The Missing Billions From The Housing/Credit Crunch

I have good news and bad news. The good news is that I am happy to report that we have located all of those missing billions from the mortgage/credit meltdown. You know all of those profits from all of those questionable loans that the banks made to the mortgage companies, who in turn with the help of the hedge fund managers bundled them together and presented them to an unsuspecting public as stable investment vehicles. That’s the good news. The bad news is that the money was found in the pockets and bank accounts of the ones who helped to start this fiasco. In what is becoming an all too familiar scene the authors of the mortgage fraud have walked away with billions in profits while the rest of the country prepares for tough times ahead.

Hedge fund managers have redefined notions of wealth in recent years. And the richest among them are redefining those notions once again.

Their unprecedented and growing affluence underscores the gaping inequality between the millions of Americans facing stagnating wages and rising home foreclosures and an agile financial elite that seems to thrive in good times and bad. Such profits may also prompt more calls for regulation of the industry.

Even on Wall Street, where money is the ultimate measure of success, the size of the winnings makes some uneasy. “There is nothing wrong with it — it’s not illegal,” said William H. Gross, the chief investment officer of the bond fund Pimco. “But it’s ugly.”[1]

So here is what we know, the CEO’s of the main players in the mortgage meltdown made bonuses in the millions while they steered their companies to the verge of bankruptcy. The hedge fund managers made billions- this is not a typo- they made billions as they played both sides against each other. We have surpassed the avarice of the Gilded Age and have created a whole new level of greed not seen before in this country and maybe not in this world. If you thought we had reached the stage where a few super-wealthy families were influencing the economies of the world, you haven’t seen anything. There will be untold carnage left behind by these hedge funds as they grow larger and more influential. Imagine managing and moving around amounts of money that dwarf many countries GNP’s and how that will affect the smaller and more volatile economies.

This news comes on the reports of the MSM of how everyone lost during this economic meltdown, well I guess everyone didn’t lose. The biggest losers were the average homeowners and investors who have been made prey for those who will never have enough. How much is enough money? How much is enough cars, clothes, and stuff? The level of disconnect between what people actually do and what they earn in the area of investing and financing has reached the level of the absurd.

Top hedge fund managers made money in many ways last year, from investing in overseas stock markets to betting that prices of commodities like oil, wheat and copper would rise. Some, like Mr. Paulson, profited handsomely from the turmoil in the mortgage market ripping through the economy.

As early as 2005, Mr. Paulson began betting that complex mortgage investments known as collateralized debt obligations would decline in value, much as Wall Street traders bet that shares will drop in price. In that case, known as shorting, they borrow shares and sell them, wait for the price to fall, buy the shares back at a lower price and return them, pocketing the profit.

Then, over the next two years, Mr. Paulson established two funds to focus on the credit markets. One of those funds returned 590 percent last year, and the other handed back 353 percent, according to Alpha. By the end of 2007, Mr. Paulson sat atop $28 billion in assets, up from $6 billion 12 months earlier.[2]

All this money making and profit taking is news to me because I lost money from my investments across the board last year. How is it possible that the market you are investing in lost money, but you actually made money? And not just a little money, but a perverse amount of money that would even be considered exorbitant in good times let alone in falling markets. I am not a Rhodes Scholar economist, but I know bullsh*t when I see it. And what we are watching in America today is exactly that. These guys use borrowed money and bail-outs to generate these excessive profits all the while espousing the impending menace of the entitlement programs, government safety nets and their subsequent implosion. Give me a break! If these guys would pay half the money they and their corporations should be paying in taxes many of the ills they speak of would be non-existent.

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[1] http://www.nytimes.com/2008/04/16/business/16wall.html?em&ex=1208491200&en=b3c6700a81395afa&ei=5087%0A

[2] http://www.nytimes.com/2008/04/16/business/16wall.html?em&ex=1208491200&en=b3c6700a81395afa&ei=5087%0A

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Enough Is Enough

If I hear or read about another billionaire claiming that the current economic woes we are suffering as a nation is due to our “entitlement” programs, I am going to scream. The latest in the long line of billionaire apologist is Pete Peterson. Mr. Peterson, is a longtime opponent of Social Security, Medicaid, and any other government programs targeted to help the needy, who appeared on Charlie Rose. According to Mr. Peterson it is not greed and speculation that has reeked havoc on our economy for the past 30 years, it is the entitlement programs. All this time I have been thinking that not being able to know when you’ve had enough is the problem. Come to find out I am looking in the wrong direction. Greed has been around for a long time, entitlements have not. The Crash and the Depression occurred prior to entitlements; I wonder who Mr. Peterson blames those on.

