Giving You The Business: Hustlers and Thieves and Bears, Oh My!
2008-04-08
By Donna Johnson & Boyd Klingler
There’s a line from an action movie where falsely accused ex-Navy Seal, Ice Cube teams up with an NSA agent to rescue the President from an army of rogue colleagues who plan to take over the country. Not knowing who in the government to trust, Ice Cube resorts to enlisting the help of his boys from the ’hood for the mission.
On the night of the impending assault on Capitol Hill where the President is addressing Congress, Ice Cube surveys his questionable crew and laments, "The fate of the free world is in the hands of a bunch of hustlers and thieves.”
To which the NSA agent quips, "Why should tonight be any different?"
Why indeed. The near bankruptcy of Bear Stearns, its ensuing rescue by the Federal Reserve Bank, touchily referred to as a “bailout,” will leave American taxpayers on the hook for $30 billion, with rival investment bank J.P. Morgan-Chase scooping up the company for a paltry $236 million.
In other words, J.P. Morgan Chase just made Bear Stearns its b**ch with the Federal Reserve (by way of the Treasury) pimping out the deal.
Back in December, 2007 with home foreclosures reaching a record high, Treasury Secretary Henry Paulson declared that there was “no silver bullet …to undo the excesses in the housing market…and bad lending practices.” There was, however, a golden parachute hustled up some months later to bail out Bear Stearns, who was highly leveraged in home loans through mortgage-backed securities.
Buyout, bailout, call it what you will, the salvaging of Bear Stearns coincides with today’s looming recession brought on by the mortgage meltdown in which Bear Stearns heavily participated. This script is, not surprisingly, reminiscent of the corporate crimes and misdemeanors of Enron, Worldcom, K-Mart, Imclone, and Tyco which coincided with the previous economic downturn of 2002.
Just as Enron CEO, Kenneth Lay reassured investors and employees of the company’s health days before it went bankrupt, Bear Stearns CEO, Alan Schwartz was on a conference call boasting of his firm’s solvency, while reaching out to Fed Chairman Ben Bernanke on speed dial.
Inevitably facing the truth about the rumors of Bear Stearns’ imminent decline, Schwartz admitted, according to one source, that without federal assistance, “customer withdrawals would have outstripped the bank’s ability to make payments.”
In simple terms it’s called a run on the bank, something which many Americans going back three generations can painfully bear witness to, depending upon whether they’re today’s parents, grandparents or great-grandparents. We’ve all experienced the celluloid version of a bank failure from watching “It’s A Wonderful Life.” If only the distressed housing crisis were confined to the fictional town of Bedford Falls and the Bailey Building and Loan Association.
But, the financial markets reforms recently rolled out by the Treasury will have little or no effect on the current credit crisis and Secretary Paulson has admitted as much.
In spite of appearing to coincide with the Bear Stearns fallout, plans for overhauling the system have actually been a year in the making and, incorporated into the 200-plus page document, are mostly the suggestions of financial industry lobbyists and related associations.
This blueprint for regulatory restructuring is a smokescreen aimed at distracting us from realizing how deep a mess the economy is really in, and mostly serves the interests of those who created the problem. The Fed, The Treasury and the SEC already have all the muscle they need to prevent unscrupulous market practices, so what’s the point of assigning them even more power?
It’s a tactical diversion meant to obscure the possibility that the government is running out of options. There’s not a lot they really can do, so the solution is to give the public a sense that these financial market reforms are a direct response to the Bear Stearns debacle in particular, and the mortgage-backed securities schemes in general.
Furthermore, the pundits who are blaming the mortgage calamity on buyers with bad credit need to get their facts straight. Sub-prime lending comprises only a tiny portion of the mortgage market.
Creative credit packages were crafted by lenders in the form of liar loans where income verification was waived, no or low down payments, interest-only loans, and for speculators intent on buying up 2 and 3 condos at a time hoping to flip them for a profit.
It was the first time in U.S. history that these types of lending practices were so widespread, with disastrous results.
In the last cycle, mortgages were the biggest economic engine driving a $12 trillion economy. They created jobs, increased profits and enhanced personal wealth. The largest part of the everyday American’s net worth is his house. Now, not only is that vital asset going down in value, but for some time to come, you’ll still owe more on it than it’s worth.
Donna Johnson and Boyd Klingler are Giving You the BusinessSM, in an occasional column for EbonyJet.com. Send your business and finance-related questions to our e-mailbag.
