Midlands Voices: Americans right to stage protests By Susanne Trimbath, MBA, Ph.D. « ColumnsShare Advertisement The writer is chief executive of STP Advisory Services and assistant professor in the College of Business at Bellevue University.
I've waited three years for Americans to get out in the street and protest the actions that created the financial crisis that sparked the Great Contraction. If some Third World leader had pillaged the national Treasury the way Hank Paulson did when he convinced Congress to spend $750 billion to bail out the Wall Street banks, there would have been angry mobs, riots and possibly U.N. peacekeepers.
Three years later, all we can muster in the United States is a sort of hippy sit-in. It's not much, but it's better than letting it run over us, drip-by-drip, until there is no middle in our increasingly bifurcated economy.
Let me summarize what 99 percent of Americans should protest. It started in the early 2000s with good intentions — policies directed toward leveling the playing field by redesigning consumer credit ratings in a way that would allow more Americans to own homes. The move was embraced by Republicans and Democrats alike, and a great boom in home prices was born. Then everyone got greedy, including wannabe real estate moguls who started flipping houses for quick profits.
Banks that were writing mortgages soon turned to securitization — bundling mortgages into bonds called mortgage-backed securities — to use the proceeds to lend more money to subprime borrowers. Banks collect fees at every step. They charge fees for making the mortgage loan and for putting together the bond deal. Then they charge commissions for trading the bonds later on.
The interest paid on the bonds was high because the interest charged on the mortgage was high — after all, these were less-than-credit-worthy borrowers by traditional standards. The banks wanted to be compensated for taking the risk, even though they were selling the risk to someone else.
Some banks paid credit rating agencies like Standard & Poor's to give triple-A ratings to their mortgage bonds so that insurance companies and pension funds could get in on the action. Insurance companies and pension funds are highly regulated in order to protect investors who rely on them for compensation in disasters and retirement. If the bank couldn't buy the top credit rating for some mortgage bonds, it turned to selling an unregulated kind of insurance called Credit Default Swaps.
The swaps became so popular that people who didn't even own the bonds were buying the swaps. Eventually, there were more credit default swaps than there were bonds — and the banks were making fees on top of fees. In the end, there was more money to be made in mortgage defaults than mortgage payoffs.
It was a little like the failing businessman who burns down his own shop because he can make more on the insurance than he can trying to sell it. Two years ago, you could have purchased all the common stock of Lennar Homebuilders for $1.2 billion — but if the company went bankrupt you could collect $40 billion on the swaps.
Like any Ponzi scheme, this one required that "new money" continue to flow in to keep up the payouts to early investors. When the swaps came due, companies like AIG collapsed under the pressure of the payments — and American taxpayers were left holding the bag. When Uncle Sam took 80 percent ownership of AIG in Paulson's bailout scheme, the Treasury in combination with the Federal Reserve provided an unlimited source of new money.
Critics of the protesters equate Wall Street with all the companies that create jobs, but this is ignorant of how the stock market works. The only time that any company gets money from its stock is in the initial public offering. Those shares are mostly sold to syndicates, underwriters and primary dealers — not the general public.
When the company's stock price goes up, it is the broker that makes money — not the company. Long-term investors don't see any profit until they sell the stock, at which point the broker takes another fee. The stock market should have everything to do with jobs, but it doesn't. It mostly creates jobs for Wall Street.
The other argument is that the problem isn't Wall Street, it's the government. Anyone who thinks that only one or the other is to blame doesn't understand how politics is financed. According to MAPLight.org's analysis, Barack Obama's presidential campaign received more money in 2007-08 from Wall Street than anyone else — but it was only $2 million more than the $22.1 million that went to Sen. John McCain.
Blame the government and blame the Wall Street banks that sponsor their political campaigns. Don't blame the protestors. They are not the perpetrators we need to put in handcuffs.
Nothing has changed since that day in September 2008 when Congress voted to bail out Wall Street. Call your representative, write to your senator and show up for the Occupy events in your city. You may find yourself savoring the exercise in civil protest.
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