Dec 8, 2013
How to Make a Million Dollars an Hour
Posted on May 23, 2013
By Nomi Prins
Finally, the repeal of Glass-Steagall in 1999 led to the behaviors that caused the most recent crises. Leopold presents an often-overlooked aspect: how big banks teamed up with hedge fund managers generally. Banks created Collateralized Debt Obligations, and hedge fund managers “managed” them, buying equity in them to entice more investors, countries and pension funds into the game. The timing was special. The junk creation and dispersion machine accelerated after home prices fell and loans faltered in 2006. That’s when the most connected hedge fund managers bet against the CDOs for which they were selecting deteriorating assets. AAA rated slices of CDOs became junk and the whole house of cards collapsed.
In Step 6, “Rig Your Bets,” Leopold asks, “Why gamble unless you’re the house?” He explains how hedge funds like Magnetar fleeced the markets. The deals they managed racked up $40 billion in losses for investors while their managers made billions. They worked with nine banks including Merrill, Citigroup, UBS and JPMorgan. It so happens that JPMorgan—whose chairman and CEO, Jamie Dimon, is often lauded for being a risk management god—did one of Magnetar’s riskiest deals in May 2007, a year after housing prices started to decline. The bank didn’t disclose to CDO investors its special role: selecting pools of 2005 and 2006 mortgages destined to fail. (Because, Department of Justice, in case you don’t get to read the whole book, they were already failing. Insider Information. Look it up.)
The same thing happened with Goldman Sachs and hedge fund billionaire John Paulson. Goldman dumped its most risky assets into its last Abacus 2007 deal, the only deal of the series, Leopold notes, for which a client selected the assets. That client was Paulson. He and Goldman then shorted those assets (devised ways to sell them, forcing the prices lower, which led to profit when they fell). The manager of the deal, ACA Management, thought Paulson would go long (buy) the assets and so bought a big chunk of the deal. In the end, investors lost $1 billion, Paulson made $1 billion. Today, those Abacus securities are worthless.
Leopold also covers such topics as Bernie Madoff and the Galleon hedge fund implosion, for which Raj Rajaratnam, once worshipped as “a great American hero,” got an 11-year prison sentence. All he was doing, though, was old-school insider trading on Goldman Sachs stock and other sundries. But these men didn’t use the system to their advantage as well as the likes of Paulson. And despite their disgrace, the financial world remains unchanged.
As Leopold laments, “The economic collapse of 2008 should have been a silo-busting event.” Only it wasn’t. That fall, progressives voted for Barack Obama, who turned out to so not be FDR, and whose election was partly sponsored by Wall Street.
Toward the end of the book, Leopold offers tips on how to stop this siphoning, rigging and the resulting wealth dislocation and global economic instability. But I can’t help wondering whether things are just too far gone. So, I asked Leopold: Do we need a greater depression followed by World War III to rattle the framework? Are these people simply sociopaths—operating in an enabling environment run by sociopath apologists—so disconnected from the rest of humanity that, like the mean little king in “Game of Thrones,” they believe in their own magnificence and their right to destroy anything in the name of financial “efficiency”?
“Good question,” Leopold responded. “I think the way forward is to start taking their toys away. One major route is to build more public state banks. Right now a trillion dollars of our state and local tax dollars are floating through Wall Street banks in every state except for North Dakota, which has a public bank. Building statewide, not-for-profit banks in state after state would begin to construct an alternative financial path that would directly challenge the money game as played on Wall Street.
“Second, we have to fight hard for a financial transaction tax that 11 other countries in Europe are putting into effect,” he continued. “A small sales tax on financial trades of all kinds would put a major dent in the hedge fund game. It would wipe out the high frequency traders by turning their hidden, privatized tax into public revenues.
“And finally we’ve got to destroy the carried interest loophole which give the swindlers a tax break for being swindlers,” Leopold noted. “I don’t think we need to wait for Armageddon to make progress. I’m counting on one simple fact—Americans really are pissed at Wall Street. The more they find out the angrier they become. We need to keep getting the word out about how high finance actually works.
“In fact, I’m sure if we had a few more Truthdiggers at work, we could give them a real run for their money,” he concluded. At that I blushed and commended Les Leopold once more for making this stuff so clear for everyone.
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