The Crisis That Wasn’t…

19 04 2009

Authored by William Robert Barber

What if the most recent financial crisis was NOT presently – and has not been – the financial disaster it’s been framed to be? Imagine the consequences… Would the stock market have fallen so dramatically? Would unemployment soar to 8.5%? Would Obama be president? Would certain sectors of the economy like the travel, hotel, and retail with all of their collaterally dependant services be suffering as much?

Businesses, both private as well as public traded, are petrified into submission by the frightful response of the former administration and discouraged by the negative economic/financial noise of Obama the candidate and Obama the president. They have responded in a defensive manner resulting in conserving cash, lowering inventory and operating cost; which in short order increases unemployment; which in turn perpetuates a continuum of economic decline. A general loss of confidence with the people had to be the natural consequence. 

But what if the crisis was no crisis at all, but instead a ruse to cover-up civil, even criminal violations of existing regulations? These violators could possibly be those certain in-the-know persons within the global proprietorships of enterprise and government. How’s that for a provocative thought?

Yes, the insurance giant AIG took (what we now know to be) exaggerated risk so to enhance premium income; but remember, AIG had been in financial trouble for many years before the real estate downturn and certainly before FAS 157 or Credit Default Swaps. And surely, with the benefit of looking back, one can ascertain the mistakes of AIG, inclusive of their profundity, over many years, for making mud out of multi-million-dollars of premium and fee income.  As significant a player AIG was in the game of selling, reselling, packaging, insuring and with global distribution reselling the securitization of mortgage backed credit; AIG was no more than a collateral participant, a feeder, certainly not a prime mover – in fact, AIG was a dependent.  

The big guys in the game were the distributors, the major broker dealers, Lehman Brothers, Goldman Sachs, Merrill Lynch, and the great many banks that participated in the international selling of high yield offerings to sophisticated, duly licensed institutions.  As long as housing and real estate boomed everything was on the upside. When the underlying value (real estate) softened, subprime borrows defaulted, and the insurance carrier could no longer pay out the downside plunge on the derivatives, the run to cash shut down all credit lines; such actions stymied the commercial paper trade and severely jeopardized the securitization of receivables as a viable financial instrument.

Places for the perpetrators to hide the dirty laundry of silliness and stupidity were rapidly diminishing. Cash and more importantly cash flow was drying up.

Well, lo and behold these gentlemen of special knowledge with the reputation of possessing the very best of business acumen made bets that had no assurance or fidelity on the recovery of principal. The taking of the interest was lauded as genius; the losing of the principal was intolerable so a crisis of the highest magnitude was created.  After all, without a crisis of global economic dimension the government of the United States would not find cause to step in and pay the perpetrators’ loss of principal.

Because leadership at private, public, and government institutions fumbled the ball, the ideal of dead reckoning wherein the more than ignorant are bamboozled by the less than ignorant was coming to an end. Conversely, the old reliable standby of flying by the seat of one’s pants would no longer hide the foolhardiness of their money-losing transgressions. The abrupt loss of bearings and precedence utilized by senior management as the measure for operational procedure was nowhere to be found – everyone panicked.  Pan jumped out of the wood line scaring the hell out of all within sight or hearing; a Pandean of emotion captured sensibility. Not understanding the actualities of the cause or effect Bush and Paulson decided that congress should grant the treasurer billions so they could act thereby saving the world from the pending economic calamity. Congress, particularly a democratic congress, loved the idea; no need to read, digest or debate – better to simplify and appropriate.

The timing could not have been better for the Democrats my candidate, McCain, not smart enough to discern the darkness from the light, fell into a trap designed by none other than McCain. Instead of holding the line on giving up billions to God-knows-what he endorses the TARP relief bill and the rest is history.

But, back to my opening suggestion, what if in fact the turn down of economic growth was and is the normal cycle of the marketplace’s economic rhythm? Is it possible that the ‘economic-financial crisis’ is a natural derivative of economic occurrence? Is this ebb and flow of financial undertakings a definitive of a freely founded market, a market populated by the arbitrary transactions of willing buyers and sellers acting on their perception of value?

I don’t know a single person that when the market was one of escalating real estate pricing, low interest, and mediocre loan underwriting, cried out in anguish when a second or third loan was approved and a proportionate lien was placed on their property by the lender. No one barked loudly at the ‘regulators’ when the benefit was perceived to favor their spending addiction. Everyone was dancing to the tune of Barney Frank’s Fannie and Freddie, of course that was because cash was flowing and every mortgage entity was affirming and selling. The buyers were packaging and reselling; there was no outcry or talk of under-regulation, bonuses, CEO salaries, nor did anyone point out that the stock market was overvalued and about to drop by two thousand points.

Of course the reader maybe saying “Oh yea, what would you have done smart one?”

So glad you asked that question, in my next article…

 

 

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