I believe the Social Security Trust Fund belongs in the first tier of classic oxymorons. In the first place, the Social Security Trust Fund should not be trusted, and it is not funded. We anesthetize the public with highly reassuring long-term statements that the trust funds are solvent for decades. Yet, we do not tell the public that the payroll taxes of our children and grandchildren would have to double to cover the costs of Social Security and Medicare. That is an unthinkable burden. We do not tell the public that whether you have a trust fund or not, you still face the same three hard choices: increased taxes, cut benefits, or try to borrow unprecedented amounts.

Now how much would we have to borrow? I think it’s time we started thinking in cash flow terms, because these programs are obviously pay-as-you-go programs. The projected cash flow deficits for Social Security and Medicare go from a modest $25 billion in 2003, to a projected $783 billion in 2020, and trillions of dollars thereafter.[1]

These statements on the surface seem reasonable enough, we have not done a good job funding and fixing the entitlement programs. Instead of facing some tough realities and questions the politicians have continued to ignore them, afraid of providing the American public the ugly truth, ugly truths do not win elections. The problem I have with these guys is they present the picture as though the entitlements were the only item in the budget. So rather than saying it is a matter of priorities they present the picture as a zero-sum game. Nowhere do they mention the military budget, the tax-cuts, or the other government programs that make up the complete budget. We are left to believe that the entitlements exist on some island, isolated from the other expenditures.

Mr. Peterson discussed the Prescription Drug benefit that was added to Medicaid as an example of making a bad situation worse. I agree, but he doesn’t mention that he is a Republican and it was the Republicans who created the Bill that forbid the Government from negotiating prices for the prescriptions. I wish just once these guys would take responsibility for the messes they make. The Republicans built in astronomical profits for the benefit of the big pharmaceuticals, just as they did for big oil who is recording unprecedented profits. Nowhere does he mention the billions of dollars that were made during the mortgage meltdown by those same companies who are now crying bankruptcy. Is it me or did billions of dollars just disappear into thin air? Someone had to profit from all of those loans, why is this information never debated? Nor, did he mention that it is the Republicans who are trying to bankrupt the system to force its collapse.

Mr. Peterson stated that he supports John McCain and was asked about Senator McCain’s flop on the tax-cuts, he presented the standard line that what McCain was against was not tax-cuts per se but tax-cuts without spending cuts. McCain and his supporters are backpedaling so fast from statements like the following it blows the mind:

“Mr. President, the principle that guides my judgment of a tax reconciliation bill is tax relief for those who need it the most—lower- and middle-income working families. I am in favor of a tax cut, but a responsible one that provides significant tax relief for lower- and middle-income families. And I commend Sen. Grassley for moving in that direction. But I am concerned that debt will overwhelm many American households. That is why tax relief should be targeted to middle-income Americans. The more fortunate among us have less concern about debt. It is the parents struggling to make ends meet who are most in need of tax relief.

“I had expressed hope that when the reconciliation bill was reported out of the Senate Finance Committee, the tax cuts outlined would provide more tax relief to working, middle-income Americans. However, I am disappointed that the Senate Finance Committee preferred instead to cut the top tax rate of 39.6% to 36%, thereby granting generous tax relief to the wealthiest individuals of our country at the expense of lower- and middle-income American taxpayers.”[2]

Senator McCain and Mr. Peterson have no problem today with the Feds bailing out Bear Sterns and the Wall Streeters, it is the average American who Senator McCain was concerned about in 2001 who don’t deserve any relief. Mr. Peterson said that while it was a dangerous precedence, he supported the bail-out to stem broader market drops. You have to love this line of, “we hate to do it and we know its bad business, but we have to. He gave the same excuse for all of the liquidity funds they have received from China. He didn’t seem to have any problem with China owning large sections of our banking industry. I’m no Nobel economist but even I know that can’t be a good idea.

