Greed Pays -
By SHARON SMITH /
On March 19, JPMorgan Chase chief executive Jamie Dimon joined Bear
Stearns chief executive Alan Schwartz to face a group of 400 stunned
Bear executives. Five days earlier, Bear Stearns, one of Wall Street's
five largest investment banks, had lost $17 billion of wealth,
triggering the biggest financial panic since the Great Depression.
Bear approached complete collapse before the U.S. Federal Reserve
stepped in to rescue it by engineering the emergency funding that
allowed commercial giant JPMorgan to take over Bear, the first time
the Fed has engineered such a rescue since the 1930s.
Dimon and Schwartz somberly explained to the assembled executives, "we
here are a collective victim of violence," as if the investment firm
had been beaten and robbed by a gang of creditors instead of aiding
and abetting its own rapid demise.
It is impossible to feel sympathy for the situation now facing Bear's
high-flying management team. Schwartz continued to issue public
assurances of Bear's solvency until the day the firm collapsed.
Current non-executive chairman and former CEO Jimmy Cayne, who
achieved billionaire status a year ago, has spent the better part of
the last year attending to his hobby of card playing and was indeed at
a bridge tournament in Detroit while the value of Bear stocks was
eva****ating last week.
Even now, Cayne will walk away with more than $16 million while
JPMorgan has already re****tedly made lucrative offers to hire top Bear
bankers and brokers. Under pressure from Bear's board of directors,
Morgan sweetened the pot, raising its initial offer of $2 per share to
$10 on March 24-again winning praise from Schwartz.
Bear's 14,000 employees, in contrast, have fared poorly. They own an
estimated one-third of its total shares, which only last year peaked
at $171.50 per share. As Bear sheds half of its workforce, many will
face financial ruin. The cost to workers whose pension funds have been
invested in Bear Stearns is unknown.
"Wall Street is really predicated on greed"
The Bear Stearns debacle is just the latest phase of the financial
distress triggered by the subprime mortgage crisis last July, and it
is unlikely to be the last. In a moment of candor, former Bear board
member Stephen Raphael summarized the unfolding crisis facing the U.S.
financial system, telling the Wall Street Journal, "Wall Street is
really predicated on greed. This could happen to any firm."
The current financial panic is based on the knowledge that since the
1990s, Wall Street investment firms have orchestrated get-rich-quick
schemes predicated on a model of betting using the odds of Russian
Roulette, in which managers offer investors op****tunities to make fast
money in high risk transactions-through hedge funds, structured
Investment Vehicles (SIVs) and other "innovative" derivative
instruments such as Collateralized Debt Obligations (CDOs).
These investment schemes, which operate free of government regulation
or oversight, have been described as a "shadow banking system," which
operates in virtual secrecy, accountable to no one, based on
mathematical models investors could not possibly understand and
leveraged by borrowed money many times the actual money invested-at
terms always skewed in favor of the short-term gains for managers.
The wheels for the current financial perfect storm were set in motion
many years before the subprime mortgage crisis hit, and the Bush
administration deserves no credit.
As one of his last acts as president in December 2000 Bill Clinton
signed into law the Commodity Futures Modernization Act, which
formally deregulated companies sponsoring derivatives schemes,
sponsored by Texas Republican Phil Gramm, now the vice chairman of the
Swiss investment firm UBS.
As Financial Times columnist Martin Wolf noted, "With the 'right' fee
structure mediocre investment managers may become rich as they ensure
that their investors cease to remain so."
On March 13, the Carlyle Capital Cor****ation hedge fund collapsed with
debts amounting to 32 times its capital. The significance of Carlyle's
demise was overshadowed by the Bear Stearns debacle. Yet, as Wolf
argued, such vehicles are "bound to attract the unscrupulous and
unskilled, just as such people are attracted to dealing in used cars
"It is in the interests of insiders to game the system by exploiting
the returns from high probability events. This means that businesses
will suddenly blow up when the low probability disaster occurs, as
happened spectacularly at [the U.K. bank] Northern Rock and Bear
Stearns."
Two of Bear Stearns hedge funds went under in the last six months due
to disintegrating subprime mortgage holdings. But as the recent string
of Wall Street crises exposed, the shadow banking system has
increasingly intersected with commercial banks. It is difficult to
know where one ends and the other begins, since banks have been
allowed to keep such investment vehicles off their balance sheets--
legally.
As the New York Times re****ted on March 23, "derivatives are buried in
the accounts of just about every Wall Street firm, as well as major
commercial banks like Citigroup and JPMorgan Chase."
In recent years, mortgages have been carved up and bundled into
investments that changed hands before the ink was dry, as investment
banks and other vehicles bundled the debt and passed it on in a global
game of "hot potato" that passed on risks to the entire international
banking system.
No bailout for distressed homeowners
Using up to $30 billion of taxpayer money-and without congressional
approval-the Federal Reserve instantly mustered a bailout plan for
Bear Stearns. But no relief is in sight for the more than 20 million
homeowners whose mortgages are expected to exceed the value of their
houses by the end of the year-roughly one-quarter of U.S. homes,
according to economist Paul Krugman-or the more than 2 million facing
foreclosure within the next two years.
While house prices have already have dropped 5-10 percent, most
economists predict they will drop by another 20 percent or more over
the next two years. But as Krugman notes, regional disparities will be
devastating: "In places like Miami or Los Angeles, you could be
looking at 40 percent or 50 percent declines."_
Yet, as the Financial Times recently observed, working-class
homeowners are the most vulnerable to market trepidations:
"remarkably, bankruptcy laws currently provide that almost every form
of property (including business property, vacation homes and those
owned for rental) except an individual's principal residence cannot be
repossessed if an individual has a suitable court-approved bankruptcy
plan."
Thus far, the Bush administration's response has promoted a "tough
love" approach toward delinquent homeowners, lured into obtaining
mortgages by predatory lenders during the heyday of the housing boom.
Preventing housing prices from falling will prolong the agony, claims
to Treasury Secretary Henry Paulson: "We need the correction."
Even the Wall Street Journal observed this glaring discrepancy,
commenting, "Why a 'bailout' for Wall Street, and none for homeowners?
Treasury Secretary Paulson is trying [to defend] what the government
just did: 'Given the turbulence we've had in our markets and the way
that sentiment has swung so hard toward 'risk adversity,' our top
priority is the stability of our financial system, because orderly,
stable financial markets are essential to the overall health of our
economy.'"__
Those expecting a Democratic Party victory in November to reverse Wall
Street forces must reconsider. "Hillary Rodham Clinton and Barack
Obama, who are running for president as economic populists, are
benefiting handsomely from Wall Street donations, easily surpassing
Republican John McCain in campaign contributions from the troubled
financial services sector," noted the Los Angeles Times.
By the end of 2007, 36 percent of the U.S. population's disposable
income went to food, energy and medical care, more than at any time
since 1960, when records began. And that doesn't count, crucially,
housing costs. Meanwhile, the other shoe has yet to drop.
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Sharon Smith is the author of Women and Socialism and Subterranean
Fire: a History of Working-Class Radicalism in the United States. She
can be reached at: sharon@[EMAIL PROTECTED]
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