Monday, September 22, 2008

High Risk Means No Risk For Those at the Top

My mind is still reeling as I ponder the potential ramifications of the recent shake up in the financial markets. Not only will this bail out cost more taxpayer money than I can possibly imagine, we have effectively nationalized our financial system. While the Republicans rail against a national health care system, President Bush showed no hesitation in spending hundreds of billions of dollars to buy up a load of worthless holdings from major financial institutions which were thought to be too big to go under. Everything Mr. Bush does sends the same message: If you are rich, we will always extend a lifeline; if you are poor, suck it pal!

So what got us into this horrible mess? As with any financial mess: greed. When you couple greed with a regulatory system that is antiquated and disinclined to intervene, you have a bomb waiting to go off. Having worked for a major investment firm for many years, I know that the layers of regulation regarding financial institutions are deep and complex. But just like our complicated income tax system, there are always those who can circumvent the system if they really want to. Fortunately, I happened to work for a company that believed in running a tight ship, but I was also aware that many of the regulations we followed were created in the early 30s in response to the Stock Market Crash of 1929. A few extra precautions were put into place after the next big crash of 1987, but surprisingly little was done during the 90s when financial institutions grew by leaps and bounds.

The proliferation of employee-funded retirement plans and the feeble interests offered by bank instruments pushed millions of Americans into stocks and bonds. Investment firms grew exponentially during the 90s, not necessarily because of their investment genius, but simply from market penetration. The flood of money into the markets in turn spurred on these markets to ever greater heights. The more people wanted in, the higher the value of stocks went, which drew even more people in, which drove stock prices even higher, and so on. By the late 90s, you could invest in just about anything and it would make money over the short term. Investment firms made money by staying open, basically.

I worked as a lowly cog in one such investment firm during the 90s. While the investment managers and administrative bigwigs treated themselves to lavish raises, bonuses, and stock options, us worker drones were given annual raises barely above a cost-of-living increase and year-end bonuses that were the monetary equivalent of Chevy Chase's Jelly-of-the-Month Club bonus from National Lampoon's Christmas Vacation. Granted, I was not working the trading desk or directly effecting any influence over our investment products, but I was a part of an army who took care of the shareholders' daily needs and made sure they were happy. And in an environment where any boob could make money in the stock market, the major deciding factor for most shareholders was the service they received. But that was always discounted by the people in power. It was their brilliant financial minds that drove their success, or so they thought.

The bubble burst in 2000. The markets dropped and no amount of trading finesse could create gains. Mutual fund managers who were once given rock star treatment by the financial press were suddenly vilified by the shareholders. Some slunk away into oblivion to pursue "other opportunities." Still, those who remained continued to receive ample raises and bonuses each year while my colleagues and I either received less or were laid off. Those who suffered most were the shareholders and the middle-class employees.

With the stock market suffering, the next area of exploitation became the housing market. Home buyers had already been benefiting from a decade of low-interest-rate mortgages, but avarice created the highly risky sub-prime mortgage. Any reasonable thinking person would know that you don't talk someone of limited means into an adjustable rate mortgage. The introductory rate they receive at the beginning is probably the rate they can afford. Once the adjusting kicks in, they are priced out of their mortgage. Secondarily, because the initial rate is so low, home buyers convinced themselves they could pay more for a house than they once would simply because the low interest rate made the monthly payment reasonable. Of course, that monthly payment was the highest - not the lowest - they wanted to pay. Raise that adjustable rate a few ticks and suddenly they were on the verge of default.

The banking piranhas who pushed these loans knew all this of course. They knew these people would be sucking wind in a year or two, but every new mortgage meant a commission. They had to keep making those commissions. If the suckers were out on their ear in a year or two, that was their dumb luck. I can't really argue that point - those who don't read or care to understand the fine print should be held accountable. But when an avalanche of bad debt comes crashing down, everyone gets hit, not just the poor saps who took out the mortgages.

Of course, that's not quite true. The bigwigs who ran these financial institutions into the ground with ridiculous risk - those same bigwigs who received enormous salaries and bonuses during the run up - are now bailed out by Uncle Sam. We, the taxpayers, have to pay for the greed of those who already had too much. In return, we get a load of bad holdings that will likely never amount to anything. Lucky us.

So the risk/reward message I preached to so many shareholders for so many years, and the warnings I carefully laid out for them that high risk investments may lead to big losses, don't hold true anymore - at least for the ones at the top. They take all the risk they want and if it blows up in their face, the taxpayers bail them out. No accountability for those who finance the campaigns of Congresspeople.

It's estimated that this financial bail out may cost $1 trillion. And a national health care plan would be too expensive? Oh right, that's for the poor people. They don't count.

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