Oh, by the way Mr. Peterson is making a donation of a billion dollars to help teach Americans how to save. First of all, how rich do you have to be to give away a billion dollars? Secondly, what he failed to mention is why the American family is in the situation it finds itself. Due to flat wage pressure being exerted by Mr. Peterson and his billionaire friends for the past 30 years, the wife has had to go to work to increase household buying power. After that money was spent, they began mortgaging their homes and running up credit card bills for expense money. Now that they have spent that money the well is now dry. And Mr. Peterson says if they had just saved money the economy wouldn’t be in this predicament. He wants consumers in a consumer economy to not consume or reduce consumption. That horse is already out of the barn, we have been bombarded since the age of television to buy. Where were the commercials for saving money?

[1] http://petersoninstitute.org/publications/papers/peterson0804.pdf
[2] —Senate floor statement during debate over President Bush’s tax relief package, May 21, 2001.

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Bush And The Gas Bubble

Why is the price of gas so high? Why is crude oil trading at all-time highs? It seems like everyday we set a new record price for crude oil. Has there been an outbreak of another war in the Middle-East that I have missed? What I have learned is that the price of gas and the record crude oil prices have nothing to do with reality. The truth is that all those rich speculators and hedge fund managers that caused the mortgage crisis have now when that bubble has burst moved their money from the stock markets to commodities. That’s right with the market taking a beating from the credit mess the “smart money” has moved to oil speculation.

According to the statement from OPEC, the global market is "well-supplied, with current commercial oil stocks standing above their five-year average." Today's prices don't reflect market fundamentals, OPEC said, but the weakness of the dollar, rising inflation and the "significant flow of funds into the commodities market."[1]

So if there is not a shortage of oil why am I paying through the nose for gas? The problem is two fold. First there is greater consumption in the world, so what was enough five years ago is not enough today. With the addition of China and India wanting to fuel their industrial revolutions the reserves are not going as far as they use to. Of course you also have the US marketing and buying SUV’s and “crossovers” like there is no tomorrow. I’m sorry I need some help on this one, we have been aware of the problems of dependency on oil and other non-renewable fuels since the 70’s and yet here it is in 2008 and instead of having vehicles that use less fuel we have the biggest vehicles in our history. Newsflash – Crossover vehicles are not smaller fuel efficient SUV’s, they are giant station wagons.

Not exactly. None of this price run-up could be possible without the unbridled consumption of oil in the United States, by far the largest oil user, and the soaring consumption of rising economies such as China and India. Increasing political tensions make shortages a possibility, and markets factor in that risk, which drives prices higher.

"I think the biggest problem is pure fear. Right now there is no supply problem," said David Wyss, chief economist for the New York rating agency Standard & Poor's. "What happens if Venezuela goes to war in Colombia? What happens if various crises in Nigeria get loose? Iran is always making noises."

Fearing the potential for shortages, investors are willing to pay a premium.

"They're not buying oil, they're buying insurance," Wyss said.[2]

Now we are forced to go hat in hand to the Saudis and other oil producers to beg for an increase in production in the hope that this will reduce prices. The second problem is that it isn’t just about production, it is about our oil policy. It is about an oil policy that rewards the big oil companies with tax incentives to continue to buy foreign oil while we spend nothing on research for renewable sources and reduction in consumption. Our energy policy eerily resembles our drug policy, instead of trying to stem consumption we spend billions of dollars to eradicate the problem in the countries where it isn’t a problem. The Saudis do not have an energy problem, we do. So while President Bush wants to continue giving his big oil friends and family tax breaks our economy rapidly approaches meltdown. And all the while we hasten the process by purchasing vehicles that don’t meet our needs but instead meet our egos.

There is no oil shortage. What there is a shortage of is common sense and willpower. I recently saw a commercial from one of the big oil companies promoting how they are now part of the solution to our energy needs. Whenever corporate profits exceed any justifiable limit they immediately roll-out these PR ads stating how they are using all of these ungodly profits not to benefit the corporate elite, but average Joes like you and me. I sleep better already just knowing that big oil is working to create renewable energy sources that will conceivably put them out of business. Remember, ignore the man behind the curtain and focus on the great Oz. The greedy see an opportunity to enrich themselves again with commodities so don’t be surprised if the price of oil is not the only thing that rises. All of which will continue to put inflationary pressure on our economy and push us closer to the brink.

