OpEdNews - Page 5 of Article: "Looting of America" Author Sees Opportunity in Meltdown

But, you know what, I don't want the listener to get a misconception. You could take all the subprime mortgages that happened and all the predatory lending, you could take that entire problem and all it all up, and at most it is a $300 billion dollar problem. You could pay off everybody's mortgage and clean up that problem for about $300 billion.

DS: And that's two percent of household net worth, you say in the book.

LL: Yep.

DS: Two percent, so . . .

LL: But that wasn't the problem. The problem was that they basically sold, securitized, those same subprime mortgages again and again and again. It was like selling the Brooklyn Bridge over and over and over again. So that $300 billion turned into $1.2, $1.5 trillion of toxic waste and not it's scattered all over the place.

That's, when the TARP money had to be used it wasn't to take care of the subprime mortgages, it was to take care of all that, to try to deal with all those toxic assets. They're still trying to figure out how to deal with the toxic assets. It's such a thorny problem. Because . . .

DS: Right.

LL: . . . nobody wants to realize the losses on those things. So we, with the selling of it again and again. Look, it became, funny thing was, it's true that the market for subprime mortgages was driven by the financial community, not by, you know, a conveyor belt was set up. They wanted those subprime mortgages as fast as possible to package and make the huge fees and sell to investors. But, you know what, that got to be too much of a pain in the butt. So the figured out how to do that without ever even owning the mortgages. Because to get title to a thousand mortgages and put them in a pool and do all the fancy things they did became too time consuming. So they invented a way to do it without owning them at all. That's called synthetic. And that's how they created synthetic collateralized debt obligations. That's where it got to be like fantasy baseball.

They just created new securities that were tracking subprime mortgages without owning subprime mortgages.

DS: Yeah.

LL: And people bought them and they had value and they borrowed money against them as well. So you started to have a pyramid of mortgages based on nothing and then loans taken out against those mortgages that are based on nothing. So even a small hiccup in the actual housing market below would cause a cascading set of problems.

DS: So the actual problem in the housing market is $300 billion. Here we are having shelled out trillions with a "T" of our children's money with no end in sight, and the problem is still there. So, as I think you explain extremely well in the book The Looting of America, it wasn't just, this can't be just blamed on poor people who bought too big a house.

LL: Oh, god, yeah. That's what I think folks would, you know, like, Wall Street would probably like us to believe that, but I, I actually think that those people who are watching this thing know better. And what the fundamental problem comes down to is the financial free markets left to their own devices, in other words, pure, free market financial capitalism left to its own devices doesn't work. It will crash.

We are witnessing a real time experiment in what happens when we deregulate high finance and let it go do its own thing. Left to its own devices, sooner or later it's going to create fantasy finance instruments because it's profitable to do so. We broke down, starting in the 70's, we started to get rid of as many controls, all the New Deal controls virtually were undermined or eliminated in the 70s and 80s and right on through the 90s.

And attempts to regulate these instruments were actually beaten back. Phil Gramm did a masterful job in passing legislation, it wasn't actually signed, that made it illegal to regulate the credit default swap market, this illegal, this insurance that we described.

By the way, the reason, if it was called insurance it would never be allowed, is in the insurance industry you have to have a material interest, well, a couple of things. You have to have real assets to cover your insurance policies if you are an insurance company. And second of all, there has to be a tangible interest. You can't insure your neighbor's house if you don't own your neighbor's house. And thirdly, 10,000 people can't insure your neighbor's house, because the insurance company knows if you do stuff like that, well, the temptation to burn down your neighbor's house, have a suspicious fire there, goes up because there are a lot of people betting on it to go down.

1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10