets regulate themselves was a flaw. View was not right.”
Greenspan realized that his anti-regulation philosophy had deep flaws.