Instead of having regulatory agencies that protect the consumers from this type of speculation we have “free market” forces that for some strange reason are only good when they favor the wealthy. Why aren’t free markets good for all products? Why are we subsidizing commodities like produce, oil, and sugar? The truth is that we continue to subsidize these markets because our politicians have been bought and sold like so many bushels of corn and will continue to allow industries to write their own legislation and regulate themselves and in the end we will all suffer. We will continue to have to choose between gas and food or gas and medicine. Isn’t free enterprise wonderful? This bubble will eventually burst just like the previous ones, but in the process many families are going to be hurting and that will be the real tragedy.

[1] http://www.mcclatchydc.com/homepage/story/29586.html
[2] Ibid

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Uncle Tom’s Hedge Fund

It began with the minority set asides in the affirmative action days and continues today all the way to the glass elevators of high finance. For those not familiar the scheme works like this. In many federal, state, and local contracts there is a certain percentage of the contract that is “set aside” for minority contractors, it allows them to share in the growth of the economy and get their fair share, so the thinking goes. This is supposed to allow smaller minority contractors to expand and become larger contractors and hopefully hire more minorities. On the surface this seems like a noble idea to help increase the participation of minority businesses.

Unfortunately, the greed of some men knows no bounds and they cannot allow even the small percentage of minority set asides to escape their grasp. There are some large white contractors that have created their own minority contractors so they can bid on the minority sections of the contracts. They will find a blackman, usually unemployed or addicted and set them up in business in name only. The blackman will technically be the owner of the business, but has no real say so in the business; many do not even work for their own companies. The white contractor has a figurehead for his “minority business” and can then go after the minority section of the contract as well as the regular contract.

This scheme has now been replicated by the big money hedge fund managers. In an effort to derail new taxation legislation headed their way which in effect would begin to tax their fees not as capital gains (15%), but as regular income (35%) they have advanced the argument that by changing the taxation rate this will hurt minority business owners and inner city investments.

If you’re lobbying to keep a tax break, rich white guys making astronomical sums by investing other people's money aren't the most sympathetic clients -- especially when they're paying taxes at a lower rate than firefighters and teachers. So the private-equity and hedge fund industry has come up with a cynical new approach, arguing that raising their taxes would hurt women- and minority-owned firms and dampen investment in needy urban areas.

Among those providing funding for the new group, called the Access to Capital Coalition, is the Private Equity Council, a trade association formed by 11 larger funds to stifle some pesky lawmakers thinking about ending their cushy tax deal. "The present carried interest policy has been essential to attracting top talented minorities and women to the industry as independent firms and fund managers. Its elimination, consequently, would have the unfortunate effect of impeding this great progress," Willie E. Woods Jr., a founding member of the new group, says in its press release.[1]

These assertions are false. The group Access to Capital Coalition is a group of minority and women money managers who are being funded by the large money managers to put a minority face on the hedge fund business that is overwhelmingly white and male. It is a blatant attempt to try to block pending legislation to begin to tax the income (carried interest) as regular income. It is a shame that these multi-million and sometimes multi-billionaires are being taxed at a lower rate than teachers and they still want a break. By enlisting the aid of these minorities with their contributions they have attempted to buy some sympathy in the Congress. They can now parade this group of “minorities” in front of the committees and make the claim that the new legislation will harm minorities when in fact it will help minorities. The money being taxed is not the return on investments; it is the fees being charged by the managers.

Once again you have Blacks who are willing to sell out other Blacks to make a little money for themselves. The revenue from these fees generated by the hedge funds could go a long way to actually increasing investment in the inner city through block grants and other forms of government renewal funding. It is only now that these large funds are concerned about inner city investments; if they do have a genuine concern let them show it by directly investing in inner city development and projects. It is a shame that these successful Blacks do not want to see other Blacks get the chance to replicate their success.

[1] http://www.washingtonpost.com/wp-dyn/content/article/2007/09/06/AR2007090602265.html?hpid=opinionsbox1

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