The Swaps of Damocles

"Privileged people don't march and protest; their world is safe and clean and governed by laws designed to keep them happy...." Michael Brock in John Grisham's The Street Lawyer (Doubleday, 1998).

"There can be nothing happy for the person over whom some fear always looms…” Cicero, Tusculan Disputations 5.62, via Wikipedia.com

If you were fearful after Wall Street decimated your life-savings in September 2008 then you should know that the sword of Damocles remains above your head.

Absolutely nothing of any significance has changed. Not rules, laws or regulations. Not government oversight or external auditing. Nothing. What happened to our financial well-being in the Fall of 2008 can happen again tomorrow. If anything is being done, it is being expertly designed to make things worse for Main Street and better for Wall Street. When the tech bubble burst in March 2000, the Federal Reserve dropped dollar bills from helicopters and inflated the housing market. At least that time around, it was obvious where the next bubble would come. In an effort to hide the inflation this time around, the Fed is pumping money into dark corners of finance where it will eventually impact everything everywhere.

First, a quick recap: During 2007, mortgage-backed bonds began failing faster than actual mortgages. Wall Street wrote bonds faster than Main Street needed mortgages – two bankruptcy judges estimated that one-third of the bonds didn’t have mortgages backing them.

Meanwhile, insurance companies like AIG were writing credit default swaps even faster – some say there were as many as 15 swaps for every bond (by value). In 2008, AIG was unable to pay off on the credit default swaps (like insurance contracts) they wrote for the Wall Street bankers. The bankers had named themselves beneficiaries and they began cashing in – again – when the whole thing went up in flames.

Then-Secretary of the Treasury Hank Paulson went to Congress and said the world would end if taxpayers did not give him $750 billion to bailout the banks. Congress said, “Sure, why not, you seem like a nice guy” and the Wall Street Bailout was signed into law by George W. Bush on October 1, 2008. In the months that followed, we learned that the Federal Reserve topped off the Wall Street tanks with trillions more dollars – a lot of which went to foreigners and private companies not under their regulatory purview. Since then, Federal Reserve Chairman Ben Bernanke has been dropping dollar bills out of helicopters by buying more and more mortgage un-backed bonds from Wall Street because – well, no one is quite sure why he is doing this.

Eventually, Senator Chris Dodd (D-CT) and Representative Barney Frank (D-MA) got their names attached to a new public law, which President Obama signed on July 21, 2010 – about two years after the bailout – that was supposed to reform Wall Street and protect Consumers. Five months after the signing, Sen. Dodd announced his retirement (not long after it was made public that he and several Senators received very friendly terms on a mortgage from sub-prime mortgage bond King Angelo Mozilo of Countrywide). Rep. Frank will not seek reelection in November 2012. Neither Dodd nor Frank planned to be around when the bill is actually effective. You see, a lot of Dodd-Frank was only to require that someone else do studies, write reports and propose rules. Less than half of the rules were required to be written before Rep. Frank leaves office – Dodd left office before any action was required under the public law with his name on it.

Both Dodd and Frank are retiring with full pensions, but the same cannot be said about the public law with their names on it. As of September 21, 2012, about as many Dodd-Frank rules have been proposed as there are mortgages backing those mortgage-bonds the Fed is buying. According to a review by New York law firm Davis Polk (as of September 4, 2012):

So far as I was concerned, the only actual success of Dodd-Frank came from an amendment which required the Federal Reserve to disclose exactly to whom they gave the bailout money  – information on 21,000 transactions valued at $16 trillion that Fox News, Bloomberg and Rolling Stone Magazine sued to get after the Chairman and Vice Chairman of the Fed refused to reply to questions from Congress. Turns out the Fed officials went from sins of omission to sins of commission – Bloomberg reported in December that they hid billions of dollars in loans from the mandated reports. Despite now knowing that the Federal Reserve is giving money to unregulated companies with no means of retrieving it, the U.S. public – outside of a faithful few Occupy Wall Street protestors still out there – have failed to notice or react. Hence, nothing has changed that would prevent a repeat of the events that precipitated the 2008 bailouts from occurring again tomorrow.

“But wait! That’s not all!” as they say in late-night TV infomercials. More than ignoring the law, more than delaying the reforms, Wall Street is now actively working to get new laws written to exempt themselves from Dodd-Frank – which, we thought, was specifically written to reform their activities. On September 19, H.R. 2827 was passed by Congress to exempt from any Dodd–Frank rulemaking the very activity that is bankrupting some US cities and states and counties.

The law they are now exempted from is the one that would require them to accept legal responsibility for putting the best interests of the municipalities and taxpayers first – a blanket requirement for fiduciary duty that already exists but is consistently ignored by the “survivors of Wall Street survivors of the financial crisis” as they are called by William D. Cohan, author of the New York Times bestseller House of Cards: A Tale of Hubris and Wretched Excess on Wall Street. Cohan emphasizes that bribing clients like Jefferson County is not new – although it seems evident that the problem may be more wide spread now than ever before in US history. Jefferson County (AL) may be the best known – bankruptcy followed on the heels of bribes and billions of dollars worth of toxic swap deals. The Wall Street banks not only bribe officials to commit municipal taxpayers to financial obligations they can never repay, they also pay competing banks so they can charge higher fees and interest rates. This breaches the simple trust you are entitled to expect even from used car salesmen (in states with “Lemon Laws”) – but no such protection is afforded anyone who has to deal with Wall Street.

In the end, we are all required to deal with Wall Street. This is a danger more real, and more imminent, than anything the world may ever have faced. It is as if we have been told that an asteroid the size of Texas is barreling toward Earth and Ben Bernanke hit the button that launched the nuke --- that missed. It’s still coming. Wall Street remains unreformed and consumers of financial services remain unprotected.

Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Dr. Trimbath’s credits include appearances on national television and radio programs and the Emmy® Award nominated Bloomberg report Phantom Shares. She appears in four documentaries on the financial crisis, including Stock Shock: the Rise of Sirius XM and Collapse of Wall Street Ethics and the newly released Wall Street Conspiracy. Dr. Trimbath was formerly Senior Research Economist at the Milken Institute. She served as Senior Advisor on United States Agency for International Development capital markets projects in Russia, Romania and Ukraine. Dr. Trimbath teaches graduate and undergraduate finance and economics.