On the Road to Catastrophe
Subprime at the Car Lot
March 15, 2012 "Counterpunch" - - Have you ever read a better description of how banking really works? It’s just one big looting operation that’s backstopped by the bandits at the Federal Reserve. Just think about it; millions of hard-working people were taken to the cleaners in an $8 trillion mortgage-laundering scam, and yet, not one of the miscreants who concocted the coup has ever seen the inside of a jail. How’s that for justice?
But that’s all “yesterday’s news”, what we’re interested in is today, and in particular, signs that Wall Street is engineering another debtbomb that will blow more holes in middle class balance sheets. Here’s some background from the Wall Street Journal:
Okay, so the big boys are licking their chops because yield-starved investors have begun dipping their toes in the water again. It was only a matter of time. When the Fed keeps rates frozen at zero, it’s like putting a gun to the head of a fund manager who has to prove to his clients that he can inflate their nest egg in time for retirement. Here’s more from the WSJ:
Let’s get this straight; the New York Fed–headed by ex-Goldman alum Bill Dudley, orchestrated the sale of AIGs bundle of subprime MBS? And to whom were those toxic bonds sold? The answer can be found on the New York Fed’s website:
Surprise, surprise! So, there’s a subprime feeding frenzy and who’s first in the sharktank? You guessed it; G-Sax. I gather that “competitive” in this case, means that the transaction was conducted in the dead of night with just a handful of other well-connected bidders.
All that aside, the gold rush for junk has resumed paving the way for another round of massive speculative leveraging leading to another behemoth credit bubble. But there’s more to this junk-buying spree then meets the eye. This isn’t about high-stakes gamblers flipping a coin and hoping they come up “winners”. Oh, no. This is about Bernanke winking to his buddies so they know what-to-buy before the Fed revs up QE3. Here’s the scoop from the WSJ:
And, what exactly did Bernanke’s first-round of MBS purchases ($1.25 trillion) do to improve housing, you ask?
Not a thing, although there was a slight blip in housing sales due to the banks withholding inventory. Beyond that, the program was a complete flop. It added no new jobs, did nothing to boost GDP, and did not stem the deluge of foreclosures. It did, however, transform the Fed’s balance sheet into the biggest stinkpile of garbage assets on the planet. (now exceeding $3 trillion) By the way, the Fed still marks its MBS at par when, in fact, their current market value is somewhere in the neighborhood of 50 cents on the dollar. That means, someone is going to get a $600 billion haircut when the last of these turkeys are auctioned off.
Here’s more on Wall Street’s high-yield hysteria from an article titled “Buyers take a Shine to “Junk’”:
It’s all just child’s-play for an old graybeard like Fed chairman Pavlov. All he has to do is dial rates down to zero and wait for the salivating to begin. He knows the bigtime fund managers have to plump up their capital or investors will vamoose. What choice do they have? They either dabble in risky bonds and take their chances or head to Vegas; there’s not much in between.
Lastly, there’s this from an article titled “Auto Bonds drive into the Fast Lane”:
Money markets are chasing yield, too, which is another sign of looming disaster. Remember, it was Reserve Primary Fund– the oldest and largest of the money market funds–that froze redemptions after the value of its shares dropped below $1 (aka–”breaking the buck”) on September 15, 2008 shortly after Lehman Brothers defaulted. The news of Primary’s troubles ignited a bank run that siphoned $40 billion from its $62.6 billion stash and triggered a panic that spread across all asset classes sending equities markets plunging. By the time the Treasury provided guarantees on remaining money market deposits, over $170 billion had been drained from other accounts and the financial system was in full-meltdown phase.
But maybe we are overreacting, after all, the banks have improved the way they screen loan applicants to make sure that only people with regular income, decent collateral and a good FICO-score can buy a car on credit, right?
Wrong. This is from Reuters titled “U.S. auto lenders give easier terms, cheaper money”:
“130 percent of the value of the car”! So you can walk away with extra money in your pocket?
And here’s the punchline: The “top lender” is Ally Financial, the former financing arm of General Motors that is “74 percent owned by the U.S. government.” So Uncle Sam–who had to bail out the whole freaking financial system after the last subprime fisasco–is now “your friendly subprime auto dealer”?
Bottom line: As the economy improves, more investors will move into riskier assets which will increase the probability of another catastrophe. Maybe we should think about regulating the system again?
MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, forthcoming from AK Press. He can be reached at firstname.lastname@example.org - www.counterpunch.org/