By Mickey Walker-June 7, 2009
In another life, I used to sell securities, municipal bonds
mainly. I was a full-blown “Series
Seven” bond broker and worked a few years before retiring for a Houston-based
municipal bond underwriter. Our firm
brought new issues of tax-free bonds to market for sale to the general public
and other institutions such as banks and insurance companies. These Texas bonds
were called MUD bonds (Municipal Utility District), ad-valorem tax bonds the capital
and interest of which was secured by property tax payments each homeowner made to
the bond issuer in his monthly payments. The bond issuer, in turn, through using paying-agent banks, paid the bondholders
(those individuals who bought the bonds) tax-free income every six months. When the bonds matured the bondholders
got their principal back and all was right with the world. Unless the bond defaulted which rarely
ever happened. The wondrous security
of it all was based upon a simple fact: rather than lose their homes for failure to pay taxes, homeowners would
pay those taxes and the bondholders would have the ultimate security in knowing
that. And if a homeowner lost his
job, then his home, the bank that held the note would sell the home to another
human being for the back taxes plus whatever the market on the house happened
to be at the time. Such a
deal! What security! And to make things even better, giant
insurers of municipal bonds sometimes offered increased security by insuring
the bond payments against any kind of default that would disrupt the flow of
cash from the paying agent banks to the bondholders. Life was sweet.
I will never forget the day when some brokers from a large New
York Wall Street investment bank came to pitch Derivatives to us. They wanted our securities firm to sell Derivatives
to our own customers, you see. The
commission for selling Derivatives was phenomenal, almost double a normal sales
fee for securities. Trouble was,
none of us country brokers from the little old tame municipal bond firm I
worked for in Houston, understood one iota about what Derivatives really were. We pummeled the dudes from New York for
answers. Were they bonds? Well, almost, but not technically, they
said. What was a tranche? Well, these were the different chambers
of time where a derivative would either pay off (and your client would win) or
lose your client his ass (if he guessed wrong). After the NY dudes in the
expensive Italian suits packed it up and left with us still looking glassy-eyed
at each other, one of my fellow brokers, born and raised in the boot heel of
Missouri, said, “Hell they’s bookie bets.” He was right. They were unregulated by the SEC, and they sort of talked around the
idea that a Derivative would pay if the mortgagee homeowners (for example)
would pay on time OR NOT. You had
to be on the right side of the fence. It was a bet on which blackbird on the fence would fly first. Get it? Nope. None of
us got it, either. And thank God,
none of us sold the garbage called derivatives. But the rest of the world for the past several years was not
so lucky.
Fast-forwarding to May, 2009, I read a column by a friend
and fellow writer of mine for The Political Junkies Magazine, Dr. Steve
Jonas. In his inimitable style and
brilliance, Dr. J. wrote about the new “Financial Capitalism” a new ballgame
from that of Mercantile Capitalism and Industrial Capitalism of the past and of
which Dr. J. speaks. It inspired
me to write more about the financial uncertainty and cloud hanging over America
at this juncture in time in May 24, 2009. You can read Dr. J’s article here:
“Financial Capitalism” as I interpreted
it is the gaggle of entangled snares and unsanctified, deregulated,
non-regulated trash of non-securities that remains after Derivatives did their
work on America for the past 15 years. Here we sit with no goals really of what will cure the disease that has
our country now borrowed and spent and robbed and cheated into a third world
state. Have you heard the
latest? Several sources throughout
the world see the United States now falling from its impeccable credit rating
by Moody’s and Standard and Poor’s of AAA to AA and below. President Obama has an impossible
task. He will be in damage control
operations trying to shore up our economy for his whole term and beyond if he
is elected to a second. No one
knows when it will ever end. No
one knows. Our nation’s falling to
a lower credit rating will plunge us below several other countries of the world
including Norway, Germany, and of course, oil-rich Saudi Arabia. That means one thing: with our multi-trillion dollar National
Debt, countries who have lent us money in the past eventually, will cut us
off. We will no longer have the
money necessary to run the government of the United States of America! Just imagine what that would be like.
We have, thanks to the borrow-and-spend Bush/Cheney mad men,
beginning with Ronald Reagan who borrowed and spent us to the brink by
“Bringing the Evil Empire, Russia to her knees” arrived at a place of economic
wasteland of what used to be the American Economy. We are the losers, to be sure when our debt now is over 15
Trillion dollars (including off budget Iraq War spending), but who are the
winners? Does Halliburton or Dick
Cheney come to mind? Reckon they
sold some of them $600.00 toilet seats to Uncle Sam during all this ongoing
financial and war corporation mêlée? Connect the dots, someone. Puhlese.
Derivatives, though, have permeated the world financial
markets like a financial Lymphoma. Combined with our national debt, we are facing a one-two punch the likes
of which the world has never seen. And nobody knows what it will look like in the aftermath because none of
us has ever seen it before where markets crash on a global scale. I know this sounds too dire, too
horrific to believe, and maybe it is; I hope so. But just last week I got an officer of a world-class bank to
infer that his bank held over 90 Trillion dollars of Derivatives. “What would happen if just 1 Trillion
dollars worth that you held got called in, say in a pension fund withdrawal
panic?” I asked him. He shuddered. There was a grand pause.
Finally, I said, “Look, these Derivatives aren’t real, are
they?” He said, “In a sense,
no.” So I asked him, what, then
would happen if his bank and the next biggest with over 50 Trillion dollars
worth of Derivatives, instead of crashing and burning and taking America and
the rest of the world down the financial toilet, what would happen if the banks
of the world who held Derivatives just said, hey, world, tough luck but we’re
resetting the taxi meter. Of
course I told him that would mean default. He said he knew that very well, but that the alternative was
to commit financial suicide the likes of which the world has never known. So by disavowing the existence of
Derivatives since they were never real in the first place, that would get us
off the hook? Yes, it would, he
added. We agreed that if the banks
needed a moral basis from which to waffle, they could all just say Derivatives
are not real, not regulated, and therefore, not recognized as legitimate
securities. Swell. So down goes the pension plan of IBM,
General Motors, the US Government Employees Credit Union, all of the
unfortunates who bought into Derivatives. AIG was bailed out because, right or wrong, it was decided that if it
failed, too many other Americans would be hurt. But the inevitable question remains. How do you liquidate a debt? You either pay it or renege, no other
possibility exists. And how do
your liquidate an impossible debt? You disavow it, don’t pay it and say it wasn’t really a legitimate debt
to begin with. There are several
who would agree with this since Derivatives were never regulated as real
securities. And AIG is on borrowed
time until the next wave.
Do you see the pandemonium ahead? Remember the municipal bond insurers I mentioned? Two of the biggest, AMBAC and MBIA have
already bit the dust after having paid out all the billions in their cash
reserves. Now a municipal bond
must be able to pay its own debts on time with no insurance against default to prop
it up. Looks like the world is
returning to real. Funny thing,
but when you play the shell game of Derivatives, there never was a pea in the
first place. Wishing that the
lesson learned would not be so harsh, I wonder truly what face financial
markets might present in the next couple of years. Dr. J painted an ominous picture of “Financial Capitalism”
and its affect on us and the rest of the world in the times to come. That’s our legacy though when we fail
to cry out against unlawful wars our leaders wage without congressional
approval, to borrow and spend our great country into financial oblivion. And when we let the financial
rapscallions of the world entice us all into playing their own shell game. Without the pea.
