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OpEdNews Op Eds    H2'ed 4/9/09

Do the Math

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Message Jeffrey Rock

It is obvious that greedy corporate captains of industry are stealing from us: stealing our livelihoods, stealing our education, stealing our medical care system, and stealing our democracy.  However, we often overlook one area that gives us insight into exactly what is going on, the math.


First, neo-economists and their media cheerleaders tell us that the sub-prime loan failures caused this economic mess.  In the same breath and using the same logic they clearly imply that the people who took out these loans and cannot pay them back are responsible.  After all, poor stupid minorities and their liberal counterparts in government were just trying to get a free ride and should therefore take the blame.  How convenient.  It even sounds logical.


But something does not add up.  The total sub-prime loan failures to date only total several hundred billion.  It is projected that the total cost could reach $1.2 trillion.  Mmmm.  So let's add up all the money spent to fix the damage caused by these poor minorities.  First there was the $700 bailout rushed through Congress under threat of Marshall Law by Bush and Paulsen.  Bush spent $350 billion of that money and Obama/Geithner are well on the way to spending the rest.  Then we have another approximate $800 billion to stimulate the economy.  So far the total is $1.5 trillion.  Now we add the real money.  The Federal Reserve is not under the control of Congress and needs no legislation to take financial action.  The Fed has printed money and 'lent' it to the largest banking and investment firms by purchasing their bonds.  That is how the Fed controls the money supply.  How much have they printed you ask?  According to Bloomberg (not your bastion of left wing propaganda) the total money printed to bailout the financial institutions is $8.5 trillion and growing.  So, we have a few hundred billion dollar sub-prime problem that may grow to $1.2 trillion.  Yet we have already pumped $10 trillion into the system to 'fix' the problem ostensibly caused by poor minorities who borrowed more than they could afford.  Oh.  Something does not add up.


The money being printed is given to these hallowed banking, investment and financial institutions in order to assist with the sub-prime mortgage crisis.  Yet where is the money going?  As many suspected, and now  confirmed beyond a shadow of a doubt, these monies are going to pay off credit default swaps and other strange and complex financial 'instruments'. Most of these payments go overseas and do nothing to stimulate our economy or to assist homeowners to avoid foreclosure.  But wait, we are not supposed to have a credit default swap crisis.  We have a sub-prime mortgage crisis.  So what is happening?  The underlying credit default swap problem has been estimated to be anywhere from $450 trillion to one quadrillion.  Since no records are available to the public no one really knows the full extent of the credit default swaps that must be paid off in the aftermath of assets that have tumbled in value across the globe.  So the math tells us that the sub-prime crisis is just a cover story to hide the real crisis facing our financial system.


We know that credit default swaps are basically bets that an institution or investment will fail. They were intended to insure investments against failure.  However, unlike insurance on your house, you can hold a credit default swap without having any investment to insure.  It would be like the entire neighborhood buying fire insurance that pays them off when only one house burns down.  Without suffering any loss, these holders of credit default swaps can still reap huge benefits if an investment fails, regardless of their lack of ownership in the investment that went bad.  In effect this is a bet, nothing more, nothing less.  Buyers of credit default swaps are betting that some investment will fail.  Makes you wonder why Hank Paulsen allowed Lehman Brothers to fail.  Could it possibly be that Paulsen held CDS's that paid off if Lehman failed?

Purchasers of CDS's gain through the failure of others.  If enough people buy insurance that pays off when my house burns down, then the motivation to have my house burn down increases.  Many people could make a fortune by torching my house. This arrangement undermines the forces of the free market because it motivates investors to desire failure instead of success.  Just do the math.  Worse, because banking, insurance and investment businesses have all merged, the taxpayer is left holding the bag for paying off all these bad bets made by the insurers who sold CDS's.


As noted above, hundreds of billions have gone directly to banks to assist in preventing home foreclosures.  However, the banks are still not lending.  I have a home loan with Well Fargo, who received $30 billion so far in the bank bailout scheme.  I contacted Wells Fargo to see how they are spending this money to prevent foreclosure.  I said my income reduced and could cause me to be unable to pay my full mortgage payment.  I also said that if I could get a slight reduction in my interest rate (now 6-5/8 %) to the rates that have been mentioned all over the news (between 4.5 and 5%) that I would avoid foreclosure.  But Wells Fargo's response was anything but helpful.  I was transferred around for two weeks to many different departments, each claiming they could do nothing.  They claimed that my house did not have enough equity even though it was appraised at a value in excess of the loan.  After three weeks I finally gave up.  It became clear to me that Wells Fargo had no desire to prevent a possible foreclosure.  That fact, so clearly demonstrated by their behavior, was the cause of great curiosity for me.  Then the light went on.  Well Fargo wants me to default on the loan.  Why?  Because they will make significantly more money than if I simply pay it off.  "How can this be?" you ask.


Simple.  Let's look at the math.  Assume that someone can no longer afford their mortgage payments and their home goes into foreclosure.  The bank is apparently losing money.  However, the government will likely give them bailout money to cover their losses.  (As an aside it would be cheaper to give the money to the borrower who can then make the payment and still stay in their home).   When they receive the bailout money that makes them whole or close to whole, they still own the property.  What a deal! At any time in the future they can sell the property for whatever the current market value is.  This system allows banks to collect twice for the loan while the original homeowner sucks wind..  First the government pays the banks back for their losses and then the banks sell the house later for yet more money.  This is what is happening now and explains exactly why the banks will never lend any of the bailout money to assist homeowners in distress.  It would be against their best interest to do so.  They make much more money by being paid twice for the same house.  Its simple math.


All of this is reminiscent of the math pertaining to the Enron failure scam.  Enron went belly-up over a $4 billion pension fund problem.  However, in California during the supposed power shortages, prices went so high that Enron was making record profits.  Doing the math, the L.A. Times estimated that the total additional monies earned by the energy suppliers during that period, above the normal price paid by electricity users, was $76 billion.  All that money would be extra profit because at the normal electricity rates, energy suppliers were already making a profit, guaranteed by the California PUC.  Enron did not make all that money.  They shared it with other electricity suppliers.  However, it was also reported that Enron accounted for two-thirds of California's electrical market.  That would mean they only got two-thirds of the extra profit.  Two-thirds of $76 billion is about $51 billion.  Just as Enron was filling their coffers with an additional $51 billion, it declared bankruptcy over a $4 billion problem.  What?  The math just does not add up.  So what happened to all the money? According to Enron accountants, all that money went overseas into multiple investments, all of which went bad.  However, upon closer examination, all these investments went to tax havens that have banking secrecy laws.  No one could therefore verify exactly how these investments went bad.  Again, something is fishy.  Tax havens with banking secrecy laws are not nations that have anything in which one could invest.  Lawyers and accountants who manage the funds of rich people trying to avoid taxation typically inhabit these nations.  They are small, often islands and are not places where huge sums of money are invested.  Instead they are places where huge amounts of money are stashed to avoid paying taxes.  What does this add up to?  Enron's executives shuffled $51 billion, plus another $4 billion into offshore banks in nations with no taxes and banking secrecy laws preventing any transparency.  Gee whiz.  Could it be that Enron's executives transferred all of Enron's wealth to their own personal offshore accounts and then claimed these 'investments' failed, losing ALL the money.  This story never added up to anything other than a vast the math.

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An economist for 34 years I have remained committed to social justice and economic equality for as long. As long as we keep voting in Tweedly-Demos and Tweedly-Repugs nothing will change. The only way we can affect the political structure is to (more...)
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